Financial Articles
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The accuracy of the budget directly affects future year budgets and maintenance fees. Under budgeting creates shortfalls which are often covered by reserve funds earmarked for future replacement and repairs. This in turn causes a shortage in reserves. If these shortages are not corrected in the year they happen, a domino effect results year after year until the community finds itself in a precarious financial situation.

Webster's defines budget as: "A financial statement of estimated income and expenses for a specific period of time". In an individual’s personal budget, income is determined and then assigned to various expenses. For a community association budget, the process is reversed. Expenses are estimated and then the source of revenue determined. Maintenance fee levels are the end product of the budget process, not the starting point. Deciding what maintenance fees will be and then producing a budget will usually produce disastrous results.

So how can your community avoid the trap? There are five basic steps to budgeting:

Step One: Reserve Contributions     Reserves are the funds you put away to fund future repair and replacement projects. For this purpose, a Reserve Study is necessary. The Reserve Study identifies the common area components (like roofs, painting, siding, paving, etc.) for which the association has maintenance responsibility, assigns a useful life and replacement or repair cost to each component, and a long range funding plan so that future maintenance can happen without the need for special assessments. It is the single most important piece of the budget because it provides a long term plan for all boards to follow. It also helps relieve the board from political pressure to not raise fees since "The Reserve Plan" dictates a prudent course of action that defends all owners’ interests, not a particular individual’s. More importantly, associations that fund a sound Reserve Plan consistently better maintain the property which produces higher resale values. Reserve Study computer software and workbook manuals are available for self help. Or, a professional consultant can perform the Reserve Study.

Step Two: Operating Budget Expenses      To budget for the upcoming fiscal year, examine the previous three year history of each line item...the actual disbursements, not the budgeted. This information will show spending trends that may otherwise be missed. Then, consider future changes that will effect disbursements. For example: utilities, what rate increases are expected for the next year? Call the utility companies and ask. Are there any operational changes that will increase or decrease utility consumption? For example, if additional security lights are to be installed, an increase in the electricity budget may be called for; If existing light fixtures are being replaced with energy efficient ones, a decrease may be in order.

These type of questions must be asked for every line item in your budget. Do not make the mistake of taking the previous year’s budget and merely adjusting for inflation. This across-the-board method merely compounds each year's mistakes.

Step Three: Operating Budget Revenue Other Than Maintenance Fees     Scrutinizing other sources of revenue is necessary because they offset money needed for maintenance fees. It involves the same process as Step Two. Prior years should be examined to spot trends. For example, look at trends in late fee collections. Consider interest revenue on reserve funds based on the next year’s beginning balance, the additions to it and disbursements from it during the year. This will impact your interest revenue. If your association charges move-in fees, is the real estate market active or flat? Do you charge for parking spaces or RV storage fees? (When it comes to limited amenities like these, the association should consider charging fair market rates to maximize association revenue.)

Step Four: Maintenance Fees     Now it's time to calculate maintenance fees. It’s a simple math equation: 

Annual Reserve Contribution+ Total Expenses - Total Other Revenue = Maintenance Fee Requirements 

This figure is then divided equally or by percentage of ownership, depending on your community's governing documents, to determine the annual maintenance fee for each owner.

If the budget maintenance fee is close to last year’s, your community has probably been budgeting well. More than likely, the comparison may show that a significant increase is in order. If so, this is the board's opportunity to revise the budget to reflect an "acceptable" maintenance fee increase. An "acceptable" fee doesn’t change reality, however. To move towards a reality budget the board might propose a transition period of, say, three years where the gap between "acceptable" and "reality" is closed by 1/3 each year.

During the transition period, cosmetic reserve repairs like painting and carpeting can be deferred as long as the underlying structure is not threatened. Lower priority disbursement items like window washing may also be eliminated to help hold the line. On the revenue side, consider raising things like parking fees when possible. Since the budget reductions reflect an austerity program, the board should carefully explain the long term plan to the members. The message to all homeowners, real estate agents, buyers, lenders and other interest parties should be that the plan will make the association financially sound.

Step Five: The Year-End Financial Statement     This step compares the current year actual to the budget. It will show whether the association spent or collected more money than planned in order to include the changes to account balances in the next year's budget. If disbursements were higher than budgeted and/or income lower, the shortage was probably made up by using reserve funds. If this was the case, the association's reserves are lower than expected and additional funds will have to be collected to bring the reserve accounts up to their proper level.

