The Asterisk

The asterisk in the last blog post, The more complicated HOA budget, was reference to items that have an estimated useful life.  Estimated useful life is a generally accepted life span for things such as paving, roofs, pool marcite or fences.  Nearly anything that doesn’t require replacement every year has an estimated useful life.

Roofs

If you live in a town home or patio home that has other units attached under one common roof, the association (provided it is stated in the documents) should set aside a portion of fees each year to allow for the replacement of the roof.  A roof has an estimated useful life of approximately 15 years.  There are other precipitating factors such as wind damage, tree damage or other damage, but for purposes of simplicity, lets just say a useful life of 15 years.  If the cost of replacing that one roof is estimated at $10,000, the Board of Directors should set aside funds each year to pay for it at the end of 15 years.  So let’s do the math, $10000 ÷ 15 years = $666.66 that should be set aside each year for that roof.  But wait there’s more!  Your community has 20 buildings, all with the same roof line and all with the same footprint.  More math, 20 buildings x $666.66 per year = $13333.00 per year or $1111.12 per month.  Here’s the touchy part of all of this.  Unless it is specifically stated in the governing documents, there is no requirement that funds be set aside for roof replacements.  Older communities sometimes do not state, in no uncertain terms, that the association must provide for roof replacement.  The fiscally responsible thing to do though is to provide for these replacements.  The downside to not setting aside these funds is the possibility of a special assessment.  For the above example, to replace the roofs on all of these buildings at the same time would cost each owner an extra $2000-all at once (20 buildings, 5 units in each building for a total of 100 owners).  When spread out over 15 years, the cost to each owner is only $133.33 per year.

Back to the asterisk.  For amenity buildings, set aside money for the replacement of those roofs as well.  The size of the building roofs  makes it a reasonable amount to budget for each month.

Gated Communities

Gated communities will usually require the upkeep and maintenance of not only the gates and gate operators, but also the streets in the community, depending upon how your association was initially set up by the developer.  If your community is responsible for the upkeep of the roads, apply the same methods of estimated useful life to your paving obligations.  Ideally, contact a reputable paving contractor to help you determine the actual linear footage needed (or square footage, your contractor can help you).  There are other  avenues to explore to help preserve the existing asphalt.  Sealing every two years is a less expensive method and will help to extend the life of your roads.  We’ll note here that asphalt is heavily dependent on petroleum products.  The volatility of petroleum commodities can cause a significant price difference between your initial price you base your funding on and the real price at the end.    If there is an experienced corporate accountant in your community, seek out his/her advice and adjust the funding each year to accommodate significant changes in the petroleum market.

Gates are a source of significant maintenance expense each year and it will be up to the Board of Directors to determine their “threshold of pain” as it relates to repairs vs. replacement.  A gate system will last ten years or so depending on its duty cycle-a small community will have less vehicles entering so the opening and closing will be less.  Larger communities with more drivers will create more wear and tear on a gate.  Proper upkeep and maintenance also helps to extend the life of a gate system.  Also, consider opening entry gates between 5 pm and 7 pm for evening traffic and exit gates between 7 am and 9 am to reduce the cycles.  As with all major capital expenditures, use the estimated useful life to allow for replacement when the time comes.

These are just three of the possible capital improvements that should be budgeted for across several years. Any other items of significant financial impact in your community should also be budgeted for accordingly.

Where to put the money

Reserve funds should be set aside in an account separate from the association’s operating funds.  A line item should be on your budget and financial statements showing how much is to be applied to that account and how much is actually being set aside (on the financial).  Two separate accounts for operating and reserves funds should never be comingled-meaning don’t use your reserve funds to supplement the operating funds.  Just because the association is short one month in the operating account, funds should NOT be removed from the reserve account to fund the shortfall.

As always when we finish with a difficult topic, check your association Declaration of Covenants, Conditions and Restrictions to determine what exactly is required for your particular association.

A more complicated HOA budget

Now that we covered a basic HOA budget, we’ll move on to a more complicated budget for an HOA or town home community.

A more upscale community will have amenities such as a pool, a pavilion, playgrounds or tennis courts.  Gated communities sometimes have all of these amenities along with entry gates and possibly paid security services.  With the restricted access comes the responsibility of maintaining the roads and drainage system.  We’ll address each one individually so you can understand how to budget accordingly.

Community Pool

The community pool for the exclusive use of the residents is a wonderful amenity to have.  However, it can be a source of constant maintenance and oversight.  In preparing your budget, place a line item under contract services for pool maintenance but also place a line item for janitorial service as well.  Nearly all community pools will have bathrooms available and those bathrooms will have to be cleaned routinely.  In addition to your pool and janitorial service, set aside money for the replacement or repair of pumps, pool resurfacing (marcite or fiberglass)* and ladders.  Prior to the beginning of pool weather, consider having the deck pressure washed and/or repainted and the area spruced up.

Pavilion

Some newer communities have opted for pavilions and playgrounds instead of pools.  While reducing overall expenses, the need for upkeep will always be present.  Some pavilions have picnic tables and bathrooms.  You should budget for janitorial services for routine upkeep of the bathrooms and picnic areas.  A word of caution-regardless of where you live vandalism is still alive and well.  The association manager or a member of the Board of Directors should make it a point to check the picnic tables weekly at least.  Not so pleasant epitaphs can be found on nearly all of the horizontal surfaces.  If you have wood picnic tables consider changing out to metal mesh tables, this reduces the likelihood of repeated vandalism.  Pavilion roof replacement should be budgeted for as well*.

