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    What to do about the Equifax data breach

    In today’s world of electronic information being so accessible, the Equifax data breach may be more than just a headache for some, it has the potential to put half of all American credit card holders at risk. Before you think you are covered by your credit card company for any charges you don’t make so you shouldn’t be worried, it can be a bigger issue than just your credit card information. These days, with just a few key pieces of information, thieves can do a lot of damage to your credit and your finances.

    By now, most all Americans have heard about the Equifax data breach and seen the news clips of what it may mean to your credit. But something you may not know is that because of that breach, thieves can purchase your social security number and birth date and can do more damage than you realize. With that information, a thief can not only take out loans and credit cards in your name, they also have the ability to access your bank accounts and access your tax return deposits.

    So you think, no big deal, you are not legally liable for a credit card you didn’t open in your name. Well, true, however it can take a lot of time to clear up what a thief can do to your credit reporting. What about hiring an insurance company to keep an eye on your credit reporting and clear up any discrepancies or charges that are not yours? Yes, you can have that too, however there is a monthly fee you need to pay for that service as well and you will still have to deal with the insurance company to clear up any illegal activity on your account.

    So what is the best solution to keep you protected? You work hard for your money, and these days with apps and on-line purchases, it’s easier than ever to be targeted by a criminal out to steal from you. Here are some tips you can use to keep you protected and protected your finances from being vulnerable.

    1. Check your credit score for free. This is probably the easiest thing you can do to keep your credit history clean. Generally, your credit score may fluctuate or unfamiliar activity may be present in your credit report if you have been victimized. Set it on your calendar, once a year, to pull your credit report. A simple review can ensure that there are no issues that need to be addressed. You are entitled to one free copy of your credit report every 12 months from each of the three nationwide credit reporting companies. You can order your credit report on-line at annualcreditreport.com or call 1-877-322-8228.
    2. Inform the credit card companies that you want your name on fraud alert. Transunion.com allows you to create an on-line account where you can manually place a fraud alert on your financial information. What’s great about this feature is that not only can the alert be removed at any time, but the dates in which you set the alert can be adjusted. When you place the alert, Trans Union will then notify the other two reporting agencies (Equifax and Experian) regarding said alert.
    3. Sign up to be alerted of any changes to your account. This tool is essential because you can be informed each time a charge, that exceeds a specific dollar amount that you choose, is made on your account. It’s totally customizable!
    4. Take the initiative to protect your tax refund. Filing a tax return in a timely manner is a pivotal step in securing your tax refund. If you file early you take the opportunity away from a thief to file a fake return with your stolen information and access the funds therefrom. Don’t procrastinate!

    Overall, the Equifax breach should be a wake-up call. Do not ignore the recent events as you could possibly become a victim of identity theft or credit card fraud. Take matters into your own hands to secure your financial identity by using the tips posted in this blog!

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    Accelerate RE Tax Payment

    To the Boards of Directors of our Cooperative Housing Corporation Clients:

    Federal Tax Legislation: Limitation of the Individual State, Local, Sales and Real Property Tax Deductions in 2018

    As you may have been following, Congress has passed tax reform legislation that is expected to be enacted by this year end. One aspect that may warrant the Board’s attention is the specific provision which would limit the annual tax deduction for all state and local income, sales and real property taxes to no more than $10,000 ($5,000 for married individuals filing separately) beginning in 2018. An opportunity exists for shareholders of the cooperative to realize a one‐time benefit in 2017, should the cooperative “prepay”, in 2017, part of its 2018 real estate taxes due in January or January and April (if paid quarterly) 2018. The benefit would be that in lieu of four quarters of real estate taxes as a deduction in 2017, this one year there would be five or six quarters whereby deductions are amassed in the year that there is no limitation. However, there are numerous aspects which need to be considered. Please allow us to explain:

    The cooperative would need to have sufficient operating cash available to fund the payment before the collection of some of the January maintenance payments by shareholders. Please realize that most cooperatives utilize the accrual basis of accounting and thus such a prepayment would normally have no effect. Having made an extra payment, a cooperative would, as part of filing its 2017 Corporate Income Tax Return, move to change its accounting method for income tax purposes to recognize all customary prepaid expenses (i.e., real estate taxes, insurance, possibly others) as deductions in the year paid as opposed to the specific period that they cover.

    Please realize that while acceptance is expected, such a filing does require IRS approval. Further, the new accounting method must apply to all future years. Therefore, the cooperative will have to continue to prepay its same real estate tax obligation that is accelerated for each subsequent year going forward to ensure a full 12-month deduction is available to shareholders. The change of accounting method will result in differences between amounts reported in the cooperative’s income tax returns and its financial statements which use the Generally Accepted Accounting Principles method. There would be a need to maintain two sets of accounting records, one to support the income tax returns and the other to support the financial statements, commencing in 2017 and for each year moving forward.

    To facilitate your decision whether to change the accounting method for income tax reporting purposes, we suggest that you consider:

    • The IRS may not agree to the change in accounting method.
    • Certain shareholders may not individually benefit from the prepayment of real estate taxes. There are many factors that could affect this including whether the shareholder is subject to the Alternative Minimum Tax in 2017.
    • The cooperative will have to continue to prepay real estate taxes to provide shareholders with pass‐through real estate tax deductions based on 12 months of expenses as reported in the cooperative’s income tax returns.
    • Should a successful challenge by the tax authorities to the tax position be taken, amended tax deduction letters and individual income tax returns might be required.
    • There will be additional accounting fees incurred for the needed one-time filing of Form 3115 and to accomplish the necessary adjustments between 2017 and 2018 to support this change as well as for each year to maintain the two sets of accounting records previously mentioned.

