Keep Track of the Money: Finance and Condos
Money is a top-of-mind topic for condos. Following the money is hard without good policies and procedures. This blog fills the gap on financial policy.
Monthly Financial Review
Reviewing the condo’s monthly financial statements is one of the most important tasks each month. It is great if a member of the board is an accounting professional like a Chartered Accountant (CA) or other similar designation, but it is still possible to have a great board without a CA. Establishing policies and procedures helps a great deal towards sound financial oversight. Anyone can learn how to read financial statements. As I mentioned in an earlier post, having a forensic sense of curiosity is an asset.
Monthly Financial Statements
One of the key items to review regularly are the monthly financial statements. These statements contain valuable information about the condominium corporation’s operations. I cannot stress enough the importance of becoming familiar with financial statements and instilling the discipline of reviewing them monthly.
Look at actual versus budgeted costs and pay close attention to any variations. Always ask why a cost is higher or lower than budgeted. Are there any unusual patterns? A sudden increase, for example, in the water bill, could mean that water is leaking due to leaks. Good property managers will notice unusual patterns and bring them to the board’s attention, but it is good practice for the board also to check. The board needs to understand why costs are increasing and be able to explain to the owners when drafting next year’s operating budget.
Always keep an eye on fee payments. Fees are the life blood of the condo and the condo’s primary source of revenue. If a written policy has not been established regarding late and overdue payments, then now is the time to create one and provide it to the owners. Be sure to give new owners this information, so that they get off on the right foot.
Late payments and non-payment are separate items; each needs an appropriate response. Late payments are payments that arrive at the management office after the due date. This problem should occur less frequently today now that many owners pay their condo fees automatically from their bank accounts. Encourage all owners to pay by automatic deduction. It is much more efficient to organize automatic deductions than keeping track of checks. Owners who pay their fees late cost the corporation in time and effort. Late payments disadvantage the other owners who pay on time. Often an administrative fee is charged in this situation. Make sure owners know the consequences of paying their fees late.
Overdue payments are another issue. In this situation, an owner does not pay their fees for more than one month. I find these situations difficult when I know the owner is having financial difficulties and cannot pay their fees. It is situations like this that test the ability of the directors to act in the best interest of the corporation and not allow one owner to get preferential treatment even when it feels like the right thing to do. Directors cannot play favorites with any owner in any situation. Overdue payments need timely action to ensure that the condo can recover overdue fees (see link for more information). The legal requirements for a lien vary by state and provincial legislation so be sure to know the law in your location.
Some owners deliberately withhold payment of their condo fees because they are not happy with the board or the property management company. It does not matter why an owner does not pay their fees are not paid; the consequences are the same. Owners will face the prospect of legal action regardless of the reason for non-payment.
Directors make lots of decisions that involve money. Having policies in place for reviewing expenditures helps the board provide appropriate oversight.
“The director’s job does not merely consist of conducting monthly board meetings, approving annual budgets, fining homeowners and raising dues. Inherent in every director’s position is the duty to oversee and supervise association vendors and employees. This includes diligently overseeing accounts payable and receivable. The board position of treasurer exists for good reason as such supervisory actions are nondelegable (LA Times, 2017).”
Spending Money – Low Value
What is the process used when a low-value contract is under consideration? A low value will mean a different dollar amount for each condo. Not every project needs a formal RFP (request for proposal). Sometimes, and it depends very much on the type of work needed, multiple quotes are not necessary. If the prospective contractor is well known, the work is straightforward, and the cost is low or the proposed cost in line with previous similar work done, then I am usually OK with not receiving multiple quotes. Best practice is to obtain several quotes before granting the contract. However, each condo board will have a different level of comfort and experience in these areas. Multiple quotes do not always result in the best price if asking the wrong contractors.
Documenting the approval of expenditures in the meeting minutes is necessary. Include a brief summary of the proposed work, a rationale for choosing contractor X and a motion to approve said contractor. Do not leave decisions in email inboxes.
Who signs the checks once the work is finished?
Multiple signatures are typically required. If the property manager signs, then make sure that at least one director also signs. Alternatively, require two directors to sign. Is there a site check to ensure that the completed work is satisfactory? Include the answers to these questions in the condo board’s policies. As always, being proactive and having a policy in place now is better that trying to fix a job that did not go well.
Spending Money – High Value
Any time the board reviews the cost of large projects, make sure that the process is fully transparent and follows proper procedures. Directors will be challenged again, to act in the best interest of the corporation, and ignore pressure from potential contractors or owners who own a company or have a stake in a company bidding on a contract. I am not going to go into specifics about procurement procedures but refer readers to this article for more information.
Directors need to exercise proper oversight of their property management company. It is not enough to say that “Yes, we trust our management company and rely on them to get bids and manage to process.” Of course, directors trust their management company; if they did not, then the directors have engaged the wrong company.
Governance is not about Trust
Governance is not about trust; it is about oversight and applying the proper oversight in every situation, especially when spending millions of dollars. Directors can delegate specific tasks to their property manager, but can never delegate their responsibility for governance. If owners ask for details of a renovation project, directors must be able to explain the reasons for selecting the winning contractor. It is an owner’s right to know.
Likewise, it is the board’s obligation to work with their management company and create processes for high-value projects. Who is going to oversee the bid? Usually, an engineering firm is engaged to run the bid process. Is the same engineering firm also going to oversee the project? On large projects, separate these two aspects. One company collaborates with the board to select a contractor that meets the requirements of the project. A second company monitors progress and is responsible for ensuring that the work is completed as per the written specifications. Property managers should never be involved in the bid process directly but advise the board on potential contractors and the bid process as the directors who may have no previous experience with procurement.
Property Management Company Limitations
Do not make the property manager require board approval for the purchase of low-value services or products. If the property manager cannot be trusted to spend a few thousand dollars on the condo’s behalf, then the board has engaged the wrong manager. A limit is necessary, of course, and set in the contract with the property management company. Typically the amount is between $1,000 – $3,000.
It is the responsibility of the property manager to provide advice, share expertise on the best information possible on three quotes on a job along with recommendations, but it is the sole responsibility of the Board to make the final decision.
In the case of an emergency, it is not realistic for the property manager to get permission before calling contractors to fix the problem, even when the cost of repair is quite significant. I do not imagine that directors want to receive a phone call at midnight from their property manager needing permission to hire a contractor to fix the leaking roof or a flooding basement when immediate action is necessary. It is a good idea to have a conversation with their property manager and define, in writing, what constitutes an emergency and how property management will respond. Good communication between the property manager and the board results in the property manager informing the board of any emergency as soon as is possible after it has occurred.
Everyone has heard “if it’s too good to be true, it probably is.” This adage is especially true when it comes to choosing contractors. First-time directors will be surprised or perhaps shocked by the cost of repairs or other things. I had no idea how much snow removal services cost. When I was on my board, we decided to replace the existing contractor with another company. When the three quotes arrived, we were shocked by the cost. Our previous contractor had not been the greatest and we soon learned would cost three times to replace. Our much more expensive snow contractor also provided vastly superior service.
No one wants to spend more money than necessary, but quality work requires quality pay; being cheap inevitably results in shoddy work or poor service. Quality pays off and reduces costs in the long run.
Policies are powerful tools that boost a board’s ability to function efficiently and provide the necessary oversight.
Do you have any suggestions for financial policies or have a question about those listed here? Tweet us @BoardSpaceinc with #CondoFinancialPolicies or leave a comment on our Facebook page.
Learn how to keep track of the money for condo finances