It's that time of year again for most condo associations. Many condo budget committees are busy reviewing those first drafts of the condo budget submitted by their community association manager. The number one concern is almost always holding condo fees to a nominal increase, if any. As today's economy faces the challenges of increasing fuel costs and medical rates rising, how does the board reduce expenses and ensure their condo budget is a sound instrument to guide them through the coming fiscal year?
Condo owners, along with the condo board of directors, must realize first and foremost, that a condo budget is a plan, not a prediction. There are situations that may arise that could not have been foreseen. To help defray additional costs to the association in the event of fire, flood or other emergency situations, two things can be done when condo budgeting for the coming year to help in the event of these surprises. The first is to build in contingency amounts and the second is to allow for condo association insurance deductibles that may be required to be paid by the condo association. This will help tremendously when an emergency situation occurs that was obviously not planned for.
It may help to understand the process that the community association manager goes through when preparing the first draft of the budget for the condo board's review. Let's start with the Operating Budget. There are several pieces of information required to begin a draft budget: the current condo budget, the current financials, the average of the past 6-18 months of the revenue and expenses and the contracts currently in place . If there are any upcoming projects approved by the condo board, those costs are needed also. The current year's condo budget is inserted in a spreadsheet or template, followed by the averages year-to-date. Then the information on the next year's projections follows. The data needed for the estimates will come from various sources, such as the utility companies, the medical associations, the cost of living allowance (Consumer Price Index) for the area, the condo association insurance agent's projections for the renewal insurance premiums, the builtin increases in contract prices and wage increases/promises for the association staff. Each line item should be carefully factored for the upcoming year based on the history of the expenses, the projected increases in cost, and a bit of room for mid-year adjustments. Once each line item is reviewed and a cost is estimated for the coming year, make the same review of the miscellaneous revenue sources.
The manager should provide a "narrative" to accompany the budget. This narrative should contain an explanation of each and every line item, describing how the manager arrived at the number. The narrative is a crucial piece in the budget presentation to the board and the owners, because it preempts questions and focuses the board's attentions on the reality of the financial needs of the association.
Once the Operating Budget is set, the other major piece of the budget that must be considered is the reserve contribution. It is usually the largest figure and makes the most impact on what the fees will be in the coming year. It is recommended that a professional Reserve Study be done every 5 years (or more frequently if mandated by state statute of the association's governing documents). If only an analysis is done by the management company, remind the board that this list of components may not be inclusive and that there may be items that have been omitted or not considered as a capital expense for the reserves. Be sure there is a contingency fund built into the condo reserve study or analysis. Review each component and call the professionals to get cost estimates that are valid in today's market. Estimate the life of the component and if a project can be done sooner to save money or later due to the condition of the component, note that in the study and allow for those variances. Once you have reviewed each and every component and made the necessary adjustments, run the numbers. There are three numbers that are extracted from that study that must be transferred over to the budget. The first is the interest projected on the funds held in the reserve accounts. The second is the capital expenses for the year. The last number is the estimated contribution required each month to put into the condo reserve account in order to fully fund the condo reserves and ensure that adequate funds are available when the useful life of the capital component expires.
Once you have this information in the condo budget, the formulas work their magic and tell the board how much the maintenance fees will be in the coming fiscal year to meet the demands of the running the association. If there is no increase, the board and the community association manager have done a great job at estimating the year's revenue and expenses and little adjustment is needed. If there are increases, however, the next step is to go back and review your line items in the operating budget to see if cuts are possible. Then review the Condo Reserve Study and see if there are projects noted to be done in the next year that could be deferred another year or two. See if it is possible to extend a large cost component into a two or three year time increment (for example, if you have a large complex and the painting is due, can the painting be done in two phases to help the cash flow?). Any changes in the Reserve Study will affect the contributions for the coming year and may be enough to get that increase down to a reasonable percentage.
Sometimes, however, the past decisions to limit the percentage of increase or not pass on any increase at all, will catch up to the condo association and a raise is required to meet the needs of the condo association, even to ensure that necessary services can be provided. In those cases, if the fee increase is too high, the board may wish to consider a loan or a special assessment. They should determine the impact of a 3-7 year loan payment on the association's cash flow, compared to the alternative of a special assessment. The condo board will need to weigh all of the options carefully. A loan may require approval of a majority if the owners, while some state statutes and governing condo documents may authorize the board or a less-than-majority vote of the members to approve a special assessments
Be sure to communicate the reasoning for any budget increases in a detailed letter to the owners. If they can understand why the increase is necessary, it is easier for the owners to accept the new fees and pay them. If no explanation is given other than a boiler plate sentence, you may find an angry crowd at the next condo board meeting. Perhaps the condo budget committee should hold a few town hall meetings prior to the final budget being presented to the board for approval if the increase is projected to be significant. If the condo owners take part in the process, they may be helpful in passing on the information to their neighbors. The newsletter is a great way to keep the community informed as well. Many condo owners access email regularly and this too can be a means of communicating news on the condo association's financial position and the fees required to operate in the next fiscal year.
Your state's statutes or condo association's governing documents may specify the amount of time an owner must be given if there is to be an increase in fees or a special assessment. Be sure to follow those parameters and give plenty of notice in the case of an increase. If the fiscal year is January to December, most notices should be in the mail before Thanksgiving. If people are on an automatic bill payment service for condo fees, they need time to make the change for the January deduction. There also are the condo owners who send in their payments early in anticipation of being on vacation during the holidays. They may not receive that increase notice before they leave, so the earlier you can alert everyone, the better.. A late condo fee policy for the condo association should be reiterated at the time of this mailing to remind owners of the obligation of timely payment and the penalty if the condo fee payment is late. Don't forget to let them know whom to call in case they have questions. They may need just a few simple explanations to assure them of the reason for the increase and the due date. Helping to ensure timely and accurate payment will lead to fewer problems;we all know what high delinquency rates do to the condo association's checkbook.
The condo board has an obligation to give their best estimates when putting forth and adopting a condo budget for the association. The condo association is, after all, a business, and must be conducted as a business. It is tough to pay increased condo fees, but the condo board's obligation to the condo association is to make sure that there are funds available to pay the bills to keep the operation running smoothly. It is a tough job being on the condo board and making the decisions, but it can be very rewarding too. When the year is reviewed and the budget is nearly on target . . . now that is a feeling of accomplishment!
Happy Budgeting!
Source: Association Times