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Budget showing excess as income?

Started by SusanH31 • 32 replies • 874 views

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SusanH31 (North Carolina)
Posts: 69
Posted:
I'm a new Treasurer of a small townhome HOA (21 units) in North Carolina. We should have a little money left over at the end of 2021, which I can apply to the 2022 operating budget. Our CCRs say "If the actual amount of annual Assessments collected in any one year exceeds the actual costs incurred for the Common Expenses for such year, the excess shall be retained by the Association as a reserve for subsequent years' Common Expenses."

The word "reserve" in this context is confusing, but since it says Common Expenses, I'm interpreting it to mean we can use it for the operating budget. Would you agree?

My main question is whether to show this excess in the new budget as an Income item (see *).

Income
Unused Funds from Prior Year * 1,823
Association Dues Assess.
Maintenance Dues 29,040
Master Insurance 18,794
Reserves 17,000
------
Total Income 66,657

Does this excess belong under Income or another category?
JohnC46 (South Carolina)
Posts: 14,265
Posted:
The answer is yes based on as you said:
the excess shall be retained by the Association as a reserve for subsequent years' Common Expenses."
MaxB4
Posts: 3,513
Posted:
The funds should be transferred into a separate account called Reserves, for the long term maintenance of the the Common area components.
MaxB4
Posts: 3,513
Posted:
Quote:
Posted By SusanH31 on 10/25/2021 9:00 AM
I'm a new Treasurer of a small townhome HOA (21 units) in North Carolina. We should have a little money left over at the end of 2021, which I can apply to the 2022 operating budget. Our CCRs say "If the actual amount of annual Assessments collected in any one year exceeds the actual costs incurred for the Common Expenses for such year, the excess shall be retained by the Association as a reserve for subsequent years' Common Expenses."

The word "reserve" in this context is confusing, but since it says Common Expenses, I'm interpreting it to mean we can use it for the operating budget. Would you agree?

My main question is whether to show this excess in the new budget as an Income item (see *).

Income
Unused Funds from Prior Year * 1,823
Association Dues Assess.
Maintenance Dues 29,040
Master Insurance 18,794
Reserves 17,000
------
Total Income 66,657

Does this excess belong under Income or another category?

I am somewhat confused, are all these items income?

Income
Unused Funds from Prior Year * 1,823
Association Dues Assess.
Maintenance Dues 29,040
Master Insurance 18,794
Reserves 17,000
SusanH31 (North Carolina)
Posts: 69
Posted:
Yes, Maintenance Dues, Master Insurance, and Reserves (shows as a full year's worth) make up the total in dues the HOA should collect from owners during 2022. Each household pays $110 per month for core operating services from lawn care to office supplies. Each pays their share of a master insurance policy, according to their square footage and set by the insurance company. The Reserves will be transferred straight into an account that's kept separate from the operating account.

The real question here is what to do with the $1,823 that I predict we'll have in the operating account at the end of this year.

(PS: we actually have 22 townhomes, not 21.)
MelissaP1 (Alabama)
Posts: 13,836
Posted:
Hurry up and spend it on something like pool furniture or an upgrade/update on his property. Best place to put it's back into the HOA in the form of an expense. So if got some painting to do or want some nice entrance pieces go for it.
Former HOA President
MaxB4
Posts: 3,513
Posted:
Quote:
Posted By MelissaP1 on 10/25/2021 11:41 AM
Hurry up and spend it on something like pool furniture or an upgrade/update on his property. Best place to put it's back into the HOA in the form of an expense. So if got some painting to do or want some nice entrance pieces go for it.

UNREAL
MaxB4
Posts: 3,513
Posted:
Quote:
Posted By SusanH31 on 10/25/2021 11:30 AM
Yes, Maintenance Dues, Master Insurance, and Reserves (shows as a full year's worth) make up the total in dues the HOA should collect from owners during 2022. Each household pays $110 per month for core operating services from lawn care to office supplies. Each pays their share of a master insurance policy, according to their square footage and set by the insurance company. The Reserves will be transferred straight into an account that's kept separate from the operating account.

The real question here is what to do with the $1,823 that I predict we'll have in the operating account at the end of this year.

(PS: we actually have 22 townhomes, not 21.)

