Yes, it’s that time of year again for HOAs. No, not the holidays, it’s budget season! Most HOAs use the calendar year as their fiscal year, and now is the time of year many boards of directors are formulating their budgets for next year. Here are tips for making the budget and next year’s finances run smoothly.
Analyze the property the HOA is required to maintain to determine its useful life and the cost to rebuild, repair, or replace it when the time comes. This is especially important for large-ticket items such as roof and siding replacement, detention-pond repairs, paving jobs, and refurbishing of swimming pools, clubhouses and other amenities.
This process is known as a “reserve study,” and there are professionals known as “reserve specialists,” usually persons with engineering and construction backgrounds, who can perform these studies for you.
The result of a reserve study is a road map for how much money from assessment income the HOA should be setting aside into reserve accounts to meet these needs when the time comes.
When done correctly, performing a reserve study and following its findings will avoid the need for large special assessments to be levied against owners in future years as the need for these projects surfaces.
Expect the unexpected. Include an allowance for unexpected expenses, also known as “contingencies.” The most common are repair costs for damage to common property that is not covered by insurance. Also make sure your budget provides an allowance for “bad debt.” Few associations collect 100 percent of their assessments. Use historical data from prior years’ financial statements to determine the proper allowance for bad debt.
Many boards focus their efforts only on the operating budget – the regular income from assessments, and the regular expenses for management, landscaping, utilities, insurance, maintenance of common property, and professional services. But your budget should also disclose any expected capital expenditures for the coming year.
For example, will you be using reserve funds or a bank loan to replace the roofs on the condominium buildings, install a new playground, or refurbish the clubhouse and replace the furniture? If so, these expenditures should be reflected on your budget.
North Carolina law requires HOAs to allow the members to review and vote on proposed budgets. The applicable law for both condominiums and planned communities says: “Within 30 days after adoption of any proposed budget for the (condominium or planned community), the executive board shall provide to all the lot owners a summary of the budget and a notice of the meeting to consider ratification of the budget … The budget is ratified unless at that meeting a majority of all the lot owners in the association or any larger vote specified in the declaration rejects the budget. In the event the proposed budget is rejected, the periodic budget last ratified by the lot owners shall be continued until such time as the lot owners ratify a subsequent budget proposed by the executive board.”
So the budget doesn’t actually have to be affirmatively approved by the members; it is approved automatically unless a majority of all the lot owners (not simply a majority of those at the meeting) vote to reject the budget.
Note also that meeting quorum requirements do not apply to budget ratification meetings, and the notice of meeting must state this fact.
This column was originally published in the Charlotte Observer on November 14, 2014, and was previously published on this blog on January 20, 2015. © All rights reserved.