Taking care of a condo or co-op building’s budget and finances is a big job. Handling such large sums of money is an important responsibility, and not every shareholder or unit owner has the expertise to do the job well. Sure, most people know the that the amount of money going out shouldn’t exceed the amount of money coming in, and people with even a small amount of financial experience know the difference between the capital budget and the operating budget.
But it’s much more complicated than that. And because it is so complicated, running a community's books often becomes a joint effort, involving the board, manager, accountant and others. In addition to solid help, another key part of the process is knowing some basic terms and concepts that apply to multifamily communities, whether condo, co-op, or HOA.
First Things First
First, let’s look at some of the main components of a typical co-op or condo building’s financial profile. According to Richard Montanye, CPA, a partner at the tax consulting and accounting firm of Marin & Montanye, LLP in Uniondale, New York, these include working capital position, available cash, capital reserves, long-term debt and budget status.
Put another way, “Associations generally follow the principles of fund accounting,” says Jules Frankel, CPA, MBA, a shareholder at Wilkin & Guttenplan, P.C., a certified public accounting and consulting firm with offices in East Brunswick, New Jersey and Manhattan. "The best way to think about fund accounting is to think about the 'envelope system' your parents or grandparents used. One envelope was for rent, one for food, and one for utilities. Instead, associations' envelopes are operating, replacement and deferred maintenance funds."
Each of these 'envelopes,' major funds, are set aside and represent certain expenditures. For example, monies in the operating fund are set aside for items such as landscaping, property management, and insurance. "The deferred maintenance fund is money the association may not spend every year, but is for repairs," says David Ferullo, a partner at The Curchin Group, an accounting firm in Red Bank. "For example, perhaps the association is planning on painting the building in three years’ time that will cost the association around $30,000. Accordingly the deferred maintenance budget is $10,000 each year in the fund. When the association is ready to paint the building in three years, the monies will be available."