What Do I Need to Know about Budgeting for Community Expenses?

What Do I Need to Know about Budgeting for Community Expenses?

It’s that time of year… budget season has begun.  The budget is one of the most important documents and tasks within a common interest community.  It is the basis for assessments and creates the foundation for an association’s fiscal health.  Your community cannot function without it.  There are statutory requirements (North Carolina § 47F-3-103(c)), as well as requirements and restrictions in the governing documents.  Every common interest community should have two budgets: A Reserve Budget and an Operating Budget.

The Reserve Budget is the financial plan to repair, replace, restore or maintain items that are generally done less frequently than annually.  It is a savings plan to ensure the community has enough money to pay for required projects without resorting to a special assessment or loan.  Not only is it highly recommended, but required in many states, to conduct a reserve study at least every three to five years.  The Reserve Budget is a product of your reserve study, which will recommend the funding plan.  The Board of Directors must determine the funding goal, whether the reserves will be fully funded (100% of the recommended amount from the reserve study), baseline funded (funded just enough to stay above $0 – if every component lasts as long as planned), or threshold funded (a specific amount somewhere between baseline and fully funded).

The Operating Budget is the financial plan to run the community on a day-to-day basis and includes items that are to be maintained at least annually.  This includes management, landscaping, electricity, water, insurance, and other regular expenses.

The first step in budgeting is to check your governing documents (Declaration, Bylaws, Board Resolutions). What is required for the association to maintain? How much can the assessments increase without a vote of the membership?  Board members should also consider what level of service the homeowners expect.

The second step is to determine your expenses for the year.  There are two ways to look at each line item: Historical Trend or Zero Line.  Historical Trend budgeting examines the last several years’ budgets and actual expenses and determines the expense for the following year based on the trend over that time period.  Zero Line determines line items based on actual calculations predicting expectations, or simply going out to bid.  Every year, the Board should Zero Line at least one line item in their budget.  If the water expense has been going up every year, Zero Line can help determine if the reason is due to price increases, or a leaking irrigation line.

Don’t forget to budget for doubtful accounts and a contingency.  Doubtful accounts, those who are seriously delinquent, can’t be counted on to pay their assessments in the coming year.  You don’t want to budget for that income knowing the money will never come in.  How will you pay the bills at the end of the year if the income has not met expectations?  Remember, too, that there are always contingencies.  Set a contingency account line item in your expenses at your insurance deductible.  On a property policy, if someone crashes into the entry monument but doesn’t have insurance, you can use this money to either cover the deductible or pay for the repairs if less than the deductible.  Unexpected expenses won’t break the bank.

Once you have your expected expenses for the year, add them up, add your reserve contribution, add your allowance for doubtful accounts, and divide this number by the total number of units, or the formula required in your governing documents if units are assessed differently.  This should be your annual assessment amount.

A few more hints:

  • Never budget for income from fines or late fees. It will give the impression that you are charging fees just to make a quota.
  • Never budget based on what you want your assessments to be. Expenses will be what they will be, and underbudgeting will just get your association further behind.
  • Never lower assessments. If you indeed have overfunded your reserves (per a reserve study) and have a surplus (more than 2-3 months operating expenses) in your operating account, you can give your homeowners a month or two credit.  Lowering assessments makes it much more difficult if you have to increase them later due to an emergency.

A well-funded association will allow you to accomplish what you need to properly run your association.  A good budget will ensure you will be able to satisfy your fiduciary duty to maintain and enhance the property values in your community.

About Henderson Properties
Henderson Properties is a full‐service real estate company founded in 1990 by Philip and Shelly Henderson in Charlotte. The company provides services to real estate investors, homeowners, tenants and community associations in the areas of rental property management, leasing, community association management, property maintenance and home sales.

Henderson Properties has been dedicated to providing professional community association management in the Charlotte metropolitan area since 1990. The highly trained staff at Henderson Properties provides comprehensive association management services for single-family, townhome, and condominium communities such as Bradfield Farms and Cameron Wood. The company’s community association managers work closely with HOA boards to communicate timely and accurate information and provide the highest level of service possible. For more information, please email HOA@hendersonproperties.com.

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