Tag Archives: Financial statement

Budgeting and Reserves for Condominiums


Most covenants for condominiums require that the association include as part of the annual budget, an allocation for  reserves.  Reserves should be set aside for roof replacement, pavement resurfacing, building painting, and any other item of association responsibility with a replacement cost or deferred maintenance expense of $10,000.00 or more.

Traditionally, the reserve schedule accompanying the proposed budget has used the “straight line” method of calculating required reserves. For example, assume that the roof on a condominium building has a twenty year useful life, is ten years old, and will cost $100,000.00 to replace. Further assume that the current amount of money in the roof reserve is $50,000.00. The association will need to collect $5,000.00 per year, over the next ten years, to accumulate another $50,000.00 so as to “fully fund” the roof reserve. This is traditional, “straight line” funding of reserves.

Similar calculations are then made for all other required reserve items (building repainting, pavement resurfacing, and other items with a replacement cost or deferred maintenance expense in excess of $10,000.00), and the annual contribution required to “fully fund” the reserve account is thus arrived at.

When reserves are funded on the straight line method, whether fully funded or partially funded, they should only be used for their intended purposes. For example, money should not be taken out of the roof reserve account to pay for painting the building. However, the association can use reserve funds for non-scheduled purposes if approved in advance by a majority vote of the unit owners.

The concept of “cash flow” or “pooled” reserve funding differs from “straight line” reserve funding.  Under pooled reserves, it is still necessary for the reserve schedule which accompanies the annual budget to set forth required reserve items (roofs, painting, paving, and other items with the replacement cost/deferred maintenance expense of more than $10,000.00). Further, the “cash flow” reserve schedule must still disclose estimated remaining useful life and replacement costs for each reserve component. The main difference in the cash flow presentation of reserves is that instead of each reserve line item having its own fund balance, there is a “pool” of money in the reserve fund, which is available for costs affiliated with any item in the reserve pool. For example, the painting and roof reserve monies are “pooled” into one fund, so a vote of unit owners is not required for expenditures from the fund, as would be the case in a straight-line reserve scenario where monies from one reserve account would be used for another reserve purpose.  As with “straight line” reserve funding, with pooled reserves, a vote of the unit owners is should be required to use reserve funds for operating purposes, or for any expenditure involving items that are not part of the “pool”.

The pooling method of reserve funding attempts to predict when a particular item will require replacement or deferred maintenance, and reserves are scheduled and funded so as to insure that a necessary amount of funds are on hand when the work needs to be done. Theoretically, monthly or quarterly reserve contributions can be lowered, while still avoiding special assessments.

Of course, what works in theory does not always work when placed in human hands. In addition to needing a crystal ball to predict exactly when a reserve expenditure will need to be made, reserve contributions may be substantially higher in certain years, such as when the fund is depleted for the replacement of a required item, and there is a short useful life for the next asset that needs to be replaced.

A condominium reserve fund helps associations pay for maintenance and upgrade costs as they become due.   As a property owner, you will be well aware of the benefits which accrue from setting aside sufficient reserve funds.   The  association will better maintained over time and you will lessen the need for special assessments to make up future budget deficits.

Budgeting and Reserves for Condominiums


Most covenants for condominiums require that the association include as part of the annual budget, an allocation for  reserves.  Reserves should be set aside for roof replacement, pavement resurfacing, building painting, and any other item of association responsibility with a replacement cost or deferred maintenance expense of $10,000.00 or more.

Traditionally, the reserve schedule accompanying the proposed budget has used the “straight line” method of calculating required reserves. For example, assume that the roof on a condominium building has a twenty year useful life, is ten years old, and will cost $100,000.00 to replace. Further assume that the current amount of money in the roof reserve is $50,000.00. The association will need to collect $5,000.00 per year, over the next ten years, to accumulate another $50,000.00 so as to “fully fund” the roof reserve. This is traditional, “straight line” funding of reserves.

Similar calculations are then made for all other required reserve items (building repainting, pavement resurfacing, and other items with a replacement cost or deferred maintenance expense in excess of $10,000.00), and the annual contribution required to “fully fund” the reserve account is thus arrived at.

When reserves are funded on the straight line method, whether fully funded or partially funded, they should only be used for their intended purposes. For example, money should not be taken out of the roof reserve account to pay for painting the building. However, the association can use reserve funds for non-scheduled purposes if approved in advance by a majority vote of the unit owners.

