Annual operating budgets for Condos and Co-ops are typically done in excel and follow a predictable structure. They are discussed and agreed upon by the board of the building. Budgets can be prepared by the board, the treasurer of the board, the CPA firm in charge of the buildings tax & audit work, or the property management company. Attached here is a sample budget template that is considered industry-standard for condos & co-ops. I will go through each section now and provide examples.
Before I get started, please allow me to define the word maintenance. Maintenance – This means homeowners’ association dues. Different cities call this expense by different names. Maintenance fees, maintenance charges, common charges, HOA does, and homeowners association fees are all common terms used to describe this item. You will see me use these terms interchangeably throughout this article.
Coverpage – self-explanatory
Contents – self-explanatory
The purpose of this page is to summarize the rest of the tabs and to demonstrate that the operating surplus/deficit will be zero by using the proposed percentage increase in maintenance expenses.
This tab uses each year’s audited financials to summarize historical data for each major category of spending. You will notice that the 2014 year (in this example) only has 10 months of actuals, and the remaining two months are estimated numbers. These numbers are estimated based on a variety of factors, which we will discuss later. However, the common methodology for most line items involves using the first 10 months’ numbers to create an annualized figure (by dividing the ten-month total by ten and then multiplying it by twelve, for a rough linear extrapolation).
The purpose of the income tab is to include all sources of income, the common charge increases, and other items to determine the amount of income that the building will be earning in the year budgeted. Of course, common charges are supposed to be the largest component. This screen serves a historical function as well, as shareholders that are present in the budgeting meeting often want to see the last time the maintenance charges were increased and by how much.
In my experience working with many buildings, tenants frequently oppose any mention of a common charge increase, even if their building is in dire need of funds. Part of the issue arises in certain Manhattan buildings were owners bought their unit when prices were particularly low. They were able to afford their payments, but since then, prices in Manhattan have increase immensely. I have a tax client who bought his unit for $700,000 and could afford the mortgage, but now that his unit is worth $4 million and all prices have increased (including 32BJ labor union pricing for the doormen, porters, etc), he can no longer afford his maintenance charges. It is not infrequent in accounts receivable for property management to see tenants that simply can no longer afford their maintenance because the common charges have increased at a far faster rate than their income – and some tenants have had flat or decreasing incomes.
Other random income items that may appear here include commercial rents collected for the storefronts downstairs. This can be a significant amount of money – and in some buildings may generate the majority of free cash flow. I have personally done the accounting for buildings that collect over $200,000 monthly for a single [large] storefront downstairs. Yet other buildings have multiple businesses operating downstairs – Walgreens, Starbucks, Wells Fargo, Chipotle – in some cases as many as a dozen buildings. The commercial lease accounting matters are a subset of accounting in their own right and justify an entire textbook. However, please feel free to contact me regarding these issues as my background is in commercial real estate and I will be happy to help with commercial least abstracts and other commercial real-estate related issues.
Laundry and vending machines
Many buildings hire an outside third party to manage these types of machines. The standard contract will make certain stipulations. A common one includes an agreement whereby the first $1200 per month goes to the vending machine company, and any remaining funds receive are split based on a ratio. This can be a simple and easy way for a building to generate additional income by simply allowing this third party vendor to install machines. The benefit is twofold, as both the tenants are given the option to use these services while at the same time generating some extra money for the building with no effort on their part (other than, of course, administration work related to managing this vendor, if issues were to arise).
This is a common source of income for buildings that have unique or historical interiors. Particularly with my clients in Chicago, Philadelphia, Boston, and New York City, lobby interiors may offer fantastic opportunities for movie production, and it is not uncommon to receive monthly checks in excess of $40,000 related to renting portions of the lobby to film. Like the laundry machines referenced above, this is another fantastic opportunity to earn money, and these earnings may be substantial. However, due to the principle of conservatism in accountancy, this sort of income should not be relied upon for purposes of meeting basic operating necessities, such as paying real estate taxes or utilities. The reason for this is that extraordinary income items typically are excluded from forecasted financial statements for a reason – they are not part of the day-to-day operations of the enterprise and do not comprise ordinary income. Therefore, they should not be relied upon to cover ordinary expenses. They can be mentioned or even slightly forecasted in a budget, but by no means should these numbers be aggressive or used to offset potential increases in maintenance.
This portion of this particular budget template shows the expenses of the building in pie format. This slide is completely unnecessary, in my opinion, and its general function is to placate the non-numerical members of the board and give them something to look at as the more savvy decision makers discuss what is important. I personally update these for the client as it does not require any additional work, but there is not much to discuss over here. This is just a portion of the standard budget that can be found in condos and co-ops across the United States. Please let me point out that this is a best-practices template and is used for my clients anywhere between Los Angeles, San Francisco, New York City, Miami, and Jersey City. There is nothing location-specific about the template.
This section is perhaps the most difficult section to understand from an accounting and operations perspective. Each city has different unions that are involved. SEIU Local 1 is the union in charge of janitors, building engineers, door staff and window washers who work in Chicago’s residential properties. 32BJ is the union associated with some overlapping activities in New York City. Many Southern states have no union at all. And to make matters more complicated, certain buildings in union cities may not be unionized. The difference in labor expense can be striking between a union and a non-union building. Whatever your political inclinations may be when analyzing your building’s expenses, you may lean to the opposite direction when your maintenance expense may require a 5% increase to accommodate skyrocketing union expenses. In New York City, the difference between a 32BJ building and a non-union building can be the difference between paying $17 per hour and $32 per hour.
