For most community associations, cooler weather signals the start of budget season. It’s the time of year when boards and finance committees hammer out the next year’s expenses and income.
We asked a panel of industry professionals for its best budgeting practices. Before your association finalizes its numbers, consider the panel’s advice:
Plan for the unexpected. A good rule of thumb is to allocate 3 to 5 percent of your budget for contingencies, said Don Kekstadt, president at Vanguard Community Management in Schaumburg, and Legum & Norman, Mid-West, in Chicago.
“Things like massive snowfalls, freezing temperatures, high gas prices and fluctuating insurance costs are so unpredictable,” he said. “If the budget is so lean (that) there is no stretch in that rubber band, the association will end up borrowing from reserves and not paying it back.”
Budget for delinquencies. Here’s the formula used by certified public accountant Brad Schneider, president of CondoCPA in Elmhurst: Estimate how many units will stop paying assessments. Multiply by six months, the average length of time for most delinquencies. Subtract any recoveries you expect from current delinquencies or foreclosures. Don’t forget to include any special assessments.
Don’t skimp on the reserve fund. Refer to your reserve study to see how much you need to contribute each year.
“Cutting reserves is a dangerous thing to do,” Kekstadt said. “When the useful lives of roofs and driveways and mechanical systems come to an end, you won’t have the funds to replace them. Boards have a responsibility to fund properly to maintain and enhance the property.”
At a minimum, put aside 10 percent of the total budget, or owners and prospective buyers may have problems with mortgage financing, Schneider said.
Strive for peace. Disputes, especially those between owners and associations, can erupt and escalate quickly. They also can be expensive. Create a line item in your budget for mediation, said Sima Kirsch, an association attorney in Chicago.
“Something as little as $1,000 may get you through a possible disaster,” she said.
Even if you’re headed for court, mediation can prepare the parties to move through the process in a timely, cost-effective and productive manner, she said.
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Call in the consultants. Their expertise is worth the cost of their fees.
For example, buying bulk energy can save you bundles, but prices fluctuate. Let a professional shop for you, Kekstadt said.
“There are utility experts who are watching the prices every day and every hour,” he said. “They want your repeat business, so they won’t try to sell you at a high.”
An insurance appraiser can make certain the property is insured for the correct amount, said Karyl Dicker Foray, an insurance broker and association specialist at Rosenthal Bros. in Deerfield.
“You might be carrying too much property coverage and not know it,” she said.
Insure smartly. Foray offered more advice: A higher deductible amount will lower your premiums, but it can be overall more costly in case of multiple losses. Ask about multiyear policies to lock in premium rates. Review your association’s loss report to make sure it is accurate.
“If you see a claim for ‘palm tree fell onto parked car,’ you can be pretty sure it doesn’t belong to a Midwestern association,” she said.
Levy fees. You can generate extra cash by charging residents for uses and services such as moving in and out of the building, owning a pet and filling document requests, Kirsch said.
Boards also should establish a fee policy, distribute it to residents and apply it equally to everyone, Kirsch said.
Think green. When making major repairs or improvements, be considerate of the natural environment. Buy products with high ratings for sustainability and energy efficiency. Other ideas: conducting an energy audit and planting a green roof.
“All of these changes, over time, are cost-saving measures for the association,” Kirsch said.