Revenue or Reduction Making Tough decisions

Revenue or Reduction

 It’s the same dilemma that single-family households across the United States are  facing: How much money can we afford to pay for the services we want? And  should we stretch ourselves thin, taking more out of our bank accounts to pay  for private schools and that desperately needed vacation? Or should we cut back  on restaurants and renovations to put more into savings?  

 The same goes for condo and co-op buildings.

 As the federal legislative fiasco over the debt ceiling this past summer  demonstrated, it's sometimes very difficult to balance a community's (or a  whole country's) need for revenue with its equal need for services.  

 In the case of an HOA, cutting costs is one sure way to bring a runaway budget  to heel, but cost-cutting almost inevitably comes with reductions in services  and amenities that many residents view as their basic rights as homeowners and  association members.  

 When boards and managers are faced with tough decisions about raising revenue  and possibly cutting costs, communication, transparency, and cooperation with  residents are more important than ever.  

 First Things First

 HOA administrators can clearly and realistically illustrate their communities'  financial situation for residents, while making tough decisions about raising  fees and possibly paring back amenities—but it’s a tough balance, and one that can upset everyone from the homeowners to the  board members to the HOA administrators.  

 The first step is to figure out the basics: Does your building need a standard  maintenance increase, a special assessment, or a reduction of services?  

 Maintenance fees are initially determined when the board looks at the total  operating budget, figuring out how much reserve they think they need and  dividing the total figure by the share of ownerships. Some buildings have  higher maintenance fees because they include more amenities, such as a doorman,  pool, or gym.  

 And when the pool needs rehabbing, the roof springs a leak, the electricity bill  rises or the common areas require new carpeting, then you can either ignore the  problem (which is hardly recommended), raise maintenance fees, or have a  one-time special assessment, says Gary van der Laan, director of management  development at Leland Management Inc. in Orlando.  

 “It is important to watch the financial status of the association on a monthly  basis,” van der Laan says. “A good rule of thumb is that the community should have three months of operating  cash on hand at any point. If levels begin to drop below this, it is time to  reduce expenses or consider an increase.”  

 Other Options

 Those are two choices, but there are a few others associations may consider as  well. In lieu of a general maintenance increase or special assessment, Florida  homeowners associations also have the ability to generate extra money by  charging a late fee on assessments, up to a $100 fee per person when  transferring for sales and leases, and rental feels for special use of common  areas, such as for parties, meetings, and other functions.  

 Regardless of the way the money is generated however, with proper budgeting  there should never be a reason to increase the fees more than once per year,  van der Laan says.  

 There are also rules in place to make sure the maintenance fees and other  charges don’t increase too often or too high. The association also needs to have everything  in writing ahead of time, explaining the percentage that the fees can be raised  annually, and for what reasons homeowners can be charged.  

 And while the state of Florida does not impose a cap on how much is too much for  a single special assessment or fee increase, homeowners associations need to be  mindful of how much their residents can actually afford with regards to yearly  assessment increases. “Other than such an unforeseeable need, regular annual increases would not  typically be greater than 5 percent,” van der Laan says.  

 But technically, a board is able to increase annual fees by 15 percent per year  without majority approval by the residents, says Sue Carpenter, CEO of  Community Management Professionals Inc. in Orlando.  

 No Surprises

 If homeowners read their governing documents and attend their association's  yearly budgeting meeting, then none of the increases should come as a surprise,  van der Laan says.  

 “When the budget process begins, the board should look at the actual expenses  through that point in the budget year, as well as projections to the end of the  budget year,” he says. “All contracts in place should be reviewed for any type of built-in increase, and  all service providers and utilities should be contacted to find out about any  expected increase for the next year.”  

 However, if expenses stay relatively stable from year to year, there doesn’t necessarily have to be an automatic annual increase in assessments, says Ken  Arnold, CEO and president of the Miami-based Association Financial Services, a  financial services provider specializing in lending and collections for condo  and homeowners associations.  

 For example, if your building is currently playing $100 per week for  landscaping, and the next year, it still will cost $100 per week, then there  would be no immediate need to tack on any extra costs to the homeowners. Of  course, if the price of the landscaping goes up, a board could either decide to  increase maintenance fees, or even turn the flowerbed into a concrete area and  get rid of the cost of landscaping altogether, Arnold says.  

 Unlike maintenance increases, special assessments aren't necessarily  predictable. There’s no cap on how much they can be, and depending on the reason, they may cost a  relative small fortune for homeowners. A special assessment can only be  requested if there’s a sudden infrastructure issue, such as a broken roof, a faulty balcony or  window that may become dangerous if not replaced.  

 And according to the legal pros, those dangers go beyond the obvious ones to  life and limb. If an owner is injured as a direct result of deteriorated  property, both the association and the individual members of the board could be  potentially liable. So even if it seems like a good idea to hold off on repairs  or maintenance projects in the name of thriftiness during a tough economic  patch, doing so could come back to bite board members where it hurts.  

 According to one Miami-based attorney, Florida state law requires that boards  manage the fees and assessments that essentially keep their building running  smoothly from day to day, and which are used in case of emergencies. But since  the specific cost of fees and special assessments isn’t spelled out, it’s up to the board to decide how fiscally responsible they should be. One of the  tangible benefits of keeping the maintenance low or steady year after year—aside from keeping residents happy—are resales.  

 “A lot of times, people make decisions on which condo to buy based on the  maintenance fee,” Arnold says. “All financial factors go into their final decision.”  

 On the other hand, residents also want—and require—a building that functions well and is safe. People want their place maintained,  and sometimes, you have to spend money to maintain it. A smart homebuyer will  look at what the reserves are, and if it’s not adequately funded, then the money will have to eventually come via a  special assessment.”  

 The Last Resort

 The final option would be to reduce amenities if the board wants to avoid  raising the assessments or creating a special assessment. But if a resident is  promised a certain amenity when buying the condo or coop, they board will have  a hard time legally and practically doing away with the perk.  

 Carpenter suggests that if a board is strapped for money, they could get rid of  relatively smaller amenities, such as a monthly social or a Christmas party,  rather than doing away with something that’s been promised in writing to the resident, such as a pool or a tennis court.  

 That way, they’d be able to scale back without upsetting the residents and going back on what  was originally promised when the apartment was sold.  

 Whether the board decides to raise assessments, add a special assessment or  reduce amenities in a cost-cutting measure, there are good and bad ways to go  about explaining to residents the plan.  

 To avoid shocking unit owners with an assessment or fee increase out of the  blue, most legal and management experts advise boards to keep their residents  informed throughout the year of the causes of maintenance increases. The board  can do this through newsletters, a website, a personal letter from the  president and via financial reports.  

 Most increases are the result of capital repairs, delinquent unit owners,  foreclosure and price increases for insurance—and if this is explained clearly and honestly to an association's unit owners,  there will likely be less push-back when the time comes to impose the increase  or assessment. After reviewing the contents of the letters, invite the unit  owners to e-mail the board with further questions or with clarifications of any  of the points they may not completely understand. Better yet, invite them to  serve on the board itself, or on the budget or financial committee.  

 “There needs to be information about why this is necessary, versus some other  option,” Carpenter says. “Emotions have to be kept out of it. If the board can’t handle it, perhaps it’s best to have their manager do it, or their attorney attend and present it for  them—someone with authority who the membership will respect.” 

 Danielle Braff is a freelance writer and a frequent contributor to The South  Florida Cooperator.

 

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