Well, to begin, I don't like how your books are set up, as it's not how I would set up an association. Since you have a reserve account and it appears you are putting money into it, I would figure a certain amount to have in your operating account as a buffer against emergencies. Some like 2-3 months of months assessments, anything over, place into reserves.
SheliaH (Indiana)
Posts: 6,964
Posted:
What Max said. Reserves are actually a separate account used to save money that will be used for future major repairs/replacements to the common areas, such as roofing for your townhomes. The “little money” left over at the end of the year could be transferred to that to help bolster the balance. That’s usually what we did depending on the amount left over.
If it is not right do not do it; if it is not true do not say it. Marcus Aurelius
SusanH31 (North Carolina)
Posts: 69
Posted:
Saying you don't like how my books are set up isn't helpful. I'm trying to learn how to set things up correctly.

Since we are a non-profit corporation and our CCRs say that if amounts collected exceed actual costs, the excess shall be retained for later common expenses, does that mean we can keep the extra $1,823 in our operating account as a cushion? We don't have to allocate it to something specific before the end of the year in order to have a zero profit?
SusanH31 (North Carolina)
Posts: 69
Posted:
Quote:
Posted By SheliaH on 10/25/2021 11:57 AM
What Max said. Reserves are actually a separate account used to save money that will be used for future major repairs/replacements to the common areas, such as roofing for your townhomes. The “little money” left over at the end of the year could be transferred to that to help bolster the balance. That’s usually what we did depending on the amount left over.

Thanks. Normally I would prefer to put this excess money into the Reserve account, but next year will be the first time this HOA has contributed to reserves, and the homeowners are facing a 40% increase in dues (35% to fund reserves + a 5% hike in normal operating expenses). I was hoping to use the excess to lessen some of the pain - about 4% worth.
MaxB4
Posts: 3,513
Posted:
Quote:
Posted By SusanH31 on 10/25/2021 12:01 PM
Saying you don't like how my books are set up isn't helpful. I'm trying to learn how to set things up correctly.

Since we are a non-profit corporation and our CCRs say that if amounts collected exceed actual costs, the excess shall be retained for later common expenses, does that mean we can keep the extra $1,823 in our operating account as a cushion? We don't have to allocate it to something specific before the end of the year in order to have a zero profit?

This is how one might look like
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AugustinD
Posts: 3,698
Posted:
Quote:
Posted By SusanH31 on 10/25/2021 9:00 AM
I'm a new Treasurer of a small townhome HOA (21 units) in North Carolina. We should have a little money left over at the end of 2021, which I can apply to the 2022 operating budget. Our CCRs say "If the actual amount of annual Assessments collected in any one year exceeds the actual costs incurred for the Common Expenses for such year, the excess shall be retained by the Association as a reserve for subsequent years' Common Expenses."

The word "reserve" in this context is confusing, but since it says Common Expenses, I'm interpreting it to mean we can use it for the operating budget. Would you agree?
I agree for now. But I have a few questions to help nail this down (if possible).

Importantly the NC Planned Community Act likely applies. If so, this statute has this definition of "Common Expenses":

47F-1-103. Definitions.

In the declaration and bylaws, unless specifically provided otherwise or the context otherwise requires, and in this Chapter:
...
(5) "Common expenses" means expenditures made by or financial liabilities of the association, together with any allocations to reserves.

SusanH31, is the phrase "Common Expenses" defined in your CCRs? If so, please provide the definition. Is your HOA/COA a condominium subject to the NC Condo Act? Or a non-condo HOA? What state statutes apply? Sometimes the Declaration states expressly what statutes apply.

SusanH31 (North Carolina)
Posts: 69
Posted:
Thanks. I have that level of detail; I just didn't post it in this thread.

Do you think we can use the excess from 2021 to offset part of the 2022 dues? If so, how does that look on paper? Using your example, what if the annual income was short by $2,000 but made up by an excess from the year before?

Income Accounts Total: $53,440
Excess from Prior Year: $2,000
Expense Accounts Total: $55,440
Difference: 0

Would that be kosher?
MaxB4
Posts: 3,513
Posted:
What type of accounting program are you using?

SusanH31 (North Carolina)
Posts: 69
Posted:
AugustinD:

Yes, the phrase is defined in our CCRs as follows:

"1.07 Common Expenses. The term "Common Expenses" shall mean and refer to all expenditures made or incurred by or on behalf of the Association, including, without limitation, those expenses described in Section 8.04(e) below, together with all funds assessed for the creation or maintenance of reserves pursuant to the provisions of this Declaration."

