All posts by Tom Willis

Thomas L. Willis, PCAM, has over 30 years of community association management experience. His professional mission is to create spaces where community association leaders and the professionals who serve them can successfully navigate the challenges they face, reach the goals they choose, find satisfaction and joy in their service, and make raving fans of association members. He founded Association Bridge, LLC in 2006 to provide customized training, support, and consulting services to community associations and businesses. He has authored several articles in Common Ground and Community Manager (CAI National periodicals), and for periodicals published by several local CAI chapters. He speaks frequently on industry topics around the country, is an instructor of CAI’s Board Leadership Development Workshop, and is on CAI National’s Professional Management Program Faculty. In addition to being a member of SEVA-CAI, Tom has served the Washington Metro Chapter as a committee chair, council chair and board member. For his efforts, that chapter has given him a number of awards, including Educator of the Year four times. He was elected to the WMCCAI Hall of Fame in 2014.

Management Insider #5 – The Power of the Zero Invoice & Other Tips

In Management Insider #4, we encouraged management companies to provide their managers with tools and support to help them communicate with their clients. This is especially important for newer managers who may not have had the opportunity to grow their emotional intelligence or general business acumen at this point in their careers.

Getting challenged by a client about your company’s practices or business model can be source of considerable anxiety, even for the most seasoned managers. A knowledge of contract specifications, the company’s business model, and business fundamentals can help a manager address challenging situations successfully. These interchanges can either go a long way in building and maintaining confidence and trust, or they can sow the seeds of distrust and discontent. Preparation is everything. And a little practical strategy doesn’t hurt, either!

Don’t Assume They Know

Clients want stuff done. The details are less important, like whether the work being requested is included in the scope of the management contract. Managers must be aware of their contractual responsibilities. But don’t assume the client is aware of them. Nine times out of ten, there’s no evil intent, just a lack of awareness.

The manager’s job is to communicate reality tactfully, yet clearly. The first answer should not be “no.” It is much better to agree that this task needs to be done, and then communicate the options to accomplish the task, even if that means additional billable hours.

Managers must also be aware of their limitations. They are not licensed to practice law. They are not trained as professional engineers, nor are they CPAs. True, managers may have high levels of expertise in certain areas, but they still cannot assume the liability that comes along with accepting responsibility for every task. Yet, clients may not be aware of this these distinctions. Our favorite line: “I would love to take care of this for you, but I don’t think you could afford me if I had a J.D, a P.E., or a CPA.”

Remember, the manager’s key competency is finding a way to get things done, not necessarily doing everything. Clients may forget that from time to time.

Be Prepared to Explain the Model

Helping managers to explain basic business concepts as applied to the management agreements can be useful to help everyone to get on the same page. Clients may raise an eyebrow about reimbursable and extra charges over and above the base management contract. The reality is, there are a few ways to approach pricing to get the compensation needed to run a company.

Imagine a contract for a repair where every condition cannot be known, such as façade renovation for a high rise building. The contractor has two basic options. He can provide a price based on specific quantities, plus line item pricing for specific repairs in the event the final quantity is greater than the base contract. From the client’s perspective, there is a risk the final cost will be more than the base contract. At the same time, they will only pay for the services that are provided.

On the other hand, if a client demanded a set price contract with no possibility for extra charges, the contractor will have no choice but to bid high to account for worst-case scenarios in order to provide a set price. While the client will know what their exposure is, they may well be paying for services not received.

Management contracts are similar. There can be many variables in the operation of an association. Long meetings, extra meetings, major project administration, and insurance claims can require significant time and effort. And yet, they may not happen. Special assessments, bylaw revisions and the like will require much more copying and postage expense than would more typical operations. Asking a management company to eat these costs is as short-sighted as asking a contractor to do work for free. Neither will be in business very long.

Under pressure, managers may respond defensively to questions about so-called “extra charges.” This is a natural reaction. Unfortunately, it also undermines both their and the client’s confidence and may begin to erode trust. Helping a manager to prepare for the question and to explain the business model can avoid unnecessary conflict and maintain the relationship.

