HOA budget planningCreating an efficient budget for your homeowners association (HOA) can be a challenge. The annual operating budget is the foundation of your community’s financial management and operation. It enables you to estimate your expenses and revenues. And it helps you measure and keep track of your association’s financial activities.   

To serve its purpose, your operational budget needs to incorporate estimated income and expenses. As well as contributions to your reserve fund for one year. Advanced preparation is critical to making your budget a valuable financial tool for the success of your community. 

HOA budget planning considerations 

As you embark on the budget planning process, the decisions you make should be informed. There are several factors that will directly or indirectly impact the cash flow of your association to consider:  

  • Trends in costs. 

  • Projected increases and decreases.  

  • Reserve funding. 

  • Financial impact on the community. 

  • Composition of your community.  

Let’s take a closer look at each of these factors.  

Trends in costs 

Reviewing trends in costs over time is an important first step. You can do this by conducting an expense-to-budget analysis. This will identify areas where costs and revenues have steadily increased or decreased.  

Projected increases and decreases 

You need to look forward to projected increases and decreases in revenue and expenses. Speak with your contractors and utility providers about any anticipated changes in rates. Factor in how the economy is performing. Is unemployment rising? Are interest rates falling? Are oil prices stable? Is inflation a concern?  

Reserve study funding 

Your reserve fund study should also be closely reviewed. This is to ensure you’re on target with funding reserves as community replacement and enhancement projects draw nearer or are added.  

In Minnesota, any association governed by the Minnesota Common Interest Ownership Act (MCIOA) is required to reevaluate the adequacy of its budgeted replacement reserves at least every third year.  

Inflation, labor shortages, and supply delays can all impact your reserves. Is the estimated repair or replacement cost from three years ago still going to suffice in today’s market? 

Financial impact on the community  

Your budgetary decisions must also weigh how your community will be financially impacted. What has your history been regarding regular assessments? Have you raised them, and if so, by how much and why? Have you had to make special assessments in recent years? Be cognizant of the fact that your residents will have a clear memory of recent community investments. So, be mindful of how they will be affected as you move through the process.  

Composition of your community 

It’s important to consider the composition of your community. For example, seniors may only want to look at plans that go five rather than 15 years out. Similarly, owner-occupants tend to be more vested in longer-term community expenditures. Whereas owners that rent might not be as committed to the upkeep of their properties for the next 10-20 years. They are more focused on the income they will receive in the current year. It’s important to balance the needs of the different ownership demographics.  

Preparing for the budgeting process 

The key to your budgeting success is upfront planning. If you gather the data, documents, and insights you need early on, the process will become more efficient.  

HOA budget planning processTo prepare for the budgeting process: 

  • Identify goals and objectives. 

  • Create a budgeting schedule. 

  • Review governing documents. 

  • Examine previous budgets.  

  • Review financial statements. 

  • Investigate legal requirements. 

  • Conduct a community survey.  

Let’s take a closer look at each step.  

Identify goals and objectives 

The budgeting process should begin with a goal-setting meeting. Your board, property manager, and committee chairs should all attend. The objective of the meeting is to determine what expenses must be covered by the association for the budget’s allotted timeframe, along with what might be covered to please residents and enhance the community. Consider whether the demographics of the community have shifted to warrant changes. Think about what assets might be due for an upgrade. Also, consider if the complaints you regularly receive revolve around the same issue(s).  If so, that might require additional budget to make a positive change.  

Create a budgeting schedule 

Your governing documents will outline when budgets must be shared with members of the community and when approvals must be secured. Simply work backward from the start of your upcoming fiscal year, allowing time for each step in the budgeting process.  

Review governing documents 

Your governing documents will offer detailed guidance on assessment payments and increases. It will also outline reserve contribution amounts and whether the budget must be presented to and/or ratified by residents.  

Examine previous budgets 

Examining previous budgets will help you identify line items that are consistently over or under budget. While you review them, think about line items that could be eliminated or added. Past budgets are a good starting point but don’t depend on them exclusively as costs increase.  

Review financial statements  

Financial statement documents should be provided by your property management company. Including your association’s income statement, the statement of cash flows, and balance sheet.  

Investigate legal requirements 

Legal requirements are constantly changing. That’s why it’s imperative to refresh yourself with your association’s legal obligations. Especially as they relate to conducting reserve studies and establishing or maintaining reserve accounts.  

Conduct a community survey 

Involve residents in the budget planning process. Formally asking them to prioritize additions and improvements to the community. This can include things like a dog park, better street lighting, speed bumps, EV charging solutions, and landscaping. The survey results will help you prioritize enhancement considerations and incorporate them into the budget.  

The importance of short- and long-term financial plans 

Successful association management hinges on a well-thought-out budget for both short-term and long-term planning. However, many associations don’t recognize that having a long-term (3-5-10-year) financial plan is just as important as a short-term (1-2 year) operating budget.  

By identifying and planning for your community’s needs farther out in time, your association can better defend itself against significant, unexpected expenses. Positioning your community to thrive well into the future.  

Long-term financial plans allow you to: 

  • Avoid financial surprises, uncertainty, and special assessments.  

  • Maintain and improve your community cost-effectively over time.  

  • Sustain property values within your community.  

  • Proactively address residents’ concerns, expectations, and understanding of their community’s financials.  

How can your property management team help with the budgeting process? 

Property manager supportThroughout the budget development process, your property management team should direct the steps that should be taken, provide the items that should be reviewed and considered, and share best practices that will create the best possible budgetary outcomes.  

When it comes to supporting our boards through the budgeting process, some of the deliverables we routinely provide include:  

  • Regular, thorough financial reporting. 

  • Analysis of budgetary discrepancies. 

  • A budget checklist outlining the necessary steps and resources. 

  • Assistance with fostering alignment and process buy-in among board members and residents.  

  • Ongoing guidance such as creating yearly maintenance calendars and offering insights on how to handle things beyond your control.  

Even if your association’s budget is developed in large part by a property management company, the responsibility of the budget falls squarely with the HOA board. Meaning you need to understand the ins and outs of the budget planning process.  

Wednesday December 13, 2023