The year-end budget review is important because it reminds the board that each year's budget affects and is affected by other years' budgets. Overages and shortages will increase or decrease funding requirements in future years.

While an association's past budgeting errors are water under the bridge, its future financial stability can be secured by a commitment to thoughtful budget planning that reflects the true needs of the community. The successful association plans for the future instead of reacting to it.  BACK

Bringing Home the Bacon
The most effective way to ensure collection of assessments is to adopt and follow a business-like collection policy. The Association should rarely deviate from it, if ever.

The collection policy should be fair but firm. Delinquent accounts should be turned over to an attorney for collection after a limited and definite number of days (such as 45 days or 60 days) without fail. This way no delinquency is permitted to go on too long or get too large. The longer a debt remains unpaid, the less likely it becomes that it ever will be paid. Knowing this, the Association must act without delay to try to collect delinquent assessments as soon as possible.

In the situation where a unit owner is experiencing financial difficulty (including cases where bankruptcy or foreclosure may be impending), the principle of a vigorous collection policy without delay becomes even more important. Delay only increases the chance that the Association will not recover its debt.

Having a business-like collection policy does not mean the Association has to be cold and cruel. Unit owners sometimes have temporary financial setbacks and there is no reason why the Association cannot be flexible and reasonable. Just make sure that any proposed payment plan is in writing and based on both the ability of the unit owner to pay as well as the Association's requirement to be paid within a reasonable time.

The payment plan interval should be as short as possible (if the unit owner receives a paycheck every week, then a payment should be made every week) so that any default can be addressed immediately. If a unit owner defaults (and it is a sad fact that most payment plans do end in default), immediate action is called for and any future proposals for a payment plan should be rejected .

Money is essential to run a community association so a firm but fair collection policy is equally essential. Spend the time to make the change you need for better cash flow. You can bank on it. BACK

Creative Cost Cutting
Many associations find it difficult to hold the line on expenses. Simply keeping even with inflation calls for a annual increase in revenue. Fortunately, there are ways to reduce costs without cutting services. First, take a look at large expense line items such as:

Utilities     Compare utility costs with similar properties by asking your utility company for data. For example, track water monthly water consumption for the last 24 months to detect large variations. There may be an undetected leak somewhere. If the association pays for all water, consider getting owners to cooperate with installation of interior faucet water restrictors.

Insurance     Raising deductibles will reduce the annual premium. Going from a $500 to $2500 deductible will often be a dollar for dollar savings.

Landscaping     Save on water and maintenance costs by replacing lawn with drought-tolerant ground covers where possible. Consider adjusting the sprinkler clocks to water one less time a week.

Pools     Check heater temperature and pump cycle times and adjust for savings. Swimmers may not notice a two degree drop in temperature, but lower temperatures may significantly decrease the electric bill.

Lighting     Convert to high lumen-low energy lighting. Though there is an initial expense, the payback period is often only 1-2 years due to significantly reduced power costs.

Postage & Mailing     Many meeting notices and information can be distributed to residents by way of flyer boxes like the ones used by real estate agents. Save stamps, envelopes and time.

Preventive Maintenance     HUGE savings here. Catch problems when they are small enough to resolve cheaply. Requires periodic property review with a maintenance checklist follow up.

Keep looking for other ways to trim costs. If you play your cards right, costs will go down and service effectiveness will go up. It can be done. BACK

The Budget Process
It's the time of year for budgets. Board members and committees will be determining how much to allocate for which expenses and, heaven forbid, if the assessment will go up. Obviously it is very important to look at all line items in your budget. Analyze each for necessity (optional vs. a required expenditure), reasonableness (appropriate amount? were bids obtained?) and accuracy (budgeted correctly last year? are there possible savings?)

Most associations require that committees such as pool, landscape, etc., present a "wish list" prior to finalizing a budget. Each committee should be able justify its budget figures and present bids, if appropriate. It’s not necessary to bid each contract every year. In fact, you may wish to set up a rolling schedule; that is, landscape maintenance contract this year, pool management contract the next, etc. And if you choose not to take bids because you are satisfied with the service, you may want to call 1 or 2 other suppliers and get a feel for whether the amount you pay is in the ballpark or reasonable. If it isn't, you may want to talk to your current contractor about fees. Most contractors will work with you within reason to keep your business.

