Calculating Operating Budget Expenses
There are two primary ways the operating budget (expenses) for a community association can be calculated:
Historic Trend – In a Historic trend budget, you use the prior year’s actual expenditures as a baseline, and add a percentage increase for inflation to all accounts.
Historic Trend budgeting is the most common, and the easiest, although it is not necessarily the most accurate method.
Zero-Based – In a zero-based budget, you start every line item at zero and justify the amount for everything that goes into the budget. While more accurate, going over every single line item can be quite time consuming.
As a general rule, a Zero-Based budget is good to do when the community is new, or if you have recently taken over management. If there was even a sniff of mismanagement or fraud associated with prior years and you cannot depend on the history being accurate, you’ll have no choice but to start from zero.
Hybrid Method (Recommended) – For most communities in your portfolio, you will likely wind up doing a combination of Historical and Zero-Based budgeting, where you start with the prior actuals for most line items on the chart of accounts, and use a zero-base model for the individual accounts you know will need to be changed next year.
An example of this hybrid model would be if you recently renegotiated a major service contract like landscaping. The historic numbers for the landscaping account in the community’s chart of accounts are invalidated because you have a completely different vendor now, so that one account you would reset to zero and calculate out the budgetary requirements for the year from scratch.
Budget Time: How much should you charge for assessments?
October officially marks budget season for many community associations across the country. And with budgets comes increases in regular assessments. That means not only is this a bad time for community managers and board members, it’s also challenging to your homeowners, and can lead to major blowups over increases.
One thing we have seen time and again is communities that fail to plan their budget properly. Some communities increase assessments based on an arbitrary value like cost of living, or a percentage dictated in the community documents. Still more communities choose not to raise assessments at all – not because they don’t need to, but because the board doesn’t want to make an unpopular decision.
But perhaps the most common issue we have seen is community association boards that simply do not know what they need to charge for assessments, and so they carry on with one of the above two options.
So Lets Break It Down
A community association’s budget needs to predict three basic things: Expenses, Reserves and Income.
At the end of the day, the amount of income the community generates has to cover the expenses and the reserve contribution. That’s why proper budgeting is so important. Nobody wants to pay higher assessments, including the board members, unless it’s absolutely necessary.
At the same time, you need to make sure your community is covered for the coming year. Because the only thing worse than raising assessments is levying a special assessment mid-year.
Not all of your association’s income may come from owner assessments. There are many other sources of income including late fees, vending machines, guest fees, parking passes and rental income that you will need to take into account. Any reliable source of income should be considered with an appropriate amount entered into the draft budget.
Look at the past year’s budget, the actual income generated by the community year-to-date and other known sources of income to identify the miscellaneous income. Like with expenses, this should be entered into the draft budget on a monthly basis in the months the income is actually going to be received.
Preparing Our Communities
Hurricane Matthew’s path has shifted closer to Florida’s east coast and officials say residents should start preparing.
Superior Association Management has already taken initiative by going over our hurricane plan and securing our communities to make sure they are prepared to weather the storm. Rest assured we will be there before, during, and after the storm for all the communities that we manage.
Please stay safe and start preparing now!
HurricaneMatthew News Update
Hurricane warnings remain in effect for Haiti, parts of Cuba and the Bahamas. Forecasters say parts of Haiti could see up to 40 inches of rain by the time Matthew leaves the area. Southeastern Cuba could see up to 20 inches of rain, according to the Hurricane Center.
No watches or warnings have been issued for Florida, but forecasters say those could be issued as early as today.
Gov. Rick Scott on Monday declared a state of emergency warning residents there could be “massive destruction” if Matthew directly impacts Florida. He urged everyone to start preparing by stocking up on water and food, and by charging cell phones.
Making Smart Budget Cuts
What about cutting costs?
HOA Managers and Board Members are constantly struggling with increasing costs, which they have to pass on to HOA members. For this exercise, the reason why costs are increasing isn’t that relevant. The important point to remember when it comes to increases is that they usually increase, on average, at a rate greater than inflation.
