Yalnes, Inc. Blog

A Resource for Condo Owners

Trimming Association Budgets By Auditing Utilities

On average, 25% of the budget of a “typical” Condominium Association goes to utilities.  “Typical”, for the purposes of this article, is an Association a) without a Master Association, which pays for some or all of utilities; b) that does not sub-meter water consumption and charge individual owners for their water use; and c) that does not contract for TV or Internet subscriptions for the benefit of the individual owners.   Twenty five percent is a substantial portion of the budget and is worth looking into on a much more detailed level.   We will review the most typical “common area” utility expenses Associations generally incur and ways to cut each one of them.

Water / Sewer – Associations often pay for water consumption for the entire Community, which includes use by individual Units and the common areas (irrigation systems, closed-loop hydronic HVAC systems, swimming pools, fire sprinkler systems, and more).

Tracking consumption and comparing it with prior years is one of the best things an Association can do.  Doing so will quickly reveal even a relatively minor plumbing leak (it is surprising how much water a “minor” leak will put down the drain).

Pro-active and ongoing communication to the residents, advising of the importance of checking their homes for leaks, will go a long way; however, there are a few things each Association can do to simply trim its expenses even without reducing the water consumption.

Water utilities have sewer charges, which are often based on water consumption.  Things like irrigation systems (roof top gardens, lawns, etc.) do not utilize the sewer systems, which is what sewer charges are designed to pay for.  Many buildings have separate meters for the irrigation and the fire systems; however, they are not always designated as such by the utility companies and thus get sewer charges.  If the Association has only one main water meter, sub-meters could be installed on the irrigation systems, closed-loop hydronic heating and cooling systems, and fire sprinklers.  Once installed and communicated to the water utility, those sub-meters will be removed from the utility’s sewer billing system.  Someone would need to take the readings and report them to the utility company.  Check with the utility provider in your area for the exact procedures as most utility companies have a process in place which allows exclusion of certain water consumption.

Telephone – How many phone lines does your Association have?  Are there two for each of the fire panels and two more for the elevators?  One more for the intercom?  At the rate of $30-$40 per phone line, the Association’s monthly phone bill will quickly surpass any “reasonable” amount an Association should pay for telephone service.  Most counties (and/or cities) require a primary and a backup line for the fire panels and the elevators.  The primary lines usually have to be dedicated to the equipment they are intended to serve, but secondary / backup phone lines can often times be “shared”.  Piggy backing the intercom and the secondary fire alarm phone lines will cut the Association’s expense substantially.

Radio transmission, at half the cost of a phone line, is also available from most fire alarm monitoring service providers.  Converting to radio transmission does require some up front capital, but it is quickly paid off by savings from the reduced number of phone lines.

Associations should also consider removing long distance functionalities from the intercoms.  While, many people now keep their same cell phone numbers when they move across the country, there are creative solutions where, with a few clicks of a mouse, a resident can have an internet based local phone number, which forwards to their out of state cell phone at a little or no cost to them.  Check your Association’s phone bill – the long distance charges may add up to ~ $20 / mo, which does not seem significant until it is multiplied by the number of phone lines the Association has.

Electricity – electricity is one of the hardest utilities to analyze and audit.  Assistance of engineers, energy savings consultants, and the expertise of electricians is almost always required.  There are, however, a few simple solutions such as replacing incandescent light bulbs with more energy efficient ones, installing motion sensors in the common area restrooms, keeping only half of the lights turned on in the corridors during off-peak hours, etc.  If the Association pays for electricity consumption within individual units, owners should be encouraged to use energy efficient appliances, install automatic programmable thermostats, and use energy efficient light bulbs.  A qualified consultant can perform an audit of your building’s energy efficiency and advise how long it would take to realize enough savings to cover the cost of replacing outdated windows, worn out door seals throughout the community, adding insulation where it is lacking, or taking other steps to reduce energy consumption.

Natural Gas – natural gas goes hand in hand with electricity.  Natural gas generally powers fireplaces and heaters and is also tough to audit for an inexperienced person.  Similar to dripping water faucets and leaking toilets, fireplace pilot lights, which are on 24 x 7, use a substantial amount of natural gas.  Reminding residents to keep the pilot lights off during summer months will go a long way towards reducing Association’s natural gas bill.

There are also multiple “green living” and environmentally-friendly solutions.  More and more Associations install solar panels, add sensors in the garages to run exhaust fans only when a certain level of carbon monoxide is reached, collect and re-use rain water for gardens and roof decks, encourage more recycling and composting rather than sending waste to the landfill (which is more expensive than recycling), etc.  Grants and rebates to alter the existing systems are often available from utility companies and local and federal governments.

A thorough review of Association’s utility bills can greatly reduce that 25% of expenses allocated to utilities.  Every Association should look into these opportunities and pass on the savings to each of the owners.

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December 6, 2011 Posted by | Aging Associations, Budget, Planning | Leave a comment

And You Are Now On The Board…

It is the end of the Association’s annual meeting and you have just been elected to the Board.  Do you know your duties and responsibilities?  Do you know the needs of the multi-million dollar corporation you’ve been put in charge of?  How do you ensure consistency in application and effectiveness of the existing policies, maintenance plans, long term fiscal planning, etc. and where do you start?

