Planning for Posterity Long-term capital budget strategies

Every year, co-ops and condos spend serious time and energy compiling their operating budgets. The process can start as early as September, with an evaluation of the first eight months of expenses for the past year–the primary purpose of which is to investigate unexpected variances from the prior budget and to determine if they will re-occur. In the end, it’s still more than likely that the new budget will mirror the old, albeit with some small adjustments or across the board percentage increase. After that, maintenance charges will be set, the philosophy typically being that maintenance charges should equal expenses. This is where most buildings stop.

Unfortunately, this stops short of what can be the most important and expensive expenditures a building generally faces every year: major repairs and replacements. While a building’s reserve fund is established to fund such projects, most sponsors only fund the required legal minimum of three percent–hardly enough to satisfy the long-term needs of the building without any future contributions. Many owners do not fully appreciate the financial imbalance that exists between the future needs of the building and the balance of the fund. Fortunately, this is changing. Prospective purchasers have begun asking to review meeting minutes, and in some instances even hiring engineers to perform basic building evaluations before choosing a building.

Seeing the Big Picture

The entire premise of common ownership puts co-ops and condos in the not-for profit industry, along with charities, schools, and governmental entities. With no profits to re-invest in real property and equipment, these entities must plan for the inevitable need for major repairs and replacements to their real property. Residential buildings require even more foresight–these units are people’s homes, and represent their single largest asset. Many owners rely on this asset and expect it to appreciate over time. Given that, the life span of a common-interest entity must be considered perpetual: Its sole purpose is to maintain the property.

By initiating long-term capital budget planning, your building can achieve long-term financial independence. It only takes one forward-thinking board member to recommend such a plan and eliminate the need to endlessly rely on increasing debt to fund major repairs.

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