    Based on concerns outlined in the previous paragraphs, we do not recommend that our clients file a request for a change in accounting method. However, we are available to discuss each client’s circumstances with them. If a client does request so, we would do the additional work to change the accounting method and update the tax deduction letter. We do request that clients inform us immediately, or the latest by January 3, 2018 if they had chosen to prepay the 2018 real estate taxes and request the added work of us.

    For those Boards which might not yet be ready to decide, the opportunity cost to make the real estate tax payment due in January 2018 by the end of 2017 is minimal, assuming sufficient cash is available, and the decision whether to change the accounting method can be delayed into early 2018.

    As always, Czarnowski & Beer stands ready to provide the professional tax and accounting advice to enable our clients to fully achieve their goals. Please let us know if you have any questions on this matter.

    Truly yours,
    Czarnowski & Beer, LLP.

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    Liabilities and Equity

    We owe vendors, Cooperators and lenders

    Equity (what we owe Cooperators when they leave):

    Shares don’t generally change

    Paid in capital grows:

    New Cooperators pay assessment

    Mortgage is amortized

    Accum deficit is net operation of the property since inception

    Income Statement

    • Reports how a property performed during the period(s) presented
    • That results in either a profit or loss (Net before other items)
    • Can be on the Cash Basis
      • How much revenue was actually received
      • What items were paid
    • Accrual Basis
    • How much revenue was earned (Amount we were entitled to)
    • What costs were incurred

    Income Statement-Revenue

    • Income from Cooperators
    • Portion to amortize mortgage
    • Allocation to capital
    • Abatements
    • Other revenue
    • Commercial and professional rents 

    Fluctuates with sale vacancies

    Can verify per room charge times number of rooms

    Mortgage amortization is an addition to cooperator basis

    If allocation, reduces taxable income funds Long Term capital

    Abatements are required to be given to Cooperators

    Surcharge revenue seems to be declining

    Other income opportunity to minimize per room increases

    Income Statement-Expenses

    • Repairs and maintenance
    • Labor and its overhead
    • Real estate taxes
    • Utilities
    • Insurance
    • Other

    As buildings age the need for Repairs tends to grow

    Less items can be repaired internally

    Labor is union scale, benefits rising double digit

    Only residential is subject to shelter rent regulations

    Commercial/professional seem to continue swift rises

    Other City charges grow many times inflation rate

    Fuel oil versus Gas

    Interruptible service

    Severity of 2013/14 winter

    Benefit for budgeting to lock in certain number of gallons even if not less costly

    Insurance rates up 10%, Workman’s comp varies and rising

    Plan on increases of 3.5% per year

    Internal controls over inventory can create significant savings

    As paying staff to do work that saves bringing in a contractor

    Income Statement-Net operations and other items

    • Excess before other items
    • Other items 
      • Allocation of monthly charges to capital
      • Nonpayers happen
      • Mortgage prepayment penalty is deductible in year paid
      • Depreciation and amortization
    • Net deficiency is simply an accounting item 

    Required to comply with accounting standards but usually 

    Statement of Cash Flows

    • Reports on the company’s cash movements during the period(s)
    • Three Sections:
      • From Operations
      • From Investments (fixed assets)
      • From Financing (debt and treasury units).

    Notes to the Financial statements

    • Provides more detailed information about the financial statements
    • Significant Accounting Policies
      • Nature of Organization
      • Use of Estimates 
      • Cash Equivalents
    • Concentrations
    • Related Party Transactions
    • Mortgage Payable
      • Shows next five years of principal
    • Commitments & Contingencies
    • Special Assessment 
    • Rental Income
      • Shows next five years of minimum lease payments
    • Future Major Repairs and Replacements
    • Subsequent Events

    Other Items

    • There may be details in supplemental schedules

    Working With the total Numbers 

    • Current Assets vs. Current Liabilities
      • Compare current assets to current liabilities 
        • Looks at ability to pay bills in the next year
    • Net Income vs. Net Income before other items/depreciation
      • Year versus year
      • Year versus budget
    • Is there cash flow from operations?
      • Are operations throwing off enough cash or is a carry charge increase called for
    • Supplemental Cash Flow
      • Evaluate improvements payable
        • Highlights unpaid bills on major repairs and replacements

    Payroll as Percentage of Net Maintenance

    • Informational
      • Indicates what portion of maintenance is locked up by payroll costs

    Real Estate Tax as Percentage of Net Maintenance

    • Informational
      • Indicates what portion of maintenance is locked up by real estate taxes

    One Other Item

    • Watch the Funding
      • Every item funded- reserves, special assessment, real estate tax, water and sewer- should be segregated
      • Should not spend excess elsewhere unless absolutely sure why excess exists

    Key Metrics

    Key Metrics-Cash Per Unit

    • Benchmark
      • $2,000 minimum suggested level
      • $5,000 healthy
      • $10,000 extraordinary

    Key Metrics-Debt Per Unit

    • Benchmark
      • $40,000-$50,000 (Manhattan)
      • $30,000-$40,000 (Other Boroughs)

    Key Metrics-Deductible Portion of Maintenance

    • Benchmark
      • 40%, 60% is getting high

    Key Metrics

    • What to do with this information:
      • Use guidelines provided
      • Benchmark to the averages
        • CNYC Study- shown on per room basis
        • Czarnowski & Beer LLP Study- approximate benchmark numbers for a variety of metrics

    One Last Thing

    • Financial statements “present fairly, in all material respects”
    • Audit does not check every penny!


