Think back to when you were younger and got your first job. You worked your hours—perhaps flipping burgers, taking orders or cutting the grass—and then earned your first paycheck. You went to the bank, signed the back and had it cashed and then…what? You probably spent it. Maybe you put some of it in a savings account. But as a teenager, your financial knowledge was pretty limited. Odds are you didn’t know that you could invest some of it. Like many teenagers, your focus was likely on clothes, music, and entertainment. Once the money was gone, you worked your hours and waited for your next check.

Fiduciary Duty

Now you’re all grown up and on the board of directors for your building. More than likely, you've gotten better at handling your finances. After all, you saved up enough money to buy your home. You probably have a savings account, a checking account, a few retirement accounts, some stocks and numerous other investments. On a given day, you know how much money you have to spend and how much you’ve saved. You’ve taken all the necessary precautions to make sure that your money is protected.

Now that you’re on the board, it’s important to know that handling the finances for an entire building is just as big of a responsibility as handling your personal finances. Residents rely upon board volunteers like you—as well as the building’s accountant—to make good financial decisions on behalf of the entire community and protect both individual and collective assets. But while handling the finances is the same responsibility, you actually need to know more, about reserves, budgets and accounts payable. It’s desirable for board members to have at least a passing knowledge of the various components of their community’s financial profile to adopt best practices when it comes to oversight and transparency where money is concerned.

Lesson #1: Learn the Difference

Co-ops and condos are similar regarding operations, but there are some differences when it comes to finances. “In a condo, there is no underlying mortgage on the building, while in a co-op there usually is, hence the monthly maintenance in co-ops tends to be higher,” says Richard Conley, senior vice president and chief credit officer at the New York City-based Community Preservation Corporation (CPC), a non-profit agency that provides financing and capital solutions for multifamily housing. “Also, each individual condo unit is a separate block and lot, allowing each unit to hold separate mortgages. On the other hand, co-op owners are shareholders in the building’s corporation, holding shares for their apartments and a proprietary lease. Therefore, an end loan for a co-op unit is secured by assigning the shares and lease for the apartment to the lender.”

Lesson #2: Learn about Financial Profiles

Conley notes that there are several components of a typical co-op or condo’s building’s financial profile that a member should understand. For example, “operating expenses, debt and maintenance,” he says.

He explains that in a co-op, maintenance is the sum of the operating expenses and debt service. “Operating expenses include taxes, utilities, repairs, building staff’s salaries, insurance, etc., as well as reserves,” he says. “Debt service is what is being paid to a lender for the underlying mortgage on a co-op, or an end loan for a condo owner. A lender focuses on how maintenance compares to that of other similar co-ops or condos. Is it at or below or above market? If it's below market, it may help enhance value; if above, there could be issues.”

The other key piece is the building’s current debt structure, or how much is owed. “How does it compare to other buildings?” says Conley. “If it’s overleveraged, it can jeopardize the financial stability of the building.”

Jules Frankel, CPA of the certified public accounting firm Wilkin & Guttenplan with offices in New York City and New Jersey, says that the first thing that board members need to know about the finances of the building is the balance sheet. “It’s a snapshot of what the association owns—otherwise known as assets—as well as what they owe, or the liabilities. The difference between them is the equity,” he says.

Lesson #3: Budget Basics

When you create your own personal budget, you write down what you spend your money on—mortgage, groceries, entertainment, etc. A building’s budget is very similar—it’s a list of the expected expenses for the year. Budgets are an integral part of an association’s financial plan. They help an association to set goals for achieving an income and monitoring how much the association is spending. There are such budgets as an operating budget and an annual budget that includes salaries, taxes, utilities, maintenance fees and insurance. There’s also a capital budget, a budget that plans for long-term repairs and replacements or for equipment or systems. These budgets are for several years, but should be looked at annually in case of changes. What repairs are a priority in this budget depends on a reserve study of the building’s needs.

“Typically, buildings work off the prior year's budget to make projections for the upcoming year,” says Conley. “Some of the things to factor into the following year’s budget include expected increases in water and sewer costs, real estate taxes and insurance premiums. The sewer and real estate tax information is usually released by the city about three months before the year ends, and insurance companies provide premiums for the following year.”

Also included in the operating budget is the salary of the building staff (doormen, porters, etc.). “Often staff is union and increases are in accordance with the negotiations with New York City unions,” says Conley. “Repairs and capital expenditures are projected based on recurring years and expectations. Finally, energy costs may be a wildcard in determining the following year’s expenses. They could spike or decrease, so it is always safer to build up reserves instead of decreasing the budget from the year before.”

Frankel says that board members should be aware of what repairs need to be made and be financially ready to make those repairs. “Each year when you are doing your budget, you should look at what you spent your money on,” he says. “For example, in 2014, it would make sense that the association spent more money on getting rid of snow. It’s a big difference between actual (spending) and budget. If that same association is using more heating in the colder weather, they need to find out what they are doing so they have the money for next winter.”

