Who is responsible for preparing a budget for board approval

How would your HOA board respond to this?

Let's say that your property management agreement required the property manager to prepare a budget by mid-November, and your bylaws required the HOA board to approve the budget.

But it's December, your property manager hasn't yet prepared (or even started to prepare) a budget, and your property manager emails to tell you that there is a six-figure expense due in three weeks.

How would your board respond in this situation and who's to blame?

Thanks.

Because the property manager was supposed to prepare a budget (which would have included the large expense, due in 3 weeks) but did not. And the property manager didn't tell the board about the large expense, due in 3 weeks, until now, when the HOA has to scramble to pay it.

It's due in 2021, but very soon.

Isn't the property manager primarily at fault here? The property manager has had full control over all bank records, checks, tax payments, everything.

Yes, admittedly it seems insane.

The contract with the PM says that the PM is to provide a budget to the HOA by November __ of each year.

The PM did not do that. The PM hasn't even started a budget for 2021 and it's now 3 weeks from the end of the year.

In the bylaws, it says that the annual budget is a matter for board approval (not owner approval).

Sorry, 3rd email now:

The issues I have are:

1. The PM didn't provide a budget by November __, despite the contractual obligation to do.
2. The PM didn't inform the board of a large payment due in 3 weeks (in 2021) until just now. The PM didn't give the board visibility in in the HOA's financial situation.

So now the HOA has to come up with a 6-figure payment that directors didn't know about.

I blame the property manager.

Chris

As a management company owner whose experience is with single family home HOAs and small condominium associations in Texas and California, I realize I have no experience in managing 'big city' properties with high dollar value infrastructure items such as elevator maintenance.

I also realize a six figure expenditure is common in such properties.

However, I would expect both the PM and the members of the Board of such an association would have a general idea an expenditure of that magnitude was coming up, be it renewal of an insurance policy, an annual elevator maintenance item, or even a 'one off' maintenance issue of which everyone involved should have been aware before now.

The PM and management company leadership should clearly should be taken to task for failure to develop the budget by the date agreed. However, I would ask of the Board why the subject was not raised within several days of the missed due date? If appropriate responses were not received from the PM, why was the matter not escalated within the management company?

Regardless, my main point is an expenditure of this magnitude should not be coming as a surprise to anyone on the Board. If it is, I suggest the Board itself conduct a stiff self-examination to determine how and why this occurred.

Very helpful. Thanks, everyone.

From the OP, the question was, "How would your board respond in this situation and who's to blame?"

My Board would have never ended up in that situation. Even if the Property Manager is contracted to accomplish a specific task, my Board still sees it as our responsibility to ensure the task will get done as agreed/contracted. This means checking in some time before the task is due, being involved as the task is being worked, and doing what's needed to ensure the task gets done on time.

This is even more true for a task that's as important and significant as the annual budget.

That does not mean however that the Property Manager in your scenario is off the hook. It means that if blame must be cast, then both the Board and the Property Manager are to blame for the task not being accomplished.

In my opinion, this is also the Boards fault.

There should be a financial report for each meeting and, if not, the board should have demanded one.

There should be financial reviews by the Treasurer and the board should have asked for the status of reviews.

The board should always have a trust but verify with all of it's contractors.
If the board is only doing half it's job (trusting but not verifying) then the board is at fault.

Uh, raise hell - a lot of it? This isn't just the fault of the management company - where was the board in all this?????

In my community, we usually started working on next year's budget in July, when our property manager would send out RFPs to current and potential vendors. If we signed a two-year contract with a company, it usually let us know around that time if the fee would increase (the contract usually set the price for two years or had a cap on the increase - and those terms are VERY DIFFICULT to find).

Anyway, we'd be reviewing bids and the first draft of a budget by September. Most of October's meeting was spent haggling over the details and sometimes we'd get two or three revisions to review. By November, we'd be ready to vote on the final. Our documents require homeowners to get the upcoming year's budget and notice of an assessment increase on or before December 1. If that increase is over 5%, homeowners have to approve it, which we never did. I think in the 10 years I served on the board we only went to 5% once or twice and explained why in the annual budget letter..

Part of the reason we started early was that Thanksgiving was the week after our meeting and with Christmas and everything else coming up after that, we didn't want to have extra meetings to get all of this done. In fact, if we didn't have any sensitive association issues to address in December, we usually skipped that meeting. The homeowners knew that would be a possibility because we published the meeting schedule in the newsletter - if they saw the "meeting tonight" sign in December, they knew what was up - and that would be posted three days in advance.

In this case, I would go to the property manager's supervisor immediately and demand an explanation.
Keep in mind your property manager may have several communities who also need budgets and some may have more issues than others. Or the manager is waiting for information from other departments that will be used to draft the budget. If our property manager fell behind in our budget preparation, these were usually the reasons why - and why we began the process early.

As far as this six figure expense, your board should already be aware of that, so it will have to ensure the money's there - or begin right now in negotiating payment, especially if this is for a repair you can't put off. As for the property manager, now is a good time to tell them you will be looking for a new property manager in 2021 - please do some research on how to select one (CAI has a decent guide and there are old conversations on this website you can review for ideas. Or start a new conversation).

At this point, your board may have to take this year's budget, add the current inflation rate, adjust the assessment accordingly, and use that for next year. Everyone should take a section of the income and expense reports and note what line items went over budget, how much, and why, and then come with suggestions on how to keep those under control. There may be a few you can't do much about (e.g. property taxes), but others may require a reduction of services, delay of improvements, and so on. This won't happen overnight - this will be a project for the next two months or so.

You may also want to establish an advisory committee that can research property management companies and make recommendations as to what to look for, a schedule to request, receive and review RFPs, a transition plan for the new company, etc.

However this ends, everyone on that board needs to understand they must pay more attention to the budget and not sit there and leave it to the property manager. This is what I was thinking of in another post where I said too many boards let their property manager do their thinking for them. Oh, and your treasurer should take the lead on the monitoring - he or she doesn't have to do everything, but the treasurer should have been talking to the property manager long before now - and you need to ask him/her for an explanation.

I hope this actually means that SheliaH would recommend that the Board go to the property manager's supervisor.

Yes, that's what I meant - tablet thumbs stumble again!

In fact, I'd have a major pow wow with the manager, his/her supervisor and whoever else has a hand in drafting the budget. Chris's board need to leave that meeting with a clear understanding of how the budget is prepared and who does what. Yes they should all go because all of them are responsible.

And if I'm a homeowner watching this saga, I'd do as some of you have suggested and call for a special homeowners meeting to sack this board. It's one thing to make a mistake (no one's perfect) but you don't get to say it's all the manager's fault when that person works at the board 's direction and this is a major f@#$ up.

He likes to witch hunt.