But — how about instead of just passing those increases on, we work on cutting costs? The difference can of course be put into the capital improvement account should the Board so choose.
How “fixed” are fixed costs?
Just because you learned in business school that fixed costs are not variable doesn’t mean that that’s the case in the “real world.” For instance, every HOA needs and uses electricity. However, the cost of electricity has two variables; the first being the cost per kilowatt and the second being how many kilowatts your HOA uses.
Changing light fixtures or light bulbs and swapping out hardware can often result in 50—100% reduction in electric use, depending on what is currently being used. Yes, 100%!
Logically, a 100% reduction would require the HOA to produce its own electricity. This is quite possible in today’s solar-society where solar panels are becoming more and more cost effective to afford and install.
Cutting electric costs by 50% doesn’t require solar installation; it frequently only requires an upgrading of the fixtures or the lamps, installation of motion sensors, or a combination thereof. Either way, there are huge savings to be realized that are often overlooked because they are not initially considered “large.”
Is your HOA looking toward the future or stuck in the past?
There are an enormous amount of alternatives on how to lease roofs or other common areas in HOAs to install solar that can be used either for the individual units, or for the common space.
HOAs are often slow to embrace change. There are still HOAs that do not allow their members to install solar panels. However, as solar becomes more affordable and homeowners become more aware, they are more likely to put pressure on boards to change policy and allow solar.
Every penny counts
When it comes to cutting operating costs for HOAs, every penny counts. It is not just about that one penny, but the cumulative effect and changing the mindset of boards and residents, to value reduced waste.
HOA Records – Save or Shred?
Many community associations maintain documents and records for many years, even decades. Most state laws require that owners be allowed to inspect records of the association under specific conditions, but the inspection right is broad. In some cases homeowners will request documents in an effort to conduct a witch-hunt against the HOA. So how long do you keep records, and what records need to be kept?
What’s a record?
The term “record” is not necessarily defined in most jurisdictions. Therefore it is presumed that any document that the association keeps in its file that relates to association business is a “record” of the association (this includes electronic records too). Of Course, certain information may be privileged and not available for owner review, but we must assume that if you’ve kept the document in your file, in a box, in your desk, or in your computer, and it relates to association business and operations, which could range from financial statements, receipts, contracts and to member correspondence, that is available for inspection by an owner.
Save it or shred it
In Utah, the declaration, bylaws, plat map, resolutions, articles of incorporation, minutes of meetings, and some similar documents are required to be kept permanently. Also, the most recent annual report delivered to the division of corporations is required to be kept for a period of 3 years. However, most associations don’t realize that all other records (be sure to review your state law) can and should be discarded upon being inapplicable to current operations of the association. For example, if you have an election and you have a ballot certification committee who tallies the results, why keep the ballots for the next year or two when you have certified results that are in a single document form? Discard the ballots as they are no longer needed. Hoarding the ballots will only give owners something to scrutinize when some scrutiny is not appropriate or necessary. Further, why keep receipts for items purchased years ago, unless you’re keeping it for a warranty purpose? It should be discarded because the cost of such will be reflected in the regular statements of the association anyways.
2017 Budget Planning!
It’s that time again: Prepare to start planning 2017 community association budgets. They have to be sent to owners and approved by the board before Jan. 1.
Before prioritizing the expenses and locking in numbers, consider these financial planning tips from industry pros:
Protect the building envelope. Allocate enough money to keep the roof and exterior tight. Association attorney Stuart Fullett suggests factoring in landscaping to keep water from flowing toward the foundation. “Water infiltration complaints typically lead to some of the more costly lawsuits facing associations,” said Fullett, managing shareholder at Fullett Rosenlund Anderson PC, with offices in Chicago and Lake Zurich.
