Posted on Friday August 11, 2017
Community associations can be wonderful. They have amenities that otherwise might not be so close to home, like a community pool, fitness center, golf course or riding trails. Being part of a managed community often means having shared interests with your neighbors, imparting a sense of community that isn’t easy to achieve in an ever-transient world. It means that everyone abides by the same high aesthetic standards. But none of that happens without stable finances, including a balanced budget and a well-funded reserve.
Rachel McLean is a controller at FirstService Residential. We spoke to her about financial best practices that you can implement in your community association. Keep in mind that the most effective boards keep a close eye on their finances, which in turn, allows them to enhance property values and improve resident lifestyles.
1. Craft a budget that works.
Your budget is the backbone of your community’s financial well-being. Keeping an eye on your financial statements, monitoring expenses and revenue, creating a solid collections program for delinquent accounts, looking at trends, reviewing your reserve study – all of these go into creating your annual budget. If you do them consistently, all year long, budget season is made infinitely easier. Once each budget is assembled, stay on top of it to make the next year easier as well. The right tracking software and expertise will help; your professional property management company should be able to provide both.
2. Communicate financial information to residents, clearly and consistently.
McLean talks about a condominium, one with a very wealthy, high end clientele. “Years ago, they found out that the façade on the high-rise was coming off and there was water intrusion. They sued their developer for the defect, but only got $1.6 million toward a repair project that was going to cost $8 million,” she said. That meant a special assessment, which no board wants to do. The board really focused on segregating their funds, making sure nothing could be co-mingled. They came up with three accounts: a regular reserve fund, a betterment fund for capital improvements and settlement fund, which managed the lawsuit settlement fund and the special assessments. That association broke the special assessment into three stages so that no one was hit with too high an amount at once.
But McLean said that the association, in this circumstance, really stood out because of their communication to residents. “They had banks come in and talk to the homeowners. Every expense was broken down for residents to see. They focused on extraordinary levels of transparency, and used a monthly newsletter and an annual budget packet to do so,” McLean explained. “This could have gone badly, but that transparency really helped the situation. They managed the situation in a way that didn’t have a negative impact on the homeowners, and the board’s transparency was a huge part of that.”
3. Find ways to save.
So you know how much money’s going out. You know what should be coming in. Now, take a look at how to stretch those dollars further.
4. Institute internal controls.
You can protect yourself against costly financial misappropriation simply by separating duties with different individuals. For instance, make sure the person who records receipts isn’t the same person who makes deposits. An experienced, knowledgeable property management company can help you identify more roles, too.
“We use fund accounting, which segregates funds so that they cannot be comingled, even accidentally,” McLean explained. “Each fund is reported as a separate financial. I would estimate that about 75 percent of the financial reports we get from other property management companies are NOT done that way, and we discover that one fund owes another one money because there are no checks and balances in place. Any manager can make a mistake coding invoices, but with fund accounting, an accountant can easily reclassify that expense and fix the problem before financial statements are sent out.”
5. Audit. Then audit again.
Your association accountant can analyze your documents and records to help you gain a clearer financial picture. If you’re a smaller association, consider hiring your accountant to conduct a “review” – it’s a more cost-effective alternative to a full-blown audit.
Why multiple audits? No one is perfect, and work may need to be double checked. McLean recounts a story of an audit gone wrong. “The auditor did the association audit – verified all of the bank accounts, conducted all the proper steps. That association had an asset sitting on the balance sheet and we – both management and board -- assumed we knew what it was, that it was a deposit that was being held by a lawyer,” she explained. “The auditor didn’t question it. It turned out the money was refunded in 2014, and had to be written off. So all that time, the association thought they had something like $12,000 that they really didn’t have.”
6. Invest wisely.
Investing your reserve funds effectively can create a robust avenue for financial growth. Seek FDIC-insured vehicles that offer both safety and liquidity – such as Certificate of Deposits (CDs). Avoid risky investments such as corporate bonds, municipal bonds or stocks.
7. Make sure you’re properly covered.
Property or casualty coverage isn’t enough. An uninsured incident can sink your association, so be sure to have proper insurance coverages that protect you against lawsuits, including an umbrella policy if appropriate. Directors and officers liability insurance will protect board members from lawsuits brought against the association. Fidelity insurance is an important protection against claims of theft. Workers compensation should also be considered, even if the association doesn’t have direct employees. Insurance requirements vary by state, so it’s important to consult an agent or broker who is experienced with communities like yours and is familiar with legal requirements. Board members can be liable for under-insuring the community’s assets, so be honest and thorough in detailing the features and amenities of your community.
“If you’re planning to add a physical property improvement out of the reserves, you have to understand the implications for the operating budget in terms of higher insurance and utilities,” McLean said. “We worked with a 300 unit community of single family homes, homes that start at $1 million. Before the project was completed, the developer went bankrupt, leaving homeowners with none of the promised amenities. So they came together and finished the job, coming in only $6,000 over their $1.1 million budget. As part of their quotes on completing the work, they included the costs of insurance for each features, for annual repairs, for necessary lighting. Many capital improvements simply come with additional costs. All of those need to be budgeted for, not just the improvement itself.”
The financial health of your community association goes far beyond your budget. Insurance, investments, internal controls, cost savings and other best practices will help ensure the long term stability of your association.
There are many other ways that your association can protect its finances, beyond what’s listed above. For more information about how to build and maintain financial stability for your community, as well as other educational articles, contact us today.
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