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Letting it Slide... The Pitfalls of Deferring Expenditures

Letting it Slide...

 It’s the same dilemma that single-family households across the U.S. are facing:  What bills need to be paid immediately and what bills can wait? And should we  stretch ourselves thin, taking more out of our bank accounts to pay for private  schools and that desperately needed vacation? Or should we cut back on  restaurants and renovations to put more into savings? The same goes for co-op  and condo buildings. While it may be tempting to delay payment on some bills,  or delay expenditures on maintenance or needed repairs, in the long run this  may end up costing far more than we ever realized.  

 Just as the federal government faced a serious financial crisis over the debt  ceiling, which still rages today, boards face some very difficult decisions  when it comes to what bills need to be paid, and what capital projects are most  important. Questions arise such as, do we really need to fix the one pothole in  the parking lot right now, or can it wait a few months? The truth is that  deferring a minor repair now may, in the long run, cost the association a whole  lot more.  

 There are many quick fixes that boards consider when faced with rising costs and  static income. The most tempting is to prioritize and pay the bills that are  the most important, while putting off other expenditures to a later date. This  is a tempting “solution,” but it is one fraught with inevitable downsides and danger.  

 Another option, one that is much more prudent that boards may opt for, is  raising revenue. This option has it's downsides as well, with so many families  living on tight budgets, they may not be able to pay an increase.  

 A third option is to levy a one-time assessment to all households in the  community. This also may seem like a good solution, however, this is only a  stop-gap measure usually reserved to pay for a major capital improvement such  as roof repair or the installation of a new HVAC system.  

 There are options, but in today's tough economic times, how does a board know  which option to embrace. How does a board prioritize what bills and  expenditures are important and what aren't important? If the board is able to  answer this question then it makes the decision-making process much easier.  

 First Things First

 The first step is to figure out the basics: What bills must be paid? What is the  cost of maintenance? What expenditures are ancillary? In other words, are there  certain expenditures that are not necessary, such as weekly deliveries of  flowers for the front desk? These are key questions that must be answered by  the board.  

 The board must always be cognizant of what's going on in the community, even  something as minor as a crack in a hallway wall is something they should be  aware of. That crack, if not repaired could become larger in time and the  repair may cost much more if not taken care of immediately. An even worst case  scenario: that hallway crack could be symptomatic of a larger maintenance issue  and left on its own it could become a major maintenance headache.  

 These kinds of sudden emergencies always pop up. What happens when the pool  needs rehabbing, the roof springs a leak, the electricity bill rises or the  common areas require new carpeting: you can't ignore the problem, you don't  want to raise maintenance fees, or have a one-time special assessment. So how  does a board plan? asks Gary van der Laan, director of management development  at Leland Management Inc. in Orlando.  

 “It is important to watch the financial status of the association on a monthly  basis,” van der Laan says. “A good rule of thumb is that the community should have three months of operating  cash on hand at any point.”  

 Van der Laan believes that this is the key to managing a successful association.  

 Many industry professionals agree. A board each month should review their  expenditures each month very closely. If there are ancillary costs that are  cutting into the three months worth of operating costs, they should be looked  with an eye to cutting or eliminating that cost.  

 Not the Best Option

 The two major downsides to deferring bill payment are; one—in the long run it will damage the association's credit and; two—eventually the bills have to be paid, and the bills will have increased. By not  prioritizing bill payment and reining in monthly expenditures a board may have  no option but to increase maintenance fees, or impose a special assessment. In  this case, the board is being forced to do exactly what it wanted to avoid.  

 Boards must remember that there are rules in place to make sure the maintenance  fees and other charges don’t increase too high or too often. The association also needs to have everything  in writing ahead of time, explaining the percentage that the fees can be raised  annually, and for what reasons homeowners can be charged.  

 And while the state of Florida does not impose a cap on how much is too much for  a single special assessment or fee increase, homeowners associations need to be  mindful of how much their residents can actually afford with regards to yearly  assessment increases. “Other than such an unforeseeable need, regular annual increases would not  typically be greater than 5 percent,” van der Laan says.  

 But technically, a board is able to increase annual fees by 15 percent per year  without majority approval by the residents, says Sue Carpenter, CEO of  Community Management Professionals Inc. in Orlando.  

 Planning Prevents Surprises

 If homeowners read their governing documents and attend their association's  yearly budget meeting, they will understand the financial health or their  association.  

 “When the budget process begins, the board should look at the actual expenses  through that point in the budget year, as well as projections to the end of the  budget year,” he says. “All contracts in place should be reviewed for any type of built-in increase, and  all service providers and utilities should be contacted to find out about any  expected increase for the next year.”  

 If expenses stay relatively stable from year to year, there doesn’t necessarily have to be an automatic annual increase in assessments, says  Mitchell Drimmer, vice president of sales for Miami-based Association Financial  Services, a financial services provider specializing in lending and collections  for condo and homeowners associations. According to Drimmer though, picking and  choosing what bills should be paid is a recipe for disaster.  

 “I call it the ‘check in the drawer game,’ all the checks are printed out, but when you open the drawer you pick and  choose which check to give. This is not the right way to run an association,  because if you don’t pay now, you’re going to pay much, much more later,” says Drimmer.  

