By Robin Rocco, CAM / Published August 2019
In recent years, we have found the most valuable component of an association is a proper budget. The most valuable tool in achieving a proper budget is that of specialty reporting, especially a reserve study. According to a definition offered by Community Associations Institute, a reserve study is “a budget planning tool which identifies the components that the association is responsible to maintain or replace, the current status of the reserve fund, and a stable and equitable funding plan to offset the anticipated future major common area expenditures. The reserve study consists of two parts: the physical analysis and the financial analysis.”
So many associations out there have outdated or incomplete reserve schedules. This is due to the schedule of assets being typically produced by a developer upon conception. The schedule may have been based upon the actual cost, or perhaps only one phase, or by using discounts on the total cost to construct all amenities. We’ve seen some associations that don’t even reserve for all of the assets, which they are responsible for replacing. In addition, we find that year to year the prices listed in reserves for each component are not being updated, and inflation is not taken into consideration or adjusted. There-fore, when it comes time to perform replacement, or an asset does not reach its expected life expectancy, you are faced with insufficient funds, resulting in the need to increase fees in the following year’s budget or to special assess.
Special assessments are words we do not like to use. Ever! We’ve come across many associations who prefer this method, choosing to never raise fees and to special assess as needed when capital improvements, major replacements, or repairs are to be made. Most associations will learn the hard way that this is simply not a good business practice or one that will last forever. Being a good manager and having accounts with longevity means you put plans in place that protect an association’s assets in a way that preserves their amenities, safeguards their cash flow, and secures their future.
We have found that in order to achieve this goal it is a good policy to have reserve studies performed and updated every five years or so. Reserve study specialist companies use their expertise and resources to compare vendor pricing and investigate remaining life on all association assets. Their summary reports normally come with detailed pictures that identify all the reserve items on the list, the square footage of the items, a unit cost to replace, inflation rate, estimated life remaining, and estimated annual cost to fund in accordance with their recommendation, along with a cash flow chart. The outcome will be a clearer picture of the condition and appraised value of your owned property, which in turn will help simplify your expense planning.
In addition to using reserve studies to firm up your budget, it is important to get proper cash and accrual reporting to ensure you are staying on budget or that you are given information to help in adjusting your budget year to year to suffice. We see so many associations that simply rubber stamp their budgets from year to year, never increasing their fees due to normal inflation rates or decreasing them when the previous year’s maintenance or reserve expenses will not repeat themselves in future years. Typically, budgets seem to only be really examined after a vendor contract is changed or services are added. We’ve found in most cases that associations are not funding their operating portion properly, which causes them to shortchange their reserve funding as well. While it is important to obtain competitive bidding for contracted services, it is equally important to provide yourself and your association with all the financial information possible so that you can make informed decisions in regard to expense planning.
While our office handles all of the accounting functions, including budgeting, billing, collection, reporting, etc., we have found that adding a third-party CPA to produce quarterly reports is of benefit. A third party not only helps with adding a second set of eyes to ensure that items are coded properly in accordance with the budget but also acts as another layer of protection and expert advice when it comes to financial planning. Certain types of reporting may be required by law, depending on the size of the community or aggregate dollar amount of the annual budget. Ask your CPA what is required. An important part of your quarterly reporting should include a snapshot of your assets and liabilities, including all prepaid maintenance fees sitting in cash for future use, and prepaid expenses that are booked, such as insurance or loans. The report should also include a budget-to-actual expense cash report and reserve funding, expenses, and balances.
We have witnessed so many self-managed communities or unknowledgeable managers mismanage money and reserve funding that it has nearly or actually bankrupted the association. By utilizing the tools of reserve studies and financial reporting, you, too, can become successful in compiling proper budgets. There are many educational classes through FCAP, local law firms, or other associations that teach what is required by the Florida Accounting Principles and the Florida Statutes. I urge boards or managers reading this to take steps to ensure you are doing things properly in order to achieve financial success and security in the future.
Vice President, Landex Resorts International Inc.
Robyn Rocco, VP, has an associate degree in business with a minor in mass communication, and a bachelor of arts degree. Robyn oversees the corporate office affairs for Landex Resorts International Inc. and its managers. She is a member of many area Chambers of Commerce, Community Associations Institute, Florida Green Building Coalition, and Florida Realtors. She is focused on educating her clients on financial responsibility and sustainable practices, for which her properties have received recognition throughout the state. Robyn brings experience to the CAM firm by holding a Florida Community Association License and Florida Real Estate License since 2009. For more information, visit www.landexresorts.com.