In a constantly changing global business environment, it seems as though challenges and complexities will only increase. First, it was a challenge with supply chains, including material shortages and logistics issues. Now, supplies seem to be back, and stores filled with products, but we are faced with inflation at a forty-year high.
The consumer price index, which is a key measurement of inflation, increased by 8.2% in September compared to the previous year. This meant that one bag of goods that cost $100 in September 2021 now costs $108.20 today. It does not seem like much, but the impact is felt every time a purchase is made across every retailer and service a person uses for a business or personal transaction.
For managed communities, inflation creates many adverse impacts on operations:
Yet, every business, including managed communities, must look at the options because it is important to keep the budget balanced and have enough reserve funds available to handle everything from preventative maintenance to unexpected repairs to ongoing asset upgrades.
When it comes to rising prices due to inflation, there are not many options on how to address the issue. Typically, the additional costs are passed onto customers and clients or, in the case of a managed property, the homeowners. The costs typically involve increasing monthly assessments or requesting a one-time special assessment payment.
The problem in raising these assessments is that those homeowners already need to cover all their other expenses that have also gone up – groceries, gas, utilities, and services they use. And, very few salaries are rising at the same rate as all these additional costs.
Another option would be to downsize amenities like closing the clubhouse or pool for an extended amount of time. While this option would save on expenses and reduce the likelihood of passing the costs on to homeowners, it would also potentially lower the value of the community and homes within it. Also, there would be significant work and cost to then get those amenities back up and running when costs normalize (if they even do).
Some managed communities have considered deferring repairs and maintenance for much longer than they originally intended. However, there is a large risk in doing so that can create larger issues and greater costs at stake. Doing so can be a huge gamble, and there are no signs that prices for materials and labor will be coming down any time soon.
So, what can be done? We have some ideas.
With such fluctuating costs, it is important to reassess managed community budgets each year as part of a living reserve study that analyzes costs for inflation by continually delivering updated analytics. Start by determining how much cost of living is increasing based on the consumer price index. Then, see if fees or assessments must be raised or the reserve should be increased.
When you have made these decisions, try to provide notice to prepare homeowners. Also, explain why it’s important to use reserve study research and evidence like the consumer price index and specific spiking costs so your community understands that you have done everything possible before increasing assessments.
There are instances where we’ve seen larger projects still come in on-budget despite the ongoing rise in inflation. While each managed community may have different projects they want to tackle and have their own unique financial position, there are some options to consider during these inflationary times outside of just asking homeowners for additional funds.
One strategic approach is to consider other available funding tools, including HOA loans. If there is a large capital project set to begin in the next few years, the cost of the project could go up significantly by the time it is set to begin. In this situation, an HOA loan makes sense as long as there are healthy reserve funds to repay the loan.
Another approach is to find ways for managed communities to work together to make bulk purchases of supplies for a greater discount than bought separately. Similarly, if managed communities were close geographically, there could also be the potential to work with the same vendors and get a multiple community discount for preventative maintenance and repairs.