Rent Real Estate

Doing the Numbers Homeowner Association Style

Fall is the time that many community associations do budget planning for the coming fiscal year. A carefully structured budget is essential for proper maintenance and preservation of association assets. The board, budget committee, property manager and accountant should start the process early to properly analyze the information. The ultimate purpose of an annual budget is to calculate the maintenance fees to charge the owners. There is two parts to the budget: The Operating Budget reflects on-going expenditures such as utilities, management, maintenance, supplies, etc. The Reserve Budget addresses major common area components that require periodic repair and replacement like roofing, painting, paving, fencing, pool equipment, clubhouse, etc. Combining the anticipated operating expenses with an annual reserve contribution produces the amount of money needed from maintenance fees and other revenue sources. Examining a few basic budgeting guidelines, let"s do the numbers: 1. Gathering Information Get budget projections from all standing committees like social, newsletter, pool management, etc. Obtain proposals and projected fee increases from service providers like the landscaper, management company and utility companies, etc. Poll the owners for "wish list" items. Conduct a Reserve Study (or review and revise the existing one). The Reserve Study identifies all major common area components for which the association has repair and replacement responsibility, estimates the remaining lives of these components, calculates the repair and replacement costs and establishes a funding plan to avoid the need for special assessments. Reserve studies are 20-40 year projections and are typically prepared by reserve study consultants. 2. Expenses Study the history of expenditures for the past three years. Do trends or patterns emerge? Review last year"s budget and financial statement line by line. How accurate was last year"s projected budget? What can be learned that can be applied to this year"s budget? What changes should be considered which will increase or decrease usage of electricity or other utilities? What about inflation? 3. Revenue All sources of revenue must also be carefully considered. These will include maintenance, late fees, interest, fees for amenities, RV storage, prepaid expenses, investments and accounts receivables. Will the community have any new services or amenities which will generate additional income? 4. Drafting the Budget Once you have gathered and analyzed all the information, you"re ready to begin drafting the new budget. List items that are "necessities" and those on the "wish list." Add new operating expenses and all rate increases on those existing. Determine how much will be added to the reserve fund. Be prepared to go through several drafts before everyone is satisfied. 5. Determine the Maintenance Fees After all expenditures and income have been calculated, the homeowner maintenance fee can be determined. To do this, follow this mathematical equation: Total operating expenses plus annual reserve contribution minus miscellaneous revenue equals the annual homeowner maintenance fee. Divide this figure either equally or by percentage (according to the governing documents) and then by 12 months for the monthly maintenance fee for each owner. 6. Year End Financial Statement A year end financial statement measures the actual performance against the budget and using the most current one will help enormously in preparing a future budget. 7. It"s in the Details Do you have enough detail in your budget line items to accurately track costs (like Repairs-Roof, Repairs-Electrical, Repairs-Fencing, etc.) or have you been lumping them all together ? (For a sample list of accounting categories, go to www.regenesis.net) Do the figures add up? Total revenue minus total operating expenses should equal the annual reserve contribution. Produce a budget that shows side by side actual versus budget on a monthly basis. Set your budget based on historical information (facts), not to produce a desired maintenance fee (fiction). Remember to replace reserve funds borrowed to meet operating shortfalls. Include descriptive notes that explain new or large line items or significant variances from the previous year. 8. Get Professional Help A CPA budget review can help identify areas of financial weakness and advise on corrective measures. Don"t keep making the same mistakes over and over. When doing the numbers, make sure you do it right. Be well informed, ask the right questions and carefully plan the annual budget to ensure a sound financial future for their community. Thanks to Lauren Bush, Russ Hoselton, Richard Kirkpatrick and Grace Morioka For more information on this subject, see www.Regenesis.net.

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