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    The simple way to look at assets is that they are what we’ve got. Everyone wants to assure an entity is solvent.  Try to obtain several years to look at. There are a number of things to consider, and obviously we can’t cove them all.  You need to glean the unique situations and then evaluate what’s going on.  Some basic things to look for are things like are the current assets more than current liabilities?   What’s the relationship of accounts receivable to sales, is cash constantly created.

    Is there a trend for cash, accounts receivable and inventory?  If they are moving in the same directions as the business that is a positive.

    Make sure you understand the longer-term assets.  Certain property and equipment is needed to run a business and that is depreciated, a provision to charge its usage as an expense over its expected life.  Nearing full depreciation assets may require replacement in the future and will cost more than they did the last time.  Other than non-cash items required to comply with accounting standards, longer term assets are generally locked up and not available to help with insolvency or contain restrictions on this usage.  So stick to the current assets and an understanding of the fixed and longer term assets.

    Not-for-profit note:

    Certain entities, like not-for-profits have little concern for fixed assets once solvency has been evaluated. At that point, the amount of available cash is an important consideration.

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    The Balance Sheet

    In this day and age, pictures are everything.  So, considering a balance sheet as a snapshot of the company’s financial position at a specific point in time or date is helpful.  It would be different both the day before or the day after. So, it’s up to you, the user of financial statements, to ensure you read and do your best to understand the entire financial statement document.   This exhibit shows what the entity owns, what it owes as of that date and then a section to somewhat show how it got there. Item are considered current if they are expected to be realizable into cash or paid within the next year.   Long term assets are recorded at historical cost, so they may be worth substantially more than that.  Some items are simply accounting entries and linking them to realization of cash is not feasible.   Remember, if it is presented on cash basis that you won’t see all the unpaid bills.  What you want to glean is if the business can meet its debts and keep operating.  Remember, while a consideration, that the net assets over liabilities generally minimally effect the value of a business where generally a reflection of the net future profits is utilized as part of the calculation.

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    Variations for the standard Independent Auditors’ Report

    The don’t come with color coding so you’ll need to be the one to see the red flags.  Some variations are common, such as a different basis of presentation, the most common of those are either the Cash Basis or Income Tax Basis (which also can be Cash Basis).  Remember cash basis is solely designed to explain only what occurred.  So a high amount of unpaid bills may have piled up and thus the expense actually incurred during the audit period are potentially more than what was paid, conversely they may actually be lower and former period bills were paid.  Further, revenue is earned only when cash is collected for something.

    Emphasis of matter paragraphs are required if there is a concern of area which requires highlighting.  The most common are exceptions to Generally Accepted Accounting Principles which would be detailed as a separate paragraph.  There is generally a reference to a financial statement note which offers an further explanation of the

    concern.  When the continuity of the business is coming into question, then a going concern is emphasized.  Not all issues highlighted in an emphasis of matter paragraph are violations of accounting principles.  Most are simply an exception to Generally Accepted Accounting Principles which may make sense in that specific industry or entities current circumstances and highlighting the further explanation is required. It is good if you do not find an emphasis of matter paragraph.

    Not-for-profit note:

    While every user should be sure to understand anything in an emphasis of matter paragraph, the situation with not-for-profit’s requires more than usual diligence.  These entities tend to get lost in that it’s all about the organization’s purpose and mission and things like ability to continue as a going concern can occur more frequently than a business operated for a profit.

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    Generally Accepted Accounting Principles

    Yes, there is group whose role is to maintain all those accounting rules and it’s the Financial Accounting Standards Board and it sets out the standard framework of guidelines for financial accounting used in a specific jurisdiction, such as the United States of America.  They are more commonly referred to as accounting standards. Basically, they are the requirements, conventions, and rules that accountants follow in recording and are thus summarized in financial statements.  Not all the rules are the same for specific industries and a user of financial statements doesn’t necessarily need to know them all.  The American Institute of Certified Public Accountants published audit alerts which deal with specific aspects of various industries might you be interested.

    There are the common principles of accounting:

    1. Revenue principle, also known as the realization principle, states that revenue is earned when the sale is made, which is typically when goods or services are provided reflected when legal ownership passes from seller to buyer.
    2. The expense principle is the flip side of the revenue principle, if you receive or use some services or goods, you’ve incurred the expense of those.
    3. There is a matching principle to relate these two, it is necessary to match the related expenses with the revenue.
    4. Amounts are generally quantified, or recorded at historical cost.  Items like the building owned by the business are reflected at what it cost way back when as opposed to what it can be sold for now, thus the historical cost principle.
    5. While estimates are sometimes required, but let’s face it, we want financial statements to be factual, thus objectively reported. This principle says to rely on subjectivity as little as possible.
    6. It is expected that a business will continue to operate, otherwise there should be a variation of the auditors’ report, thus the continuity assumption.
    7. Quite simply what is reported for a U.S. businesses needs to use U.S. dollars in their accounting.  The unit-of-measure assumption assumes that a business’s domestic currency as its unit of measure.
    8. To be clear, a business must be an entity separate for its shareholders, partners or it has a sole owner, that individual.
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    Who did what?

