Replace Your Plumbing At 50 Years? 60 Years? Not So Fast…
You may have been noticing an increase in the frequency of plumbing system replacement, at very high costs. Now that a significant portion of the housing stock we serve within Washington Community Associations has reached or is near the 50-year mark of life, expect that trend to continue. But what do you plan for in terms of timing, and cost? Why isn’t total replacement typically in your reserve study?
Answering the last question first, reserve studies are limited to exterior visual inspection and research, for budget purposes, guided by National Reserve Study Standards that state:
must be common association responsibility;
must have predictable useful life;
must have predictable remaining life;
must be significant in cost.
It is the hidden and unpredictable nature of plumbing that often keeps replacement out of the reserve study, unless there is a higher level of evaluation underlying the projected timing and costs. There are so many other issues that associations know about and can see every day, that cause plumbing to go out of view.
It is also a challenge to plan for, because there are many types of plumbing systems, configurations and site conditions that can lead to full replacement in as few as 15 – 20 years, or as far away as 75 – 100 years. There are different material types, grades and wall thickness of piping, water chemistry, fittings, etc. As reserve study providers who regularly track actual expenses in our region, we have noted replacement costs around $10,000 per unit, to recently over $90,000 per unit factoring: asbestos, tight in-wall install conditions, currently high inflation and extensive unit interior repairs.
So again, what do you do? We suggest that you begin by hiring a reputable engineering consulting firm to thoroughly evaluate your particular system conditions, providing recommendations for both near-term care and the most likely timing and rough order of magnitude cost, specification options as basis for planning. This is our approach as proactive reserve budget consultants.
At the end of the day, it is better to have an idea when this large expense may be coming, than continuing to let it slip from view, to someday turn into an even larger disruptive and costly “surprise”.
CASH! Everyone likes cash! Associations are no different. Without enough cash, association management and community property can become neglected, often leading to future major repairs requiring loans and special assessments. Understanding what activities have the most impact on cash balances is vital to the future success of an association’s operations. As managers and board leaders, it is so important to review cash activity and balances continuously. Be proactive in a timely manner. Not reactive two years down the road.
Cash includes petty cash, checking, and money market accounts. Remember from the last blog, assets represent what an association owns. We recommend a serious review of cash every month. Cash balances are going to significantly impact an association’s ability to pay for budgeted expenses. Not addressing near term cash challenges can result in current and future budget constraints and economic pressure on the association and its members, including surprise assessment increases. (Please refer to our article on budgeting which discusses assessment increases, at www.hoacpa.com).
If you have significant owner delinquencies, your cash holdings will be negatively impacted. We recommend that you review the accounts receivable balances in conjunction with a review of cash balances every month. As assessments receivable/delinquencies increase, you will usually see a decrease cash balances. Addressing reductions in cash received compared to budgeted revenues will help you to determine if you also need to work on reducing expenses. Know how much money is received each month.
Contributions Of Assessments To The Reserves Fund:
Associations budget for monthly contributions of assessments to the reserves fund. When associations do not make payments from the operating fund to the reserves fund each month because there is not enough money in operating bank account, the reserves fund will start to be underfunded. The association still has a liability to fund reserves per its ratified budget. Not funding reserves because of operating fund shortages will lead to significant cash pressures as major repairs and replacements are deferred and future special assessments and loans may be required to fund expenditures.
We will continue to address various aspects of cash management and controls surrounding cash in future blogs.
By Newman CPA
Chapter Happenings Sponsor, May 2021
By: Jeremy Newman CPA. Newman Certified Public Accountant PC.
Balance sheets present the financial position of your association as of a certain date, usually the month or year end.
What Are The Classifications Of Accounts On My Association’s Balance Sheet?
Equity or Funds
What the association owns or owns the rights to, including:
Assessments and other receivables
What the association owes or is obligated to pay, including:
Accounts payable (unpaid vendor invoices)
Equity or Fund Balances
The association’s net worth. Generally, represents the cumulative revenues minus expenses over the life of the association since its inception.
Basis of Accounting
One of my favorite topics is “What basis of accounting is used to present your association’s financial statements?” Some balance sheet accounts will not be presented on financial statements if your association presents its financial statements using the cash basis of accounting.
Being aware of what you are reading, as well as what may be missing from the balance sheet you are reviewing is important to your understanding of the association’s financial position each month.
We will dive deeper into the individual accounts like cash and receivables in future blogs in this Series. A short example of what to look forward to:
Cash – Do you know what your bank accounts are used for? Do you verify balances? Are you pursuing returns over security?
Receivables – Are you expecting to collect everything that is owed to the association? Did you bill for all services?
Payables – How much does the association owe to vendors?
Prepaid assessments – Are you shoring up today’s cash balances with money collected for future expenses?
Operating Fund (Equity) – Does the association have excess funds, has it been over-spending?
By Newman CPA
Chapter Happenings Sponsor, May 2021
By: Jeremy Newman CPA. Newman Certified Public Accountant PC.
A Strong Reserve Fund Is The Strongest Hedge Against Inflation
What is a Community Association’s strongest hedge againstinflation? A strong reserve fund! As of the end of April, 2021, increases in the pricing of lumber, asphalt binder, and other materials have risen well into the double digits when compared to the previous year. Costs for the “Big 9” projects (painting, roofing, asphalt, siding, windows, decks, plumbing, elevators, HVAC) are simply wild and unpredictable right now.