Setting aside enough cash to make major repairs and replacements is critical. Order a Reserve Study to use for planning purposes.

No one wants to increase maintenance fees but some times it cannot be helped. You should never allow a short-sighted approach that can harm the future of your association to control your decision to increase assessments. After all, the board must act in a fiduciary capacity when dealing with the financial well-being of your association. Don't let an outcry of public opinion sway you from doing what is best for the entire association.  BACK

Records: To Keep or Not to Keep
The year's over, taxes prepared and the annual CPA review completed. Let’s clean house and dump all these old records...HOLD ON! As community associations grow older, records accumulate until a new director decides he isn't going to keep all the @%*# files in his garage. Sound familiar? Whether or not you have a management company to store the files, it does become an issue at some point. Do you know what to keep and not to keep and for how long?

Always discuss record retention plans with your attorney and CPA before tossing papers out. Some CPAs and attorneys recommend fire safe file cabinets for documents with special inserts for keeping computer disks. Below is a general list of records and recommended retention times. Keep in mind that the recommendations are minimums. If storage space allows, keeping records from Day One can’t hurt as long as they are well organized and easily accessible. Remember to have your CPA, attorney and insurance agent advise you about any special requirements. If in doubt, keep it...better safe than sorry. So, how long should records be kept? This list isn’t definitive but will give you a great starting place.

1. Permanent Records
2. Accident Reports
3. Financial Statements
4. Articles of Incorporation
5. Declaration
6. Bylaws
7. Deeds
8. Insurance Claims & Settlements
9. Insurance Policies
10. Labor Contracts
11. Minutes of Meetings
12. Plans and Appraisals
13. Specifications
14. Reserves Studies
15. Rules & Regulations
16. Tax Returns
17. Unemployment Taxes
18. Most Recent 10 Years of Accounting Journals
19. Check Registers
20. Property Tax Returns
21. Workers' Compensation Reports
22. Seven Years of Bank Statements
23. Cancelled Checks
24. Correspondence
25. Daily Time Reports
26. Delinquency Records
27. Vendor Contracts
28. Employee Records
29. Inventory Records
30. Property Leases
31. Maintenance & Repair Records
32. Payroll Tax Returns
33. Property Damage Reports
34. Sales Invoices & Slips
35. Social Security Tax Returns
36. W-2 & W-4 Forms
37. Most Recent 5 Years of Equipment Leases
38. Expense Reports
39. Receiving Reports
40. Most Recent 3 Years of Budgets
41. Fidelity Bonds, Travel Records
42. One Year Licenses (after termination)
    From an article by Sara Barry  BACK

Financial Basics
As a board member, you’re charged with understanding financial statements. While the terminology may be confusing and you may not be comfortable with math, don’t despair. Once you know the basics, you’ll get the hang of it.

Accounting Methods
Financial statements are prepared three different ways: Cash, Accrual or Modified Cash Basis. Each method is quite different:

Cash Basis. Similar to a personal checkbook. Financial records track when cash is received or paid out. Income is recorded when a deposit is made to the bank. Expenses are recorded when a check is written to pay a bill. Cash basis financial statements are easy to understand and to prepare. However, they omit information on unpaid bills or uncollected assessments.

Accrual Basis. Tracks all transactions, even if cash is not received or paid out. Income is recorded when the dues are assessed, not when they are collected. Expenses are recorded when they are incurred. For example, if the association buys new equipment, the purchase is recorded even if the bill has not been paid. Because it tracks all income and expenses, accrual basis accounting more accurately records the financial activity of a particular time period.

Modified Cash Basis. Most associations use modified cash basis accounting for their record keeping. It is a compromise between the cash basis and accrual basis. With this method, most transactions are recorded on the cash basis, but some are recorded on an accrual basis. For example, income is commonly recorded when due (accrual basis). Expenses are recorded as the bills are paid (cash basis). Modified cash basis is less complex than accrual basis financial statements.

Types of Financial Statements
Balance Sheet Shows the association’s financial picture at a particular date. The balance sheet is made up of three sections: Assets, Liabilities, and Equity (aka Retained Earnings). The sum of the Assets must equal the sum of the Liabilities plus Equity (thus, the term "balance" sheet).