    Financial statements are the responsibility of the entity.  Some believe incorrectly, that because they came from the accountant, the accountant is responsible.  The examination letter clearly lays out who is responsible for what.  Management is generally supervised by “those charged with governance”, most commonly a Board of Directors, periodically elected by the shareholders to represent them in governing the entity.  Governing is leadership and thus carries responsibility.  A hole management team or members of management can be replaced at any time, it is less easy to replace a Board.  In some cases, such as Homeowners Associations, the owners are made up of members as they own specific parcels which make up the entity that manages a specific property the Board is dedicated to managing.  With the responsibility comes the role to assure internal control is appropriately designed (sufficient checks and balances), and such is properly implemented and maintained by management.

    Not-for-profit note:

    Smaller entities tend to have less than comprehensive segregation of duties.  Segregation of duties is vital to reaching best practices level of financial controls.  Professional, management is generally utilized when it comes to Cooperatives and Condominiums of less than one thousand units.  Segregation of duty issues can be resolved with a well function Board of the entity that appropriately monitors management.

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    Limitations on examinations or audits

    Regarding examinations, we need to realize that an audit does not mean every transaction will be examined, as the report will clearly mention that the Financial statements are “presented fairly, in all material aspects”.  In practice, this means that while an examination is intended to detect material fraud, it may not detect all fraud.   The report will mention that the Financial statements are presented under generally accepted accounting principles in the United States of America.  That indicates that they are on the accrual basis, recording revenue when its earned and expenses when the obligation arises.  This indicates a more informative premise than cash basis, which reports what occurred in bank accounts or Income Tax basis which follows Income Tax regulations.

    The goal is a reasonably fair presentation that is free from material misstatements in the Financial statements, whether such misstatement might come from fraud or error. Thus, the Certified Public Accountant expresses solely an opinion subject to the material misstatement concept by performing procedures to obtain sufficient audit evidence about various amounts and disclosures contained within the entire Financial Statement document.

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    Independent Auditors’ or other Accountants’ Report

    The accountant acknowledges to degrees varying based upon the level of evaluation they are asked to apply, the reasonableness of those numbers and disclosures. Those variations range from certifying that the numbers and disclosures are materially correct, down to simply presenting the client’s information.   As you read the financial statement report, look for the highlighting of the level of service.  It may be an examination (a certification), review, or compilation (presenting client information).   The variation can be substantial. For an examination, the Certified Public Accountant accepts responsibility of the accuracy of the amounts and disclosures.  For a compilation, if the client said the sky is purple, the accountant can present that in the financial statements, even though we all know that is not the color we see.

    Many lenders require an examination but that is not always the case.  In instances where there is a small entity with a long term working relationship with the lender, a lower level of accountant service may be accepted, to save the borrower money.  If you are relying on a set of Financial statements, we suggest you tread lightly if they are not an examination.

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    Components of Financial statements

    Financial statements are the accepted presentation of an entity’s financial condition.  The accountant acknowledges, to degrees varying based upon the level of evaluation they are asked to apply, the reasonableness of those numbers and disclosures.  With some patience, most anyone can glean important information and knowledge from the financial statements. The components:

    Independent Auditors’ or Other Accountants’ Report

    Balance Sheet – what they have and owe on the date of the Financial statements

    Income Statement – results of profit and loss operations for the year

    Statement of Equity – details on the owners’ equity and accumulation profit and loss results less distributions to owners

    Statement of Cash Flows – reconciles income statement, which is on the accrual basis, to cash coming in and going out of the organization (recording revenue when entitled to it and expenses when incurred, neither reflected when they are paid)

    Notes to Financial statements – important disclosures that Financial Statement users need to know

    Following postings will address each component.

    Not-for-profit note:

    For these entities, Owners’ Equity is quite meaningless.  Also, distributions don’t occur.   Cash flow rules!

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    Unit Owner Budget Time

    As we put away our beach blankets and memories of our summer trips and the seasons change, it becomes time to anticipate what everyone at your property needs to be paying for up to fifteen months.  Annual budget preparation season brings a number of obligations as well as some helpful opportunities.

    The obligations involve a reminder that whatever amounts the Board calculates, each unit owner will need to prepare to pay at least for the next year.  It may be necessary to impose that increase earlier than New Year’s as we will explain later. So now it’s time to prepare the annual document most anticipated by unit owners, the annual budget. The anticipation is over how much of a monthly charge increase is necessary.  For some reason, even in an environment of annual increased costs for union employees, vendors and equipment, there is the belief that somehow the possibility exists that there may not be an increase this year. Unfortunately,  other than plunging energy prices and a couple warm winters in the Northeast, costs are rising each and every year.

    The budgeting process is simple enough and it’s best to start as soon as possible.  Unfortunately, your property management firm has a portfolio of other clients who need theirs done as well.   Therefore, the term budget season comes to mind for all the Finance Department employees as they tend to have work compression and possibly overtime hours.  Part of the reason to do the budget early is being sure your property completes a comprehensive and timely process and can take advantage of opportunities to accomplish appropriate planning for calendar year end.  These include the ability to detect potential issues that could make your properties financial results a concern to lenders as well as the possibility to save income taxes.

    Before we get to the planning opportunities, let us look at the basics of the process.  It is a chance to look at what goes into each expense category and detect opportunities to save.  Examples include better scheduling to minimize the number of employee overtime hours required for coverage, shopping for insurance well before the deadline for policy renewal, and use of employees to accomplish repairs in lieu of outside contractors.  Even when 90 or 95% of your propert’s costs are non-discretionary, it’s really important to take the time to understand what makes up those costs if your interest is minimizing annual increases.