If your association is less than 50% funded, and any of these major projects are due within the next few years, get moving, now. Armed with a well-conceived scope of work, specifications, bid documents, and some time, you’ll stand a good chance of achieving the best value for project $$$ spent.
Strong reserves can hedge against significant price swings, and the extra costs of emergency work, Special Assessments, deferred maintenance, bank loans. Don’t be tempted to cut corners – I can confidently say after thirty plus years of experience, your best value is to hire a reputable consulting firm to oversee the process, and the work for these major projects.
Reserves are all too often thought of as for some distant “rainy day” event. Reserves are for the ongoing, measurable deterioration in your community, and should be thought of as real as any other bill of the association. Past the cautionary notes, there is good news if you are a part of a well-run, and well-funded community association. With Reserves Percent Funded of 70% or more, you have a 1% or less probability of a Special Assessment. For these communities, the news gets even better. Our studies show that on average, resale prices are ~12% higher than similar properties in their market area with weak reserves.
Think about that.
If you start with a median Seattle area condo unit value of $500,000 and to strongly fund reserves and building maintenance, have been paying ~$150 a month more in assessments over the last seven years than your weakly funded neighbors, you will have paid somewhere around $12,600 more, to realize a sales price $60,000 higher. That’s a nice return. Communities that understand this, and are proactive, vs. reactive, are: easier to live in, easier to manage, and as it turns out, likely a better investment!
 Chicago Mercantile Exchange lumber futures  WSDOT Asphalt Binder Reference Cost  Association Reserves, Inc. database
Coronavirus Introduces New Legal Considerations for Common-Interest Communities
By Allison Peryea, Esq.
The novel coronavirus compelled communities to confront a number of new challenges with legal implications. The overarching challenge has been for an association to figure out its role in a completely new type of environment. While associations always have had to be mindful about making sure people are safe in the common areas, the reality of this pandemic is that associations have had to explore the scope of their authority to preserve that safety. This can involve questions about who to let into shared-access buildings, and what information to report when a resident tests positive for the illness. (The general rule is for the association to exercise its right to regulate the common areas using its reasonable discretion, while staying mindful of people’s privacy considerations.)
Other considerations have involved concerns about liability exposure when an association decides to—or declines to—get involved in efforts to bring neighbors together to provide support for each other, whether it is to pick up prescriptions or lend exercise equipment. The general rule in that context is that an association should be comfortable with relaying helpful information among neighbors, but that associations should be wary about serving as the “center of command” for these sorts of efforts.
“Stay Home, Stay Healthy” Order Considerations
A third issue involves the governor’s “Stay Home, Stay Healthy” order. A question arises about an association’s right or duty to enforce the terms of the order—for example, if association management sees people gathering in recreational areas in violation of the order. The general rule in that case is that an association is not responsible for enforcing the order—but it can take steps that dovetail with the order with respect to keeping the common areas safe. This could include, for example, requiring people to stand at least six feet away from the concierge.
The question of enforcement of the order does come up with respect to construction projects. While many construction projects are on hold, some are ongoing. It is up to each association to determine whether an ongoing construction project presents an unreasonable danger to residents in the current public-health situation. For instance, it may be appropriate to hold off on projects involve likely contact between workers and residents with immune-system concerns.
Associations & Board Meeting Considerations
A final issue that many communities have faced concerns association and board meetings. Fortunately, today’s technology has facilitated face-to-face meetings over the phone and computer with programs such as Skype and Zoom. The question has arisen however whether Boards and owners have the legal right to hold meetings and take action without an in-person meeting.
The good news is that most communities have the legal right to conduct board and owner meetings over the phone or by computer so long as the means of meeting allows real-time communication. Accordingly, meetings and business may not usually be conducted by email—except that boards may be able to conduct business by email if there is unanimous approval of the action. Communities also have the option of participation through proxies or (depending on the language of the governing documents) voting by mail or email.
Communities may need to get creative if there is a desire to keep votes confidential during a Zoom meeting or teleconference. One option to consider for communities that do not allow for voting by email is to have owners email their vote to the manager and then have the manager have the owner verbally confirm that the emailed vote is their intended vote during the meeting.
Our New Reality
While likely few of us expected that we would ever be in a situation like the current one, this new reality has taught us a lot about the limitations of our governing documents and also creative ways to keep operating and serving owners and communities. In the future, consider working with your association counsel to amend your governing documents to help your community better navigate unusual situations like the one we are currently facing together.
By Allison Peryea, Esq.
Allison Peryea, Esq. is a partner at Leahy Fjelstad Peryea. She has worked in the community association industry for eight years. Her practice focuses on dispute resolution including litigation, and general counsel. She is a longtime member of the WSCAI Communications Committee and a former editor of the WSCAI Journal.
Management companies and other vendors hit hard by the coronavirus may have some relief headed their way. On Friday, April 3, 2020, the application process opens for the Small Business Administrations’ Paycheck Protection Program (“PPP”). This $350 billion emergency program is part of the federal government’s $2 trillion federal coronavirus relief package, officially known as the CARES Act.
The PPP is not only a loan; it is meant to incentivize business owners to keep employees on the payroll by offering loan forgiveness. Details of the program are still being ironed out, but here is what is known at the time this post goes live:
Who is Eligible?
Small businesses with fewer than 500 employees.
Note that for some types of industries (restaurants and hotels), locations with fewer than 500 employees may apply for loans even if they belong to a larger chain. This may apply to management companies with a national reach.
Includes self-employed individuals, independent contractors and sole proprietors.
