In the context of multifamily communities, there are two kinds of budgets: a capital, or reserve budget, and an operating budget. Capital budgets apply to long-term, big-ticket projects like new roofs or an HVAC overhaul. By contrast, the operating budget covers recurring monthly expenses such as salaries, taxes, utilities, insurance and maintenance items. In creating and managing their operating budget, co-op/condo boards must try to predict expenses, balance cash inflow and outflow, and keep a lid on unnecessary spending.
Know Your Funds
An operating budget, as the rather literal name suggests, is an attempt to forecast the costs associated with the operation of the building for the year. This includes fixed expenses like the mortgage, insurance, and taxes, as well as variable expenses such as fuel oil, air conditioning, gas and electric. “The function of the operating budget is to have a reasonable estimate of the day-to-day annual operational income and expenses. This is helpful when processing bills so that the treasurer, or manager if professionally managed, can quickly see any variances when processing actual expenses throughout the year. For instance, if the monthly electricity bill has a $500 budget, but the bill comes in at $700 for a particular month, then we know that there is an issue to investigate,” says Keith Hales, president of Hales Property Management in Chicago.
As with any budget, operating budgets have different components that play certain roles. “Some expenses you can't put in a corner, like sometimes snow plowing, unless you have a contract that it's a fixed amount, but then you're usually paying more, so there's a gamble with snow plowing. You either do it per push, or you do a flat fee—there's pluses and minuses with both. Normally with operating expenses, you want to spec out the work that needs to happen, like landscaping for example, and you want to get some good bids from good companies. You'll determine what the fee is and throw that in the budget,” says Mark Cantey, CPA, president of Cantey Associates, a condominium accounting firm in Wheaton.
Despite the fancy name and hard numbers underpinning it, a budget is really an estimate. Some of the numbers, of course, can vary widely. Even professional climatologists have difficulty forecasting the weather from year to year, although they try. Weather can be one of those variables for associations. It's always ideal to provide a little financial cushion when possible. Everyone wants to save money at every possible point, but in the end, it's always preferable to cross the annual finish line with excess funds, rather than come up short. The dreaded special assessment is particularly burdensome and frustrating for unit owners, since they are essentially paying up for services they thought they already paid for.
“One of the keys,” says Cantey, “is to try to minimize your unforeseens. Even in landscaping you could have unforeseens, if you have plants die in a drought or storm. It's not always a bad idea to have a contingency line-item for some of the major expenses. It's usually called landscaping extras, and we also see it with snow plowing. You see a snowplow contract, and then snowplow extras,” says Cantey.