It’s November and for us, since many of our clients operate on a calendar year basis, that means it’s budget time!
For all of us here at Tudor Realty Services Corp., and for many of the board members and residents of the more than 90 residential cooperative and condominium buildings that we manage throughout NYC, it’s that time of year where we review and finalize the building’s budget for the following year.
In today’s blog post, we’ll be providing a brief overview of our approach to the budget process and then we’ll highlight current trends that we’re seeing as we are preparing next year’s budgets.
An Overview To The Budget Process
As you may have heard us report at annual meetings, in our view, the budget process and decision making around that should not be driven by a desire to achieve a particular “favorable” result (a certain amount of increase in maintenance cost or desire to avoid such an increase), but rather should be driven “by the math” as it’s really a mathematical exercise based on data, current and historical results, and use of informed assumptions. In the end, our goal is to work with our clients to help appropriately plan to ensure that operating income will be in place to cover operating expenses and that the building also has a financial plan in place to pay for and implement any capital projects while still also maintaining adequate reserve funds.
So where do we start the budget process?
In cooperative and condominium buildings, there are three components that we focus on in the budget review process. There is the operating budget, the capital budget and a review of the building’s balance sheet.
The operating budget is where we will project the building’s annual income such as shareholder’s maintenance, common charges, and other sources of income including commercial leases, laundry, storage, etc. We project the annual expenses to operate the building including payroll, mortgage, repairs and maintenance, real estate taxes, insurance, etc.
The building’s balance sheet identifies all assets and liabilities. It will also indicate the building’s financial position and funds available for working capital and reserve funds.
That leads us to the third component, which is a review of the capital projects budget. This is a review of upcoming capital projects that are planned and/or required and projected costs, such as façade repairs, elevator replacement, etc.
When all three of these components are coupled together, the result is an overall budget for the building which then is presented to the building’s Board for discussion and approval. Each year, we review these three components for each building. We review each income and expense category of the operating budget and work line by line through each, making required adjustments along the way based on projected future expectations. These factors include market indicators such as current cost of fuel, changes in payroll contracts, etc., as well as the building’s historical results. We then review the building’s capital projects plan (near and longer term), review the building’s balance sheet and then produce an overall budget for the upcoming year.
In short – expenses are continuing to rise! While it’s hard to generalize and each building should be discussed on a case by case basis with us, this year on an overall basis, we are seeing four to six percent maintenance increases being required in most of our buildings.
A driving force in most NYC co-op operating budgets is the line item for Real Estate Taxes and this year is no exception. In many co-op buildings in NYC, Real Estate Taxes make up 35% of the budget or more. Each year, NYC evaluates each building and then issues new tax bills. While we’ll save all the details on how real estate taxes are calculated (and contested) for another post (we’ll need a lot of space to explain!), we continue to see rising Real Estate Taxes and increases in building’s assessed valuations. As a result, before we look at any other category in the budget, we are seeing required maintenance increases just to adjust for the increases in Real Estate Taxes.
As expected, we are also seeing increases in payroll, and in particular, for those buildings that employ staff thru security guard service companies, with higher payroll costs than in year’s past because of New York State legislation which increases the minimum wage in both 2018 and 2019. Most security guards are currently being paid less than the new standards. If fact, we are seeing 15-17% rate increases for 2018.
As always, thanks for reading! Hope you find this interesting and helpful! Since 1990, we have been advising co-op and condominium boards on these issues and how to appropriately plan for current and future operations. Of course, if you have a specific budget related question and/or issue you would like to discuss, please give us a call. We’d be happy to discuss our experience and approach.