March 24, 2023
If you stay in touch with the United States economy and news, odds are you have heard the term “inflation.” From an economic perspective, inflation can be defined as a general increase in prices and a fall in the purchasing power of money. Whether you realize it or not, inflation is likely affecting your Community Association. Increases in insurance, contracts, and materials are just some of costs that Associations are experiencing due to inflation.
There are things that each Association can do to navigate this period of high inflation. Below are 5 items your Association should be doing to potentially combat inflation:
1. Conduct or Re-evaluate the Community’s Reserve Study
A reserve study is a capital budgeting planning tool for Community Associations that provides directional guidance on a community’s assets and the potential replacement cost of those assets. It's typically recommended that a reserve study be completed every 3 to 5 years. Most reserve studies will account for inflation and have an assumed inflation rate built into the long term financial planning tool of the study. It is likely that if your reserve study was not completed recently (within the last year) then the inflation rate that was accounted for in the study is low, which could mean you are not properly funding your reserves. With the increase in inflation, you should conduct a reserve study or revise your reserve study to confirm your inflation rate is proper so your Association can properly fund for future capital projects.
2. Shop Interest Rates on Investments
To combat inflation, the Federal Reserve has raised the federal funds rate by nearly five percentage points in the past year. Raising of the federal funds rate means it is going to cost the Association more money in interest should they need to seek a loan. However, on the flip side, banks are offering higher interest rates on items such as certificates of deposit (CD), savings accounts, and money market accounts. Community Associations should evaluate where their funds are currently deposited to see if they capitalize on the increased interest rates which will result in increased income. If your Association already has investments in items such as a CD, in some instances, it may make more sense to take the early withdrawal penalty to reinvest in a new CD with a much higher rate. Boards should evaluate if this makes sense prior to doing so as banks have different withdrawal penalties so it may not be worth withdrawing early in many instances.
3. Evaluate Assessments
One of the unfortunate consequences of inflation is increased costs to the Association. The Board of Directors should evaluate their current assessments to confirm if they are properly covering the costs. If assessments are not properly covering the Associations costs, the Board of Directors should look to increase regular assessments or potentially levy a special assessment. During this process, it's important to be transparent with owners and share financials news sooner than later so owners can prepare. Low assessments could result in the Association not properly being maintained, which could result in high costs in the long run.
4. Evaluate Contracts
To keep increases in assessments “on the lower end” during times of high inflation, it’s important to evaluate contracts, scope of work, etc. to see if there is any potential reduction in costs that the Association can seek. With many contracts, Boards can seek longer term contracts with vendors that lock in pricing which may help keep dues fixed. When evaluating scope of contracts, its important to note that cutting costs and scope may potentially lower curb appeal if the assets are not properly maintained. This could ultimately result in loss of property values.
5. Keep an eye on Delinquencies
Another unfortunate consequence of inflation is the potential increase in delinquencies. Inflation not only effects the Associations expenses, but many times it will adversely affect homeowners’ finances. It’s important for Associations have a good collection policy to make homeowners aware of how assessments are to be collected. Many Associations will work with homeowners via payment plans during hardships, but it's important for this to be outlined in the collection polices. Associations should be consistent in collecting delinquencies and follow their outlined processes.
Overall, inflation is likely an issue that many Community Associations are currently dealing with. If you're interested in learning more about how your Association can combat inflation, reach out to Priestley Management Company by visiting our website at www.priestleymanagement.com.