Entities must have been in business as of February 15, 2020.
Some Features of the Program:
Loan amounts up to 250% of the average covered monthly payroll and selected overhead expenses (payroll, benefits, rent, mortgage and interest) not to exceed $10 million.
No prepayment penalties.
No business collateral or personal guarantees are required.
Use the funds for anything your business needs.
Loan forgiveness available for eligible payroll and benefits, rent, mortgage and interest for the 8-week period after origination. Reduced forgiveness amount if payroll costs are lessened through layoffs or wage cuts.
Payments may be deferred up to 12 months.
Repayment term of 10 years.
What Portions of the Loan May Be Forgiven?
While there’s no limit on what the loan can be used for, loan forgiveness is available for certain expenses paid with loan proceeds within the first 8 weeks after loan origination:
Payroll (but not exceeding salaries is excess of $100,000 a year).
Health care for employees.
Mortgage payments on preexisting loans.
Rent on preexisting leases.
Interest on debt for preexisting loans.
Which Lenders Are Participating?
Any SBA-approved lender. As of this writing, Chase Bank has announced that while it will have the program up and running on April 3, it will not offer PPP loans except to existing business customers. US Bank, the largest SBA lender in the Seattle area, also expects to be up and running on April 3, and will accept all applications, whether or not the borrower is a current US Bank client.
How To Apply
Lender applications will be accepted through June 30, 2020 or until funds run out
The program is first come, first served, so apply early!
However, it is unknown whether lenders will be using this form in conjunction with their own applications, or whether the banks’ applications will replace the Treasury Department’s form. It may be worthwhile to check your preferred lender’s website first.
At a minimum, you’ll want to have the following information:
The date you started your business.
Your company’s mailing address.
Detailed information in order to calculate the past 12 months’ payroll for your employees, mortgage, rent and utilities.
Your company’s annual revenue.
2019 financials, including P&L and balance sheet.
Your most recent IRS Form 941 – Employer’s Quarterly Federal Income Tax Return.
While the PPP application process will be almost entirely self-reported (less verification than is typical for SBA loans is expected), do note that there are criminal penalties of up to $1 million for submitting fraudulent information to a federally-insured lender.
More About Loan Forgiveness
SBA will issue additional guidance on loan forgiveness by April 26, 2020.
For now, we know that the loan amounts will be forgiven so long as:
75% or more of the loan amounts are used to cover payroll, mortgage interest, rent and utilities during the first 8 weeks after the loan is made.
Employee payroll and compensation is maintained.
Borrowers who reduce the number of full-time employees or salary levels between February 15, 2020 and April 26, 2020, face a reduction in loan forgiveness unless they restore the number of full time employees and salary levels by June 30, 2020.
Loans covering payroll above $100,000 per person will not be forgiven. It is unclear if this is inclusive or exclusive of benefits.
All indications are that this emergency program will be heavily subscribed, and applications will no longer be accepted once all funding is awarded, so apply early.
By Michelle Ein, J.D.
Michelle Ein, J.D., has represented community associations since 2002. She is the owner of Law Offices of Michelle A. Ein, PLLC in Seattle. Michelle is devoted to helping her association clients solve their legal matters and keep the peace. By listening, diffusing conflict, and finding common ground, Michelle enjoys helping people find reasonable resolutions to tough problems. While she mostly appreciates single family home ownership, she is considering “condominiumizing” her yard, and designating sole and exclusive authority over its maintenance to her husband.
By Ken Harer, CCAL
Ken Harer, CCAL, is Condo Law’s managing partner. He’s an experienced attorney and has been working with community associations for more than twenty years. His practice, formed in 2000, provides assistance on all types of legal matters for condominium and homeowners associations. He offers legal assistance with contracts, construction disputes, and warranties related to the Washington Condominium Act and general legal advice on interpretation, enforcement, and modification of governing documents. An active WSCAI volunteer, Ken is a frequent speaker at industry events and homeowner association seminars, and contributes regularly to industry periodicals.
Washington’s 2020 Legislative Session ended on March 12. The Washington State Chapter of Community Associations Institute (WSCAI) had a very successful year. The bills described below and outcomes noted are a small snapshot of the hundreds of hours of work by WSCAI’s Legislative Action Committee (LAC) and the Chapter’s professional lobbyists to advance the interests of homeowners living in community associations in Washington State.
Bill Descriptions & Outcomes:
Construction Defect Bills: SB 5219 & HB 1576 (OPPOSE)
Last Session, several bills were introduced that would have eliminated condominium warranties from projects with 7 or fewer units, including SB 5219 and HB 1576. The Chapter opposed those bills. The bills did not pass last session but they were automatically reintroduced this session under Washington’s biennium legislative procedures. SB 5219 was a point of contention with last minute attempts to amend and pass the bill within hours of the House of Origin Cutoff. We are pleased to report that the bill did not pass.
HB 1165 – Low Water Landscaping (SUPPORT)
HB 1165 passed out of Senate Agriculture, Water, Natural Resources & Parks Committee, with WSCAI, Department of Ecology, and League of Women voters all testifying in support. Under the bill, community association boards will no longer be allowed to outright ban low-water and wildfire ignition-resistant landscaping but will retain the ability to decide what water-efficient and wildfire ignition-resistant landscaping will be allowed and the aesthetics of the landscaping. In addition, community associations cannot fine residents who are following drought emergency guidelines issued by the Department of Ecology. The bill passed almost unanimously from both chambers (House: 93-4-1 & Senate: 46-2-1) and was signed by the Governor. The law takes effect June 11, 2020.
