By their nature, co-ops and condos are about ownership, common interests and camaraderie. They are also predicated upon the sharing of costs–both of the day-to-day maintenance of the property, as well as periodic capital expenditures. As with any other home, at some point in time there will be a need for major repairs and replacements.
While most co-ops and condos prepare an annual budget, these tend to address only the normal operating costs of the building, often neglecting plans for future repairs and replacements. There are many physical components of a building–the roof, elevator, heating and/or air conditioning system, façade, electrical wiring and windows–which ultimately will need significant repair or replacement. A long-term capital budget should be employed to itemize the anticipated need and the costs of future capital expenditures, as well as to develop a plan to fund these inevitable and significant projects. This capital budget should also be prepared and updated on an annual basis.
While the major purpose of this exercise is to ensure that all owners are aware of the need for long-term financial planning, it also supports the popular concept of charging the current occupants for their proportionate usage of each component. Let’s use the roof as an example. If it is expected to last for 20 years and costs $100,000 to replace, then an annual provision of $5,000 for roof replacement should be included in the budget so that each owner will currently fund his or her proportionate share of the annual wear and tear. Managers and accountants should explore this concept with all new clients.
Most buildings don’t have sufficient reserves to cover the cost of all of the major repairs and replacements that arise, nor a plan to provide the necessary funding. In the rising real estate market, it has been easy for co-ops to raise funds through mortgage refinancing or by establishing a line of credit and–fortunately, for many–at historically low interest rates. Since these options are not generally available to condos, and as the market may be softening, let’s explore the two options that are always available: a special assessment and/or maintenance increase.
Breaking It Down