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Cooking the Books

Cooking the Books

Article written by Jack Carr, P.E., R.S., LEED AP, Criterium Engineers
Published in Condo Media, March, 2015 

My apologies to those nefarious bookkeepers who were drawn to read this only to find out it has nothing to do with creative accounting.  Instead, we will be discussing the budgeting needs for small condominium associations who manage their affairs in-house without the assistance of professional property managers or other financial service providers.  In effect, we will develop a budgeting cookbook.

Condo communities in Maine are not what are typically found in other major condo markets across the country.  Maine does not have mega-city like condo communities nor is its rocky shore strewn with high rise condominium towers.  Perhaps because of it large inventory of old buildings having been converted to condos or just our Yankee thriftiness, many of our condos are small (i.e. 4 units and less) or contain Board members wanting to manage on their own.  Though I have often discouraged condos from running their operations without any professional advice, I have to recognize it is a fact of life in Maine.

When condos are small almost everyone is on the Board or is involved in one way or another.  The finances are often handled as if the association was a family and everyone gathers around the kitchen table to make decisions.  Often this means reserve funds are not set aside to handle the big problems such as resurfacing the roof(s).  Everyday expenses such as utilities and snow plowing are relatively easy to manage out of a check book.  It is the long term issues that are often ignored putting the unit owners’ net worth and quality of living at risk.

One of the reasons I am bringing this matter up now is there may not be a better opportunity than now to begin planning for long overdue capital repairs.  Maine is on the verge of some significant multi-family property growth.  Apartment vacancies in southern Maine are at an all time low.  The inventory of available apartments at reasonable prices has recently shrunk.  Property for conversion to condos in such areas as the past maligned but now trendy Munjoy Hill neighborhood of Portland is becoming scarce.  Biddeford’s converted mills are experiencing resurgence with downtown improvements including the removal of the waste treatment facility along the Saco River and the influence of University of New England’s growth and emerging arts renascence.

Second, the price of construction is dropping making reserve fund planning more palatable.  As the price of a barrel of oil keeps falling, so do construction materials made from petroleum such as asphalt paving; roof shingles; vinyl siding; etc.  In addition to plastic based PEX piping prices coming down, so is copper piping.  Up until recently copper materials for plumbing and flashing has been selling at a premium but now it experiencing what I call the ‘China’ effect.  China is scaling back its industrial and construction expansion plans due to the slipping world economy with the result it is no longer absorbing large quantities of the construction materials such as steel and drywall.   Copper products alone have dropped over 12% since the summer.  Maine condo budgets can benefit from these world events.

So with these incentives how does a non-financial Board member go about cooking up a reserve fund budget the association will swallow?  First, the ingredients need to be organized and laid out.  Instead of a kitchen countertop you will be laying out the reserve fund elements on a spreadsheet.  This can be done on computer spreadsheets or the old fashion way on paper.  The first column should have your main ingredient going down the page with the top half of the spreadsheet devoted to cash coming in and the bottom half listing expenses going out.

Your first entries will be the balance of cash in the reserve fund account with the second line having the expected contributions.  These should be spread over 20 years i.e. 20 columns.  The cash going out are the estimated capital repairs such as window replacement; deck repairs; and roof resurfacing.  Once the spreadsheet is filled out, sum the total of the capital repairs at the bottom for all 20 columns.  The source for these costs will be your maintenance service providers.  Increase each of these totals by 3% to account for inflation.  Then subtract this from the net cash available each of the 20 years rolling the balances into the next year.

It is likely you will find you are in a negative cash balance.  This is when the creative cooking begins.  Determine how much money has to be set aside each year for the bottom line to not only be in positive numbers but also a slight excess.  Your community needs to select how large the excess should be to feel comfortable.  This is called threshold funding.  As with any recipe, it will need to be adjusted and seasoned to your taste.