When a new development is being marketed at startup, the initial HOA operating budget is created based on estimates and projections – the improvements are usually incomplete at the time the budget is created. As a result, the as-built improvements may be slightly different than originally planned.
For real estate professionals marketing the new development, and for the developers themselves, it is important to know that the start-up budget prepared for the development contains accurate information.
- What are the individual building and common-area components? For example, a change made from a stone wall to installing a wrought iron fence makes a meaningful difference in the budgeting.
- Long-term replacement costs (reserves) are also very different for stone walls vs wrought iron fencing.
- Lifetime expectancies and long-term maintenance requirements are different for different components, so it makes sense that the most conservative budget approach would create more stable or balanced budgets when the time comes to address each component’s repair or replacement.
- How much will it cost to replace? Differences in furnishings and appliances can have a huge impact on the HOA budget — the replacement cost should be directly correlated to the elements initially included in the development. In other words, the budget should be structured based on replacement of “like kind” – if you install upgraded appliances to market and sell the facilities, the budget should be based on replacement of upgraded appliances, rather than standard economy items.
Many different people are involved in the processes of early planning, design, purchasing, and on-site construction, so it’s no wonder that changes sometimes go unnoticed at some point during the process. An “as-built” Reserve Study will provide the confidence and backup documentation to support the HOA operating budget, and can help to avoid issues that might develop later on if there are indeed variations between what was budgeted and what was built.
If you are unsure about any differences between what was projected in the original approved startup HOA budget, and the as-built product, and want to avoid potential problems, we recommend the initial Reserve Study within the first year. Doing so will provide you with the backup information you need to discern whether or not the approved startup budget is accurate, and whether adjustments may be needed to avoid long-term financial issues for your HOA.
Because of this, the DRE has a 20% increase and 10% decrease threshold in their budget approvals – meaning the HOA can increase or decrease their budget amounts (so long as they remain within the 20% up and 10% down threshold) and keep their DRE approval!
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