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    Planning Next Year’s Budget with COVID-19

    Many unit owners would consider the annual financial statement, which is audited by an external accountant, to reign supreme but to many the annual operating budget seems to be the most important financial document. This is because the operating budget determines the amount of monthly charges to unit owners for the next year and the need for any assessments to supplement revenue. In the COVID-19 era there are several significant risks to your annual budget:

    1. Will unit owners be able to pay on time and in full each month?
    2. Will the commercial or parking space no longer be able to pay rent or worse yet become vacant?
    3. Where will the funds for the inevitable added costs of dealing with COVID issues come from?

    At Czarnowski & Beer we have been advising our clients that this year is time to start looking at the operating budget a little earlier. We suggest that you start by getting together with your financial analyst to commence the usual Fall budget process much earlier this year, this summer if possible. This will allow you to investigate what obstacles your property is encountering due to COVID-19 and you can then move to determine which of those past costs will impact the property in the new year. After these evaluations are complete you can transition into a thorough review of where the property is so far this year – this evaluation of the present situation also allows you to establish a benchmark for year-end results. By planning for the rest of the year you cement your future. You will learn now, as opposed to in December, whether you need an increase and also have adequate time to plan for it. While no one wants to pay more, as a board member with fiduciary responsibilities you really need to understand the property’s COVID age finances now.

    Research is key here. Do you really know for sure what your property’s costs of the initial shut down were? We suggest that you make it your business to find out. If there is the expected second wave planning for at the least those amounts a second time in 2020 is prudent. Let’s face it, we don’t know if a second wave is coming, or if the costs will be more or less than this Spring, but there is no better time than now to evaluate what  increased costs are caused by the crisis. Do you really want to sit still and be reactive to the news that there is not enough money coming in? Short of drawing on loan facilities, the only place the funds will come from is cash reserves so do your due diligence.

    One aspect of added costs may be the property’s payroll. We suggest you compare the costs that occurred during the shutdown with a period before the crisis. Certain added costs for coverage can be hidden in payments to security or concierge services as well reimbursement for the managing agent. Small amounts may be hidden as payments to individuals along with repairs or administration. Looking into overtime is a great way to find where money might not have needed to go. When looking at these costs it is best to have dealt them dealt with by year end to avoid financial statement deficits as best you can.

    If your property has commercial space, you will need to appropriately evaluate what is now vacant as well as the ability of your remaining tenants to pay. Allowing reopened businesses to not pay rent, even if only a diminished amount, is something that should not occur. We suggest continuing to monitor any rent arrears on these units and dealing with them as soon as there is a shortfall. Remember, every dollar lost will either need to be borrowed or paid by the unit owners. Knowledge is power in accomplishing an accurate operating budget going forward.

    Certain, hopefully limited in number, unit owners who cannot pay because of employment issues also need to be considered. While we all feel for those suffering in these times, the board took on the fiduciary responsibility to make sure the bills get paid. While a lender is much more likely to step in for a cooperative unit should arrears occur, the risks are pronounced for condominiums. You need to be prepared to only collect token amounts from lenders and then only some monthly common charges. Careful negotiation through this situation is vital and the best way to accomplish that is using future budgets and constant monitoring by the board.

    Take the time to talk to your property manager and/or building’s Superintendent about what is going on. Realistically understanding your financial situation and moving to resolve the issues impacting your property from COVID-19 is essential to your financial success. Let’s make sure that we move swiftly to determine our position and structure a plan to assure we understand where we are going.  Only by getting started on this exercise now can you hope to use the budget to plan for the latter half of 2020 and have comfort knowing that you understand 2021 as it approaches.

    The Czar Beer team is dedicated to providing timely, accurate information on all aspects of COVID-19 that affect our clients. However, as this is all developing quickly we are here to offer support in any way we can. You can email us at info@czarbeer.com or call 212 397 2970 with any questions you may have.

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    Why You Should Take a Closer Look at Your Financials During COVID-19

    Prospective purchasers and lenders to cooperatives and condominiums utilize both the annual budget and financial statements as the basis for their perception of your property’s financial health.