SB 5168 – Homeowner Notices of Fines (SUPPORT)
SB 5168 originally added a 45-day notice period before community associations could issue fines. Over the last few years, WSCAI and the Washington Commission on African American Affairs worked on a compromise solution. The bill, supported by WSCAI, stated that notice should be given in a reasonable time frame and a chance to appeal to the board should be provided in a fair manner. The bill made it out of the Senate (47-1-1) but died in the House due to lack of time.
SB 6617 – Accessory Dwelling Units (NEUTRAL)
HB 2570 and SB 6617 dealt with the issue of facilitating and promoting the use of accessory dwelling units (ADUs) through changes to development and zoning regulations. WSCAI was able to include language making the new requirements “subject to” recorded covenants in common interest communities. That language was challenged by certain parties in the final days of the session but we were able to keep it intact. The bill passed and was signed by the Governor on March 27.
WSCAI’s Legislative Action Committee is made up of homeowners, community managers, and business partners who volunteer their time and expertise to benefit the more than 2.1 million homeowners living in community associations in Washington State whose interests the Chapter represents.
As the session wraps up, let’s all take a moment to thank them for their work!
Learn more about WSCAI’s advocacy efforts through our Legislative Action Committee (LAC).
The Best 4 Financial Reports For HOAs & Condo Communities
Ihear it all the time, the board gets a stack of paper reports but doesn’t look at them. The reason why? I suspect information overload and not knowing what to look for in each report. It can be overwhelming for a community board member that isn’t used to looking at financial reports.
So how about if you only needed a handful of reports to look at – it would make it simpler and take less time to get a picture of your association’s financial health. The following are my top four financial reports for HOAs and condo communities.
Board members have a fiduciary responsibility to exercise due care and diligence when overseeing the community and its funds. These 4 reports are vital tools for protection of association assets, control and planning:
This aged delinquency report/aged owner balance report shows who is behind in their assessments. Different reports can also break out the delinquency by type of charge owed (assessment, late fees, etc). The board needs to review this at every board meeting to see what action needs to be taken at certain late dates (30, 60 days) like sending a demand letter or turning the account over to a collection attorney or agency.
If you get behind in collections it can cause a problem with services at your community and worse, you may not be able to collect the entire past due amount depending on your state laws and how long it took you to commence a legal action. Some states only guarantee collection of 9 months past due assessments and it takes a few months for the action to work itself through the courts so if you are owed a year you may only get 9 months – ouch!
 Comparative Income & Expense Report
This is my favorite report to run for the association. The Income Statement is meant to inform how the association is doing compared to budget. It shows the current period actual expense, budgeted expense and any variance between the two. It also shows the same thing for the year to date.
When you see a variance it is a warning flag to ask why and dig deeper. It can also allow you to make up any shortfall quickly so you don’t cripple your community’s cash flow and vendor payments. For example if you are spending more on snow removal than budgeted due to an extreme winter you can do a special assessment right away to cover the shortfall while it is still cold and owners are more understanding.
 Balance Sheet
A balance sheet is an important part of the financial package. It tells where the association stands with their asset, liability and reserves at a particular point in time. There are three key accounts on a balance sheet that association officials should pay special attention to:
Cash in the Operating Checking Account – shows ability to meet current operating expenses.
Accounts Payable – shows how much is owed to vendors and service providers.
Capital Reserves – shows how much is available for major capital repair and replacement projects in the near and distant future.
 Bank Reconciliation Report
The Bank Reconciliation report is used to “prove” that the cash assets shown on the association’s books and balance sheet agree with what the bank statement shows. The reconciliation takes into account outstanding checks that have not been processed by the bank as well as deposits of cash that have not been processed by the bank. There should not be any difference it should be $0 but if there is a difference it is a flag for you to look into something further.
Additional Reports to Consider:
Bank statements are another tool to ensure you are not a victim of theft. Plus, you can easily see how much money you have in the bank. Bank statements are easier to understand than the balance sheet since we’re all used to looking at them and they show the current amount of money in the bank account(s), recent deposits and withdrawals.
Current Capital Reserve Plan
You don’t need a fancy report, but you should have something that shows how much money you have set aside and the anticipated cost for replacements and larger capital projects. This report is far superior than looking at a capital/ reserve bank account which can be deceiving. You may think you have a lot of money saved but if you had a big roofing or paving project it could be wiped out with no funds for other projects.
As a volunteer board member, you only have so much time to dedicate to operating your community. There are emergencies to deal with, vendors, projects and of course financial and administrative tasks. A large part of your responsibility is your fiduciary responsibility to the community. Overseeing that the community funds are safe and being spent properly is of high importance.
This article first appeared in the Jan/Feb Issue of Community Associations Journal.
By Russell Munz, CMCA
Russell Munz, CMCA is thefounder of Community Financials which provides stress-free financial management to self-managed communities and managers nationwide.Previously, Russell grew a successful 41-person full-service management company over 16 years; he now provides big company systems and processes to a new audience.
Practical Tips for Delinquent Account Reconciliation
Anyone who has worked in the community association industry knows that not all owners pay their assessments in a timely manner. Sometimes, boards need the assistance of a lawyer to collect delinquent amounts. But when the file is ready to be closed, what if the amounts recovered by the law firm do not match the management company’s ledger? In situations like this, community managers and lawyers are thrust in the role of accountant. This article will provide a brief overview on how to reconcile the delinquent owner’s account and bring closure to the matter.
