Category Archives: Budgeting

Budget Bonus!

Thanks to some excellent interchanges with Robert Nordland, PE, RS, founder of Association Reserves as we were rolling out the Building the Budget series, we decided to create a budget template In Excel for anyone to use.  CLICK HERE to get to the Helpful Links page at www.associationbridge.com and click on “Budget Template here!” to download the file.    

Excel is a useful format for budgeting.  It provides flexibility in formatting, line items, and data.  When the formulas are set up for you (like they are in the template), it can also help to maintain some of the disciplines we discussed in the blog series.  For instance, the “Proposed” column in the comparative worksheet is set to maintain a balanced budget. The fee income line item will automatically change anytime you change an expense or other income line item.  This helps you to maintain discipline and resist the urge to fee target.

Use What You Need, Chuck the Rest

The template may include more than you need.  It is a workbook of two linked worksheets.  Don’t worry if you are not an Excel whiz.  If you don’t want to use the narrative worksheets, don’t use it.  The comparative worksheet can stand on its own in conjunction with any narrative or other supporting materials you already use. 

If a line item or expense category doesn’t apply to your association, leave it at zero or delete the row(s).  If you do delete or add rows, just make sure you adjust the formulas in the subtotals or totals as needed.

How to Use the Template & Write Your Budget, Step by Step

1. Preparation – A Few Tips

  • Gather everything you need in advance. This may include the latest adopted budget and narrative/line item explanations, contracts, proposals, most recent financial statements, most recent audit, reserve study, utility usage information, and wage and benefit information.
  • This is a good time to collaborate with those who serve the association. Think through and discuss potential projects for the next year with your business partners and professional service providers to get realistic data to plug in.
  • Try to schedule uninterrupted time blocks to complete the work.

2. Populate The Comparative Worksheet

  • Take your financial statements and edit line items in the template to match the format of your financials. We’ve included some typical line items and spaces to add others.  All the total and subtotal cells have formulas plugged in for you already.  Hint: Don’t plug data into the cells shaded in yellow – that’s where formulas have been plugged in for you.  If you add or delete categories or line items, you may need to edit the formulas in the affected totals and subtotal cells. It may take a little while to set up, but it makes everything easier when you start plugging in the data.  We’ve even created a column where you can also include general ledger numbers for each line item if you like.
  • 2019 Adopted Budget Column: Plug in the data from the budget.
  • Audit Column(s): Plug in the data from your last audit or audits if you choose to include multiple years. Hint: The audit may not have all the line item detail included in your financial statements.  If that’s the case, get the Adjusted Trial Balance from the auditors. That will have all the line items.
  • Year-to-Date Column: Plug in the data form your financial statements.
  • Projected Column: Take the year to date figure and add what you think will happen for the rest of the year.
  • Woo hoo! You just helped to take a snapshot of the past and present.  This will help you budget for the future.
  • If you are NOT using the narrative worksheet, populate the Proposed Column, taking into consideration the historical information and all current information. We strongly recommend the use of a detailed narrative, but you don’t have to use the template.  If you would like to use it, go to Step 3.

3. Populate the Narrative

  • Format the line items and categories to match the comparative worksheet.
  • Time for brain work. Describe each line item as best you can. The worksheet includes some samples you can use if you wish, including a calculation of the percentage fee increase.
  • Review the description and the history for the line item shown in the comparative worksheet, and input a dollar figure considering everything you know. Hint: The narrative line item values are already linked to the comparative worksheet. If you plug values in here, the Proposed column on the comparative worksheet will populate automatically.
  • The template includes space for calculations you can plug in to make sure you are calculating things like contract escalations correctly. You can just cut and paste the sample provided into as many line items as makes sense.

4. Supplementary Worksheets: In some cases, supplementary worksheets can be very useful.

5. Take a Step Back: Take a break, and take a look at the draft with fresh eyes.  Edit as needed.

6. Roll It Out: Presentation and communications will be important from here on out. A few tips for doing so are available here.

7. Final Tip: Once the budget is adopted one of the last steps will be completing the 12-month spread that will find its way into next years; monthly financials statements. Make sure the spread is in line with the plan described in the budget.  If you’ve done a solid job writing your narrative, calling out notable expenses and detailing contract escalations, this will be easy.

Congratulations! You are now a certified budgeteer!  Welcome to the club and best wishes for a successful budget season.

Building the Association Budget: Fundamentals, Hard Work & Guts – Part 5 (Avoiding Common Pitfalls & Achieving Awesomeness)

Part 1 of this series established the real goal of the association budgeting process. Part 2 presented a method of budgeting to learn from the past, see the present clearly, and plan for the future. The third piece got into the nitty-gritty, outlining the components of a budget. A common theme began to emerge. Budgeting requires discipline, and sometimes some courage. Having guts was a highlight of part 4 , where we presented strategies for communicating the results of the process, especially when sharing a difficult message. In this final segment, we identify the pitfalls we’ve seen managers, boards, and communities fall into and how to avoid them. Of course, we can’t close out without some final encouragement.

