The rippling effects of the recent recession has required all boards and property managers to investigate progressive ways to ensure that their bottom line is covered. While the latter has always been the inherent goal, the existing tenuous economic climate has placed more emphasis on finding creative financial solutions via new revenue streams.
To this end, there are numerous ways boards can increase revenue including installing cell phone towers or cable/satellite services on the roof, putting in vending machines or storage lockers, or contracting with companies for advertising billboards and signage. However, there are also numerous obstacles, regulations and concerns to be addressed before potential revenue can be realized.
“The idea of creative revenue generation triggers the notion of a broader fiscal analysis,” says Attorney Kenneth Direktor, director of the Community Association Practice Group for the law offices of Becker & Poliakoff in West Palm Beach. “A board or managing agent must look at ways to create revenue that will place as little financial burden on the owners as possible.”
For small to mid-size buildings, the ability to traverse this often rugged topography can be taxing. With capital improvement projects, emergency repairs and general maintenance an ever increasing cost, often any revenue realized simply offsets fees and price spikes to residents. To be affective, a multi-tiered approach is required without losing perspective.
“The function of an association is not really to focus on external revenue sources,” says Ken Arnold, CEO of Miami-based Association Financial Services. “Its function is to maintain the facility, and the maintenance fees maintain the facility.” After due diligence is executed and standard board operations are addressed, then focus can be placed on investigating new revenue streams, notes Arnold.
“It’s important to spend enough time discussing the association’s financial issues. A general board meeting may not be the right venue; a special finance committee meeting may be needed if the issues are serious,” says Arnold. “It’s also important to do the research and find out which options will be appropriate for your association.”
Determining Revenue Possibilities
If the idea is not to cut services such as valet parking or lobby cleaning services from five times a week to three thus maintaining status quo, then determining what options exist to offset increases becomes the paramount objective. The first area most boards look at is what is referred to as “passive” revenue generators such as rooftop antennas, commercial real estate rental space or signage. Often these are often the easiest to “sell” to residents.
“One of the most common revenue generators is installing an antenna on a roof but that opportunity doesn’t exist for every building as it depends on the location and height; basically it has to be desirable for a telecommunications company,” says Direktor. Cell phone and cable companies are actively seeking new sites but require long term commitments which many boards do not realize. For example, a board should be prepared to enter a 10 to 30 year contract with renewal clauses based on successful milestones embedded in the contract.
While cell contracts can be lucrative bringing in between $1,000 and $3,000 dollars per month, boards have to include other related costs, explains John Frazer of J.R. Frazer Reserves and Insurance Valuations located in Boca Raton. “The insurance carrier will look at an antenna as a negative because you are creating another exposure with other people coming on the property and going on the roof,” he continues. “I recently did an evaluation in Miami with three different cellular towers with three different vendors.”
He notes that due to the construction and wear-and-tear to erect the three antennas, a re-roofing was required. “While there should be more than enough revenue to offset the cost, it does cost money,” he continues. “Boards should know the good, the bad and sometimes the ugly; and I’m not saying this is ugly but there can be drawbacks.”
While many boards consider billboards and signage an easier pitch to residents, selling the concept to municipalities can be an uphill battle. “One association we know of next to I-95 leased out space in their parking lot to erect a billboard. Keep in mind, associations have to also consider their local laws when considering certain ideas,” says Arnold.
When it comes to advertising, Direktor explains that a billboard is considered a major alteration which impacts the entire building. “Any revenue increasing venture that involves fundamental changes to the building will most certainly require a vote,” he says.
For a smaller building, this can be a benefit as there is more of an opportunity for board members to discuss issues with residents and gauge interest. “Obviously with a building of twelve, you only have to convince nine which is different than a building with 600 and you have to convince 450 to get the 75 percent majority needed,” he adds.
