Understanding Operating Costs What Every Board Should Know

Understanding Operating Costs

 In your own household, you have money coming in and money going out. You have  things you want to save up for—say, a new cool high-def, flat screen television or the latest iPad. Yet you owe  your car company and your creditors. To keep it all straight and get a handle  on your spending and what you need to save for, financial experts recommend  creating a budget.  

 Running an association is no different. There is money coming in from resident  fees and money going out to pay such items as the landscaper or the maintenance  crew. But what about if the roof springs a leak, the insurance rates go up, or  the cost of electricity skyrockets? How does an association keep track of it  all? The same way an everyday Joe would—they draft and stick to a budget.  

 An Integral Part

 There is one major difference with our own personal budgeting and an association’s budgeting. Unlike our individual budgeting process, there are two kinds of  budgets for an association—an operating budget and a capital budget. Capital budgets apply to long-term,  big-ticket items like new roofs or an HVAC overhaul.  

 By contrast, the operating budget covers recurring monthly expenses such as  payroll and salaries, taxes, utilities, insurance and maintenance items (see  the sidebar for a more complete list). In creating and managing an operating  budget, co-op and condo boards must try to predict expenses, balance cash  inflow and outflow, and be aggressive in collecting arrears and late fees from  delinquent residents.  

 Budgets are an integral part of an association’s financial plan. They help to set goals for achieving an income and monitor how  much is being spent. In a condo, co-op or HOA, the final budgets need to be  presented in front of the board of directors for their stamp of approval. The  board of directors must vote on and approve the budget, depending on the  association’s bylaws.  

 “It’s a requirement of the Illinois Condominium Property Act and the Common Interest  Association Act to distribute an annual budget with detailed accounting,” says Marshall N. Dickler, an attorney and principal with the law firm of  Dickler Kahn Slowikowski and Zavell, Ltd. in Arlington Heights. “However, there is no outline as to how you have to establish or create that  budget.”  

 Dickler explains that two required items are income and expenses. Income is the  money gained from several sources depending on the property. It can come from  rental monies, dues, assessments, interest on bank accounts, financial  penalties, user fees and security deposits. Expenses, or what is paid, are  those that are set and are paid every month, such as personnel and maintenance  expenses, or variable expenses—which vary from month to month—such as utilities and various maintenance charges.  

 “But it doesn’t tell you what you have to put in the budget,” he says. “It can run the full spectrum and we have some properties that do nothing and  those who put in everything. Some boards, who create the budgets, have people  with business backgrounds and some don’t have a clue as to where to start.”  

 Hear ye! Hear ye!

 The best place to start is a meeting with your association’s team players. “Usually the property manager, treasurer and the finance committee sit in on the  meeting with the board,” says Steven Silberman, CPA and shareholder of Frost, Ruttenberg & Rothblatt, P.C. in Deerfield. “Board involvement is so important because they have a fiduciary responsibility.  We give them monthly reports and review them from the management company.  Accountants are usually asked by some associations who have a property manager  to tell them about fees and income but typically we don’t sit in on the meetings unless we’ve been hired by a self-managed building to help with the budget.”  

 Dickler explains that in Illinois, meetings must be open if you are taking  action. “You don’t have to have an open meeting when discussing budgets, but it’s a good policy to let people come in if they want to and aren’t going to be disruptive. You don’t want residents to think you’re doing things behind closed doors. You want them to understand the process.”  

 When should the meeting be held? “It’s a misconception that you put together an operating budget at the end of the  year,” says Silberman. “What associations should be doing is gathering information from prior budgets  before the end of the year. We always recommend that associations review their  actual budget and compare it to their actual expenditures so they can see what  they budgeted against what actually happened.”  

 Silberman says that when the meeting is held depends on the association’s fiscal year. “A budget is usually prepared to go to the whole board for approval and  distribution by October,” he says. “But that’s if you’re using a calendar year. Typically you want to start the process five months  before your year’s end.”  

 Preparing a Budget

 The main parts of any budget are income and expenses. “If you’re looking at last year’s budget, you’re going to want to keep ongoing expenses,” says Dickler. “For example, you spent a half million dollars a year on common electrical  expenses, so that gets put in the budget.”  

