Getting Residents Behind an Assessment
Money is a topic some people are skittish about discussing. When you’re a board member or the managing agent of a residential co-op or condo building however, there’s no benefit to skirting financial realities just because they may be difficult or contentious—on the contrary, not talking openly and candidly about a building’s financial picture, or the need for a special assessment or fee increase can have serious consequences for the entire community.
The Manager's Role
“A managing agent needs to do every possible thing to inform the board of their finances,” says property manager Steven Greenbaum of Mark Greenberg Real Estate (MGRE) with offices in Long Island and New York City. “Board members are volunteers. Managers know the day to day.”
“The managing agent must be instrumental in guiding the board to make prudent financial decisions,” adds Carole Newman of the Long Island-based accounting firm of Newman Newman & Kaufman, LLP. She cites that the managing agent should strongly encourage the board to adopt a realistic break-even operating budget every year. She adds that a manager must have a thorough understanding of the financial aspects of the building operations.
“Certainly the manager must support sound financial decisions,” says Rick Montanye of the Long Island-based accounting firm of Marin & Montanye LLP. “The manager typically presents a budget that must be realistic and encompass known and potentially unforeseen circumstances. Right now the economy is difficult and the building’s professional team, including the manager, accountant, attorney and in many cases, the building’s engineer, must work together to adequately plan and handle financial problems as they arise.”
Greenbaum and Montanye both provide monthly reports for their boards about the financial state of the buildings they represent.
“These reports bring out issues that members may not be familiar with, but are an integral part of running the building,” says Montanye.
Greenbaum says that his firm also brings a “financial snapshot” to all board meetings to show how much money there is, what are the unpaid bills and who owes the board or association money. Additionally, throughout the year, Greenbaum’s firm does financial reviews that go over the board’s budgets of the previous year, present year and upcoming year.
Newman agrees, saying that managers have to continually bring into focus where they were, where they are and where they are headed.
Richard Koller of Criterium Tauscher-Cronacher, a professional engineering consulting firm serving the New York metro area, says the managing agent typically handles all the building’s repairs.
“It’s up to the managing agent to get different quotes from contractors to get best deal,” he says. Additionally, he cites that the management company also crunches the numbers for the board and is very heavily involved in creating reserve funds for these projects.
Newman agrees saying that the manager’s job is to work with experts to assist in determining the level of reserves sufficient to meet upcoming major capital replacements and repairs and to maintain a reserve fund equivalent to four months maintenance/common charges at a minimum to be able to pay for these projects.
According to Greenbaum, the manager also needs to be mindful of quality of life issues and critical building repairs. Most cities have inspection requirements such as façade and elevator inspections that need to get conducted and if they are not, the city can issue the board or association a violation, which usually has fines attached to it, he says.
“Shareholders will be very vocal if this maintenance is left undone,” he says. “They’ll call the city. The city will come down and give the association a violation. You don’t want to run your building this way.” He also points out that too many violations could prevent shareholders from closing on sales of their units when they are ready to move out.
Not doing special assessments and maintenance upkeep causes the building’s value to depreciate, Koller adds. And on top of that, the building’s infrastructure will continue to worsen if repairs are deferred and not made.
They all agree that at the end of the day it is also their responsibility to educate the board on financial matters as best as possible.
“The more informed the board is, the better decisions they make,” says Greenbaum. “Boards that are not informed make mistakes. If the manager points out pitfalls, the board can start making conscious decisions.”
Newman suggests lobby meetings and short-written communications on an ongoing basis to the residents to keep the residents informed and knowledgeable.
The managers who stray from their roles and don’t work with their boards can start to run into problems.
“The most common problems managing agents have are not setting a real budget and using money from the reserve for operating,” says Greenbaum. “They need to properly plan capital for future budgets.”
Newman cites that bad managers often use transfer fees from nonrecurring or sporadic revenues to project a break-even operating budget.
“Revenue items that cannot be depended upon, should not be used to balance the budget for obvious reasons,” she says.
Newman also cites issues related to refinancing a building’s mortgage as another common mistake. “Managers sometimes don’t take into account a five-year capital plan when negotiating a refinancing of the underlying mortgage,” she points out. Rates are at an all-time low so there should be a way to obtain reasonable financing from lenders these days.
“If you don’t have money, Freddie and Fannie won’t loan you any,” Greenbaum adds. “Explain this to the boards.” He says this is a double-edged sword because you don’t want people getting let down. “But it’s also a blessing so that boards can properly plan their budgets,” he says.
Difficulties of Communicating
“Probably the most difficult issue is getting board members to separate their responsibilities to run the building with the desires of the shareholders and their personal issues,” says Montanye.
“Boards get complaints that are not always reasonable,” agrees Koller. “The board will sometimes spend money to put a blanket on the complaining.”
“Getting them to focus on making decisions based on professional input and not the personal objectives of the most vocal shareholders is one of the most difficult issues to deal with” says Newman. “Their engineers, architects, managing agents and auditors can provide advice that will ensure the long term financial stability of the entity.”
Greenbaum says the most challenging aspect of working with boards on their finances is reality. “A lot of boards do not want to hear the reality of taxes, water charges, payroll, insurance, etc. Although you [as a manager] want to work hard, there are challenges.”
He says that boards assume that they can try to cut costs by refinancing, or saving money on water or payroll. This isn’t always the case, however, since loans and building mortgages have fixed rates, payrolls have union costs built in and other variables that boards can’t control.
“Boards may have a strategy to spend as little as possible thereby preserving cash and maintaining a low level of maintenance,” says Newman. “But we know that deferred maintenance can lead to major expenditures. It is incumbent upon managers to be as analytical and independent as possible with respect to making recommendations and not fall into a trap of recommending what the board wants to hear.”
Montanye agrees. “The best situation here is to cite examples of where spending is needed and perhaps not doing a particular project will be more costly in the long run,” he says. “In many cases it is necessary to spend money just to maintain the marketability of a building as compared with its neighbors.”
And unfortunately, the only way to get extra income is through maintenance, concludes Greenbaum.
Best Ways to Talk Money
Everyone has to be open and honest and communicate freely, says Koller.” If there’s distrust in the management company, then that’s not good.”
Nine times out of ten, if something goes wrong, the board will end up blaming the management company. Educate the board. “Put everything in dollars and cents,” says Koller. “Explain the long-term benefits.”
“The best that can be done is to educate them about the pitfalls of a decision, and the long-term cost of a mistake,” adds Montanye. “There are vast resources available for information and education and the manager can suggest attendance at these sessions to help the board get educated on proper procedures and how to evaluate various projects.”
And if the time comes when co-op or condo fees must be increased, that line of communication has to go a bit further.
“Sometimes it is necessary to use several forms of communication,” says Montanye. As a first measure, he suggests a newsletter or notice that would get sent to all owners describing the situation and potential steps that must be taken resolve financial difficulties. He then advises a town hall meeting to outline the issues and solutions and what steps the board needs to take, or has taken to alleviate the situation.
“We’re a big fan of town hall meetings,” says Greenbaum, citing that his firm prepares projections, pie charts and other various visual aids to explain everything. “Nobody will think the board is working in a vacuum this way,” he says. “Communication is the best way to keep shareholders informed. Everyone feels like they’re part of the decision.”
Koller says that including a third party professional at these meetings, like an engineer, can help too. A follow-up notice or a second meeting might even be necessary to completely inform everyone.
“Unfortunately when the situation is dire more information is necessary so that unit owners can also plan their personal lives and obligations,” Montanye says.
Bernadette Marciniak is a freelance writer and a frequent contributor to The Cooperator.