The concept of “cash flow” or “pooled” reserve funding differs from “straight line” reserve funding.  Under pooled reserves, it is still necessary for the reserve schedule which accompanies the annual budget to set forth required reserve items (roofs, painting, paving, and other items with the replacement cost/deferred maintenance expense of more than $10,000.00). Further, the “cash flow” reserve schedule must still disclose estimated remaining useful life and replacement costs for each reserve component. The main difference in the cash flow presentation of reserves is that instead of each reserve line item having its own fund balance, there is a “pool” of money in the reserve fund, which is available for costs affiliated with any item in the reserve pool. For example, the painting and roof reserve monies are “pooled” into one fund, so a vote of unit owners is not required for expenditures from the fund, as would be the case in a straight-line reserve scenario where monies from one reserve account would be used for another reserve purpose.  As with “straight line” reserve funding, with pooled reserves, a vote of the unit owners is should be required to use reserve funds for operating purposes, or for any expenditure involving items that are not part of the “pool”.

The pooling method of reserve funding attempts to predict when a particular item will require replacement or deferred maintenance, and reserves are scheduled and funded so as to insure that a necessary amount of funds are on hand when the work needs to be done. Theoretically, monthly or quarterly reserve contributions can be lowered, while still avoiding special assessments.

Of course, what works in theory does not always work when placed in human hands. In addition to needing a crystal ball to predict exactly when a reserve expenditure will need to be made, reserve contributions may be substantially higher in certain years, such as when the fund is depleted for the replacement of a required item, and there is a short useful life for the next asset that needs to be replaced.

A condominium reserve fund helps associations pay for maintenance and upgrade costs as they become due.   As a property owner, you will be well aware of the benefits which accrue from setting aside sufficient reserve funds.   The  association will better maintained over time and you will lessen the need for special assessments to make up future budget deficits.

Do Research Before Voting Down the Association Budget


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Q: I live in a small, 70-unit condominium project, and we are having terrible money problems, mainly steming from the misappropriation of funds from the management company.

We are having a meeting where our homeowners’ association board is expected to ask for its third assessment in two years.

A group of residents sent letters to homeowners asking them to vote down the proposed new assessments and increased dues, and to get a new management company. What is the percentage of votes needed to stop the board from increasing our costs?

A: You always want to be careful when making statements that the management company has misappropriated funds from the association.

Such a statement needs to be made from actual facts that came be obtained from an audit. If the management company did misappropriate funds, an immediate complaint should be filed with the Nevada Real Estate Division.

Your board sets the priorities as to where the money will be spent and most of your funds are probably being used for insurance, utilities, annual financial report from a certified public accountant, management fees and maintenance contracts.

Condominium projects tend to have higher operating expenses because of the maintenance, repair and or replacement of the roofs, exterior painting and plumbing/mold/water leaks.

In addition, state law requires the association properly funds the reserve account. It would not surprise me if your association has a delinquency issue that is contributing to the financial deficit.

You need to make an intelligent decision to review a projected 2012 budget, 2011 year-to-date financial report, an accounting of the total dollars owed to the association and an estimate of how much of the debt is collectable, the reserve study — more specifically what is the projected ending balance for the reserves for 2011 and 2012 — plus the anticipated capital expenses for 2012 and monthly contractual expenses for the association for 2011 and projected 2012.

After reviewing these financial documents, you may discover that without an increase in assessments, you may have to cut services for the association to pay its regular operating expenses.

Assuming that an increase is not warranted, you would need a majority or more (look at your covenants) of members to reject the proposed budget, which calls for an increase, at a meeting in person or by proxy.

If the proposed budget is rejected, then the previous budget remains in place until a new budget is prepared by the board, to be either ratified or rejected by the membership.

If you do not have the percentage of owners to reject the budget at the ratification meeting, then by state law the budget is ratified.

Depending upon your governing documents, look at assessments and voting, you may need 51 percent or as high as 75 percent of the voting members to reject budget.

As to changing the management company, it is the authority of the board to select, hire and fire its contractors. You would need to either convince the board to make a change using membership pressure or elect new board members who would make the change.

