Written by Shlomo Sharon | 21 October 2014

Condo Business

Setting a condominium corporation’s budget, which will ultimately dictate the monthly fees each unit owner is required to pay, is by no means a simple task. The previous year’s actual operating results serve as a good benchmark for the upcoming fiscal year’s budget. But the board, with input from the management company, may make further considerations in preparing the optimal budget. Accounting for all the factors at play requires a balancing act.

Some factors are in the control of the board and management — for example, service levels. Others, such as insurance premiums, are not. Both types of factors will impact maintenance fees.

Consider the following factors in preparing a condominium corporation’s budget.

Services

Service levels will influence a variety of budget line items. For example, a corporation could change from part-time to full-time security, or plan for additional underground garage cleaning, which would increase expenses. Conversely, a corporation could switch from a full-time to part-time cleaner, or maintain versus improve the building’s landscaping to decrease or contain costs. And don’t forget to account for necessary ongoing building repairs and maintenance here.

Owner expectations

Owners may expect certain maintenance and service levels, but those levels come with associated costs. Where this can get complicated is when various groups of owners have different expectations.

Resident unit owners generally have a greater interest in the well-being of their home. Investor-owners who do not reside in a community are typically more concerned with their return on investment. The greater the condominium fees, the lower their return, as it’s not the renter who pays the condominium fees, but rather the investor.

What’s more, an investor-owner who plans to flip their unit for a profit will be cognizant of the fact that a prospective buyer may be less willing to purchase a unit in a building where maintenance fees are high. That said, a well-maintained condominium is also likely fetch a higher price.

Even in a building with mostly owner-occupied units, an owner of a smaller, less expensive unit may have different expectations from an owner of a larger, more expensive unit. The latter may be more willing to accept higher condominium fees than the former.

Management company’s input

The management company’s input into a budget is important. The management company must obtain quotes for each line item, as it is common to see different prices from different contractors for the same work description. The board may also wish to consider the management company’s advice on the quotes. However, the board has final say on the budget.

Utilities

The utility expenses section of the budget will also be set based on the prior year’s actual results, after taking into account any anticipated increases the governing bodies of the utility companies are expected to make. If such an increase is contemplated, it would be subject to the approval of the provincial government.

Insurance premium

The insurance premium expense can also be calculated based on the prior year’s actual, plus the industry’s anticipated standard percentage increase. The board will need to remember that any insurance claims the corporation has filed may also affect both the premium and deductible and will have to budget accordingly. The board may also choose to obtain new quotes. This expense can be determined with a level of certainty.

Reserve fund contribution

Normally, one of the largest line-items is the reserve fund contribution. This amount is determined by the engineering consulting company when it prepares the reserve fund study, which must be updated every three years.

In the end, a budget is a financial projection.

Even if budget preparations suggest a fee increase is unnecessary, a board may still have reasons to contemplate one. A surplus that is used to keep the fees the same one year may not occur in following years, requiring a higher increase then to compensate for the surplus amount. A delayed but higher increase may not be welcomed by owners used to seeing no increase.

While a budget should not be prepared with the purpose of creating a surplus, the knowledge that future years will require an increase due to inflation as well as wear and tear, a modest annual increase equal to the Consumer Price Index or in the range of two to four per cent may help to minimize unexpected future and larger increases.

Some owners may question an unnecessary increase. It is the board’s duty to provide a clear explanation in communicating the increase in the budget.

Ultimately, annual budgeting requires the board to account for fixed costs and to balance the continued upkeep of the common elements of the property and the financial ability — and willingness — of the owners to pay for it.

Shlomo Sharon is CEO of Taft Management Inc. and a member of CCI since 2002. Taft Management Inc. is an ACMO 2000 Certified Property Management Company and has been providing property management services since 1996. Visit the website www.taft-forward.com for further information or email him at This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

 

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