Homeowner Association Financial Analysis: Part I

Published in the ECHO Journal, February 2007

One-Year Data Comparisons

In the fall of 2005, my “staff” (two teen-aged sons) and I developed a spreadsheet containing financial information from all the homeowner association financial statements that I currently review, now totaling 60 associations. Professional standards for CPAs have been recently amended to emphasize more “analytical review” procedures by the CPA when performing a financial statement review and developing the financial statements that are required annually by California law when associations have more than $75,000 in combined assessment and other revenues. One of the analytical review procedures available is to compare the entity’s financial information with comparable information from other entities in the same industry, but not a lot of that kind of data exists for homeowners associations.

I had several goals in mind when I prepared the initial spreadsheet.

  • Develop data specifically for the Santa Barbara geographic region. In the study, 57 of the associations are in South Santa Barbara County and three are in North Santa Barbara County.
  • Establish baseline amounts that could be updated continually as financial reviews were prepared for 2005 and fiscal 2006 and examine the changes in the amounts over a one-year period.
  • Create an ongoing project that can be reviewed in the future to determine longer-term trends.
  • Develop a range of data, minimum, maximum and median (half above and half-below), to compare a particular association’s data set with all the data in the sample.
  • Provide a schedule to each association in the sample to compare its own data to the total sample data.

The initial schedules to the associations in the sample went out in November 2005. These schedules were sent to my association clients who use the calendar year as their reporting year. An updated schedule is also provided at the conclusion of the review engagement (ed—required by the Davis-Stirling Act for all associations with yearly incomes exceeding $75,000. These schedules have been the source of much discussion between board members, association managers and me. We know that homeowner associations are not a homogeneous group. We have new associations and mature ones. We have town-home style condominium associations where the association has a lot of common area maintenance responsibility. We have planned developments where the association has limited common area.  Some associations pay for a lot of the members’ utilities. Other associations pay none. Many associations are responsible for building insurance including earthquake and flood. Others are only responsible for limited common area elements and insurance coverages for the board of directors.

An unexpected result (at least to me) was that board members and managers have been able to cite data in the reports to back positions for the need to increase assessments and to confront all-too-common peer pressure to not raise monthly assessments. Comments such as “We already have the highest monthly assessment in town” or “If we go over $300 per month, we won’t be able to sell our units” are common. These reports have thus been used to support facts and debunk myths.

Homeowner Association Financial Comparisons and Analysis: Fall 2005 to Fall 2006

The schedule below compares data from Fall 2005 to Fall 2006. The data is historical. The fall 2006 data includes calendar year 2005 plus some associations whose fiscal years ended during 2006. Commentary follows:

Financial Data Categories (Median), Per Member Per Month Fall 2005 Fall 2006 Dollar Change Percent Change
Monthly Assessment $285.00 $318.45 $33.45 11.74%
Operating Assessment $214.40 $234.32 19.92 9.29%
Reserve Assessment $72.22 $73.60 $1.38 1.91%
Rate of Return – Investments 0.92% 1.75% 0.83% 90.22%
Utilities Expense $60.75 $64.39 $3.64 5.99%
Common Area Maintenance $90.93 $94.61 $3.68 4.05%
Insurance $43.62 $54.22 $10.60 24.30%
Administrative Expense $23.26 $26.04 $2.78 11.95%
Reserve Expense Paid Out $44.24 $57.29 $13.05 29.50%
Cash & Investments per Member $2,663.00 $3,093.00 $430.00 16.15%
Delinquent Assessments per Member $16.44 $14.11 $-2.33 -14.17%
Consumer Price Index $188.50 $196.50 $8.00 4.24%

Monthly Assessment

The median monthly assessment increased from $285 to $318.45 in the past twelve months, an increase of 11.74%.  This increase is substantially higher than the 4.24% inflation rate for Southern California measured by the Bureau of Labor Statistics.

Operating Assessment

The median operating assessment posted a nearly $20 per month increase or 9.3%.

Reserve Assessment and Expenses

The median monthly reserve assessment only increased $1.38 or 1.9%. The total monthly assessment increase of $33.45 exceeds the sum of the operating and reserve increase of $21.30 due to the independent computation of the operating and reserve assessments’ median amount. Reserve expenses paid out (median) were $57.29 per member per month – $16 less than the $73.60 collected for reserves.

Rate of Return

During 2004, interest rates hit historic lows. The Federal Reserve Bank’s “11th District Cost of Funds” index hit a low of 1.71% in May 2004. Since then, the banks’ cost of funds has steadily increased to 4.38% as of September 2006.  Those who have adjustable rate mortgages (ARM) are familiar with this index. A borrower who has an ARM at the index plus 2.6% has seen his interest rate increase from 4.3% to 7% during this period. Short-term CD rates that were below 2% three years ago are now up to 5-5.25%.

Association return on investments tends to lag these indices. Cash in checking accounts may earn no interest or funds in some savings and money market accounts earn less than 1 percent. Returns have increased from the Fall 2005 median of 0.92 percent to the Fall 2006 figure of 1.75 percent. Because CD rates have been in the 5 percent range for most of 2006, I expect that the rate of return amount will continue to increase during 2007.