Lesson #4: Eyes on the Books

Frankel says that it’s important to make sure that all the numbers on all the reports make sense. “On the balance sheet you’ll see where the money is, who is handling it and what the investment strategy is,” he says. “And the reconciliations should be done in a way that makes sense. This means taking the records—the building’s records and the association’s records—and making sure the two are in sync with each other.”

Think of reconciling an association’s or co-op’s records the same way you reconcile your own checkbook. Each month, you compare your statement from the bank to what you wrote in your checkbook. If something doesn’t add up, it’s time to track down the mistakes.

“You make sure there isn’t anything unusual,” he says. “Make sure the right signatures are being signed on the checks. It’s looking over someone’s shoulder and making sure all the power isn’t concentrated in one place and that you have a segregation of duties.”

But regardless if you’re in a condo or a co-op, if you have one treasurer or an accountant, why do you need a second set of eyes on the books? To make sure that what happened to a Monmouth County condominium complex doesn’t happen to yours. According to New Jersey news reports, its former property manager, Theresa Tierney, embezzled more than $400,000 from its homeowners association and was sentenced to a six-year term in the state penitentiary. According to reports, the theft was discovered four years ago after the residents, who were accused of not paying their dues, said they paid them. In another Monmouth County association, another property manager stole a little shy of one million dollars. And another stole $400,000 from a Toms River association.

“At least two board members should be signatories on all accounts, including those maintained by management,” says Richard B. Montanye, CPA at the accounting firm of Marin & Montanye, LLP in Uniondale, New York, who also has a number of New Jersey clients. “Requiring board signatures on all transactions is very helpful.”

In the case of missing dues that led to more than $400,000 missing, the association should have had a system in place to track payments and make certain that, every month, the payments were coming in. Such a system would have prevented such a tragic ending. “The board should make sure they are looking after what’s due them,” says Frankel. “An accounts receivable report is who owes the association and do you have a process in place for making sure you’re getting paid. If you do, there’s a greater probability that you’ll collect anything.”

Lesson #5: Signing on the Dotted Line

In addition to two sets of eyes, there should be more than one signature. “To reduce the probability of fraud, the more eyes looking at [the books], the lower the probability that someone is going to try something,” says Frankel. “If someone has free run—writing and signing checks, doing financial statements—the most likely scenario, someone has the opportunity for fraud,” he says.

“Purchase limits must be included to restrict the level of purchases by management or any one individual,” adds Montanye. “Inventories of items should be kept to a minimum and records maintained. In addition, boards should require management companies to provide dishonesty bond and crime insurance coverage in addition to that held by the building itself with annual renewal certificates of coverage provided to individual board officers.”

Lesson #6: Not Making Mistakes

Budgeting for repairs is another area of concern. “A common financial mistake for associations is the failure to plan and budget for maintenance and repairs, especially large ticket items like a new roof,” says Gina M. Mann, an enrolled agent with Freedom Financial Solutions LLC in Wappingers Falls, New York.

Conley says that boards are often reluctant to increase maintenance fees and to spend extra money. “However, sometimes you need to increase maintenance fees in order to account for increased costs, such as higher water and sewer charges,” he says. “By acknowledging when to raise maintenance fees and cover rising costs, you increase your chances of operating on a truly balanced budget, as well as addressing capital needs.”

For more information, Conley says that board members would do well to take a course in housing finance and maintenance. “The City of New York, through its Department of Housing Preservation and Development (HPD), provides courses on the various tax abatement programs, issues of maintenance, capital improvements, and local codes,” he says.

The Council of New York Cooperatives & Condominiums (CNYC), the Federation of New York Housing Cooperatives & Condominiums (FNYHC) and the New York Association of Realty Managers (NYARM), offer seminars and instructional coursework useful for board members, building staff and managers. CNYC and NYARM hold their own trade shows, and CNYC also offers classes, such as “The Workshop for Building Treasurers,” “Challengers for Condominium Boards & Unit Owners,” and “Self-Management 101,” among others throughout the year. The Cooperator’sown Co-op & Condo Expo, now in its 27th year, took place April 8th at the Hilton New York in Midtown Manhattan. The day included more than 270 exhibitors, informative seminars and free advice booths.

Know What You’re Doing

Once all your I’s are dotted and your T’s are crossed on a budget and you know who’s doing what on your board, then it’s important to make sure that your residents aren’t being kept in the dark. “Annual financial reports prepared by an independent account should be distributed at least annually to all owners,” says Montayne. “In some instances, boards also provide interim budget information as well as disclosing significant financial issues or events in newsletters. Individual collection issues and shareholder/unit owner information should be kept confidential.”

The bottom line for learning about your property’s bottom line, says Frankel, is that board members should know that you can’t run a business with nothing in the bank. “They need a cushion because there are peaks/valleys of cash flow,” he says. “Someone shouldn’t be there just there taking up space and not understanding what’s going on. That board member isn’t helping the situation.”

With deference to the late Sy Syms, ‘an educated board member is the best board member.”

Lisa Iannucci is a freelance writer and a frequent contributor to The Cooperator.