Assets. These are items the association "owns." Cash basis financial statements generally list only cash as an asset. An accrual basis financial statement may list cash, assessments receivable, prepaid expenses, and deposits (money held by the association which will be returned).

Liabilities. These are amounts "owed" by the association for products, services, or taxes. Cash basis financial statements generally do not contain liabilities. Liabilities may appear on a modified cash basis statement at the end of the year since the expenses are not accrued monthly or quarterly.

Equity. This usually states the current balance in the reserve funds (money set aside for future major repairs and replacements of the common areas).

When reviewing the Balance Sheet, ask: Do the "Assets" equal "Liabilities" plus "Equity" ? Is there sufficient cash to cover operating expenses? Is operating cash increasing or decreasing? If it is increasing, should the excess be transferred to reserves or an operating savings account? Are reserve expenditures being paid out of the reserve account? Has the association "borrowed" from reserves to meet monthly expenses? If so, is there a plan to repay the amount? Are receivables (money owed by members) increasing or decreasing? If receivables are increasing, does the board need to increase its collection actions and adjust spending until money received?

Income Statement. Shows the association’s income and expense status over a period of time (for example, "for the six months ended June 30, 1998."). The Income Statement generally shows the current period, either the month or quarter, as well as a cumulative total for the year. At the end of each year, this statement "closes out" and starts again with the beginning of the new fiscal year.

Is there enough detail in your statement to see at a glance where the money is coming from and going?  When significant unbudgeted sums occur, add a descriptive account code so that it "flags" the entry in the reports.  In addition, when the annual budget review takes place, the Budget Committee can better forecast future needs and refine the budget. 

An important feature of the Income Statement is the budget to actual comparison and variance column to show whether the association is over or under budget for each line item.

When reviewing the Income Statement look for: Unbudgeted items. Get a reasonable explanation of what they are.

Are income and expenses in line with the budget? If not, ask why. Are expenses way over budget?. The association may need to adjust spending.

As a board member, the association’s financial stability is one of your key responsibilities. Timeliness is critical in financial management so insist on receiving an up to date Balance Sheet and Income Statement monthly (usually). Don’t hesitate to ask your property manager, treasurer or accountant for an understandable explanation of the financial statements. Keep these financial basics handy for review. With a bit of practice, you’ll soon feel right at home. BACK

Overcoming the Ostrich Syndrome
A few wise Boards have a long range plan for funds to address roofing, painting and other major repairs and replacements. Unfortunately, the vast majority fail to plan and rely on special assessments to fund the projects or worse, put off doing them at all. To further complicate matters, unforeseen repairs like siding replacement with extensive dryrot may require tens of thousands of dollars per owner to correct. Sometimes the sheer enormity of the repair paralyzes the Board to inaction.

Many boards develop "Ostrich, or Head in the Sand Syndrome". Ostrich Syndrome is closely related to "Out of Sight, Out of Mind Syndrome" (unacknowledged problems don’t exist) and the "Tooth Fairy Syndrome" (problems are magically solved by someone else). As the Ostrich Syndrome implies, ignoring a problem in no way diminishes its impact. On the contrary, it often mushrooms in size and expense. Regardless of a failure to plan for major expenses or falling victim to the unforeseen, the Board is clearly responsible for taking action. So, what’s the prescription for relief?

The First Step to Recovery is a comprehensive reserve plan. Reserve planning identifies all major association components, their remaining useful lives and the cost to repair or replace each when the time arrives. With this data, a funding plan can be developed that calls for all owners to contribute relatively small monthly amounts to the reserve fund. Reserve planning is recommended by association management experts and fair for all owners.

In spite of "best laid plans of mice and men (and women)", some repairs require immediate and decisive action to forestall further damage. If the association cannot raise the funds to perform the repairs now, Step Two to Recovery includes a bank financing option.

Community associations typically do not have the collateral that lenders look for to make improvement loans. What the association does have is the right to assess and collect fees to maintain the community. Further, if fees are not paid, the association has the right to lien owners’ property. From this perspective, the association can demonstrate proven cash flow to justify a lender making a loan.

