Budgets and The Process

Having attended too many budget meetings to count, the budget process is often misunderstood by some owners in the Association.  Long before the budget is presented to the Association to be ratified it has gone through much scrutiny and deliberation.

The process typically begins with the accounting team and property manager putting together a draft budget months prior to the upcoming fiscal year, complete with actuals, projections, and narrative detail that is then reviewed and discussed with treasurer.  Throughout this process, each line item is carefully reviewed.

Association budgets, typically with no or little contingency are designed to be break-even and have very little discretionary spending.  The biggest expense for most associations is insurance costs.  Premiums have risen significantly over the last 3-4 years with very few competitive markets looking to write this type of risk.  It is important to try to manage risks where possible and control losses.

Capital planning is also reviewed and analyzed in the budgeting process.  It is important to take a realistic approach to understand future capital needs and to fund them appropriately.  Often owners can be short-sighted and don’t want to properly fund the capital fund, taking the approach that it will be someone else’s problem down the road when the roof needs to be replaced, for example.

Once all of the components have been reviewed, the entire Board then does their review prior to voting to approve the budget.  Once approved, the budget then goes to the owners for ratification.

Costs that affect Associations continue to rise and as buildings age, they require more funds and become more expensive to maintain, and budgets that rise with them are the healthiest Associations.  We have seen examples in the market, often self managed or poorly guided, where boards are averse to raising common charge and keep them artificially low at the expense of capital projects.  These properties over time fall into disrepair.  Special Assessments and/or loans are then the only resource, often for a new board who takes control after realizing their building needs a new roof or siding, etc. to fund these expenses.

It is important to remember that your board members are also unit owners and are paying common charges just like you.  They are volunteers that take on the responsibility to make important decisions and insure that your association is fiscally responsible and prepared to deal with the future needs of your association.

A Condominium. A Cooperative. A PUD.

There are several different forms of ownership that make up the stock of home owner’s associations in Connecticut. They are typically condominiums, cooperatives and planned communities or PUDs. While these types of ownership can not be distinguished from the physical appearance, it is the legal structure that differentiates one from the other.

The most common form of ownership is the condominium. In this fee simple form of ownership, the owner of the unit owns the unit and an undivided interest in the common elements.  The owner receives a property tax bill for the individual unit.  The governing documents are the declaration, bylaws and rules.

A popular form of ownership in NYC and less common in Connecticut is the cooperative. In this form of ownership, it is stock in the corporation that the individual owns and he is entitled to occupy his unit through a proprietary lease. As the individual does not own any real estate with a cooperative, they do not receive a real estate tax bill from the municipality; rather the corporation receives the real estate tax bill.  This is usually the largest operating expense item in the budget of the cooperative. Prior to purchasing shares, the buyer is required to complete an application that is reviewed and vetted by the corporation’s board of directors. Many cooperatives will also have an underlining mortgage that is an obligation of the corporation and can be significant.

Another form of ownership is a planned community or planned unit development (PUD). In this type of ownership the owner typically owns the land which the unit sits and the air space above the surface of the land as well as an undivided interest in the common elements of the association.  Units in this form are attached townhouse style or free standing detached units.

Each of these different types of ownership forms has their own benefits, and negatives.  Financing, purchasing and selling, use of a unit and maintenance responsibilities all can vary significantly from one type to another and from association to association.  It is best to thoroughly understand the property you are considering and work with professionals that can help you along the way.