Where to Start
The recommended place to start is to have the lawyer create a ledger with all assessments, late charges, administrative fees, interest, legal fees, costs and payment credits. This is to ensure that all amounts are accounted for in one place and identify all amounts the lawyer recovered. This may be different than what is on the management company’s ledger. Next, compare the lawyer’s account balance to the management company’s balance. Subtract the larger figure from the smaller one to determine the reconciliation gap to be closed.
The following amounts commonly create discrepancies between ledgers and should be explored to close that gap:
Generally speaking, the lawyer’s ledger calculates interest on delinquent amounts and the management company’s ledger does not. This means that if the lawyer receives payment from a delinquent owner, that the payment may include interest.
This can be further complicated if there is a judgment against the delinquent owner where there is pre-judgment interest (i.e. interest on delinquent assessments included in the judgment) and post-judgment interest based on the judgment amount. Failure to put the pre- and post-judgment interest on the management company’s ledger can create an unearned credit on the owner’s account.
For example, say ABC Association has a $1,000 judgment against an owner. There is $50 in interest in that judgment. Then, $50 of interest accrues after the judgment. The owner then pays $1,050 to bring their account current. Unless the management company adds $100 interest to its ledger, it will show a $100 credit on the owner’s account. Thus, to reconcile the account to $0.00, the management company must put $100 in interest on its ledger.
Late Charges/ Administrative Fees
Generally speaking, most associations have the right to collect late charges on delinquent amounts monthly. It is important to note that just because the management company has not put every single applicable late charge on the ledger, that is was not collected by the lawyer. Check to see how many late charges are on the management company’s ledger versus how much the lawyer collected.
Legal Fees & Costs
Under most governing documents and Washington state law, associations can recover its reasonable legal fees and costs from a delinquent owner. Make sure all invoices from the lawyer have been put on the ledger for reconciliation purposes.
Alternatively, sometimes judges reduce the amount in fees and costs the association can recover from a delinquent owner. If that has happened, then the management company will want to remove those amounts off the ledger since they cannot be collected from the owner.
Accelerated Amounts/ Security Deposit
Some governing documents permit the association to collect in the amount of up to three months of regular assessments from a delinquent owner as a security deposit. Furthermore, sometimes up to 12 months of assessments are collectible from a delinquent owner.
If three to 12 months of assessments have been collected in addition to assessments and amounts already accrued, then note the account to make sure no further late charges are added to the account and calculate to ensure the credit balance matches the future assessments recovered.
If an account becomes so entangled due to consecutive collections with judgments, garnishments or sheriff’s sales, then to reconcile the account, consider writing off certain amounts on the account. Soft costs (i.e. interest and late charges) are not amounts the association has actually spent money on, so writing off those amounts to reconcile the account is an easy way to bring the collection matter to a close.
It may take some time, but reviewing amounts described in this article should help managers and lawyers reconcile pesky collection files and put them to bed for good.
This article first appeared in the Jan/Feb Issue of Community Associations Journal.
By Bennett Taylor, Esq.
Bennett Taylor, Esq., is an associate attorney with Leahy Fjelstad Peryea, a law firm dedicated to creating clear and timely solutions for community associations so they can thrive. He counsels clients on a broad variety of legal issues pertaining to its governance and solvency. He currently lives in the Greenwood neighborhood of Seattle with his wife Lindsay, their daughter Sloane and their cat Peanut. In his free time, he likes to spend time with his family, read and golf even when it is raining.
Hitting a Moving Target: How to Stay on Budget this Fiscal Year
Year after year, many associations struggle with the same concern: staying on budget. While there are certainly times where unforeseen expenses arise that send your budget into a tail spin no matter how proactive you were, there are a few steps your association can take to help your budget stay in the black by the end of the year.
Your budget is never going to stay on track if it wasn’t adequate in the first place. If your association’s water and sewer bills have averaged $8,000 per year for the past three years, it isn’t reasonable to budget $6,000 for the upcoming year. Therefore, take a moment to review your budget in depth to make sure that it is adequate. Compare the 2019 budgeted amounts to last year’s actual expenses, and if there is a significant variance, find out why. If you didn’t do so during budget season, consider calling your local utility companies to determine what, if any, rate increase will take effect this year. Even a moderate utility increase can affect an association that consumes significant utilities, such as a condominium that includes water and sewer in the assessments. We all understand an association’s drive to keep assessments as reasonable for the membership as possible, however the association also has certain operating expenses to cover and it is important that the budget adequately represents those expenses.
Review Your Contracts
Take a moment to review your recurring contracts, such as management and landscaping, to determine what is included in the monthly rate to reduce the risk of any surprise expenses. As an example, most landscape contracts exclude tree trimming above a certain height; if your association finds a need to trim trees this year, it may be an extra expense and it would be helpful to know this in advance, so the association can prepare accordingly. It is also helpful to anticipate what administrative expenses may arise that are not included in your management contract, such as special mail-outs to the membership.
Check Your Reserve Study
It is important that your association is familiar with the components which are, and are not, included in your reserve study. This will ensure that expenses are paid out of the correct account and that your budget accurately represents your actual anticipated expenses. Many smaller routine maintenance expenses, such as annual roof moss treatment and gutter cleaning, should be handled as an operating expense and not through the reserve account so it is important to ensure that your budget includes line items for these expenses. It is also important that your association contributes to the reserve fund at one of the rates recommended by your reserve study. Under Washington State Law, your reserve study must provide baseline and 100% full funding recommendations; the association should ensure that it is budgeting somewhere within this range to lessen the risk of a future special assessment. My firm recommends that the association budget at the 70% to 100% full funding level, however that is a topic for another article.
