HOA finances

Started by RubenE • 20 replies • 1832 views

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RubenE (California)
Posts: 7

Posted:

Today I received a notice from the HOA management company that the HOA dues are going to be increased by $79 per month starting September 1st.
Our dues used to be $397, but ever since we've lived here (since July 2012) a special assessment of $75 was charged on top of that amount.
Just last March the special assessment of $75 ended.
So the increase will be about 20%, which happens to be the maximum increase per year here in California (what a coincedence).

The reason for the increase is the fact that without the special assessment they have been unable to contribute to the reserve fund.

After receiving this notice I started digging into the CID we received when we bought this condo. I am not an accountant, but I'm trying to understand the contents of the CID and especially the funding plan and I was hoping some expert here could help me with that.

If I look at the current funding plan then the contribution to that seems very low as compared to what comes in. If I multiply the number of units by the monthly contribution and that times 12 to get the total annual income then the contribution for future repairs is only about 30% of the total income (HOA dues) and even less than that if I count the special assessment which was active in the previous year. This seems strange to me, because the real balance is way too low as compared to the fully funded balance (-3% in 2012, -21% in 2013 etc.). I'm also wondering where the other 70% (or actually more) of the HOA dues are being spent on (no information on that included). Isn't the reserve fund meant to pay for the repairs that are due?

Question: is it normal to spend only 30% or less of HOA fees on building up reserves even if it's showing red numbers already? Also isn't $476 a month excessive for HOA dues (in California)? And is there a way to appeal this increase?

Thanks in advance.

GlenL (Ohio)
Posts: 5,491

Posted:

Ruben $476 may or may not be excessive depending on what you have to fund. The reserves are monies set aside fore capital repairs or replacements (like roofs) in the future, not normal maintenance. Banks are starting to deny refuse loans where the reserves are underfunded.

The other 70% goes to things like a Management Company if you have one, normal maintenance, landscaping, water, electric (for common areas), amenity maintenance i.e.pool, tennis court etc., insurance and a certain amount is used to cover those of your neighbors who do not pay.

I know of no way to appeal the increase other than to complain to the current Board and hope they can come up with a way to decrease it. But please remember Board members are owners just like you and the increase effects them too.

Studies show that 5 out of 4 people have problems with fractions

GlenL (Ohio)
Posts: 5,491

Posted:

Ruben $476 may or may not be excessive depending on what you have to fund. The reserves are monies set aside for capital repairs or replacements (like roofs) in the future, not normal maintenance. Banks are starting to deny refuse loans where the reserves are underfunded.

The other 70% goes to things like a Management Company if you have one, normal maintenance, landscaping, water, electric (for common areas), amenity maintenance i.e.pool, tennis court etc., insurance and a certain amount is used to cover those of your neighbors who do not pay.

I know of no way to appeal the increase other than to complain to the current Board and hope they can come up with a way to decrease it. But please remember Board members are owners just like you and the increase effects them too.

Studies show that 5 out of 4 people have problems with fractions

GlenL (Ohio)
Posts: 5,491

Posted:

Well that didn't work the way I hoped, I was trying to correct a mistake not intending to double post.

Studies show that 5 out of 4 people have problems with fractions

RubenE (California)
Posts: 7

Posted:

Thanks for the reply Glen. Actually things such as landscaping and tennis courts are all listed as depreciating components. So for instance they take tree trimming as one component with a useful life of 1 year and hence it depreciates 100% each year if that makes sense.

I can imagine there are other costs, such as the water (which is included) and electricity for outdoor lights as you mentioned and the management company. But I can't think of much else. In that scenario 400k per year for a management company for a complex with 140 condos seems a bit excessive or is it just me?

GlenL (Ohio)
Posts: 5,491

Posted:

Ruben, below I've included some of things we budget for but you can contact the MC or Board and request a copy of your annual budget, in fact in CA the Board is mandated to provide a copy to every homeowner - every year. I would recommend you visit davis-stirling.com (attorney website) and visit their budget page at: http://www.davis-stirling.com/MainIndex/BudgetMenu/tabid/614/Default.aspx#axzz2aiShTlZ3 for more info.

