INDUSTRY JOURNAL Vol . 8 members figuratively cover their eyes and only peek out from behind their fingers occasionally . A good community manager can help with the economic issues such as interest rate projections and inflation factors . However , it is up to the board to be responsible for such things as the capital reserve study projected needs of the community for this year ( surely you have an up-to-date capital reserve study !), community desires and goals ( often derived from committee reports or from resident surveys ), and revenue projections ( what is the ‘ pain threshold ’ of the residents to a levy increase ?).
It is rare for an association to budget for emergencies . Most boards believe that if an emergency does develop , they can use the accumulated capital reserve to cover it . This is not a good strategy . Capital reserves should be set aside to cover major replacements such as roofs or asphalt parking lots .
The argument is often made that insurance will cover emergencies and we ( the board ) do not have to budget funds for them . This is also a specious argument . Insurance , for example , will not pay for the trees that get knocked down in a storm ( it will pay , in some cases , to have the downed trees removed but not replaced ). In any event , even in situations where the insurance company does pay , there is always an excess payment . A modest emergency fund should be established and if you ’ re fortunate enough not to use it in one year , add to it in the next year .
Many budget experts argue that a budget should be for a long term – three to five years . With all the problems in developing a workable budget for one year , it is difficult to imagine the complexities of a multi-year budget . It is not unusual for a contractor to agree to perform a service for the same price as last year , assuming that the manager and the board agree not to compete . However , it is difficult to visualise a contractor agreeing to keep the same price for three or five years . It is also difficult to visualise a management company keeping its monthly fee the same for an extended period .
It is not unusual for a builder / developer to turn over a community project where each unit pays the same monthly levy . This is frequently done because it is easier to sell units and easier to manage them if all the levies are the same . However , if the Declaration shows owners with different shares of ownership , it is patently unfair to about half the community who are paying more than their percentage of ownership .
A resident ’ s ownership percentage , in a sectional title scheme , is usually determined by the ratio of the square footage in the individual ’ s unit as a percentage of all the square footage in the community . The ownership percentage is expressed as a percentage , such as 1.234 %. This percentage is critical because the resident ’ s levies should be that percentage times the final annual budget , divided by twelve . In addition , any special levy should be developed the same way . And the final significant issue is that voting at annual meetings should assign each voter the appropriate percentage and count the percentage when tallying the vote . That way a person with 1.234 % has more than one vote for their unit .
When , in a free title scheme , a responsible board changes from a flat levy to a pro rata levy , the community is in a turmoil . Again , about half will be paying more and about half will be paying less . In the long run , the board can avoid those nuisance lawsuits that are so prevalent in this business , by a resident who is paying too much , by making the correction and dealing with the turmoil . Occasionally , a pro rata share is developed by circumstances other than a percentage of ownership , for example , how close a resident is to a lake or what view they may have . In any event , the basis of the pro rata share is developed , and the fact that the Declaration provides for a pro rata share is very important .
The beginning of the financial year for a community is the end date for the budget process . A properly prepared milestone schedule begins about three months prior to the beginning of the financial year , with the budget being approved and in place at least one month before the beginning of the financial year . Many financial years , certainly not all , coincide with the beginning of the calendar year , 1 January . This means that to be effective and properly in place , the budget process must begin no later than 1 October .
The start point is historical data and information . The manager should prepare a spreadsheet showing the budget and expenditures from the two previous years . Without the expenditures , the budget alone tells you nothing . Then add to the spreadsheet the budget and expenditures for the current financial year . You won ’ t have the entire year , so add fixed expenditures that you know about , like
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