By James Phifer, ACCU, Inc
It is not uncommon for our esteemed colleagues in the industry to shy away from discussing financial management, especially when it comes to the delicate balance between providing professional advice that may not be appreciated and keeping the coveted contract.
However, before we proceed with our discourse, let us set aside the communities that are already flush with funds, diligently following their reserve studies, and dutifully maintaining their properties. They are already living the dream and we need not bother them with our humble musings.
The number of underfunded communities that are unwilling to raise their assessments is growing, and they are facing mounting pressure from the rising costs of construction, materials, labor, and insurance.
As previously expressed by attorney David Graf: "Bad management is obvious; mediocre management is visible; yet excellent management is unseen." It's no easy task to showcase the smooth sailing of a well-managed community. Said another way, it’s easy to show your worth in solving problems but it’s much harder to highlight your excellence in keeping problems from arising in the first place! No judgments here -- many of us are tasked with managing a community teetering on the edge of financial hardship or already immersed in it, all while trying to meet expectations on a shoestring budget.
Managers, what are some essential resources at your disposal when dealing with an underfunded community?
Let's explore a few ideas:
Behold the power of the monthly management report! As the expert in the field, it's your responsibility to provide appropriate financial guidance. It falls upon the shoulders of the esteemed professional (that's you!) to navigate the treacherous waters and steer the ship in the right direction. This means making professional recommendations for responsible funding of the client, irrespective of how you believe the message might be received. There is an obvious stress that Board members will have in reaching out to their neighbors and asking for more money.
Next comes the delicate art of dealing with underfunded communities requesting bids. Please, I implore you, do not abuse your contractors. Many contractors are willing to give you a Rough Order of Magnitude (ROM) estimate. You know, the classic question of, "Will this cost us $1,000.00 or $100,000.00?" It's a fair question, and qualified contractors should be able to provide a ROM without significant investment of their time. If you do need a more precise estimate than a ROM, please ensure that you are sincere in considering using that vendor for the ultimate project. Bids do not cost the association anything -- but they certainly cost the vendor an investment of their time and if they repeatedly invest that time and do not get awarded the work, they will stop responding to your requests for bids.
Let's talk budgets, my fellow managers! Construct a budget that not only covers expenses but also reasonable reserves and present it to the Board during budget season. Even if your Board takes charge of their own budgeting process, I implore you all to build a budget that leaves no expense or reserve unaccounted for. And don't forget to save a copy of the budget you supplied to the Board in the designated folder for your company. If the community decides against raising assessments, you will have the data you supplied as evidence, proving that any shortfall was not the result of "mismanagement from the management company." This will surely save you from future headaches, whether it be in your current role or with a potential future management company.
Last, but not least, confide in your supervisor! Share the financial status of the community with your superior, enabling them to engage in a candid conversation with the Board. This will provide the Board with additional guidance and support during these trying financial times. Make no mistake-- if raising assessments to cover all anticipated expenses was easy, we wouldn’t be having this conversation. Board members are understandably cautious in raising assessments without a clear need to do so. So, make sure that the need is made clear to them so that they can be transparent with their owners.
Now, dear struggling Boards grappling with the financial affairs of your community, this one's for you! As inflation skyrockets and every budget line item sees a staggering increase from 10% to 1,000%, while equipment nears its end-of-life expectancy, and the underfunded reserve dilemma looms large, what options do you have for exemplary financial management?
Gather 'round, Boards! It's time for a meeting to discuss expectations, and boy, do we have some gems for you. If the community is stuck in a financial tight spot and can't afford to replace the (insert asset here) within the next (insert timeframe here), despite the dire need for repairs, make sure to communicate that information to the community. Transparency is the name of the game in association operations, and not just when the news is good.
But fear not, my friends, for clear communication is the knight in shining armor that will rescue us from a barrage of angry phone calls from upset owners. It's a win-win situation when it comes to handling the association’s reputation and owners’ expectations with finesse.
Ok team, let’s talk bank loans! They're like magical unicorns prancing through a field of financial possibilities. Now, hold on a sec while I put on my old man hat and reminisce. "Back in my day, a Board member had to sign a personal guaranty for an association to obtain a loan." But lo and behold, times have changed! Communities can now secure a loan through an assignment of assessments (aka UCC filing), and fret not, my friends, it doesn’t count against your personal credit report. A loan can inject some much-needed strength into our common elements, improving the overall quality of living and boosting resale value.
Pro Tip! - Just be aware that if you first levy a special assessment to raise the funds and owners default or defer payment, you may not be able to go back and get a loan because your delinquency rate may be too high for the lender.
And here's a nifty idea: chat with your management company about contractors who are willing to finance your project or explore external funding resources with long-term amortization payments. You'd be surprised to find funding companies out there flaunting repayment terms stretching up to 40 years! Now, that might just be the perfect fit for certain clients and their assets with a longer life span.
So, there you have it, folks! A delightful mix of humor and professionalism to guide us through the trials and tribulations of managing a community on a tight budget. Let's tackle these challenges head-on, and don’t forget to treat your community manager and their team with kindness.
Author: James Phifer, President ACCU
ACCU, Inc. has been providing community management services to homeowner associations since 1979. For more information, please visit us at www.accuinc.com
