HOA Budget Process

HOA Budget season can be a challenging and stressful time for HOA and condominium association boards. Many underestimate how complex HOA budgets can be and the challenges HOA managers face in the process. The HOA Budget Process involves navigating complex financial decisions, forecasting future costs, managing stakeholder expectations, and planning for both immediate and long-term needs. However, it does not have to be stressful or drawn out. As an HOA Board Member or HOA Management professional, creating a professional and quality HOA budget efficiently can help save your volunteers time and improve the timeliness and accuracy of your communications with members. Regardless of the budget size and complexity, following these HOA budget tips will streamline your budget season, reduce analysis paralysis, and help you prepare a professional-quality cost forecast that your board and membership can have confidence in.

At RISE, we have a proven step-by-step HOA budget best practices manual developed by MBAs, CPAs, and Association Management professionals to help guide your HOA’s board and manager through the process to ensure your condominium association or homeowners’ association has a thorough and well-structured budget. Keep reading below to follow our HOA Budget guide and be the budget hero your community needs.

The HOA Budget Process

First, let’s break down what goes into an HOA Budget. During the HOA Budget Process, you’ll start by breaking down the components of the HOA Budget, which consist of:

• A cost forecast for recurring costs and contract costs
  We sometimes use prior years, trends, or the actual contract rates for these, depending on the type of expense.
• An estimate of insurance costs and options
  Due to volatility in the insurance markets, this is its own category that requires a sit-down conversation with a qualified HOA insurance professional.
• A Payroll and Staffing Plan Forecast (if applicable)
  Including rate increases.
• Non-Assessment Revenue Forecasts
  Parking spaces, clubhouse rentals, etc.
• 5-Year (minimum) Capital Reserve Project Plan
• 5-Year (minimum) Capital Reserve Funding Plan
  The money going into reserve to pay for the capital expenditures above.
• An estimate of HOA Assessment levels needed to fund these forecasted expenditures.

The First Rule of HOA Budgeting: The HOA Budget Is a Forecast, Not a Fantasy

HOA Boards and Managers often make the mistake of creating budgets intended to be noncontroversial. We get it—no one wants to tell the membership they need to increase assessments by 20%. However, this approach often leads to major and dangerous pitfalls, including underestimating costs or underfunding expenses out of fear of homeowner backlash. Not planning for increases in expenses like insurance and dealing with the potential backlash from members over assessment hikes can lead to delays, indecision, and insufficient funding for essential projects. Rule number one is that your HOA budget is a forecast, not a fantasy. Most of the costs incurred by the Homeowners’ Association are to fulfill the mandatory responsibilities of the HOA or condo association, such as providing for insurance, maintenance, or landscaping. The budget should be an estimate of what is reasonable and necessary to operate the association and set aside appropriate reserves for long-term capital expenditures during a fiscal period. Many Boards make the mistake of underestimating costs in hopes that setting a restrictive budget will limit spending. However, this usually results in going over budget or neglecting vital repairs due to a lack of funds. Finally, the old approach of “last year plus 5%” is, while fast, not likely to result in an accurate budget.

The Second Rule of HOA Budgeting: Reserve Contributions Are Set First, Not Last

Funding Reserves is critical to ensuring the long-term well-being of the HOA. Reserve Funds are earmarked funds set aside for infrastructure replacement or restoration, such as road resurfacing, retaining wall restoration, roof replacements, and mechanical systems such as HVAC and elevators. It is the Board of Directors’ responsibility as a steward to provide for this. As the asset is enjoyed, it degrades, and therefore the Association should set aside that specific amount of money each year so that at the end of its useful life, the asset can be restored without the need for a special assessment. This ensures that the owners who live in the community at the time the asset is enjoyed are also funding the portion of the asset’s useful life that they have benefited from. Many HOA Managers set the amount of reserve contributions as a flat “10%” or whatever is “leftover” when the other budgeted items are finished. However, this approach is flawed and potentially dangerous. Reserve Contributions should actually be the first item on your budget. If you have a reserve study, you can determine easily how much money should be set aside each year to meet the future needs of your community. As lenders are increasingly scrutinizing infrastructure and special assessments, funding for long-term repairs is a must and should be the top priority during budgeting.

This isn’t just a “rainy day fund” but rather every dollar has a specific purpose. If you do not fund those dollars, eventually you will not be able to fulfill the Association’s purpose. Ideally, the balance of your reserve fund should be the actual amount of money you need to have in your bank today if everything you’re responsible for maintaining needs to be replaced at the projected end of its useful life.

