3 Critical Items for Condominium Association and Homeowner Association (HOA) Budgets

MAY 2011

     

By: Candy Cunard, CPA

The association budget is a formal and detailed written plan that provides the cornerstone of an association’s financial operations. The budget reflects the needs and goals of the association for a period of time and identifies sources of income and the amount the board anticipates spending on predetermined expenses. The homeowner association budget also provides the basis for calculations of member assessments and a method for measuring financial performance while also giving owners an understanding of the plans for the association. The budget should include all estimated and known common expenses, as well as include full disclosure of reserves for future capital purchases.

During my 14 years as a CPA specializing in condominium and homeowners association audits, I have learned how critical the following three items are in the budget process:

1. ASSOCIATIONS SHOULD OBTAIN SIGNED CONTRACTS WITH VENDORS.

The more fixed price common expenses the association can include in the budget, the more it provides for fewer variances between actual and budgeted expenses at the end of the year.  The best way to accomplish this goal is through signed contracts with as many of the association vendors as possible—especially for any large expense. All too often, associations rely strictly on history and are surprised when they receive the bill for the goods or services.  Several years ago, insurance costs escalated and many associations did not work with their insurance carrier on premium amounts in advance of the budget process. As a result, associations did not budget for the large increases leading them to shortfall on the budgeted insurance line. The absolute best way to avoid these surprises is to get as many signed contracts with vendors as possible during the budget process. Signed contracts are simply a good business practice as they establish a fixed price and provide good communication on the expectations of both parties.

2. CONDOMINIUM AND HOMEOWNER ASSOCIATIONS SHOULD HAVE PROFESSIONAL RESERVE STUDIES WITH PERIODIC UPDATES.

A separate portion of the condominium association or homeowner association budget should be used to fund the future major repairs and replacements of the association’s common elements where the replacement cost will exceed $10,000 (e.g. roof, pool, tennis courts, painting, paving, etc.) These common elements are typically referred to as the reserve components.  Professional reserve studies are a valuable tool for the association to use to identify the reserve components and estimate the lives and replacement costs of the components. Homeowner association boards have a fiduciary duty to provide the best estimate of the future reserve expenses and to allow the owners to fund those expenses over a period of time—thus preventing the need for a special assessment at the time of replacement. At a minimum, owners should be aware if the association is not setting aside monies for these repairs so they will not be surprised when a special assessment for the repair or replacement becomes necessary. 

 3. ASSOCIATIONS SHOULD CONSIDER INCLUSION OF NON-CASH AND NON-EXPENSE CASH NEEDS.

The economy over the past few years has demonstrated the importance to condominium associations and homeowner associations of budgeting for non-cash items such as bad debt expense. Unfortunately, when owners do not pay their assessments in a timely manner (or at all), the paying owners have to make up the difference in order to maintain the amenities and appearance of the association properly. This situation is a very difficult item to budget adequately as each delinquent owner’s balance and situation needs to be evaluated independently rather than looking at past due receivables as a whole; however, it is a crucial budget item. Condominium associations and homeowner associations need to understand the importance of spending the time to estimate this line item as thoroughly as possible and on the conservative side as often there are other related expenses such as legal expenses that are also incurred during the collection of delinquent accounts. Another non-expense item that should be included in the budget process is the repayment of a loan. Including the future cash payments for a loan is critical because if the association does not budget for all required cash payments, the association will find it unable to meet its obligations. 

In summary, signed contracts with vendors, professional reserve studies and budgeting for non-cash and non-expense items are very important in the budget process for condominium associations and homeowner associations. These items help associations minimize surprises to their cash flow more often than any other expenses I have seen in my condominium and homeowner association accounting career. Associations need good budgets in order to avoid a cash crisis and to plan for additional projects designed to enhance the standard of living of the owners. Hindsight, it’s said is 20/20. I wish more condominium associations and homeowner association in recent years would have consulted their CPA during the budget process as it may have minimized some of the effect of the housing crisis on their finances. So if your association needs budgeting assistance, call CRI's condominium association and homeowner association CPAs.