Coming Back from Financial Mismanagement

November 2018

Financial mismanagement takes many forms.  A condo corporation may have mishandled funds or been the victim of fraud.  It may have failed to fund its reserve fund in preparation for known expenditures or unexpected repairs.  There may have been a failure to prepare for dealing with a major weather event causing damage to the building.

Financial mismanagement can be evident in the reserve fund or operations account.

A condo corporation with an inadequate reserve fund has a more serious and long-term problem.  When evident, residents thinking they may have made a poor decision by purchasing in the building may want out.  Too many feeling this way reduces property values and can make a condo more difficult to sell.

Coming back from the brink requires discipline and difficult decisions.  It means recognizing the mathematical basics – money coming in must exceed money going out.  Mismanagement means ignoring this basic reality.

Proper management means understanding what it takes to manage a building so it can continue to serve its residents.  A functional building requires ongoing renovations.  It needs repairs and replacement as parts wear out or get damaged.

Condo corporations with low monthly fees make current owners happy for a time at the expense of easily anticipated problems.  Charging $400 per month in condo fees when it should be $550 comes with a cost.  A $1,000,000 reserve fund no longer looks good when upcoming expenses are $1,500,000.

The short-term response to a financial shortfall is a special assessment.  Problems arise when owners are unable to pay this assessment.  Condo buildings include a mix of well-off and financially strapped owners.  It may not be reasonable to expect all owners to be able to pay a necessary special assessment.  Preventing this outcome requires that condo fees be at a level sufficient to avoid the need for any special assessment.

Condo loans, with or without a special assessment, provide a way to accommodate owners who may be unable to pay a special assessment.  Borrowed money will have to be repaid along with fees.  Repayment of any condo loan is an important component of any plan to borrow money.

Successful and well run condo corporations share important traits.  They have responsible owners who elect good directors.  They also have owners who pay their condo fees on time.

When financial problems arise the worst thing to do is nothing and hope the problem goes away.  Such problems do not fix themselves.  Good directors elected by responsible owners will need to work to change the situation.  The first step is to recognize and admit there is a financial problem.

The next step is to identify the cause.  One possibility is a failure to collect condo fees that are due.  This revenue problem can be resolved by requiring condo owners to pay all monies due and pursue legal remedies against those delinquent in paying their condo fees.  Cutting costs is another option.

Beyond these immediate and short-term measures, best practices for management are more important than ever.  Walk the building; understand where money is being spent and where expenditures can be reduced without creating further problems.  It is difficult to implement changes without an intimate understanding of the building and its problems.

Implementation of best practices ensures that a bad situation does not get worse and can lead to improvement.  Transparency becomes more crucial than ever.  Owners need to be shown the budget and have it explained to them.  They need to understand why changes are necessary and the consequences of failing to act.  There has to be a realistic assessment of the problem and a solution understood by all.

A problem that has been years in the making will likely take at least as long to resolve.  Financial mismanagement requires a long-term commitment and directors focused on the end result which is a stable financial footing.