The Zero Invoice

My mentor taught me about the power and utility of the “Zero Invoice.” The strategy is simple. When the manager performs a task outside the scope of the base management contract, an invoice is generated in accordance with the terms of the agreement. Let’s say a board meeting lasted four hours, and the contract allows for a maximum of two. Let’s say the contract calls for an hourly rate of $75 per hour. The invoice would clearly show the billable hours, but also include a notation of a courtesy discount of $150, resulting in a net due of $0. It could be either emailed to the board or included in the next board package as an informational item.

This is brilliant for a few reasons. First, it establishes or reinforces the value of the manager’s time. Second, it informs or reminds the board of the contract terms. As such, it can be issued after the manager provides advance notice, or as a tool to be that notice. Finally, it creates space for a healthy discussion to plan moving forward.

It’s About Trust

When trust is present, relationships thrive. It takes time to build but is all too easy to lose. Fair or unfair, perception is always a major factor. Little interactions make or break trust, and eventually, relationships.

Training portfolio managers on the technical competencies of the job is critical. Preparing them for real-world business questions can be just as important. Get both right and build trust. Fail to do one of them, and trust may be eroded. Build up your people, build trust, and strong client relationships will follow.

Management Insider #4 – Make it Personal

Taking the human factor out of business can cause problems. Big problems.

What’s Going On?

There’s been an interesting trend in recent years in the Washington Metropolitan area. DC has a significant and growing number of community associations with on-site managers. Often, boards of directors have control over their compensation. The manager may be an employee of the association or of the management company as a pass-through expense.

On-site manager salaries, on the whole, have risen fairly significantly. Many boards seem happy to increase their budgets for salary increases. They may award year-end bonuses to recognize excellent service. Historically, community association managers have been generally undercompensated as compared to commercial and “residential” (rental) managers. So this direction is welcome and will help to attract and keep talent.

Interestingly, those same boards may be considerably less inclined to negotiate meaningful increases in management company fees, even when they are pleased with the performance of their portfolio manager. They know that the market is very competitive. Cheaper services are almost always available. This is a major factor in the commoditization in the management industry. The race to the bottom of low price can easily result in the failure cycle described in a recent blog on the subject.

So What?

There is a disconnect here. How can a company adequately compensate their managers and other personnel when they are unable to collect fees sufficient to do so? Clients set themselves up for portfolio manager and support staff turnover and never see their role in the problem.

Another result of all this over time has been that that portfolio managers are often supervising on-site managers who are frequently better compensated than they are. Things are upside down.

I saw this play out first hand. While working for my last management company, I served a portfolio of clients. As memory serves, when I left last year, my shortest client relationship was a little over 10 years. During contract renewal negotiations, two of them required that I be named specifically in the management contract. Yet, in one of those cases, they successfully negotiated a three-year contract with no increase in year one, and minimal increases in years two and three. With another client, we had an annual ritual every budget season. The Budget Committee Chair would semi-humorously express shock and horror at the thought of any proposed increase in management fees. Then he would say it was the management company’s problem to find a way to give me a raise. Fortunately, my other clients did not follow suit and were happy to pay reasonable increases for quality work.

Make It Personal

The lesson is this: When a person gets paid, there’s a direct correlation to value. When a company gets paid, the correlation gets lost. It gets corporate and theoretical. It stops being personal.

This is why some associations and wise management companies migrate management on-site where possible. With enough brains on-site, an association may not need redundant services or additional supervision (a.k.a. “full service management”). In this business model, management companies may sometimes generate less gross income, but their exposure to uncontrollable workload is mitigated. So while gross income may be less, the percentage of net profit increases. Done well, these contractual relationships can last longer than stressful, low profit, full service arrangements. The clients have more resources to compensate great on-site personnel who can best serve them. The key word here? Relationships.

But What if Full-Time On-Site Management Isn’t an Option?

There are other ways to establish healthy relationships, make it personal, and reinforce the cost/value connection. It might take a paradigm change and some creative thinking.