These are the questions newly elected Board members and Associations find themselves asking when annual meetings are held and the membership elects “The Board”.  One must find a perfect balance between continuing down the path toward the vision the Association previously established and trying to find ways to build community, increase property values, maintain the existing assets and be fair to all residents (owners and renters). 

The administration of community associations, as a whole, is a unique industry with its own set of governing documents and policies, as well as laws at the local, state and federal levels.  A community association is also a diverse neighborhood where residents have different backgrounds, ideals and expectations.  Board members are often burdened with the responsibility of ensuring the Association complies with applicable laws, acting as a mediator when it comes to neighbor disputes, and being experts in plumbing, roofing, insurance, financial planning, and other matters which impact the community.  That’s a tough job especially if the Association is self managed; yet being on the Board can be one of the most rewarding ways to volunteer your time (yep, you don’t get paid for being on the Board).

There are a few practical solutions to make the transition between Board members easier:

  • Education – answers to most questions can be found in the Association’s governing documents; however, there are also general industry standards and other laws which apply to community associations.  Community Associations Institute is a great resource for volunteer leaders and provides networking and educational opportunities.  Community Association Volunteer Leadership, as a one day workshop, is just one of the many educational seminars offered by CAI that will immerse you in the basics of Condominium and Homeowner Associations.  CAI also offers publications, available through its website, that are a valuable resource to current and future Boards;
  • Staggered Board member terms – many Association Bylaws include a provision which provides for staggered Board member terms.  The most common provision is where each Board member is elected for a set number of years, with positions expiring in different years.  Some of the positions could expire in odd-numbered years and some in even-numbered years (for example, if you have five Board members, three could be elected in 2011 and two could be elected in 2012).  This approach carries the wealth of information and knowledge from one Board to the other through members who remain on the Board, allowing the newly elected members to learn how the Association operates;
  • “Policy Manual” – develop a comprehensive Standard Operating Procedures / Board Manual to cover items the Association handles on a regular basis.  It does not have to be extremely detailed, but should include enough information for someone to quickly understand the Association’s operations.  What happens when a new resident moves in?  The intercom has to be updated, appropriate documents must be collected (e.g. lease agreement if a unit is rented), new residents should be given a tour of the community, etc.  The manual generally includes a maintenance plan, emergency procedures, vendor list, annual budget and financials, reserve study, prior meeting minutes, governing documents and Association policies, insurance, and other information pertinent to the Association’s day-to-day affairs.  If the Association is self managed, the document will allow Board members to easily carry out routine tasks and make decisions in the future.  If the Association contracts with a professional management firm, it will bring clarity and consistency to the Association’s affairs.

The wealth of knowledge that an Association accumulates over the years is almost impossible to document.  A good share of that knowledge is lost every time a new Board member is elected, however this loss of information can be mitigated through Board member education and communication, staggered terms and the development of a comprehensive policy manual.

April 14, 2011 Posted by | Board of Directors, Planning | Leave a comment

Budgeting

Budgeting

Once again it is everyone’s favorite time of year… budget preparation time.  The purpose of this article is to provide a brief overview of the most common budgeting approaches.

A budget is more than just revenue and expenses balanced to a net zero.  A budget should be viewed as an Association’s operating plan for the upcoming year.  There are two basic approaches to creating a budget – zero based and historical.  With a historical approach, expenses are budgeted based on the last few years of actual expenses.  With a zero based approach, the expenses are budgeted based on factual information calculated from scratch annually.

To begin, separate the budget into categories and work on one line item at a time.  This will make the budget process easier to manage.  Below are some of the most common categories with specific details and budgeting approaches on each:

Revenue

What to include: Member assessments, fees for common area use (e.g. cabana rental), move-in/out fees, interest income (be cautious not to use interest on reserve funds to offset operating expenses), sale of access devices, and other potential sources of revenue;

 

Approach: Top down or bottom up?  Most Community Associations, as non-profit entities, generally take the bottom up approach.   Revenue (e.g. member assessments) derives from expenses the Association will need to cover in the upcoming fiscal year.  Often times, the expenses are trimmed and/or services are eliminated to minimize the necessary increases in member assessments.

Professional Services

What to include: Management service, accounting, tax preparation, audit, legal fees, reserve study, etc;

Approach: A mix of zero based and historical.  Use zero based for recurring contracted services such as management, accounting and reserve study.  Base the budget on the value of the contract, check with the service providers to see if they will be increasing their rates next year and update the budget accordingly.  For non-recurring services such as legal fees, use a historical approach.  Checking the last two to three years of legal expenses will provide an idea of how much the Association relies on its legal counsel.  Take into account “special needs” that the Board knows the Association will require next year such as a Declaration Amendment.

Personnel Expenses

What to include: Gross payroll, payroll taxes, bonuses, benefits, recruiting expenses, staff education, etc.

Approach: Zero based for the most part.  Calculate the budget based on pay rates from employment agreements between the Association and staff.  Take into account projected pay increases for next year, bonuses, benefits, etc. Be sure to include a budget for extra coverage when staff members take paid vacations.