    In the era of COVID-19 the seasonal publication of those documents creates a situation where the ability to rely on them is quite different now. You see, these documents will now need to chronicle how things have changed, which is why you should take a closer look at your financials during COVID-19.

    With the stay at home order and the reboot of the usual time frame to publish an annual financial statement many properties have just now, or will soon, published their 2019 financial statements. This means that the shortest interval for annually updated documents will be nine months if we return to the usual timing of publication. We suggest that boards prepare certain information about their property’s COVID-19 effects to be at the ready for those who will inquire. However, the annual operating budget is a document that can be more easily updated to demonstrate the effects of COVID-19 to those needing financial information.

    Effects on Your Operating Budget

    On the financial statement side of the COVID effect on finances is the amount of property reserves. In the past, reserve funds were generally viewed from a distance with a range of ideas on the topics from accepting what is there to structured plans for future capital costs that are planned to be needed. While there have always been questions as to what the reserve fund balance is, now during the period between financial statements these will be more common and will have urgency added. The concerns include how much was required to be utilized to get through the crisis to pay bills; were the added costs of COVID-19 dealt with in the budget; how the shutdown impacted commercial tenants’ ability to pay rent; and what was the mix of the population of unit owners who suffered severe enough personal financial issues that they can’t pay their monthly charges.

    Any updated operating budget information will demonstrate plans to solve the latter two questions, but only potentially painful financial actions by the board can offset the funds used for the crisis and the added COVID costs. Your board needs to consider the aspects of the reserve fund that are not only important in the near term, but also for the future.  Only by having complete knowledge of what has occurred can you expect to keep your reserve funds appropriately replenished and be ready to present a viable financial recuperation plan from this event. The need to take a closer look at the finances of your property during the COVID-19 pandemic and work with your auditor on how the finances will look when the next financial statements are published is paramount.

    Extra Working Capital Versus Restricted Cash

    Cash on a cooperative or condominium financial statement has always been king, but now this is more important than ever. While cash always had a positive association of being available for emergencies there now needs to be an enhanced level of amounts, not just for that but also for the usual reserve fund for future capital projects that everyone looks for.  The better option is to have two funds, one for major repairs and replacements and a “working capital” excess fund for emergencies. The amounts sought will tend need to be roughly twice the amounts in the past, we are now suggesting $4,000 per unit and a bare minimum amount of $200,000. If your accounts have been depleted planning now to attempt to recover lost ground can be vital to creating the best possible post COVID financial statement.

    Using Restricted Cash to Fund Operations

    We mentioned having cash for emergencies earlier and another aspect of this is determining how much was been needed during the Spring and potentially how much will be needed in the second wave of shutdowns. This leads us to ask how much the deficit (maybe deficits if there are multiple waves) was, how much cash was utilized, and might it have been cash restricted for capital projects. You will need to know if the cash was designated in order to avoid income tax consequences to unit owners, and if so that use needs to be accounted for as a ’loan’ from reserves and a plan needs to be adopted to return those funds to the restricted fund. Appropriate planning for the inevitable questions and tracing the funds that might have previously been designated for capital projects is of utmost importance.

    How to Make Your Financial Statement Presentation Picture Perfect!

    Working together with property management and the auditor can help you create the best possible financial documents. We urge you to get started with the 2021 operating budget process NOW. Many of the operating budget models utilized by property managers include a current year projection as well as the future operating budget. Having that information available can be quite helpful to quell concerns in the off-season of financial documents your property produces.

    By starting this summer as opposed to the usual timing in late Fall you can have the financial information ready for those who need it. You also can communicate any future substantial increases to unit owners well in advance or if working capital is needed, implement a COVID increase or assessment in a proactive as opposed to reactive manner.

    Obviously no one wants to pay more, and many simply are not able to, but in this situation, knowledge is power, and people need to know. Only by fully understanding how funds were needed can you ever hope to best window dress the reserves that your next financial statement will present. Covering both financial aspects before their usual timing allows you to enhance the financial situation of your property.

    The Czar Beer team is dedicated to providing timely, accurate information on all aspects of COVID-10 that affect our clients. However, as this is all developing quickly we are here to offer support in any way we can. You can email us at info@czarbeer.com or call 212 397 2970 with any questions you may have.

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