“Best Practices for Planning and Evaluating Your Community Association Budget” – KSN attorney Julie Jacobson discusses the best practices for planning and evaluating your condominium, homeowner (HOA), and townhome association budget. Topics include best practices for establishing budgets, estimated annual revenue, evaluating expenses, and managing reserve funds. (15 mins.)
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Episode Transcription
Bernie: You’re listening to the KSN podcast and today we’re talking about the best practices for planning and evaluating your condo and HOA budget. Welcome to the KSN podcast where you’ll hear from KSN attorneys as they share their experience and insight on legal issues surrounding community associations, collections, property tax appeals and landlord tenant law. I’m Bernie, and today we’re joined by KSN attorney Julie Jacobson. Julie Practices condo, townhome, homeowner association law and has handled a significant number of collection matters, evictions, landlord tenant disputes. Julie, welcome to the podcast.
Julie: Hi Bernie. It’s great to be here.
Bernie: All right, Julie, our topic today, best practices for planning and evaluating your Condo HOA budget. Let’s get right into it. Safe to say if you have a thriving community, a healthy community, it starts with a thoroughly prepared budget, right?
Julie: Definitely. But before we get into getting to the details, I want boards to take a second, just take a breath and that we’re going to take it step by step and you need to find team members, I should say, like a good accountant, a good attorney and that is the way to start off with the budget because a lot of times people don’t even know where to begin. You just have to say, we’re going to figure this out. Of course we want to be proactive, we want to be able to plan ahead and if you’re going in with the mind that you’re trying to do the best for your community, talk to people and figure things out.
So, the first thing you have to do when you’re looking at a budget is you have got to give yourself some time and you have to say to yourself, what is it that we need to have money for? Do you have vendors of other sorts? You have to cover yourself with insurance. You may have an attorney on retainer. You may have an accountant. Now those are your professionals, but then you have communities that have pools. Maybe your facade building has brick, maybe you have balconies that you have to have to repair, questions that you’re going to have to ask yourself. You might be lucky enough to be in an association where you had a great board before you became a board member and they have great budgets to look at. But you may also be realizing that every year you’re coming short on your assessments to cover everything. Or maybe you’re just getting enough to cover everything but you’re not have enough for your reserves. And that’s really an important topic that I’m going to get into a little deeper today. But right now I think what you should be thinking about is everybody who owns property, it’s usually their biggest asset. If it’s not just their personal asset, it may be an investment and they rent it out. Maybe it’s a city of property. But regardless of what your goal is is to make your property to be the most marketable for someday a potential buyer.
Bernie: And this is where fiduciary duty comes in. I mean, we’re talking about board members, that you’re volunteers and you’re taking the time out of your schedule, the energy to be a part of the board to help contribute to the community. And then on top of that, you’re hopefully working with a good team that’s helping you put together finances, all the planning that’s involved because you’re also working with 5, 10, 200 other fellow neighbors, unit owners where for them, that’s the most valuable asset they have.
Julie: Exactly. And I will say for all our board members, I give them so much credit. It is a thankless job. You’re not getting paid and you’re usually the one people are complaining to and you have to make a decision as a board, where are you going to spend that money? I mean, some people want their parkway trees taken care of when there’s not enough in the budget to cover even sidewalks or whatever it is, every choice is going to be on you and you’re going to feel that
Bernie: High level here Julie, talking about a budget, there’s certain items that have to be included cause like you said, there’s a lot of moving parts here. Every community is unique, every budget is unique. Let’s talk about some of the basics.
Julie: You’re right, Bernie. A budget should always include your reserves expenses and it should have the annual revenue estimated out. You have to be thinking about all of these things and you want to work with the board, the community leaders, property managers to make sure that you’re following your governing documents and follow the state law. Let’s go back to your expenses and what things you need to be thinking about when you’re doing your budget. Utilities generally go up and they fluctuate every year. So that’s something you really kind of keep mindful of. You may have trash, you may have garbage disposal needs, you have maintenance, lawn; building maintenance, you have security for the association, cameras, motion sensors, maybe a card reader, all kinds of things.