Lender confidence in the association’s financial information is critical to the successful negotiation of a loan. Lenders typically require regular (monthly/quarterly) financial statements, an annual audited financial statement and tax returns to properly monitor a loan. These are key to tracking cash flow.

Loans may be either revolving (for a construction period only) or long term (to pay off a construction loan). Repayment periods can range from three to seven years or longer, depending on the strength of cash flow and overall stability of the association. To ease the loan process, the lender will need:

• Purpose of the loan & proposed usage
• Construction contract, plans, permits, builder's risk insurance; structural, mechanical and engineering reports
• Current Operating & Reserve Budget
• Articles of Incorporation
• Last three years tax returns
• Declarations and Bylaws
• Director names, addresses and phone numbers
• Last three year-end financial statements
• Most current financial statement
• Name of the management company
• Number of units & breakdown of monthly fees

To recover from the Ostrich Syndrome, the long term treatment program includes a comprehensive reserve study and funding plan supplemented, from time to time as needed, by bank financing for emergencies. When full community association health is restored, the Board will enjoy better long range vision, improved community health and sexy curb appeal.  BACK

Green Bananas
A manager of a seniors community once commented "We have to approach long range planning carefully around here. Many of our residents won't buy green bananas."

While it’s understandable that some folks may not relate to long range planning for practical reasons, the truth is that Americans in general, regardless of age, live "in the now" and reluctantly engage in advance planning. This attitude is reinforced by the incredible abundance with which our country is blessed. There is also a pervading sense that no matter what happens, something or someone will be there to catch us if we fall. Bankruptcy laws are a case in point: If a personal or business plan doesn’t work out, there is limited personal liability.

Homeowner associations are based in the premise that sharing common property makes the unaffordable affordable. The framework allows ownership of parks, pool, ponds and other expensive amenities that few homeowners alone could support. In common wall communities, individual owners turn over their exterior building maintenance duties to the association and agree to pay a fair share of the costs. Sharing such costs reduces costs to the individual IF proper planning and execution are involved.

Reserve funding is an issue that frequently causes associations to stumble. The premise of reserves is that money is set aside systematically to pay for big ticket items like roofing, painting and street maintenance. Since these repairs or replacement crop up infrequently, when they do, the costs are significant. If there has been no systematic accumulation of money to pay for them, guess what? Special Assessment Time!

Special assessments are the product of poor planning. They penalize current owners who are unfortunate enough to live in the community when major costs come due. Prior owners skate on their obligations leaving current owners to hold the bag. Special assessments are particularly burdensome because they:

• Put some owners in an immediate financial crisis.
• May be uncollectible if an owner’s equity is small.
• Are always politically unwelcome and,
• Pressure the Board to defer needed maintenance to avoid the turmoil.

Associations that fail to plan for major long range expenses typically do not handle day to day association business very well either. The two seem to go hand in hand. Those Associations typically keep fees unrealistically low and, by so doing, services are starved, maintenance lags and curb appeal suffers. Curb appeal directly impacts market value of the homes so in a real sense, owners are cutting their own throats.

There is a fundamental conflict of interest at work here: The long term financial and maintenance needs of the community conflict with the individual homeowner’s short term desire to hang on to the money a.k.a. the Green Banana Syndrome. A homeowner living in a stand alone home has the luxury or misfortune of doing business this way while a community association will fail miserably if it does.

A reserve "philosophy" is a fundamental ingredient of association policy. The best way to solidify that philosophy is with the adoption of a Reserves Resolution. This resolution reflects the desire of owners to do long range reserve planning and funding. Such a resolution curbs the impulses of some boards "to raid the cookie jar" by misspending reserve money or failing to add to reserves when the plan clearly calls for it. A Reserves Resolution is a critical step toward proper care of the community.

Consider the negative effects of Green Banana thinking on your assets. If such is the case in your community, be aware that you are on a slowly sinking ship and need to take action before it’s too late.  BACK

Trumping the IRS
A recent U.S. Supreme Court decision could be helpful to homeowner associations in collecting judgments for delinquent assessments in cases where the IRS records a lien against the debtor's real property after an association's judgment lien. In U.S. v. Estate of Romani, the Supreme Court resolved a conflict between two federal statutes, one which provides that federal tax liens "shall not be valid" against properly recorded prior judgment liens, and the other which provides that, in certain circumstances, claims of the U.S. Government "shall be paid first."

