Blog

Posted on October 8, 2019 12:58 PM by Melissa Gentry
 
Equipment and major components must be replaced from time to time, regardless of whether we plan for the expense. Pavilions, clubhouses, plumbing, electrical, pools, roofing, paving, or sports courts to name a few—will need to be replaced, what they will cost and how much we need to set aside each year to pay for the various components at the necessary time.

We need to plan and set the funds aside now. Reserve funds aren’t an extra expense—they just spread out expenses more evenly. There are other important reasons we put association monies into reserves every month:

1. Reserve funds meet legal, fiduciary, and professional requirements. A replacement fund may be required by:
  • Any secondary mortgage market in which the association participates 
  • State statutes, regulations, or court decisions.
  • The community’s governing documents.
2. Reserve funds provide for major repairs and replacements that we know will be necessary at some point in time. Although a roof may be replaced when it is 25 years old, every owner who lives under or around it should share its replacement costs.

3. Reserve funds minimize the need for special assessments or borrowing. For most association members, this is the most important reason.

4. Reserve funds enhance resale values. Lenders and real estate agents are aware of the ramifications for new buyers if the reserves are inadequate. Many banks require associations to disclose the amounts in their reserve funds to prospective purchasers.

5. The American Institute of Certified Public Accountants (AICPA) requires the community association to disclose its reserve funds in its financial statements.

How do we know how much to save?
 
Preparing it requires a unique combination of specialized engineering knowledge, a keen understanding of financial projecting and savvy investing skills.  Professional reserve study providers are extensively trained before they are considered qualified to perform competent reserve studies tailored for each community. These professionals have met stringent requirements and are held to high standards. They have a thorough knowledge of common interest developments, HOAs, and community associations, and can provide the board with sound guidance. Your board should take its fiduciary responsibility very seriously to be good stewards of owner money. By hiring these professionals it’s a road map to ensure we are doing the right thing.
Posted on September 3, 2019 3:37 PM by Melissa Gentry
 
The budget is a formal financial plan that determines the annual assessment. It should cover operations and reserve funding. A lot of work goes into preparing the budget. It’s a complex activity that has to start early so the budget can be finalized and approved prior to the beginning of the new fiscal year. Here’s how we do it:
 
•    The board appoints a budget committee to help with some or all of the following tasks.
•    The board and manager work together to gather all financial information we’ll need to project expenses for the coming year. This could be a reserve analysis, bids for contracts, projections for utility or service increases, comparisons of past years’ budget trends and many other details.
•    The board also examines all sources of income—assessments, interest on investments, proceeds from concession or club operation and other types of miscellaneous income.
•    When projecting income, remember that some owners will inevitably default or be late with assessment payments, which will reduce monthly cash flow.
•    The board creates a working draft by adjusting the expenses and income until they balance. This may be accomplished by foregoing certain expenses to avoid raising assessments. Or it may be necessary to raise assessments to cover increased expenses such as utilities that the board cannot control.
•    When the board has developed the best possible draft budget, the association sends it to association members. This is typically done at the annual meeting of the members.  We can email it to member in advance of the meeting to ask questions and offer comments.
•    Based on member comments, the board revises the draft budget as needed.
•    At the annual meeting the association votes to approve the final budget. 
 
Do You Need a Budget Committee?
 
The budget committee comprises members of our community association, which enables residents to have a say in how their money is spent. How does the budget committee work and who serves on it?
 
The Treasurer’s Role
It makes sense for the board treasurer to chair the budget committee. As chair, it’s the treasurer’s job to keep everyone on track as the budget is prepared. The treasurer also presents the budget for approval to the board and members.
 
Who Should Be on the Committee?
The owners who serve on the budget committee should represent a cross-section of the community. Of course, if there are members willing to serve who have expertise in areas such as insurance, that’s even better. When it comes to size, a good general guideline is that the committee shouldn’t be so large that it becomes unwieldy. 
 