Some people have gates and they have gate personnel, the maintenance and operation of the recreational area. You may have pools, a community center, you have got to go through everything, and you want to make sure you have your insurance covered. Do you know your fiduciary? And going back to the team, as you know, you will need your professional management company. They are the ones that are dealing with things day to day. They’re dealing with the landscapers, the vendors, they’re getting your contracts and getting different estimates. Keep in mind how busy they are. You’re going to also have a team member of an accountant. They’re going to know, let’s say you actually have a little bit of profit even though you’re non-for-profit at the end of the year, what are you going to do with that money? Are you going to have to return it to the homeowners? Do you want to roll it into the reserves? There are laws about that. You have to work with your accountant and your lawyer on that.
That’s the other thing. If you get a lawyer, they can make sure that when there is a budget meeting, I should say, they’re going to help you with the timing of the notices. You have to make sure all membership, when I say membership, I mean ownership, that they are aware of the budget. I have to tell you, I am an attorney who’s in court on a daily basis and many of the defenses people can claim when they come in and say they don’t pay their dues is because the board doesn’t properly adopt the budget. They don’t give the right notice, they don’t give the right information and we end up in litigation, very costly and in litigation right now, I have three juries right now going through this process. And we have to go back and make sure the board has done everything according to either the statute or your declaration.
Bernie: The impact of improper planning in a budget. The cause and effect, if you have the timing that you put in, you’re working with your team, you’re taking the time as a board to put together that proper budget, you’re doing it the right way then at least everything is outlined for the membership, for the owners but then obviously in some cases, like you said, there’s the worst case where the cause and effect, if you are starting with a poorly planned budget, things that you see on a day-to-day basis, well then that’s where you see the impact in court.
Julie: Yes, and it’s not an easy court case and it’s going back and unraveling something is a lot harder than doing it well the first time.
Bernie: KSN is committed to educating our clients and the community. As a service to our current and prospective clients, we’ve authored and compiled a number of educational resources for condo, HOA board members, property managers, landlords, and real estate professionals. If you visit ksnlaw.com/education, you’ll be able to review our educational resources, including articles, legal updates, booklets, podcasts, laws and ordinances and more. You can also sign up for the KSN newsletter where over 30,000 peers receive free industry news, legal updates and details on our upcoming events.
All right, Julie, so we started talking about budgets. We really need to get into reserves cause that’s also a part of a healthy community that’s done their work to set up their financial planning. So let’s get into reserves and a few areas that we should look at as far as reserves are concerned for a community association.
Julie: Yes. And I have to tell you, reserves are always a strange one because everybody’s like, what is the legal requirement? How much do I have to put in for reserves? Well, unfortunately there is not a lot of guidance. There isn’t any mandate to say it’s got to be 20% or 30% of your budget and this is one that’s very important for the board to sit down and say what are our needs? What are our long-term needs? So, there’s a couple of schools of thought. Take it for what it’s worth when I’m saying this because I’m not advocating one way or the other, I just want to be very clear and I think it’s always best to talk to your professionals, your property managers, your accountants, and your attorneys and ask them what is your take on it?
So, one of them is to get a reserve study done and basically what that is is that professionals will come out, they will look at your capital expenditures. What is a capital expenditure? Well, those are those big projects, right? Like streets maybe, maybe elevators, maybe it’s you know, depending on your association, everybody’s a little different. But it’s those big things. It’s not your day-to-day stuff, it’s not a light bulb, it’s the bigger things. And what they do is they do a study and they look at everything you have. They see how old it is, what the cost of a repair would be, when they think that item is going to be worn out or needs to be replaced. So those reserve studies are done by engineers. You have to just have reasonable reserves. What is reasonable? Well, look around you. What do you have? Do you have a pool? Do you have a pond or an aerator? Start thinking through all the things that your association takes care of or may have to take care of. Don’t just assume it has to be 10% or 20% or you’re going to have to collect a special assessment. What you really should be doing is looking at your needs, making a list, saying to yourself, okay, is it worth a reserve study at this point or should we figure this out on our own?
