Stop! Before Raising Association Fees, Try Cost Containment
You know how important your association’s annual budget is, what it means for the future. You know that your fiduciary responsibility is the most important commitment you make to your fellow homeowners. And you’ve planned, and calculated, and followed all the budgeting steps, but you’re still looking at the one thing NO association board wants to do: increasing assessment fees. But first, take a long, hard look at cost containment strategies that can save your association money and help optimize your operating budget.
What do we mean by cost containment? Cost containment is maintaining or reducing expense levels to get more for your money and hopefully reduce the need for assessment increases. You may be able to save money in budget lines you never considered. What are some of those areas?
Insurance and Investments
Where and how is your reserve fund invested? IS your reserve fund invested? Almost 35% of board members tell us that they are not confident they are getting the best returns on their reserve fund investments. Make sure your money is working as hard as it can for your association.
“When new clients hire FirstService for professional property management, we immediately look for ways to help generate additional income in the cash management space to optimize the budget,” says Drew Ahrensdorf, vice president at FirstService Financial. “It’s rewarding to deliver tangible value by leveraging our bank relationships and proactively providing solutions to our clients."
“In January 2017, we began managing a 300 unit condominium in Arlington, Virginia. This client was about to embark on a multi-million capital improvement project that included significant structural repairs and replacement. The board engaged FirstService Residential’s financial professionals to help guide them through HOAthe process,” Ahrensdorf explains. “One of the first things we did was a financial ‘check-up’ and evaluated their reserve portfolio. Given the association’s need for liquidity since they were about to spend significant sums of money over the next few years, we noticed that they had almost $1 million in a money market fund earning 0.01%. Furthermore, those deposits were not FDIC-insured. We proposed re-allocating those balances to FDIC-insured money market accounts earning between 0.60 percent and one percent. This re-allocation generated an additional $7,000 per year in additional interest income to their bottom line.”
When did you last have your insurance audited? Are you covered correctly? Don’t set your policies to auto-renew – every year, work with your broker or agent to assess your coverage and make sure that it is up to date and adequate.
“We always begin with a review of the association’s current insurance program,” explains Sean Kent, senior vice president at FirstService Financial, the financial services affiliate of FirstService Residential. “It’s easy to make a determination of whether or not they have adequate coverage and looking for cost savings. We drive a competitive bidding process, through our internal insurance managers or coordinators. We do have exclusive relationships with some carriers and we leverage our relationship with those carriers to deliver better terms and conditions at a lower cost.”
Kent says that sometimes coverage can be consolidated and sometimes FirstService Financial can provide access to insurance products the association couldn’t get before. “We have our own D&O (directors and officers), crime and umbrella insurance products and, depending on their previous claims experience, they may be able to save money there,” he says.
Saving on insurance goes beyond the premiums your association pays. “Water damage is the major claim that most affects policy holders,” Kent says. “Any capital improvements a board makes to help prevent water damage can be used as ammunition to negotiate with underwriters. Those capital improvements can be related to replacing boiler or risers or other piping in the building. Maintenance plans for water pipes or requirements for replacement of washing machine hoses can help too.”
Kent cautions against looking at insurance costs only as a matter of the premium paid. “If a client insists on a low-premium/high-deductible policy, we recommend that they add a line item to the budget to save for coverage of that premium if something happens. There’s really no savings there,” he says. “It’s important to consider the whole picture.”
Vendor Contract Review
Do you review your vendor contracts on a regular basis or renew them automatically? Does your management company review them? More than 57% of board members said they are not sure if their management companies take this important step, but this is not the time to take a “set it and forget it” approach. Reviewing your contracts may reveal places you can save money. Or it may show opportunities for your association to get more for the same dollars, perhaps saving elsewhere.
Benchmarking, or comparing what communities of similar size and type spend on a number of services, is a powerful tool that tells communities where they stand relative to their peers. It is the second important piece of contract review and can only be accomplished by a professional management company of the size to have access to numerous communities to track that data.
Imagine an expert sitting down and looking at your landscaping contract in the context of other communities in your area. She realizes that, compared to other properties of your size and type, you are paying 15% more for your landscaping. She then looks more closely at your landscaping contract, line by line. Are you paying for higher-end services? For unnecessary services? Or just being overcharged? That information gives your board and management the leverage to go to that contractor and negotiate better pricing or to find a new contractor who will work within your budgetary requirements.
Svetlana Malinsky is a community association manager at an upscale community of 600 single family, townhomes and condominiums in Delaware and primarily handles the association’s financial matters, which includes managing the budget and invoices. “When I started here two years ago, I immediately looked at contracts,” she explains. “The first one I looked at was the fire alarm system and monitoring in the club house. When I saw the invoice, I thought it was really high. So I reached out to the company and was able to renegotiate the fee by $30 less a month and also got them to waive an inspection fee. We saved the association $1000 a year in just one meeting and a phone call!”
Malinsky was also able to lower the price of water delivery to the clubhouse by 30% after realizing that the community was being overcharged by the vendor. She recommends being assertive with vendors: “Often when you use the same vendor such as a plumbing company regularly, they are willing to give discounts for each call as the relationship builds and they are confident in getting your business. At first, I had to ask for that, but now it’s automatic.
How much energy does your association use in common areas? Are you using traditional lightbulbs? Are the lights kept on when no one is using a space? Is your pool or hot tub a few degrees too warm? Are you using the most efficient pool heater for your location and type of property? Is the air conditioning a few degrees too cool? Do your parking garage fans stay on when not needed? Are there areas of your community with excessive outdoor or landscape lighting? All of these are potential places to cut costs.
Some, like changing from traditional lighting to LED lighting, require an upfront investment but pay off that investment very quickly, resulting in long-term savings on energy, maintenance and staffing. Malinsky said that she purchased LEDs for the outdoor lights in her community to save on both energy and labor; the lightbulbs don’t need to be replaced as often, so they require less maintenance. Others, like putting light switches on motion detectors so that the lights can’t be left on with no one in the room or changing the temperature of the swimming pool, don’t require much investment to start to see savings.
We know you don’t want to increase assessment fees for your homeowners. Taking a look at where you can contain costs is a good step toward not having to.
For more information on how a professional property management company can help your association save money on insurance, financial services, energy and more, sign up today!