The mixed-use association budget plays a critical role in both short-term and long-term operations. A mixed-use community combines residential and commercial properties, so budgeting tends to be more complex. Still, board members must understand the distinction and how to allocate expenses.
What is a Mixed-Use Association Budget?
A mixed-use association budget is a financial tool that outlines the anticipated revenue and expenses over a specific period. It serves as a guide for mixed-use communities to manage their funds, track cash flow, and achieve their financial goals.
In a mixed-use community, budgets work a little differently. Traditional HOAs and condominium associations only have to account for residential and common area expenses. On the other hand, mixed-use associations must add commercial property expenses into consideration.
It is important for mixed-use boards to allocate expenses fairly among residential and commercial owners. The association’s governing documents should include guidelines for determining expense allocation.
Understanding Budget Components in Mixed-Use Communities
Just like with traditional HOA or condo budgets, a mixed-use association budget has two components: the operating fund and the reserve fund.
Operating Fund
The operating budget covers daily or recurring expenses. Examples include landscaping, maintenance, insurance, and utilities. Regular dues are the primary source of income for the operating fund.
Reserve Fund
The reserve budget covers major repairs and replacements. These are expenses that associations don’t incur regularly. Instead, they come into play when a component reaches the end of its useful life.
The reserve fund is a long-term financial planning tool. While mixed-use communities are not statutorily required to fund reserves, Section 215.005 authorizes boards to adopt reserve budgets. The association’s governing documents, on the other hand, may require reserve funding.
As with the operating budget, the reserves are funded through regular dues. Board members include reserve contributions in the annual budget, allocating that portion to the reserve account. Special assessments may also be used to fund reserves.
Residential vs Commercial Expenses: Why the Distinction Matters
In a mixed-use development, residential and commercial owners share space and infrastructure. Yet, different users place different demands on properties, buildings, and elements.
Commercial areas, for instance, often generate higher traffic. As a result, these spaces usually experience more extensive wear. Damage is also fast-moving, so components may reach the end of their useful life more quickly.
In comparison, residential areas don’t experience the same extent or speed of wear. Homeowners are typically responsible for their own homes or units, while the association bears the burden of common-area maintenance.
Of course, residential owners may use different amenities and services, too. The budget must accurately reflect the corresponding expenses.
Operating Expenses in a Mixed-Use Association Budget
The mixed-use association expenses in an operating budget commonly include shared, residential-only, commercial-only, and utility expenses. Boards usually use historical data, current trends, and economic factors to make these projections.
Shared Operating Expenses
Examples of shared operating expenses include:
- Master insurance policies
- General management fees
- Accounting and audit services
- Legal services
- Common-area lighting
- Security services
- Landscaping in shared areas
- Administrative expenses
Residential-Only Operating Expenses
Examples of residential-only operating expenses include:
- Residential clubhouse maintenance
- Residential amenity staffing
- Pool operations
- Residential fitness centers
- Resident event programming
- Residential access control systems
Commercial-Only Operating Expenses
Examples of commercial-only operating expenses include:
- Retail corridor cleaning
- Storefront maintenance
- Commercial signage maintenance
- Business directory systems
- Additional security for commercial areas
- Loading zone management
Utility Expenses
Examples of utility expenses include:
- Water allocation costs
- Shared electric costs
- Separate metering versus estimated allocation
- Common utility reimbursement
Reserve Funding in a Mixed-Use Association Budget
Reserve planning is more complicated than projecting operating expenses. Since different components serve different users, it takes more work to estimate the remaining useful life and calculate repair costs. Associations must also follow different replacement schedules.
When planning the reserves, mixed-use boards must take into account shared components, residential-only components, and commercial-only components.
Shared Reserve Components
Examples of shared reserve components include:
- Building roofs
- Structural systems
- Parking structures
- Elevators serving all occupants
- Shared mechanical systems
- Fire protection systems
Residential Reserve Components
Examples of residential reserve components include:
- Residential amenity facilities
- Residential elevators
- Resident lounge furnishings
- Residential access systems
Commercial Reserve Components
Examples of commercial reserve components include:
- Commercial entry systems
- Retail façade improvements
- Commercial HVAC equipment
- Business-focused infrastructure
How to Allocate Expenses Between Residential and Commercial Owners
There are several methods for allocating expenses among residential and commercial properties. Mixed-use boards must check their governing documents to know which method they are obligated to use.
- Percentage Ownership Allocations. Using this method, expenses are allocated based on ownership interests.
- Benefit-Based Allocations. This method allocates expenses based on who uses or benefits from a component.
- Usage-Based Allocations. To use this method, expenses are allocated based on actual consumption or demand.
- Separate Budget Pools. Residential and commercial cost centers determine budget allocation.
Best Practices for Planning a Mixed-Use Association Budget
Creating a budget in a mixed-use community can be a challenge, especially for volunteer boards. Boards should adopt the strategies below to develop a fair and clear budget.
1. Review Governing Documents
The CC&Rs and bylaws often determine how the board must allocate expenses between residential and commercial owners. Some documents establish separate categories, while others provide formulas for calculating shared costs. Before preparing the annual budget, the board must review these documents to ensure they are using the required method.
2. Conduct Regular Reserve Studies
A reserve study can help the board identify future repair and replacement costs for shared components. In mixed-use communities, reserve studies are particularly important because some assets may benefit all owners, while others serve only residential or commercial areas.
When crafting the mixed-use association budget, boards must consult this study to determine the appropriate reserve contributions. This will also help reduce the risk of special assessments or sudden spikes in regular dues.
3. Separate Shared and Exclusive Expenses
Allocating expenses is a must for mixed-use associations. Not every expense should be shared equally because some costs benefit only a select few. It is important to separate these costs to create a more accurate budget.
4. Communicate Budget Decisions Clearly
Disputes often arise when owners don’t understand how costs are allocated or why some costs are higher than others. The board should clearly explain the budget, including each line item, at the budget meeting. This way, owners will know why they must pay a specific amount and will be less likely to challenge the budget.
5. Work With Experienced Financial Professionals
Mixed-use communities often face budgeting challenges that are more complex than in traditional associations. Board members should not be afraid to enlist the help of certified professionals to make the process easier. Reserve specialists, accountants, and HOA management companies can all provide valuable guidance.
A Financial Asset
Developing a mixed-use association budget requires an understanding of expense allocation, residential vs commercial costs, and best practices. With a clear and carefully crafted budget, the community can avoid disputes and operate smoothly.
Graham Management offers exceptional mixed-use association management services to Houston communities. Call us today at (713) 334-8000, request a proposal, or contact us online to learn more!
RELATED ARTICLES:
- What Is A Mixed Use Community Association?
- Common Problems In Mixed Use Community Associations
- HOA vs Property Management Explained: Roles, Responsibilities, And Benefits