 For example, if your building is currently paying $100 per week for landscaping,  and the next year, it still will cost $100 per week, then there would be no  immediate need to tack on any extra costs to the homeowners. Of course, if the  price of the landscaping goes up, a board could either decide to cut into the  three months of operating cash to pay the landscaper; they can increase  maintenance fees, (which is what the board is trying to prevent); they can come  up with a more creative solution such as turning a flowerbed into a concrete  area to decrease the cost of landscaping; or they can negotiate with other  landscapers and sign a new contract, Drimmer says.  

 Additionally, Drimmer advises that boards have to be firm when it comes to  collecting past due common charges, fees and assessments.  

 “It’s a disservice to the entire community when a board isn’t firm, consistent and cohesive in collecting common charges, fees, and fines.  That lack of revenue will quickly force a board to be tempted into playing the ‘check in the drawer game.’ Additionally, boards must also take a firm line in collecting interest and late  fees. The loss of this income can quickly deplete an association’s cash reserves,” says Drimmer.  

 Sticker Shock

 To avoid shocking unit owners with an assessment or fee increase out of the  blue, most legal and management experts advise boards to keep their residents  informed throughout the year of the increases in the operating budget, and what  the board is trying to do to rein in costs. The board can do this through  newsletters, a website, a personal letter from the president and via financial  reports.  

 Most increases are the result of capital repairs, delinquent unit owners,  foreclosure and price increases for insurance or other expenses—and if this is explained clearly and honestly to an association's unit owners,  there will likely be less push-back when the time comes to reduce amenities, or  impose an increase or assessment. After reviewing the contents of the letters,  invite the unit owners to e-mail the board with further questions or with  clarifications of any of the points they may not completely understand. Better  yet, invite them to serve on the board itself, or on the budget or financial  committee.  

 Risking a Special Assessment

 If the board doesn't get expenditures under control and continues to defer bills  until balances rise and then suddenly that crack in the hallway wall becomes a  dangerous hazard, the board may be faced with the distasteful option of  imposing a special assessment.  

 Once again, this is a situation that can be avoided through proper budgeting and  planning. Had the board repaired that crack in the hallway when it was first  reported then the board would not be placed in this untenable situation.  

 Special assessments are usually reserved for financing a major capital project.  Unlike maintenance increases, special assessments aren't necessarily  predictable. There’s no cap on how much they can be, and depending on the reason, they may cost a  relative small fortune for homeowners. A special assessment can only be  requested if there’s a sudden infrastructure issue, such as a broken roof, a faulty balcony or  window that may become dangerous if not replaced.  

 And according to the legal pros, those dangers go beyond the obvious ones to  life and limb. If an owner is injured as a direct result of deteriorated  property, both the association and the individual members of the board could be  potentially liable. So even if it seems like a good idea to hold off on repairs  or maintenance projects in the name of thriftiness during a tough economic  patch, doing so could come back to bite board members where it hurts.  

 Affecting Resale Values

 According to Miami-based attorney Michael J. Marotta, Florida state law requires  that boards manage the fees and assessments that essentially keep their  building running smoothly from day to day, and determine what will occur in  case of emergencies. However, since the specific cost of fees and special  assessments isn’t spelled out, it’s up to the board to decide how fiscally responsible they should be. One of the  tangible benefits of keeping the maintenance fees low or steady year after year—aside from keeping residents happy—are resales.  

 “A lot of times, people make decisions on which condo to buy based on the  maintenance fee,” Drimmer says. “All financial factors go into their final decision.”  

 On the other hand, residents also want—and require—a building that functions well and is safe. Residents not only want their home  well-maintained, but, equally as important, residents want a building that is  well-managed. A smart homebuyer will look at how the board handles the budget and what the  reserves are. A smart homebuyer understands that if the community is not  properly managed and adequately funded, then the money will have to eventually  come via a special assessment. This will deter most homebuyers.  

 Final Thoughts

 If the board is finding it more and more difficult to pay the monthly bills  without cutting into the three months reserve, and the board has decided that a  fee increase is not an option then the board will have to make some very tough  and possibly unpopular choices.  

 One option would be to reduce amenities if the board wants to avoid falling  behind in expenditures and avoid increasing fees. Boards must remember though  that if a resident is promised a certain amenity when buying into a co-op or  condo, the board will have a hard time legally and practically doing away with  the perk.  

 Carpenter suggests that if a board is strapped for money, they could get rid of  relatively smaller amenities, such as a monthly social or a Christmas party,  rather than doing away with something that’s been promised in writing to the resident, such as a pool or a tennis court.  

 That way, they’d be able to scale back without upsetting the residents and going back on what  was originally promised when the apartment was sold.  

 Above all, the most important and effective tool a board can utilize is  communication. We've seen the downside and implications of deferring bill  payment, but residents have to be kept in the loop. Informing the residents of  the budget process is key to garnering support from residents and will in the  long run help the board if it does have to reduce amenities, eventually raise  fees or impose a special assessment. There are both good and bad ways to go  about explaining these options to residents.  

 But above all else, never defer paying a bill, what may seem like a quick way to  balance the checkbook, may end up costing more than anyone ever realized.    

 J.M. Wilson is a freelance writer and a frequent contributor to The South  Florida Cooperator. Associate Editor Liam P. Cusack also contributed to this  article.  

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Comments

  • yaya.lettis@gmail.com on Saturday, February 15, 2014 4:24 PM
    can a co op maintenance board borrow money from a bank to fund a certain project--i did not find any reference to this in chapter 719--thank you