Take an all-at-once approach to big projects. If you are facing an expensive, multipart task like rehabbing decks or replacing dying trees, don’t do it piecemeal. Negotiate a contract for the complete job and lock in the pricing. You’ll save money in the long run by avoiding future price increases, according to Beth Lloyd, president of the Association of Condominium, Townhouse and Homeowners Associations. “Contracts for bigger jobs are usually priced more reasonably than frequent work orders or small proposals,” she said.
Establish and follow maintenance schedules. Fixing a small problem now is less expensive than fixing a big problem later. “It is very easy to understand how sometimes communities get a bit behind the eight ball and defer maintenance either because of a cash shortfall or because some projects just simply creep up,” said Mark McLallen, president at Condominium Insurance Specialists of America, based in Elgin. “But catching up almost always comes at a premium, and sometimes that cost can be significant.”
“Too often I hear of a place that touts it lowered assessments or maintained the same level of assessments for years,” Fullett said. “What that generally tells me is that the association is deferring maintenance.”
Shop carefully for contractors. The lowest estimate may not include all the necessary items or expertise for the job. “Hire experienced, licensed, insured and quality vendors,” McLallen said. “When someone says, ‘I have a guy who can do that for nothing,’ run. Don’t walk.” McLallen notes that some projects require specialized contractors, so it’s helpful to explore options a year or more ahead of the desired project start date.
Swim with solar power. When the swimming pool’s hot water system goes kaput, replace it with a solar unit. “The payback time for solar hot water is reasonable — approximately five years,” said architect Daniel Baigelman at Full Circle Architects in Highland Park. “There is money to be saved here, and many of the unit owners will appreciate the more environmentally friendly approach.”
The Superior Team Hopes You Enjoy Your Labor Day Weekend!
Who’s Meddling with Your HOA Contractors?
There seems to be at least one in every neighborhood. The neighbor who feels the need to mind your business, other neighbors’ business, and the association’s business. When vendors are working in your community, Meddler wants to direct the work or at least give an opinion about what’s being done. The Board should establish a few prevention rules before Meddler gets too involved in the association’s business.
Does Meddler have extra time? Perhaps Meddler has recently started working part-time, stopped working or had another lifestyle change that resulted in extra time. There’s always plenty to do in a homeowner association, so ask for some help with a specific task that will keep Meddler busy doing something productive. Then, there’s less time to interfere with maintenance and other HOA issues.
Are homeowners aware of HOA responsibilities? Take this communication opportunity to remind all owners about their responsibilities and the areas that are managed by contractors and vendors. Developing a simple responsibility matrix with topics and names can help set expectations and ensures owners know what is expected of them. A matrix can also include names of point persons for vendor management, and specify that all vendor communication must come through the designated point person.
Do vendors know the chain of command? When multiple people provide input and/or direction to a contractor, it almost always leads to misunderstandings. Creating a maintenance process that includes a vendor point person can streamline vendor communications. It’s also important to include a channel for owner requests and feedback to help curb owner communication with the contractor. Share the process with vendors so that they know that direction comes only from their point person, and they can help you maintain control.
Do HOA policy documents spell out vendor communication? Most associations develop policies that reference communication with vendors and contractors, but they may be vague. Creating or revamping vendor communication guidelines is time well spent by the HOA Board, even if you don’t have a Meddler in your midst. Include details about how homeowners, point person and Board members work and communicate with vendors. Ask for input from homeowners, and then communicate and enforce the guidelines.
Consistently enforcing vendor communication guidelines is key to managing a Meddler’s behavior.
The first case of locally-acquired Zika virus has arrived in Palm Beach County.
Gov. Rick Scott said Monday the infected person recently traveled to Miami-Dade County, ground zero for an outbreak of Zika acquired through domestic mosquitoes. State health officials are attempting to determine where the unidentified person contracted the virus.
What we know
– Zika is spread mostly by the bite of an infected Aedes species mosquito (Ae. aegypti and Ae. albopictus). These mosquitoes are aggressive daytime biters. They can also bite at night.
