When a new condominium development is completed, the condominium corporation is formed, and one of the first essential tasks is creating a budget. This budget is crucial because it sets the financial foundation for the building's ongoing operations, maintenance, and long-term financial health. However, the first-year budget differs significantly from the budgets that will be created in the years following. To gain deeper insight into this, we spoke with Audrey Loeb of Shibley Righton LLP, who provides expert advice on condominium law and financial matters.
Let’s take a closer look at these differences, especially since the first-year budget is typically set by the developer.
Understanding How a Condominium Corporation’s First-Year Budget Differs from Future Years
The Developer’s Influence on the First-Year Budget
In most cases, the developer is responsible for setting the condominium corporation's first-year budget. Since the condo is newly built, this budget often reflects some unique characteristics that will not be seen in future budgets.
For one, the first-year budget might include items that are subsidized or provided for free by the developer. For example, the developer may cover the cost of certain services, such as property management fees or utilities, during the first year. These subsidies are designed to ease the financial burden on new owners, as the building settles into its operational rhythms.
Additionally, the first-year budget will not reflect some expenses that won’t come into effect until later years. This could include things like certain repairs, ongoing maintenance costs, or new operational needs that arise after the condominium has been fully occupied and after the developer hands over control to the owners.
The Missing Reserve Fund Contributions
Another key distinction in the first-year budget is the lack of a true reserve fund contribution. A reserve fund is a savings account used for large, unexpected expenses such as major repairs or replacements of building components like the roof or HVAC system. While the reserve fund is a critical part of future budgets, the first-year budget may either understate or completely omit these contributions.
The developer may choose not to include the full, recommended reserve fund contribution during the first year. This can happen for various reasons, such as keeping initial fees lower to attract buyers or because the developer is still involved in the property’s day-to-day operations. In future years, however, the condominium board, once fully established, will be responsible for setting aside an appropriate amount for the reserve fund based on expert advice and the building’s long-term needs.
What Changes in Future Budgets?
As the condominium corporation transitions from the developer’s control to the owners, future budgets will reflect a more accurate representation of the building’s financial needs. In particular:
Increased Operational Costs: The cost of maintaining and running the building will become more realistic. The developer may have subsidized certain operational costs in the first year, but owners will need to take on those costs in subsequent years.
Full Reserve Fund Contributions: A proper reserve fund contribution will be introduced in future budgets, ensuring that there’s money set aside for long-term capital repairs and replacements. This amount will be calculated based on the building’s condition and the expected lifespan of its major systems and components.
Accurate Allocation of Costs: Future budgets will better allocate costs between different areas of the building’s operation, including maintenance, utilities, insurance, and management services. The expenses will be more evenly distributed among the unit owners.
Further Resources: Budget in Condos
Our blog also offers a wealth of information on relevant condo law topics, making it a valuable resource for property managers and boards alike. Or, explore Stak’d, our library with over 10,000 hand-curated condo-related resources for additional summaries and tools, or dive deeper into our blog for more detailed discussions on topics that matter to you and your community.
Condominium Corporation’s First-Year Budget Differs from Future Years: In Conclusion
The first-year budget for a condominium corporation, often set by the developer, differs from future budgets in significant ways. It may include subsidized items, exclude full reserve fund contributions, and fail to reflect the actual ongoing costs of the property. As control shifts to the owners, future budgets will need to account for the true operational costs of the building, including proper contributions to the reserve fund. Condominium owners should be aware of these differences and plan for the changes in financial responsibilities that will come after the developer hands over control.
By understanding these differences, condo owners can better prepare for future expenses and ensure the long-term financial health of their condominium corporation.
-Stratastic Inc.
P.S. Looking to secure your condo's financial future? Reach out to a trusted financial company to ensure your budget and financial plans are on track. Find the right experts in our vendor directory, My Condo Vendor.
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