As we put away our beach blankets and memories of our summer trips and the seasons change, it becomes time to anticipate what everyone at your property needs to be paying for up to fifteen months. Annual budget preparation season brings a number of obligations as well as some helpful opportunities.
The obligations involve a reminder that whatever amounts the Board calculates, each unit owner will need to prepare to pay at least for the next year. It may be necessary to impose that increase earlier than New Year’s as we will explain later. So now it’s time to prepare the annual document most anticipated by unit owners, the annual budget. The anticipation is over how much of a monthly charge increase is necessary. For some reason, even in an environment of annual increased costs for union employees, vendors and equipment, there is the belief that somehow the possibility exists that there may not be an increase this year. Unfortunately, other than plunging energy prices and a couple warm winters in the Northeast, costs are rising each and every year.
The budgeting process is simple enough and it’s best to start as soon as possible. Unfortunately, your property management firm has a portfolio of other clients who need theirs done as well. Therefore, the term budget season comes to mind for all the Finance Department employees as they tend to have work compression and possibly overtime hours. Part of the reason to do the budget early is being sure your property completes a comprehensive and timely process and can take advantage of opportunities to accomplish appropriate planning for calendar year end. These include the ability to detect potential issues that could make your properties financial results a concern to lenders as well as the possibility to save income taxes.
Before we get to the planning opportunities, let us look at the basics of the process. It is a chance to look at what goes into each expense category and detect opportunities to save. Examples include better scheduling to minimize the number of employee overtime hours required for coverage, shopping for insurance well before the deadline for policy renewal, and use of employees to accomplish repairs in lieu of outside contractors. Even when 90 or 95% of your propert’s costs are non-discretionary, it’s really important to take the time to understand what makes up those costs if your interest is minimizing annual increases.
As far as planning, generally these entities do not pay income taxes. However, it does happen, most specifically for condominium complexes with over 15% of their square footage utilized for commercial purposes and cooperatives which have expired operating loss carryforwards, which tend to be older properties. In that case, the earlier the conversion to cooperative ownership took place, the more likely income taxes are to be an issue.
Clerks at banks which originate mortgages on units are now armed with checklists to identify potential financial issues. An important one is operating losses. No one wants to hear that a prospective purchaser has been told that the building is not qualified for loans from that lender. Therefore, taking action now, months before calendar year end, to avoid reporting a financial operating loss on the annual financial statements, allows for a more focused and precise result. The goal in all cases is the best possible operation of your property.