Jan 25, 2023

Effects of Inflation on HOAs and Ways to Navigate the Increased Costs

Sponsored Content provided by Dave Orr - CEO, Community Association Management Services

Everyone is feeling the effects of higher inflation these days, and community associations are no exception. Everything seems to be getting more expensive, from increases in utility bills to the price of goods and services. But there are ways board members can try to navigate these increased costs without passing them on to your members or adversely affecting the quality of life in your community. In this blog post, we'll explore how inflation has affected community associations and what you can do to offset those increased costs.

Delays in Completing Capital Projects
Inflation means that spending power weakens, and costs of labor and materials rise. This can affect the community association in various ways, but one of the most pressing issues is delays in project completion. As a result of these delays, board members may need to allow more time for projects to be completed – it may not be realistic to expect projects to be finished within the same timeline as in previous years. To make up for any inconvenience this may cause homeowners, HOA boards should strive for clear communication about the timeframe and projected costs associated with project completion during inflation. In addition, non-essential projects may be deferred to a future date.

Increases in Regular Assessments
Moderate inflation is expected in a healthy economy; therefore, the board should ensure that assessment levels are reviewed and adjusted annually to keep pace with increases. Bigger inflationary spikes mean the costs of running a community association rise disproportionately, creating a strain on the budget. To avoid making special assessments and keep operations running as smoothly as possible, boards should adjust regular assessments upwards when expenses rise, and careful planning and budgeting will help minimize the impact. Essentially, assessments are calculated based on projected expenses and should reflect the cost of doing business in a particular year. Once decided upon, assessments must be collected from all members to meet financial obligations. Tougher economic times often drive higher delinquencies, and it is important to plan and budget for realistic levels of uncollectible assessments so that cash-flow issues can be avoided.

Impacts on Reserve Funds
Inflation can have a dramatic effect on a community association's reserve funds. This is because it can cause the cost provided by the reserve specialist to become outdated, which could lead to insufficient reserves. In other words, as prices rise with inflation, the projected amount of money needed for future repairs and replacements may no longer be accurate. Updating the reserve study will provide board members with anticipated costs that more accurately reflect their financial situations, helping them plan and more proactively manage resources. In addition, updating a reserve study now will help communities reduce their long-term financial risks and ensure they are well-prepared for short-term and long-term expenditure needs. Experts recommend that reserve studies be updated every 3-5 years so that long-range plans can be adjusted based on changing economic impacts and reassess the status of capital infrastructure and adjust the projected life of the asset.

Increases in Insurance Premiums
Inflation can widely affect our lives, including the increased cost of insurance. Insurance premiums are unavoidable for any association, and rising premiums can present a significant financial challenge if left unchecked. To ensure that these premiums remain manageable, board members should review the association's policies regularly along with its insurance agent. But, before you go reducing the amount of the association's insurance coverage, remember board members must understand what coverage is required under the association's governing documents and budget accordingly. 

Reviewing Service Contracts
Board members need to take proactive steps to help manage costs in an inflationary environment. Reviewing service contracts and getting estimates from other vendors can be a great starting point. Community associations can select the most cost-effective services by exercising due diligence while not sacrificing quality or squandering community funds. Additionally, regular expense reviews will allow board members to detect any potential spike before it negatively affects their budget and operations. These measures should be practiced for margins to remain healthy within the current economic landscape.

Alternative Funding Sources
When inflation throws a community association a curveball and a major repair needs to be taken care of quickly, it can be difficult to come up with the extra money. Fortunately, there are funding alternatives that can help get projects completed as soon as possible to avoid even costlier damages in the future. One way is through loans and lines of credit–while expensive options, they provide the necessary funds without abandoning any other current objectives or postponing the repair until the association has saved up enough money. Even if securing a loan may seem like an extreme measure for the present situation, it could be considered carefully when previous plans may not suffice to cover all costs.

Financial Transparency
Keeping community finances and the effect of inflation in mind is a priority for community association members. To ensure their action plan is effective, board members must meet routinely to discuss options and communicate openly and transparently with the community about any cost increases due to inflation. They should explain why and how prices are changing, as well as stay vigilant about monitoring what expenses can be reduced or kept under control. With careful planning, board members can prioritize short-term and long-term budgeting strategies to help accommodate inflation with minimal disruption to the community.

In conclusion, inflation has a definite and real effect on every community association. It's critical for board members to be aware of it, understand it, and address it accordingly. Effective communication and open dialogue with residents is the best way to do this. Educating the community about how inflation can shape financial decisions within the association is also important. 

By readily making this information available, residents will understand any changes made by the association more easily, ultimately leading to a happier and better-connected community. In addition, having a plan in place for managing potential problems early can help insulate against most of the negative impact that rising prices can cause—it's all about being proactive!

Board directors who recognize these issues should safeguard their communities with detailed action plans to avoid long-term ramifications associated with cost-of-living increases. Taking control of rising prices so they don't have control of your community is key!

About Community Association Management Services
In business for over 32 years, CAMS is North and South Carolina’s premier community management company. With experienced local managers in each of its nine regions, CAMS is dedicated to providing innovative solutions to the community associations it serves. 

Additionally, CAMS was featured on Inc. Magazine’s 2022 Inc. 5000 list of the fastest-growing private companies in America. To learn more, visit www.camsmgt.com/choose-cams.

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