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Crunching numbers: What goes into a community association’s budget?

Budgets are crucial to a community association’s financial operation. Just like for-profit businesses, association boards should work diligently to develop annual budgets that estimate revenue and expenses for the upcoming fiscal year. A properly drafted budget can help prevent reduced services, deteriorating property, or special assessments.

Many state statutes and most governing documents impose a legal obligation on boards to develop an accurate budget and collect sufficient assessments to cover expenses. A detailed budget helps residents understand why assessment amounts are reasonable and how their money will be used.

Community associations have two types of budgets: an operating budget and a reserve budget. Operating budgets have unrestricted funds that are used to run the association through the fiscal year, while reserves have restricted funds saved for expenses that will occur in the future.

The board is tasked with gathering the necessary financial information to project potential sources of income and expenses, including conducting a reserve analysis, looking at bids for contracts, projecting utility or service increases, and comparing past years’ budget trends.

Certain line items constitute expenses that associations are required by law or contract to pay and should be allocated for first. An association also should allocate contingency funds, separate from the reserve budget, for unanticipated expenses such as extreme weather, economic conditions that could increase fees for products or services, emergency repairs, and lawsuits.

Here are some of the most common expenses that associations should include when drafting the operating budget.

Maintenance. Allocate line items that protect and enhance the community’s property. A maintenance schedule should be developed or amended annually for budget considerations, and service contracts should be checked to anticipate potential increases or to negotiate a better rate.

Taxes. While assessments are not taxable, other sources of income, such as interest earnings, facility rental income, and income from goods and services, likely will be taxed. Other taxes that associations may need to pay include personal property, payroll (if it hires salaried employees), or real estate tax.

Utilities. Associations should measure past consumption of electricity and water to anticipate any increases. Conducting a professional utility audit can ensure meters and other equipment are functioning properly. The audit also can help an association determine if it can reduce expenses by installing energy-efficient systems.

Insurance. An association should ask its insurance professional to audit current property and liability coverage and recommend appropriate protection that fits its needs.

Administrative costs. These include expenses for professional services provided by consultants, reserve specialists, attorneys, and accountants, fees for banking and collecting delinquencies, as well as the costs of maintaining an office, including equipment, supplies, and phone and internet service.

Once your budget is drafted, share it with homeowners so they can review before the annual meeting.

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Turnaround leader: How a board president revitalized a community in financial disarray

When Michael Shucart took the helm as president of Leisure Town Home Association’s board more than five years ago, financial disarray and outdated amenities plagued the 1,150-home community in Vacaville, Calif. Now, the retired banker is credited with putting Leisure Town back on a path to success.

Development of the 55-and-older community first began in the early 1960s, and the association had gone without a professional community manager for more than 50 years. There had been little resolve from the board to raise assessments and make improvements. “The community was left deferring maintenance with little in the reserves for replacement or repairs,” says Shucart.

Undoing decades of neglect, Shucart developed a list of priorities “to help define our vision” after consulting with the community’s 1,800 residents. The board developed a plan to overcome years of deferred maintenance.

Michael Shucart

Drawing from his experience as a banker specializing in wholesale mortgages, Shucart also reviewed each line in the association’s budget for cost-saving measures. He saw that the reserve study replacement costs were unrealistic and that vendor contracts could be improved.

“I realized all of our vendors were friends of friends. As a result, most of them were not giving us favorable conditions,” says Shucart.

In addition, after more than five decades without a manager, the board decided to hire a full-time, on-site manager to fill the void in day-to-day operations.

Through these steps and a few others, the community recently unveiled updated amenities including a new bocce court, a lawn bowling field, a remodeled swimming pool, and a new fitness center for residents. 

Because of the contributions that have improved Leisure Town’s financial standing and infrastructure, Shucart was named Homeowner Leader of the Year by CAI’s Northern California Chapter in 2018.

Shucart credits the success of Leisure Town’s turnaround to the collaboration with the other members of the board. He also points out that effective leadership “starts with identifying the concerns of membership, putting a plan together that addresses those issues, and working together in the best interests of the association toward a solution.”

But the work is far from over. Shucart has already set future goals to address at Leisure Town. “We are figuring out how to deal with the closure of our golf course, trying to bring in recycled water to use for the roughly 17 acres of green space, and installing new solar panels to offset the cost of electric usage,” he says.

April is National Volunteer Month. Read our articles about preparing for a volunteer role and five steps for effective community leadership. And stay tuned for another look at inspiring work done by a homeowner leader.

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A community’s last resort: Foreclosing on a home

Nobody wants to foreclose on a home—not a mortgage banker and certainly not a community association. Countless Americans lose their homes when lending institutions are unable to collect mortgage payments. In a perfect world, no one would ever face foreclosure—for any reason.

That’s why foreclosure should always be used as a last resort, applied only when a community association has exhausted all other collection options and only when a homeowner refuses to remedy a significant debt to the association.

CAI does not support people losing their homes to foreclosure for insignificant sums of money. Even when the debt is significant, foreclosure should be considered only after other approaches have failed. In all cases, homeowners facing foreclosure deserve reasonable opportunity to appeal the issue to the leadership of the association.

There is no universal threshold that should trigger a foreclosure. The decision should be based on many factors, including the amount of the debt, the financial health of the association, the reason for the debt, and the homeowner’s willingness and ability to bring the account up to date. The magnitude of this decision requires an approach that is fair, reasonable, and consistent with practices and procedures established by the association’s governing documents.

