Condo Media - July 2020 - 20
COST-CUTTING OPTIONS FOR ASSOCIATIONS
As boards try to balance budgets skewed by the pandemic,
they will probably find more options for reducing their expenditures than for increasing their revenues. That's not a particularly high bar, given the dearth of revenue-enhancing choices
available to them, but industry professionals we consulted
identified six strategies they might consider.
Reduce or eliminate non-essential services and reconsider the services that are deemed essential. "You have to
pay for utilities and if the air conditioning breaks down, you have
to fix it," Christopher Barrett, a CPA with Barrett & Scibelli, LLC,
observes. "But you may be able to have the grass mowed every
two weeks instead of every week," he suggests. Boards may also
find that it isn't necessary to continue the intense cleaning and
sanitation of common areas required at the pandemic's height,
although owners' attitudes about this may vary.
Delay the reopening of amenities that were closed
during the pandemic. Exercise rooms will require supervision and enhanced cleaning, at least for a while; keeping them
closed or reducing the hours they are open will eliminate or reduce those expenses. Swimming pools may be another target
for cost-conscious boards, according to Jill Wetmore-Piken,
CMCA, AMS, general manager with Barkan Management
Company, Inc., AMO, who thinks some communities may decide not to open their pools at all. "In addition to the opening
and closing expenses," she says, "there are maintenance and
supply costs and labor expenses for lifeguards. That can add
up to $50,000 or more for the season."
Delay (non-essential) capital projects. The leaking roof
must be repaired or replaced, but the buildings could be
repainted or the decks re-stained next year. Boards have the
discretion to defer planned projects, Thomas Moriarty, a principal in Moriarty Troyer & Malloy, LLC, says. "But they shouldn't
do it on a gut check. They should get some input from experts
- engineers or architects" to be sure the delay won't be harmful. "You don't want to delay a repair if you find out that it's going to cost you five times more to do it later," he notes. "And
you probably don't want to use bubble gum to repair a leaking
roof. But if an engineer tells you the bubble gum will last for
nine months, then it may make sense to do that."
The board at a community Wetmore managed decided to delay two major projects that were scheduled to begin in the spring.
Their primary concern was the health of residents: "They didn't
want to bring in a lot of extra people onto the site" because of
the potential risk of spreading the virus. But pushing back the
projects will also delay the payment of construction-related expenses, giving the association some financial breathing room.
If a community has already levied a special assessment to
pay for the project, Barrett notes, the board could use those
funds to cover operating costs, treating that reallocation as a
temporary loan from the reserves, which would be repaid when
the association's finances stabilize. In accounting terms, Barrett
explains, "instead of having cash in the reserve fund [to pay for
these delayed capital projects], you would have a receivable
due to the reserves from the operations budget."
CONDOMEDIA July 2020
A bank loan might also be repurposed in this way, Wesley
Blair, senior vice president at Brookline Bank, says. "We don't
follow the use of the funds that closely, so I would say if the accountant thinks it is appropriate, we would allow it." He cautions,
however, that when the association is ready to proceed with the
project, if it is short of the funds required, it will have to fill the
gap either from reserves or through an assessment on owners.
Renegotiate contracts. An association that has a contract
with a landscaping company would have to renegotiate
the terms in order to scale back the services or reduce the
fees the contract specifies. "This is going to be a huge issue,"
Moriarty predicts, as more communities explore options for
reducing their expenses.
Vendors providing services won't be surprised by requests
to renegotiate contract terms, Barrett notes. "If you're in business today, you're getting these calls all the time."
Those calls may go in both directions. An association Wetmore manages pays a monthly fee to give residents access
to a local gym. The gym was closed in April, she notes, and
the gym forgave the dues for that month. "That's a $3,500
expense allocated in the budget that we won't have to pay."
While many vendors may be receptive to requests to delay or
cancel projects or reduce agreed-on services, renegotiating contracts won't necessarily be easy or automatic. The enforcement
of contract terms for or against the association, will depend on
the wording. "Parse the language to determine your rights and
obligations," Moriarty suggests, with particular attention to any
provisions specifying conditions under which performance of
the contract would be "impossible" or "impracticable."
"Performance may be excused as a matter of law in some cases,
but not in others, notwithstanding extreme difficulties related to
it," he notes. Associations can file suit to enforce contract terms (or
to negate them), Moriarty says, but they should try to negotiate a
compromise instead. Associations and their vendors are all struggling with the pandemic's effects, he notes. "Recognizing that
[the pandemic is affecting everyone] and everyone has interests to
protect, boards should act reasonably and even beyond reasonably, with as much empathy and compassion as they can offer," he
advises. "People who try to play hardball in this environment will
probably find that it won't work out well in the end."
Extend vendor payment windows. Most associations
pay their bills immediately, within 30 days or less, Barrett
notes, "but they don't have to. There is no reason not to go
out 60 or 90 days. Corporate America does that all the time."
Following a longer payment schedule even for a few months
"can do a lot to improve an association's cash flow."
Run an operating deficit. Most associations don't have
excess cash in their operating accounts, Barrett notes, but
those that do could use it to cover a budget deficit, building a
surplus into the next year's budget to repay the previous year's
deficit. This is not a practice accountants usually recommend.
"In normal times, associations should run a flat budget," Barrett says. "But these aren't normal times, and associations may
have to do things they don't normally do."
Condo Media - July 2020
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