Avoiding Common Pitfalls

  1. Communication Gaps: Never present a draft without a cover memo. Anytime a draft is changed, memorialize those changes and explain them, whether directed by a committee or board. Memories get short. Valuable history can be lost. Managers and boards get unfairly blamed for leaving things out of budgets years later. Allow the documents to refresh memories and tell the story.
  2. Time Blocking: Drafting a budget is a great example of a task requiring sustained focus. Gather all supporting materials in advance and have them at the ready. Try to carve out blocks of uninterrupted time to the extent possible. According to some productivity studies, you can lose up to 50% productivity every time you put a project down and have to pick it up again later. This is not a time to attempt to multitask. It’s Time Management 101.
  3. Fee Targeting: One of the gravest sins in budgeting. If the board or management comes into the process predisposed to a meet specific result (such as no or minimal fee increase), results are inevitably skewed. The values in expense line items must not be artificial. They represent real activity and have real consequence. Lowering an expense line item unrealistically may get the condo or HOA fee where you want it, but it is likely to cause an operating deficit. Keep it real!
  4. Disconnection With Long Range Planning: All too often, the contribution to reserves is a number picked to help the budget meet a fee target at the end of a budget process. This is a blueprint for major problems. Interestingly, the Virginia legislature continues to modify the POA and Condominium Acts in attempts to require boards to maintain this discipline to some extent. We expect other states to follow as more citizens living in community associations suffer from special assessments and significant fee increases because of deferred maintenance and poor budgeting discipline. Careful consideration of current and future capital projects and a realistic funding plan to have the money available when needed are crucial. Including capital projects in the budget, along with a corresponding transfer from reserves- so that these expenses do not impact fees- helps establish and maintain a pattern of discipline in long-range planning. If your budget format does not allow for capital projects to be included in the annual budget, create a separate schedule and include it in the package.
  5. Failure to Plan for Contingencies: Murphy’s Law reigns supreme – it pays to plan for the unexpected. This can be accomplished in two primary ways: an operating contingency line item, or an operating reserve contribution line item. The former raises fees to be maintained in the operating account until needed. The latter creates a plan to transfer a specific amount to a reserve fund each month for safekeeping until needed. It is generally recommended that associations maintain between 10% and 20% in unrestricted funds (i.e. not included in the replacement reserve account). Since associations are not-for-profit organizations, they do not budget for surpluses. That means there are only two options to build up contingency funds: hope the condo fairy comes by and whacks you on the head with her wand, or budget for contingencies. The latter seems more prudent.
  6. Failure to Recognize & Address Reality: Chronically underfunded associations tend to exhibit the same characteristics – they budget too optimistically without consideration of the actual condition of the property and financial history. This is part of the value of the comparative spreadsheet. The end result is recurring budgeting errors, a vicious cycle of deferred maintenance, operating deficits, and underfunded reserves. Inspecting the property prior to the beginning of the budget process will help to avoid costly mistakes. Interestingly, we’ve noticed that associations that show only one or two columns in their comparative budgets and/or have no narrative to explain line items are very prone to chronic under budgeting.
  7. Failure to Allow Include All Possible Options in the First Draft: Rather than force an artificial result by fee targeting on the first draft, it is much better to allow the first draft of the budget to be a “kitchen sink,” worst-case scenario version, packed with every contingency and idea that may have come up in the course of the year. This allows honest dialogue geared towards establishing priorities and making value decisions as the budget is pared down in a systematic, logical, and realistic way. In the end, there will be a real plan that just might work!
  8. Failure to Help Owners Understand the Correlation Between the Budget and Their Fees: People love getting something for nothing. Don’t assume owners understand that the budget defines the services the association can afford. A little education can go a long way in building buy-in.
  9. Failure to Separate Emotional Factors from the Business Decision (a.k.a. Making the Numbers Real): Many owners may intuitively feel they cannot afford a fee increase in any amount. It is sometimes helpful to break down the facts into numbers that are meaningful, such as dollars per month per home. A 5% increase sounds astronomical, but if a condo fee is $300 per month, that’s $15 per month – roughly the cost of 3 Starbucks lattes. If a 5% increase helps avoid a special assessment in the future, is it worth 3 lattes per month?
  10. Accepting Reserve Study Estimates Without Careful Consideration: The reserve study is an essential tool to help the Association plan for capital expenses. But that’s just the beginning. The board and management need to make sure there is a real plan in place. 

Guts

A word about leadership and courage here – sometimes the result of due diligence is bad news.   As tends to be the case with mature communities that have been chronically underfunded, sooner or later the piper will demand to be paid. Significant fee increases and special assessments are not happy news, and it takes a measure of courage to speak the truth to those who do not want to hear it, especially in difficult economic times. The argument will be made that people can’t afford the additional burden, that’s it’s not fair for current members to pay for the sins of their predecessors, and that resale values will plummet if fees are too high. Leadership and management must be prepared to communicate reality. While fees have an impact on resale values, you can bet that a property in disrepair affects values significantly. Poor curb appeal affects more than just values, it affects salability. At the end of the day, it’s the Board’s fiduciary responsibility per the association’s governing documents to do what it has to do to maintain the property. Biting the bullet at some point is sometimes painful, but necessary. Hopefully, the association will learn from history well enough to plan better going forward and avoid having to make up for the mistakes of the past.

A Time Investment

Yes – careful budgeting is a lot of work. But it’s well worth it when you consider the benefits. Stick to the fundamentals and follow the disciplines practiced by successful community associations. Everyone will win in the end. Don’t miss the opportunity to make a difference. This is the reward of leadership. You can do this!

Building the Association Budget: Fundamentals, Hard Work & Guts – Part 4 (Communicating the Results…Especially the Hard News)

You’ve done the hard work. The budget’s built. The plan is solid. Now it’s time to roll it out. You may be delivering the first draft to a Budget & Finance Committee or the Board. If you are in a state that requires the proposed budget to be sent to homeowners in advance of adoption, or are blessed with governing documents mandating owner approval of the budget, there will be a second roll out. This can be where your mettle is tested. The bigger the fee increase, the higher the level of anxiety. This segment gives you tools to help.

Even if state statute does not require advance delivery of the proposed budget to membership it’s not a bad idea. Members have the opportunity to have real input, and the Board has the opportunity to listen. Sometimes good ideas come out of the exercise. Even in a worst-case scenario where some members may be unhappy with the news, empowered anxiety is better than alienated, hopeless frustration. It’s ALWAYS a good idea to be as transparent as possible.