While there are isolated instances of inappropriate foreclosure, this action is viewed as a last and unavoidable step by the overwhelming majority of community associations. Knowing that people occasionally face financial hardship—a lost job, for instance—many community associations do work with homeowners to develop deferred or special payment plans.

Elected by their neighbors, volunteer community leaders are responsible for ensuring financial stability and the continued delivery of services to residents in the community. An association’s budgetary obligations do not change when assessments aren’t paid. Common areas must still be maintained. Garbage must be collected. Insurance coverage must continue. The pool remains open in the summer. Snow is plowed in the winter.

Homeowners who simply refuse to pay their assessments—as they contractually agreed to do when they purchased their homes in an association—are cheating their neighbors, their community, and themselves. When homeowners are delinquent on their assessments, either their neighbors must make up the difference or services and amenities must be curtailed. That affects everyone in the community, perhaps even leading to a decline in property values.

Used as a last resort, the lien and foreclosure process gives community associations a mechanism to ensure the resources necessary to provide services, protect property values, and meet the expectations of the community as a whole. Placing a lien on property, with the ability to foreclose, is typically enough impetus to get delinquent residents to meet their financial obligations to the community.

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Condominium assessments and bankruptcy: What can associations collect?

Courts across the nation are split on whether post-petition community association assessments constitute dischargeable debts under Chapter 13 of the U.S. Bankruptcy Code. To make matters worse, in November, the Supreme Court denied a petition to review the issue, leaving the community association industry wondering if the existing dispute among the courts will ever have a concise national remedy.

This past July, the Ninth Circuit Court of Appeals, which comprise several Western states, had held in Goudelock v. Sixty-01 Ass’n of Apartment Owners, No. 16-35385 (9th Cir. July 10, 2018), that an individual’s pre-petition debt or claim for assessments—created when a property owner takes title to property and which contractually obligates the owner/debtor to pay assessments—is dischargeable when the owner/debtor successfully completes a confirmed Chapter 13 plan. In November, CAI attorneys drafted and submitted an amicus brief in tandem with the (now denied) petition to the U.S. Supreme Court appealing the Ninth Circuit case.

CAI’s amicus brief made it clear to the Supreme Court that the rationale employed by the Ninth Circuit in Goudelock has far-reaching implications for community associations throughout the U.S., as it threatens the lifeblood of community associations—the continued ability to levy and collect assessments and dues for the maintenance and preservation of community property. Due to the Supreme Court denying the association’s petition, the Goudelock decision stands. This decision is already negatively impacting community associations in the Ninth Circuit, as courts have cited the Goudelock decision in their reasoning for denying community associations the ability to collect debts in Chapter 13 bankruptcies.

Yet not all courts across the country agree with this decision. In February, the U.S. District Court in New Jersey handed down a decision that positively impacts the amount of money a condominium association with a properly recorded lien is entitled to receive when a unit owner files for Chapter 13 bankruptcy.

In an appeal filed by the Oaks at North Brunswick Condominium Association, the New Jersey court reinforced that a condominium association lien that is recorded in accordance with the New Jersey Condominium Act is given elevated priority over other claims and that said lien is partially secured and no amount of the lien can be stripped because of the Anti-Modification Clause. This means that condominium associations should receive the full amount of their lien claim when a unit owner files a Chapter 13 bankruptcy.

For now, these conflicting rulings leave our community association attorneys confused and frustrated. Outcomes such as the Oaks at North Brunswick case provide hope for dischargeable debts in our industry. However, Goudelock provides that pre-petition condominium assessments are dischargeable in Chapter 13 proceedings but leaves some critical questions unanswered. This being the first circuit court case on the issue, chances are the other circuits may weigh in. At the end of the day, attorneys need to be aware of Goudelock and its possible application to every Chapter 13 case where the debtor owes community association assessments.

This post also is running on CAI’s Advocacy blog, where you can read about the latest court cases, state and federal advocacy efforts, public policies, and more.

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Enforce, collect, and hire help: An association board’s biggest responsibilities

A community association board consists of volunteers elected to serve on behalf of residents to execute a wide variety of tasks. It’s a big job, but most board members are happy to serve and make the community a great place to call home.

The board’s biggest responsibilities include enforcing rules, collecting assessments, and hiring help.

Enforcing rules

One of the most important things the board does is enforce the association rules and regulations.

Rules and regulations help community associations maintain property values and protect a quality of life. These standards are typically described in detail in an association’s governing documents, which all homeowners should have an opportunity to review before purchasing a home in a common-interest community.

While some residents may not like being told what they can and can’t do, ultimately the board is looking out for the greater good. By enforcing the rules, the board is doing its best to keep property values up and conflicts down. Of course, the board wants to make sure the rules are beneficial for the majority—and hopefully all—residents.

You are welcome to raise concerns about the rules at open board meetings. Before you do, come prepared to discuss background information, causes, circumstances, desired solutions, and other considerations.

Collecting assessments

Another major responsibility of the board is to collect assessments from homeowners. Collecting this money is important for the financial stability of the association.

The assessments pay for the common elements enjoyed by all residents. Assessments also help to replenish the reserve funds, which pay for any major repairs the association may need.

The board is responsible for the association’s finances, and collecting assessments is how it ensures that the association remains solvent.

Hiring help

Finally, the board acts on behalf of the association by hiring managers, attorneys, contractors, and other professionals who help better the association. Board members also help conceive and lead many of the projects that will improve the community.

Learn more about what these volunteers do by talking to your board members, attending an open board meeting, or even running for a seat on the board during the next election. The more people we have looking out for our associations, the stronger they will be.

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