What the Committee Does
The treasurer will make sure that all committee members understand the three basic components of the budget:
 
1. Funds needed for daily operation of the community, such as common electricity and water, grounds maintenance, management, insurance, and general maintenance. These expenses are either contractual or can be reasonably estimated based on experience. An important consideration when looking at items in the operating budget is the expectations of the community—for example, do members want a landscaper who is a “blow, mow, and go” type, or do they want a landscaper who provides a higher level of service?
2. Funds needed to maintain our reserves at sufficient levels. Reserve funds provide money for the repair and replacement of the community’s assets—such as the pool, roofs, pavement, etc. 
3. Funds for additions or enhancements to the existing property. This is a function of what members of the community want and are willing to pay for. The community should provide input and approval for this component. 
 
Armed with this knowledge, the committee will estimate total expenses for the coming year and compare that sum to the association’s potential revenue (assessments, interest on investments, concession income, and so on). If expenses are greater than revenue, the committee will look for ways to lower expenses without compromising service. If that doesn’t balance the budget, the committee may have to make a tough decision—whether to increase assessments or levy a one-time special assessment. 
 
The budget committee performs a very similar process as the board when preparing the budget.  The difference is that the committee does the work!  
 
As you can see, this is a detailed project that requires time and consideration.  The more amenities and accounts payable, the longer and bigger the budget process will be.  That’s why we are getting started soon for your 2020 budgets now.  Expect to start discussing budgets at your next board meeting.  
 
Join us for our upcoming Board Education Class on October 22, 2019 at 6p.  Please RSVP here.  Hope to see you there!  
 
Posted on August 13, 2019 12:29 PM by Melissa Gentry
Countless Americans face foreclosure when their lending institutions are unable to collect mortgage payments. In an ideal world, no one would ever face foreclosure—for any reason. But that world does not exist. Banks and other lenders foreclose on homes when owners default on their loans. Although relatively rare, association-initiated foreclosures are occasionally required to recover delinquent assessments.
 
It’s important to remember that homeowners choose where to live, and by choosing to live in a community like ours, they accept a legal responsibility to abide by established policies and meet their financial obligations to the association and their neighbors.
 
Association budgets
Associations rely largely—many exclusively—on homeowner assessments to pay their bills, which can include landscaping, garbage pickup, pools, street lighting and insurance. For condominiums and cooperatives, these costs include building maintenance, utilities and amenities enjoyed by all residents.
 
You trust our board to develop realistic annual budgets. We base our assumptions on careful cost projections and anticipated income primarily from assessments. Our budgetary obligations do not change when some owners don’t pay their fair share. Common grounds still must be maintained. Garbage must be collected. Utilities and insurance premiums must be paid.
 
When homeowners are delinquent, their neighbors must make up the difference or services and amenities must be curtailed. The former is an issue of fairness; the latter can lessen the appeal of the community and erode property values.
 
Liens and foreclosures
When an owner fails to respond to repeated attempts to collect the debt, the association can be left with little choice but to place a lien on the property. The magnitude of this decision requires an approach that is fair, reasonable and consistent and that complies with applicable laws, practices and procedures set forth in the governing documents that guide our decision-making.
 
We believe homeowners facing foreclosure deserve a reasonable opportunity to appeal to the leaders of the association. Knowing that people occasionally face financial hardship—a lost job, for instance—we will try to work with homeowners to bring their accounts up to date.
 
Nobody wants to foreclose on a home—not a mortgage banker and certainly not our association.  However, the threat of foreclosure is often the only tangible leverage an association has to ensure fairness and shared responsibility. Without this option, many residents would simply choose to default on their obligation to their association and neighbors.  How many Americans would pay their taxes if government had no means of enforcement?
 
With each additional delinquency, an association’s financial position can become increasingly precarious, a situation that is exacerbated in a depressed housing and economic climate.  Placing a lien on property, with the ability to foreclose, is typically enough to get delinquent residents to meet their financial obligations to the community—without removing the owner from his or her home. When that fails, associations turn to the final—and unfortunate—option of foreclosure. 
 
We want you to know that we understand the magnitude of this decision and why it may occasionally be necessary.
« previous 1 2 3 4 5 next »