Utility Expense

The median association utility costs increased $3.64 per month to $64.39 per month, an increase of 6%. For the median association, utilities comprise nearly 24% of the operating assessment. Natural gas prices increased substantially after Katrina (August 2005) while electric costs increased early in 2006. Many water and trash rates increased 4-5% and some, like Carpinteria Water, had double digit rate increases.

Common Area Maintenance

The median association showed a 4% increase in costs from 2005 to 2006. At $94.61 per month, the median association allocates 42.6% of its operating assessment to common area maintenance.  Labor costs for landscape and other maintenance services tend to be tied to the Consumer Price Index. Note that the minimum wage will increase 11% on January 1, 2007 from $6.75 per hour to $7.50 per hour and this will indeed have a palpable effect on common area maintenance budgets for 2007 and beyond.


Insurance costs increased by over 24% for the median association from 2005 to 2006 or $10.60 per member per month. This increase is computed before the latest round of insurance premium increases. The median association was spending $54.22 per month per member on insurance. On a percentage basis, the median association is spending nearly ¼ of its operating assessment on this one item. Board members and managers have been frustrated by the current insurance markets. Late cancellation notices, skyrocketing premiums (double/triple), and the lack of choices in coverage have drained association resources from other obligations.  These costs have gotten so high that a bank is offering to make a loan to finance premiums at rates lower than insurance companies.

Administrative Costs

These costs represent about 12% of the median association’s operating costs and include expenses such as management, accounting, legal, office supplies and income taxes The increase for the median association was $2.78 per month. Some of the increase can be attributable to increased income taxes on increased investment income from 2004 to 2005.

Figure 1 shows the relative size of each of the four major components of an association operating budget. This chart only covers operating items, no reserve funding nor reserve expenses. Administrative costs are approximately half of insurance and utility costs while common area maintenance is just over 40% of total operating costs.

Delinquent Assessments

The median amount of delinquent assessments per member actually declined to $14.11 per member per month. An inordinate amount of legislative initiative has been spent on restrictions in collecting assessments. For many, but not all associations, collections are a non-issue. Yet, the increase in mortgage and home equity loan interest rates noted earlier is causing a higher percentage of owners to become delinquent or default on their mortgages. Managers of associations with affordable units are noting an increase in delinquent assessments as a result of the current interest rate environment. It is possible that a highly leveraged unit could be foreclosed upon by the lender resulting in lost assessments to the association because associations are last in line behind loan lenders.

Cash and Investments

In the face of rising costs and pressure to hold the line on assessments, the median association still managed to increase its cash balances by $430 per member during the year to $3,093, a 16 percent increase. While this may sound to some people like a lot of money, it really isn’t when you consider that costs of major repairs have also increased.

There is a substantial range between the minimum and maximum values in each category. For example, a couple of associations have master-metered electricity, which means that the association is paying for each unit’s electric bill. Insurance costs can fluctuate if the association does not carry earthquake insurance or is not responsible for building insurance at all. Some associations have major landscaping responsibility, others none at all. Some associations operate a full on-site management office and handle vacation and short-term rentals for their members. And finally, some associations are responsible for many common area components, others very few.

This wide range of values is why I have used medians throughout this analysis rather than averages. The “median” of a sample of data is the midpoint of the group and is considered to be less susceptible to skewing of the results by unusual data than the “average” of that same group of data. For example, the association in our local sample data that has a monthly assessment of $2,164 (yes, that is not a typo) would increase the average monthly assessment for the total sample of 60 associations by $35 by itself. Using the median treats each association the same. The total number of dwellings in the sample is nearly 4,400, a significant portion of our region’s housing inventory.

Figure 2 shows how wide the range of costs can be. The first column is the minimum amount (would be the lowest rank – 60th). The second column is the 25th percentile. One-fourth of the data would be below this number while ¾ would be above it (rank – 45th). The median amount is where half the amounts are above and half are below. The 75 percentile is where three quarters of the data are below the amount while ¼ is above. And finally, the maximum is the highest amount reported – rank equal to 1.

Homeowner Association Financial Comparisons Range of Assessments and Expenses: Fall 2005 to Fall 2006

Per Member (Unless Otherwise Noted) Minimum 25th Percentile Median 75th Percentile Maximum
Monthly Assessment $100 $238 $318 $405 $2,164
Operating Assessment $80 $177 $234 $313 $2,164
Reserve Assessment $0 $50 $74 $104 $226
Rate of Return – Investments 0.00% 1.28% 1.75% 2.32% 5.75%
Utilities Expense $9 $38 $64 $91 $155
Common Area Maintenance $37 $66 $95 $151 $1,367
Insurance $5 $39 $54 $79 $434
Administrative Expense $2 $20 $26 $39 $188
Reserve Expense Paid Out $0 $21 $57 $139 $728
Cash & Investments $555 $2,125 $3,093 $5,291 $32,573
Delinquent Assessments $0 $0 $14 $44 $544

ECHO member associations that are not in the 60-association database can develop their own information from the annual financial statements prepared by their CPAs, property managers, bookkeepers or treasurers and make comparisons with the results in this article.

Editor’s Note: Part II of this article that looks at 10-year cost comparisons will appear in the March issue of the Journal. Watch for these interesting results.

Michael Gartzke, an ECHO member, is a Certified Public Accountant with a large homeowner association practice in the Santa Barbara area. He is also the coordinator of the South Bay Homeowners Group with a membership of about 120 associations.