The Big Roll Out – First Draft

The budget process should be a means by which communities set priorities. It’s an opportunity to imagine possibilities and a platform to make informed business decisions. Yet many associations short-circuit the process in the very first draft, usually out of fear. If the writers of the budget are constrained by an artificially-imposed limit (“we can’t afford anything above an x% increase” is a familiar refrain), the result will be less than optimal. Worse, a manager could use the budget to curry favor by playing the hero, even if it makes no sense. (Theoretically…I know YOU’D never play that game). Be skeptical of anyone who says “I’ve got great news – there will be no fee increase!” It MIGHT be true (see “Guts, Part One”).

Boards that don’t do their due diligence or that do not provide a space for professional managers to share difficult news may be setting themselves up for poor service.  Boards can blame management all they want for faulty budgeting, but they are ultimately responsible for the end result. Burying one’s head in the sand is a questionable strategy in the short term. In the long run, it becomes deadly when the tsunami strikes. Questioning and challenging assumptions doesn’t have to be a challenge to a manager’s professionalism. Done correctly, it’s a sign of an engaged Board (or Committee) and a healthy relationship. No one is perfect, and Committee and Board input results in a better quality product.

One of the best ways to avoid the trap of fee targeting is to treat the first draft a “kitchen sink” version. Include all worst case scenarios, contingencies, and even the wild ideas that might have come up over the course of the past year. This is the time to throw it out there.

A well thought out and well written cover memo is crucial. If the first draft results in a fee increase, the memo outlines the factors that contribute to the increase, preferably in order of impact. Your outstanding narrative already gives the details for each line item. The cover memo helps to put them into context and allows the group to see the impact of each possible expense. It makes it easier to prioritize. Non-priorities will disappear in draft #2. The cover memo is also an opportunity to explain any new line items or features of the draft, whether or not they impact fees.

Let the Data Speak & Make It Real

If you’ve done the hard work and woven it into the budget document, you’ll save time in budget meetings. When questions arise, you’ll be able to direct attention to the appropriate place in the document to answer most inquiries. There will always be a level of discretion in decisions on many line items. Opinions will matter. But if the data in the budget is thorough and accurate, it will help to drive the discussion. Get out of Opinionworld as fast as possible.

It’s hard to wrap your brain around large numbers. Breaking the number down is a great way to help a group decide if a particular expense is worth considering. Do the math. What is the cost per unit per month? The answer to “Is it worth the cost of a Starbucks coffee per week to beautify the front of the property?” provides way more context than “Should we spend another $2,500 on flowers?” Get out of Theoryworld as fast as possible.

What if the News is Really Scary?

Some associations are behind the proverbial 8-Ball. Like the community mentioned in the first segment in this series, the tsunami is upon them and they are facing some really tough choices. They may be in the unenviable position of playing catch up. They must create an action plan to address years of deferred maintenance and figure out how to pay for it. For the plan to be successful, the process must be communicated effectively to community members. This can be a source of considerable angst for board members and managers alike. It’s no time to wimp out on the disciplines and strategies already shared this and the first three segments in this series.

Here are a few successful strategies and perspectives employed by community association that have successfully dug out of the hole.

  • Collect the Data: Get hard data from professionals as needed. Engineers, architects, lawyers, reserve analysts, and others have no dog in the fight. They are paid to advocate for the association. Work with those familiar with community associations who can communicate effectively with the board and community members.
  • Share The News Like Voting in Chicago: Communicate early and often. When the data starts to roll in, share it, preferably well in advance of the budget process. Plan for town hall informational meetings. Plan for extra budget meetings before adoption. Share recaps of those meetings so that any who couldn’t attend get the information. Members likely have diverse backgrounds. Some may find it difficult to understand some of the information. Be patient and persistent. And don’t get angry when someone stands up at the last meeting and claims no one ever informed them about any of this. It happens.
  • Assemble the Team: This can be an excellent opportunity to form an ad hoc committee. Expanding the board’s knowledge and talent base helps to address trust issues. Got detractors? Bring ‘em in the fold. Use the talents of the professionals who have provided the data that is driving the discussion. Have the committee volunteers and professionals play a part in presenting information at the town hall and other meetings.
  • Show All Options: Lay out every possible option to the members, even those that the board or committee thinks are non-starters. There are three benefits to this; (1) a free flow of options may spur an innovative solution, (2) there is a good chance an uniformed member will claim the exercise is flawed because an option wasn’t considered, and (3) it allows the membership to be a part of the decision-making process and conclude for themselves some options are better than others. Buy-in is huge in these circumstances.
  • There Ain’t No “Them”: The volunteers are going to have to pay, same as all their neighbors. A thorough, inclusive, and transparent process helps to break down the tendency for members to hold on to an artificial and damaging Us vs. Them mindset.
  • It’s Not Personal: Managers and volunteers put themselves at risk of suffering personal attacks. It’s home. It’s money. So it IS personal to the members including volunteer leaders. But the process is not. It’s business. The strategies outlined above will help to mitigate distrust and anger, but for some it might not do the trick. If you’ve done everything you can, it’s good enough. It’s not on you unless you allow it. Never let negative people rent space in your mind (see Lesson #3 here).

And, Finally…

We’ve covered a lot of ground in the first four segments of this series! In the last one, we’ll share common budgeting goofs and how to avoid them.

Building the Association Budget: Fundamentals, Hard Work & Guts – Part 3 (Components of a Great Budget)

We’ve established the purpose of a community association budget. We’ve learned the benefits of applying sound methodology  Now we are ready to dive into the nitty gritty.

Budget formats can vary significantly. Their contents depend on the complexity of the property. A 300-unit condominium association with a central HVAC plant and staff will have a more intense budget than a 30-home HOA. But the best budgets tend to have a few things in common, regardless of their scope and complexity.

How Do We Get There from Here? Essential Budget Components

There are two basic components that can help support the budgeting disciplines outlined in the first two parts of this series.

