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Best Practices, community associations, condo associations, Cooperatives, HOAs, leadership, Management, Professionalism

8 Characteristics of a Great Board/Management Company Relationship

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There are seminal moments in our lives and careers. One of mine was circa 1985. I bumped into  a board member of a condominium for whom my maintenance company had completed some projects. The question she asked me that lovely spring day on a bustling city sidewalk 35 years or so ago changed the way I approached business and I am certain it led to both my entry and inevitable exit from the community management business… “Tom, how come we can’t find a good management company? Are there any of them out there?”  My mind raced as I thought through the three they had fired, all of whom I thought were among the better companies that I had worked with as a contractor. I gave her a tactful answer, but one she did not expect to hear. More on that in a moment.

As a young entrepreneur, I had begun to immerse myself in the study of leadership. I started working with community associations a couple of years before that fateful exchange. I became fascinated by the dynamics of volunteer boards, their communities, and the managers who served them. A few short years later, in a joint venture with a management company, I entered into a contract to provide part-time, on-site management for a small condominium. Eventually, I left my business and dove into management full time for the next 30 years. I had the privilege of working with some great managers and boards. For much of my career, I was also the company’s designated “Fixer.”  If it was messed up, my job was to find a way to make it work. Of course, I was not always successful, but it was the best business education I could have received. Along the way, I saw the great, the good, the bad, and yes, the ugly. Stepping away from the management business and working with clients from the community association field in a different capacity and in different markets has reinforced for me how unique communities can be.  At the same time, I see common principles, fundamentals, and practices that produce results. So…here are eight characteristics that exist in the most successful and sustainable board/management company relationships.

1. Shared Expectations

The working relationship between a board and management company can be very dynamic and fluid. Times change, technology changes, society changes, people change, volunteers change, and properties age. These factors all may impact expectations. An agreement for management services provides a basis for expectation and accountability. It also needs enough flexibility to address the variables inherent in the relationship. COVID has been a testament to this. Who could have anticipated the workload and process changes that the pandemic would require?  Agreement on contract terms and ensuring that these are in harmony with the board’s goals is crucial to a sustainable and successful relationship, which leads directly to our second characteristic.

2. Communication

In my management days, I would receive the occasional phone call from a board member along the lines of: “Would you be interested in sending us a proposal for management? Our company is horrible.”   These days, the question is: “Can you help us find a new management company?”  My first answer has remained the same. “Have you spoken to company executives?”  Astonishingly, 90% of the time, the answer has been no! Changing management companies is a big deal. It can take far less time and effort to repair a damaged relationship than it would to make a change.  Talk about it, set clear and reasonable expectations, see if it can be fixed.  If not, then it’s time to move on, but not before.

Management companies can bolster the relationship by maintaining periodic executive-level contact with volunteer leaders, especially when the players change.  This may be after annual meetings, changes in board liaisons, and any time there is a manager reassignment.  Likewise, new boards are wise to get on the same page with the management team as soon as possible during these transitions.  Don’t let the relationship fall off the rails!

At their core, business relationships are human relationships.   Just like in our personal lives, we get busy, make assumptions, and don’t always get the message right.  Communications suffer and issues fester.  The electronic age makes this a bigger challenge.  Consumer expectations for immediate gratification (the Amazon effect) have challenged all customer service industries.  Businesses can rely so heavily on technology to gain efficiencies that they adopt a transactional mindset without realizing the negative long-term impact on the relationship.  Zoom meetings are great for efficiency, but we miss the cues that the full human interaction experience provides.  Tech and society will continue to change, but some things remain the same.  Community management is a relationship business.  Relationships require effective communication.  And it needs to go both ways.  

3. Mutual Benefit

All sustainable business relationships are mutually beneficial.  A zero-sum game benefitting the client will inevitably lead to poor management performance.  A company that can’t make a profit will fail.  Historically of the real estate management niches (commercial, rental, and community associations), community association management is the least profitable.  A review of the history of the industry and market pressures helps one to understand how we got here. The full story would be an article all by itself.  The net result is that community association management as a professional field has become increasingly commoditized.  Profit margins are always tight.

This can lead to the zero-sum game benefitting the company, which is likewise unsustainable.  Unintentional service creep can happen slowly over time with managers and boards losing focus on contract specifications.  A manager may lose focus of contract out of sheer work volume and when the board is unaware and seems happy with their performance.  Regardless of intent, the reality of this situation is that the relationship is being abused and could end badly.  

In the end, the old axiom is true.  You get what you pay for.  The logical corollary should therefore be that you should pay for what you get.  Maintaining awareness of and regularly revisiting contract specifications for any adjustments to meet the needs of the community are the keys to ensuring mutual benefit.        