Since the antenna and signage discovery to implementation process can be long and intensive, there are other revenue avenues to explore. “Associations may have a clubhouse room that can be rented for parties. There may be soda and snack machines or an ATM machine,” says Arnold. “They may sell advertising in the newsletter or have laundry facilities. Some associations can get very creative,” he adds.
Creativity is the name of the game with many managers and boards thinking out of the box and renting buildings out for television and movie shoots. Additionally, multipurpose rooms are repurposed and made available to the public. While potentially lucrative, there are down sides. “It’s interesting that the different ways to be creative when generating new revenue often runs directly contrary to the wishes of a lot of the owners with regard to a wanting a quiet, private lifestyle,” says Direktor. “And if a building decides to rent space it opens up a host of liability issues because you are renting to the general public which might require certain insurances and there is wear-and-tear on the building, not to mention possible code issues by turning a residential property into a commercial space.”
For those buildings that do not have the space or shareholder approval to rent out their exterior to advertisers, other options exist such as tax abatements. “Tax abatement is generally for the individual unit. Member approval is very important in anything the association would want to consider. The association should review their governing documents and consult with their attorney before moving ahead with a decision that would affect the entire association,” says Arnold.
Managing Revenue Opportunities
For smaller buildings, determining who should lead the revenue charge—the manager or the board—can become an issue. Oftentimes there is a gray area as to where this responsibility should fall. Therefore it is best to have objectives spelled out in the governing laws of the association.
“It is the responsibility of the board to set policy, which then guides the property manager as the board’s representative. But it’s also the responsibility of the manager to advise the board as to how best to manage the facility, including the finances,” says Arnold. “So the answer is both.”
You often hear the old adage “you have to spend money to make money” when people look for new revenue streams. This could be the case, as Frazer notes, with the installation of antennas. Another expense is repurposing existing rooms for new uses, explains Barry Goldberg, a senior private banker for Wells Fargo Private Bank in Boca Raton. “The board or manager will approach us to work with them on a capital improvement such as renovations, repairs or equipment,” he says. “While we are active in the market, we aren’t involved in the creative aspect of it; for us it is more straightforward. Where we get creative is in the terms and structure of the assessment.”
Seasoned, experienced board members generally have an understanding of what possibilities can exist with regard to the budget and are able to anticipate shortfalls due to economic restraints. If a manager has been hired without discussion regarding revenue opportunities, this issue should be revisited—so an acceptable game plan that will meet the needs of the board and residents is reached. As well, they have to determine the likelihood (i.e., signage vs. vending machines) of executing the plan.
“Every community has a wealth of knowledge and talent among its residents. A good start is to begin identifying successful businesspeople and discussing ideas to receive feedback,” says Arnold. “Then someone needs to take a leadership role, find the information required to make a decision, and present the proposal to the right people in their association.”
Self-managed buildings often start with a few strikes against them. For example, due to the smaller size, they may not be on the radar of companies looking to install antennas which is normally the most lucrative revenue stream for a building. Additionally, board members are usually stretched thin as it is and have little time or inclination (due to lack of experience) to pursue possible contracts with vendors. However, other helpful options exist.
“The national non-profit organization Community Associations Institute (CAI) provides educational direction on a variety of subjects of interest to boards. CAI chapters meet monthly and can provide members with expert advice,” says Arnold. “There are other organizations that serve the industry, as well as numerous online blogs written by industry experts. But a self-managed building would most likely still employ a professional manager,” he says.
In the final analysis, a board’s first concern should be to ensure that a steady cash flow is realized, and most importantly, that past due accounts are collected in a timely fashion. The latter has become an increasing problem, and if not properly dealt with, additional revenue streams simply fill that existing shortfall without any appreciable benefits to the treasury.
“A manager’s role varies depending on the homeowners association. Some boards are very heavily involved whereas other boards are not due to a number of reasons,” says Direktor. “But in the end, you don’t hire a manager to make policy changes—that is the provenance of the board.”
W. B King is a freelance writer and a frequent contributor to The South Florida Cooperator.