Maintenance / Common Charge Operating Budgets - Considerations

For Boards -

The hardest part about approving a yearly budget is not finding ways to decrease the overall increase, it's explaining to your owners and shareholders the basis of the common charge or maintenance increase. Here are the categories to consider and my thoughts on each:

R/E TAXES (for Cooperatives)
On the buildings I work with, I've seen increases of roughly $100,000 this year, most going from the $500-$700k range increasing to $600-$800k range. This major increase mandates a minimum of a 3%-4% increase in maintenance charges. Here's a cool site to see what other buildings' NYC real estate tax valuations are. With tax certiorari attorneys charging the standard rate of 15% of the reduction and with all of them processing tax reductions seemingly the same way, there's not much that can be done in the line of overall reductions aside from filing each year. Make sure they bill your building regularly so you're not hit with multi-thousand dollar bills every few years. This should be the main component of your letter to owners as it's the majority of your budget, which you and your owners have no control over.

PAYROLL
The majority of the buildings I work with are 32B/J Union buildings. With the new contract, increases are in the 3% range for each of the next 4 years, occurring each April. There are ways to decrease payroll.

Do not approve overtime. Have your managing agent hold a staff meeting informing staff that no overtime will be approved. Should an emergency occur, and define what an emergency is, overtime will be allowed, however at no point will 'filling in for someone else' be approved. If a staff member calls in less than 4 hours from the start of his/her shift, warn them or write them up. Little lead time gives the Superintendent a headache trying to find relief coverage. Make sure your building has at least 2 go-to relief guys to cover for people taking vacation, sick, clinic, or personal days. Try to avoid paying anyone over 40 hours a week at all costs. Also, inform your Superintendents that they are expected to stay an extra 1-2 hours past their regular end time if a problem occurs and they are salaried. However, be fair in paying them overtime if they end up working long hours.

The largest decrease in payroll is obtained by reducing the building's services. The contract refers to this as a "Reduction in Force". Say for instance you remove a night doorman's shift for 5 of the 7 days of a week, leaving Friday and Saturday schedules on. This removes 40 hours of payroll, or one entire employee. Each 32B/J employee costs the building roughly $70,000 per year. However, this changes the dynamic of the building. If you intend to do this, make sure you work closely with your managing agent, building attorney, and the RAB so the process is followed to the "T". You don't want to mess this one up (by not giving proper notices or documenting how your services are being reduced) or else the employee will grieve and you'll probably lose the case.

Also, shareholders may see a decrease in the valuation of their property as there is no longer a 24/7 door staff. Security concerns arise as a key or other type of system will be needed and a human will not be screening the building's traffic.

Another method is to reduce a porter. Buildings may be able to handle this if they require their Superintendent to handle the brunt of the duties or if one of their porters moves slowly. You'll need to be clear with your remaining staff of their new responsibilities. Trash and cleaning will need to be handled by less staff. Door staff should then be required to polish and clean all lobby, first floor common areas, and elevator walls/floors/doors/mirrors. Again, a $70,000 reduction. New this year (with the new contract) is the ability to claim that due to financial cut backs, the staff reduction is mandatory. Make sure to consult the RAB for proper filing of this type of claim.

If you have temporary staff handling break coverage or trash duties on the weekend, check with the Realty Advisory Board before doing so, but you may be able to reduce these positions easily and quickly. Just plan on how their roles will be covered and address owners accordingly.

REPAIRS AND MAINTENANCE (R&M)
The majority of cost cutting is done through Real Estate Taxes (often 40%-50% of a budget) and Payroll (~30%), so the other 30% is made up of fuel, utilities, mortgage payments, insurance, and other factors, with R&M being the largest of the other factors (5%-10%). For costs over $1,000, always try to get 3 bids and let the vendors know of the other bid amounts. I've found that asking vendors to hit specific numbers generally works to reduce their bids. If they know there is significant competition, they'll work with you. Elevator contracts, boiler work, camera systems, uniforms, and air conditioning systems are highly competitive.

Try to capitalize major projects and plan on doing well in advance. This will help explain to shareholders what upcoming assessments will be for. Capitalizing them, aka having them included in a capital budget rather than the operating budget, will keep your percentage increases lower, and if they're true building improvements rather than just repairs, it will keep you from paying tax on them. These can also be funded through your reserve, if your building is fortunate enough to have one. Having lower maintenance charges comparable to surrounding buildings will increase the value of your homes. There is no reason for the overall maintenance charges of a building to increase substantially if the basis is for a capital improvement. The increase's need may only be temporary, so it should be assessed for to cover the cost.

