As an HOA board member, you must make informed decisions to ensure your association remains financially solvent. Unfortunately, proper money management isn’t always easy, especially for larger associations with complex budgets.
When HOAs fail to manage their finances effectively, the consequences can be serious. The association may lack funding for essential services, resulting in neglected maintenance. Financial mismanagement can also trigger special assessments and, in extreme cases, bankruptcy.
In this blog, we focus on strategies for financial planning, including generating revenue, managing reserves, and avoiding special assessments. Our goal is to help your community remain vibrant and financially sound.
Contents
- The Importance of a Comprehensive HOA Budget
- Can You Sell Common Areas to Generate Revenue?
- Best Practices for Reserve Fund Management
- What Are Special Assessments and Why Should They Be Avoided?
The Importance of a Comprehensive HOA Budget
A budget provides a clear financial framework, allowing your association to allocate funds and meet both current and future needs.
To create an accurate HOA budget, you must establish the association’s income and expenses.
Potential HOA Income Sources
HOAs generate income through various sources, including:
HOA Dues and Fees
The most significant source of revenue comes from regular dues paid by homeowners, typically on a monthly or quarterly basis.
Special Assessments
Occasionally, HOAs may levy special assessments. These one-time charges can provide additional funding for unexpected costs.
Fee for Services
Implementing fees for specific services, such as guest parking or use of select amenities, can provide additional revenue.
Rental Income
If the HOA owns common areas, it may lease these spaces for events, gatherings, or other activities. In big cities, for example, associations sometimes lease roof space so utility companies can install cell phone towers.
Interest Income
Funds held in reserve accounts or other investments can generate interest income, adding to the association’s overall revenue.
Sponsorships and Partnerships
In some communities, local businesses pay a monthly fee in exchange for advertising opportunities. For example, a community may sell advertising on its in-house cable channel.
Potential HOA Expenses
Understanding the monetary outlays your HOA may face is crucial for financial planning, too. Typical expenses include:
Operating Expenses
This category includes all the day-to-day costs associated with running the community, such as common area maintenance and utilities.
Administrative Expenses
Costs related to managing the HOA itself should also be accounted for. These include:
- Fees paid to property management companies
- Legal fees
- Insurance premiums
- Income and property taxes
Reserve Fund Contributions
Reserve funds are essential for addressing major repairs. A well-planned budget allocates a portion of the annual income to the reserve fund, ensuring the HOA is prepared for significant expenses.
Capital Improvements
This line item allocates funds for planned enhancements to community facilities, such as installing a new playground. Budgeting for these projects improves resident satisfaction while also boosting property values.
Can You Sell Common Areas to Generate Revenue?
If your HOA is facing hard times, the board may consider selling common areas.
For example, an HOA may sell:
- A large, underutilized park to a developer
- The community clubhouse to a private entity
- Vacant land intended for future development
- Excess parking space
- Facilities like tennis courts or swimming pools
In some cases, boards may consider selling common areas to minimize future expenses. For example, a board may sell a rarely used pool to avoid ongoing maintenance. Or, a board may sell a parking lot that needs to be resurfaced.
It’s important to remember that selling common areas typically requires approval by 100 percent of all owners and approval from each owner’s mortgage company. Unfortunately, these approval requirements are often impossible to achieve.
Best Practices for Reserve Fund Management
A reserve fund is a designated savings account for an HOA. Building a robust reserve fund allows your association to address unexpected expenses, such as major repairs and replacements, without resorting to special assessments.
The Federal Housing Administration requires that association budgets contain a line item of at least 10 percent for reserves. Meanwhile, most state laws and governing documents call for “reasonable” reserves.
Since every community is different, it’s important to hire an independent expert to conduct a reserve study to determine what is “reasonable.” This expert should be someone who doesn’t stand to profit from the repair work, has professional qualifications in this field, and is designated by the Community Associations Institute as a Reserve Specialist. The study should be coupled with an energy audit to buffer rising energy costs.
