Some associations adopt budgets that have little relation to reality as to forecasting assessments needed to cover expected expenses.
Brad Schneider of Condo CPA in Elmhurst offered an example based on a real situation. A manager prepares an accurate budget that reflects a 15 percent increase in assessments but the board rejects it, ordering the manager to drop it dramatically.
He then comes back with a 3 percent increase that he is sure will likely result in adverse financial consequences to the association later. But this is what the board wants and the directors ratify it quickly.
"The expenses are not really reduced and the year ends with a deficit," said Schneider. "That deficit first is paid with operating reserves and then they borrow from the capital reserves."
That ultimately leads to a special assessment to pay for capital work or for diminished or depleted reserves.
Some associations slash services to a minimal level. "If they cut back on security or on basic services like cleaning, they are reducing the value of their units indirectly," he said. "When prospective buyers see the condition of the property, they will discount how much they will pay for the units."
Schneider encourages associations with central heating plants to look into energy-efficient boilers. "They can reduce the amount of gas so much that the payback can be less than three years," he said.
Boards also should not delay collecting from owners delinquent in their assessments. "This can help avoid some unit owners having steep balances that they have no way to pay," he said.
Larger associations should set up inventory systems that monitor supply usage.
"If supplies are tracked, costs will go down," he said.
Associations with unionized employees should make sure that union monthly assessment forms contain the names of all employees in the union. Check to see if part-time employees have to be included.
"If an association owes past-dues for employees, the union charges exorbitant rates of interest," he said.
Here are other ideas from Schneider:
- Pay insurance premiums in advance if this results in lower rates or no interest charges.
- Deposit funds in interest-bearing accounts.
- Seek to reduce charges for lock boxes.
- Keep bank accounts within the $100,000 limit for FDIC insurance.
- Check with several vendors to find the best deal on phone/Internet combinations.
- Determine if leasing rather than purchasing copiers is less expensive.
Energy savings
Tim Allwardt of Aegis Properties added some energy cost-saving tips that both associations and individual unit owners can follow.
Use energy-saving light bulbs. Dialing down thermostats in winter, and up in summer. Lower shades to retain heat in winter and to deflect the sun's rays in summer.
Tracy Davis of McGill Management, however, cautioned against one means by which associations might try to control costs: always selecting the low bidder for a service or a job.
"Lowest price won't always be the best," she said. "You sometimes have to end up paying again if the job wasn't done right. Make sure the company hired is the right company for the job."
Always check references and inspect work a contractor has previously completed before making a final choice.
Freelance writer David Mack
Last winter overextended the budgets of a lot of condo associations.
"In many cases, snow removal and heating will probably be over budget," said Brad Schneider of Condo CPA in Elmhurst.
Some money-minded condo associations took steps to counter these price pressures. "Some were creative and added an energy surcharge, which I thought was a good idea," he said.
Tim Allwardt of Aegis Properties in Chicago also highlighted energy costs as budget busters. "The current major impact that all buildings will be feeling is the energy crunch," he said.
"Last year, you could lock in [natural] gas prices at .75 to .80 a therm, but this year rates being quoted are .50 per therm higher," he said. "This will have a significant impact on high-rise properties that are currently struggling to make ends meet."
Generally, condo associations can expect to see increases from vendors in categories other than those related to the price of utilities and gasoline. "In calling vendors to see if there will be an increase for 2009, most are saying yes," said Tracy Davis of McGill Management.
"The financial pressure on Chicago condo high-rises from the ongoing facade inspections have continued to have a serious impact on many buildings' ability to stay financially solvent," said Allwardt. "As if the cost of this is not significant in and of itself, on top of it you have the life-safety work that needs to be completed by 2012, and major increases in natural gas." Associations have been forced to borrow money and regularly special-assess to cover these mounting expenses.
Allwardt, whose firm manages primarily Chicago buildings, indicated that multiple foreclosures can have a devastating effect on an association's budget. "I haven't seen it as critical yet, but this certainly can change with a long-term mortgage crisis," he said.
Schneider has found the same true by the lakefront. "Most of the condo associations along Lake Shore Drive do not have huge problems with foreclosure," he said. "Some of the properties in the suburbs have experienced high rates of foreclosure."
Schneider recommends that condo associations faced with the problem of multiple foreclosures estimate what their bad debts will be and cautiously include that income loss in their budgets to be covered by higher assessments. Hopefully, that will not be too much of a strain on the other owners.
By freelance write, David Mack.