4. Flexibility & Reasonableness

Great service companies will go above and beyond from time to time.  Community management is such a dynamic field that a manager will inevitably see the need to do something technically outside of their scope.  They want to make their clients happy and just take care of it.  But there is a danger of an unintentional death spiral. 

I’ve seen this play out many times.  Management agreements typically include provisions to charge for work outside the scope of defined routine services.  Many managers fear a negative reaction from clients and shrink back from noting that a requested service is a billable item.  Sometimes, the assignment is completed and that’s that.  Everyone is happy.  But sometimes, the requests keep coming.  The manager becomes overburdened.  The task list gets longer and longer.  The board grows increasingly dissatisfied, and the manager grows increasingly resentful.  All the while, more times than not, the board has no idea that they are making unreasonable requests because the manager never said a thing about the contract terms.   

When there is healthy communication about the best way to handle non-routine services, boards can make business decisions to allocate funds that allow the company to bring in the resources necessary to accomplish the task or facilitate service by an outside party.  Reasonable boards understand that a set-price contract cannot be a blank check.  (See Mutual Benefit and Communication) 

5. Get Out of the Box

Fundamentals and time-tested principles apply to every relationship, but every situation is unique.  One of the most valuable skills board and management companies can have is the ability to see things as they are and recognize when glue diligence (“that’s the way we’ve always done it!”) needs to be replaced by due diligence, which may involve finding a non-standard solution. This is where my experience noted in the introduction had such a profound impact.  The board member who complained about perfectly good management companies didn’t have a performance problem.  She had a system problem.  She lived in a 27-unit condominium with a seven-person board and half a dozen or so active communities.  Most unit owners were retired.  I loved that community because it had such a remarkable commitment to volunteerism.  If you lived there, you were on the board, a committee, or both.  However, the volunteers had no context to see how much management work was being generated by all that activity.  They were NEVER going to be satisfied with the level of time and attention a portfolio manager could give them under the terms and price of a standard management agreement.  They needed to adjust the system, adjust expectations, or both.

Without analysis, we easily default to assuming that people stink.  Just fire them and get somebody new.   If you can’t see whether you have a performance problem, a system problem, or some combination thereof (usually the case to some degree), you’ll always be answering the wrong questions. Wise board and management companies invest the time to make the determination and have the creativity and flexibility to change the system if needed.

6. Clarity on Roles

The board’s highest and best role to benefit their communities will always be to lead. It sets the culture, goals, and standards for the community and its management.   Everything a professional management company does can be grouped in one of two baskets – supervisory or advisory.   Most boards have no problem rightly holding management accountable for the supervisory tasks it performs on behalf of and at the direction of the board.  Highly functioning boards allow management to assist and guide as it fulfills its role. This allows the relationship to function at its highest level – as a partnership. This can involve helping volunteer leaders to translate strategies that worked in their professional or personal lives into the context of community associations and the statutory requirements,  governing documents, and best industry practices that apply.  Both parties may need to check their egos at the door: Board members might have to recognize the realities of an organization slightly outside their area of expertise, while managers who may passionately recommend a particular path have to recognize that the board is the boss and responsible for the decision.

Ideally then, as a leadership body, the board sets the targets (Why, What, and When), taking into consideration feedback and recommendations offered by professional management.  Leadership gives management the resources to accomplish the resultant goals and delegates the details (How) to them.  In that paradigm, management can focus on getting things done and reporting to the board.   The board can focus on gauging results instead of getting bogged down in the process.   For the board to stay out of the weeds and maintain a bigger picture focus, management must demonstrate competence and proactivity, and be willing to be accountable.

That said, there may be factors that make a certain level of “co-management” ideal.   Communities that are blessed with volunteers who have subject matter expertise and time may allow them to successfully achieve more without having to pay more for management.  Also, small associations suffer from the inequity of scale, requiring more time and attention than their management fees can reasonably command and making the co-management model more likely.

7. Get Things Done Without Being Pennywise and Pound Foolish

It is important to remember that a key role of a manager is to facilitate, not necessarily to do.  A manager’s area of expertise is the administration of the community, governance, and business aspects of community associations.  As such, they may maintain professional designations such as CMCA®, AMS®, PCAM®, and LSM®.  If they were also credentialed professional engineers, insurance brokers, architects, or licensed lawyers, associations would never be able to afford them.  Yet, some boards expect managers to provide opinions and services outside their area of expertise, usually to save money.  Wise boards understand that there are times when bringing in specialists is an investment.   Wise managers, especially those with high levels of subject matter experience, know how to leverage that knowledge and put their boards in a position to make good business decisions.

