Cut Operating Expenses or Capital Reserve Contributions

It's budget time for us and our property manager ran the initial numbers. The board has yet to see the first cut of the budget and I know this post is premature because of this. However, I already know this is a topic of importance in this day and time.

If we continue with our services in the same manner as previous years and we agree to contribute to our capital reserves as our reserve study suggests we will need to raise our assessments 16%. Anything above 15% means a majority of owners would need to agree. I can't afford a 16% increase and I view myself as more fortunate than other owners. I wouldn't even begin to entertain the thought of proposing such a huge increase in today's economy.

Our basic services are not extravagant. We have no swimming pool or clubhouse. We are a smaller complex of 56 townhomes. We provide landscape maintenance, snow removal, retention pnd maintenance, and general repairs to common elements. Our complex is 9-10 years old. Oh...there of course is the 4 times a year wild extravagant trips for the board members to carry on, eat, drink amd be merry (joking).

Have other associations found them in this spot and how have you come to terms with it? I'm hoping we can find a few ways to decrease the operating expense, but I also know the contributions to our capital reserves is big. I wonder, can we contribute less to the capital reserves with the comfort level necessary to know this fund can be re-built when the economy is better?

Of course, the answer lies on when we need the money for capital funding. But, there is always the option of postponing improvements, repairs, etc.

Its not an easy time to be involved in budget manners of homeowner associations. I'd like your thoughts on this and how you see yourselves handling this issue.

Rick

Rick,

How much of that 16% accounts for an increase to the reserve account? At what % is your reserve fund funded at this point?

Glenn,

Our reserve study was done in 2007. We had planned on having it updated in 2010. Our complex was built in 2000-2001 so we are relativlely new and just beginning to experience capital expenditure. I attended a seminar this past week on budgeting, reserve studies, and loans for capital reserve projects. The reserve study spokesman recommended having your reserve study update every 2-3 years. The president of our management company said he recommends 5 years. I originally thought we should update our study in 2010 since it will begin to provde an accurate record of how our complex is aging. However, given the budget crunch I can see putting this update off for one more year. Funding wise, we are basically where the reserve study says we should be at this age of our complex. I am concerned with cutting contributions in fear it will hurt us in the long term as you stated.

I'll definetely look at operating expenses to cut first. However, we are already not high on the operating expenditures in my mind.

I don't have an issue with calling a special meeting. I'd be more than happy to explain why our assessments need to be raised 16% this year. However, we typically have 2 onwers present at any meeting. What happens if we call a meeting to approve this high increase and do not get a quorum?

As a second after thought, I would not want our assessments raise above the average for comparable propoerties in our area. Anyone know how I can research this?

Tracie,
This is what I was looking for, ideas to trim operating expenses. We have snow removal for 2" or more, maybe we can save to up the amount. We already have a special agreement with our village to salt the streets when we request it. This has turned out much less expansive than going to the snow removal company for salting.

Another thought would be to have landscape maintenance every other week instead of every week.

Of course we have to assume the company invoilved would be willing to provide service as such.

1. Check your documents about raising annual assessment. Mine have a provision that allow for a REDUCED QUORUM at the SECOND meeting called for the purpose of discussing/voting an annual assessment increase. Ex. I have 19 units, so my typical quorum as defined by my documents is 75% for an assessment incrase. This gives me a quorum of 14.25 (or 15). If there's no quorum for the first meeting, we can notice for a second meeting, and that quorum requirement would be only 7.125 (or 8). Disinterest on the part of apathetic property owners does NOT help them in this situation (according to my documents).

2. Research can be done through your local realtors association. They keep numbers about averages of everything by every neighborhood imaginable. You could also check your chamber of commerce/visitor & convention bureau/etc. Most agencies in your city charged with bringing new business will have this info. You could also just search online (if you know other community association names) to see if they have websites.

RickW - I would not consider raising maintenance to cover the mandatory capital reserves a slap in the face. It is however a dose of reality. If you do reduce reserve contributions for a period, the responsible thing is to keep track of the necessary amount not transferred so it can be replenished when your association regains fiscal responsibility.