Source: http://www.lvrj.com/real_estate/do-research-before-voting-down-budget-132843408.html

Brought to you by Riverside Property Management, Inc. (678) 866-1436

Protect the HOA Operating and Reserve Accounts


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I know anyone that has any affiliation with an HOA or Homeowners Association has heard of someone stealing or trying to steal money from the Community. The scams are often as simple as writing a check to themselves, either as an administrator, treasurer or president. This is the one constant to which no one paid much attention. Now, with the vast majority of the Associations tax year ending, here’s your chance to make sure that does not, and is not going to happen. Whenever the economy takes a hit, and particulary when it both an extended and bad one, you need to pay special attention to the deep pockets, your association’s bank and reserve accounts.

First – GET AN AUDIT – not an opinion, not a compilation, but a real, honest-to-god audit. Only an audit of the CPA will unearth evidence which, in turn, could be fraud or embezzlement. Yes, an audit is more expensive, but considering the huge increase in financial crimes against associations, this is not the time to spare. Remember, every person trusted the people who were scamming from the Association funds. The fact that the treasurer is a good person, does not mean that they are not having personal financial problems.

Then make sure your insurance covers the Community Association if the money is lost. All too often association’s think that fidelity bonds that the management company has protects them – it doesn’t, it only protects the management company if an employee steals from them.  Whether its a bond or crime insurance, make sure the association is covered for ANY loss, no matter who is  lining their pockets.  This can be done with Directors & Officers Insurance or D & O.

Always make sure the bank or any financial institution that holds your money, sends a second statement, an original for someone other than the person who writes the checks or books. The crooks got away with their scams for long periods of time because they were the only one receiving the bank statement, and then delivering a retouched statement to the Board of Directors. Someone else must have an authentic, original – that can,  in fact be compared to the one presented in the financial report.

Periodically, hold a test of invoices. Ask one of your contractors to review their bills with you. A basic scam is a book of false invoices for work that was never completed, and then write a check for that amount to the scoundrel himself. Unless you’re reviewing canceled checks or verifying proof of the bill, it is quite easy for the thief get away with it. Each time you have a supplier or contractor that is going over budget or contract, this is likely to be the output.

Make sure nobody can get to the reserve accounts easily to withdraw or transfer funds. Talk to any institution that is holding the funds and ask them for the best way to ensure that nobody can reach them without going through a lot of checkpoints.

Basically, you should make sure you have all the necessary protections in place and they are, in fact, actually being followed. There are plenty of articles about how to do this, and that’s a good place to start. But remember, it is the entire process to be followed – not just a part will protect your Property Owners. For example, you can utilize the recommendation to require two signatures on checks, but in reality, banks no longer see or verify the signatures, so that alone will not protect you.

Why go through all this? I’m no lawyer, but if I were a Home Owner and someone was to abscond with a lot of money from my Association, I believe that the board would had failed in its fiduciary responsibilities and should be held accountable for that failure.

Find the Best Atlanta Property Management Company


Ten Tips for Finding the Best Atlanta Property Management Company For Your HOA.
HOA management companies in Atlanta range from the mega, big-box companies to the Mom and Pop companies run by families.  Regardless of the size of your association, you should understand the key differences in management companies and how to choose the best management for your HOA or condo association.

Here are ten things you should look for in an Atlanta HOA Management Company:

1.  Find a Locally Owned Company. Working with a locally owned and operated management company means that all management decisions originate in Atlanta and not 800 miles away.  Locally owned management companies are focused on the Atlanta market and their key vendor and banking relationships are right here in Georgia.  Best of all, if you ever have a question or concern, you can personally visit and meet with the company and its highest executive officers and inspect any and all management records.

2.  Make Sure Your Management Company Banks with a Georgia Bank. Banking locally means fewer errors in banking transactions and more efficient depositing of HOA checks without delays caused by interstate bank transactions or delayed mail processing times.  It also means that if you ever have any concerns or a need to withdraw or move funds, you can do without any delay.  If your property management company works with an out-of-state bank, you will have a longer turnaround and less access to records and money when you need it.

3. Find a Company That Delivers Financial Statements at the Beginning of Every Month. If you entrusting your company’s affairs to a management company, you have the right to receive timely and accurate financial statements every month.  If your management company is giving you full and complete financials by the 10th of every month, something is wrong.  Either they are too big and inefficient, understaffed or lack the organization they should have to effectively manage your community.   And make sure the financial statements include a Balance Sheet, Income and Expense Statement, Cash Receipts Journal, General Ledger and Check Register as well as copies of the actual bank statements.  If the management company can’t provide you with all of these basic financial documents (and many cannot), there is something wrong and you need to find another company.