Managers may feel pressure to have all the answers and assume they are expected to have all knowledge at the top of their heads. As a wise man once observed, it’s perfectly acceptable to say, “I don’t know,” if it is followed by a comma and not a period. “Can I get back to you on that?” can be the best answer a manager can give at the moment. Wise boards allow space for a manager to provide accurate information. Wise managers don’t wing it. This leads us to the final, and perhaps the most crucial characteristic of great board/management company relationships.

8. Trust & Respect

I was thrilled to get an “Aha” moment when I was introduced to a principle that was so simple, so profound, and so applicable to community associations. The basic premise of Steven M.R. Covey’s The Speed of Trust is this: When trust is present, things happen quickly and cost-effectively. When it is absent, everything takes longer and becomes more expensive in the long run. Trust is everything. It underpins all the other seven characteristics. Boards need to trust that their managers are advocating for them and acting in their best interest. Managers and management companies need to trust that the board is dealing fairly and reasonably with them.  Trust begets respect. Both are essential to any highly-functioning relationship.

Let’s Do This!

There is far too much negative media about community associations. Certainly, there are bad players out there, but I am proud to be part of a field where so many dedicated people are working to get it right.  Whenever I hear a negative comment about boards, I always take the opportunity to share that my experience has been that the vast majority of volunteers I’ve worked with serve for all the right reasons. That is particularly impressive considering how many goofed-up situations I’ve been asked to jump into. The same goes for managers and management company executives. Those that stick with the industry tend to be incredibly dedicated professionals with a servant’s heart, qualities that are all too rare these days.  When community volunteers and the professionals who serve them choose to fulfill their responsibilities in a collaborative way and to an elevated level, it has a positive impact on the quality of life and investment of every community member. And they put themselves in a position, not only to leave a legacy of success, but to enjoy the satisfaction of a job well done. It is always worth the effort.

Best Practices, community associations, condo associations, Cooperatives, Management

A Good Start (and a Creative Solution if it’s Too Late)

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A recent blog focused on the unique challenges faced by small community associations face.  The crux of most of the solutions offered was to provide access to the attention and resources typically available to larger associations.

But First, Let’s Talk About Beginnings

One of the biggest difference-makers in the success of all community associations is how they transition from developer to homeowner control. I had an eye-opening experience taking CAI’s M-370 class , “Managing Developing Communities.” It became clear to me that in many parts of the country, litigation and firing the management company soon after transition are foregone conclusions. I realized how fortunate I was to have come up in the Washington DC area where litigation is not nearly as common. I think there are a few reasons for this; (1) there are more lawyers per square mile in DC than in most areas, (2) those lawyers understand the true cost of litigation, and (3) the transition engineering study procedure has been embraced by boards and developers alike for a couple of decades.

I also found that creating a very transparent, community-specific series of orientation programs leading up to transition was hugely beneficial. When homeowners understood what to expect, understood the fundamentals of the community association concept and best practices, were fully aware of the requirements set forth in their governing documents and prevailing law, and understood the context of the roles and relationships of the developer, association, management, and individual members, things went really well. Another factor was working with developers who were wise enough to invest in set-up fees so that systems and personnel were in place and in concert with the product they were selling so that everything was in place when the first owner settled.

Managing developing communities is a LOT of work. However, doing the hard work up significantly decreased the workload on the back end. For a manager, there is potential for a considerable payback. There are few things more satisfying than being an integral part of successful communities. By the way, the company I worked for very rarely lost contracts after transition.

When these factors are not in place, much is left to chance. I noticed that some of the new clients we took over shortly after transition were working through chaos that could have been avoided had effective orientations and systems been put into place. The same was true for clients of the company I was working with when the programs were not put into place. I heard it from everyone from unit owners to the managers to accounting staff. Failing to prepare and execute upfront impacts everyone adversely in one way or another.

Back to the Little Guys

We saw the impact of inadequate transition practices early in Association Bridge’s history. We would get calls from board members from tiny condominiums two or three years after owner control. The small developers either didn’t know enough or care enough about association operations to set up the owners for success. Owners purchased with no clue, only to realize too late that they would have to deal with issues that in some cases should have been addressed by the developer. It was too late to do anything about that now and the unit owners were faced with significant financial burdens, magnified by the inequity of scale endemic of their situation.

I thought…What if we could find a way to give small associations the tools I had been providing my management company’s clients for over 20 years? Would it work?