In 1985, a Pennsylvania court entered a $400,000 judgment against Romani. The judgment was recorded in the county clerk's office, thereby becoming a lien against Romani’s real estate. Later, the IRS filed a series of tax liens on Romani's property, totaling $490,000. Romani died in 1992, leaving an estate worth only $53,001. The estate’s administrator sought permission from the court to transfer the real property to the judgment creditor, but the IRS claimed that its later-recorded tax lien had priority.

The Supreme Court decided that a prior-recorded judgment lien prevails over a later-recorded federal tax lien and authorized conveying the property to the judgment creditor. This decision is important for homeowner associations in situations where there is not enough money to satisfy creditors. So long as an association's judgment lien is recorded before IRS tax liens, the association should have priority in satisfying its judgment.  BACK

Borrow to Build
More and more community associations need loans to help finance major common element repairs. Loans are not intended to replace proper reserve funding. Associations have four options to pay for repairs:

1. From operating income
2. From the reserve account
3. Special assessment
4. Common element repair loan.

A common element repair loan will raise all of the necessary funds for repairs to expedite the repair plans and schedule. For example, if your association consists of multiple buildings that are in need of siding replacement, obtaining a loan will allow siding replacement for all of the needed buildings, a much more cost effective approach than replacing siding on one or two buildings a year for the next several years.

When applying for a common element repair loan, a lender will request financial information such as CPA prepared financial statements (preferably audited statements), budget, delinquency reports, declaration and bylaws, and the most recent reserve study. The lender will use the financial information to analyze various items, such as:

• Reserve Balances What are the current and historical reserve balances?
• Cash Flow Will the loan be repaid from operating income or a special assessment?
• Reserve Study Has the association followed the reserve funding recommendations? What other repair projects are needed in the future and how will these costs be funded.

Common element repair loans are usually secured by an assignment of the association’s assessments. The loan does not impact a unit owner’s ability to sell their unit. These types of loans should be used to help finance the costs of major repair projects (such as roof and siding replacements, deck repairs, window replacements and parking lot repairs). Costs associated with routine repair expenses, decorating, and landscaping should be paid from operating income. In other words, the "useful life" of the common element that is being repaired should exceed the term of the loan.

One of the most important issues for an association to consider is the experience of its lender. Lending to condominium associations is unique; and the lender needs to be experienced with this type of transaction. Having the right amount of experience will enable the transaction to proceed in a timely manner and at minimal costs. BACK

The Loan Arranger
Community associations faced with large renovation projects that exceed available reserve funds often have difficulty obtaining financing for improvement projects even when they are well run and show strong historical cash flow. Not all projects can wait, like in the case of a bad roof or structural dryrot. The longer you wait, the more costly the repair. Traditional banks are often reluctant to lend due to lack of collateral and repayment sources. All is not lost. There are commercial lenders that understand the special needs of community associations. The trick is to find them and present your loan request properly.

Typically, loans to homeowner associations are made for repairs and renovations to common area components. The association doesn’t own hard assets in the same way a homeowner does so many lenders look on association loans as "unsecured" (no collateral). However, some lenders understand that using the proven assessment fee cash flow can be a reliable source of repayment and an acceptable risk. Lenders also look closely at the historical financial information presented in the loan application.

Many lenders require detailed monthly financial statements and an audited annual statement to evaluate the loan request. The annual tax returns are also helpful in verifying assessment income. Once the association’s cash requirements are understood by the lender, a financial projection can be made to assess the impact of a new loan on that cash flow.

Loans to community associations may include revolving lines (typically for the construction phase) or long-term loans (to pay off a construction loan). Amortization periods can range from three to ten years, depending on the strength of cash flow and overall stability of the association and management.

