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Crunching numbers: What goes into a community association’s budget?

Budgets are crucial to a community association’s financial operation. Just like for-profit businesses, association boards should work diligently to develop annual budgets that estimate revenue and expenses for the upcoming fiscal year. A properly drafted budget can help prevent reduced services, deteriorating property, or special assessments.

Many state statutes and most governing documents impose a legal obligation on boards to develop an accurate budget and collect sufficient assessments to cover expenses. A detailed budget helps residents understand why assessment amounts are reasonable and how their money will be used.

Community associations have two types of budgets: an operating budget and a reserve budget. Operating budgets have unrestricted funds that are used to run the association through the fiscal year, while reserves have restricted funds saved for expenses that will occur in the future.

The board is tasked with gathering the necessary financial information to project potential sources of income and expenses, including conducting a reserve analysis, looking at bids for contracts, projecting utility or service increases, and comparing past years’ budget trends.

Certain line items constitute expenses that associations are required by law or contract to pay and should be allocated for first. An association also should allocate contingency funds, separate from the reserve budget, for unanticipated expenses such as extreme weather, economic conditions that could increase fees for products or services, emergency repairs, and lawsuits.

Here are some of the most common expenses that associations should include when drafting the operating budget.

Maintenance. Allocate line items that protect and enhance the community’s property. A maintenance schedule should be developed or amended annually for budget considerations, and service contracts should be checked to anticipate potential increases or to negotiate a better rate.

Taxes. While assessments are not taxable, other sources of income, such as interest earnings, facility rental income, and income from goods and services, likely will be taxed. Other taxes that associations may need to pay include personal property, payroll (if it hires salaried employees), or real estate tax.

Utilities. Associations should measure past consumption of electricity and water to anticipate any increases. Conducting a professional utility audit can ensure meters and other equipment are functioning properly. The audit also can help an association determine if it can reduce expenses by installing energy-efficient systems.

Insurance. An association should ask its insurance professional to audit current property and liability coverage and recommend appropriate protection that fits its needs.

Administrative costs. These include expenses for professional services provided by consultants, reserve specialists, attorneys, and accountants, fees for banking and collecting delinquencies, as well as the costs of maintaining an office, including equipment, supplies, and phone and internet service.

Once your budget is drafted, share it with homeowners so they can review before the annual meeting.

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Talent wanted: How to hire and retain skilled community association managers

Recruiting and retaining skilled managers can be challenging for community associations and management companies, especially in a very competitive labor market and with communities limited by tight budgets.

In this reality, it becomes even more important for associations and management companies to highlight their strengths and address organizational shortcomings, says business speaker and author Peter Sheahan.

The founder and CEO of Karrikins Group, a Denver-based business growth strategy consulting firm, Sheahan has been an innovative business thinker for more than 20 years. He has advised leaders at companies such as Apple, Microsoft, Hyundai, IBM, and Wells Fargo. He’s also authored seven books, including the recently released Matter: Move Beyond the Competition, Create More Value, and Become the Obvious Choice and Generation Y, a book about the millennial workforce.

Peter Sheahan

Generation Y came about due to Sheahan’s experience as manager of a hotel in Sydney, Australia. “I noticed there was a very big disconnect between what the young people that I was hiring wanted from their experience of work and what I needed from them at work, as their employer,” he says.

Since that formative experience, Sheahan and his team have strived to help company leaders understand ways to attract talented workers.

“People think that the secret to attracting and retaining talent is little things like, ‘Let’s give them free lunch’ or ‘What perks can we offer?’ or ‘What are our benefits compared to the benefits down the road?’ But at the end of the day, it really comes down to the quality of the organization,” Sheahan says. “Is it successful? Is it high performing? Because good, smart people want to work in those environments.”

Sheahan recommends a few best practices for community associations and management companies for recruiting and retaining talent:

    1. Stop thinking about tactics, and start thinking about the performance of the organization. The focus should be on building an organization that is robust and resilient. “Great organizations have no trouble attracting and retaining talent,” says Sheahan.
    2. Build a culture that people want to work in. The perks and benefits can’t be the only lure for bringing in talented workers. Sheahan warns that if the culture doesn’t reflect what was promised to the manager when hired, “You’ll find yourself in bigger trouble.”
    3. Be courageous. It’s important to brave a tight labor market to find talented people, says Sheahan. It’s also about having the courage to build a high-performing team. “A team is only as strong as its weakest link, so we need to be capable of managing the performance of the underperformers or, at times, even having the courage to move people on,” he says.

Sheahan will be one of the keynote speakers at the 2019 CAI Annual Conference and Exposition: Community NOW, May 15-18, in Orlando.

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A community’s last resort: Foreclosing on a home

Nobody wants to foreclose on a home—not a mortgage banker and certainly not a community association. Countless Americans lose their homes when lending institutions are unable to collect mortgage payments. In a perfect world, no one would ever face foreclosure—for any reason.

That’s why foreclosure should always be used as a last resort, applied only when a community association has exhausted all other collection options and only when a homeowner refuses to remedy a significant debt to the association.

CAI does not support people losing their homes to foreclosure for insignificant sums of money. Even when the debt is significant, foreclosure should be considered only after other approaches have failed. In all cases, homeowners facing foreclosure deserve reasonable opportunity to appeal the issue to the leadership of the association.

There is no universal threshold that should trigger a foreclosure. The decision should be based on many factors, including the amount of the debt, the financial health of the association, the reason for the debt, and the homeowner’s willingness and ability to bring the account up to date. The magnitude of this decision requires an approach that is fair, reasonable, and consistent with practices and procedures established by the association’s governing documents.

While there are isolated instances of inappropriate foreclosure, this action is viewed as a last and unavoidable step by the overwhelming majority of community associations. Knowing that people occasionally face financial hardship—a lost job, for instance—many community associations do work with homeowners to develop deferred or special payment plans.

Elected by their neighbors, volunteer community leaders are responsible for ensuring financial stability and the continued delivery of services to residents in the community. An association’s budgetary obligations do not change when assessments aren’t paid. Common areas must still be maintained. Garbage must be collected. Insurance coverage must continue. The pool remains open in the summer. Snow is plowed in the winter.

Homeowners who simply refuse to pay their assessments—as they contractually agreed to do when they purchased their homes in an association—are cheating their neighbors, their community, and themselves. When homeowners are delinquent on their assessments, either their neighbors must make up the difference or services and amenities must be curtailed. That affects everyone in the community, perhaps even leading to a decline in property values.

Used as a last resort, the lien and foreclosure process gives community associations a mechanism to ensure the resources necessary to provide services, protect property values, and meet the expectations of the community as a whole. Placing a lien on property, with the ability to foreclose, is typically enough impetus to get delinquent residents to meet their financial obligations to the community.

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