Wow, not opening up the pool! I'm surprised that most people didn't get upset with this. I can imagine this move saved you quite a few dollars. Congrats on the board taking such a step.

I found a local realtor who is also a HOA member. He has provided me with a list of associations in our area and their assessments and what the assessment covers. It's extremely helpful! I plan on using this not necessarily as a tool, but maybe a guideline as we budget for next year. We'll increase our assessments, thats a given, but I want to be able to juggle the fine line betweenour budget and property values. Any complex with assessments that are extremely high compared to others would be looked at twice by potential buyers.

Hi Rick,

I live in a 110 unit HOA comprised of townhouse-building-style condos in Kane County, IL. We are 14+ years old.

Early on our assessments were more or less flat from year to year as we were new construction and did not budget for a lot of maintenance (year to year the assessments varied by a couple of percent - up and down). We also under-funded our reserves (less than recommended in our Reserve Study). Lots of mistakes.
More significant increases in assessments began when we needed to do periodic maintenance more regularly (painting wood trim, replacing rotted wood trim, asphalt sealing, concrete repairs, siding repairs, roof repairs, landscaping replacements, etc.).

Then with an updated Reserve Study (the 2nd study), we began doing catch-up on our Reserve funding over a 3 year period. This resulted in maximum assessment increases per our governing docs without needing to obtain HO approval (just under 15% increases per year for those 3 years).

Along came next Reserve Study, #3, (inadequate in that was missing some components) and with a new BOD, reserves back to being underfunded (IMO) and the BOD also began limiting assessment increases. We have also had increases in delinquencies and in regular maintenance costs (roofs, driveways, wood, siding, etc. repairs) over the past several years, yet our assessments have been kept down to only several percent increase per year.

We are now at the point of needing roofs within ~2 or 3 years and will not have enough reserve funds (under the current funding plan). Unofficially, the BOD has indicated that a special assessment will be needed. I am waiting to see our proposed 2010 budget. I believe they are considering other options than a special assessment.

Lessons learned:
• Include funding pots for regular maintenance in your operating budget every year, even if you are not going to use it. For example, if you need to paint wood trim every 3 years, place 1/3rd the cost into that pot every year.

• Increase assessments to keep up with inflation.

• Get a Reserve Study by a reputable firm and go over it carefully to ensure it includes all components. Every common element component (and limited common element depending on how your gov docs determine responsibility) needs to be covered either in your annual operating budget, or in your reserve study/budget. Also, check that the firm is using the correct numbers and check their assumptions.

• Plan for delinquencies with appropriate funding pots (contingency operating reserve and legal) in your operating budget.

• Trim the fat from the budget. Sign up for 2 or 3 year contracts that specify (i.e., limit) annual increases, and, provide for a renewal bonus. Do you cover limited common elements? If so, check your gov docs to identify where you can trim the fat by requiring HOs to be responsible for the maintenance and develop a clarifying responsibility chart/policy. We identified a HO responsibility for: chimney caps, patios, decks, privacy fences, lights, front stoops as these are exclusive use limited common elements; thus were able to remove these from our maintenance program and long term capital improvements/replacements.

My recommendation (in addition to trimming the fat) is to increase your assessments to the extent needed to adequately fund your reserves, but not over your 15% limit (IMO, based on the info you have provided).

As for updating your reserve study – I have heard from our PM they should be updated every 3-5 years, or when the underlying assumptions change – for ex., a major capital improvement or other significant event. BTW, is the cost of the update included in your reserve study/fund? That way the cost does not impact your operating budget (i.e., is paid for out of reserve funding pot).

Sheila makes a good point about assessments reflecting your HOA needs, and not comparing your assessment to those of others in your area. This is like comparing apples to oranges and has been discussed on HOATalk in the past.

I hope this helps. Wishing you success,
Bonnie

P.S. Do you have the emerald ash borer in your area? Do you have ash trees? If yes, how is your HOA planning for this?