    As far as planning, generally these entities do not pay income taxes.  However, it does happen, most specifically for condominium complexes with over 15% of their square footage utilized for commercial purposes and cooperatives which have expired operating loss carryforwards, which tend to be older properties.  In that case, the earlier the conversion to cooperative ownership took place, the more likely income taxes are to be an issue.

    Clerks at banks which originate mortgages on units are now armed with checklists to identify potential financial issues. An important one is operating losses.  No one wants to hear that a prospective purchaser has been told that the building is not qualified for loans from that lender.  Therefore, taking action now, months before calendar year end, to avoid reporting a financial operating loss on the annual financial statements, allows for a more focused and precise result.   The goal in all cases is the best possible operation of your property.

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    Monthly Report – Arrearages

    Collecting money is just plain vital to any business.  Most of the property management firms have developed a report which details the billings and collections from tenants.  It is imperative you understand that this form of report offers a life-line to a most important aspect of your operations.

    Let’s face it, people can choose to be chronic late payers.  Business revolves around the notion that

    “Cash is King”. Let’s remember, if it’s not in the bank, it can’t be used to pay your bills. It’s hard to believe that our neighbors don’t think they need to pay it all, or get it to us timely unless we follow up on collection.

    So, it’s important that a monitoring function takes a look at this report to see that all who should have been billed have been billed and who hasn’t paid.

    Managing arrearages can be fraught with difficulties, as the tools available to the Board, including assessing late fees and interest charges or placing a lien on the property, can seem harsh. However, every board member must remember that each owner deserves to be treated equitably, including not being charged for another owner’s unpaid maintenance charges.

    Don’t be the one asked by your property manager, What, you didn’t  look at the reports we provided?

    If you as a Board is not watching, who will be?  So take the time to really understand what’s going on with arrearages as they provide a vast amount of information when appropriately evaluated.  This will ensure timely collect and maximization of cash flow.  Remember, each dollar missed needs to be collected in the form of monthly carrying charges.

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    Monthly Report – Aged Payables

    It’s easy to move past looking at the detail of the unpaid or aged unpaid bills listing provided with the monthly management report.  Whilr the total due might be the most pressing issue, looking at the detail of what’s due can lead to saving money and protecting assets. So let this report do more than just inform you as to the extent of the unpaid bills.

    The components of the total are most important as to what’s for capital items and what’s for operations, the regular monthly bills.  The former is generally non-recurring and, hopefully, adequate capital budgeting and planning was done as part of approving the capital work.  The total for operations should generally be comparable.

    Operating expenses can change as certain expenses are due on a less than monthly basis. Generally real estate taxes are due quarterly or semi-annually and without financing, insurance is due once a year.

    Is it possible for you to consider the work that you are aware of has been accomplished over the last month?

    If so, see if those services or deliveries had been paid for in the check register.

    If not, you can evaluate if all that you are aware of is included in the unpaid bill listing.

    You may find that not all the items are actually included.

    We wish to warn you to never expect that the list is totally comprehensive.

    As part of our audit work, we find unpaid bills which were not included on the unpaid bill listing by the date it was printed.

    Have last month’s report handy.

    It is helpful in order to review this month’s listing!

    Compare to the one from the prior month to the current one and:

    • Evaluate invoices which remain from the prior month
    • Consider how the total amount owed has changed from the prior month
    • Scan the list to determine which types of invoices are reasonable
    • Verify the effect on non-recurring items on annual budget
    • Compare the balance in the operating cash bank account to cover the change
    • And most of all, always be aware of the total aged payables balances that are growing and growing! 
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    Monitoring Budget Preparation

    So the Governing Documents require that a budget be prepared each year and the unit owners get a copy. Realize, however, that for the well-functioning property it doesn’t stop there.  You see, applying that information as a benchmark offers a very important monitoring opportunity, the chance to watch month by month as the year progresses.

    Garbage in, garbage out.  The right way to do this is not, inflation is X so we just raise each cost by that percentage, satisfies the opening requirement, but offers us little else.  So, let’s do more.

    Here’s your chance to get into the heart of each source of revenue, each aspect of expense.  Can’t do all this year?- then start with what’s the most discretionary, or what’s out of line with other properties.  We offer a per room checklist that can help you identify which costs may be out of line for your property.  While you need to maintain the systems and supply the amenities that you have, you can drill for cost savings gold by delving into the detail.   One aspect this year, another next.  Look back how at how it all comes together and the year after do it again, that is, if you really want to know and save.

    There is detail to dig into. Someone has to lead and if they can divvy up the research, that’s preferred.  The higher intelligence of bringing it all together is necessary.  Have the Superintendent or Resident Manager dig into the maintenance systems and where the supplies are going.  Put the payroll on an hour-s-of-the week schedule to see who’s working when, you will find savings in overtime.  Speak to the insurance broker, have conversations on energy usage and potential savings ideas.  Benchmark your costs against data from other properties.   Some expenses are comparable from property to property, others are property-specific, but understanding the variances and the reasons will only strengthen your budget model.

