Many unit owners would consider the annual financial statement, which is audited by an external accountant, to reign supreme but to many the annual operating budget seems to be the most important financial document. This is because the operating budget determines the amount of monthly charges to unit owners for the next year and the need for any assessments to supplement revenue. In the COVID-19 era there are several significant risks to your annual budget:
- Will unit owners be able to pay on time and in full each month?
- Will the commercial or parking space no longer be able to pay rent or worse yet become vacant?
- Where will the funds for the inevitable added costs of dealing with COVID issues come from?
At Czarnowski & Beer we have been advising our clients that this year is time to start looking at the operating budget a little earlier. We suggest that you start by getting together with your financial analyst to commence the usual Fall budget process much earlier this year, this summer if possible. This will allow you to investigate what obstacles your property is encountering due to COVID-19 and you can then move to determine which of those past costs will impact the property in the new year. After these evaluations are complete you can transition into a thorough review of where the property is so far this year – this evaluation of the present situation also allows you to establish a benchmark for year-end results. By planning for the rest of the year you cement your future. You will learn now, as opposed to in December, whether you need an increase and also have adequate time to plan for it. While no one wants to pay more, as a board member with fiduciary responsibilities you really need to understand the property’s COVID age finances now.
Research is key here. Do you really know for sure what your property’s costs of the initial shut down were? We suggest that you make it your business to find out. If there is the expected second wave planning for at the least those amounts a second time in 2020 is prudent. Let’s face it, we don’t know if a second wave is coming, or if the costs will be more or less than this Spring, but there is no better time than now to evaluate what increased costs are caused by the crisis. Do you really want to sit still and be reactive to the news that there is not enough money coming in? Short of drawing on loan facilities, the only place the funds will come from is cash reserves so do your due diligence.
One aspect of added costs may be the property’s payroll. We suggest you compare the costs that occurred during the shutdown with a period before the crisis. Certain added costs for coverage can be hidden in payments to security or concierge services as well reimbursement for the managing agent. Small amounts may be hidden as payments to individuals along with repairs or administration. Looking into overtime is a great way to find where money might not have needed to go. When looking at these costs it is best to have dealt them dealt with by year end to avoid financial statement deficits as best you can.
If your property has commercial space, you will need to appropriately evaluate what is now vacant as well as the ability of your remaining tenants to pay. Allowing reopened businesses to not pay rent, even if only a diminished amount, is something that should not occur. We suggest continuing to monitor any rent arrears on these units and dealing with them as soon as there is a shortfall. Remember, every dollar lost will either need to be borrowed or paid by the unit owners. Knowledge is power in accomplishing an accurate operating budget going forward.
Certain, hopefully limited in number, unit owners who cannot pay because of employment issues also need to be considered. While we all feel for those suffering in these times, the board took on the fiduciary responsibility to make sure the bills get paid. While a lender is much more likely to step in for a cooperative unit should arrears occur, the risks are pronounced for condominiums. You need to be prepared to only collect token amounts from lenders and then only some monthly common charges. Careful negotiation through this situation is vital and the best way to accomplish that is using future budgets and constant monitoring by the board.
Take the time to talk to your property manager and/or building’s Superintendent about what is going on. Realistically understanding your financial situation and moving to resolve the issues impacting your property from COVID-19 is essential to your financial success. Let’s make sure that we move swiftly to determine our position and structure a plan to assure we understand where we are going. Only by getting started on this exercise now can you hope to use the budget to plan for the latter half of 2020 and have comfort knowing that you understand 2021 as it approaches.
The Czar Beer team is dedicated to providing timely, accurate information on all aspects of COVID-19 that affect our clients. However, as this is all developing quickly we are here to offer support in any way we can. You can email us at info@czarbeer.com or call 212 397 2970 with any questions you may have.