Once we have completed our annual budgets, held all our meetings, approved the plans and sent out the annual assessment coupons /statements, we can breathe that sigh of relief and look forward to the new year. Hopefully in preparing your budgets you reviewed your association’s reserve study and all contracts in place. Before we enter the next season, now is a good time to review the plans for the coming years.
We all remember planning to move from our parents’ homes to our own places. We may have had a car and bills, like everyone else. We may have prepared a monthly breakdown of what our bills would be at the encouragement of our parents, to prepare for the road ahead. What happens next is a learning experience that I would hazard to guess everyone has experienced in some form or another. All that is important to YOU, funds you had saved for, had to be spent for that “set of new tires” or that “insurance deductible from the hit and run.” At that age, who would have thought?
Having a Plan – Preparing for the long haul is not only necessary, it is also important to account for the uncertainty of the future. As in the game of chess, your opponent may make a move that doesn’t fit with your next planned intentions. You ask “who is the opponent in preparing a budget”? It might be unforeseen expenses such as failed boilers, leaky roofs, or mold growing in attic spaces. All of these things can put a damper on savings. Perhaps you, or your Board, are the opponents because you are reluctant to propose assessment increases.
Getting Started – Reviewing an association’s reserve study and the life expectancy of capital expenses is foremost in preparing for the future. The reserve study notes the capital expenses, typically listed in the association’s Declaration for which the association is required to set aside funds. All too often boards and community members provide excuses and reasons for not funding the reserves in the manner for which the reserve study calls. Historical Moves – While reserve studies are very important, it is also imperative that we understand where funds were spent in the past and if those elements were included in the reserve study. In the game of chess, once a player takes his finger off the game piece the move is over and the turn is up. You may have thought long and hard about that move but as soon as your opponent made his next move, you realize your strategy has been foiled. Many boards assume that when they are low on funds, they can “bust” into their reserves, however they fail to realize that these funds might have to be paid back. Be sure to review governing documents regarding reserve expenditures and reach out to your association’s CPA for advice on the possible tax implications involving the use of reserve funds. Reviewing costs from similar past projects will help the board understand the costs of future projects.
Knowing your Property and your Vendors – In addition to having a reserve study in hand, visual inspections of your property also help to determine areas in need of maintenance sooner rather than later. Avid chess players may anticipate all the moves before they occur, and boards and managers can prepare for disasters by understanding the components of the important players they are protecting. But what happens when the unexpected occurs? You may have noticed additional work orders for various repairs of common elements. This may signal the need to push up the scheduling for replacement which would eat into your reserve savings and possibly even into the operating budget. In some chess tournaments, a player’s turn may be timed. The players must be ready to make quick and accurate decisions under the watchful eye of cameras and onlookers. The key to chess is to outsmart the other guy and the key to planning for future expenditures is to review your strategy by starting early. Contacting trusted vendors should be utilized to help the board minimize future losses. Making sure all building components are properly maintained and serviced at appropriate times may increase the life expectancy of those items. Community members rely heavily on the board to make important and informed decisions to protect their “castles.” Preparing a maintenance plan in advance of unexpected replacements may extend the life of the common element components and give the association more time to save for these projects.
Allocating your Funds – Remembering to use only operating expenses designated for regular maintenance and avoid dipping into reserves that are set aside for capital improvements is most important. It was recently affirmed that the Internal Revenue Service (“IRS”) does not consider painting a reserve expense (Revenue Ruling #75-370). This does not mean the association cannot allocate a line item and continuously fund that line item yearly through their operating budget. Reach out to the association’s auditor or accountant and review governing documents to determine the best way to carry funds from one year to the next, and do so up until the year the expense occurs. Obtaining a proposal or reviewing past expenditures will give the board an idea of what painting costs will be. Your reserve study can also list painting and its expenditures as a non-capital reserve item. Planning to budget appropriately each year for painting (and other large expenditures which don’t occur yearly) by dividing the proposed cost by the number of years anticipated until the project is due and then allocating those funds on a yearly basis for the project, can prevent having to special assess residents. By allocating enough funds for specific projects, the association can avoid a potential “blunder” and cease worrying about the unexpected “checkmate.”