First, a comparative spreadsheet helps to see patterns and context. At a minimum, it includes columns for:
• next year’s proposed budget
• current year’s adopted budget
• projected current year-end results
• last year’s audit results

To gain longer range perspective, prior year budget and audit figures can be added. For smaller communities that may not engage an independent auditor each year, unaudited figures are better than nothing. The goal is to see the reality of past performance in order to help plan for the future. To provide context for the current year’s projected column, a year-to-date column may be helpful.

The next component requires the most work. It is also essential to understanding what’s behind the cold, hard numbers in the budget. A detailed narrative, in which each line item and the assumptions behind them are expressed in detail, can make a huge difference. The process of creating, reviewing and editing the narrative is where each line item is challenged. Exactly what is included in “miscellaneous administrative” or “landscaping non-contract?” How was the total annual figure calculated? Memorialize it. If “meeting expense” includes recording secretarial services at $175 per meeting times 12 meetings, plus an allowance for light refreshments at the annual meeting of $300 and room rental for the annual meeting at $250, put it in writing. Include contract details. If the terms of a two-year janitorial service contract include a $2,000 per month fee with an escalation of 1.5% at the May anniversary, show the math: ($2,000/mo. x 4 mos.) + ($2,000/mo. x 8 mos. x 1.015 increase) = $24,240. It’s kind of like 3rd grade arithmetic – show your work!

Other Useful Components

Line items that require significant funding can be carefully budgeted and communicated by supplemental worksheets. A high rise with large utility usage can benefit from the compilation of utility logs. Several years of utility use can provide valuable data to make the 12-month spread more accurate, track energy conservation efforts, and mitigate some of the guesswork involved in developing the budget. If the association is in a locality where it can buy natural gas and electricity on the futures market in bulk, the gross rate can be very accurately estimated. (Accurate usage) x (accurate rate) + contingency for unusually hot or cold weather will result in a nice, tight budget.

Associations with large staff may benefit from a detailed personnel worksheet to capture the potential cost of coverage for full-timers while on leave, allowance for pay increases, overtime, and state and federal unemployment tax costs. The methodology used by health insurers in determining premiums can also create budgeting headaches. A detailed worksheet can help in estimating costs.

A statement of capital expense cash flow and reserve contributions can help demystify the calculation for replacement reserve contributions. We will cover this in greater detail in Part 4 of this series.

Finally, some people are visual learners. If charts and graphs help community members to grasp the data in the budget, use them.

It’s Good for You…and Everybody Else

There are many benefits to fully utilizing these components. The discipline to analyze and prioritize wants, needs, and realities with the financial plan is maintained. There will be a clear understanding of the plan for the upcoming year. And the final document helps to ensure continuity from year to year in the event of volunteer or management turnover. These two components, if well-crafted, show the results of the combined trend and zero-based approach and give community members confidence in the plan, their leadership, and their management. The transparency built into the discipline builds trust. And trust is everything. 

Next…

In the next segment, we will offer tips for communities facing the challenge of change. There are additional components that can be included in the budget package. Additionally, leaders and managers of communities facing challenges can be filled with anxiety. We will share communication strategies to help.

Building the Association Budget: Fundamentals, Hard Work & Guts – Part 2 (The Method)

In the first blog in this series, we covered the basics. A focal point of that piece was clarifying the real goal of a budget. It’s worth repeating:

The purpose of the budget is to create a reasonable plan to finance the operation of a community association in accordance with the realities of property condition and in accordance with the vision and values of the community.

Focusing on the purpose helps stakeholders gain clarity and provides context. It also gives them some tools to make tough decisions when needed.

The Past, the Present & the Future

The inability to predict the future is a common human weakness. We really stink at it. And yet, predicting the future is what budgeting is all about. While, we will never get it exactly right, we can hedge our bets with sound methodology.

This methodology will also help to avoid other all too human foibles. Ignoring the past is always a fantastic way to ensure disaster. Seeing past our biases to recognize current realities can also be a challenge.

Trend or Zero-Based?  Both!

There are two basic budgeting methods – “trend” and “zero-based.” Trend budgeting uses the current year’s budget as a baseline and assumes an incremental increase each year thereafter. For example, if the landscape non-contract line item is $10,000 and the annual inflation assumption is 2%, the budget for the following year will be $10,200. Frequently, the same multiplier applies to all line items. There may be some variations from line item to line item in the actual expenses during the year. However, the hope is that the overall bottom line will come out about right. Do communities apply the same percentage to all line items?

Zero-based budgeting is far more robust. It is commonly utilized when drafting a budget for a community that has not been built yet. Those writing these budgets use all available information about the planned project. They attempt to visualize what it will take to operate the property when built. Finally, they proof each operating line item for accuracy against similar properties and industry knowledge.   The reserve contribution line item is calculated by creating a reserve schedule, compiled using RS Means data and construction figures provided by the developer.

The best budgets for existing community associations use elements of both methods. Every single line item should be scrutinized and challenged with a fresh set of eyes each year. The analysis may result in some cost savings, or it may result in creating new line items to reflect expenses not previously required. At the same time, history and current conditions help predict the future, like it or not. Uncontrollable trends cannot be ignored. They must be reflected in the affected line items. Assembling the information necessary to analyze data from the past and seeing the present clearly will go a long way towards creating a viable plan for the future.

Why All the Work?

One benefit to this approach is that it helps to build trust. Members, who are reasonably concerned about how their money is spent, are more likely to recognize the scholarship woven into the process. The budget document will provide some level of comfort that money is not being spent needlessly. It isn’t something conjured up to make the numbers look good, or to achieve some political purpose. The figures represented in each line item mean something. They’ve been vetted thoroughly. They are grounded in reality and reason.

