Operating and Reserve Are Two Separate Stories
The first thing to establish is which money you are looking at.
- Operating covers the running of the building — management, insurance, utilities, cleaning, landscaping, snow removal, day-to-day repairs.
- Reserve is the money set aside for major repair and replacement of capital components.
A corporation can look comfortable on one and thin on the other. An operating surplus does not tell you the reserve is adequate, and a healthy reserve does not mean the operating budget is realistic. Read the reserve fund study alongside the statements, because the study is what gives the reserve balance its meaning.
Budget vs Actual: Read the Variances
Most statements show what was budgeted against what was actually spent. The differences are the interesting part.
A line that consistently overruns its budget year after year suggests either a cost the corporation has not accepted yet, or a recurring problem. Repairs and maintenance is the usual candidate — an operating repairs line that keeps blowing past budget is often the financial shadow of something being discussed in the minutes.
Large unexplained variances in either direction are worth a question. So is a budget that has been set at exactly last year's number despite known cost increases.
Arrears: What Owners Owe the Corporation
Arrears are unpaid contributions owed by owners.
Some arrears are normal in any building of size. Persistent or significant arrears are worth understanding, because the corporation still has to pay its bills whether or not every owner has paid their fees. Money that has been budgeted but not collected creates a shortfall somewhere.
Worth asking: how much is outstanding, how long has it been outstanding, how many units does it involve, and what is the corporation doing about it?
What Else to Look For
- Reserve contributions actually made — does what went into the reserve match what the plan said would go in?
- Transfers between funds — money moving from reserve to operating is worth understanding.
- Insurance costs — a sharp increase may reflect a claims history.
- Legal and professional fees — an unusual figure may indicate a dispute.
- Bad debt or write-offs — contributions the corporation has given up collecting.
- Whether the statements are audited or reviewed — and what any accompanying notes say.
The notes to the statements are frequently more informative than the numbers, and are frequently the part nobody reads. Contingencies, disputes and commitments tend to be disclosed there.
What the Statements Cannot Tell You
Financial statements are historical. They tell you what has already happened to the money.
They will not tell you that the board discussed a major project last month, that owners are unhappy about something, or that an assessment is under consideration but not yet levied. For that you need the minutes, and for what is coming you need the reserve fund study.
We are not accountants. We can help you understand what the numbers may mean for the property as a real estate decision — for carrying costs, for risk, for resale and for your negotiating position. For an accounting opinion on a corporation's financial statements, engage an accountant or a professional condominium document reviewer.