Encinitas Property Management – How to write a budget: Bottom Up
At Pilot Property Management we think it is fair to say that neither property managers in Encinitas nor HOA’s really like to write a budget, especially in our current situation when money is tight and Associations may be feeling the strain of rising receivables. Presently, the law makes no provision that would require the funding of reserves, although some of the government’s insuring agencies are demanding to see at least 10% funding annually.
Q: What is a Board to do?
A: Bottom Up
Commonly, community budgets start with the various sources of income that they have, and then list by category the expenses divided into:
• Common area repairs
• Reserve deposit
The reserve deposit is where they should start, even though it is the last item listed above. The reason for this, is that all too often the reserve deposit is the balancing number between the expected income and the expected normal expenses.
In our opinion, the process should start with an analysis of the reserve study and its projections. The reserve study, (which is usually prepared by a third party) and provides a dispassionate view of the number of years a capital item has life and its anticipated cost of replacement. They include modest projected interest rates on both the funds being reserves, and the likely cost when the item is to be replaced. From that study, they propose a variety of scenarios in order to achieve full funding of the reserves and alternative plans for shorter periods of time.
Boards should review the reserve study and select a rate at which they choose to fund the reserves to meet their objective. For example, to be 60% funded in say five years time. Then, having made that decision, they can then determine what amount to set aside for the forthcoming years for their monthly reserve deposits. Then they can work their way upwards to determine the cost of utilities for the ensuing year, followed by maintenance and administration. The sum of all of these costs will provide a total expense for the coming year. This number can then be divided by the number of units and that is the amount of dues that need to be collected annually from each unit.
Unfortunately, Boards and managers tend to start from the top, and decide not to increase dues FIRST and then shuffle the numbers to fit that scenario, in effect, leaving the reserve amount until last. This will be the leftover difference between income and expense. Although this may make perfect arithmetical sense, it makes the consideration of the reserve study almost worthless. In 2006, we suggested making a provision for bad debts, and there were howls of derision. For no-one wants to raise their dues when they feel they cannot afford it, or question why now all of sudden their dues have increased. When the results for the year came in, the lack of a provision resulted in a shortage of funds being transferred to the reserves. Following our suggestion, at least in the drafting stages, will allow an association to see the real cost of doing business and therefore the necessary dues required. Any shortages can be seen in advance, and perhaps alternative changes to the line items can be made to cover whatever increase in dues is suggested by the study. The study is there for a reason, and abiding by it, may provide a safety net for an association.
We hope you enjoyed this Encinitas property management article about writing a budget.