– Zika can be passed from a pregnant woman to her fetus. Infection during pregnancy can cause certain birth defects.
– There is no vaccine or medicine for Zika.
– The Florida Department of Health has identified an area in one neighborhood of Miami where Zika is being spread by mosquitoes.
The Centers for Disease Control (CDC) is urging people to take immediate steps to precent mosquito bites, and ultimately infection:
– Wear long sleeved shirt and long pants to cover skin
– Use EPA-registed insect repellent
– Treat clothing and gear with permethrin or purchase permethrin-treated items
– Stay in places with air conditioning or that use window and door screens to keep mosquitos outside
– Make sure all screens are in good working order
– Eliminate sources of standing water in surrounding areas
If you have any questions on how to protect yourself and your family, please refer to the information published by the Centers for Disease Control (CDC) at www.cdc.gov/zika
Feedback From HOA Members
And a great way to continually find out how residents are feeling is by offering community surveys. They are a great way to ask members about specific topics and find out how residents generally feel about possible changes. Plus, it reminds residents that you care about their input and are taking it into consideration.
How to Conduct an HOA Survey
You might be a little turned off by the idea of a survey for fear or bringing up negative feedback or revealing unknown problems. However, this may be just the reason you need to do it. Part of being a board member means accepting to responsibility of understanding and working to resolve sources of problems and negative attitudes.
The flip side of this is that surveys can also reveal your board is headed in the right direction! You might find the majority of members are supportive of a difficult decision or understand it better than you think they do.
Set Clear Intentions
It’s also important to note that surveys are not the same as voting. Just because you bring up something in a survey and ask members about it, it doesn’t mean you have to respond to every single issue—in fact, that is usually impossible. The purpose of surveys is to help you in figuring out what’s most important to focus on, in making the best decisions for the community, and in identifying any problems. Even though you can’t address every problem, you’ll be made aware of it.
To make sure residents understand the purpose of the survey too, include a message from your board at the beginning explaining why you are doing the surveys.
Know Your Duty As The HOA Treasurer
Your HOA board is responsible for many important decisions, but one of the most important responsibilities is maintaining the financial health of the association. Although each board member needs to participate in sound financial decision-making, no one is more responsible than the HOA treasurer. It is the treasure’s responsibility to protect the association’s assets, and while these duties and the authority to exercise them are detailed in the HOA’s governing documents and state law, it can still feel like an overwhelming responsibility.
Even though we encourage most associations to use a community property management company to help with the details, we wanted to help jump start process by identifying six things to help every treasurer with their decision making process.
- Records. Having accurate and detailed financial records is critical. Without them it’s impossible to know what funds you have to operate the upcoming year with. If keeping detailed records isn’t your thing, an experience HOA management company can help.
- Internal Controls. A treasure’s job is to keep a watchful eye on how and where money is spent. When something seems off, voice concern and get to the bottom of it before things become truly mismanaged.
- Budgets and Reserves. Just like you can’t operate your HOA without proper finical records, you can’t plan for the future without a vision and detailed budget. Every budget should also include a reserves study to make sure community reserves are adequately funded. While budgets take time and attention to detail, they are necessary. Work with the association’s CPA and or property management company to ensure the community needs are accurately reflected in the budget.
- Audits and Taxes. Don’t let these words intimidate you. Every association needs to be periodically audited and taxes are just part of doing business. A treasurer’s job is to liaison between the association, its CPA, and property management company to make sure these processes run smoothly.
- Assessments. While the HOA management company usually collects dues and monitors delinquent accounts, the treasurer needs to be an active participant. Since the treasurer is also a resident in the community, he or she will always have a better idea of what is going on with residents than a management company.
Congratulations TJ Scarborough on becoming a Property Manager!
Pokemon Chasing In Your Community
People roaming around your front yard at all hours of the day and night with their cell phone in tow? Have you seen carloads of adults and kids pulling over, getting out, and scattering in your neighborhood?
