At this time of the year, it isn’t uncommon to see your association’s Board of Directors, often with the assistance of a professional association management team, working diligently to complete an annual budget. Once completed, the budget will be presented to and voted on by the homeowners.
If one of the primary responsibilities of an association is to maintain, preserve and enhance the property values and assets of the community, then most assuredly your association’s annual budget is key to the association’s success. The budget determines WHAT services will be provided as well as WHEN and HOW services will be accomplished. Make no mistake, the annual budget is a management tool and as such it should amongst other things:
- Be used to plan for activities (rather than reacting)
- Determine assessment rates (rather than the assessments determining the budget)
- Maintain quality of life (present and future)
- Limit surprises (nobody, and I mean NOBODY likes special assessments)
If you have taken an interest in the management of your association you are most likely familiar with your association’s Operating budget. The Operating budget or account includes both revenue and expenses. Revenue consists of assessments, interest on accounts, and other revenue such as fines or fees to include user fees or late fees. Expenses are obviously the costs for maintaining the day-to-day operations of your association, such as maintaining the landscape, pool maintenance and/or utilities. These expenses are planned for and included as part of your Operating budget.
But what about those big-ticket items that aren’t part of the day-to-day expenses. For instance, you don’t plan for your main vehicle gate to up and die on you. Or for your pool pump to conk out in the middle of July. And who knew the roof on your condo building was going to leak like a sieve at the first Spring downpour? This is where your Reserve account becomes critical. Unfortunately, these unforeseen expenses are too often overlooked or just not planned for properly.
But the need for a Reserve account is not just about preparing for major expenses. A Reserve account directly impacts the goal of maintaining, preserving and enhancing your association’s value. As a member of your association, you need to be looking at and asking about the financial security of your association’s Reserve account. Too often associations, to include the Board, ignore the need for a strong Reserve account, thinking the cost for maintaining a Reserve account as being too costly or paying for something that will be a future benefit but not useful for today.
This is actually the opposite way you and your Board should be thinking. A strong Reserve account helps:
- Meet legal, professional, and fiduciary requirements
- Minimize the risk of needing a costly Special Assessment which for many can create a financial hardship
- Maintain and may even help increase property values.
- A robust Reserve account is a positive selling point not only to prospective buyers but also to financial lending institutes.
So how does your association determine how much they need in their Reserve account? This isn’t an easy question to answer but a good place to start is with a Reserve Study.
When having a Reserve Study conducted for your Association, it may be best to hire a professional. Hiring a specialist demonstrates a high level of fiduciary responsibility on the part of the Board.
A Reserve Specialist (RS) brings a specialized set of skills, engineering and financial investing, to the table. This is important because your Reserve Study is basically made up of two components:
- Physical Analysis to include identifying physical items and their components along with life expectancy, and
- Financial Analysis which is further divided into an evaluation of the current Reserve Fund and deciding on a funding plan.
Understand that a Reserve Study is a “living” document, meaning your Association will need to review your Reserve Study annually. And as your community ages the need to update your Reserve Study will likely increase in frequency. Remember, the Reserve Study is a tool that will assist your Association in planning for eventual costly replacements of community assets while helping protect homeowners from unplanned Special Assessments.
“Setting a goal is not the main thing. It is deciding how you will go about achieving it and staying with that plan.” Tom Landry