Now for the fun stuff. I will go through the template and explain each component. This portion of the budget is mindnumbingly boring and is avoided at all costs my most when analyzing budgets. Junior-level property accountants are frequently confused and afraid of this sheet.
FICA – Gross Wages:
You will notice a calculation happening here on row 21 of the included template whereby total gross wages are multiplied by 7.65 percent. The reason for this is the employer’s responsibility must be accounted for. As the employer, the building must pay taxes on (for 2015) the first $118,500 of gross wages. This 7.65% is actually comprised of two percentages: 6.2% Social Security and 1.45% Medicare taxes for a total of 7.65%. For buildings that have employees making over $118,500, this formula is adjusted not to exceed that amount ($9,065). Such employees are common in larger buildings with $5 million or more in annual maintenance revenue. These include property managers, who have a long list of responsibilities – everything from managing the escrow accounts and juggling expenses and vendors to the quasi-therapist role of listening to tenants vent about certain unresolvable issues outside of everyone’s control.
SUI/FUI – State Unemployment Insurance and Federal Unemployment Insurance
The next items (row 22 & 23 of the Payroll tab in our template) are SUI & FUI. This will come from the statement of deposit and filings. Speak with the payroll processor that handles this item for the building and find the rate out from them, as it may vary. The example is using a 2.1% rate.
Many cities offer transit benefits to their employees. One large company common in the NY and Chicago areas is called TransitChek, which administers transit benefits. The general idea here is that there is currently a government program that allows certain commuting expenses to be tax deductible. This is called the “Qualified Transportation Fringe Benefit.” As an employer, I highly recommend having these programs in place. The link here provides detailed information on this fringe and the amounts you can deduct every month, which is subject to change as this portion of tax law changes frequently. It is important to have a program like this in place as an employer because if most employers in your area have it, employees will feel cheated without this program, particularly because it is a tax benefit that must be administered by the firm in order for employees to take advantage of it. Many third party vendors (such as TransitChek) will directly send a Metro Card for New York City residents. For other counties, they will send a commuter debit card that can be used to purchase BART credits, for example (for San Francisco area employees).
NYS Disability – self explanatory
Worker’s Comp – this will depend on your policy
Health Insurance – also depends on the policy
Heating, Electric, and Gas
This information is found on the Con Edison site, or whoever the provider is for each type of utility being used in the building. The entering of this data is a very manual process, and there are certain assumptions that need to be made. One assumption pertains to the cost increases foretasted for a particular resource type. Another assumption attempts to forecast future seasonality. For example, I had several buildings that experienced rough winters and did not feel that the prior two years of heat expenses are representative of typical winters. They asked me to use prior years’ averages of usage rather than the most recent average.
Esco service providers may be involved here. Many cities will offer this sort of arrangement. Here is an example of how this works: Consolidated Edison is the provider of gas in the city. However, a building is allowed to choose another gas provider. The price paid is then for the commodity (the gas, oil, steam, or electricity), as well as a rental portion that goes to Consolidated Edison for allowing the Esco company to use ConEd’s infrastructure. This is an effect of utility de-regulation, which allows customers in certain markets to choose who their utility provider may be. There are a variety of reasons why a building may do this. Some Esco providers claim to have lower costs. Others stand for a particular cause, such as the ones linked here, which are marketed as “green.”
Other operating expenses:
This section is the one that building boards, property managers, and any concerned party have the most interest in adjusting. Any time a budget does not balance, this is the first section that is screened for possible things that can be cut. Unfortunately, with general inflation increasing the cost of goods or services gradually, there are few things that can be done here. Typically, this section is carefully reviewed by those that have strong involvement in the operational day-to-day tasks associated with the building. This budget uses the first 10 months activity and then annualizes it for the remainder of the year to compute the 12 month forecast. You will notice that many of the tabs do this. The reason for this is that many buildings will start working on their 2017 budget anywhere between August and November of a given year, and aim to complete and approve the budget based on an agreed-upon schedule. The most common months for condo and co-op budget approval are September and October. This means that you are working with 9 or 10 months worth of actuals data, and the remainder of the current year must be extrapolated. This total (achieved using this linear regression method) is then either increased or used as a basis for estimating the subsequent year’s numbers, which will be used for the year in question
Water & Sewer:
This information comes from the meters and will be available through the municipality that assesses water charges. The method for calculating it in the attached template uses some percentage increase assumptions as well as some basic algebra to forecast out the following year using numbers coming from lopsided billing periods provided by the city, which don’t correspond with the dates of the budget. Each city will have a different way of assessing water charges, but the general concept is to attempt to estimate cost per day, and then increase that daily cost by the projected percentage increase in water charges.
Capital Expense Tab:
This is typically the last tab in most building budgets and attempts to forecast capital spending. As was mentioned in my article on audited building financials, these capital expenditures can occur for a variety of reasons:
- Aging roof, stairwells, windows, sidewalks, lobby, hallways, all other common areas
- Oil to Gas conversion projects
- Updating electrical wiring, updating sewer
- Renovation of super’s unit