Do you have questions about Condo/HOA Financials?

[Richard F.]

For over ten years, in addition to over 100 residential rentals, I also was Managing Agent for a number of Condo and HOA projects with anywhere from 6 to 125 units each. I worked with the Boards, educating them, developing budgets and reserve plans for them, and dealing with day to day and Owner related issues including accounting issues. Additionally, a number of the rentals were also in separate Condo/HOA projects, so I needed to have copies of each of their Governing Docs; and interacted with their Managing Agents and the unit Owner of the specific Rental units.

I am somewhat surprised by the apparent lack of understanding around Condominium Projects, HOA's and other "Common Interest Ownership" properties. Even when the issue is raised, 99% of commenters, after I have posted critical info that can and will affect your investment, are still seem either oblivious or clearly disregard the info. The financial calamity that these projects can cause you is dramatic, and sadly, just not uncommon. You MUST understand specific documents and records to do any more than "guess" what effect the project Boards can have on your APOD (Annual Property Operating Data).

Indeed, every project is unique, but a very large percentage are based in the same "Uniform" statute, as shown here. These are all organized in a similar manner, although the names for certain documents, and the governing body of the project, may vary by State, they contain the same general information and govern in similar manners, with limited variance.

They all are created with a Charter, or Articles of Incorporation, or other method; most, if not all, are formed as a 501c (or variant) "Non Profit" per IRS regs.

They all have "By-Laws" and a "Declaration", or combined DCC&R's (Declaration of Covenants, Conditions, & Restrictions). These docs spell out details regarding Regular and Annual Meetings of Board and General Membership, including defining "quorum"; make up of the Board or Committee, how they are elected, how much and what type of Notice is required prior to a meeting, how votes are counted, and how long they serve; responsibilities of the individual Board Officers and the Board as a whole; and authorizes the Board's powers and duties. The Declaration clearly defines the "Common Elements", as well as the Owner's spaces and responsibilities. These details are very specific to each project. In every case, the Board is responsible to maintain, protect, and preserve ALL common elements. Most By-Laws do not put limits on the Budgeting process, the Board is simply required to fund adequately to meet their responsibility.

They all are responsible to "maintain" appropriate records. Typically the accounting process is delegated to a Licensed Property Management Company, that uses common accounting "best practices" to execute the accounting of all income and expenses. The PMC will also "manage" the daily operation of the project, dealing with service calls, routine maintenance, and all other matters necessary, AT THE DIRECTION OF THE BOARD. This is per State Laws as well as the Management Contracts. PMC's are, in theory, the Professionals, however just like Doctors and Auto Mechanics, some are good, some are not. Most, but certainly not all, "management" problems that arise are directly caused by the Board not developing or consistently enforcing solid policies and House Rules; not adhering to their own By-Laws or other Governing Docs; and the number one failure: Failing to budget properly and accurately. The PMC certainly can provide guidance, but often they entirely come up with a Budget and Reserve Funding Plan. However. it is not based on accurate numbers because the Board fails to get estimates or provide reasonable numbers, and will not spend the money to obtain better numbers. PMC's do not create the HOA rules or establish late fees, or make changes to rules including the limiting of the number of Rentals allowed in the project. This is ALL done by the Board, and the By-Laws specify what types of changes they are authorized to change with only Board approval, or if they require approval of a majority of the General Membership. The PMC just delivers the Notices and invoices.

