How Do You Manage HOA Reserves During a Crisis?
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In our 2020 Budget Survey…
35% of association board members said that their budget has been negatively affected by COVID-19.
21% of board members still weren’t sure how COVID-19 would impact their budget.
No matter where your HOA budget stands during and after a crisis like COVID-19, preparing for the future and taking steps to protect your HOA reserve funds and operating funds is critical. Whether your reserves are fully funded and you’re operating in a very comfortable place, or you’re dealing with uncertain financials on a day-to-day basis, it’s important to take thoughtful and preventive measures.
Ensuring you have well-funded reserves and a solid operating budget is key to maintaining property values and maintaining your reputation in the community at large. To learn more about keeping your reserves strong and healthy during a crisis, watch the webinar Post-Crisis Reserve Funds and Cash Management.
Here are 3 ways to successfully manage your reserves and plan for the future during a crisis:
1. Prioritize Reserve Expenses (Effectively and Wisely)
When it comes to prioritizing reserve expenses during or after a crisis, board members should make decisions with the same mindset that they have for all association decisions, which is “Do what’s right for the community.” That means making decisions that are in the best interest of the association and residents.
When it comes to reserves, doing what’s right for the community may mean holding off on expenses that are temporarily unnecessary. For instance, you may want to pause some surface level changes or repairs to amenities that aren’t currently being used or visible. That doesn’t mean holding off on those actions entirely, but it may mean postponing them.
Robert Nordlund, Founder of Association Reserves, a national reserve study firm, suggests assessing and labelling reserve expenses under 5 color-coded categories to determine what needs to be done now and what can be postponed to a later date. These 5 categories of reserve expenses include Inconsequential (red), Reevaluation (yellow), Obsolescence (yellow), Protection (green) and Catastrophic (green). Boards may want to consider delaying inconsequential reserve expenses like new paint in a rarely used stairwell, but they should prioritize expenses that may be catastrophic or that would put residents’ safety at risk, such as repairs to an entry gate. Work closely with your management company and engineering specialists to make these determinations.
2. Reallocate Reserves to Operating Funds (When Necessary)
In some cases, associations that have been hit hard by a crisis or emergency will look to reducing or suspending reserve contributions or borrowing from their reserve funds in order to stabilize their operating budget. While none of these are ideal actions to take, if you are in an emergency or crisis situation, they may be necessary.
While it is legal in most states to temporarily transfer reserves to operating funds, these funds must always be paid back in a timely manner (typically within a year, depending on state requirements). As Nordlund said, “In addition to state laws, the timing for paying back reserve funds is also determined by the association’s upcoming reserve projects (when that cash will be needed) and their governing documents.” Always check with your HOA attorney and financial services partner before borrowing or making any changes to your reserves.
If your board is considering borrowing from reserves to keep your association budget running smoothly, partner with your manager and management team to protect you from risk and potential liability.
3. Maximize Value Within Your HOA Budget (Proactively)
A crisis or emergency can often put boards in a reactive state, looking to cut costs in whatever way they can to protect their budget. However, the best associations look for opportunities to save (or earn) money proactively, so that they are better positioned for an emergency.
For starters, you may want to review your current investment plan to see if there are opportunities to increase your reserve fund returns. If you don’t have an HOA Investment Policy, this may be the time to develop one with your management company and financial services provider. Fill out the form on this page to download a complimentary guide to creating an Investment Policy.
Secondly, sit down with your association management company and insurance specialist to review premiums and deductibles to see if there are any gaps in your coverage. With the right partner, you may be able to secure better insurance coverage while saving on premiums. Lastly, shave off unnecessary expenses, such as non-essential landscaping or amenity additions.
The good news is that even if you haven’t taken proactive steps to save money prior to a crisis, you can set your association up for success in the aftermath. Andrew Schlegel, executive vice president of high-rise and mixed use at FirstService Residential said, “Making minor changes and being conservative with expenses during the aftermath of a crisis can help balance a shaky budget and protect you from financial issues down the road.”
Looking Ahead
While your board can’t predict the future, you can make wise and timely budget decisions that help protect your property values and enhance your association.
To learn more budget strategies, watch the webinar Post-Crisis Reserve Funds and Cash Management.