The beginning of our CCRs says the declaration was made "pursuant to Chapter 47F of the North Carolina General Statutes" so the NC Planned Community Act applies. (Thanks for mentioning that. I had not realized the statute would be referenced as Chapter 47F, and now we can be certain that we're following the right one.)
SusanH31 (North Carolina)
Posts: 69
Posted:
Quote:
Posted By MaxB4 on 10/25/2021 12:56 PM
What type of accounting program are you using?


QuickBooks Desktop plus Excel for cases when QBDT is too clunky.
MaxB4
Posts: 3,513
Posted:
What I attached is a sample budget with chart of account numbers. I would use Quickbooks exclusively so I can prepare proper financial report, one that would include a Balance Sheet.

A Balance Sheet would show the extra income as net income during the year and retained earning the following. I have attached a sample set of reports for you to look at.

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📄11025182647154.pdf(186 KB)
BenA2 (Texas)
Posts: 1,273
Posted:
I agree that "common expenses" clearly means the operating expenses. Perhaps they should not have used the word "reserve" but if the writers had intended it to be used for a reserve fund they would not have said "for the common expenses."
MaxB4
Posts: 3,513
Posted:
Quote:
Posted By BenA2 on 10/25/2021 1:28 PM
I agree that "common expenses" clearly means the operating expenses. Perhaps they should not have used the word "reserve" but if the writers had intended it to be used for a reserve fund they would not have said "for the common expenses."

What do reserves cover?
SusanH31 (North Carolina)
Posts: 69
Posted:
Quote:
Posted By MaxB4 on 10/25/2021 1:18 PM
What I attached is a sample budget with chart of account numbers. I would use Quickbooks exclusively so I can prepare proper financial report, one that would include a Balance Sheet.

A Balance Sheet would show the extra income as net income during the year and retained earning the following. I have attached a sample set of reports for you to look at.


Is "Retained earnings" the proper term for a nonprofit? I wouldn't want to ring alarm bells in the minds of future auditors or CPAs.

"A for-profit entity’s balance sheet includes retained earnings or owner’s equity (measured as assets minus liabilities). By contrast, a nonprofit doesn’t retain earnings; it uses them to support its mission." Source: https://www.indinero.com/blog/nonprofit-balance-sheet
MaxB4
Posts: 3,513
Posted:
All retained earnings are is year over year, profit/loss. HOA are not for profit, versus the non-profit foundations you here about.
TimB4 (Tennessee)
Posts: 21,059
Posted:
Susan,

Keep in mind that budgets are your best educated guess and not an absolute. Therefore, there will be some line items having spent more then budgeted and some spent less then budgeted.

Budgets for the reserve accounts work the same way. Some line items under funded and some over funded based on costs at the time of the reserves. To counter this, we established a contingency line item within the reserves to offset any shortages.

We then adopted a policy that any excess funds in the operating account would be transferred to the contingency line item of the reserves.

This specified for future boards how the funds should be handled and kept us in compliance with similar language in our governing docs that you have.

If you don't transfer the funds, as long as you include them when creating the following years budget (which is used to establish the annual assessment) you would be in compliance with your governing documents.

Expected income (disclosure statements, interest, etc - but do not include any assessments) plus existing funds (operating reserve) minus expected expenses = amount of assessments needed divided by the number of lots provides the annual assessment needed. (see attached)

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SusanH31 (North Carolina)
Posts: 69
Posted:
TimB4 -- Thank you for sharing your budget draft. Seeing the transfers to and from Reserves is very helpful, as is the rest of the detail in your budget.

Thanks a million!
Susan
KellyM3 (North Carolina)
Posts: 2,239
Posted:
Hi Susan,

You need have the HOA board authorize the opening of a money market account. We call ours an "Operating Money Market Reserve" account and have shifted carryover funding into that particular account. It is not restricted money like the Reserve Fund so the board should exercise restraint in tapping it for expenses.

It is not an income item on next year's budget. I'm not an accountant but if you tap that operating account, it may show up as a liability for some odd reason in the current year budget (don't hold me to that but it seems our accountant treated a transfer from our Operating Money Market that way). It's not income, thought.
SheliaH (Indiana)
Posts: 6,964
Posted:
Quote:
Posted By SusanH31 on 10/25/2021 12:32 PM
Posted By SheliaH on 10/25/2021 11:57 AM
What Max said. Reserves are actually a separate account used to save money that will be used for future major repairs/replacements to the common areas, such as roofing for your townhomes. The “little money” left over at the end of the year could be transferred to that to help bolster the balance. That’s usually what we did depending on the amount left over.


