Condo Media - July 2015 - 24

HOLE
In a

1

The budget doesn't balance. This
may mean the community's expenses
are out of control, the common area fees
are too low, or both. But for whatever
reasons, the community is consistently
spending more than it collects in fees-a
situation that obviously can't continue
forever, say Bonnie Whittemore, CPA,
and Karen Mericantante, CPA, partners
at Keane + Company, PC. "If the board
doesn't address this right away, it could
lead to bigger problems down the road,"
Whittemore says. Boards relying on
bank loans or borrowing from reserves
to meet operating expenses (practices
most accountants strongly discourage)
are ignoring the obvious message:
Their fees are too low. That's a message
boards don't like to deliver and owners
don't like to hear, says Christopher
Barrett, CPA, a partner at Barrett &
Scibelli. "It doesn't make accountants
very popular."

2

The board attempts to balance
the budget by slashing services.
"When the lawn is being mowed every
other week instead of every week," Barrett says, "there is probably a reason."
The warning lights flash for Ken
Bloom, CPA, a partner at Bloom Cohen
Hayes, LLC, when he sees a board
reducing insurance coverage or deferring essential maintenance to cut costs.
"These are the first places boards look
when they're trying to avoid raising
fees," he says. He sees this most often
when newly elected board members,
who have vowed to cut costs, discover
there isn't nearly as much discretionary
spending as they assumed.

3

The association doesn't have
reserves or doesn't fund them
regularly. "One of our top suggestions to boards is to commission an

independent reserve study and follow
its recommendations," Mericantante
says. It is boards that don't have studies
that are most likely to ask if they can
use reserves inappropriately-to close
budget gaps or fund non-capital projects. "If they have a study, they know
what the reserves are for," she says. "(If
they don't), this becomes a gray area
for them and could lead to the potential
misuse of the funds."
Barrett agrees. "An association that
is using all of its revenue for current
expenses and not funding reserves isn't
thinking about the roof that will have to
be replaced one day," he says. And that
community, "is going to be in trouble."

4

Accounts receivable-payments
owed to the association-are
exceptionally high or are increasing.
There is only one explanation for this,
Bloom says. Owners aren't paying their
fees, and the board isn't doing a good
job of dealing with the delinquencies.
"This problem only gets worse over
time," he says. "The bigger the accounts
receivable number, the worse the community's cash flow crunch-and the
deeper its financial hole-becomes."

5

Accounts payable-payments
the association owes others-are
exceptionally high and/or increasing. Odds are the communities having
trouble collecting payments (the
accounts receivable problem noted
above) are also having trouble paying
their bills. If the board is paying June
bills with September fees or sending
assessment notices early to accelerate
owners' payments, Barrett says, "you
know something isn't right."
Recurring late charges on overdue
bills make that warning light flash
brighter, Mericantante adds. If you're

paying late charges because of cash flow
problems, "you're throwing money out
the window" and exacerbating the association's budget woes.

6

The association's special assessments aren't special. A special
assessment is a planned "13th payment"
some boards levy annually, Bloom
says. It's a way to increase the monthly
fee without announcing an increase.
While there are appropriate uses for
special assessments, Bloom says, this
isn't one of them. "If you're anticipating $500,000 in expenses, you should
collect enough in common area fees to
cover that." Special assessments should
be used, if necessary, for "extreme and
unexpected" expenses. That is not only
a poor management practice, Bloom
says, it is also misleading for new buyers
who discover that their fees are higher
than they expected-and possibly higher than they can comfortably afford.

7

The association raises fees
repeatedly or doesn't raise them
at all. Both indicate the board isn't being
realistic about what the association's
funding needs are. "If you have to
increase your fees every year, you're
not budgeting or planning properly,"
says Filomena Scibelli, CPA, a partner
at Scibelli and Barrett. But if you never
raise your fees, you're falling behind
somewhere because the cost of most
goods and services increases over time.
For that reason, a letter from the board
telling homeowners, "We're happy to
announce that there will be no increase
in fees again this year," doesn't always
make Whittemore happy, because "it
isn't always the right answer," she says.
"The goal isn't to avoid fee increases. It
is to make sure the fees are high enough
to cover normal operating expenses."

"One of our top suggestions to boards is to commission an independent
reserve study and follow its recommendations."
-Karen Mericantante, CPA, partner at Keane + Company, PC

24

CONDOMEDIA
Condo Media - July 2015

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