3 Cost Containment Strategies to Minimize Assessment Hikes
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Your association board is working on next year’s budget. You know how important the budget is and what it means to the future of your association. One of the most important commitments you make to your fellow homeowners is your fiduciary responsibility. Even if you’ve effectively planned your budget and thoroughly reviewed your reserve study with help from an expert, costly emergencies and unforeseen expenses (e.g., rising insurance rates and inflationary pressures) can still arise. If you’re in that position and facing the potential for a significant increase in assessments, consider strategic, cost-containment strategies to help your association save money and optimize its operating budget.
Remember: Your association's budget can be bolstered over time if you raise assessments incrementally. By raising dues gradually in accordance with inflation and other costs that rise over time (e.g., staffing wages), you're preventing a major assessment increase later. You'll also minimize any owner backlash that can occur when owners receive a significant increase or surprise assessment.
Cost containment can prevent a steep increase. Cost containment aims to maintain or reduce expenses to maximize your association's budget and hopefully avoid the need for significant (or surprise) dues increases.
There may be ways to save money in your budget that you never considered. What are some of those areas?
How much energy does your association use in common areas? Are the lights kept on when no one is using a space? Is your pool or hot tub a few degrees too warm? Are you using traditional lightbulbs? Are you using the most efficient pool heater for your location and type of property? Are there areas of your community with excessive outdoor or landscape lighting or water features? Do your parking garage fans stay on when not needed? All of these are potential places to save some money.
Some, like changing from traditional lighting to LED lighting, require an upfront investment but pay off that investment very quickly, resulting in ongoing savings on energy, maintenance and staffing. Others, like putting light switches on motion detectors so that the lights turn off when no one is in the room, or changing the temperature of the swimming pool, don’t require much investment to start to see savings.
In 2016, LED lighting was installed at Skypoint, a Tampa high-rise. During the first phase of the LED upgrade, the association saved $12,000 in electrical costs over 6 months by upgrading the garage, valet area, loading dock, and elevator lobby areas. During the second phase, the association installed high-efficiency LED lighting in the hallways, which led to a cleaner, brighter appearance and a reduction in staffing hours and material costs. The full installation cost was recouped within just 13 months. Based on projections that Skypoint's lighting upgrades will save 441,924-kilowatt hours of electricity annually – about $48,600 – it earned the Florida Public Service Commission's Triple E Award for Energy Efficiency Efforts.
Having the right pool heater can impact your budget as well. Chris Normandeau, director of FirstService Energy, broke down the costs for both installation and operation of the three most common kinds of pool heating systems for a 3,000-square foot pool in West Palm Beach to 83º Fahrenheit, year-round. As with the LED lighting example, the option with the lowest operating cost is the highest to start up, but you can recoup that investment in lower energy costs very quickly compared to other options.
- Solar: $1000 to run the pumps plus annual maintenance
- Gas Boiler: $24,000 fuel, plus annual maintenance
- Air Source Heat Pump: $7,000 electricity to run plus annual maintenance
- Solar Thermal: $45,000
- Gas Boiler: $5,000
- Air Source Heat Pump: $12,000
Insurance and Investments
Where and how is your reserve fund invested? IS your reserve fund invested at all? Almost 35% of community association board members aren't confident that their reserve fund investments are yielding the best returns. Make sure that your association's money is working as hard as possible. “Through our extensive banking relationships, we are able to offer our associations better rates of return on investments and reduced fees,” said John Lee, vice president of FirstService Financial, the financial services affiliate of FirstService Residential. “We understand how important it is for associations to have investments that are both safe and yield the highest return possible. Reallocation of funds can generate thousands of dollars in returns each year.”
