CAI-NJ November 2020

ers. The problem with this is that the initial budget does not anticipate any transition costs. As such, the monthly fees being charged are not sufficient to cover the additional invoices arising from transition. This can put a significant strain on an association’s cash flow and can lead to the accumulation of large operating deficits. Furthermore, when sufficient cash is not available to pay these new invoices, boards are left to find ways to “cut spending” in other areas. Many times, this leads to a lack of funding in the capital reserves. In order to prevent this, it is very import- ant for boards to review and update the budget on an annual basis to ensure that an appropriate fee is being charged to carry the costs of transition. It is important to remember that settlement funds received through transition are not intended to fund the transition process itself. Monies awarded to an associa- tion through a transition settlement are intended to cover past funding short- falls of the developer, remediation of construction defects within the site, etc. As such, running large deficits as a result of an ongoing transition and settling those deficits with settlement monies is not an effective approach, and will only lead to financial strains down the road. 2) Isolating the Activity: As noted above, if not properly planned for, the transition process can put a significant strain on an associ- ation’s finances, leading to operat- ing deficits and underfunded reserve accounts. In my experiences, I have found that boards find it very helpful to segregate all financial activity relat- ed to transition from the other funds. CONT I NU E S ON PAGE 19

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