    Build a model that takes this down to the property aspect level, then it can all be summarized into where the money goes each year.  Avoid the use of miscellaneous or other, wherever possible.  Things break this year, but then not again for some period of time, so accumulation and expansion are tools available to make the best possible product.  When you are done, you and the Board will know so much more about where your money goes, then you can ask more than common sense questions as work needs to be accomplished.  You’ll find that relying on what you are told diminishes as your knowledge of this niche industry grows.  Accumulate the data for future Boards, your contribution will save money, increase revenue and build a Board with renowned function and culture.

    Investment in the budget preparation will yield enhance monitoring, and possibly, even time saved in that function.  See our separate posting on using a well prepared budget as an incredibly effective internal control as a monitoring tool.

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    Maximizing Building Revenue


    When it comes to managing real estate, a cash flow drought can quickly become a catastrophe. Whether cooperative or condominium, a building that does not have the resources to pay its expenses is headed for disaster. The fall-out can damage everyone with a financial stake in the property, especially unit owners who are usually forced to make up any shortfall in meeting financial obligations. However, many property owners and managers may be overlooking important opportunities to reduce unnecessary expenses and find additional sources of revenue.

    Repair Controls

    One of the primary ways Boards spend money unnecessarily is through repairs. Often, it is not immediately clear whether a repair is the responsibility of the unit owner or the building. As a result, this may cause disputes between unit holders and building management fueled by contractors who may not be fully aware of the responsible party. In some cases, mistakes may even lead to improper billing of the building management for repairs that are the responsibility of the homeowner. To prevent these unnecessary charges, building management should develop a protocol for repair orders. A straightforward form, produced in triplicate with copies for the unit owner, manager, and contractor, should be used to record the initial concern as well as the contractor’s assessment. From there, the building management will have a clear paper trail of the specific problem, as well as whose responsibility it is to pay for the repair.

    Additional Asset Rentals

    Within the property, there may be space or assets that represent untapped revenue opportunities. For example, if your property has a large parking lot in an area where parking is scarce, you may be able to rent some of those spots. Review your building’s use of space to see if there are opportunities for storage units that can be sublet or meeting rooms that can be rented. Look at the needs of the community in which the property is located and seek out asset rental opportunities that fit the local market.

    Similarly, if the property features an amenity such as a workout facility, swimming pool, playground, or roof garden, it may be possible to recoup additional dollars by offering memberships or rentals to community members or by charging fees for guest access.

    Administrative and Enforcement Fees

    The daily administration and enforcement of rules can be time-consuming and costly. However, some of that expense can be recouped in the form of fees for paperwork requests and item replacements, as well as fines for rule violations. For example, replacing a lost stock certificate or occupancy agreement could command a $250 each per occurrence fee*. Fees for lost keys ($25-$75 each); replacement of parking garage clicker or card requests ($75); unit alteration agreements ($200-$500), to name a few, could result in adding significant money in the building’s coffers.

    Enforcement fees and fines serve two purposes: They provide an incentive for residents to abide by the building’s rules, creating a more orderly building, while also generating revenue from those who choose to violate building rules. Some enforcement fees and fines include: Alteration agreement violation (up to $3,000); first, second, and third rules violations ($50to an amount set by the building board) and even bounced check fees ($50).

    Transaction-Related Fees

    When a unit is purchased, sold, transferred, or sublet, there is typically a significant time commitment needed from building management in overseeing the change in ownership or occupancy. This expense can be mitigated by fees such as a prospective purchaser application fee ($300), stock and estate transfer fees ($200 to $800); and various closing-related fees ($100 to $400 each). Fees can also be applied to refinancing and reverse mortgage financing ($50 to $100 each).

    While every building will have different opportunities for such revenue streams, the opportunity exists for almost every property. The key to using them effectively is to tailor a menu of fees, rental and access opportunities, and enforcement fines (to each building’s individual circumstances). In addition, these charges must be clearly communicated to unit owners or shareholders before they are put in place to ensure that everyone understands the purpose and impact of the new fees and fines.

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    Fannie Mae Effected by Cost Overrun

    All Cooperatives, Condominiums and Homeowners Associations need to be concerned about their eligibility for Fannie Mae loans to avoid conflicts between the Board and Unit Owners who are attempting to sell their units. This is due to the fact substantially all end loans on individual units are originated through Fannie Mae. The Board is most likely to be informed about a difficulty encountered in satisfying approval requirements by the current unit owner, as they believe the hard part of selling is behind them, i.e., finding a buyer.
    However, the buyer generally can not obtain a mortgage if the property does not meet the eligibility requirements.

    The most pressing issue which is impacting both established and new Condominium projects is that the budget is to provide for funding of replacement reserves for capital expenditures and deferred maintenance of at least 10% of the budget. We all need to remember that this should not be viewed as a threshold that replacement reserves are to be in excess of 10% of the budget, but rather that the annual funding of such is 10% of the budget. For many properties, this is has potentially required an increase in carrying charges of 10% above rising operating costs.

    For example, an unusually cold winter can make the full funding of this provision a potentially difficult situation. Many properties can come close to depletion of their FULL YEAR heating budget just partway through the winter. This means the shortfall has to come from another source. If all is going well elsewhere in the budget, some will find overall that their properties are still on target. If not, an additional assessment, even though fully explainable, is generally frowned upon. That leaves utilizing existing cash or the annual reserve fund provision. We suggest Board fully explore the effects on potential cost overruns, especially in energy costs. The most comprehensive method is to have a consumption to date report obtained from the vendor and compare the amounts to your annual budgets. Historically, 2/3 of the heating budget is utilized in the first six months of the calendar year.