Thanks. Normally I would prefer to put this excess money into the Reserve account, but next year will be the first time this HOA has contributed to reserves, and the homeowners are facing a 40% increase in dues (35% to fund reserves + a 5% hike in normal operating expenses). I was hoping to use the excess to lessen some of the pain - about 4% worth.

I understand wanting to lessen some of the sticker shock, but this may be a good time to level with the neighbors on what really happens with assessments. When you were under developer control, it subsidized a lot of the costs to maintain the common area and build whatever amenities you have. They also kept the assessments artificially low so people would buy homes.If

It would have been helpful if they leveled with the new board in saying things would increase - a lot - once they left and the homeowners would be responsible for everything, but that never happens. Since you can't change the past, the board should focus on .going forward. Explain what's going on with expenses (there are increases everywhere) and why it's important to begin funding reserves properly from the start. If they squawk (and some will), remind them of Surfside. Note we don't talk much about that anymore because it's well past the news cycle and people have the attention span of a fruitfly.If

Stay transparent and encourage people to make suggestions on how the association can control costs. And be sure to keep educating yourself on HOA finances - there are educational materials on the CAI website you can buy and the costs are reasonable. Good luck!

If it is not right do not do it; if it is not true do not say it. Marcus Aurelius
JohnC46 (South Carolina)
Posts: 14,265
Posted:
Susan
If your Reserves are properly funded then I would place the excess as income under Retained Earnings. Rarely, if ever, should excess be given back to owners.
LetA (Nevada)
Posts: 2,679
Posted:
As a rule of thumb you want to have on hand three months of operating expenses for your operating budget. It don't hurt to have more, because you never know when something is going to bite you that
isn't covered under reserves. If you can safely see you have three months of operating expenses, by all means transfer the overage to your reserves.
SusanH31 (North Carolina)
Posts: 69
Posted:
Thanks SheilaH. We're definitely going to explain to the members that the developer left important, expensive things out of his budget. Many of the homeowners could handle an increase from $180 to $288 monthly, but some would probably have trouble absorbing that. There is also a fairness question, in that the current owners would pay more than their share compared to those who buy in 5 years from now, if we increased to the full amount in one year. We have a plan now to ask for 60% of the original reserve contribution and to increase that by 5.5% in subsequent years, to spread out the expense.

I haven't forgotten the Surfside example, and I'll definitely use it if needed.

Yep, honesty and transparency are the top priority, in spite of what one or two neighbors say. We are proving that malicious gossip wrong.

Thanks for the tip on the CAI. I'll check it out. Have a good weekend!
SusanH31 (North Carolina)
Posts: 69
Posted:
Quote:
Posted By JohnC46 on 10/28/2021 8:27 AM
Susan
If your Reserves are properly funded then I would place the excess as income under Retained Earnings. Rarely, if ever, should excess be given back to owners.

I wasn't suggesting giving funds back to owners. I'd like to use the excess to keep next year's budget from growing too much, and thanks to help from this forum, we're going to do that.
TimB4 (Tennessee)
Posts: 21,059
Posted:
Susan,

Keep in mind that from what I've seen, Associations tend to need a 3 to 5 percent increase each year just to keep up with inflation.

MaxB4
Posts: 3,513
Posted:
Quote:
Posted By JohnC46 on 10/28/2021 8:27 AM
Susan
If your Reserves are properly funded then I would place the excess as income under Retained Earnings. Rarely, if ever, should excess be given back to owners.

Sorry John, you can't put money into an account called Retained Earnings, doesn't work that way.
SusanH31 (North Carolina)
Posts: 69
Posted:
Quote:
Posted By TimB4 on 10/29/2021 9:41 AM
Susan,

Keep in mind that from what I've seen, Associations tend to need a 3 to 5 percent increase each year just to keep up with inflation.


Yes indeed. We're seeing some of that now in the regular non-reserve budget, which is what I'm using the excess funds to cover. I won't count on being able to do that for 2023, but it should be easier to stomach a $12 monthly increase then compared to the $65 increase needed for 2022.

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