UTILITIES
Fuel - Some buildings look to ESCOs (alternative energy suppliers, generally deviating from a Con Edison supply and sometimes cutting your costs), others lock in pricing (anticipating fuel price increases or just to do this for budgeting purposes, either way obtaining a credit a the year's end if consumption is less than planned), others look for alternatives like partially organic fuel for tax breaks. Any way you splice it, just try to prepare for yearly increases so surprises are not had down the road.

Water - Plan on roughly a 13% increase in water and sewer year over year.

INSURANCE
Get a broker that will bid out your policy to a multitude of carriers and have them provide a report on the outcome of each carrier's conclusion. Plan on a 2% increase in insurance if your building had no claims during the year. Should your building endure a small fire or contractor or resident suit, your increase could be as high as 50% on the premium (generally on the liability premium). Worst case scenario is that your carrier may not renew with your building and you'll have to scramble for coverage. Try to jump on this early if you'd had claims throughout the year.

MORTGAGE
If possible, refinance. Now is the time as rates are the lowest as they've been in years past. Have your managing agent contact your bank for fees associated with refinancing such as early-out payment clauses. Do not expect your managing agent to handle this process for free. It's a huge amount of work. Discuss a percentage take with them prior to beginning the process or have them act as an intermediary with your Board Treasurer handling a good portion.

CHARGEBACKS
Look to your management company to chargeback anything possible to owners. This includes alteration engineering reviews, plumbing and electrical work (for non-building expenses - generally anything not "in the walls"), legal fees, or anything else that could possibly be charged back. If you're not sure, ask your agent about the paid bills that you see at each month's end. This could save a building $10,000-$20,000 or more per year. Ask your managing agent for a chargeback report at the end of the year. You can also see this on their monthly management report.

LETTERS TO OWNERS
When explaining the above to owners, I've found it best to be as honest as possible, explaining the math step-by-step to take them through the process of how the Board derived the percentage increase. You can expect some people to start to dislike the Board, however most will understand. Some people may need to move out of the building. The past few years allowed buildings to increase charges by 0%-3% as real estate taxes barely increased, however last and this year I've seen maintenance increases in the 5%-14% range, with as high as numbers over 30% (not a typo) as property taxes are increasing through the roof.

Give owners a fair warning. I would not want a one week warning that I'm suddenly in the hole for a 10% increase on my apartment. I'd want at least a 2 month warning. Also, try to cite surrounding property's maintenance figures, and if you can find out, their associated year over year increases. Talk to your management company to provide these figures. Your owners will feel more at ease if they see that their neighbors are going through the same process.

RESERVES
Many reserve funds are low or are being depleted to cover vendor bills or to decrease maintenance increases (the reserve fund acts as a supplement). I've seen buildings invoke one or two time assessments throughout the year of roughly $50,000 each time to aid in the recovery of their reserve funds. Purchasing attorneys look for 3 times the building's monthly maintenance to be in reserves. Fannie Mae looks for a 10%-to-reserve-fund line item in the budget to approve investment property funding for loans under $729,000.

Don't pull from the reserve fund for capital work if you can avoid it. Capital work is generally assessed for as the figures are often in the $500k-$1M range, but this type of assessment combined with all of the above factors translates into owners being agitated. The best method is to plan ahead and provide adequate warning to owners through detailed letters.

If you're lucky enough to have money in the bank with liquidity to spare, ladder your investments. Contact your reserve fund's bank and ask about available laddering products. Always have at least enough liquidity to handle two months of vendor bills should the opportunity arise to pay off bills without incurring finance charges. For instance, if you can pay your insurance bill in a lump sum, which usually ranges from $20,000-$30,000, you'll save your building $2-$4,000 in finance charges. Also, ask your vendors for payment plans for big ticket items such as boiler section work. Most will be open to the idea.

GOING FORWARD
I'm happy to answer an question the best I can. Write to me! Good luck!

(top image from touchpodium.com, we can do it image from thependulumgrp.com, ladder from getyourlifebackfromme.com)