The condo association budget is where smart financial planning and spending begin. It is the condo board’s job to plan the budget and prepare the community for upcoming expenses. To plan an effective budget, there are certain steps that boards must take.
The Importance of a Condo Association Budget
The budget for condo associations serves several important purposes in effectively managing the financial aspects of the community. The condo board determines and manages the budget with the following purposes in mind:
1. Financial Planning
Budgets provide a roadmap for the association’s financial activities so the board can best plan and allocate resources effectively. By outlining annual projected income and expenses, budgets enable the association to anticipate and prepare for its financial needs and obligations – both in the short and long term.
2. Expense Management
Budgets allow condo associations to track and control expenses. By setting spending limits and allocating funds to specific categories, budgets help prevent overspending and promote financial discipline within the association.
3. Assessments and Fee Determination
Having a clear understanding of the association’s budget is crucial for determining the amount of assessments or fees that will need to be collected from unit owners. If assessments need to be raised, the board will also need to demonstrate the why and how with clear budget projections.
4. Reserves Planning
Each condo association in Illinois is also required to maintain a reserves fund. Reserves help condos pay for planned improvement projects as well as fund unexpected emergencies. By including reserve contributions in the budget, associations can build up funds over time to handle future expenses and maintain the property’s value.
5. Transparency
Additionally, budgets serve an important purpose in providing transparency to the association’s financial activities and promoting accountability. They give unit owners and stakeholders a clear understanding of how the association’s funds are being allocated and help foster trust in the association’s board.
Communicating the Budget to Owners
Condo members who are elected to their association’s board in Chicago have many responsibilities, but perhaps one of the biggest is managing the annual budget.
Board members must maintain a fiduciary responsibility to the association and make all decisions based on the best interests of the community. That said, despite those decisions being made in the best interest of the association, that doesn’t mean all members will see it that way.
To help Chicago condo association members best understand the purpose of the annual budget, how expenses are managed, and the decisions made, it can be useful to explain and discuss the purpose of the condo budget. As boards get to work preparing their association’s annual budget, don’t forget to share the purpose behind the budget with the community.
The more informed they are, the more supportive they will likely be of any changes or increases to the budget.
How to Create a Condo Association Budget
Condo associations rely on owner dues to fund day-to-day and long-term expenses. To calculate how much to collect in dues, the board must anticipate upcoming costs. This comes in the form of an operating budget.
An annual budget determines what costs the association expects to incur in the year ahead. It sets the financial tone for the community. Boards use this budget as a guide for expenditures, allowing them to know if they are overspending or underspending.
Here’s how to plan a condominium association budget.
1. Review Legal Requirements
First, board members should review state laws and the governing documents. These often outline the procedures for setting the budget and any notice requirements. For some communities, it is even mandatory to have the budget approved by the membership.
Additionally, legal requirements can determine what costs the board should anticipate. In Illinois, for instance, condominiums must budget for reserve contributions (765 ILCS 605/9). Because of this, boards must take reserve summaries and studies into account.
2. Analyze Prior Financials
To understand future costs, boards must look to past expenditures. It is important to check the actual costs of the previous year by analyzing financial reports. This builds a solid base for future estimates.
Key items to review include:
- Actual income vs projected income,
- Operating expenses and any overruns,
- Delinquency rates, and
- Reserve contributions and balances.
This helps the board identify trends and avoid repeating mistakes. For example, if delinquency rates in the prior year were at 5 percent, then the board should adjust the budget to account for a similar rate this year.
4. Estimate Operating Expenses
Next comes the hard part. The board must estimate how much the operating expenses will cost. Typical categories include landscaping, maintenance, utilities, condo management fees, insurance premiums, and administrative costs. Of course, exact line items will depend on the association’s needs.
For realistic projections, boards should use insight from past financial reports. If actual maintenance costs from the previous year were at $5,000, for instance, the board can expect something similar or higher for this year. Boards should also talk to vendors to see if they plan to raise their prices.