01. Management Fees
02. Legal
03. Audit Fees
04. Postage/Printing/Supplies
05. Insurance
06. Federal Taxes
07. Common Utilities
08. Water and Sewer
09. Common Area Cleaning
10. Building Maintenance
11. Clubhouse Maintenance & Repairs
12. Landscape Maintenance
13. Landscape Materials
14. Pond Maintenance
15. Pool Maintenance, Labor and Chemicals
16. Trash Removal
17. Snow Pushing
18. Reserves

Studies show that 5 out of 4 people have problems with fractions

JonD1
Posts: 2,350

Posted:

Ruben:

Before you make the assumption or claim the MC is being paid $400,000 per year (which I doubt) perhaps you might take the time to atend a monthly meeting of your association and ASK for some breakdown in costs rather than approaching it from the point you have decided something is being done improperly.

As Glen pointed out the numbers you collected would assume 100% of the property owners are paying for their share. Is that in fact the case?

Our there any legal issues going on?

Special projects being done?

As Glen also pointed out under some federal guidelines your association might need to show a monthly transfer in the reserves accounts to qualify for loans and financing.

My guess without having any first hand knowledge there just might be some costs o running your property that you might not be aware of.
My understanding your state has some requirements that make monthly meetings open to all owners, and financial records available to you also.

Gather some information and facts and THEN make your evaluation of what is being done. Without those your assumptions just might prove to be wrong.

And to attempt ANY comparison as to what you pay versus another property is in my opinion impossible. To many factors that might affec those numbers to give a realistic basis for what hose numbers should or might be.

I would guess those serving on your Board also will be paying these increases is that the case? I know as dues paying Board member I don't wish to increase my costs for any reason other than it is necessary.

Good luck.

KellyM3 (North Carolina)
Posts: 2,239

Posted:

Ruben,

You're doing what so many other people won't with HOA finances in that you're taking a basic look at the numbers and asking legitimate questions.

You found that your Reserve Funds funding isn't adequate and you've learned that your recent special assessment was to boost that underfunded reserve fund. That's why special assessments exists...they are needed when Reserve Funds cannot cover the cost of community projects they're designed to fund. So, a special assessment is a quick fix because dues payers haven't paid into the Reserve Funds in the past. It's also an unfair method of collecting dues because people who may have moved into your neighborhood this week will be paying the special assessment because the person who has moved away didn't pay his/her share in past months and years.

Regarding if your dues are too much per year, let's consider this:

1. You say the Reserve Funds are woefully underfunded. - You need a higher dues rate, potentially, with money feeding the reserve -

2. What kind of grasp do you have over the operating budget, the budget that pays the regular maintenance, repair and service bills of the HOA? If Reserves are down, and cash is coming in, then the operating budget is consuming that vast majority of the HOA's monthly collections, preventing any "leftover" money from being saved for Reserves.

What you may likely find is that your monthly dues, however painful, are too low to support the community in which you live at the level of amenity and service you expect. If your monthly operating bills seem fair for the size of your neighbors and those expenses in-line, in conjunction with Reserve Funds that are too low, then your monthly rate is too low. The problem with Reserve Fund items is that an HOA board can choose to keep monthly rates artificially low if they're able to "keep the lights on" and the pool clean, etc. BUT, when you need that big-ticket roof replacement etc - the special assessment is required to quickly fill the financial hole. The "HOA Beast" will be fed its money and those repairs will be made because dues payers, like yourself, will ponder how your monthly dues are allocated and managed. It's a delicate balancing act that requires transparency, communication and board members (all volunteers) who TRULY understand their budget and the concept that reserve funds are not HOA profits but rather a pre-payment on a huge repair bill that you know will come.....tomorrow. As president of my HOA, I found critics of monthly dues reach identical conclusions of our board when they are informed and feel comfortable asking about their expenses. In fact, my budgets have been amended to increase dues by more than the budget requests after they - and their board representatives - review the documents and discuss it.

Good luck to you. You're seeing a common problem of HOAs.....my HOA's reserves are adequate for repairs but will require 5 years of continual savings, with some expenditure on property replacement, to reach full heatlh. But, we have a roadmap.

JohnC46 (South Carolina)
Posts: 14,265

Posted:

Ruben

You have 140 units at $401 per month or $673,680 per year. Generally budgets are broken down into Operating Expenses and Reserve Accounts.

Operating Expenses are the costs to run this place on a daily, monthly basis. This money comes in and goes out.

