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Wednesday, July 30, 2014
July 2014 View Previous Magazine Features
 

Looking for Alternatives
By: Nena Groskind

There are two things all condominium association boards hate. Well, probably a lot more than two, but for purposes of this discussion, two in particular: Increasing common area fees and reducing services. But with costs rising and essential (often long-deferred) renovations draining reserves, many boards are finding that they must do one or the other in order to cover their operating expenses. There is another option, however, which some boards have already discovered and many are beginning to explore: Finding alternatives sources of income to boost revenue without raising owners’ fees.
There are actually a number of revenue alternatives boards might want to consider. We’ve identified 8 that we thought were worth discussing. Some are more lucrative than others and all entail difficulties and potential disadvantages that must be weighed against the revenue they will produce.

Telecom Contracts
Leasing rooftop space for cell tower installations is hands down the least troublesome and most profitable option available to community associations. “It’s the only option likely to generate a large amount of revenue,” according to Kenneth Bloom, CPA, a principal in the Massachusetts accounting firm Bloom, Cohen, Hayes, LLC, who provides accounting services primarily to community associations.
Cell tower leasing arrangements are also relatively trouble-free for community associations, notes John Shaffer, an associate in the Massachusetts law firm Marcus, Errico, Emmer & Brooks, who has negotiated many of these contracts. “The telecom company does everything,” he says. “All the association has to do is collect the payments.”
“Potentially, it is a very nice way for a ommunity association to enhance revenue,” Hugh Shaffer, PCAM, on-site manager at Harbor Towers in downtown Boston, agrees. But not all communities are candidates for cell tower installations, he points out. The buildings have to be tall enough, they must have sufficient roof space to accommodate the equipment, and they have to be in a location where telecom companies need cell towers. The community’s rooftops also have to be more desirable than those of other buildings in the same area, because competition for these contracts, understandably, may be intense. Shaffer says Harbor Towers has been approached twice by telecom companies interested in discussing a rooftop lease, but “for whatever reasons, the contracts went to other buildings.”
Desirable though cell tower contracts may be for associations, there isn’t much boards can do to attract them. “You can’t go out and get these deals,” Shaffer (the attorney) notes. “They come to you.” And they don’t lways produce as many dollar signs as boards anticipate. Your negotiating position will obviously be much stronger if your building is the only viable option in the area, Shaffer points out. If there are several equally appealing alternatives, telecom companies will have no incentive to offer any of them top dollar for a lease.
Cell tower contracts offer a relatively rare combination: Decent (if not always exorbitant) revenue without any significant disadvantages for the association. But owner approval, if it is required, may not be assured, because of concerns that exposure to radio waves may increase cancer risks. Although scientists have found no conclusive evidence of such health risks, some people are still uncomfortable living in close proximity to cell towers.
Give those concerns, Hugh Shaffer (the manager) suggests that even if boards have the authority to negotiate leasing agreements on their own, they should discuss the plan in an open meeting with owners first, and proceed only if most owners approve.
“You have to consider whether the revenue is worth the risk of alienating a large portion of the community,” he cautions. Boards also have to consider the risk that the presence of cell towers might discourage some prospective buyers from purchasing units in the community. That may not be a reason in itself for rejecting a contract, Shaffer emphasizes; but it is a factor boards should consider in assessing the pros and cons of these transactions.

Cable and Internet Service
Associations may find communications-related revenue options inside their buildings as well as on their roofs, in the form of exclusive marketing agreements with cable service providers. Federal law requires associations to grant access to any company that wants to provide communications services to residents. So they can’t negotiate the exclusive service contracts that were once common and could be quite lucrative for associations. However, boards can give a selected company the exclusive right to promote its services in the community, by circulating advertising material or holding informational meetings with owners, and many companies are willing to pay a sizable per-door fee for this privilege.
Companies will also pay handsomely to negotiate a new contract or renew an expiring one allowing them to use the existing “home wires” leading from a cable box to owners’ unit. Other companies could install their own wires, but using the existing ones is obviously far more cost-effective for them.
Pat Brawley, CMCA, AMS, PCAM, an industry consultant, whose firm, Central Management & Consulting Services, LLC, advises community associations and management companies, says one community received a sizeable payment for negotiating a long-term (10-year) home wire use agreement. But this was a one-time payment, she notes; not a monthly revenue stream a cell tower lease would generate.
Some management companies have negotiated “bulk service” agreements with cable providers, offering exclusive home wire access to several communities to produce a much larger per-door fee than smaller communities would likely receive on their own. Robert McBride, Robert McBride, CMCA, AMS, PCAM, president of The Dartmouth Group, Inc., AAMC, AMO, says his company has negotiated per-door fees for some communities this way.

