It’s that time of year. It’s time for many homeowners’ associations to establish their annual budgets, and give notice to their membership of what that budget means for the association’s regular assessments.
Unfortunately this process is often misunderstood by boards and homeowners alike. The process by which budgets and assessments are established is really quite simple. There are essentially two methods for developing an association budget.
The first is the historical trend method. This approach looks at the expenses that have occurred in the past to determine what expenses are likely to occur in the future. The downside of the historical trend method is it reliance on historic budgets. The use of historical trends can lead to a budget that may be bloated with spending that is ingrained and perhaps ineffective.
The second method is zero based budgeting. This approach looks at the expense categories and ignores historical budgetary allocations. The association then seeks to identify what funds will be needed to fund the board’s agreed priorities for the coming year.
We have learned that no two communities are alike. Each community will approach their budget with differing needs and expectations. It is far too easy to fall into the trap of comparing monthly assessments and miss the larger questions that should determine them. One association’s fees may be lower, but if they are failing to reserve for long-term capital projects the homeowners are NOT getting a better deal. Another association’s fees may be higher, but if water/sewer and garbage are paid as common expenses a simple comparison of fees will be misleading.
The most commonly overlooked issue in developing a budget for condominium and homeowners associations is an association’s long-term capital reserves. It’s quickly obvious when an association fails to mow the grass or to pay insurance premiums, but funding long-term items (e.g. roofs, paving, clubhouse and community pool repairs, etc.) can often be deferred undetected for years. Don’t allow your association to fall into this avoidable trap. Reserve Studies should be a part of your budget process to ensure that short sighted decisions, and their long-term consequences, are avoided.
Once a homeowners association has gone through the exercise of developing a budget to fund their plans for the coming year, the assessments can be set. Depending upon the association’s governing documents, the assessments will be determined in one of two ways. First, the assessment may be charged to each property owner equally. Second, the assessment may be charged to each property owner according to the percentage of the property their unit represents. Ultimately to arrive at the assessment, the budget is simply allocated to the owners and paid accordingly.
While it may be tempting to be penny wise and pound foolish don’t fall into this trap. A well-developed budget is critical to the short-term management and long-term condition of any condo or homeowners’ association.
Wise Property Solutions serves condominium and homeowners associations by addressing their financial, association and facilities management needs. The only certified and licensed community association management firm serving the Mountain South (Virginia, North & South Carolina, Tennessee) with offices in the Tri-Cities and Knoxville.