 Dickler also suggests looking at the last few years of budgets if they are  available. “Look at three to five years of expenses and see if there is any consistency on  recurring expenses,” he says. “Are certain expenses rising on a regular basis? The more you break down the  categories, the more you quantify recurring expenses so that people look at  them and get a better picture.”  

 Don’t Forget!

 When you’re writing your own personal budget, there are so many categories you can create  down to shoes, makeup, books and more. In any budget, there are sure to be some  things that are forgotten. Most commonly, Silberman says that boards forget  income tax payments and assessments. “Many associations have residents who are slow paying. One of the key things they  have to do is keep slow payments and possible bad debts to a minimum,” says Silberman. “They can talk to a good collection attorney about this, but they should have a  line item for bad debts.”  

 Saving Money

 Once a budget is created, it’s normal to go through sticker shock—or see how much you’re truly spending, so it’s important to generate some money saving ideas that will help to limit your  association’s debts. Costs should always be on the forefront of everyone’s mind and there may come a time when you have to tighten your belts. Energy  prices rise, businesses close, and suddenly you’re paying more for the same services. Reviewing the budget on a monthly basis  gives you plenty of opportunities to find hidden dollars in savings.  

 Silberman suggests first deciding between the association’s want and needs. “You have to look at what’s mandatory and then what’s discretionary, or what you’d like to get done but don’t have to,” he says. The association can look to save money but make sure not to compromise  the safety, cleanliness, maintenance or security of the community.  

 “For example, one way to save money is to get competitive bids,” he says. “Don’t just say that this is last year’s vendors and costs. Have a proven vendor list that you can turn to and make  sure they are independent good companies and see if they can reduce their  costs.”  

 Projects may also need to be reconsidered. When the economy is tough, it’s hard to find the money to pay for capital projects. Unfortunately that may  mean putting some things on the back burner.  

 He also suggests bulk purchasing. “For example, certain supplies such as salt—might be cheaper to buy in bulk—and certain contracts might be less expensive to do for a whole year rather than  paying on a monthly basis.”  


 In simple terms, the bottom line is the last line of the budget—the line that shows whether there is a profit or loss. Finding this number can  be done by taking the fixed and variable expenses and subtracting them from the  total income. This is net operating income. Once you have this number, you can  see how much money is flowing in.  

 What if, once the budget is done, you end up with extra money in the plus  column. What do you do? No, this isn’t a trick question and divvying it up among the board members or the residents  is not an option.  

 “The declaration should have the provisions of what to do with surplus,” says Dickler. “You can actually give it back to members as a reduction in assessment or not  collect it for a month or two, but in most cases, you add it to the reserve  account. Now your budget is zero.”  

 One of Dickler’s pet peeves is when budgets don’t cover bad debt—having a fund to cover a shortfall is important. It’s a common scenario to have a tenant who has hit a rough patch in his life and  they are affected by the local economy. “They forget to cover for delinquencies,” he says. “There should be a 5 to 10 percent reserve, not necessarily for bad debt, but in  case there’s a shortfall.  


 Emergencies are going to happen. For example, even though it has been properly  maintained, the boiler suddenly breaks down. “To pay for the repair, you use your building’s reserve fund, which is exactly what it sounds like, money reserved in case  something goes wrong,” says Melissa Prandi, a California-based property manager and best-selling  author. “Each month, part of the rent or the dues collected from tenants is designated to  pump up the reserve fund to cover emergencies. How much money should be in the  reserve is determined by a reserve study.”  

 How much should be set aside? “Every association is different,” says Silberman. “That’s why you need the study, so you can see what large projects you have coming up  and can budget for them.”  

 Financial statements and budgets are prepared so the goals and objectives of the  association can be met. Carefully planning your capital expenses and budgeting  for them properly can significantly reduce overall building expenditures while  maximizing the use and enjoyment of your building community.    

 Lisa Iannucci is a freelance writer and a frequent contributor to The  Chicagoland Cooperator.  


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