Option 1 – Dedicated Single Site: If a community does not have the facilities for an on-site office but the workload justifies the attention of a full-time or near full-time manager, assign a single manager to the property. Establish an office at the management company or nearby location. Don’t let logistics get in the way. Mobile apps and laptops make it possible to do a decent amount of work without formal office space.

Option 2 – Hybrid Approach: If an association has the logistical capability for an on-site office but not the workload to require a full-time, on-site, consider a hybrid approach. This was the model I created when I managed my first clients. I had either three part-time, on-site arrangements. I worked out of either two or three on-site offices on a standard schedule, subject to change in cases of emergency. I had to track my time and activity so that the clients knew they were getting what was promised. Time dedicated to each client at a base of operation on-site created a relationship of trust and accountability that I could not have achieved as a portfolio manager operating from offsite office. That was 1991. Cloud computing and other technology should make this option more viable now.

Option 3 – Quantify Portfolio Work: There is a solution for smaller associations that do not justify exclusive personnel or an on-site office. In some areas of the country, there is a management contract model that helps to quantify the work and foster a respect for it. In this model, fees are split into two components. Base financial and administrative services are one component. The other component is based on an estimate of management and administrative time dedicated to the service of that client each month. Quantifying the workload creates dialogue and opportunity for adjustments as needed. Of course, this requires that affected management company personnel track their time accurately and communicate the results with the client. An annual review creates the groundwork for a healthy, working partnership.

Sometimes It’s Simple

There may be missed opportunities to help clients appreciate the value of a manager’s time within the typical, set price management contract model. All set price contracts are based on an estimate of workload and contain a set of specifications to match. A client would never hire a contractor to paint their house and expect them to throw in the garage for free after the deal was done. Yet, frequently managers do not charge for extra services outside the terms of a base management contract. Failing to recognize and charge for billable services will ensure a manager’s time and value are neither fully appreciated nor respected.

There are typically two reasons for this: (1) They are unaware of the terms of the contract, and (2) they fear they will anger the client if they charge. First, management companies need to make sure their managers are aware of contract terms and communicate them in advance with clients. Then, they may need to give managers the magic words and support to help the clients understand the rationale behind the contract model. Help them communicate that they are not trying to “nickel and dime” the client. They are simply charging for time and effort not anticipated in the base contract. The service has value.

Remember the Goal

Whatever the solution, the ultimate concept is simple: A client should get what they pay for and pay for what they get. That means they must have an understanding and appreciation for the value of services provided. There must be a connection between cost and value.

All enduring business relationships must be mutually beneficial. Zero sum games have a short half life.  If the status quo isn’t working, blow it up and find a better solution. In the end, everyone wins.

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.

Management Insider #3 – Getting Off the Hamster Wheel

Management Insider #2 provided a historical analysis of the current state of affairs. Armed with that knowledge and a deeper understanding of underlying issues, we are in a position to move towards solutions. Trust and perception of value are at the core of the downward press on management fees. Creating spaces where these two factors become strengths in the management-board relationship gets everyone off the hamster wheel of dissatisfaction.
There are no easy answers. Not every approach works in every situation. And there will be boards and management companies that don’t get it and never will. That’s OK. This blog is not for them.