Playgrounds

Playgrounds are also a prime source of vandalism.  Routine inspection will ensure your equipment is in working order.  While routinely inspecting the equipment, check the inside of slide tunnels for graffiti, gum or other destructive items.  Commercial playground equipment is expensive therefore, budget accordingly*.  Twice annual replacement of ground covering is sometimes necessary.

Tennis Courts

There are several aspects of the tennis court that should be addressed.  First is the surface itself.  Most commercial tennis courts for communities have a painted asphalt surface.  If the courts are shaded and unevenly sloped, mold and mildew can accumulate is spots.  Check your courts routinely and have mold and mildew removed immediately.  Consider having your courts pressure washed with bleach and light pressure to remove the accumulated grime.  Use caution as high pressure with the pressure washer could strip sections of the paint away leaving your court with a “striped” appearance.  Nets should be replaced annually.  Every few months, measure the net at the center point to ensure it is at the proper height (36″ at center strap, 42″ at the post).  Windscreens should be secured at several points to prevent rips and tears.  Check the fencing routinely to identify any loose tie downs or missing hardware*.  Ensure that you budget accordingly for tennis court repairs and maintenance each year.

Gated Communities

Depending on the incorporation provisions of the Articles of Incorporation and the Declaration of Covenants, Conditions and Restrictions, gated communities are (most of the time) responsible for the roads and drainage system that exist behind those gates.  This is usually the most expensive reserve item in a homeowners association budget.  Maintenance of the storm water drainage system should not cause alarm, as most systems have a useful life of 15-20 years or more, but repairs are sometimes needed prior to proceeding with a paving project.  Adequate funding of a paving reserve is needed to ensure that when the roads in your community begin to fail the money is there for paving.  The same holds true for the gate system.  An entry gate system has a useful life of about ten years.  But each year, make sure to set aside enough to perform needed maintenance because gate arms break, loop detectors go bad and motors fail.

We’ve covered the annual expenses for maintenance.  In the next post, we’ll cover what all those asterisks mean and how to avoid the dreaded special assessment.

The HOA Budget

Setting up the operating budget for your HOA, townhome or condominium can sometimes be an arduous process.  We’ll start simple here and work our way up to the more complicated budgets.

THE HOA BUDGET

Depending on the size of your HOA, your budget can be as simple or as complex as you want.  This all depends on the number of amenities you have in your community.  Below is a sample of a simple HOA budget:

(see note regarding budget at bottom of post)

This particular association has no amenities such as a pool, entry gates or playgrounds.  As you notice, there is a surplus of $8700.  Although that may seem excessive and you may be inclined to reduce your annual assessment (the amount each owner pays), the generally accepted rule is that you will have a delinquency rate of 10-20%, homeowners who do not pay their assessments.  These surplus funds can be held in reserve to make up any shortfalls by those that don’t pay.  If the vast majority of your HOA members pay their assessments, you very well could reduce your annual fees.

Every two to three years the HOA should put their contracts up for bid.  This will ensure that your existing contracts are appropriate for your needs.  This also provides an opportunity to open discussions with your existing vendors regarding any concerns they might have.  An example would be your landscape contract originally bid your contract when gas was $2.00 per gallon, but two years later gas is $3.75 per gallon.  Because of the increased cost, the Board of Directors might allow the vendor to increase their contract amount to a more reasonable rate if they are happy with the vendor.

The other line item that was not included in the budget above is liability insurance and Directors and Officers/Errors and Omission coverage.  A liability policy will protect the association against lawsuits for events that occur on association property.  For example, a car accident on the corner causes the driver to veer off the road, smash through the privacy fence surrounding the community, into the retention pond causing the drive to lose consciousness and drown in the retention pond.  If the driver’s family wanted to sue the association for damages, the liability policy protects the association as a whole.  The Directors and Officers/Errors and Omissions policy protects the Board of Directors from lawsuits where a member of the association wants to sue the Board of Directors for an alleged wrongdoing.  Having insurance to cover the association for these possible scenarios is always prudent.

In the next post, we’ll cover how to set aside reserves in your HOA for capital improvements and amenities.

 

(The trials and tribulations of WordPress.  If you click on the image it will take you to a gallery, in the bottom right corner, click on “view full size image”, that image will be easier to read).

Condominiums-not just for commandos

The condominium is similar to the townhome in that your unit constitutes a portion of a larger building. However, condominiums differ from townhomes in the way ownership is determined and the financial requirements.

Typically, when you own a condominium, you own and are responsible for your particular unit from the walls inward.  You also own a percentage of the common elements such as the building, roof, walls, landscaping, pools, etc., that percentage or ownership being outlined in your Declaration of Condominium.  Each condominium is different when it comes to determining your financial responsibility.  Some condominiums determine ownership equally-for instance an association of 100 condominiums will each pay $500 per month.  There are other associations however, that determine ownership percentage based upon square footage such as; owners of A type units of 1000 square feet will pay $500 per month, owners of a B type unit of 750 square feet will pay $375 per month and owners of a C type unit of 500 square feet will pay $250 per month.  If your condominium association requires that your assessment be determined by your square footage, these figures will be outlined in the Declaration of Condominium.

An important consideration in condominium ownership is the funding of reserves for capital maintenance or improvements.  Funds must be set aside, preferably in a separate account, to pay for the future replacement of roofs, painting of buildings and paving of parking lots.  These improvements typically occur every 10-15 years but are a significant outlay of cash.  Some higher end condominiums along the beach or in resort areas can spend close to $1 million dollars on roofs and painting every 15 years.  Without proper reserve funding, a special assessment might be needed to make up the shortfall with each owner required to provide additional funding.

As stated in previous posts, always refer to your governing documents to determine your specific ownership responsibilities.  In future posts we will address how to prepare a budget for condominiums and properly fund reserve items.