Preparing the annual budget for your condo or HOA isn’t the same as figuring out a budget for a couple, or even a large family. The board of a shared-interest community has to consider all the angles—past, current, and future—when drawing up a financial roadmap for the years ahead. 

It’s important for every board member to have at least a working familiarity with the way their community’s budgets function and interact in order to uphold their fiduciary duty and maintain their association’s fiscal good health. “Every board member needs to develop a basic skill set,” says CPA Steve Silberman, a partner with accounting firm FSB&W LLC based in Deerfield, Illinois. “At a minimum, they need to learn to read and understand a financial statement, rather than just relying on the treasurer. The board has a fiduciary responsibility over the financial information of the association or corporation, so all the board members need to understand their finances.” 

Fortunately, while every community may be unique, there are a few budgeting basics that apply to every condo, HOA, or co-op. Let’s take a look. 

Know Your Terms

Budgeting for condos, HOAs, and co-ops actually involves two budgets: the operating budget and the capital budget. 

Recurring, more or less predictable expenses such as taxes, utilities, staff salaries, insurance premiums, and staple maintenance and janitorial supplies are the line items most frequently found in the operating budget. According to accounting pros, these recurring expenses make up 75 to 80 percent of an association’s budget. 

Major projects, long-term plans, and emergency funds are accounted for in the capital budget, and those items will vary depending on the individual community’s needs, wants, and means. 

While expenses are divided into operating and capital buckets, income is typically obtained from just one source: the residents who call the building or HOA home, in the form of their monthly dues or fees, as well as any fines or penalties they may incur. An exception to this general rule would be a building with an income-generating component such as a public parking facility, exterior signage space, or ground-floor retail space. 

Revenue, minus expenses, equals net income. Cash and reserves and their differences are also important concepts in terms of short-, medium-, and long-term planning. Board members must know short-term concepts and goals for operating, and long-term concepts for capital projects. Especially in the current environment, they should understand inflation, as well as local regulations. 

“Boards need to understand fund accounting,” Silberman notes. “Operating accounts are based on fund accounting. They must also understand what a reserve fund is. A major issue for boards is the possible co-mingling between operating accounts and reserves. That requires understanding the difference between accrual versus cash-basis accounting. Most board members, regardless of their overall knowledge of accounting, understand ‘cash-basis’ accounting, as that’s how a personal checkbook works; income is accounted for when received, and expenses accounted for when paid. By contrast, accrual is more true to [a community’s] current financial position, because it records income when earned and expenses when incurred.”

When calculating operating costs for the coming year, it helps to look at the history of both the projected income and expenses. If the income remains stable, allowing for 5 to 10 percent increase in expenses will usually adequately allow for inflation. 

The Budgeting Process

While reviewing the existing budget and updating it for the upcoming year is an annual duty for an HOA board, the process often starts with the property manager, who (assuming the association has one) plays a central role. 

“The manager is usually the one that prepares the draft budget,” says Silberman. “They review it with the treasurer, the finance committee, and the board. Board members should have a basic technical understanding of what their governing documents say and require relative to the financial management and maintenance of the property. The first thing every board member should look at and understand are the bylaws and declarations of their association. Those documents hold information about financial audits, what to do with excess cash from operations, and other details of financial management under the laws and regulations governing the association.”

The pros advise boards to actively solicit feedback from owners in the community as they’re developing the budget to make sure residents' needs, expectations, and concerns are understood and taken into consideration. After any changes and adjustments are made, the board will often hold a workshop meeting for additional fine-tuning, and then formally approve the budget in a final meeting.

Most boards will also closely consult with their accountant or CPA at budget time. Silberman recommends working about three months out before an approved budget is expected to allow sufficient time for fine tuning. His rule of thumb will work for an association on either a calendar year or a fiscal year timetable. 

Matthew Kuisle, PE, RS, PRA, Regional Executive Director with Reserve Advisors, a national firm which has offices in Chicago, recommends starting the budgeting process even earlier when possible. “Budgets are often created by managers, boards, and committee members, and these individuals often consult accountants, attorneys, professional reserve analysts, and other experts for guidance.” All of that takes time, so the more proactive your board can be, the better. He also recommends keeping budget folders for upcoming years to stay on top of proposed projects and contracts, as well as any changes that might be required in each budget. 

Reserve Studies

“A reserve study can be done as a first step to help set the budget for capital repairs and replacement projects,” Kuisle says. “This approach can help anticipate the expense of large projects and allow ample time to build the reserves.” Kuisle recommends using a professional engineer for the reserve study to help eliminate any big surprises in the budget.

Accountants and financial advisors strongly recommend hiring a professional engineer to assess the condition of the key structural and mechanical elements in your building or HOA to accurately project when a major repair or replacement will be needed. “Contractors and service providers can help,” says Kuisle, “but an independent reserve analysis by an engineer can best determine future annual cost and times of big projects. This analysis arms a board with lots of information that can help define the scope of projects, and even negotiate better contracts and save the association money.”

Reserve schedules are calculated using a formula that takes into account the projected useful life of an item, its remaining useful life, and its replacement cost. This information is then used to plan the association budget. 

How associations handle their reserve studies tends to be an indicator of how good their budget practices are as a whole. Best practices include planning for the future as much as possible, and then adjusting to changes in an efficient manner. “It's important to have a current study in place,” says CPA Anthony Bertucci of accounting firm Mrjenovich & Bertucci, Ltd. in Burr Ridge, Illinois. “Years 1 through 5 are the most important. Things farther out in the future are more rough estimates. Staying current with your reserve study is crucially important to the budgeting process.” 

Many accountants favor reviewing the past expense history and obtaining cost estimates from contractors or engineers to better determine the estimated cost of future expenses and projects. “We'll see that a property manager will budget either a miscellaneous account so they have a little bit of a cushion in case there are overages on certain things, in case there are unforeseen items in the budget,” says Bertucci. By contacting vendors early, a board may also negotiate a better rate with the current provider, or have time to shop for better pricing, particularly if contracts are up for renewal.

Kuisle also recommends allocating funds for near-term services while keeping a strategic plan in place for the future. “We see many energy-saving options for buildings today,” he says. “Everything from lighting modifications to geothermal heating options can lower energy usage and costs over time. These modifications generally require an initial capital investment however, so it’s important to keep these future expenses in mind when budget planning.” 

Another way to get ahead of expenses is to negotiate a flat fee for seasonal services. According to Bertucci, “With energy, an association gets into a contract at certain rates for the year, so the property at least knows the specific price. That can apply to things like snow removal as well.” 

Rainy Day Funds 

Repairing damage from wind or other severe weather is paid for out of the capital budget—so if an association is underfunded (as many were after the 2008 recession, and more recently during the pandemic) and gets hit with a blizzard or torrential rain, residents may also get hit with a special assessment to fix the damage. 

Assessments are never popular, and most boards prefer to avoid them whenever possible. So in addition to the general 60-90 days of operating capital, Kuisle advises every association to also have some 'rainy day' savings. If those funds wind up not being used, an association may actually wind up with a surplus. While not common, if a surplus is accrued, those funds must be included in the association’s annual statements and financial reports. How the surplus is handled depends on the individual community and its needs. An association may opt to have excess funds rolled into the operating budget, or transferred to the reserves. Some may vote to save the surplus in an interest bearing account, roll it over to the following year, or allocate the surplus funds for a special project.

The takeaway message is that while running your building or HOA's financial operations might seem intimidating at first, doing some homework to familiarize yourself with your community's financial profile, planning ahead with the help of competent professionals, and keeping things transparent among both board and residents will make it a whole lot easier—both for your current board, and for boards to come.