Planning Ahead for 2021: A Brief Guide to Annual Budgets
As we approach the final months of the year, community associations and their Board of Directors must start planning for 2021. There is no question that the global pandemic caused by COVID-19 this year has unexpectedly and significantly impacted every facet of our lives. Condominium Associations have particularly felt the financial repercussions of the pandemic as some members have been unable to pay their monthly assessments, which has resulted in an influx of collections.
Moreover, many associations have been forced to incur unplanned expenses in complying with CDC guidelines to maintain the health and safety of their residents around the condominium property. The foregoing have, without a doubt, taken a toll on associations’ operating expenses and must be taken into consideration when planning the annual budget for the coming year.
Section 718.112(e), Florida Statutes requires condominium associations to hold a meeting each year to adopt an annual budget. Board members will work with the association’s property manager to prepare the draft budget for the coming year in order to have same adopted at a duly noticed budget meeting. Planning and preparation for the annual budget should occur several months before the start of an association’s fiscal year.
A condominium association’s annual budget is generally comprised of an operating budget and reserve budget. The purpose of the operating budget is to ensure that the operational needs of the association are identified and provide a means to estimate the association’s expenses for the year. Section 61B-22.003(1), Fla. Admin. Code, requires that an association’s budget:
- state the estimated common expenses and expenditures annually;
- disclose the beginning and ending dates of the period covered by the budget;
- show the total assessment due for each unit type on a monthly basis, or for any other period for which assessments will be due; and
- include all estimated expenses or expenditures of the association.
This includes a review of all of the association’s financial obligations under maintenance, utilities, and service provider contracts to determine how much must be allocated for the payment of same on a monthly and annual basis. With the health and safety threats of COVID-19 still impacting our daily lives, associations should factor increased delinquencies on assessments and cleaning expenses into their operating budget.
Capital Expenditures and Deferred Maintenance
The budget must also include reserve accounts for capital expenditures and deferred maintenance. Section 712.112(f)(2)(a), Florida Statutes expressly requires that these reserve accounts include roof replacement, building painting, pavement resurfacing, in addition to any other item that has a deferred maintenance expense or replacement cost that exceeds $10,000.00. Calculating the proper amount of reserve funding for a given year requires estimating the replacement cost for each reserve component and its remaining useful life. Typically, condominium associations will engage a qualified third party, such as a reverse analyst or engineering company, to perform a reserve study on these reserve components in order to determine their replacement costs and remaining useful life period.
About the Author: Katrina Sosa concentrates her practice in the areas of complex business law and litigation, condominium association law and construction law. Since joining the firm, she has worked on both litigation and transactional matters. Katrina has worked on various phases of construction defect litigation ranging from the inception of the case to preparing for trial. On the transactional side, she has worked on a shareholder buyout for a local food company as well as real estate acquisitions.