Thursday, August 9, 2012

Assessments, Budgets, Money: The Heart of Any Association


In case you need a reminder, the center of any association's business is based in money: the dollars owners pay as assessments into accounts dedicated to the maintenance, preservation and protection of the real estate assets owned in common. (Other monies are also key: settlement awards, judgements and so forth.)

Finances are one of the first criteria that any association-savvy buyer will inspect, before buying into an association. Any failure to account for monies spent, plan for predictable expenses, or follow the law is a red flag to this kind of buyer. Potential buyers are entitled to review the past three years' financials for any association.

In our meeting invitation, we promised to cover the subjects below. We learned from several related conversations during the session, but here are the highlights for the topics promised.


Best practices dictate that a budget plan be prepared in reverse of these steps, starting at the end date, which tops the list below. Then work backwards through your calendar to determine these dates:

  • For some, produce assessment coupons. Work with your association manager to ascertain how long this process takes, which is usually three to four weeks.
  • Hold the Budget Ratification Meeting
  • Give proper notice for the Budget Ratification Meeting according to your governing documents
  • Finalize the budget, based on input from the association's long-term strategic plan
  • Hold the board meeting to give the board an open forum for discussion of final line item budget numbers
  • Give proper notice for the budget discussion board meeting
  • Hold the board meeting to give owners an open forum for discussion of line items
  • Give proper notice for the owners' budget discussion board meeting
  • Build the model for the planned expenditures given vendor research for next year's costs, owner  values' input, and review of the association's longer-term strategic plan
  • Gather next year's increases from vendors; price new vendors
  • Survey owners to confirm satisfaction with preservation, security, maintenance, and 'look-and-feel' of the property 
  • Inspect this year's invoices to identify vendor costs
  • Develop a matrix of line item expenses across budget period planning window (12 months).
If your fiscal year ends in December, you can begin the budget process anytime, but July and August are the months when you can begin in order to avoid any 'crunch' or excess of volunteer work required to complete the budget process on time. This makes budgeting about a half-year process.

NB: If no budget work is performed, the next fiscal year's budget will continue forward based on the current year's budget, which is also true when owners fail to ratify a proposed budget.


Expenses drive association budgets/ assessments. This means that the board must be aware of both practical and legal requirements necessary to operate the association according to the owners' expectations, and the law.

If the strategic plan anticipates that this is the year for 'the rental cap' amendment, the 'collection resolution', the major preventative maintenance project, and so forth, its expense falls into this budget.

Current expenses may expose or verify strategic plan timing. For example, if more than 10% of the units are rented, it may be time for the rental cap amendment, especially if the association expects to qualify for FHA or other common funding sources for unit sales.


The Finance Committee is generally a standing committee, described in your governing documents. Every effective board enables this committee, and delegates tasks to it. Owners interested in how assessments are established and spent can participate. Your governing documents explain committees and how they operate within the realm of board work.

For example, when the committee reviews invoices, the committee can spot mis-categorized charges, inappropriate charges, and unexpected charges that should not be paid. 

NB: Crawling through invoices for every association regularly is a board obligation. Without this task,  the board can fail to earn a trustworthy rating from owners.

A competent committee meets as frequently as monthly, reviews the association's finances and discusses expenditures as indicators of the association's financial health. The committee may make recommendations to the board for actions to be taken, based on financial indicators.


Often, when you contact a vendor in summer and ask about next year's increases, you'll catch the vendor off-guard. If you cannot tease an answer from a vendor, you can estimate the increase based on last year's increase, a new series of tasks for the vendor, for which the vendor will give you a new quote, or chose an arbitrary number, such as five percent.

Maintaining contact with the vendor to glean the new rates, up to the date of the board vote is wise, given that predictable budget numbers are more realistic than SWAG estimates.


As a past association president, I can tell you that getting the call from the manager asking whether to pay the master policy premium or the water bill is an uncomfortable position. Cutting a budget 'to the bone' makes unrealistic assumptions including that every owner will pay their assessment on time and in full, and that expenses will never exceed their budgets.

Commonly, new condominiums are sold requiring that two-months' worth of assessments be paid at closing, to afford the association a reasonable float. Best practices for cash flow management dictate that a float amount be present in the operating account, so that the association can pay all its bills as they are due. A review of past years' cash flow requirements may dictate a float percentage to include in the budget.

In addition, there are owners who do not pay assessments, and over time, this income must be 'written off' the books, because it will not be collected. Bad debt write-offs are always difficult to predict. One strategy is to review past years' late payments or non-payments and include an average of this amount in a line item titled 'bad debt'.

Either of these amounts -- float or bad debt -- can be considered 'sugar jar' funds: you've got them even if you don't need them.


Amounts that you carry over from the end of one fiscal year to another can appear as such in your budget.

The worst idea is that the board refund unspent assessments. This sets up unreasonable expectations for future years, since refunding assessments, and generally lowering assessments, is rarely wise.

NB: Be aware that a negative carry-over from the past year should dictate an informed and positive budget for the next year, so that negative carry-over doesn't continue year-to-year.


Washington State Legislators discussed association reserve studies for several years, and enacted a law requiring associations to budget for a Reserve Study beginning with the 2013 budget. Savvy boards budgeted for reserve studies in their 2012 budgets, where possible, so that the 2013 budget could reflect up-to-date reserve contributions.