Other best practices for reserve fund management include:
- Create a Long-Term Funding Plan: Develop a plan that outlines how you will gradually increase reserve funding.
- Monitor and Adjust Regularly: Review the reserve fund status quarterly or semi-annually to ensure it aligns with the budget and actual expenses. Make adjustments as needed based on changing conditions or unexpected costs.
- Educate Homeowners: Communicate the importance of the reserve fund to residents. Transparency about how funds are managed encourages timely payments of dues.
- Maintain Detailed Records: Keep thorough documentation of all reserve fund transactions, including contributions, expenditures, and any income generated.
- Be Aware of Reserve Fund Regulations: Boards should be aware of specific reserve fund regulations mandated by states. These regulations often dictate how much HOAs must keep in reserves and how often reserve studies must be conducted.
- Engage the Community in Decision-Making: Involve homeowners in discussions about major repairs and reserve fund expenditures. This can help foster a sense of ownership and accountability within the community.
What Are Special Assessments and Why Should They Be Avoided?
If HOAs have insufficient reserves to pay for unforeseen costs, they may turn to special assessments.
Special assessments are additional fees levied by an association to cover unexpected or extraordinary expenses that fall outside the regular budget, such as replacing the roof after a storm or upgrading outdated plumbing.
Unfortunately, special assessments are inherently inequitable because they fall on the people who happen to own units at the time payment is due, without regard to length of ownership. In other words, someone who has lived in a condo for five years will pay the same fee as someone who has lived there for 25 years.
Given these dynamics, owners often challenge special assessments. These disagreements can delay needed repairs and even escalate into litigation. As a result, association boards should avoid special assessments, if possible.
Using Loans and Bonds to Fund Improvements
The single best way to avoid special assessments is by creating a reserve fund. But what happens if an association doesn’t have the reserves for a needed repair?
In these situations, the next best solution is to secure a loan. Since the debt is paid in small amounts over time, it’s more equitable. The obligation transfers from one owner to the next as sales occur, spreading the cost and benefits.
Another option is a bond. Unlike other forms of debt, the lender is not a bank or finance company but rather investors who buy the bonds. Compared to conventional loans, bonds tend to have lower interest rates and longer repayment terms.
What to Do if Special Assessments Can’t Be Avoided
When special assessments are unavoidable, the board must exercise due diligence before imposing the additional fee.
More specifically, your board should:
- Ask your attorney to review your plans, applicable statutes, and governing documents.
- Follow all applicable procedures in the governing documents for approving the budget.
- Make sure you have a full board that is properly elected and that all voters are qualified.
- Comply with the provisions in the statutes and governing documents for adopting a special assessment.
- Be diligent in identifying and evaluating options. For example, if you are replacing the siding because it would cost less than continued repairs, collect reliable data to support this finding.
- Keep the owners informed throughout the process.
- Remember your obligation to disclose information about the special assessment on resale certificates.
- Use competitive bidding to find the lowest and best proposal. At least three proposals are recommended.
- Confirm that the components and systems to be repaired or replaced are within the association’s authority. For example, if you want to replace all the windows in the condominium, make sure the windows are common elements, not parts of the units.
- Get an opinion letter from your attorney confirming you have satisfied all substantive and procedural requirements.
Empowering HOAs: Financial Solutions at Your Fingertips
As a board member, you have a fiduciary responsibility to your community. But between managing dues, adhering to state and federal regulations, and budgeting for capital improvement projects, it can be difficult to ensure the association remains financially solvent.
Fortunately, Community Association Management is here to help. As the premier provider of HOA management services in North and South Carolina, we offer association boards the tools and knowledge needed to create vibrant communities. From a suite of flexible HOA management services to intuitive HOA accounting solutions, we are here to serve HOAs across the Carolinas.
To learn more about our HOA management services, contact us online or give us a call at 888-565-1226.
