May-June 2017 Issue
And Now, To Repair the Financial Damage
The contractors have cleaned up and moved on. The gutters and downspouts and scuppers are cleared and repaired; the siding and paper are replaced; the flashing and stucco are repaired; the roof has been repaired or replaced and the vents have been caulked. Water damage and maybe even mold in the units have been remediated; drywall repaired; flooring re-installed. What now? Time to put up your feet, scarf bonbons and coast until the next El Niño?
Well, not quite. You have taken care of the physical damage—and if you have not already, now it is time to evaluate the financial damage, mitigate it, and perform your fiscal planning for the remainder of this year and for the next. Most likely some of the work was paid for out of the replacement fund (reserves) and some from your operating fund. It is time to look at your current reserve study and financial statements with a critical eye.
Reserve Expenditures. Were the storm-related replacements anticipated in projected expenses of the reserve study? Were the costs in line with the study? If yes, all is well. If no, then your reserve study may need some major tweaking when it is updated. Be sure to give all of the costs to your reserve study provider so that the new study and new funding reflect this information accurately.
Operating Expenditures. Were the maintenance and repair costs anticipated in the annual budget? Did they go over budget? Do you expect it to even out by the end of the year or is there no way? If your storm repairs totaled, for instance, $12,000 in January and your budget was $1,000 per month, you will be over budget for now but will normalize by the end of the year (assuming no additional fall storm damage). If your storm repairs totaled $24,000, you will most likely end the year with an operating loss, assuming other receipts and expenditures are essentially at budget.
Are there upcoming collateral costs from the storms? For instance, with all of the rain, the trees will most likely have a robust growing season. That may increase your tree trimming and gutter cleaning costs later in the year. Also, accelerated tree root growth may make the area drain clearing and sidewalk lifting repair costs greater than normal.
How healthy is your operating fund? Take a look at the balance sheet. CAI recommends that the cash in the operating bank account(s) minus prepaid HOA fees should equal at least one month operating expenses (M-206 Checklist for Financial Records and Reports, 2009). If you have a "healthy" operating fund, you may be able to absorb some or all of annual budget overruns. If your operating fund is less than stellar, it is time for Plan B: a special assessment to cover the storm damage repairs and/or to increase your operating fund. If the total of the special assessment is under 5% of the budgeted gross expenses for the year and you have not pulled that card already, most likely the board of directors can vote to pass the special assessment. Always check with your attorney. She or he may tell you that the special assessment falls under the emergency assessment rules, or you may need to have the membership vote on it. Plan C, the other alternative, is to increase the HOA fees mid-year (if allowed in your governing documents) or increase the HOA fees in next budget to cover this operating loss this year.
Plan D—the absolutely wrong approach if the cost was significant and not budgeted—is to do nothing at all. If that path is taken, you will most likely have several or many cash-poor years that will eventually need to be rectified. It is much easier to fix the cash situation in the year that it occurred - explain to the membership that the budget did not anticipate $x amount of essential storm damage repairs, and the funds need to be reimbursed. Then the owners who were affected by the damage pay for the cost of the repairs. It is much harder to sell a special assessment or fee increase five years down the road that was due to storms five years in the past—plus the new buyers should not have to shoulder the costs.
Your CPA or reserve study provider may be able to help you if needed. With a little analysis, you should be able to keep your association financially healthy despite the additional costs from the storms.
Sue DeLucia, AMS, is the co-owner and CFO of Horizon Management Company, a full-service management company in Torrance. She can be reached at firstname.lastname@example.org.
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