Most associations determine the assessments amount after they have calculated the exact amount of the anticipated expenses. This approach assumes that all owners will pay their assessments on time, which we know is often not the case. If your association has considerable delinquencies, it should consider how to adjust the operating budget to ensure that adequate operating funds are available. Most associations include a line item for “bad debt expense” that is based on a percentage of assessments from historical trends, or an actual calculation based on current and projected delinquencies. Your management company and/or CPA, who knows your association best, will be a great resource for advice on how best to proceed. As part of this process, the association should also consider the resources which will be needed to collect on delinquencies. While most governing documents permit the cost of collection to be billed back to the owner’s account, the association still needs to have funds available to pay those fees up front.
Track Utilities and Conserve
Most associations have some sort of utility bill, even if it is just for irrigation of the common area landscaping, and most utility bills include consumption data. Your association may consider tracking consumption so it can more easily identify unexplained spikes in usage. Some utilities are going to fluctuate based on the time of the year; water usage, for example, often peaks during the summer months when landscape is being irrigated. However, if your water usage spikes in February, it may be an indicator of a leak. Since utilities can be one of an association’s largest operating expenses, consult with your landscape vendor to see if inexpensive conservation methods are available (rain sensors added to irrigation systems or drought tolerant plantings, for example), and encourage residents to conserve. Many utility companies offer free or discounted utility conservation packages to residents which include low-flow shower heads and sink aerators so be sure to check with your local utility company to see what is available in your area.
Don’t Let Budget Shortfalls Affect Reserves
Many associations make their monthly reserve transfers as the last transaction of the month. In theory this makes sense because the association wants to ensure that funds are available to pay all the other bills first, such as landscaping, utilities and insurance. For an association that is struggling to stay on budget, the transfers to reserves that were not made begin to pile up on the balance sheet as a liability to the reserve account and at the end of the year, that association must decide whether to increase assessments the next year to make up those reserve transfers. It is important that the association create a plan to catch up on reserve transfers, and ideally, create a budget that is adequate so they don’t fall behind again in the future. As a side note about budgeting for reserves, it is recommended that the association include the reserve contributions as either a line item under income or expenses, and not at the end of the budget. Reserve contributions are a true “expense” to the association; they represent the annual deterioration of the association’s assets and are quantifiable through the association’s reserve study. By listing them at the bottom of the budget, it gives the membership the impression that not only are they less important than the other line items in the budget, but that they are a “catch all” for excess income which is not the case at all.
Budget for Contingencies
One way of helping to ensure that the association will not go over budget or need to borrow from reserves for unexpected operating expenses is to budget for contingencies. Some associations set up a contingency line item and the amount depends on the association’s history of overruns and circumstances. Other associations include a contingency amount in most budgeted line items, such as 5%. This is highly recommended as the association should expect the unexpected!
Check Your FDIC Limits
While it isn’t necessarily budget related, it is also a good idea to review your bank balances annually to ensure that they are not exceeding the FDIC limit. FDIC stands for Federal Deposit Insurance Corporation which provides insurance coverage for the balances that are held in a bank account(s) at an FDIC insured institution in the case that the bank were to fail. The current FDIC limit is $250k per depositor (not per account). If your association has more than $250k held at one banking institution, it should consider moving funds in excess of the $250k to another institution to ensure that those funds would be insured/protected in the rare case that the bank were to fail. Budget time is a great time to review these limits, as oftentimes reserve contributions in the upcoming year may cause the association’s balances to exceed the FDIC limit. There are a few unique circumstances which may affect FDIC limits when it comes to certain investments, therefore it is best to consult with your banker and/or CPA prior to moving any funds.
Hopefully you have now reviewed your budget and checked all the boxes that indicate that it is adequate. But what happens if you are concerned that the association may fall short this year? In this instance, many associations have the ability to pass a supplemental budget, which essentially replaces any budget that was previously ratified by the membership. The process for passing a supplemental budget is often the same as it was for the original budget, however do check your governing documents and consult with legal counsel if any questions arise.
Budgeting is both an art and a science. You will never completely hit the mark as the budget is an estimate, however using these principles will help you stay closer to your target.
This article first appeared in the Jan/Feb Issue of Community Associations Journal.
By Karen McDonald, CMCA, AMS, PCAM, RS
Karen McDonald, CMCA, AMS, PCAM, RS is a Project Manager at Association Reserves of WA. A former association manager, 2019 marks Karen’s 19th year in the community association industry where she now helps bridge the gap between associations and their reserve studies. Karen is the current President for the WSCAI Chapter and serves on the Market Expansion Committee and as liaison to the Membership Committee. Outside of the office, she enjoys gardening and traveling.
Commonly Ignored Best Practices of Commercial Landscape Maintenance
How you care for your plants makes all the difference in the lifespan and overall look of them. Here are some best practice tips for landscape maintenance:
The difference between hard pruning versus using hedge shears is significant when not shearing the correct plants. The more you improperly prune your plants, the more often you will need to be outside pruning them. Keeping the significant pruning to hard pruning in the winter will make a difference in how time consuming your plants are throughout the rest of the year.
Clearing low-hanging branches and overgrown plant material will open up lines of sight into your property, decrease potential hazards and eliminate safety concerns of individuals hiding in your plants.