    Czarnowski & Beer LLP has always recommended that a long term funding vehicle be in place for all of our clients. While waivers are being issued in certain situations, established and new Condominium projects should endeavor to establish a reserve provision of some amount in their operating budgets and work toward fully satisfying the requirement over a certain period.

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    Long Term Funding Vehicle

    Establish a long term capital budget including evaluating long term funding options

    A business’s strategy is the key to its success.  Corporations spend huge sums on assuring that executives take time to annually plan strategy including functions such as corporate retreats.  Strategy needs to be spawned, then nurtured, with continued and periodic attention.  Your Board is charged with the responsibility for strategy and you may be focused on the concept.  But as the Boards are made up of volunteers, Board meetings tend to follow the same recurring agenda of dealing with the issues of the present, while strategy seems to be lost along the way. Then, when action is required for major repair and replacement, options become limited.  With the tightening of lending practices, refinancing to obtain funding is much more limited than in the past. Many boards find it helpful to schedule strategy meetings separately from regular monthly meetings several times each year to ensure focus on longer term issues.

    The Board is administering an association whose sole purpose is to operate and maintain the property. The largest issue for long term strategy is funding for major repairs and replacements of the property.  Unlike a for-profit business which can build a new factory across town, the structure(s) of your property must be maintained.  Rebuilding is an unlikely option.  So long term budget planning, including the utilization of long term funding vehicles are not luxuries but necessities.  But in an age of limiting of costs, such requirements tend to move to the bottom of the list. But that is precisely the time they need to be maintained. Otherwise, when funds are required to fund major repairs, reserves may be inadequate.

    What vehicle is your property using for its long term funding ?

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    WARNING – Financial Window Dressing is now a REQUIREMENT

    As the pendulum has swung from easy access to lenders and mortgages to loan officers armed with denial checklists, publishing the best possible financial “picture” on your property’s 2016 Financial Statement has become a necessity. Attention is required to avoid unpleasant developments for your property in 2017. Prospective purchasers and their lenders are scrutinizing YOUR performance as a Board member. Previously, that might have been limited to the amount of monthly increases over time, but now seems to include responsibility for qualification to each lender’s requirements. No Board member needs to deal with implications of the building not being on the approved list for a lender. Items such as deficits, minimizing taxable income, inadequate funding of replacement reserves are highlighted “after the fact” with unprecedented urgency. This departs from past experiences where mostly additional monthly increases and assessments were focused on.

    In addition, as part of our Exceptional Services, it is important to evaluate the many important individual income tax benefits available to your unit owners. With rising income tax rates, this area is becoming an even more significant consideration in the costs of maintaining a home in a cooperative or condominium. There are various enhanced tax benefits beyond solely deducting a percentage of monthly charges.

    Planning strategy is the key to success and presentation is everything. By working with your professional team, we can attempt to maximize important issues and ensure the best possible financial picture is presented and that all available tax benefits are utilized as part of the operation of the property.

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    Amount of Monthly Charges

    Many go shopping for a residential unit and naturally the complex, amenities and the actual unit are their most important considerations. Some, however, do compare monthly carrying charges as part of the evaluation, relying on what they are told are the monthly costs, but do little to understand what’s included, what the unique expenses of the property are, and how future capital needs will be funded. Then, there can be regret, when an additional assessment is imposed or the increase is well above other properties.

    As our properties rely on the plunge in energy costs and the warmness of the weather the last couple years in the Northeast to offset other rising costs, knowing what’s going into your monthly charges, the risks you carry for others and the diligence of prior Boards to adequately fund for capital needs seem to come with that regret.

    It’s straight forward that monthly charges should cover operating costs. But some properties have a large mortgage, others do not. Does a doorman meet you twenty-four/seven or only certain times? Was the property built with valuable commercial space or not? If so, who’s benefiting from those rising commercial rents, the owner of that unit, the developer or Sponsor or the unit owners? Are energy efficiencies a priority or does your property just incur the same old costs year after year. Amenities, naturally come with costs, so finding the right fit for your needs may seem to make a lot of sense.

    We are not suggesting that you should become a gadfly about maximizing revenue or minimizing costs and nickel and diming is not for everyone. But by evaluating the aspects of the property that reflect reasonable extra charges, assuring that commercial lessees are paying all they are required, and a focus on timely unit owner charges can create new cash flow without an increase in monthly charges to unit owners. Long term capital needs must happen, and their funding needs must be considered constantly. A board taking the trouble to work into their agenda a community effort to discuss how to save money, whether that is something as simple as maintenance schedules to assure that the equipment runs efficiently, the seals chalked and the systems last as long as possible just plain seems to have lower annual increases than other properties. Remember, it is the Board that asks the most questions, and asks for the most, that tends to get the best service. Such service can help differentiate your property in many, many ways. Maybe it’s time to think about what goes into the monthly charges your property is paying.

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    Don’t Get Fooled By Others!

    In an effort to maintain your property, hiring professional services and supplies is a must! These services and supplies require expenditures. In order to run a smooth financial operation and participate in smart-spending, your Board needs to assess what services and supplies are needed, how much your budget allows for, and match it with the best price for the necessary quality of services and supplies.

    Bidding can be compared to going to another doctor for a second opinion. In the case of servicing and supplying your property, your Board should almost always be calling on multiple companies that can cater to that one service or supply that’s needed. How many of you have a “Preferred Vendor List”?  This will help your company select vendors that are responsible and cost effective.