The discipline inherent in the methodology can also help to explain reality to homeowners. It is simply not realistic to imagine that HOA fees can remain flat when rising costs impact every other facet of life. Any architectural, mechanical, electrical, landscaping, or plumbing component becomes more expensive as it ages until it is finally replaced. I like to share an automotive analogy to help make it real. I can make a classic ’57 Chevy Belair my daily driver. But my running costs are going to be much higher than if I bought a brand new Honda Accord. If I fail to recognize that reality, I won’t have the money to keep the Chevy on the road.

What’s Next?

With the basics and methodology covered, we are ready to explore the components of a great association budget. That will be Part 3 of this series. Stay tuned!

Building the Association Budget: Fundamentals, Hard Work & Guts – Part 1 (The Basics)

Budget season for community associations with calendar year-ends are upon us. Even though I’m no longer responsible for writing several budgets each year any longer, I could feel it coming. Thirty years in the management business re-wires your brain, I suppose.

It might sound odd to some, but I always looked forward to budget season. It found it was an opportunity to establish and build upon the partnerships I enjoyed with my clients. I found that once I wrote a budget for a client for the first time, the exercise put me in a position to have full command of the operation. I noticed that by upgrading the budget document and process, I earned immediate credibility with my clients. The boards understood the numbers and had confidence in sharing the information with their communities. I also got the opportunity to collaborate with on-site personnel, which was a great way to help them to have input, for me to better understand their day-to-day challenges, and to build our team from the mutual respect the process required. It was a LOT of work. We took no shortcuts. But it was worth it. The community members were well served, everybody learned a lot, and it as a blast, even when the results were difficult to communicate! I will never forget standing in front of a large group of owners explaining why their developer’s budget created the need for a 24% condo fee increase the first year after transition. 25 years later, that condominium still stands, thanks in part to the tough work we did together those first couple of years.

Thanks to great training and a boss who gave me his torch to carry and the freedom to expand on the fundamentals he taught, after a few years I became the semi-official Budget Guy. I taught the process to new managers and helped other managers out when they got stuck, or were nervous about sharing a difficult message with their clients. I got to present an annual budget workshop for the management company for a few years. In 2011, I was asked to co-present on the topic for the Montgomery County (Maryland) Commission on Common Ownership Communities. We had so much fun, the crowd gave us an ovation at the end. Attendees from the concurrent sessions were shocked to hear people’s enthusiastic response to a budget program! That was followed by a lengthy recap in the COC’s newsletter.

I dusted off that old article and realized that a multi-part blog format allows us to share the best practices and tips picked up through the years without the constrictions of print space or seminar time constraints. As with everything else we share on this blog, we hope the series saves you some time, gives you a tool or two you can use, and helps you to avoid some of the quadrazillion mistakes I’ve made through the years. Maybe, just maybe, you will come to enjoy budgeting as much as I do and find the same benefits I was able to reap. So here we go!

Let us start at the very beginning…

BACK TO THE BASICS

The story goes that famed football coach Vince Lombardi opened every Green Bay Packer preseason camp with the same introductory sentence. Raising the pigskin high enough to be seen by the 50 or so professional players in front of him, he intoned, “Gentlemen, this is a FOOTBALL…” He understood the importance of reinforcing fundamentals.

So what is a budget? It is an essential part of association operations as the first of the three interrelated financial phases – planning, operations, and review. Deficient planning in the budget process leads to poor performance in the operating phase as reflected in monthly financial statements. Inevitably, this leads to poor results in the review phase, the annual audit. Conversely, excellent budgets lead to solid operational results and contribute to nice, clean audits. Creating a budget is not an isolated exercise or theoretical effort. It has real impact.

Done properly, budgeting lays a foundation for financial and community success. Done poorly, serious short and long term difficulties are sure to be created or perpetuated. We’ve been helping a number of clients dig out of financial trouble. Sometimes replacement reserves were underfunded directly with the “transfer to reserves” line item being set too low. Other times, reserves are underfunded indirectly. Unrealistic operating budgets lead to deficits. After paying the bills, there was not enough money left to fund the reserves from month to month.

Regardless of the reason for insufficient reserve funding, there’s always telltale signs of chronic under budgeting: A belief in the myth of saving money and deferred maintenance. Budgeting low out of fear of increasing fees has a vicious and compounded boomerang effect. Deferred maintenance results in exponentially higher fees for the members in the long run. Maintaining components past their useful lives is very costly, and can include the collateral damage from water leaks and emergency remediation. Higher fees are also required to help fund capital expenditures made more expensive by emergency replacements, exponential deterioration, or interest costs for debt service. Look at the exhibitor list from any CAI conference. You’ll see plenty of bankers there. There’s a reason that market niche is growing. Many associations have under budgeted for years and are now forced to pay the price…a very high one.

So let’s get back to the basics and get this right.

WHAT’S THE GOAL?

What is the purpose of the budgeting process? I ask this question when I teach financials to community association volunteer leaders. Sometime I get some pretty good answers. But I always find myself compelled to say, “I guarantee that a percentage of you don’t want to say out loud what you believe – that the purpose of the budget process is to keep fees as low as possible.” True, it is the board’s responsibility to the community to use funds wisely and avoid waste. But read any governing document and you will find the primary responsibility of leadership is to maintain the common elements and collect fees sufficient to do so. Of course there is more to a budget than accounting for the sticks and bricks. Quality of life is largely determined by the service levels provided for in the budget.

So then, the purpose of the budget is to create a reasonable plan to finance the operation of a community association in accordance with the realities of property condition and in accordance with the vision and values of the community.

GUTS, PART ONE

Too many managers are either nervous about proposing budgets with increases, or intentionally propose budgets with low or no fee increases as way to stay in the good graces of their clients. Don’t get me wrong, in rare cases, no increase can be possible. I even had one client who reasonably decreased their fees after paying off a loan. But when it’s done for political reasons, it’s a slippery slope. For the nervous, we’ll offer some perspectives and strategies in the following segments to help. For the political animals, please stop. Sucking up is not customer service. You aren’t helping anyone in the long run, including yourself.

