Managing the finances of a Condominium or Homeowners Association (HOA) can be an overwhelming task, especially if it’s your first association or a new association. There is an elected Board of Directors, which is typically between three to five people, and they are responsible for the management of the association. These representatives of the owners are required to act in the best interest of the association and its members and that can be a difficult task at times. There are several key responsibilities to ensure the smooth operation of the community and the maintenance of its infrastructure and amenities. Here’s a breakdown of tasks typically involved in an association:
- Budgeting: Developing an annual budget is a necessity and generally a requirement of your associations’ declarations or by-laws. The budget should outline projected expenses and income for the HOA, generally the income is owner dues but depending on your association there may be other forms of revenue. This budget will cover maintenance costs, utilities, insurance, reserves for repairs and replacements, administrative expenses, and any planned projects or capital improvements.
- Dues: Once the annual budget is complete the dues for the year can be determined. These can be paid monthly, quarterly, or annually depending on your association. Ensuring timely collection of homeowner dues or special assessments are essential to fund the budget. This involves invoicing, tracking payments, and following up on delinquent accounts.
- Expense Management: Some of the day-to-day expenses of an association are landscaping, repairs, utilities, insurance premiums, and any contracted services. These expenses need to be negotiated annually (if possible) and monitored to ensure it aligns with the budget. Special projects can require a bidding and approval process to ensure the cost and quality of any project.
- Reserve Funds: These are funds that are maintained in a separate bank account to cover major repairs or replacements of common elements such as roofs, elevators, pools, and any common area amenity. Typically, these expenses are determined by an engineering study so that the association is saving adequately each year to avoid a large special assessment when the replacement is necessary. The frequency of updating the engineering study can vary by association, but it is critical to have these funds on hand and contribute annually.
- Financial Reporting: The HOA board should provide regular financial reports to the homeowners detailing the income, expenses, reserves, and any variances from the budget. Transparency is key in building trust.
- Compliance: Compliance with all federal, state, and local tax requirements, including filing annual tax returns and any necessary forms related to nonprofit and homeowners’ associations is a necessity. The board must also make sure the association follows all federal, state, and local laws and inspections. These can include annual state elevator certification, pool inspections, local fire inspections, etc. These inspections and requirements vary by location.
- Insurance: Insurance coverage must be secured for the association and generally includes property insurance for all common area elements, liability insurance, director and officers (D+O) insurance, and possibly workers comp (depending on if the association has any W2 employees). These policies and policy limits should be reviewed annually and put out to bid every few years if not every year to ensure the best pricing available.
- Investment Management: Prudently investing the Reserve Account can help to generate revenue for the association to supplement the budget or to help build the reserve. These funds are typically a longer-term investment account so allow for various investment opportunities but some factors to consider are risk tolerance, investment time period, and regulatory constraints.
- Legal Compliance: The board needs to ensure that it operates within the legal guidelines of the association. Stay informed about laws, regulations, and governing documents relevant to your HOA, such as state statutes, covenants conditions and restrictions (CCRs) and bylaws.
Plan + Prosper is available to help with any or all of your needs relating to Associations. I have over 15 years’ experience in dealing with various Associations, from start-up after new construction, developer turnover, continued management, and owners’ representative as a member. I have served on the board of various Condominium Associations and handled aspects from budgeting, property management, and even vacation rentals. P + P can handle an initial organization to get your board started or handle any/all aspects on a continual basis.
Effective financial management is essential for the long-term sustainability and success of any association. It requires detail, careful planning, organization, and a commitment to serving the best interest of the community.
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