Don’t be alarmed, it likely isn’t burglars casing your home or a zombie apocalypse. This suspicious activity is probably coming from the the new latest cell phone game craze called Pokémon Go. A game that turns peoples phones into a camera on a parallel universe in search for an imaginary creature on their.
This new app has taken America by storm with over 60% of people who download it, using it every day. This game was released less than a week ago already ranks among the most downloaded and top-grossing Smartphone apps out there. Americans of all ages find themselves chasing the creatures through neighborhoods, yards, cities, and rural areas by using the GPS on their cell phone that is connected to the app. The goal is to find as many Pokémon’s as you can.
This gaming craze has created stories and news all over the U.S. It’s even impacting HOA’s and homeowner association management companies. Homeowners are calling in concerned about the activity they are seeing go on in the community. After further research community manager and board members have found the activity was not dangerous but rather it was people out on the hunt for Pokémon.
What do we suggest?
- As always we encourage you to stay safe out there. If you are chasing Pokémon in your community be aware of your neighbors and your surroundings.
- Keep a heads up for those who may not be paying attention.
- Send an email: let your homeowners know what they may be witnessing and remind them of the association’s safety guidelines.
- If you are in doubt about suspicious activity a call to the police is always a safe bet.
- If you are participating in the craze, then be safe and Happy chasing!
What To Do If You’ve Been Sued
“You’ve been served” is a phrase no one ever wants to hear. While lawsuits against board members are usually unsuccessful, it’s still important to protect yourself and your board from the threat. Since we hate legal speak as much as the next guy, we’ve boiled down the must-know things when dealing with lawsuits into five pointers.
- These lawsuits happen and are usually unsuccessful. A disgruntled homeowner may attempt to even the score by suing the board or by targeting individual board members. Usually, the homeowner is hoping the HOA will rescind their policy and in return the homeowner will drop the case. Here are two examples – one of a lawsuit with merit and one the judge would likely dismiss.
If the board member, Jimmy, decides to shut off the outdoor water to his neighbor (Peter) because he doesn’t like the new flowers/shrubs that Peter planted, the judge will likely rule in favor of Peter.
If, however, Peter didn’t get approval on his new landscaping and has ignored the HOA’s attempts to rectify the situation though proper channels, then Peter’s lawsuit against the board and any individual members will likely be dismissed.
- Good Insurance can make for a good defense. Individual members of the board are protected by the association’s directors and officers insurance (D&O insurance), and while legitimate lawsuits against individual board members are unusual, D&O insurance is necessary to protect them. In some cases, the association’s general liability coverage will also protect board members. Before you just assume officers are protected under your association’s current insurance, review your policy.
- Don’t stick your head in the sand. No matter how “out there” a lawsuit sounds, don’t ignore it. Immediately contact your insurance provider and lawyer if you or the board is being sued. Quick attention to these issues is often the best way to diffuse and solve the problem(s). Ignoring it NEVER makes it go away.
- You may need your own lawyer. While the HOA’s insurance will likely provide an attorney for a board member, an individual member will need his or her own lawyer when/if it becomes obvious that their interests are not the same as those of the board.
If you do need your own lawyer, make sure you review the HOA’s insurance policy because it may or may not cover separate counsel. If it doesn’t, your individual umbrella liability policy might offer coverage for lawsuits stemming from a nonprofit capacity. Or, as another option, you can hire your own attorney and based on the indemnity provision in your association’s bylaws, insist the association indemnify.
- Protect yourself down the road. Take the time to make sure your insurance has D&O coverage, that your bylaws contain an indemnity provision, and always strive to conduct work in good faith and within the set boundaries of your HOA and its legal documents.
Hopefully these five tips help you navigate any lawsuits your HOA encounters. However, this is not intended as legal advice and the circumstances of your case may vary. Remember, often the best way to protect yourself is to be proactive and cover your bases.