Budgets can be intimidating documents but they are a pretty critical part of your ownership experience. After all, the Corporation does not have a credit card, so its important to plan accurate for the coming year expenses because no one likes to get that Special Assessment letter asking for more money.
While budget formats and contents will vary greatly from property to property, we will address the most basic areas, common to all condominiums. Detailed line items which remain a mystery to you following this brief study should be addressed with the Treasurer of your Board or your Condominium Manager.
The annual budget for any condominium corporation is an Operating Budget. This means that it represents the Plan of the costs anticipated to operate the property for the coming year. The planning is based on budget-to-actual comparisons for the current (and previous) year as well as estimates of any increases or decreases in expenses. The careful review and thorough research, combined with some knowledge of your property and / or adequate experience with similar properties, will produce a relatively accurate reflection of these expenses.
Annual figures for even a single-family home can be intimidating – when you look at the numbers for multiple units over the course of 12 months, they can look staggering, but never fear! These costs are divided among all units (usually based on square footage) and are payable monthly – whew! So, having established what the budget is and how it is paid, we'll need to address the components of the budget (which will also help you to understand how you can help to save money on fees in the future).
The Operating Budget Expenses usually involve several categories and for the purpose of simplicity, we will only look at some basic summaries, rather than detailed descriptions:
Administration Expense : this category plans for expenses such as the Management Company's fees, Auditor fees, insurance premiums, bank charges and things like photocopies and postage.
Utilities and Contracts : fairly self-explanatory, this section covers common utility costs (depending on your property, this could simply be for irrigation water and parking lot lights OR could include the heat, water and even electricity and cable TV for every unit), as well as contracted services such as snow removal, boiler maintenance, landscaping, etc.
Maintenance Expense : these costs will be the planned expense for items such as eaves trough repairs, fence repairs, caulking of roof vents, hallway carpet cleaning, elevator repairs, etc., again, depending on your property. These expenses are for regular wear-and-tear / aging issues and preventative maintenance items; not included are major replacement costs, which brings us to the final category:
Reserve Fund Contribution : based on the Corporation's Reserve Fund Study and the subsequent Asset Management Plan adopted by the Board, this fund is used for long-term planning of replacements for major components, based on the common life-cycle, age and current condition of these components. If shingles should last 20 years and asphalt should last 15 years, the Reserve Fund will need to have contributions over this (or the remaining) time period, equal to the expected cost (including allowances for interest income and inflation factors) at the time the replacements are due. If this wasn't done, every owner would face a special assessment in Year 15 for asphalt replacement and another assessment in Year 20 to replace the shingles. By contributing smaller amounts over time in anticipation of these expenses, the funds will be in place to have the work done, without having each owner write a check for several thousands of dollars.
Allow me to digress for an unscheduled educational opportunity at this point: we often hear owners ask, "Why should I keep putting money into this fund if I'm not even going to own my unit in 15 years?" Good question! The short answer is: Property Value. The longer explanation involves a potential purchaser's concern that without this prudent financial planning, they will be buying not just a unit, but the likelihood of a substantial debt – who wants to take possession of this large investment and receive notice of a special assessment the following month? In order to maintain the value of everyone's units, it's important to show fiscal responsibility, so that no one is faced with this situation at any point.
And now, back to our regularly scheduled lesson on budgets: The bottom line, is that it costs money to maintain the property (just think of the costs for a single-family home, multiplied by many homes and then shared by everyone).
The real lesson in all of this? The more owners are cost-conscious, the more everyone can volunteer time, contribute materials, assist with tasks … the less it costs the Corporation. This in turn, reduces the costs for everyone and voila! your monthly fees are not subject to uncomfortable increases! I point this out because I still hear people saying "they increased our fees again this year, so I'm going to take longer showers and leave my lights on all day to get my money's worth"! ?? When I ask who they think "they" is, lots of owners will say "the Board" – FYI: "the Board" is comprised of people who also own units and also pay monthly fees – they don't want increases any more than anyone else.
Make a point of knowing what the line items in your budget are for, what the costs are and take the time to compare this year to last year numbers – it will help you to understand why "they" are increasing your fees; which brings us to a final point:
It is extremely rare that costs ever go down. Utilities will fluctuate, once in a while we'll see snow removal costs lower than expected, sometimes we can find a better price on repairs, but generally, the price for almost everything keeps going up (if nothing else, remember that your property gets older every year!). We never recommend lowering a budget (read: fees) and rarely advise that fees can remain at the same rate as the previous year (without sacrifice of some sort) – this practice will very likely create a financial deficit, which is far more difficult to resolve than if a modest corresponding increase is implemented each year.
As an existing or a potential owner in a condominium, its important to understand that while no one likes to pay more, it is easier to keep up with expenses and its far better for your re-sale value, than to have unrealistically low fees and be faced with a Special Assessment – which, even if you have this money sitting in your bank account, never has a good connotation for potential purchasers and therefore, impacts your property value negatively.