Preparing the annual budget for a condo or HOA isn't quite like figuring out a budget for a couple, or even a large family. The board of a multifamily building or association has to consider all the angles—past, current, and future—when formulating a financial roadmap for their community. Fortunately, while every community may be unique, there are a few budgeting basics that apply to every condo, HOA, or co-op, and knowing them will help boards and managers keep a better handle on their building or association's money matters.
“The board is the fiduciary for the association,” says Mary Faith Nugiel, principal with RCP Management Company in Monroe. “As such, they need to make sure they have knowledge of the association’s finances and spend adequate time on financial planning...to insure that the association members are as protected as possible from financial disasters. The manager is responsible for providing the board with the best information possible so it can do its job in an efficient and professional manner. The manager should evaluate the association financials and make recommendations to the association members. This requires a manager well-trained in association financial analysis.”
Know Your Terms
Budgeting for condos, HOAs and co-ops actually involves not one, but two budgets: the operating budget, and the capital budget. Recurring, more or less predictable expenses such as taxes, utilities, staff salaries, insurance and maintenance are the line items most frequently found in the operating budget. Major projects, and long term plans, and emergency funds are budgeted for in the capital budget, and those items will vary, depending on the individual community’s needs, wants, and means.
While expenses are divided into operating or capital expenses, income is generally obtained only from HOA dues or fees, and any fines or penalties incurred and repaid by residents. When any member of the board is unclear or confused on which budget should be assigned which cost, it can be difficult for the board to function properly and to uphold the fiduciary duties for the community. That's why it's important for every board member to have at least a working familiarity with the way their community's budgets function and interact.
The Budgeting Process
Reviewing the existing budget and formulating a budget for the upcoming year is an annual duty for the HOA board. Property managers play a central role in the budget, and the process starts with them. “The manager is the one that usually prepares the draft budget. He reviews it with the treasurer, and the finance committee, and the board. The managers usually revise it and make any changes, and they'll mail a summary of the proposed budget to the owners,” says Steven Silberman, a CPA with the nationwide accounting firm of Marcum, LLP, based in Deerfield, Illinois.