Boards and Finance Committee Members get nervous, too. It’s completely understandable. They must answer to their neighbors. The nervousness means you take your responsibility seriously. You are to be commended! We hope this series of blogs helps.

It takes guts to take the long view. But that’s what leaders do. Outstanding professional managers and community volunteers know they are leaders first and foremost.

COMING SOON…

In the coming segments, we will continue to outline fundamentals of budgeting. First, we will review budget methods to help analyze the past, see the present, and plan for the future. Then we will identify critical budget components and tips for assembling and presenting them. With the fundamentals covered, we then get to the really fun stuff. We will cover strategies for communicating difficult news…like a 24% fee increase. Then, we’ll finish up with how to avoid common mistakes and a final exhortation to stay the course.

I know I’ve been a bit of a deadbeat lately in the blogging department. Sorry about that! Chantu’s been doing her part, but I haven’t been shipping. Business has been great, but that’s no excuse. I’ll try to make it up to you by delivering upcoming blogs more quickly so you can have them at your disposal as you dive into your budgets.

14 Things Your Reserve Analysts Might Not Tell You – And It’s Not Their Fault (Part 3)

Two weeks ago,,  we shared five focus points to help you analyze property components. Last week, we offered another five, which were practical considerations to discuss with your reserve analysts in order to estimate project expenses as accurately as possible. To recap, we’ve covered:

1. Engineering Study for Stuff You Can’t See
2. Elements Impacted by Code Compliance
3. Piping Systems
4. New Construction Technology
5. Underground Piping and Wiring
6. Project Design & Management Expense
7. Logistics for Limited Access Projects
8. Collateral Damage
9. Items Outside Study Period
10. Strategic Improvements

We close out the series with the last four nuggets. These cover areas where the Board has a level of discretion and help you deal with some thorny cash flow issues.

11. Interior Renovation Upgrades: Interior renovations can take many forms. If you don’t tell your analysts what you have in mind, they are left to guess. For instance, I helped one client to plan for wallcovering, painting and lighting that would last through two cycles of carpet. In another case, the whole lighting plan was to be revised. That specific data had to be plugged into the reserve study.

12. Alternative Funding Options: If the community is behind the ball financially, debt service, special assessments, or a combination of the two might be options to consider. Clarifying the Board’s authority to do either and strategically planning to communicate options to members are absolutely crucial. This will no doubt be the subject of a future blog. Your reserve analysts should be able to help you to run “what if” scenarios, but you are going to have to tell them what those options might be.

13. Big Trees, Drainage & Other Landscaping: I’ve heard arguments that greenspace does not belong in reserve studies. However, mature trees and landscaping can be really expensive to remove, not to mention replace. Over time, surface drainage can become ineffective and might even lead to flooding. A review by an arborist, landscape designer or architect can be a real eye-opener. You can consult with your reserve analyst and auditor to confirm the appropriateness of including such items in the replacement reserve. If it gives either of them heartburn, you have an option. See #14 below.

14. Major Periodic Maintenance: I regularly see five-year electrical panel and switchgear maintenance in reserve studies. I even see the cost for future reserve studies in some reserve schedules. Even though these expenses may not pass the test as a reservable component, it makes sense to flow the funding evenly from year to year. Including such expenses in the operating budget could have significant impacts on fees. The fact that it’s on a schedule and in the financial plan helps Boards to maintain the discipline to actually tackle these vital projects. Depending on the property there might be other major periodic maintenance that is just as vital and has a similar financial impact. Hydro-jetting of plumbing stacks and laterals, dryer duct/vent cleaning, HVAC duct cleaning, and chimney inspections and cleaning can add up. There may be a couple of approaches to consider. If the property can be divided up with a portion of the work done each year, it would flatten out the expense. But if that’s not feasible, you might ask the reserve analyst to include such projects in the study. If the analyst (or the auditor as noted in #13) or the Board is uncomfortable with that approach, there is an option. You can create an operating reserve, set up a schedule of expenses, and calculate a monthly contribution to that reserve in the same manner as the replacement reserve. This will make sure the money is in the bank, keep you from deferring critical preventive maintenance, and even out the financial impact on association members.

Who & When?

We’ve identified a number of capital projects that may require additional professional support to properly plan and estimate replacement costs. Investing funds up front to work with a qualified, structural engineer, mechanical engineer, construction manager, construction estimator, project manager, elevator expert, fire protection system engineer, architect, or contractor can significantly mitigate the possibility of unhappy surprises and create a realistic funding plan. We’ve identified a few areas where legal and audit advice is advisable. Making this a point of discussion with your reserve analyst will help. Some firms that provide reserve studies are multi-disciplinary and may have some of these resources in-house.

The optimal time and depth of study will depend on the projects themselves. Hopefully this series has helped you to take a hard look at the components in your reserve schedule, do a risk analysis and take the holistic approach described in last week’s blog. Once you’ve identified elements that may benefit from further analysis, check the timing. Early on, perhaps you can get some inexpensive thumbnail estimates (hint – plan for the worst, guess high). If you are getting to within about five years of a large project, it might be time to make a more significant investment and hire specialists to take a deeper look. The more complicated the project, the more important this is.

Bottom Line

A truly comprehensive reserve plan can make all the difference in the financial health of a community association and the quality of life of its members. The reserve study is a tool. Your reserve analysts are your partners. See the bigger picture. The better the data, the better the study. The better the study, the better the plan. The better the plan, the better the execution of the plan. The better the execution of the plan, the better the community.

14 Things Your Reserve Analysts Might Not Tell You – And It’s Not Their Fault (Part 2)

Last week’s blog offered five focus points to improve the accuracy of your reserve plan. Nuggets 1 through 5 help you analyze property components. This week, we share nuggets 6 through 10. These are practical considerations to discuss with your reserve analysts in order to estimate project expenses as accurately as possible.