Handy Man Services
Communities that employ maintenance staff sometimes offer on-site handy-man services for a fee to residents, who appreciate the convenience, the attractive pricing (usually much less than they would pay to hire handy-men on their own) and the security of having association maintenance personnel, whom they know, work inside their units. But boards that expect these operations to generate significant income are likely to be disappointed. “I’ve never seen them priced to generate a profit,” Bloom notes.
Managing the services can also be difficult. “You have to make sure to keep the work “within the skill set” of the staff, Hugh Shaffer notes. “You have to know when to say no,” McBride agrees. That typically means eliminating any tasks that require a licensed electrician or anything more than very basic plumbing work.
While handling in-unit maintenance tasks for owners “can keep the maintenance group busy,” Shaffer says, “it can sometime keep them busier than they need to be,” potentially distracting them from their primary common area maintenance duties. “It’s a balancing act,” he suggests.
Brawley shares that concern. “If they’re spending half their time or more working for owners,” and common area maintenance and repairs suffer as a result, she says, “is that a net positive or a negative for your budget and for the condition of your property?” She sees other concerns, as well, among them:
• Liability, if an association employee steals an owner’s property, or is accused of doing so.
• The “life span” of the work. Owners sometimes assume the equivalent of a lifetime guarantee, Brawley notes. If a problem recurs or a part that was installed wears out, “they forget you did the work 10 years ago, not yesterday.”
• Owners aren’t always satisfied with the results. And that dissatisfaction justified or not, can morph into general dissatisfaction with the board specifically and with the community generally. And there are the personalities involved. “There are some owners you know won’t be satisfied with anything you do,” Brawley says, “because they complain about everything. Can you refuse to do work for them?”

To take the association out of the mix, and out of the line of fire, some boards allow maintenance staff to work for owners on their own time. This may have the added advantage of allowing the association to pay workers less, because they can augment their income with after-hours work. But that arrangement creates some of the same problems for the association as providing the services directly, primary among them: Given the opportunity to earn money on the side, some workers may neglect their association duties.
Whether provided directly or indirectly, handyman services have to be monitored carefully, Brawley notes, adding another administrative task and potential headaches for the board, the association manager, or both.

Laundry Machines

The revenue generated by on-site laundry facilities doesn’t come close to the income from cell tower leases, but it can be equally hands-free for boards. Associations typically lease laundry equipment from a vendor, who does all the work involved: Maintaining the machines, replacing them when necessary, collecting the money from the coin-operated equipment, and sharing part of the proceeds with the association. The revenue potential from these contracts is limited, however, Hugh Shaffer notes, because there are only a few vendors in the business sand they have “close to a monopoly” on the service.

Because of that, some boards opt to purchase the machines themselves. This eliminates the middle-man, but it also puts the maintenance and management burden on the board. Collecting the coins has been a particular headache. Because pocketing loose coins is so easy and potentially tempting to maintenance staff, the collection job usually falls on board members, Hugh Shaffer notes. “Smart cards” have made the collection process easier, however. Residents can deposit money in a cash machine and load it onto a card, which they swipe instead of depositing coins in the washers and dryers. “Someone still has to collect the money from the cash machine,” Shaffer notes, “but at least it’s dollar bills rather than bags of quarters.” Credit card authorization is another way to avoid the money-collection process, Shaffer says, but it requires a designated phone line.

Brawley doesn’t see many disadvantages for associations in owning laundry equipment rather than leasing it, but there are costs involved that boards need to recognize, including:
• The cost of purchasing the equipment’
• The cost of maintaining and repairing it;
• The collection headaches (which Shaffer mentioned);
• The utility costs related to operating the machines, for which vendors are typically responsible under a leasing agreement; and
• The cost of replacing the machines when they wear out, which boards should include in their reserve planning, but don’t always, Brawley says.
Leasing, on the other hand, “is much simpler for the board,” she notes, “and it is almost pure income.”

Rental Income
Some associations own units (usually purchased at foreclosure sales) that they rent to tenants and/or hold for investment purposes. This isn’t common (most communities lack the cash required to acquire the units, Brawley notes), but it has worked out quite well for some associations – not so well, she adds, for others. In the latter category, one community acquired a unit and rented it to a long-time tenant, enjoying the revenue stream it generated for several years. But the tenant encountered financial problems, fell months behind in his rent, and ultimately had to be evicted. The lost rent combined with the legal costs and the cost of renovating the unit before it could be rented again “pretty much wiped out the income for more than a year,” Brawley says. While the association was able to increase the rent for the new tenant, on balance, she says, “this hasn’t been a great deal for the association.” The loss of rental income and renovation costs “definitely affected the community’s financial position – not a lot,” she says, “but it did have an impact.”

Another community had a better experience with two units it acquired in an attractive deal with the developer, who was anxious to get rid of them. The board sold the first unit easily booking “a very good (after-tax) gain,” which it used to bolster the community’s reserves. The plan was to sell the second unit as well, after holding it for a while, expecting values to rise. But the market collapsed instead, forcing the association to continue renting the unit for longer than expected, and producing less of a gain than hoped. This illustrates the down side of acquiring investment property, Brawley says: “You can’t predict market conditions and you can’t always sell when you want.” Nor can you necessarily count on netting a profit when you do.

