Massaging the numbers 
“We have become ninety-nine percent money mad. The method of living at home modestly and within our income, laying a little by systematically for
the proverbial rainy day which is due to come, can almost be listed among
the lost arts.”
—George Washington Carver

If the finances are in trouble, there are tricks the manager and the board can play to pretty them up.



Operating funds
If the operating expenses are over budget, then many items can get pushed out or cancelled. Some painting can be deferred, a dead tree cut next year instead of now and security hours can be cut back a few hours during the week.

No big deal. However when this is not enough, games can be played.

Some boards will bill regular maintenance costs to the Reserve Funds instead of the Operating Fund. The costs of replacing fan belts, fuses, filters, locks and light bulbs are included in the major repairs.

A more obvious trick is to underfund the Reserves. You can tell if this has been done by looking at the "Statement of Financial Position" page in the audited financial statements. If money has been "borrowed" from the Reserves, it means that the money was illegally taken out of the Reserves or was not put into the Reserves. Auditors may also list the shortfalls as "Reserve Fund Receivables" or as an "Interfund Balance."

Some expenses can be pushed out into the next fiscal year by having needed work done now but have the contractor bill you in several monthly payments. That way, the expenditures show up next year. Technically, this is a loan and loans need to be approved by the owners but they will not even know about it.

Reserve funds      
If the board does not like the figures that the engineers tell them they need to raise for the Reserves, they can find ways to avoid raising the fees.

They can try to get the engineers to remove items or push them out further into the future. The board can stall the study’s implementation for months, or even longer, if it wants to. Until the board passes a resolution to pass the study, it remains just a draft.

Once the negotiations between the engineering company and the board are over, the board signs off the modified reserve fund study. It then should be distributed to the owners. However some boards just sit on the study and supply it—only if requested—as part of the status certificate.

Ignoring reality
The board can also ignore parts of the engineer’s study and modify the study to their liking. One director posted on the Internet:

“To my knowledge, no useful or universally applicable definition of "fully funded" exists. At our building, the board approves their own funding plan, not what the engineer suggested, and that's what we call 'fully funded'.

How many buildings do exactly what the reserve study engineer suggests, without a bracing "GET REAL, BUDDY" from the board? How many buildings use the financial numbers that the engineer suggests (e.g., allocate $2.5 million for the garage by 2030, just in case)?

So what happens if we don't follow the engineering study? Nothing. Absolutely nothing.”

Well, that is not quite accurate. The auditor will, or at least should, add a paragraph to the front sheet of his report stating that the board has not followed the Act by failing to properly fund the reserve fund—and that is about all.
(Usually they will bury this bad news in the back Notes.)

A different trick is to have a note that states that the board of directors used the Reserve Fund Study and other sources of information to determine the required contributions required to be put into the Reserves.

Only an alert potential buyer, or their lawyer, will read that paragraph and see it as a warning not to buy in that condo corporation.

The Act doesn't say when
A small condo up in cottage country is not collecting sufficent funds. The monthly financial reports that the management company prepares for the board shows that the required contributions have been deposited into the reserve fund.

But they haven't been. The management company is using that money to help pay the operating costs. How does the manager, who works for an ACMO 2000 management company, get away with this? She tells the directors that the Act does not say when the money has to be deposited into the reserve fund.

So there. The board does not have to raise the common element fees or levy a small special assessment. They will push this slowly increasing deficit out to sometime in the future.

Good thing no one has told the owners about the tricks they play as all the directors had to sign the CCI Code of Secrecy. (That is what the directors call CCI's Code of Ethics.)

What is “fully funded”?
Fully funded has a definition and it is:
When the money in the reserve funds equals or exceeds the figures in the Reserve Fund Study.

If the condo follows the proper funding from Day One, it can be easily done; especially if, the board sues the developer for any building deficiencies in a timely basis and if, over the years, the managers and the presidents don't squander the money.

But the money was just sitting there
However; if over a number of years the different boards decide, from time to time, to take a reserve fund holiday or if they transfer funds from the reserve fund to pay for the operating fund deficits, then the building puts itself in financial danger. The money lost due to the missing compounded interest alone can be staggering.

Digging your way out of this mess may be impossible. If owners are paying $700 a month or more for maintenance fees, a board will not survive if it tells the owners that it is now going to bump that up to $1200 a month for a few years so it can save up for repairs that will be required a few years later.

So what can a board do?
It is common for some boards go merrily along ignoring major building defects as long as possible. Some boards brag that they have not raised the condo fees in five years or more.

However this cannot go on forever as it becomes obvious to everyone that the property is deteriorating and the property values are declining.

top   contents  chapter  previous  next