Many associations are facing rising operating costs, which are likely to necessitate increasing assessments beyond an anticipated amount in 2009. Under normal circumstances, a forward-looking association will usually augment assessments annually.
"Boards are encouraged to raise assessments at least 3 percent each year," said Tracy Davis, a property manager and marketing director with McGill Management, based in Arlington Heights. When associations are consistent in this action, separate assessments can generally be avoided. Davis conceded that some boards may wait two years to bump up the monthly levy.
But there are board associations that maintain assessments at a constant level despite rising expenses.
"One we work with did not pass an increase in the operating budget for 12 years," said Brad Schneider of Condo CPA in Elmhurst.
This board kept drawing on its reserve to pay bills until finally the account was depleted. Finally, the directors had to draw up a realistic budget document that jacked up assessments substantially.
"In the past several years, many associations have had to increase their assessments significantly more than the average increase of 3 to 5 percent," Schneider said.
Some did so because of developers who had advertised low, inadequate assessments for marketing reasons. Most were forced to do so as the result of dramatic increases in certain expenses, such as utilities and insurance. Schneider particularly underscored the huge rise in fuel costs in 2006 and electricity charges in 2007.
Let's focus now more closely on growing expenses and what continuing impact they can be expected to have on association budgets and assessments.
Many firms that are heavily dependent on vehicles in the services performed for associations notified customers of an upward price adjustment for their higher gas costs, according to Tim Allwardt, President of Aegis Properties in Chicago. "Several companies [added] a fuel surcharge for travel, particularly scavenger companies," he said.
The same has been happening at some of the properties managed by McGill.
"I had a landscaper send a notice stating that they [would] be adding a 5 percent fuel surcharge to our monthly bill," said Davis.
The cost of paving maintenance has also risen substantially this year due to the cost of oil.
"Seal-coating of parking lots and asphalt repair have had a huge increase," said Allwardt. "I have seen 40 percent increases over last year's pricing. There is a real concern that the price will continue to increase."
By free-lance writer David Mack
speed14@urbancom.net
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CondoAssociation.com Announces HOA Construction Loan Program
Construction loans are now available exclusively to Townhomes, Condo Associations, Cooperatives, Office Condominiums, Timeshares and Homeowner Associations (HOAs) at CondoAssociation.com at very competitive rates and terms depending on the Association's creditworthiness.
While traditional construction loan interest rates can be anywhere between 8-15%, CondoAssociation.com can offer very favorable terms to Community Associations because of specialty HOA loans which are secured by an assignment of the assessment rights. Construction loans traditionally use the property asset as collateral or control of the association's cash.
This HOA loan structure offers a bright spot to Community Associations and other types of associations looking to start or complete new construction projects, whereas traditional construction loans may be too expensive or not available.
- HOA Loans for construction don't require a lump sum down payment
- Traditional Loan To Value (LTV) models don't apply to HOA Loans
- Construction loan uses may include, but are not limited to renovations, the purchase of units or land leases construction defects and construction defect litigation and renovations.
- HOA loans also apply to Condo Associations, Homeowner Associations, Community Association, Co-Ops and Timeshares.
Who pays for common area charges and how?
Some condo association members feel they are constantly over-assessed for everything from common area repairs to renovations. On the other hand, the association often doesn't have enough cash in reserves to cover any of these costs, but feel its in the HOA's best interest to take on these projects.
In a perfect world, the condo association board has designed and implemented a budget that is able to fund all operational costs along with any projects envisioned for that fiscal year. As we all know this is often not the case. This can leave the association in a bind with ill-will from condo owners who feel they are getting an unjust assessment because the condo association didn't plan properly.
The best solution to pay for these common area charges is always to take from the operating or reserve accounts - if there is enough cash. Otherwise, the best funding alternative today may very well be an HOA loan for 100% of the project cost or a mixed funding solution of debt and assessment. This hybrid approach may be the best way not to make condo owners feel the pain of writing one large check. The payments of a loan can be incorporated into condo fees moving forward and a loan can always be paid of ahead of time.
How come we're not all paying our monthly condo fees by credit card? Between the condo fees and assessments that I have seen over the past couple of years in my condo association; I would have had enough rewards points for a trip or two to Maui.
Although credit cards are not normally offered by property and community association managers, ACH payments are readily available. ACH stands for Automated Clearing House - the standard for automatically drafting funds from your bank account. I cant imagine credit card payments being too far behind ACH in their acceptance. As we get closer to a paperless society, electronic payments are inevitable. Especially for the larger repeating payments in our lives, like condo fees.
