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Condo Q&A

Low Budget Is Not Necessarily Best for Association

September 07, 1997|JAN HICKENBOTTOM | SPECIAL TO THE TIMES; Hickenbottom is a community association management consultant and a founding director of the California Assn. of Community Managers

QUESTION: The board members for our condominium association are working on the annual budget. I understand that we have a narrow window of time before our fiscal year ends when we must deliver a copy of the new budget to all of the members of the association. Can you give us any last-minute advice that we can use to debate with our treasurer who always wants to cut corners and adopt a "bare-bones" budget?

ANSWER: Your question is often asked by board members and other concerned owners. You are correct about the requirement for distribution of the new budget. It must be distributed to the owners from 45 to 60 days before the beginning of the fiscal year.

I am glad to provide some suggestions for your discussion with the treasurer. I have very little patience with treasurers who keep such a tight fist on the association's money that the whole complex suffers from deferred maintenance and inadequate reserve funding. Being frugal is fine, but treasurers, and indeed, all of the board members, have a responsibility to adopt a realistic budget and to act in the best interests of the whole association.

I recently found an article from the Community Assns. Institute's newsletter titled "Ten Budgeting Mistakes Made by Community Associations." It was written several years ago, but the advice in it is timeless. The authors, Arthur W. Hiban, a certified property manager, and James T. Derry, a certified public accountant, give the following advice:

"The annual budget is the most comprehensive planning tool available to the condominium or homeowners association. If properly approached and carefully conceived, the budget will become the basis for successful management of the property.

"The budget must be approached with the goal of providing for efficient operations and for funding adequate reserves to meet long-term requirements.

"When an association loses sight of this goal, the result is usually an inadequate budget, improper management and a community burdened by seemingly insurmountable problems."

Your association cannot afford to ignore the aging process. Each year, maintenance costs become more expensive. More money must be spent on preventive maintenance to preserve the life expectancy of your mechanical systems and other major components. An example of an expense that some associations scrimp on is landscaping costs. They budget for mowing, fertilization and weed control when more comprehensive services are needed as the landscaping matures.

Proper tree care and trimming is expensive but necessary because mature trees are an asset that should not be ignored. The association should plan for replacement of shrubs and trees that may be affected by drought or cold weather. Don't underestimate maintenance costs. Anticipate that you will have emergencies and plan your budget accordingly. A leaking roof must be repaired. A broken water line must be replaced.

Low-Ball Danger

Your property insurance will not pay for these emergencies because they are maintenance expenses. Insurance may pay for the damages that result from an emergency, but the insurance carrier will soon refuse to pay for claims if your facility isn't properly maintained. A high number of claims will then affect your insurance costs in the long run.

It is a mistake to low-ball your budget and then expect to find contractors who will meet your price. Don't assume that you should always accept the lowest bid for repair projects. The board must make prudent business decisions based upon complete specifications including warranties, compliance with deadlines and many other considerations in addition to the quality of the materials and the cost of the labor.

The board needs to determine the type and quality of the services that the owners expect. How often are the corridors going to be vacuumed? Do the garages need cleaning by an outside contractor on a periodic basis? How many times per week does the swimming pool require service? Would the owners like to hire a management company that will provide 24-hour emergency service?

Hiban and Derry encourage the association to define the level of service or maintenance standards. "Too many communities ask: What can we afford? What is the lowest price we can get for services? How can we reduce the condominium fee? They ignore the standards before preparing the budget. The results can be disastrous. If you prepare a budget without first considering standards, then the standards, goals and specifications will be determined by the budget and not the other way around."

I believe that associations should plan their budgets so that they can afford to rely on the advice of experts when the need arises. The association should rely on professionals to assist in their decision-making on complex matters or legal issues because the board's liability is reduced by doing so.

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