  • System vs. Performance: I learned long ago that most boards assume that management problems are performance issues. Unless I figured out whether issues were actually a performance issue, a systems issue, or a combination of the two, everyone was asking and answering the wrong questions. The analysis must be case-specific. Every community is different. Dig deep into needs and expectations, and compare that reality to the resources in place to meet them. The right system with metrics and accountability puts people in a position to succeed. Outstanding performance can mask deficient systems. Management companies must resist the urge to tell clients they will take care of everything without fully appreciating the implication. Overpromising and oversimplification serve no one in the long run.
  • Enough with the Price Per Door Already: Management fees per unit per month are somewhat helpful to gauge costs, but it is an incomplete metric. Unit count can have little correlation with the work required to manage a community. Age of structure, type of construction, logistics, reserve funding, deferred maintenance, neighborhoods, internal demographics, and expectation for service will all play a part in the system and performance required to manage a community. I am floored when I hear of management companies who provide pricing without so much as a site visit, a meeting with a board, or a review of documents. Estimate the workload. Price it accordingly. A cookie-cutter approach can work for some clients. But without some analysis, there’s an awful lot left up to chance. Management companies that can explain the rationale behind their pricing and system set the table to earn respect and trust.
  • Value the Work: Set price contracts must assume a certain workload. Boards can have the unrealistic expectation that no matter what happens, the monthly management fee should cover it. That makes zero sense. Managers, fearing the wrath of their clients, are sometimes either unaware of contract terms or nervous about charging for extra work. Until those work hours and efforts are acknowledged, a manager’s time is not likely to be respected. Communicate in advance, explain the business model, agree to terms as needed, and change when appropriate.
  • Migrate Management On Site: A common complaint about portfolio managers is that they do not spend enough time or attention to their clients. This may be a system problem. Twenty-six years ago, my mentor Arthur Dubin advocated bringing management on site in an article for the Journal of Property Management. He said, “A growing number of condominium associations are choosing on-site management better serve the needs of the owners, residents, and boards of directors. This reallocation of resources has often proved successful in both cost efficiency and quality of service.” A quarter of a century of experience has proven him right. Boots on the ground and brains on site can be the most effective allocation of resources in many circumstances. Some creativity may be required. Even if the shift means association payroll increases while management fees decrease, everyone wins in the long run. Lower fees that result in higher total profits over several years with a happy client beat higher profits from unhappy clients that fire you after two years every time.

Those are just a few perspectives and strategies to help both boards and management win. If a community has a pattern of dissatisfaction, there’s a reason. Dig a little deeper. Challenge your assumptions. Let’s begin to get off the hamster wheel.

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.

Sucking Up is Not Customer Service

I had a conversation once with a young manager. She was learning to navigate the sometimes challenging terrain of management-board relationships. At the time she was working for a management firm that had, in my opinion, lost their way. At one of their company functions, a more experienced manager had shared an anecdote about golfing, drinking, and intense schmoozing with his board president. She concluded, “I guess it’s true – the best strategy for job security is being buddies with the board president.”

NO, NO, NO!

Our young manager had a misguided understanding of what customer service is all about on a deeper level in the specific field of community association management. How can managers and other professionals truly serve their community association clients?

What Are We Really Doing Here?

Miriam-Webster says a contract is “a binding agreement between two or more persons or parties.” I think there is a fundamental element missing from that definition. In order for the performance of a contract to meet the expectation of the parties, the definition should finish with the words, “…that provides mutual benefit to both parties.” A zero-sum gain approach to a contractual relationship is short-sighted. If the party performing the service is forced into a low-price box, or is otherwise constricted in the performance of their duties, the relationship often proves unsatisfactory and tends to be short in duration.

When the agreement is some form of service contract, one of the benefits to the client is they receive services that they do not have time and/or expertise to perform themselves. Digging deeper, that means a client is forming a partnership of sorts with a party who brings value to the table. The more mutual the benefit and the deeper the partnership, the more successful the relationship can prove to be.

Supervisory + Advisory = Partnership

Management contracts and position descriptions describe the work that will be performed on behalf of the client. This is proper and important, because it establishes expectations for service. It is describing supervisory functions. Yet, a contract or position description does not always describe the expertise with which those tasks may be performed. Furthermore, the greatest potential value of the relationship may be largely unstated, except perhaps in the fluffy marketing material provided in a proposal. Excellent management companies and professional managers are able to provide recommendations and guidance that can change the status quo and set the table for progress and improvements in the community. It is these services of an advisory nature that make the relationship most beneficial to the client. Yet, while most boards are happy to take management to task for deficiencies in their supervisory duties (and reasonably so), they may never get to the level of receiving or accepting advisory services. In the end, no one wins.