Administrative Expenses

What to include: Copies, postage, etc., fees and licenses, taxes (income and property taxes), insurance, loan interest expenses, Board education, etc.

Approach: A mix of zero based and historical.  Use a zero based approach with fees, licenses, permits, insurance, loan interest, etc.  Check with your insurance provider to determine the Association’s insurance needs and the premium cost for next year.  If the Association has a loan, confirm the amortization schedule and work with the Association’s CPA to estimate next year’s income tax obligations.  Use a historical approach for other miscellaneous administrative expenses such as copies, postage, Board education (attendance at CAI seminars/events), etc.

Utility Expenses

What to include: Utilities paid by the Association – water/sewer, garbage, recycling, electricity, natural gas, etc.

Approach: Historical for the most part.  Check the Association’s utility consumption for the past two to three years.  Look for unusual changes in consumption (a sudden increase in water usage may indicate a hidden leak somewhere on the property).  Use a zero based approach for items such as telephone lines and sewer capacity charges.  Use a zero based approach for garbage as well – review/assess the Association’s refuse removal needs, determine the size of the containers and frequency of pickups and budget in accordance with utility company’s rates to meet the refuse removal needs.

Maintenance Expenses

What to include: All property maintenance expenses.  It is generally a good idea to separate expenses by type – landscaping, elevator, fire safety systems, janitorial, etc. 

Approach: A mix of zero based and historical.  Use a zero based approach for recurring contracted maintenance.  Review contracts for each provider (elevator, fire systems maintenance, etc.) to determine the monthly cost of service and create the budget after first checking with vendors for next year’s increase.  For routine day-to-day maintenance (light bulb replacement, touch up painting, etc.) review actual expenses for the last few years, account for inflation and budget extra for special projects if planned.  It also helps to better track expenses if they are split up between “recurring contracted services” and “incidentals”.  Using landscape maintenance as an example, landscape related expenses would be separated into two separate budget line items – “Landscape Contract” and “Additional Landscape Maintenance”.  If the Association’s financials follow the budget and there is a question on “landscaping expenses”, it is much easier to see if the issue is with contracted monthly maintenance or if a significant amount of additional non-recurring work is being performed (replacement of dead plants, broken sprinkler heads, etc.).  Splitting up expenses between “contracted” and “additional” also helps during the budgeting process.  Contracted expenses such as an elevator maintenance agreement are generally mandatory.  Things like additional landscaping work (i.e. annual summer flower plantings) are “negotiable”.  One could decrease the frequency of such service or eliminate it altogether if the Association is unable to meet its financial needs.

Reserves – A reserve study should be used as a tool to budget for monthly funding of reserve contributions, and for forecasting major projects for next year and their associated reserve expenses.  Separating contributions to reserves and reserve expenses from day-to-day operating expenses will provide a better picture of the true financial needs of the Association.

There are a few additional things to consider while preparing a budget.  Bad Debt – many Associations struggle with high delinquency rates due to the state of the economy.  It is important to include a provision for bad debt write-offs as there is a high possibility that an Association will write-off some portion of uncollected assessments, especially due to the current high foreclosure rate.  Associations have several options to pursue owners for unpaid assessments after foreclosure, however if the prior owners do not have assets and/or verifiable income to garnish the Association may struggle to collect on the debt while continuing to incur legal fees to pursue the collection effort.

Contingencies – Always try to include a contingency in the budget.  The level varies depending on each Association’s financial situation, however a contingency equal to 10% of the annual budget is advisable.  A contingency will also assist in better management of annual increases in the Association’s assessments.  If other costs drastically increase, the Association can temporarily reduce the contingency and then increase it back to the original level over time.

Monthly vs. Annual budget – A budget written by month provides better tracking of an Association’s revenue and expenses throughout the year because some expenses are incurred once annually.  For ease of calculation, let’s assume the projected cost of an Association’s audit is $1,200 and it is scheduled to be completed in March.  Budgeting $1,200 in March is much more accurate than budgeting $100 per month for January through December.

A note on expense allocations – many governing documents, especially mixed-use developments with commercial and residential units, include provisions as to which units pay for specific expenses.  This important part of a budget is often overlooked.

Budget approval – there are two basic approaches to budget approval depending on whether the Association is an “Old Act Condominium” (pre-1990), “New Act Condominium” (created after July 1, 1990), or a Homeowner’s Association.  The Association’s Declaration will provide specific guidance on the budget approval process, however typically the Board of Directors approves the budget in “Old Act Condominiums”.  “New Act Condominiums” and Homeowner’s Associations generally follow a budget ratification process – the Board of Directors approves the budget and holds a budget ratification meeting with the general membership.  At that meeting, unless the majority (or any larger percentage specified in the governing documents) of the Association members reject the budget, whether or not quorum is present, it becomes effective as approved by the Board of Directors.

Hopefully by the time this article comes out everyone will have at least a draft of next year’s budget ready and will find this article useful in preparing a final version for the Board of Directors to review and approve.

September 23, 2010 Posted by | Accounting, Budget, Planning | Leave a comment