An opportunity to test the idea came up in a conversation with Matt Cheney. Matt was the agent selling for a developer of Lanier Station, a 9-unit condominium in Washington DC. I met Matt a decade or so below when he was leading the sales team sat one of my favorite old clients, the award-winning Lionsgate at Woodmont Corner Condominium in Bethesda, Maryland. Matt lit up with the idea of replicating the Lionsgate model at Lanier Station and made the introduction. Sure enough, the developer, Pete Lambis. We truncated the program from three sessions to one and agreed to help facilitate the transition meeting.

We were able to help the owners prepare to assume responsibility for the operation of the condominium. We laid out various operational models for the unit owner board to consider. In the end, they remained self-managed with a full appreciation of their options and the systems they needed to put into place to get things started and maintain them. Their small investment got them off to a great start that will no doubt benefit owners for a long time. The model works!

A Bonus for When It’s Too Late

Some of the condominiums developed in Washington DC over the past 20 years were townhomes converted into condominiums or newly constructed small buildings. Many of them were not blessed with developers as wise as Mr. Lambis. Owners bought in with no concept of how to lead and manage a condominium, much less with an understanding of the association’s rights or developer responsibilities. By the time the fecal matter hit the fan, they were faced with significant financial hardship.

An innovative solution comes courtesy of Don Plank, Assistant Vice President at National Cooperative Bank.  As Don and I were kicking around deep concepts one day, we noted that very small condominiums in distress usually do not have the option their big brothers in condoworld have. They will never be able to qualify for a loan. Suddenly, the proverbial light bulb appeared over Don’s head. “You know, the best thing one of those tiny condos could do would be to re-organize as a cooperative.”

There are legal hurdles to terminating a condominium regime, but this may be a rare time when small size presents a large benefit. Getting mortgagee approval could be tricky, so working with a lender who can write both underlying cooperative corporate mortgage and share loans could help. Unit owner approval to dissolve and re-create the legal entity would likely be a nearly insurmountable challenge for most associations. But with fewer owners to corral, reorganization may well be the best option if a small association is facing oppressive and unfunded capital projects. Working with a qualified lawyer, banker, and project manager, creating a new cooperative with an underlying mortgage would help to defray major expenses over 30 years. Legal costs could also be wrapped up in the loan proceeds. It’s just crazy enough to work! Don is a genius!

Creativity and Innovation

Business as usual can be the death of success. Small associations need creative solutions. We can learn from enlightened developers like Mr. Lambis and original thinkers like Mr. Plank. Community members in small associations will benefit. Success and excellence are possible. Let’s make this happen!

Best Practices, community associations, condo associations, Cooperatives, HOAs, Management

The Annual Calendar – A Key Component of Management Success

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No one can dispute the value of preparation. Coach Wooden knew it firsthand. By his own admission, he was a poor tactician. Still, he was one of the most successful and respected coaches in the NCAA. No team ever out-prepared UCLA.

For various reasons, many managers fall short in this area. They are in reactive mode much of the time. Acting without planning quickly creates a vicious cycle of rushed response and crisis triage. Many never learn the secret of slowing down in order to speed up. 

It’s no surprise then, that many of the annual calendars (a.k.a. “management plans”) in use tend to be less than complete and not always user-friendly. An effective calendar identifies as many controllable activities as possible. It breaks down those activities to specific deliverables. It creates a mechanism to track activities and proactively plan for upcoming events. It is a tool to analyze the workload and make adjustments. It promotes accountability and communication. Creating and implementing a detailed annual calendar will make you the Coach Wooden of community association management!

Manager par excellence Karen Harris, CMCA, AMS, of the Old Georgetown Village Condominium in North Bethesda, Maryland, began utilizing a detailed annual calendar 16 years ago. She notes:

“The annual calendar system is a comprehensive management tool that enables the manager to “manage.” It initiates the planning and discussion between the Board and Management at the beginning of each year, giving everyone the data and participation necessary to promote buy-in.

With an emphasis on organization and goals throughout the year, it keeps management on track, prompting action instead of inaction. In the field of property management, unexpected emergencies always pop up. If you are on top of everything else, you can minimize overall stress. Sitting in the driver’s seat is the best place to be whenever possible.”

Note: This blog is geared towards managers, but a detailed annual calendar can be hugely valuable for volunteer leaders of small and self-managed community associations. In addition to the benefits noted above, the calendar memorializes processes and supports continuity of services as board members change over time.

Yeah, but…

Buying into the concept can be a challenge. It is a lot of work up front. And it requires accountability.