4.  Insist on Complete Transparency. There is nothing magical about what management companies do and nothing should be secret from the Board.  The Board should be able to request records and get them without a runaround.  And the Board should be able to review every property inspection the company performs.  Too many companies claim they do property inspections when in reality they whistle through the neighborhood on the way to Starbucks.

5.  Make Sure You Get to Choose All Vendors. Management companies often have “sweetheart deals” with vendors that enhance their bottom line and cost the HOA more money.  So when it comes to selecting vendors and soliciting bids, make sure you are able to direct what companies you want to receive bids from and that you make the decision of who to hire.   If any management company tells you that they select all of the vendors, pack up your bags and run!

6.  Be Realistic. Management companies deal on a very low profit margin.  Think about what services you want and what you are willing to pay for.  If you want weekly property inspections, you are going to pay a lot more than a neighborhood that wants monthly property inspections.  But are weekly inspections necessary or reasonable?  Most Covenants require that associations provide homeowners a minimum of thirty days to correct a violation.  Weekly inspections would be an unnecessary waste of resources and would only increase the management costs.

7.  Look at the Company’s Insurance Before Doing Business With Them. Is your HOA property management company insured to cover your association in the event of a loss?  Do they have liability insurance in case they hit the front entrance sign on the way into the neighborhood?  Do they have an umbrella insurance policy just in case?  Do they also have fidelity coverage in case one of their employees steals from the association coffers?  Do they have workers compensation coverage in case one of their employees is hurt on the job?  If not, you probably need to find another management company.

8.  Beware of the Big Boys. Bigger management companies often have longer response times and more “red tape” to deal with.  If an Atlanta property management company has to refer your question to someone else in the company or can’t get a bill paid within five days of receiving it, you are going to be frustrated dealing with the company and the delay in response time is ultimately going to cost you time and money.  Also, lack of service and delayed responses put your Atlanta HOA, High Rise or Condo association in situations of extreme liability. If problems concerning the health and well being of the public, lets say a tripping hazard or leaking roof in a community center, aren’t addressed immediately the cost and liability associated with the problems rise exponentially.

9.  Meet the Company Representatives. You will never get a true sense of what a management company does and how companies differ from one another until you meet with representatives.  If all you are doing is collecting bids and comparing prices, you are missing the boat.  If the management company representatives aren’t “liable,” when you meet them, they sure aren’t going to get any better when they talk to homeowners.   And make sure they are willing to return all phones, not just calls from Board members, from all homeowners within 24 hours.  Many companies will give “A+” service to Board members and “D-” service to the homeowners.

10.  Visit the Company Offices Before You Decide. Worried about who you are doing business with?  There is no better way to get a sense of how your management company operates than by a personal on site visit.  Is the office clean, neat, professional and organized?  It should be if that is how they conduct business.  If the office is a disorganized mess with boxes piled everywhere and papers scattered in a heap, you may want to choose another management company.

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Review the Financial Statements of the Association


As part of its responsibility for financial supervision, a nonprofit board should review the organization’s audited financial statements regularly. These statements include: Statement of Financial Position (Balance Sheet) Activity statement (Income Statement) Cash Flow Statement Statement of operating costs Notes … Continue reading

Reviewing Financial Statements


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As part of its financial oversight responsibility, a nonprofit board should review an organization’s audited financial statements on a periodic basis. These statements include:

Creation of the statements is the responsibility of management and they are typically produced monthly. The monthly statements are presented for the month just ended as well as for the year-to-date to provide valuable reference points and to allow the board to see how well the actual results follow projected assumptions. At year end, the year-to-date figures reflect the accumulation of the previous 12 months of transaction activities applied to the balance sheet and income statement.

Here are some tips for board members reviewing financial statements

  • Request that management show cash to the board in a trended monthly format (preferably as a graph) to highlight the movement of the organization’s cash balances.
  • If accounts receivable or promises to give are a major portion of your organization’s balance sheet, ask the organization’s finance division to summarize its effort to maximize cash collections and to minimize bad debts and write-offs. Also request that they provide the policy for classifying purchases as capital assets and for depreciating them.
  • Examine the most recent footnotes to the financial statements and discuss with the auditors any significant issues.
  • Analyze with senior management the benefits and costs of adopting procedures similar to those outlined in the Sarbanes-Oxley Act. Discuss with the auditors the changes that would need to be made under the adoption.

This is an excerpt from the book Understanding Nonprofit Financial Statements, Third Edition by Steven Berger.