As an HOA Board Member, how do you think about long term financial planning in times of great uncertainty?
Never forget you are in essence operating a small municipality when running an Association. Just like your local municipality, Association’s expenses such as insurance, maintenance, utilities etc. are covered by the revenue collected from the residents. Those costs often increase annually, hence the reason municipalities raise taxes or secure financing. Rarely will they special assess tax payers unless they are facing difficulty collecting revenue or are not in a fiscal position to secure a loan.
What is the common denominator? Revenue collection is greatly impacted by the underlying fiscal strength of the community. Given the record unemployment claims filed and the amount of uncertainty for the months ahead we must be prepared for a possible reduction in revenues.
Just like any business, strategic scenario planning for revenue shortfalls due to changing market conditions is critical right now. You should be monitoring monthly collections and possibly even create a budget template assuming an income reduction of 10-20%. How does that impact the ability to balance the budget in 2020? What about 2021? In addition, how does that impact your ability to address immediate and long term capital projects? This will tell you how the projected loss of income could impact your long- term financial strength. Looking at your finances through this lens is extremely helpful in figuring out how to supplement projected operating deficits.
Many boards immediately consider funding operating deficits with reserve funds. Reserve funds need to be protected as much as possible. Capital reserve projects protect asset value and can often increase values within the community. Depleting reserve funds will have the opposite impact over the long term. Relying on a scenario analysis as indicated above can help. Map out what a decrease in reserve funding over the next 12-24 months does to assessment income and what increase will be needed in the future if that income is diverted today. Your HOA can now run options with different reserve allocations to account for the revenue shortfall. You can plug in lower reserve balances so when the shortfalls come in, you will know which scenario to rely on. This will give you a better picture of your financial strength as your HOA weathers the financial storm and will allow you to make better decisions.
Chances are with the revenue shortfall; the capital spend will need to be re-prioritized. Breakout projects by essential and non-essential. Assume non-essential will be pushed either next year or the year after. Make sure to incorporate these changes into your scenario analysis so you can see the impact.
As you weather the current market conditions and revenue shortfalls, keep in mind the often quoted philosophy of professional money managers. Always raise money when it’s possible. Don’t wait until it’s necessary. If you wait until assessment arrears are increasing to explore loan alternatives many banks will be hesitant to lend. The same applies if you were thinking about a capital assessment. Residents may not be able to come up with the money and the result will be to create further upward pressure on delinquencies.
Financing capital projects does not have to be a 1:1 ratio of cost to loan amount. Think about augmenting the reserve cash on hand by partially funding a project with a loan. This strategy can help free up reserve contributions and additional cash on hand as a long term cushion.
Managing the finances for your community in the best of times is a difficult balance between the short terms desires to keep fees low against the long term capital needs of the community. Remember, the main goal needs to be to protect and if possible enhance the value of the community. Reserves need to be protected as much as possible. Cash is king in times of economic turmoil.
For best practices, contact professionals to help you craft a scenario analysis to drive your strategic initiatives.