I just don't think the community association industry has accepted credit cards as a acceptable payment method yet. In a couple of states, credit card payments may be an issue - as service charges are illegal on condo fees, The average credit card processing fee is about 3% with a nominal transaction fee as well, which is usually about 30 cents or so, depending on the size of the transaction.
Credit Card Processing services may be available for your HOA or Condo Association. You pretty much just have to go looking for it and make sure its not an issue in your state.
Often condo associations and HOAs get in trouble with their cash flow management because either they are spending too much or association members are not paying their HOA dues on time or not at all. Here are some practical ideas to increase cash flow.
Reduce Condo Association or HOA Spending
- Take a close look at the budget. Are there service and maintenance items your HOA can due with out? Maybe there are services that can be performed once per quarter instead of every month or semi-annually instead of quarterly.
- When was the last time your HOA negotiated with your vendors or service providers? If your HOA uses a property management company, they should be doing this for you. If your HOA is self-managed, go out and get competitive bids and bring them back to your current service provider so they have the opportunity to lower their price for you.
HOA Bank Loan or Line of Credit
Whereas a HOA bank loan will provide an association with a one time lump sum, a HOA bank line of credit can be used by an association to draw down on during times of cash flow issues. The HOA or Condo Association receives a check book from the association bank and can use the checks for whatever purposes the association sees fit. Every HOA and Condo Association should have an association line of credit in place for future use.
HOA Assessment
HOA assessments are the most common and traditional ways to increase cash flow. Unless an association credit line is in place, assessments are typically the best way to get a condo association cash quickly, although it can often be painful to condo owners.
Sell Your HOA Fees You Can't Collect On
An option to sending your HOA collections to a lawyer is to sell the debt to a 3rd party purchaser at a discount who will then try to collect on the debt themselves at a small profit. This will get you needed cash much quicker and easier than going the legal route.
Have Your HOA Consider an Automated Pay Solution
Your Condo Association or HOA can receive association dues via Bank Account Debiting or Credit Card Payments. 3rd Party payment companies charge a transaction fee and handling fee. This could help your HOA to get paid quicker.
Our association's dam is in need of repair and we would like to get a condo association loan for doing the repairs. What is a likely rate for a condo association loan?
The exact interest rates are a function of several variables. However, the approximate range in today's market is 6.75% to 7.25%. For a current condo association loan rate quote you can submit the Free Loan Proposal Request Form
We are a Co-Op. Do we qualify for an Association Loan?
Yes, Community Association Lending is for all types of Associations including: Condominiums, Homeowner Association's, Town-homes, Cooperatives, Timeshares.
Are there any restriction to what our HOA can use a loan for?
Lenders usually work with associations to provide innovative loan structures to just about any application. Typical reasons for Home Owner Assocation (HOA) loans are to support capital maintenance projects, construction defect litigation, insurance premium financing, purchasing real estate or equipment, land lease buyouts.
Other solutions include an Association Line of Credit which HOA's can tap at their discretion to increase their cash flow.
What's the difference between an Association Loan and a Line of Credit?
When a Condo Association takes out a loan, the lender provides all the funds in one lump sum. With a line of credit, a Condo Association qualifies for a credit limit, which they can draw down on and pay back at any time.
Top 5 Reasons for a Condo Association Loan
1. Increase cash flow
2. Capital improvements or repairs
3. Purchase of additional property
4. Purchase of units from owners
5. Construction defect litigation
It is getting more difficult to get volunteers for filling in the 5 seats as a trustee. We have 4 buildings, 30 units per building, a 55+ community. What would it cost us to hire a firm to take over as trustees?
Unfortunately management will not take over as the Trustees or Directors of the Association. Management works with the Board of Directors to make their job easier and less burdensome.
The directors will still be the decision makers and responsible parties to insure that the Condo Association or HOA is run properly. Property or Association Management should do the leg work and provide information to the Board for decisions. Once a decision is made, the property manager will implement and carry out the decision.
Fees are typically based on a perceived amount of work that will be necessary on the part of the management company to run the condo association. In many cases management fees are referred to on a per door basis. You will find that prices can fluctuate greatly between many companies based upon their experience and level of services provided. Condo association and HOA boards should always interview several companies.
The best way to find companies is to speak with friends in other condo associations that are happy with their current management. Your current attorney may have suggestions for you as well. Since the question was how much it should cost, a range of pricing for your association would be between $25.00 per unit and $35.00 per unit; however this may change based upon conversations with management regarding your expectations.
Scott Wolf