Some of the information often requested by lenders:

1. Copies of the Articles of Incorporation and the governing documents
2. Minutes from particular meetings where fee increases or large expenditures were approved by the members.
3. Contact information for all board members
4. Purpose of loan and breakdown of proposed usage.
5. Last three year-end financial statements (Year End Balance Sheets plus Income & Expense Statements)
   Last three year tax returns.
6. For construction loans, a copy of construction contract, plans, permits, architect's contract, builder's risk insurance, bonding and liability insurance, etc.
7. Structural, mechanical and electrical engineering reports, which are helpful in identifying the condition of existing premises and which support the repairs to be made.
8. The name and contact information of the management company, if any.
9. The average historical sales price per unit and recent real estate conditions.
10. Number of owners and percentage of owner occupants

The sources of funding for loans usually is found among commercial lenders, not the traditional banks most associations use for their checking needs. These commercial lenders can be either regional or national in their reach. There are specialists that know where these lenders are and how to package loan requests for higher degree of acceptance. The loan requests are often made to three or more lenders to ensure that the association gets the best rate and terms available.   BACK

Doing the Numbers
Fall is the time that many community associations do budget planning for the coming fiscal year. A carefully structured budget is essential for proper maintenance and preservation of association assets. The board, budget committee, property manager and accountant should start the process early to properly analyze the information.

The ultimate purpose of an annual budget is to calculate the maintenance fees to charge the owners. There are two parts to the budget: The Operating Budget reflects on-going expenditures such as utilities, management, maintenance, supplies, etc. The Reserve Budget addresses major common area components that require periodic repair and replacement like roofing, painting, paving, fencing, pool equipment, clubhouse, etc. Combining the anticipated operating expenses with an annual reserve contribution produces the amount of money needed from maintenance fees and other revenue sources.

Examining a few basic budgeting guidelines, let’s do the numbers:

1. Gathering Information

• Get budget projections from all standing committees like social, newsletter, pool management, etc.
• Obtain proposals and projected fee increases from service providers like the landscaper, management company and utility companies, etc.
• Poll the owners for "wish list" items.
• Conduct a Reserve Study (or review and revise the existing one). The Reserve Study identifies all major common area components for which the association has repair and replacement responsibility, estimates the remaining lives of these components, calculates the repair and replacement costs and establishes a funding plan to avoid the need for special assessments. Reserve studies are 20-40 year projections and are typically prepared by reserve study consultants.

2. Expenses     Study the history of expenditures for the past three years. Do trends or patterns emerge? Review last year's budget and financial statement line by line. How accurate was last year's projected budget? What can be learned that can be applied to this year's budget? What changes should be considered which will increase or decrease usage of electricity or other utilities? What about inflation?

3. Revenue    All sources of revenue must also be carefully considered. These will include maintenance, late fees, interest, fees for amenities, RV storage, prepaid expenses, investments and accounts receivables. Will the community have any new services or amenities which will generate additional income?

4. Drafting the Budget    Once you have gathered and analyzed all the information, you're ready to begin drafting the new budget. List items that are "necessities" and those on the "wish list." Add new operating expenses and all rate increases on those existing. Determine how much will be added to the reserve fund. Be prepared to go through several drafts before everyone is satisfied.

5. Determine the Maintenance Fees      After all expenditures and income have been calculated, the homeowner maintenance fee can be determined. To do this, follow this mathematical equation:

Total operating expenses plus annual reserve contribution minus miscellaneous revenue equals the annual homeowner maintenance fee. Divide this figure either equally or by percentage (according to the governing documents) and then by 12 months for the monthly maintenance fee for each owner.

6. Year End Financial Statement     A year end financial statement measures the actual performance against the budget and using the most current one will help enormously in preparing a future budget.

7. It’s in the Details     Do you have enough detail in your budget line items to accurately track costs (like Repairs-Roof, Repairs-Electrical, Repairs-Fencing, etc.) or have you been lumping them all together?

• Do the figures add up? Total revenue minus total operating expenses should equal the annual reserve contribution.
• Produce a budget that shows side by side actual versus budget on a monthly basis.
• Set your budget based on historical information (facts), not to produce a desired maintenance fee (fiction).
• Remember to replace reserve funds borrowed to meet operating shortfalls.
• Include descriptive notes that explain new or large line items or significant variances from the previous year.

8. Get Professional Help      A CPA budget review can help identify areas of financial weakness and advise on corrective measures. Don’t keep making the same mistakes over and over.

When doing the numbers, make sure you do it right. Be well informed, ask the right questions and carefully plan the annual budget to ensure a sound financial future for their community. 
Thanks to Lauren Bush, Russ Hoselton, Richard Kirkpatrick and Grace Morioka  BACK

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