McBride thinks these are reasons community associations “shouldn’t be in the real estate investment game.” Associations, he believes should be “risk-averse. They could be on very thin ice,” he says, if real estate values decline and the gain they are anticipating turns into a potentially significant loss instead.

Although the rental income an investment unit produces can be attractive “most boards don’t want the headache of being a landlord,” Hugh Shaffer notes. But some communities purchase units for other reasons – to provide a guest room that owners can make available to visitors, or as a rent-free perk boards can use to attract a live-in superintendent. Neither option would generate revenue directly, but the superintendent’s apartment could affect the association’s budget indirectly by reducing the superintendent’s salary.

Parking spaces can also be a source of direct rental income, less lucrative than rental units but also far less problematic. To pursue this option, the association must have excess parking spaces available and the ability to reclaim them if necessary. Attorneys suggest including a provision in the contract reserving the right to terminate the rental agreement should an owner want the parking space.

Converting unused space into storage areas owners can rent is another option for communities that have the space available. But someone must oversee the construction work (if required) and manage the rentals. “We would do that for a client,” McBride says, “but we would expect to be compensated for the additional work.”


Making Association Amenities an Income Source

Allowing non-residents to use association facilities (swimming pools and tennis courts, clubhouses, exercise rooms, etc.) for a fee is another potential revenue source for associations, but a decidedly unpopular one with most managers and boards.

Owners typically view use of the amenities as a benefit of living in the community and so resist – or resent – the idea of offering access to non-residents, especially if that results in overcrowding or over-use of the facilities. In addition to the possibility of annoying or inconveniencing residents (if the pool is crowded or if they have to wait to use the exercise equipment), there are also cost and liability concerns. At a minimum, Brawley says, you will be increasing wear and tear on the equipment, increasing repair bills and accelerating the replacement date.
On the liability side, there is the general concern that non-residents might be hurt or harm someone else. The broader the access to the community’s facilities, McBride notes, the greater those risks. For example, he points out, allowing public use of the swimming pool might alter the association’s insurance requirements or trigger local health and safety requirements, which would increase the association’s costs as well as its liability risks. For that reason, McBride says he is “not quick to advise boards to go down that path.”

Fines
Some boards view fines imposed for rules violations as a potential revenue source, structuring their fine schedules and (to some extent) their rulemaking with that idea in mind. Like most managers, Brawley doesn’t think very much of that strategy. “It’s perverse,” she says. “You don’t want to be hoping people will violate the rules,” so you can increase the association’s income, she says. “It just feels wrong.”
Boards that are depending on fines to meet income goals might also become overly aggressive about enforcing rules, which might be good for the association’s budget, but would not be helpful at all in developing a sense of community or encouraging a positive relationship between owners and the board.

A Few Cautions
Industry professionals generally agree that it makes sense for boards to consider alternative sources of income – there is certainly no reason not to do so. But they also add these cautions:

1. Be realistic about the income prospects of any initiative you consider. “I’ve never seen a revenue source that was so fabulous it reduced condominium fees significantly,” Brawley says.
2. Consider the costs of producing the income you are anticipating. Those costs may be direct (the cost of acquiring and maintaining laundry equipment, for example) or indirect ¯ the headaches related to managing rental property or the blowback from owners who object, for whatever reasons, to the revenue generating activities.
3. Consider the tax implications. Unlike common area fees, which are tax-exempt, revenue generated from mother sources may be taxable. There are strategies community associations can use to avoid taxes or mitigate them – by taking advantage of tax-filing options. But boards should not assume that the income they derive from non-fee sources will be tax-free, Bloom emphasizes.
4. Don’t become dependent on alternative income. Boards that use their non-fee revenue to slash common area fees or keep them level could face sudden and steep increases if the revenue stream disappears. That’s a particular risk with cell tower leases, which can produce sizable monthly payments over a long period of time. But a long time isn’t forever, Bloom cautions. “If technology changes, which it may, or the company finds a better location, that revenue stream may dry up when the contract ends.” He suggests that boards treat alternative revenue as “found money,” using it to boost reserves or to finance unexpected expenses, rather than incorporating it in the operating budget.
Heather Cozby, Managing Partner at the Massachusetts accounting firm Cozby & Company, LLC, offers similar advice. Many boards want to cut their fees immediately after negotiating a lucrative contract, “before they’ve received the first payment,” Cozby says, but she urges them to set aside money to cover taxes first, then “update their reserve study,” and use the extra cash flow to boost their reserves. “When the reserves are where they need to be, then the board can think about reducing fees or holding them level.” That, in any event, is the advice she gives when discussing revenue issues in seminars for association board members. “I don’t know if anyone listens to it.”
5. Consider carefully whether the revenue options boards are considering are appropriate for the community. McBride isn’t convinced boards should be trying to generate additional income at all. An association exists “to serve its members,” he says, and that should be the purpose of any initiatives the board pursues. If those initiatives also produce some extra income, that’s a nice additional benefit, McBride says, “but it shouldn’t be the primary goal.”

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