5. Plan for Reserve Contributions
Reserves cover the cost of major repairs and replacements in the future, when components eventually wear out. To ensure the condo has sufficient reserves, the board should review the latest reserve study and follow the funding plan. This will inform the board of the right reserve contributions for the year.
In Illinois, condominiums must maintain a reserve fund (765 ILCS 605/9). The board can waive this requirement with a membership vote if the governing documents don’t mandate reserve funding. That said, it’s best not to waive the decision, as reserves play an essential role in the long-term financial stability of the condo.
6. Account for Inflation and Rising Costs
Costs rarely stay the same forever. Economic changes can affect pricing, typically resulting in higher costs. The board should account for inflation in all areas, but especially in insurance, vendor prices, utilities, materials, and labor. Even a small percentage increase across multiple categories can have a big impact.
7. Include a Contingency Line
Unexpected expenses will happen — they are a normal part of operations. To ensure the condo has enough funds to respond to emergencies, the board should set aside a contingency fund. This fund must usually reflect 5 to 10 percent of the operating budget.
A contingency fund helps the association avoid additional financial burden. It gives the board more flexibility in times of crisis without needing to levy emergency assessments.
8. Calculate Dues
After the board finalizes the anticipated expenses, it’s time to determine how much each owner must pay in dues. The formula usually follows simple division, dividing the total expenses by the number of unit owners. Some condo communities use a percentage basis depending on square footage instead of dividing the costs equally.
That said, boards should first subtract other projected revenue from the total expenses before dividing among owners. Other revenue sources can come from amenity rentals, vending machines, condo-operated laundromats, donations, and grants.
Boards should also check for any caps on dues. In Illinois, unit owners may challenge dues increases that exceed 15 percent of the prior year’s dues. Without a challenge or if the vote doesn’t pass, the increase stays.
9. Draft and Review the Budget
Once all the numbers are in, the board can then draft the budget. Make sure to use a clear and organized format so that owners can easily understand it. This budget typically includes:
- A line-item breakdown of expenses,
- Comparisons to the prior year, and
- Notes explaining major changes.
Boards should review the budget carefully and make any adjustments necessary. After that, the board can put it to a vote for approval.
10. Distribute and Approve the Budget
Depending on the governing documents, a condo may need to ratify the budget with a vote from the membership. More often than not, only a board vote is required. This prevents delays in financial operations and dues collection.
Before approving the budget, the board must share it with unit owners (765 ILCS 605/9). At a meeting, the board should open the floor to any questions that owners may have. The board should explain any major increases or upcoming projects. With clear communication, the board can reduce pushback and confusion.
After clarifications, the board can then vote on the budget at an open meeting.
Who Prepares the COA Budget?
The committee in charge of preparing the condo association’s annual budget is the elected condo board. They spend significant time reflecting on previous years’ budgets and estimating anticipated future expenses. They also ensure that they are setting aside enough in the reserve fund to pay for future improvement projects and unexpected emergencies.
Before going to a vote by the board, they must distribute the condominium budget to the full association. Then, a majority of board members present must vote to approve the proposed annual budget for the following fiscal year.
In larger communities, the board seeks help from a separate budget committee or an HOA management company to prepare the budget. Of course, the board still gets the final vote on whether or not to approve it.
How to Manage the Condo Association Budget
The work doesn’t stop after the budget is approved. Condo associations must still track the monthly performance of the budget and spending. This will allow the board to make adjustments that will keep the association in the green.
Key metrics to watch out for include:
- Variances between projected and actual expenses,
- Income shortfalls, and
- Unexpected repairs.
Board members are responsible for managing the condo budget. That said, they may not have the time or expertise to fulfill this task alone. This is where an HOA management company comes in. A management company can help the board estimate costs, avoid overspending, and make smart decisions.
A Wise Choice
The condo association budget guides income and expenditures in a community. It projects upcoming costs and serves as a basis for determining regular dues. Given its role in financial stability, boards should take the budget seriously. Oftentimes, this means obtaining help from professionals.
First Community Management helps condo communities and HOAs with budget planning and management. Contact us today at (312) 829 8900 or contact us online to get started!