These all come from my experience working with clients through the years. In some cases, I noticed a disconnect between plan and execution. In their planning process they dutifully used the expense listed in their reserve study. However, once the project got going, additional necessary expenses that were not anticipated in the study were funded from replacement reserves. This made it appear that the projects were over budget, resulting in weeping and gnashing of teeth, not to mention death glares in the direction of their reserve analysts. The truth was that these projects were not over budget, rather they were under planned. In other cases, under planning occurred when clients failed to take a bigger picture or strategic approach to planning projects. The lesson is clear: The more accurately you can see the future, the better the odds you can get there.

Clients who implemented this week’s nuggets planned more realistically and utilized reserve funds to the maximum benefit.

6.  Project Design & Management Expenses: Wise associations elect to engage professional engineers, architects, and/or project management firms to develop specifications, facilitate the bidding process, and provide quality control for major capital projects. Depending on the nature and size of project, the investment can be in the neighborhood of allowing 10% to 15% of the total project costs.

Lately I’ve been encouraged to work with boards that understand the impact of major projects on their management team. Projects that impact residents in an intense way take human resources to make sure they run smoothly. Hiring additional staff or a professional project manager can make all the difference between a great project and one that sucks the life out of every resident, board member, and team member. Too many associations ignore the fact that without that support, something will give – the quality of the project, the quality of day-to-day operations, or both.

Reserve studies may not anticipate any of these expenses. You may need to direct that they be included.

7.  Logistics for Limited Access Projects: If something is hard to access, it’s going to be more expensive to replace or maintain. Sometimes A LOT more expensive. Getting a handle on those costs can be crucial to estimating the total price tag of a project. A cooling tower on top of a 27-story high rise is going to cost exponentially more than one on the ground floor. If a building elevation presents challenges in accessing a roof, the costs of roof or gutter replacement and periodic major maintenance on components like soffits and trim go way up. Contractors and construction estimators can be lifesavers in helping to avoid some gnarly surprises.

8.  Collateral Damage: This can be a tricky one. Technically, the association may have limited or no responsibility for replacing unit components. But what if they are altered to access common element replacements like pipe risers? My favorite example to illustrate the point: Let’s say the only way to replace a piping system is to go through 1950’s era ceramic tile. You’ll never match the old tile. Will the Board repair the plaster only? Tile one mismatching wall? Or replace all the tile in the unit? Multiply the expense by all the units in that tier. The answer might make a significant impact on project costs. Here, your first call may be to association counsel to be clear on your responsibilities and options. Then you’ll have to make a business judgment. Just don’t wait until you start the project to decide. Get clarity in the planning process and plug the info into the reserve study. That is not your reserve analyst’s responsibility, it’s the Board’s.

9.  Items Outside Study Period: Many studies include only those components that have useful lives within the period of the study (usually 30 years). The rationale is that if you conduct studies every three to five years, the component will eventually make its way into the study. But some major components such as electrical switchgear, transformers, or piping systems may have useful lives of 50 years or more and they may be major expenses. Waiting to fund those expenses over only 30 years could create a big bump in required funding levels when they magically appear in the study. Plug them in now.

10.  Strategic Improvements: Instead of replacing components in kind, it might make sense to rethink and plan. For instance, a property may have high-maintenance components such as wooden exterior soffits, fascia, and rake boards. These require repainting every few years and eventually sectional or full replacement. It might make sense to replace them with low-maintenance materials. More expensive up front, but much less expensive in the long run. Original gutters might have been undersized and should be replaced with larger ones. If gutters and downspouts are being replaced, it might be the golden opportunity to replace wood trim with low-maintenance material. The Association could pay only once for mobilization for two projects and save money in the long run. Better yet – think strategically and tie these projects in with the next roof replacement to get to best bang for the buck. Take a step back and see property components in a broader context. Adjust the plan accordingly and make sure the data gets plugged into the reserve study.

Perspective

No one wants to increase fees. It can be tempting to ignore the potential for additional expense, even if it means losing out on savings in the long run. Making the best use of members’ assets is a key element of the board’s fiduciary duty. Think strategically, plan wisely.

“Leaders keep their eyes on the horizon, not just on the bottom line” –Warren Bennis

Next…

Next week we close out this series with the last 4 nuggets. These will help you to recognize areas where the board has a great deal of discretion in the planning process. Many community associations are facing the tough realities of under funding and have to include options such as loans and special assessments in their funding plan. We will help you to partner with your reserve analysts and other professionals to develop scenarios and choose the best plan for your community.

14 Things Your Reserve Analysts Might Not Tell You – And It’s Not Their Fault (Part 1)

Reserve studies are invaluable tools for condominiums, cooperatives, and homeowners associations. Used properly, they assist boards and managers to make good decisions for reserve funding with long range planning in view. They also help to plan for near term capital projects. The reserve study provides a basis for a systematic and disciplined approach to reserve funding and capital project planning.

At the same time, I’ve heard too many complaints from clients through the years about accuracy of the data included in their reserve studies. This tends to occur when unpleasant and unplanned realities throw a monkey wrench into the best laid plans. I’ve found that either an unrealistic expectation or a poor understanding of the study process are typically at the root of the issue. This series of 3 blogs helps to address the first issue. I’ll provide tips on how to work with your reserve analyst in another blog soon.

What a Reserve Study Is…And Isn’t

Professional reserve studies have two components – a physical analysis and a financial analysis of major property components. The physical analysis helps to estimate the remaining useful life. The financial analysis turns it all into an actionable plan to recommend a funding level that ensures the Association will have enough money in the bank to replace components when needed. For more details, you can review CAI’s National Reserve Study Standards, and the Association of Professional Reserve Analysts Standards of Practice.

Reserve studies are relatively inexpensive as compared to other engineering analyses. There are reasons for that.

