In the context of a cooperative or condo association, the term “budget” may refer to one of two things: the operating budget or the capital budget.
The operating budget covers recurring monthly expenses such as payroll and salaries, taxes, utilities, insurance and general maintenance items. In creating and managing an operating budget, co-op and condo boards use previous years’ budgets as predictors for the coming year’s expenses, and factor in other considerations, such as the balance of cash inflow and outflow, collection of arrears and late fees from delinquent residents, and potential emergencies. How do condos and coops earn income? As with all things, it depends on the property. Income can come from rental monies, dues, assessments, interest on bank accounts, financial penalties, user fees or security deposits.
Capital budgets apply to long-term, big-ticket items, like new roofs or an HVAC overhaul – in other words, expenditures that relate to improving building conditions and consequently, increasing the value of the building. Capital budgets typically span several years and are prioritized following a capital needs assessment or building survey, conducted by an architect or engineer, who evaluates all aspects of the building and determines the priority of improvement projects as well as cost.
Budgets are an integral part of an association’s financial plan. But who is responsible for creating the budget? Typically the budget is created by someone in the accounting department of the management company, in most cases the chief financial officer if they have one, or an outside CPA, if the management company does not have a qualified accounting person on staff to prepare the budget in house, or if the property is owner-managed. Once the first draft is complete it is presented to the board or the owner(s) for review. Once the budget has been agreed upon, unit owners or shareholders should be notified of any changes or increases. While offering plans and bylaws typically allow for unit owners and shareholders to receive annual financial statements and year-end tax deduction information, boards should also consider providing more information than that. The more everyone understands about the rationale behind budget increases, the less likely it is that the board will be facing serious backlash.