KEEPING THE ASSOCIATION’S BUDGET BALANCED IN INFLATIONARY TIMES
When costs rise, condominium boards face hard choices because balancing the budget generally involves either increasing the association’s revenues or reducing its expenses.
On the revenue side, associations have some options, and when times are tight as they are now, it is worth looking at all options. Here are a few ideas to explore:
Increase association fees. This is the most obvious means of closing a budget gap, but it is also the one most boards try mightily to avoid. Owners don’t like fee increases. We all know that, but prudent management suggests that fees – the primary source of association revenues – should at least keep up with inflation. Raising fees to match inflation will help in the future, and the strategy also has some other benefits:
Owners will anticipate the increases each year, and will be less likely to be surprised or infuriated by the increases, and can budget for them.
Holding the line’ on fees simply kicks the financing can down the road. You’re not avoiding the increase, you’re just delaying it. The result: Instead of increasing fees modestly, say five percent every year for three years, the board will have to impose a 20 percent increase in the fourth year, creating a financial shock that some owners may not be able to absorb.
Look for license fee income. Are there unused storage spaces or unoccupied parking spots the board controls? If so, it may be possible to squeeze some revenue from them.
Negotiate contracts with telecom companies. This will work only in locations where telecom companies need cell towers, and only if the buildings are tall enough and have sufficient roof space to accommodate the equipment. But there are deals out there and some associations receive decent fee income from them.
Offer exclusive marketing rights to a cable company. Federal law requires associations to grant access to any company that wants to provide communications services to residents, so boards can’t offer exclusive service rights; but they can give a selected company the exclusive right to promote its services to residents onsite, and some companies may pay an attractive per-door fee in larger communities for that privilege.
Rent laundry equipment from a vendor or purchase the equipment directly. Neither will generate a lot of revenue, but both can produce some income for the association.
Look for Revenue
But Be Realistic
Boards contemplating revenue prospects, from whatever source, should be realistic about both the likely income, the potential costs involved, and the aggravation factor. The direct costs of acquiring and maintaining laundry equipment, for example, and the indirect costs and headaches related to managing the service and maintaining the equipment, may more than offset the revenue produced. Boards should also consider the tax implications. Revenue generated from sources other than common area fees may be taxable.
Also, while any additional income you can generate will be welcome, boards shouldn’t become dependent on it. Nothing lasts forever. If technology changes or the telecom company finds a more desirable site, that lucrative telecom contract, and the income it is producing, could disappear. Use the non-fee income you produce to boost the association’s reserves or to finance unanticipated operating expenses; don’t use it to avoid increasing common area fees or, even worse, to reduce them.
Try Cutting Costs -
It is Hard But Possible
Boards generally will find more options for cutting costs than for increasing revenue, among them:
Keep a close eye on income and expenditures throughout the year. Know where you are in relation to where the budget says you need to be. Identify line item increases and try to control them.
Review vendor contracts. Re-bid older ones to see if you can obtain comparable or better services at a lower cost. If you like your current vendor, try to renegotiate the terms when the contract comes up for renewal.
Review the services the association is receiving and identify any that are non-essential. Owners would no doubt object if the grounds begin to resemble a jungle, but perhaps mowing every other week rather than weekly would be sufficient.
Delay non-essential capital projects, or spread the work over a longer period. If the roof in one building is leaking, you have to deal with it, but you don’t necessarily have to replace all the roofs or all the siding on all the buildings in the same year.
Reduce insurance costs. You may be able to accomplish this by increasing the association’s deductible, moving to a per unit deductible, reducing claims, and/or taking advantage of the discounts some insurers offer for risk reduction measures, such as effective maintenance practices, security improvements, and the addition of automatic shut-off valves on water heaters and washing machines.
Reduce energy costs. Installing water-saving irrigation systems, adopting a less frequent watering schedule, and installing LED bulbs in light fixtures are just a few ideas; an energy audit might help you identify others.
Use less paper. Send the association’s newsletter, announcements and other communications via e-mail or text.
On this list of measures boards can consider to increase fees or lower costs, there are a few important don’ts:
Don’t rely on fines and penalty fees as a revenue source. The income will be unreliable and the emphasis on fines will create a perverse incentive for aggressive rules enforcement that most owners won’t appreciate.
Don’t reduce reserve contributions or skip them altogether.
Don’t borrow from reserves or from a bank to cover operating expenses. If expenses exceed revenues you need to increase condominium fees.
Don’t be penny-wise and pound-foolish. Tighten the budget if you can, but use a scalpel, not a hacksaw to slash expenses. Think long-term. Spending less on maintenance will save money in the near term, but will guarantee out-sized expenditures in the future to repair or replace the equipment you’ve neglected.
Don’t budget in reverse by basing expense projections on a budget that will allow the board to avoid fee increases, rather than on a realistic estimate of what costs are likely to be. Better to assume that costs will increase (they almost always do), rather than hope they will decline.
By: Richard Brooks