Understanding Condo and Co-op Annual Budgets: A Comprehensive Guide

Annual operating budgets for condos and co-ops are usually prepared in Excel and follow a predictable structure. These budgets are discussed and agreed upon by the building’s board, which may also prepare them. Sometimes, the treasurer, the CPA firm responsible for the building’s taxes and audit, or the property management company may handle this task. Here is an industry-standard annual budget template for condos and co-ops. Let’s break down each section.

Defining Maintenance

Before diving into the details, let’s clarify the term “maintenance.” This refers to homeowners’ association dues. Depending on the city, this expense may be called maintenance fees, charges, common charges, HOA dues, or homeowners association fees. These terms are used interchangeably in this guide.

Annual Budget Overview

The annual budget’s main purpose is to summarize the remaining tabs and demonstrate that the operating surplus or deficit will be zero by adjusting maintenance expenses accordingly.

Yearly Comparison

This tab summarizes historical spending data for each major category based on audited financials. For example, the 2014 data might include ten months of actual figures with the remaining two months estimated. Typically, the first ten months’ data are annualized to create a rough estimate for the entire year.

Income Sources

The income tab includes all sources of income, such as common charge increases, to determine the building’s projected income. Common charges are usually the largest component. This tab also provides historical data, allowing shareholders to see when and by how much maintenance charges were last increased.

Handling Maintenance Charge Increases

In many buildings, tenants often resist common charge increases, even when additional funds are necessary. Some Manhattan buildings, for instance, have owners who bought units at lower prices but now struggle with maintenance charges as property values and related costs rise. Some tenants can no longer afford these charges due to stagnant or declining incomes, which poses a significant challenge for property management.

Additional Income: Commercial Rents

Some buildings generate substantial income from commercial rents, especially those with high-profile tenants like Walgreens or Starbucks. In some cases, a single storefront can bring in over $200,000 monthly. Commercial lease accounting is a complex field, but it’s crucial for buildings that rely heavily on this income in their annual budget.

Vending and Laundry Machines

Buildings often contract third-party vendors to manage vending and laundry machines. A typical contract might allocate the first $1,200 per month to the vendor, with any remaining funds split based on a pre-agreed ratio. This arrangement benefits both tenants and the building, offering convenience while generating extra income with minimal effort.

Movie Income

Buildings with unique or historical interiors may rent their lobbies for film production, particularly in cities like New York, Chicago, and Boston. This can be a lucrative income source, with monthly payments exceeding $40,000. However, this extraordinary income shouldn’t be relied upon for regular operating expenses like taxes or utilities in the annual budget.

Visualizing Expenses: The Pie Chart

This budget template includes a pie chart illustrating the building’s expenses. While some may find it unnecessary, it serves to provide a visual overview for board members who prefer a graphical representation.

Payroll Tab: Understanding Labor Costs

The payroll section is one of the most challenging to understand. Different cities have different unions, like SEIU Local 1 in Chicago or 32BJ in New York City. The presence or absence of unions can significantly impact labor costs, with unionized buildings often paying much higher wages.

FICA – Gross Wages

The FICA section calculates the building’s tax responsibility as an employer. For 2015, this involved multiplying total gross wages by 7.65%, which covers Social Security and Medicare taxes. Adjustments are made for employees earning above the threshold ($118,500).

SUI/FUI – State and Federal Unemployment Insurance

SUI and FUI rates vary and should be confirmed with the building’s payroll processor. These items are essential components of the payroll tab in the annual budget.

Transit Benefits

Transit benefits, such as those administered by TransitChek, are tax-deductible commuting expenses available in many cities. As an employer, offering these benefits is recommended to remain competitive and compliant with government programs.

Utilities: Heating, Electric, and Gas

Utility costs are entered manually and based on assumptions about future price increases and seasonal variations. Buildings may also choose alternative providers through ESCOs, which can offer lower costs or more sustainable options.

This is an effect of utility de-regulation, which allows customers in certain markets to choose who their utility provider may be. There are a variety of reasons why a building may do this. Some Esco providers claim to have lower costs. Others stand for a particular cause, such as the ones linked here, which are marketed as “green.”

Managing Operating Expenses

Operating expenses are closely scrutinized whenever a budget doesn’t balance. However, options for cost-cutting are limited due to inflation. Most buildings start working on their budgets between August and November, using the first 9-10 months of actual data to estimate the year-end figures.

Water & Sewer Charges

Water and sewer charges are calculated using meter readings and projected increases. Each city has a different method, but the goal is to estimate daily costs and adjust them for future price hikes.

Capital Expenses: Planning for the Future

The final budget tab forecasts capital spending, such as repairs to aging infrastructure or upgrades to utilities. These expenditures are essential for maintaining the building’s long-term value and functionality.