Bernie: And I think this is where it always goes back to the fact that every community is unique. They’re going to have their unique issues, unique problems that may come up. So a community that has an elevator will have maintenance for that elevator because they have to go through their own inspection process and you’re going to have people who are licensed that will look at that elevator and will tell you if it’s operating in its best condition compared to an association that doesn’t have an elevator but for example has a pool and like you were saying maybe you have a pool pump malfunction and while you can’t always plan for a catastrophic failure, you are planning for those line items for maintenance, the things that keep the pool running, that keep the elevator running but then that’s where the reserves come in, right? When you do have something that’s unplanned for.
Julie: Exactly. And I will tell you the federal government is going to step in in this year and I’m not sure if anybody’s aware, but down in Miami, that falling to the surf side, because of that new federal guidelines are going to be coming in about structural repair, when things have to be done. So it’s important to have money set aside cause if you don’t do it now, it’s going to come back and get you later either through lawsuits or code violations or fines and now you’re paying money to us for something that we could have had helped you out at the beginning for a little bit and now you’re paying attorneys a lot for something that you could have fixed from the start. That’s really important. I also say, even though it’s not straight on budget talk, I do collections. I’ve been doing collections for 22 years and what I see every day is that we allow, sometimes owners go too long for not paying their dues cause you’re feeling bad or you don’t have a collection policy in place, or you’re not even sure where to begin and then you’re behind the eight ball and then you’re working in the red.
What you need to do is get on top of your collections, make sure homeowners are paying you month to month. If they’re not, what should you be doing about it? You should know what the law is, what you’re allowed to do and I have to tell you you have to, as a board, be proactive. That’s very important.
Bernie: And I think that goes back to something we said right at the beginning. Generally a budget is the association’s estimated annual revenue, the expenses and the reserve fund contributions. So, we’ve talked about reserves, expenses and in talking about collection, that again, is not a subject that a lot of board members and property managers may want to talk about, but that’s what can contribute to a community that’s not healthy.
Julie: Exactly. When people go to buy a home, there are some mortgage companies and different loan applicants. They need to see the finances of the entire association and if there’s too many people in collections, that buyer may not get a loan. And let’s just say you’re going to buy a place and two communities are similar, but one of them has financially, legally healthy and the other one has tons of collections or they’re not keeping up their amenities the proper way or they don’t have the reserves, what is going to be a more favorable place to move into? What’s going to have a bigger property value? You’re going to want to live in that neighborhood that has everything put together and that’s really important.
Bernie: That was KSN attorney Julie Jacobson. Julie Practices condominium, townhome and homeowner association law and has handled a significant number of collection matters, evictions, landlord tenant disputes. KSN is an experienced legal resource ready to provide you with quality advice and exceptional service. We look forward to demonstrating how we’ve earned the trust of thousands of clients over the past 40 years. If you’d like to reach Julie or any of KSN’s experience attorneys, please call 855-537-0500. You can also visit ksnlaw.com and complete the contact form to send us a message. Thanks for listening.
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Please note the material contained on the KSN Podcast is for informational purposes only and does not constitute legal advice. No attorney-client relationship is established by your review or receipt of the information contained on the KSN Podcast. You should not act on the information discussed on the KSN Podcast without first obtaining legal advice from an attorney duly licensed to practice law in your State. While KSN has made every effort to include up-to-date information on The KSN podcast, the law can change quickly. Accordingly, please understand that information discussed on the podcast may not yet reflect the most recent legal developments. Material is not guaranteed to be correct, complete, or up to date. KSN reserves the right to revise or update the information and statements of law discussed on the podcast at any time, without notice, and disclaims any liability for your use of information or statements of law discussed on the podcast, or the performance of the podcast generally. The KSN Podcast may be considered advertising in some jurisdictions under applicable law/s and/or ethical rules/regulations. © 2023 Kovitz Shifrin Nesbit, A Professional Corporation.