In the interest of education, we wanted to put together a list of benchmarks that you can apply to your property’s performance. Many have requested that we share what we see within our work in order to allow Board members and unit owners the opportunity to compare themselves against others. For those interested in best practices of the Board monitoring function of internal controls, this also serves as the chance to highlight an aspect of finances that might be out of whack, thus indicating areas for improvement and those with higher risk that theft or fraud might be occurring. Just a reminder, the Board should serve as more than the ultimate decision maker but also as monitor of operations. We suggest all Board members establish a periodic comparison as an important internal control.
Minimum cash/reserves per unit
So we are wondering what you heard should be in the reserve fund? Comments of three to six month carrying charges tend to be the reply. Our premise is that you can’t truly know the appropriate amount unless you have a physical needs assessment accomplished. With this, an independent engineer predicts which systems will need extensive renovation or replacement and estimates the expected costs. Only with that information can the Board truly understand the amount they need to maintain or should have.
We understand that is an involved and costly process, so we took a look at what our clientele maintained. So, you have a reserve fund, but is it reasonable? We determined that a per unit comparison level was the best metric and that there is a usual range. Does your property maintain a minimum reserve fund of $2,000 or $100,000? That appears to be what buyers and lenders are looking for as they shop for a unit to invest in. In order to have a well-dressed annual Financial Statement your reserve fund needs to be at least these minimums. That means that your Board cannot spend any of a reserve fund at that level or lose the minimum needed to meet prospective buyers’ requirements
Annual monthly carrying charge increases
Nobody likes to pay more, but costs do continue to rise in markets like New York. If you didn’t get an increase this year, be thankful. Our properties are seeing in general, increases of 1% to 3%. If yours was higher, we suggest you learn the reason. It may be appropriate but at least your Board should understand the issue, which lately in New York has been real estate taxes, when this metric is exceeded.
Debt per unit
The amount of debt per unit tends to translate into how high maintenance charges are compared to other properties. Generally, you should look for debt per unit to be $40,000 to $60,000 in strong New York City markets, somewhat lower in the outer Boroughs. If a building’s debt per unit is out of the $40,000 to $60,000 range, it’s a sign that there might be an issue. Further investigation on your part is needed to see how what you are paying compares to other properties. It could be that the property can carry the additional debt and it’s not be an issue. It could also indicate higher monthly carrying charges as that debt carries higher service costs than lower debt levels. With rising interest rates there is substantial risk that when a loan obtained during the last decade comes up for refinancing that those costs will skyrocket due to a higher interest rate.
Long term funding method
Reserve funds are the wallets the property has available for future major repairs, so what’s being added to your wallet? Let’s face it, properties need long term repairs. Where do those funds come from? Well, we are getting to the point that additional borrowing might not be practical. So, your property needs a long-term funding vehicle. Consider a transfer fee or an allocation of monthly carrying charges. A transfer fee can be imposed on departing owners. Such fees are now becoming expected in the market. Another option is an annual allocation of monthly carrying charges to capital. Thereby, funds are set aside from what as unit owners pay each month. Either way it’s important that such a long-term program be in place.
Unit owner receivables
Life happens and sometimes people can’t always just pay right now. We want your Board to consider having an operating budget that reflects the potential of late payers, say 1% of revenue each year is set aside as potentially uncollectible. But wait a minute, what’s with that, all my neighbors aren’t current in their payments? Unfortunately, late payments do happen, what we don’t see happening is a cushion to absorb the tardy payments. Your property needs to be prepared for a potential shortfall for non-payers, and as we mentioned, 1% for annual charges usually suffices. But if arrearages start to grow above that level, it’s best to spend the time to better understand the situation and what’s being done to collect what’s due. Make sure your Board collects everything its due.
Minimum working capital levels
Even if you timely collect expected revenue, figure that you need minimum working capital to run a business of about 1/2 month’s revenue. So, if monthly revenue is on average $10,000 per month, you need as a minimum to keep 1/2 that amount or $5,000. Let’s face it, business operation requires working capital. Putting aside seasonality of a business, most can get by on 1/2 month’s average revenue. So, if your business is doing $1.2 Million in annual revenue, you need at least $50,000 of working capital. That doesn’t mean there won’t be calls for capital; it’s just a rough guideline for the bare minimum. It is best to leave management in a place where they have available at least minimum resources to operate.
Whether you are a business, individual, or non-profit – we will outline specific steps you can take to minimize taxes, maximize loan eligibility, or enhance the value of your property. With one call or email we will provide you with a professional, complimentary financial Statement evaluation – no obligation. Just visit Czarbeer.com/offer or contact us at firstname.lastname@example.org, or call (212) 397-2970 and we will be happy to help you and answer your questions.