10 Reasons to Use a Thorough Annual Calendar and Include it with Status of Items Noted in Every Management Report

1. You will save time by being more efficient – no time wasted on fixing errors and communicating embarrassing problems.
2. You will rush less, thereby greatly improving the quality of your work.
3. You will have the confidence that you have more things under control.
4. You will have less stress and worry.
5. Your clients will have more confidence in you.
6. You will reduce the potential for unnecessary expense.
7. Your rear end will feel better. (Since you won’t forget important events and deadlines, those things can’t bite you in the butt!)
8. You will control your time better.
9. You will set yourself apart from the pack. (Most managers in the industry do not do this).
10. You will have a clue why you do what you do – once you embrace the concept and use it as a tool, everything makes more sense and a whole new world opens up to you.

Busting Four Commonly Held Myths 

1. Myth: “I don’t have time.”
Reality: If you don’t have time to do things well now, when will you have time to do things poorly later?
Reality: Planning properly and executing a plan saves time because you are far more focused and efficient than when you wing it and perform tasks randomly.
Reality: Successful managers learn to recognize the difference between a time investment and a time expense.

2. Myth: “My clients don’t care – they don’t read my reports as it is.”
Reality: Even if they don’t read it after the first time they see it, no client has ever
failed to be impressed when first introduced to the concept.

3. Myth: “If I tell the client everything I plan to do and for some reason can’t deliver, they will hold me responsible. What they don’t know won’t hurt them or me.”
Reality: Whether the client holds you responsible or not, you ARE responsible. Some think being held responsible is a bad thing.
Reality: If you keep winging it, it’s only a matter of time before you will be held responsible for a major error because you failed to plan – better to be held accountable for little things if they don’t go 100% according to plan.
Reality: Your client will find your willingness to be accountable and honest refreshing. They will trust and respect you for it.

4. Myth: “If I give them all that data, the Board meetings will take longer and they will nag me about everything.”
Reality: The first meeting or two might be longer, but you will find that because they know you have things under control, the meetings are shorter…and they get OFF your back.

OK! I’m a believer… now what?

When is the Best Time to Create or Review a Calendar?

1. When you take over a new client from another company or manager (helps you to learn the property QUICKLY)

2. Right after a budget is adopted and while you are completing your 12 month spread (helps you merge the physical and administrative plan with the financial plan)

What do I Need in Front of Me to Build my Calendar?
1. 12-Month budget spread
2. CC&Rs or bylaws
3. Policies that might impact management activity (ex. ARC)
4. Contracts
5. PM schedule (if it exists…and if it doesn’t, make one!)
6. Annual meeting file
7. Anything from the files that helps you to identify when things are to happen at the community (paid bills, etc)

The 10 Steps to Success

Step 1: Identify the tasks you can control and do routinely, and those tasks and projects that are on the plate this year in the following areas:

  • Administrative tasks (annual meetings, budget processes, etc)
  • Contract administration
  • Board, committee, and community activities
  • Basic preventive & scheduled maintenance
  • Capital and other projects

Step 2: Identify the steps you need to complete each task

Step 3: Identify deadlines and decide during which months these tasks should be completed – work backward from deadlines (ex: contract award process).

Step 4: Draft the plan on a chart in a format that allows you to see the total picture and how tasks relate to one another

Step 5: Review the plan and adjust the timing of events as possible so that you don’t overload yourself.

Step 6: Roll out the plan in the next management report. Let the Board know their input is appreciated and that the plan will be adjusted if needed as time goes on.

Step 7: Schedule time to review your plan during the month, verifying you are on task in the current month and prepared to handle next month.

Step 8: Mark completed items in the chart to track performance and include in the monthly management report.

Step 9: At the end of the year, analyze performance vs. plan, learn from the past, and adjust the plan or your performance as necessary.

Step 10: Enjoy the benefits of being a truly professional manager!!

Means & Methods

Any plan is better than no plan. Annual calendars or management plans exist in various forms ranging from lists by month to tasks plugged into Outlook or Google Calendars. To achieve all the goals outlined above, it is most helpful to have one master document. To find a sample and template you can use, we’ve placed a link on the Association Bridge website for you.  Look for the Samples You Can Use! box.

Best Practices, community associations, Management, Management Insider, Professional Development

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

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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.

Best Practices, community associations, condo associations, Cooperatives, Management, Management Insider

Management Insider #4 – Make it Personal

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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.

Best Practices, community associations, condo associations, HOAs, Management, Management Insider

Management Insider #3 – Getting Off the Hamster Wheel

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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.

Best Practices, Budgeting, community associations, Management

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

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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!

Best Practices, Budgeting, community associations, Management

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

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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.

Best Practices, Budgeting, community associations, Management

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

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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.

Best Practices, Budgeting, community associations, Management

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

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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!