For the Investor or Homeowner considering purchasing a Condo/HOA property, regardless of how many units in the project, or the physical type of structure, the project finances are all organized essentially the same. The Annual Operating Budget, reviewed and approved by the Board, IS the authority for the PMC to make payments within the categories and for the amounts approved. PMC needs approved invoices, and Contracts signed by the Board Pres to make those payments. The Operating Budget covers all routine daily, weekly, and monthly expenses, such as Insurance, Groundskeeping, Pool maintenance, Trash pickup, housekeeping for common areas, utilities for exterior and hallway lighting, etc. as well a reasonable amount of "contingency" funds for relatively minor repairs, such as plumbing or electrical service calls for common elements, or legal fees if there are multiple delinquent Owner accounts, and servicing of fire extinquishers or testing of fire systems. All planned, recurring, and misc unplanned but minor expenses. The Operating Budget is reviewed and adjusted every year, with the approved Budget being delivered to all Owners about 2 months prior to start of new fiscal year. They should receive the Year End Financials for the project during the first quarter of the new fiscal year. Comparing what WAS spent, with what they PLAN to spend is a smart way to determine what changes are being made. Total Operating budget, divided by 12 months, divided by number of total units in the project (or your actual percentage of ownership of the common elements as defined in the Declaration) will give you the estimated (or actual if you have the correct percentage) monthly cost of the Operating Budget ONLY.

The Reserves Funding Plan covers all Common elements that will cost more than $10,000 to repair or replace. Roof. Siding. Fire System. Common portions of sewer lines and supply lines, as well as electrical. Flooring in lobbys and hallways, other common areas. Parking areas and driveways. Tree trimming, including high work. Gutters and downspouts. Park areas or community Centers. Sidewalks and stairways, often the balconies/lanais are a "limited common element" that the HOA also takes care of. The original goal of the plan is to simply determine, from Day One, a reasonable estimated cost for each of these elements, divide by the statistical "useful life", and collect that amount each year plus adjustment for inflation. This would result in having over 90% of the needed funds for each element at the time it needs the major repair or replacement. Some years there will be zero spent from the fund, other years there will be multiple items that are due, and the funds for each will be there. As long as the numbers are updated and kept reasonably accurate, there will not be any unexpected, or unfunded, major repairs needed. This is in essence, a 25 to 30 year or longer plan, depending on the life cycles established. The plan will calculate the required Annual Contribution needed to "fully fund" the reserves FOR THE SINGLE PLAN YEAR ONLY. This figure assumes following years will be at a full funding level each year. Any "shortage" of funds for the plan year, will need to be made up in following years, prior to actual need for the elements with the shortfall. Those "fully funded" amounts are totaled, then divide by 12 months, divide by number of total units in the project (or your actual percentage of ownership of the common elements as defined in the Declaration) will give you the estimated (or actual if you have the correct percentage) monthly cost to fully fund your reserves for the year.

Operating budget monthly cost plus reserve funding monthly cost equals total monthly fee.

By sticking to the plan by funding at 75% or more of the full funding amounts, AND assuming there are not multiple very large elements due within a short period...three years or less, AND IF the estimated costs are reasonably accurate, there will be minimal increases in maintenance fees. They SHOULD rise every year, but primarily due solely to inflation or specific insurance or contract annual increases. There should NEVER be a "Special Assessment", unless there has been a natural disaster or catastrophic event. 

To reiterate, the Board's primary responsibility is to maintain, protect, and preserve all common elements, and adjust their Annual Operating Budget and Reserve Funding Plan each year to maintain reasonable accuracy and fully fund all expenses, current year and for future years. Boards make all of the decisions. Indeed, Board Members are a varied group of regular homeowners, rarely with any background or skills in facility management or significant finance, yet they are expected to Govern the project. They are, per law, fiduciaries to all Owners within the project. They are held, by the Courts, to the Standard known as the "Business Judgment Rule", which states that "they must do what any reasonable person in similar situation would do". In most cases, that means seek Professional guidance and advice for each specific type of issue. Utilize Consultants; obtain proposals and question Vendors regarding durability, quality, warranty, etc.; follow the advice of Professionals in each industry, including accounting, insurance, law, contracts, and others. Lastly, they are all required to follow all applicable laws for their jurisdiction, such as Contractor licensing and insurance, Fair Housing, and many others. By NOT following laws or NOT sufficiently researching issues and following professional guidance, they put the entire project at risk of lawsuits.

Here is a sample Reserve Study and Funding Plan to review, which illustrates how these are developed. Feel free to post questions, I will try to answer any for you.  If you have specific By-Laws, Declarations, Budgets, Reserve Funding Plans, post a link with your questions for more specific answers, or DM me. I am retired now, and not selling anything.