Annually, the Condominium Manager and Board of Directors have a fiduciary duty to prepare a budget for the condominium corporation. As such, by the 8th or 9th month into the fiscal year the Condominium Manager will begin the process of preparing the operating budget for the upcoming fiscal year. A condo corporation’s budget is made up of 3 sections; Income, Expenses, and the Reserve Fund, which is legislatively required. Within these sections, however, are subsections for each.
The Income Section
Condo fees, which are prearranged fees that an owner must pay based on the sq.ft. of their unit, are the main subset of the Income section. This primarily refers to monthly common element fees and sundry incomes, such as parking, laundry fees, and interest from the corporation’s accounts.
The Expenses Section
The subsections to consider when budgeting for your condo’s expenses typically consist of: Administrative Expenses: accounting and legal fees, bank fees, management fees, and office expenses. Contracts: Landscaping & snow removal, security contracts, cleaning, and life and safety. Miscellaneous Repairs & Maintenance: Common element maintenance such as plumbing, electrical or mechanical repairs. Finally, there are Insurance and Utilities: Hydro, gas, water, sewer, and telephone.
There are several steps associated with collecting the information needed to provide an accurate operating expense projection.
Start with the contracts: The easiest line items to complete on a budget are the contracts, as there are usually stipulations within the contracts that speaks to annual increases. Therefore, gather all the contracts and check the terms of increases. If these are not easily identifiable, contact the contractors and ask for their annual rates.
Review the corporation history: Once the contractual amounts are in place then its time to determine how much was spent for the remaining items during that fiscal year. An industry practice is to review the last two budgets as well as the monthly statements to provide information on the corporations normal spending habits versus an anomaly. This will also allow you to decide if a ‘cost of living’ increase is adequate or more funds need to be allocated to a particular line item. As it relates to Miscellaneous Repairs & Maintenance, it is important that sufficient funds are allocated based on the age of the building, as the older the building the more likely things will fall apart.
Get Quotes: This step is taken for any item that is not on a contract and you cannot adequately provide an estimate. This may include new line items or items where there is little or no spending history.
Project Increases for Utilities & Insurance: Typically, these items cause the most increase on an annual budget, along with the reserve fund allocation. This is because the corporation has no control over these costs. For all the other line items the manager and the board may look for alternatives, like a new contractor, to reduce cost. However, this approach cannot be taken for utilities with constantly increasing rates. With that said, a good approach is to investigate local and municipal rates, which will give you an idea of the percentage increase to account for. Regarding insurance, industry rates have been on the rise recently, with condominiums seeing exorbitant increases – even those without claims. As such, one method for projecting an increase is estimating for at least an 8% raise. For added protection some condominiums have taken it further and based their increase on the 8% + 1 general deductible, or simply asking their broker for a quote beforehand.
Prioritize Upcoming projects: At this point, your budget should almost be fully populated. However, the board of directors usually has a ‘wish list’ for the year. These are items that are not reserve fund eligible, but the board would like to implement. It can range from a beautification project to wanting cameras. The onus is on the board to differentiate between wants and needs, and determine where funds are best spent.
The Reserve Fund Section
The Condominium Act, 1998 requires that all condominiums have a reserve fund, and it is used to pay for major renovation or repair projects. For the annual budget, the reserve fund contribution is taken directly from the 30-year schedule in the Reserve Fund Study.
Conclusion
The major mistake that boards and some management teams make is trying to keep budget increases as low as possible, which is not a correct way to manage your condo’s finances. The budget should always reflect the true amounts needed to efficiently operate the corporation. By creating an effective budget, the management and board are ensuring that they are maintaining a fiscally responsible property. For tips on what is a financially healthy property see our blog post.
Written by Ashlee Henry*
Vice President – Operations at Alwington Communities
Ashlee Henry is an experienced Property Manager and Operations Professional with a diverse background in Commercial, Townhomes and High-rise Condominiums. She has earned an excellent reputation for resolving problems, improving customer satisfaction, and driving overall operational improvements. In addition to doing her MBA from Fredericton University, Ashlee has additional ACMO qualifications from Sheridan College. She holds a Supervisory Workplace Health & Safety Certification, RCM designation and is working towards her CPM designation.
* Though written by a qualified and experienced Condominium Manager, this article is not intended as legal advice. Please consult your own experts for advice.
