By Alan D. Seilhammer, Community Association Banc/CondoCerts
remember growing up hearing the tales of children being given spoonfuls of cod liver oil for all of the healthful benefits it could provide. It was reputed to be a horrifically distasteful experience. But, the product truly offered healthful benefits against some pervasive health problems of the day. The popular phrase is: No pain, No gain.
We are well aware of the economic challenges the entire country faces. Some regions have faced a more dramatic impact than others. Foreclosures, food price increases and the massive, broad-based impact of the high cost of energy, both directly and indirectly. The 2009 budget is likely to be one of the most difficult challenges a great number of associations are going to deal with.
The foreclosure environment might leave the association with no good solutions. Consequently, the association simply has to make a decision on how to proceed and work through it. The challenges are that the court system is bogged down with the huge volume of foreclosures. Your attorney’s office may be struggling with the same overwhelming level of volume. The financial entity that provided a mortgage on the unit may be have gone out of business. Or, the financial entity may be unresponsive because of the high volume of defaulting mortgages. It is also becoming routine that if a mortgage holder has foreclosed a unit, that mortgage holder is not paying the association fees. If the FDIC begins taking over financial institutions that hold foreclosed units, the delays in obtaining a restoration of association dues could become even more dramatic. The environment, in total, could take a unit from being non-paying for a typical 6 months to being delayed for 18 to 24 months. In states such as Nevada and Florida, non-paying unit holders can make up more than 25% of all unit owners within the association.
The data suggest that the pace of increasing foreclosures might continue through the balance of 2008 and perhaps into the first quarter of 2009. RealtyTrac reports home foreclosure filings increased 121% through June versus the same period last year based on a survey of the country’s 100 largest Metropolitan districts. Let’s be clear, the high pace of foreclosures will continue. After the level stops increasing, there will still be a substantial level of foreclosures to work through. It is just that the trend will not be increasing. With all of that foreclosure activity occurring, it is likely that the 2009 budget will have to take into account the number of units that will not be paying all year. Plus, the costs of foreclosing the delinquent unit owners — both person and mortgage holder alike.
It is this number of non-paying units that the association must realistically factor into the cash flow needs of the association’s 2009 budget. This will be a very strenuous budget impact to sell to the unit owners in good standing. They are likely to be under financial stress, too and will now need to carry their neighbors that are not paying. Simply put, a community of 100 units that has 10 units that are not paying requires that the remaining 90 units cover the association’s entire budget.
The second budget-busting crisis is the increase of energy costs. We all need to come to grips with the fact that these costs are likely to continue increasing because of the growing oil use in China and India. The additional trickle-down effect is that increased energy costs will dramatically increase the costs of absolutely everything else: services and goods. There is not a single line item in the association’s operating budget that can legitimately be considered currently adequate. Routine small increases that might have been justifiable in the past will prove to be inadequate.
As an example, the huge office building where an insurance company operates has experienced soaring energy costs, paper costs have increased, and employees want more money to support the personal costs they are experiencing. Expect insurance premium increases because of this. Then, think about what the landscaper is experiencing. The fuel prices for his trucks and equipment has gone up, his labor costs are higher for the same reasons the insurance company’s people need more. The seed and plants that he uses are more expensive because transportation costs have increased in getting the product delivered to him. It goes on and on across all industries.
To address this matter appropriately, every vendor needs to be contacted prior to developing the 2009 budget. The basic two questions to the vendor will be: “How much of a price increase can the association expect for the product or service provided?” and “When will it go into effect?” If you cannot get a vendor to suggest a potential price increase, increase the budget line item by at least 20%. Why 20%? Regarding price inflation for 2009, we are all in an unpredictable no-man’s land. 20% is a large increase. If it proves to be too much, you have been prudent to cover the expense, with the then-unused portion simply being placed into reserves or covering a higher expense posted elsewhere in the budget. If the expense is greater than 20%, then you have at least gone a long way to anticipating where that expense might be.
Unit owners might scream loudly when presented with the needed 2009 budget. But there is no escaping the reality of the situation. They all have the right to move if they cannot support the cost of living in the association. A lack of planning on the part of the Board or manager did not leave the association in a situation to experience these financial impacts. Prepare the unit owners for the budget that will be presented. Start sending them notices and include explanations as to why the budget impacts are going to occur. It would be prudent to have preliminary unit owner meetings with the association’s professional team present. It could deflect or diminish the unit owner anger away from the Board or Manager. The unit owners will want to hear from the association’s attorney about the difficulty that exists with turning non-paying units into paying units. Having the association’s Certified Public Accountant present to help explain the general increase in line items of the operating budget could mitigate the disbelief.
Overall, being prepared to explain why the budget has reached the level that it has will be essential to confirm that the Board has studied the matter in depth. Having external professional support will demonstrate the believability of the board’s claim that the budget needs to be at the level presented. Informing the unit owners in advance, in the end, help constrain opposition. In conclusion, the Board has a fiduciary responsibility to present a budget that is satisfactory for the overall community’s financial well being. This will likely mean that some unit owners can no longer afford to live in the community. Very tough times, with very tough decisions to be made.