    Have you ever selected a vendor with the lowest bid and been disappointed with its services or supplies? Maybe the lowest bidder isn’t the way to go.  You could utilize the RFP (Request for Proposals) process which will help get you the best performance and supplies at a competitive price.

    First, think of the expenses for these services and supplies because, often times, they are different. These differences are recurring and non-recurring expenses, and the bidding for these has its disparities as well.

    Recurring expenses for services should be bid out periodically by the Board- usually every year (though this can be hard for a volunteer board). Annual bidding is also highly recommended for recurring suppliers. On the other hand, non-recurring expenses for services should be bid out only when the quote for the service is over-budget. However, it is recommended that your Board should seek out multiple proposal requirements anyway. If non-recurring suppliers are over the set apportionment amount, it’s time for your Board to get that second opinion (and a third, fourth, and fifth) as it’s important to establish a minimum number of bidders. Also, play it safe- get every detailed quote in writing!

    But wait, the bidding process isn’t over just yet! Once each bid is presented to the Board in its sealed envelope or package (hence the term “sealed bid”), it’s extremely important to have all aspects of the opening process documented such as a specific attendance sheet of the Board members (also make sure that there’s the required amount of members present at the opening of the sealed bids) and a Bid Control Sheet (the reason for the decision on the chosen vendor).

    Please note that there are exceptions to the rules about bidding when the need for a service or a supply is an emergency, the required professional services are of a confidential nature, or when there is absolutely no possibility of competition for a given service or supply.

    To protect the property’s objectives and demonstrate stellar operational practices within the Board, it’s very important to monitor and control these processes by documenting them in a written policies and procedures manual, a schedule, and/or a checklist. This will preserve a set way of your Board’s activities and practices while improving the quality of your property, minimizing costs, and enhancing Board accountability.

    I guarantee that your Board will get the very best financial results!

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    Evaluation of Internal Controls

    Auditing Standards for condos and coops are evolving toward a focus on the Auditor communicating more with the client.  This may be somewhat more difficult with not – for – profit volunteer Boards as they tend to outsource the basic accounting work and the relationship with the Auditor to a management company.  Here are some of the potential concepts that we report to our clients.

    While evaluation of internal controls is not part of a Financial Statement audit, gaining an understanding of your controls can allow auditors to identify significant deficiencies or material weaknesses.  The most common concern, is that the auditors involvement in the conversion of the Corporation’s internal financial information (which is prepared on a cash or modified accrual basis) to the full accrual basis of accounting, including preparation of the financial statements and related footnote disclosures, constitutes a significant deficiency in internal control over financial reporting.  This issue arises in the audits of many smaller entities which outsource the year end closing function. Any concern on our part tends to be alleviated with management possessing the skill and competency to prevent, detect and correct potential misstatements.

    Czarnowski & Beer provides comments and recommendations that are not just required but are intended to improve internal controls and/or may result in other operating efficiencies.  This helpful information allows management and the Board to enhance operations and minimize risk.   Comments and recommendations tend to cover broad aspects of your operations.

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    Auditing Standards for Condos and Coops Are Evolving

    Not all clients are aware that auditors are required to provide you with certain information related to the audit.  This tends to occur at the conclusion of the engagement in the form of a letter to management (in the case of condos and coops, this is the Board). This management letter relays information required by professional standards on Auditor and Board responsibilities, regarding the scope and timing of the audit and any difficulties encountered in the audit, including the extent of any required adjustments to the financial statements and any disagreements with management.

    Czarnowski & Beer provides comments and recommendations that are not just required but are intended to improve internal controls and/or may result in other operating efficiencies.  This helpful information allows management and the Board to enhance operations and minimize risk.   Comments and recommendations tend to cover broad aspects of your operations.

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    Communicating More with The Client

    Segregation of duties is a challenge in some office environments
    The most basic, and one of the most important, internal controls is adequate segregation of duties. This can be difficult in small offices with only a few individuals available. In such cases, the monitoring role of the Board becomes even more important as this expanded control can offset the limitations of the management office. This role may include additional monitoring activities which should be performed routinely by a member of the Board or committee(s). Czarnowski & Beer offers a checklist to aid in identifying potential areas for improvement in your management office’s functions. This allows your own Board to better coordinate activities to assure adequate segregation of duties for best practices designation.

    Monitoring of financial reporting is a critical element of internal controls
    An important internal control over operations is the monitoring of the financial reporting system. An integral part of the controls is a structured process to periodically evaluate the revenue and expenditures in the management reports. While it is understood that Board members serve as volunteers and the amount of time they are expected to be available is limited, the implementation of such a structured process for monitoring of the financial reporting systems is one aspect through the review of a comparison to budget report, including investigating significant differences should be a priority of the board operation. Guidelines can be designed to assure adequate monitoring of the financial reporting process utilizing the most common budget comparison report.

    Identifying incorrect payments is a key Board duty
    With the volume of invoices to pay for all of the entities, payments of invoices for other entities do occur. The most effective internal control to offset this risk is a Board Committee serving as a monitor of management, this can include reviewing substantial invoices paid as part of their periodic review of the management reports.

    Our experience indicates that when a Board meets in a scheduled format there tends to be an increased level of involvement in decision making. That is, significant issues tend to be more likely to be brought before the entire board for discussion and broad based approval is given for the actions to be taken. Depending on the needs of the operations these scheduled meetings may be monthly, bimonthly or quarterly. Special attention may be required more often than once or twice each year.

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