You can read this legal opinion about the effect of the new Reserve Study Law, as it affects reserve study/ reserves funding reporting for associations formed after July 1, 1991 (new act condominiums) and Home Owners Associations, and discusses the content of any Reserve Study.

Here are a few comments about Reserve Studies:

  • A Reserve Study affords an association a means for saving up monies for major asset repair or replacement, which avoids owner-sinking special assessments often required without them. It follows the notion of 'pay as you go' use of real estate assets. 
  • Owners and boards that resist this common sense task, desiring to 'push off' this requirement to new owners/ boards, demonstrate a certain lack in common sense thinking, because assessments in future will be higher overall, and potential buyers will cross units off their lists which belong to associations that demonstrate the lack of a current Reserve Study and/or underfunded reserves.
  • Owners and potential buyers are interested in their personal financial requirements for the next five years, which can be documented -- okay, as estimates: sound, solid estimates -- by a Reserve Study. 
  • Reserve Study vendors can also prepare annual Preventative Maintenance Plans based on details established in the Reserve Study. This strategy is one of the most effective for boards so that they can preserve and maintain real estate assets, which are board charters under state law.


One suggestion is to use a digital, commercial spreadsheet software product, such as Google Docs, Spreadsheets, or Microsoft© Excel© to develop the budget model.

It's simple to architect the digital spreadsheet with a top, summary page, and with separate tabs for Landscape, Utilities, Professional Services, Preventative Maintenance, Reserves Funding, and Miscellaneous categories. Then you can list the detailed line items, accordingly, in the left column, and add the months across the top in a row.

The top sheet summarizes each major category and contains the income line item, which represents total monthly assessments.

You can connect cells from the tab sheets to the top sheet, so that your model can be exercised, adjusted and modified as you proceed through the several iterations of gathering data from vendors, and finalizing approvals from owners, board members, and association manager.

Finally, you can produce a graph -- a pie chart works -- of the budget categories, for presentation to owners. One suggestion included listing all expenses by unit, starting with the highest expense, and explaining the total amount by category and purpose, by month. An entry in this list, for example, read "$26.51 pays our Master Insurance Policy premium."


When possible, in September -- four months before the Budget Ratification Meeting, add an agenda item to a board meeting to discuss next year's budget. You can present what you've learned from vendors and lead an open discussion with owners about the overall state of the property. Because the board has developed a long-term strategy for the community, you can discuss items such as next year's painting project, changing landscape vendors, increasing the community charity contribution, projects that didn't take place this year, put off until next year, and so forth. 

The goal in this presentation is to verify and ascertain the values of owners relative to the community's reputation, its 'look and feel' and so forth. This may also be a good time to discuss security, parking, pets and other community-centric values.

In this draft budget, you can include expenses to cover all the items you discuss, so that owners can help prioritize what to pay for next year, and what to include in this budget. 

Often, this is the best chance for an open dialog with owners about the 'state of the community', since it involves values and how to pay for them.


Your CC&Rs specify that a budget for common expenses be prepared and ratified by owners each year.  Too many condominium owners, -- whether they be 'apathetic' about their ownership:  they pay their assessments, live their lives and expect that 'everything will be okay'; or 'ignorant' of assessments, their purpose and genesis -- don't understand the budget process.

Explaining the process to owners is vital in engaging owners in it. Budget ratification by pro-active non-ratification by owners -- see your CC&Rs -- may appear backward. But, this style of budget ratification gives boards the funds required to complete their legally-mandated tasks, regardless of owner resistance, unless such resistance is the majority specified in your CC&Rs.

You may want to include this education in your draft budget meeting with owners.

NB: Associations which hold Annual Meetings that contain Budget Ratification can confuse themselves and owners. Here's why. Agenda items at Annual Meetings requiring a membership vote can be voted by proxy, except Budget Ratification, which cannot be voted by proxy.


Owners who are not willing to approve -- ratify -- any budget, must appear at the Budget Ratification Meeting in person and cast a negative vote. The majority of owners required in the CC&Rs must appear in person and vote similarly in order to defeat a proposed budget.

NB: Commonly, this is 51% of owners, but your CC&R percentage may be different.


Some owners believe that if they don't agree with a board, a board action, or otherwise wish to protest, simply do not pay their assessments. This is not a smart position for any owner to take. Why?

Your governing documents -- which you agreed to when you purchased your property -- specify that your clear title is involved in your requirement to pay your assessments. You may also be personally liable for them. 

When you don't pay your assessments, your association can pass your obligation along to a collection agency, or an attorney, to file a lien on your title. When it takes this step, you are also obliged to pay fees and expenses of collection. As a final and drastic step, the association can sell your property in order to satisfy the debt that you legally owe.


Since money is at the heart of every association, engaging and educating owners as to the expenses of ownership, demonstrating trustworthy and thoughtful work in developing budgets, and taking the most care in spending association funds is one of the best ways to keep association members generally calm, content and happy with their common interest community ownership.

Transparency regarding money can represent the integrity required of boards, as they exude their power over multi-million dollar associations.

Violating money matters offends all owners, and a few may take issue with these violations. Mis-use and abuse of OPM -- other people's money -- can become a criminal matter. 

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