Step-by-Step Guide to Creating HOA and Condominium Budgets

1. Ensure You’re Using the Right Accounting Method
   • Operating Fund: Non-Profit Fund Accounting and Accrual Basis Accounting are our preferred methods and are also required by US GAAP for Community Associations. We prefer true accrual basis accounting; however, modified accrual is also quite common. Cash basis is less common and, while simpler, can lead to operating fund vicissitudes that can wreck your planning if cash expenditures do not match their appropriate period.
   • Reserve Funds: These should always be accounted for separately from operating funds per GAAP fund accounting requirements. For reserve funds, because we do not deal with prepaid expenses generally, we are more interested in cash flows in and out of reserves. Therefore, we recommend creating a cash budget for future periods. We want to see the cash balance on hand the year that large expense is expected to come out from reserves and how we’ll replenish it. Cash budgets also help manage cash outflows like loan repayments and special assessment proceeds, which are less intuitive to track when using accrual basis budgeting.
2. Obtain or Update Your HOA’s Reserve Study
   • Long-range planning comes first, and the place to start is well before budget season ever begins. A reserve study assesses the value of assets and their replacement timelines. For small HOAs with minimal assets, a DIY approach may suffice. For most communities, a professional reserve study is essential for accurate cost projections and planning. This gives you a starting point for how much cash you need on hand and how long you have until you need it. These are generally just models based on average costs, but they’re useful tools that can often be customized. If you do not have one by around the middle of the fiscal year, you’ll need to budget for one in the coming year and plan to use this tool for the subsequent fiscal year.
3. Reserve Fund Planning: Update Your Long-Range Plan for Capital Expenditure
   • Review the forecasted major expenses over the next 10 to 15 years and ensure that these are reasonable and accurate to the best of your knowledge. For example, if you think your clubhouse roof will need to be replaced more-or-less in 10 years, that is generally sufficient for this step. If you know you just replaced the roof and have an additional 20 years, then you can update this using the Long-Range Planning Tool.
   • Add any other reserve cash outflows, such as bank loan repayments or loans to operating, for things such as insurance.
   • Set the amount of the needed Reserve Contribution that satisfies your projected cash needs for the reserve fund based on this 10-15 year plan. This projection is a baseline and will be updated with actual data as needed. Typically, we assume that this amount will increase each year, and your job here is to set that amount not just for this year in the plan. Maybe you contribute $10,000 this year, $12,000 next year, and $14,000 the following year.
   • If you have shortfalls, identify how you’ll plan to bridge those, whether through a hypothetical future special assessment or loan.
4. Reserve Fund Planning: Refine Your Near-Term 5-Year Capital Budget, Emphasis on Next Year
   • Plan for the next three to five years of capital expenditures, adjusting for any new priorities or changes not covered in the original reserve study. The emphasis here is on what you’re planning for next year and attempting to dial in that figure.
   • Add your Board’s “wish list” items to the list, including when you plan to proceed with them and the estimated dollar amount.
   • Refine the amount needed for annual reserve contributions for this coming year, ensuring it’s sufficient to fund the projected cash needs of your reserve over the coming years, assuming you keep or increase the contribution to reserve each year. This is the first number you’ll plug into your Operating Budget.
5. Operating Budget: Calculate Contract-Based Expenses
   • Review all contracts for fixed rates or annual increases (e.g., utilities, management costs, landscape maintenance). Call vendors to get an estimate of any planned increases they foresee at renewal. Now is also the time to ensure that if you plan to switch a provider, you have a firm estimate of their contract cost.
   • For variable expenses, like utility consumption, use prior year data to make an estimate. Sometimes three years of information can help you to see the bigger picture and determine the best way to forecast. Usually, the quantity of consumption doesn’t change much, but the rate does—so use the prior year consumption data and multiply using your new rates.
6. Operating Budget: Estimate Non-Recurring or Unpredictable Expenses
   • Analyze the past three years of non-contractual recurring expenses, such as maintenance.
   • Decide whether to use an average, median, or the highest recent figure for budgeting, based on patterns or upcoming projects.
   • Be conservative in your estimates—remember, this is a forecast. While you hope things won’t break, the reality is that if they do, you usually have no choice but to fix them.
7. Operating Budget: Estimate Insurance Costs
   • Consult with insurance brokers to forecast renewal costs, noting that insurance rates can vary significantly year-to-year. This is a good time to get a sense of deductible structures that might affect your budget and whether your existing insurance carriers plan to offer renewal options. This can drastically affect your costs. Experienced insurance brokers can generally tell you what to expect with reasonable accuracy.
8. Operating Budget: Determine Total Assessment Revenue
   • First, add your Non-Assessment revenue, such as parking rentals, clubhouse use fees, and late interest.
   • Now, calculate the total amount needed from assessments to cover all expenses calculated in the previous steps. Remember, this is your first draft, and sticker shock is not uncommon. Share the budget draft with your team and then set up the next meeting to refine the budget. Transparency is crucial here, and sharing your thinking will help others work collaboratively with you.
   • Expect potential adjustments based on stakeholder feedback, balancing necessary funding with concerns about large increases.
9. Finalize the Budget
   • Revisit and adjust capital expenditures, prioritize projects, and consider additional funding options like loans or special assessments if necessary to ensure you have a balanced budget. We often call this “massaging” the HOA budget.
   • Ensure the budget is set at an appropriate level to maintain and improve property values, even if it means making unpopular decisions.
   • Now it’s time for a vote. Set your Board Meeting, share your thinking well in advance, and ensure your board has a unified position going into that meeting. If you do not build consensus prior to the Board Meeting, this may result in an impasse, meaning your assessment rates will not change. Sharing information and thinking while building consensus is critical here.
10. Timeline for Budget Preparation
    • July: Begin capital budget planning for the next year.
    • End of August: Prepare the first draft budget.
    • September-October: Adjust figures, negotiate with stakeholders, and finalize the budget.
    • November 1: Adopt the budget and notify members of the new assessment levels before the end of November.

By following this structured approach and adhering to the recommended timeline, HOAs and condominium associations can ensure a successful and well-planned budget season.