With the weight of a commercial mower and mowing in the same direction each week, your turf is prone to having a matted look, unhealthy and unsightly grass. You can help fix that by alternating your mowing pattern each visit encouraging standing turf.
Fertilizer can be a great resource for your turf and plants, but too much of it can harm your landscape. Commonly referred to as fertilizer burn, having too much can cause yellow, brown or dead sections. Additionally, the more you apply fertilizer, the more dependent your turf & plants become on that particular fertilizer to look and stay healthy. Leaving your grass clippings is a great way to naturally fertilize your lawn. Organic fertilizers are also a great way to have a more balanced and sustainable landscape.
Annuals are a great way to add seasonal color to your landscape, whether they are around entrances, signage, walkways or plant beds giving a fresh and updated look to a potentially older property.
Cleaning up the landscape debris after you are done maintaining your property, instead of blowing it into the street or a native area will help you to be more responsible as a community association manager or owner and it will make your property and the surrounding areas more appealing and help to reduce pollution problems.
Having a mulch bed around your trees helps protect the trees’ trunks from mechanical damage caused by mowers and trimmers and improves the overall appearance of the property. Mulching your beds throughout the property can help nourish your plants, increase curb appeal & reduce weed infestation.
One mistake seen frequently is people using the wrong equipment for the task at hand. Whether it is hand pruners, string trimmers or mowers, be sure that you or your service provider is giving you the proper and best resources for maintaining your landscape.
Misunderstanding the pitfalls caused by regular landscape maintenance can lead to long-term failure of your landscape. Focusing on the ‘big picture’ of your property and where you want to take the landscape can have a lasting impact on your budget, overall aesthetic and how much effort is required to keep the property looking good long term.
(Editor’s Note: This blog article first appeared in the May 2018 issue of Community Associations Journal.)
By Tim Hawkins
Owner, Brookstone Landscape & Design
Having been involved in the landscape industry for over 15 years, Tim Hawkins takes pride in developing solutions and opportunities for people! In his free time, he enjoys running marathons and spending time with his family.
The Washington State’s 65th Legislative Session adjourned on March 8th. For only the third time in the last decade, the Legislature did not go into Special Session.This is no small feat, finishing on time has only occurred during the short (non-budget) legislative sessions of 2008, 2014, and now 2018. The next Legislative Session will begin on January 7th, 2019. CAI’s Legislative Action Committee (LAC) has already started planning for next year.
There is a high probability of another long session looming, leading to several lawmakers announcing they will not seek reelection in 2018, with more announcing every day.
“It’s almost like we need to be a full-time Legislature, or figure out a different schedule,” Representative Lytton said to The Seattle Times.
As of the end of March, 13 lawmakers have announced they will not be seeking reelection, leaving a large vacuum of political power in Olympia. Political jockeying to fill those voids of power has already begun.
The surprise retirement announcement of Senator Sharon Nelson (34th – Vashon Island), who is the current Majority Leader in the Senate, will mean that no matter what happens in November the Washington Legislature will have a completely new leadership structure. Several Democratic Senators have started throwing their names into the mix as the potential new leader.
In the Senate Republican Caucus, Michael Baumgartner (6th – Cheney) has announced he will be running for Spokane County Treasurer, instead of seeking another term as Senator. Rep. Jeff Holy, Sen. Baumgartner’s current seat mate, will be vying for this seat.
IIn the House of Representatives, three House Democratic Chairs have also announced their retirement:
Rep. Kristine Lytton (40th – Anacortes), Chair of the Finance Committee
Rep. Ruth Kagi (32nd – Shoreline), Chair of the Early Learning & Human Services Committee
Rep. Judy Clibborn (41st – Mercer Island), Chair of the Transportation Committee
On the Republican side of the aisle, 9 GOP House members have announced their retirement, including the House Minority Leader Dan Kristiansen (39th – Monroe). J.T. Wilcox (2nd– Yelm), who was the Deputy Minority leader, was elected as the new leader before the Legislature adjourned.
This large exodus of lawmakers means that the Legislature will have a lot of new personalities and new leadership in all four legislative chambers come 2019.
2018 Election Cycle
In 2018, every member of the House Representatives and half of the Senate is up for reelection.
Both parties have announced that they will be targeting key races throughout Washington State. The Democrats, wishing to secure their majority in all chambers, have announced their top targets as follows: Sen. Mark Miloscia (30th – Federal Way), Sen. Joe Fain (47th – Kent), Sen. Jan Angel (26th – Gig Harbor), and Rep. Mark Harmsworth (44th – Snohomish). The Republicans have announced they will be targeting Senator Steve Hobbs (44th – Snohmish), Rep. Christine Kilduff (28th – University Place), and Rep. Brian Blake (19th – Aberdeen).
Candidate filing deadline is on May 18. All candidates running will need to have declared by this date and then the campaign season will truly kick off.
CAI Specific Legislation
During the 2017-18 Biennium, the Legislative Action Committee (LAC) advocated for the interests of CAI members. Over 20 pieces of legislation were actively worked on or monitored this year, however only 3 passed.
Substitute Senate Bill 6175 – WUCIOA
Brief Summary: Establishes the Washington Uniform Common Interest Ownership Act (WUCIOA) to govern the formation, management, and termination of common interest communities including condominiums, homeowner associations, and real estate cooperatives.
Only two sections of WUCIOA will automatically apply to existing common interest communities (condominiums, homeowner associations, and cooperatives) in Washington. One addresses the process for an existing community to elect to be governed by WUCIOA and the other addresses budget ratification and assessments. The full Act will only apply to common interest communities created after its effective date.