Reserve Accounts are money set aside for future projects. As an example if a roof has a 20 year life and it cost say $200K to replace then one should be setting $10K aside per year. At the end of the 20 years one has the $200K to replace it. If the money is not set aside then there will be a scramble to get it when needed. Usually called an assessment. $200K spread over 140 units. Each unit gets a one time assessment bill for roof replacement bill of $1,428.58 cents. Kind of like pay me now or pay me later.

How much should be in a Reserve Account is determined by doing a reserve study. This means calling in experts to review the whole complex and come up with a structured plan. One suggested think might be lobby refurbishing every 5 years at $8,000.00.

There will always be unplanned things that will jump and bite so they have to be taken into account also. Hard to put a number on it but there has to be some Reserves set aside for this. Unexpected elevator breakdown as an example.

I have seen Reserve Accounts with many line items, amount and timelines. Like $10K per year for a $200K roof in 2033. $1,600 per year for a $8K lobby refurbish in 2018.

There is no set number on how much should be in a reserve fund. It can vary widely. The more complex the association (elevators, amenities, pools, tennis, lobbies, halls, etc.) the more reserves they will need. Some say they would be nervous unless 15-20% of dues are going into reserves every year. In your case about $120K per year. I have heard some say if there is less then 6 month dues from each unit in the reserve fund (in your case $335K) they would be nervous.

Hope this helps.

DaveD3 (Michigan)
Posts: 796

Posted:

Ruben,
Has your board not provided an annual budget and basic financial statements (income statement & balance sheet)?
Sounds like you need to find out what is budgeted and what the money is actually spent on.

RubenE (California)
Posts: 7

Posted:

Hi Glen, Jon, Kelly, John and Dave,

Thanks a lot for your replies. I think this puts me on the right track as to what to look for. I was already planning on attending the next monthly meeting, but I first want to be prepared by doing this research otherwise it will be a waste of everybody's time.

We haven't lived here for that long (less than a year) so we haven't been able to attend a meeting yet (also because of work and time constraints). There also didn't seem to be a reason to attend, because I (naively) assumed that everybody was running smoothly.
Since we only received this notice yesterday I started looking into this also because the essence of the notice is sort of alarming to me.

We didn't receive an annual budget overview or any other financial statements about 2012. We only received the 2011 one when we bought this place in 2012. So the first thing I'm going to do is request the most recent annual budget and other financial statements. I'm especially interested in the operating expenses, because that's a big blind spot at this point.
I will also ask for the meeting minutes, because it may also contain some clues.

I'm also unsure about how many of the owners are not paying. There have been some foreclosures, but I'm not sure how many.

I'm really glad I found this forum, you have been a great help. Thanks a lot, much appreciated!

KellyM3 (North Carolina)
Posts: 2,239

Posted:

Ruben,

The best course is to simply begin attending your monthly meetings before demanding financial documents and budget papers because you don't have background. The best you'll do, by reviewing aging or irrelevant documents (budgets are for one year only) is armchair quarterback and second guess decisions made before you arrived and possibly before your board members were elected to serve. The important thing is to look forward. The assessment has hit, so that alleviated the financial strain of the recent project, but the fair question is "what will your board do to ensure the community saves enough money for future repairs while avoiding special assessments?" Assessments are non-desirable acts by an HOA UNLESS the assessment covers a property emergency that no reasonable person could foresee (natural disaster cleanup, for instance).

Worrying over every aspect of the HOA board, from Reserves to delinquency rate will affect you negatively. Enter your HOA activities from the shallow water and swim deeper. No "head-first" diving or you'll go nuts, guaranteed. HOA finances turn slowly, including reforms and changes.

RubenE (California)
Posts: 7

Posted:

Thanks for the advice Kelly. Are you saying that I should not request the budget and financial statements before attending meetings to not step on toes? Pardon my ignorance, but I am not familiar with HOA etiquette and rules of engagement as I'm new to all of this.

DaveD3 (Michigan)
Posts: 796

Posted:

I would absolutely START with the financial documents. I would also ask for a copy of the most recent reserve study.
There should be nothing wrong, questionable, suspicious, or anything of the sort for any owner to be requesting that info. Obtain it, understand where the money is going, then you can question things at those meetings.

