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 real estate taxes, as well as variable expenses such as heating oil, gas and electricity. “The operating budget should consist of normal expenses for the operation of the building, all inclusive,” says David M. Rosenblum, CPA of the accounting firm of Rosenblum Mishkin & Company, LLP in Plainview.
Despite the fancy name and hard numbers underpinning it, a budget is really an estimate. “It’s nothing more than a guess,” says Steven Schneider, managing agent and owner of The Back Office, Inc in Manhattan. “It’s an educated guess, but it’s a guess.”
Part of it is the revenue streams: maintenance fees mostly, even if there may be other ways for a building to generate income. “Some buildings want to include a flip tax, but it’s a risk,” says Rosenblum. “You can’t count on a flip tax, because you don’t know how many units will sell from year to year.”
A flip tax or transfer fee is money usually paid by the seller that goes back to the co-op each time an apartment is sold. Although some condominiums do have a flip tax, it is not very prevalent because of the laws governing ownership in condos.