  • Reserve analysts are by definition generalists engaged for the specific purpose of creating an overall financial plan. They do not undertake the detailed condition reports, basis for design, or specifications that a specialty engineer may create in preparation for a particular capital project.
  • Reserve studies do not include destructive testing. No walls will be opened, ground dug up, or other means to get into the details of conditions unseen.
  • Reserve analysts are neither omniscient nor clairvoyant, nor do they possess X-ray vision. You’d have to pay a lot more for that!

Throw Me A Bone, Man!

The good news is reserve analysts LOVE data. The more valuable information you can give them, the more they will plug into the study. The better the study, the better your plan.

Here are a few nuggets you should consider feeding to your reserve analyst. Complicated condominiums and cooperatives, especially high rises, are more likely than HOAs to benefit from the additional data points listed in this blog series. Regardless, it’s worth taking the time to consider whether each of the 14 nuggets factor into your association’s reserve plan. I can tell you they’ve either saved my clients a lot of heartburn, or I learned about them because of my clients’ heartburn!

These first 5 nuggets deal largely with building components. The next 2 blogs will address discretional expenses, practical project planning, and approaches to thorny cash flow issues.

  1. Engineering Study for Stuff You Can’t See: This could apply to components like waterproofing systems under patios, parking lots, green space, fountains, etc. Without doing destructive testing and taking a look at what is underneath, you may have no idea how much it will cost to design and replace a system you can’t see. You will likely pay far more for this engineering study than you will for the reserve study, but it will be well worth it. One client’s reserve study had estimated system replacement for four garages to be $500K. When it was all said and done they paid about $1.1M…. per garage! The information gleaned from their engineer’s work helped them to prioritize and pay for the project. If they had that information up front and included in their reserve study they could have avoided sticker shock.
  2. Elements Impacted by Code Compliance: The typical reserve study assumes like-for-like replacement. However, local code may require a building to upgrade an old system to meet current codes, exponentially increasing the cost of some projects. This is particularly true of fire protection systems and elevators. Getting cost projections from sources familiar with local codes can save you from ugly surprises.
  3. Piping Systems: No pipe will live forever. Yet, I have seen common piping systems omitted from reserve studies for whatever reason. Also, determining the remaining useful life of copper piping is easier than ever before thanks to non-invasive technology. Obtaining a pipe condition study for domestic, HVAC and waste piping can provide invaluable data.
  4. New Construction Technology: Sometimes new building products or construction techniques can post a challenge until there is a track record of periodic major maintenance, rehabilitation or replacement. Installing contractors, architects or engineers involved in the new construction can sometimes provide some insights to help plan for future projects.
  5. Underground Piping and Wiring: This can be a big one for garden communities, especially those built in the 1960s as apartments, and particularly those with central HVAC plants. I don’t always see underground electrical feeds, HVAC piping, or domestic water piping in reserve studies for communities that have these components. Tracing a break or a leak, digging up between buildings to replace a section of wiring or piping and restoring the grounds on an emergency basis is an expensive proposition. It is surprising how much electrical wiring has been laid in the ground without being run through conduit. This can even impact the planning for replacement of light poles. Identify the risk and make a plan to include in the reserve study as needed.

Hard Reality

In some cases, the engineering and design costs outlined in the 5 nuggets above might exceed the cost of your reserve study. But that’s irrelevant. Think about the impact of not having the data. Underfunding by any means is a bad strategy.

When & Who?

In the third and final blog in this series, we’ll identify potential resources and factors that will help the Board to decide when to reach out.

Next…

In next week’s blog, we will discuss data points related to practical considerations when planning for projects. I will again reach back into my bag of experience to find the things that made a huge difference for my clients through the years.

The Vision Thing

The words keep falling out of my mouth. I see it again and again. So many boards think their mission is to keep fees low, period. Ironically, the mindset that this engenders pretty much guarantees that in the end, everyone will pay more.

Never forget that the budget is a tool. It is part of the plan that provides the means by which the community’s needs are met. At a higher level, it can be part of the plan that provides the means by which the aspirations of the community are met. It is the tail, not the dog.

Don’t get me wrong – a fiduciary has a duty to make sure that members’ assets are well utilized. But there’s a huge difference between price and cost. A low price up front can mean tremendous cost later on. A myopic focus on trying to make sure expenses do not exceed the budget plan (key word PLAN) leads to a vicious cycle of failure that goes something like this:

A “we can’t afford it” mindset begets a budget that ignores the reality of the facilities, operations and shared values of community, which begets a budget filled with artificially low line item values, which begets cheap, shortsighted financial decisions during the year, which begets poor quality repairs, supplies, and low reserve funding, which beget Band-Aids and deferred maintenance, which beget emergency response repairs, poor curb appeal, and increasingly unsatisfactory service, which beget negative community spirit and higher accumulated expenses, which beget fear of conflict and board exhaustion, which beget more shortsighted decisions making until….

The bottom drops out. Special assessments, huge fee hikes, and/or debt service (unless the financial condition of the association has been flushed so far down the toilet it’s no longer an option). Ironically, in the end everybody pays more because the board managed down to the budget instead of leading up to a vision.

Vision doesn’t have to be a pie-in-the-sky, magical thing. It can be pragmatic. In working with community association clients, I’ve learned to start with a simple annual planning session. Tell me what you want to do and I’ll tell you what’s important to you. Which means you’ve identified your values. Which leads you to your vision.

So start with planning.  Establish a disciplined, robust budget preparation process. Lead.  And truly serve your members. That is your duty. It’s hard at first, but ask those who have tried to lead associations out of the ashes. It’s much worse.

Going cheap at all costs may be a value, but it does not lead to a sustainable vision. Walk around without your glasses and eventually you will stumble and fall. Don’t be afraid to open your eyes and get the help you need to see clearly.