KellyM3 (North Carolina)
Posts: 2,239

Posted:

Ruben,

You can certainly request any documentation but, tactically, be seen and meet your board as you review those documents. The meeting is likely not the place to read the budget and ask questions as you go along the document. I've often asked budget inquirers to allow our business meeting to adjourn so that fellow board members and any attendees can be sure all business is finished and can return home without missing votes if they don't want to hang around for essentially a one-on-one conversation. Meet the treasurer or president or board member most knowledgable about the budget and the philosophy guiding budget and spending decisions and explain your feelings following the special assessment...and that you're beginning an educational process about the HOA workings. Certainly, there will be no rhetorical fireworks and accusations but immediate demands, if handled improperly on a interpersonal basis, will set you back.

Ask your questions or make demands following your review of the budget, reserve study and after ensuring you understand what you're reading. You're off to a great start but if you've never been to one HOA meeting in your neighborhood, start there and get a sense if the board is business-focused or a bunch or retirees with lots of time on their hands and the need for petty political power. It will be fairly obvious. Nothing will change overnight so you have time as a luxury if your board meets monthly.

If your board simply won't talk to you or ignore you, then you have another topic to address. But, as of now, that doesn't seem to be a challenge and your inquiries - as best I can understand them on this internet message board - seem reasonable and above-board from my perspective as an HOA board president. I can see no reason why you can't have a conversation and relationship with the board, even if you ultimately disagree with their direction.

1. Reserve funds should be funded monthly.

2. Special Assessments, if the money is used for reserve fund projects, reflect an underfunded Reserve Fund.

3. Despite being expensive, it could be a fact that the property requires higher dues to maintain current services and build the reserve fund without special assessments.

4. Property maintenance may be delayed but the maintenance expenses are a certainty.

Place those thoughts in your mind as you continue with an open mind. After all, your suspicion is that dues are being wasted. That's the common perception of every one of these citizen inspection threads on HOATalk.

RubenE (California)
Posts: 7

Posted:

Thanks Dave and Kelly. I went ahead and asked for all the information from the MC. So that will give me some homework before the next meeting.
Of course I'm trying to approach this with an open mind, but I can't help but wondering about what's going on. Please note that this increase isn't a special assessment, but a permanent 20% increase. The special assessment ended March 2013. The actual goal was to increase the dues 3% each year so that's a big discrepancy.

KellyM3 (North Carolina)
Posts: 2,239

Posted:

Ok Ruben, got it.

You have a solid foundation and a good question about the twenty percent increase. Focus not on the "what" - which is a dues increase of 20% ( the max ). I ask you to focus on the "why" that dues increase is coming and how much is being used to solidify your reserves. Otherwise, you'll be hit with repeated special assessments out of the financial blue.

Good luck and I hope your investigation is satisfactory.

RichardP13 (California)
Posts: 1,767

Posted:

Ruben

Based on your statement of current assessments of $397.00, you have annual budget of just under $667K. As Glen pointed out, you have monthly expenses that have to be paid. If you live in a condo or townhome community, you assessments are going to be considerable more than if your lived in a SFR HOA. You expenses per month might look like this for $140 units:

Landscaping-$3K-$4K
Insurance-$10K if earthquake is included
Water-if included-$12K or more
Trash Removal-if not provided by city-$2K
Management-$2K-$4K depending on the level of service and time required.
Reserve Allocation-based on monthly budget of $55, should be $5-$10K per month
Repairs-??

Your monthly income is $56K.

RubenE (California)
Posts: 7

Posted:

Hi Richard,

Thanks for the reply. Yeah that makes sense. I got a message back from the MC that they are going to send me all the info I've requested. So hopefully I'll soon have the actual numbers that I need.
One thing though... you mentioned the repairs as did the MC representative, but aren't repairs supposed to be funded from the reserve fund unless it's something unforeseen?

RichardP13 (California)
Posts: 1,767

Posted:

The reserve fund or replacement fund is generally for the replacement of the components that are individual listed in your comprehensive reserve study, which must be done every three years. For example, if you have entry gates to the community, if the gate opener went down, the repair to get it back and running would come from operating account (repairs), but if it had to be replacement, the monies would come from reserves.

Hope that helps.

RubenE (California)
Posts: 7

Posted:

Hi Richard,

Yes that helps, got it now. Thanks!

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