Making sure your reserves are getting the best returns possible is an excellent strategy, but even more important is ensuring that your reserves are adequately funded and meeting state law requirements. Beginning January 1, 2024, Tennessee law will require condo association boards to have a reserve study done on or before January 1, 2024, if the board has not had a reserve study conducted on or after January 1, 2023. The new law will also require boards to have an updated reserve study done within five years of the original reserve study date and every five years thereafter. The legislation further outlines that if an association has performed a study after January 1, 2020, it will count as the first study and start the five-year clock. To ensure that your association is protected, and most importantly, following the law, you should consult with association counsel and reserve experts. Learn more about the new requirements here: New Tennessee Law Impacts Reserve Studies.
When did you last audit your insurance program? Are you covered correctly? Having the right insurance doesn’t just mean getting the lowest premium. In fact, it is common for low premiums to come with high deductibles. It may be in your best interest to pay a little more each month and be better covered in the event of a disaster, or maybe not. Don’t set your policies to auto-renew. Work with your broker or agent to ensure that your coverage meets legal requirements, management agreement requirements, and your association's specific needs every year.
It's best to audit your coverage and start your renewal process early since insurance rates fluctuate significantly based on market conditions (e.g., natural disasters). For instance, in the last few years, insurance rates have risen due to supply chain issues and the increased cost of labor and materials. You can't control these factors, but you should work closely with your insurance agent and management company to understand your available options and market conditions.
Again, Lee asserts that the depth of resources of FirstService Financial can help his clients get the most for their insurance dollars. “Too many people think that saving on insurance means getting the lowest premium, but a lot more goes into it than that,” he says. “It’s important to take that time every year to make sure you have the right coverage. If something happens, a cheap policy will cost you more than you bargained for.”
Despite rising insurance costs, you can use several strategies to manage them. For example, to mitigate insurance premiums, your board may decide to move up planned capital improvement projects. One association moved up their roof replacement project, which resulted in significant savings on premiums (due to improved safety and protection from wind damage). Not every project will yield these kinds of results, so it’s important to stay in close communication with your insurance provider and management company to ensure you are making the right investments.
Value Engineering and Benchmarking
How often do you review your vendor contracts? Or do you just let them renew on their own? Does your management company review them? More than 57% of community association board members are unsure whether the management company takes this important step. Taking a closer look at your contracts may reveal opportunities for saving money. Or it may show opportunities for your association to get more for the same dollars, perhaps saving elsewhere.
Stephanie Parker, president of South Florida Condo-HOA at FirstService Residential, explained how value engineering works, “Our team partners with the associations we manage to do a full, line-by-line review of their financials, vendor contracts, utilities and operations with the goal of identifying opportunities for value, including potentially better pricing and service from their suppliers.”
Comparing what communities spend on a number of services is an excellent way to determine where they stand in relation to other communities of similar type, size, age, and location. Only a professional management company capable of managing thousands of communities and tracking their budgetary data can provide this kind of comprehensive industry information.
So, what does the combination of value engineering and benchmarking look like? Imagine an expert sitting down and looking at your landscaping contract in comparison to communities in Georgia. They realize that, compared to other properties of your size and type, your landscaping costs 15% more. Then they closely examine your landscaping contract. Are you paying for higher-end services? For unnecessary services? Or just being overcharged? With that information, you can negotiate a better price with the contractor or find a new contractor who can work within your budget.
“It’s amazing how an association can get used to just paying for something. Sometimes, a simple phone call to a vendor can lead to a better deal. Or a conversation with other communities can result in a better way to approach a budget line item,” explains Dante Chiabra, regional director at FirstService Residential. “Every contract should be evaluated every year, to make sure you’re getting the most for your money and not paying any more than you need to. Your property management company should facilitate vendor discussions and contract reviews.”
All of these things can help your association cut costs and potentially avoid, or at least minimize, a significant or surprise increase in your dues. “I tell associations that it’s better to raise fees, if they need to, by 1% each year,” says Chiabra. “It’s a small enough amount to be absorbed into the homeowners’ budgets, and it’s much better than a larger increase later on. Little by little is better.”
For more information on how a professional property management company can help your association save money on insurance, financial services, energy and more, contact FirstService Residential.