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Budget Season for Condo and Community Associations

by Mary Arnold, CMCA®, AMS® on Sep 6, 2018 8:41:00 AM

It is budget season at RealManage, and that means our managers and accounting team are hard at work preparing the preliminary budgets for our boards to review. The budget is one of the most important things the management team and the board does each year for their community association. A great deal of effort goes into researching historical trends, as well as accurately projecting for future anticipated expenses. The team at RealManage will contact vendors, utility companies, and the like to inquire about anticipated rate increases for the new fiscal year so that these can be factored into the new budget.

PLAN FOR THE FUTURE

When preparing your budget, be sure to factor in any planned projects that may be covered by the replacement fund. If you have a reserve study, be sure to budget for any projects the study recommends for the year. Historically, when the board chooses to defer capital expenditure projects past the expiration of the asset's remaining useful life, it causes the project to cost more in the long run when the board chooses to approve it years down the road. The deterioration expenses during those additional years will often require a more expansive project at a greater cost. Do you have a reserve study? This would be a great time to consider approving one and factor the cost into your budget.

BUDGET TO ENSURE FUNDS ARE AVAILABLE

Another part of good budgeting is ensuring that there is enough available cash throughout the year for the community to meet its expected expenses, along with a little "cushion" in the event the community either goes over budget, or experiences a high delinquency rate. Another factor is that your assessment revenue arrives in fixed periods (monthly, quarterly, etc.), but expenses can spike at different times based on seasonal expenses. Water may be higher in the summer, lower in the winter, but the revenue still only arrives at a fixed time and amount. Therefore, it is our recommendation that a community have at least two months of their annual budgeted expenses left over at the end of the year being budgeted to meet the goal of having sufficient cash flow at all times.

THE BOARD HAS AN IMPORTANT ROLE

We understand the board has a difficult job to do. The board has an obligation to provide for proper maintenance and upkeep of the community in order to preserve curb appeal and protect the investments the homeowners have made in their homes. Sometimes once the projected expenses are analyzed, it becomes apparent the association cannot continue to provide the proper level of service without increasing assessments. This can be a difficult and unpopular decision. Just keep in mind the greater goal - preserving the community. In the long run, you might not be doing your homeowners any favors by keeping assessments artificially low, and as a result being unable to perform repair and maintenance when it is needed to keep the community looking its best.

COMMUNICATING ASSESSMENT INCREASES

When you are facing an assessment increase, we find that proper communication is key. A detailed letter should be sent to your residents explaining the reason(s) for the increase, and how they are going to benefit from it. For example, perhaps the residents have been requested the pool open earlier in the year and close later in the year; that will likely impact the pool maintenance costs, but will be giving the people what they want. Or in snow regions, your homeowners were unhappy with the snow removal contract that only provided for snow removal when snow accumulation exceeded 2", so you change it to 1" based on owner feedback. That will increase your costs, but you can explain the increased service they are receiving for the increased dollars. Sometimes you will not be increasing service, but an assessment increase is still necessary due to inflation. Either way, most people will appreciate it when something is explained to them and are more likely to be accepting of it. RealManage can help you put together such a letter. Also try to get that notice out as soon as possible; the more notice your residents have of a pending assessment increase, the better they can help budget for it. Be sure to give proper notice of the meeting at which you plan to adopt the budget to give homeowners an opportunity to ask any questions in person.

USE YOUR BUDGET AS A GUIDE

Finally, at the end of the day, do keep in mind that the budget, as extensive and well thought out as it is, remains a guide. Should you budget for a project and later decide to defer it, you are not breaking any rule or commitment, as long as the deferral doesn't negatively impact your community. And vice versa. Perhaps you didn't budget for a repair that could not have been anticipated, but must be done. Do the repair and find somewhere else to cut back for the remainder of the year. In other words, just because something is budgeted doesn't mean you must meet each projection 100%. You may find you go over in some expenses, under in others, as some expenses do fluctuate and can be tricky to project with 100% accuracy. Prepare your budget as close as possible to anticipated expenses, but take comfort in knowing that variances in your budget is not a negative reflection on the work you are doing in your volunteer positions as board members.

We hope you find this information helpful as you begin to prepare your 2019 budgets. At RealManage, we strive to have all budgets completed and signed by October 19th. This is for several reasons, such as assuring we can get coupon books and/or statements in the hands of your residents in ample time. Another important reason to consider is so we have an approved budget to provide when closing documents are requesting for pending home sales. If the association does not have an approved budget to provide when requested, it can impede the ability of a homeowner to sell their home, or possibly even cause a deal to fall through, as someone may be reluctant to buy in the community not knowing if they will be surprised by a significant assessment increase in the new year. Be sure to comply with any deadlines established in your governing documents and keep these other important timeline factors in mind.

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