The Challenge? Fear & Schmooze

Some managers are afraid of getting fired. Some may be inexperienced. Some may lack confidence in their abilities. Boards may micromanage for any number of reasons. An “on-the-cheap” mentality may have led to a vicious cycle of mediocre service. Mediocre service invites micromanagement. A manager who never passes the test of capability in supervisory duties will never earn the trust necessary to be an advisor.

Some management companies are afraid of being fired. They fear telling clients anything that they think will put the contract at risk. This sometimes plays out in a blame game. Companies throw their own managers under the bus to appease an angry client and never deal with core issues. Saving the client by skewering your own people creates a cancerous organizational culture and impedes true partnership. It’s based on personality or politics, not leadership, values and vision.

All of these factors are unhealthy. They easily lead down the slippery slope of schmooze. Trading professionalism and respect for a shallow relationship based on low standards may keep the relationship going for a while. But no one is well-served, especially not the community members.
That is why I see this as so insidious. Community Association 101: Board members and the managers who serve them have a duty to care for the best interests of community members as a whole. Anything that works against that violates this fundamental principle of leadership and stewardship.

It’s Not Always Evil

Sometimes people just don’t know. A dedicated volunteer leader may not realize what is available. To illustrate: While performing an operational audit for a client, it became clear to me that volunteers had been performing management duties for a long time because they did not have a clear picture of what a professional could do. During that engagement, there was a need to find an interim on site manager. I was able to connect them with two PCAM-credentialed managers for short periods of time. Both of them blew the board away. A new world opened up to them over the course of a few short weeks.

When the Customer is Right

“The customer is always right.” 

– Chicago Retailer Marshall Field, 1905

There are times when our clients are always right. Like when expressing how they feel about something. Or when they communicate an expectation. Whether or not a feeling is justified or an expectation is reasonable is a different matter. In the moment, it’s irrelevant. That IS how they feel, that IS their expectation. We spend too much time judging the feelings and opinions of others. It’s a damaging, waste of time. Just listen. Acknowledge. Identify.

When the Customer is Wrong…or Perhaps Uninformed…

Sometimes a manager’s conundrum raises its ugly head when a client has difficulty accepting reality. There could be different reasons for this. Fear, ego, or simply a lack of understanding can be powerful obstacles. In this critical moment, a manager may feel she has a choice – tell the client the truth, or tell them what they want to hear. The truth is, a professional manager has a duty to provide their best advice, whether it will be accepted or not. The art is in the telling. Managers with high will discern whether their challenge is in the timing of the message, its presentation, or both.

Rolf Crocker, CEO/Principle of OMNI Community Management, LLC, in Fair Oaks, California, is one of my favorite thought leaders in the community association business. He has a unique perspective and a knack for helping others reach clarity. He taught me a rhetorical device to guide clients to what should be an obvious answer. A version he usually uses is as follows:

“This is the point in the conversation where I ask you if you want to hear what you want to hear, or do you want to hear what you need to hear? If it’s what you want to hear, we can talk about the weather, the market or your favorite sports team.”

This approach is genius. He’s making his point while allowing his listener the room to make light of it – for a moment.

Getting to Mutual Benefit

Boards and managers need to be deeply rooted in the fundamentals of business, ethics, and leadership. Management has to suck it up and prove value, sometimes without being paid for it at first. It’s a tough row to hoe, but “trust me and pay me” won’t always work. Once the opportunity for value is proven, boards need to see that value, respect it and pay for it. We must be responsible for ourselves, remember who we serve, and stay true to that, no matter the short term cost. Tell truth to power, tactfully but unfailingly. Forging and maintaining successful partnerships is one of the most fulfilling human experiences we can have. Please don’t blow it by throwing away principles and relying on a relationship based on influence. Those come and go. Partnerships based on respect, trust, and shared values are those that last. Done right, everyone wins.

Is this a pipe dream in the commoditized and occasionally political world of community association management? Nope. I’m proud of the relationships I forged with the communities I served. I am also comfortable with the few relationships ended by one party or the other. Those partnerships were fatally flawed and needed to end. My principles remained intact and there are no regrets. I’m not alone. There are some great managers, companies, and boards out there who get it. They are profitable in every way. Just ask Rolf.