Prime Sponsor: Senator Jamie Pedersen
Bill Status: Governor Inslee signed the bill into law on March 27, 2018.
Effective Date: July 1, 2018
Second Engrossed Substitute House Bill 2057 – Foreclosure Fairness
Brief Summary: The striking amendment introduced by Senator Mullet is the culmination of a two-year process with over twenty stakeholders. The final bill is the agreed upon language that touches on everything from Department of Commerce’s foreclosure fairness fees to how the financial server can “maintain” the property. The two sections that impacted community associations were: deceased borrower and nuisance abatement.
The deceased borrower provisions created a process for servicer and associations to follow if an individual passes away without a will and is in a foreclosure procedure.
The nuisance abatement section forces servicers to conduct maintenance on the property if it falls into all three of the following categories:
It is in a foreclosure
The property is abandoned
The city or county has deemed it a nuisance under prudery. Associations will be continuing the nuisance discussions over the interim
Prime Sponsor: Representative Tina Orwall
Bill Status: Governor Inslee signed the bill into law on March 29, 2018.
Effective Date: June 7, 2018
Substitute House Bill 2514 – Discriminatory Provisions Found in Written Instruments Related to Real Property
Brief Summary: Authorizes an owner of property subject to a written instrument containing provisions void by reason of Washington’s Law Against Discrimination to record with the county auditor a restrictive covenant modification document. Changes the list of unlawful provisions that homeowners association boards may (and in some cases, must) remove from their governing documents by majority vote to include all provisions that are void by reason of Washington’s Law Against Discrimination.
Prime Sponsor: Representative Christine Kilduff
Bill Status: Governor Inslee signed the bill into law on March 15, 2018.
Effective Date: June 7, 2018 – except for section 1, which goes into effect on January 1, 2019.
What to Expect in 2019
Throughout the 2018 Legislative Session there was a constant chorus of “Washington needs a more robust housing supply.” However, with the Democrats gaining control again, they had several key pieces of legislation they wanted to pass, pushing the housing discussion off until next year.
This is where the LAC will come into play and we must prepare for what is to come. The following is a list of potential top housing issues for 2019: construction defect claims, dispute resolution programs, and association voter apathy.
As the LAC begins planning for the 2019 Legislative Session, it is always good to start with what was introduced during this last biennium, but did not pass, as it is likely to be reintroduced again.
House Bill 1172: Low-water landscaping
Brief Summary: Prohibits homeowner association and condominium association restrictions that limit private property owners’ ability to deploy low-water landscaping techniques.
Prime Sponsor: Rep. Tina Orwall
Substitute House Bill 1494: Private Road Maintenance
Brief Summary: Requires the holders of an interest in an easement to maintain the easement and permits agreements that allow maintenance obligations to be allocated to fewer than all holders of an interest in an easement. Requires the cost of maintaining an easement to be shared by each holder of an interest in the easement.
Prime Sponsor: Rep. Jeff Morris
House Bill 2022: Homeowners’ Association Violations
Brief Summary: Entitles an aggrieved party, if a willful violation of a homeowners’ association is found, to exemplary damages up to two times the actual damages sustained.
Prime Sponsor: Rep. Christine Kilduff
Substitute House Bill 2475: Tolling of Construction Defect Claims
Brief Summary: Revises the notice and opportunity to cure process in a construction defect action, adding a mediation process and further detail with respect to the termination of this process. Extends tolling provisions and provides for tolling in the context of claims by one construction professional against another.
Prime Sponsor: Rep. Cindy Ryu
Substitute House Bill 2485: Low-Water Landscaping
Brief Summary: Prohibits homeowner association and condominium association restrictions that limit private property owners’ ability to deploy low-water landscaping techniques.
Prime Sponsor: Rep. Tina Orwall
Substitute House Bill 2790: AGO Dispute Resolution Program
Brief Summary: The Office of the Attorney General (AGO) is directed to establish a dispute resolution pilot program in Clark, King, and Spokane counties, for the resolution of disputes between condominium and homeowners’ association boards and owners. The pilot also instructs the AGO to create educational materials on the rights of homeowners and the authority of the boards.
Prime Sponsor: Rep. Vicki Kraft
Substitute House Bill 2831: Association Notice Requirements w/Condo Defect Litigation
Brief Summary: Requires increased notice, a meeting, and a majority vote of the homeowners before the board of a condominium or homeowners’ association may commence a construction defect action.
Prime Sponsor: Rep. Tana Senn
SB 5082: Fire safety compliance
Summary: Requires an insurer, before issuing or renewing a policy of insurance to the owner of commercial or residential rental property for coverage of the premises, to require the owner to certify that he or she is in compliance with fire safety requirements. Requires an insurer, before issuing or renewing a policy of insurance to an association for a condominium, to require the association to certify that the condominium is in compliance with fire safety requirements.
Prime Sponsor: Sen. Kirk Pearson
SB 5134: HOA Notice and Opportunity Provisions Relating to Certain Enforcement Actions Taken by a Homeowners' or Condominium Association
Summary: Before a homeowner’s association or unit owner’s association may impose and collect charges for late payments of assessments, the owner must be give 45 days notice and an opportunity to be heard by the board of directors or their designee. It is also clarified that the opportunity to be heard must be fair and impartial.
Prime Sponsor: Sen. Bob Hasegawa
SB 5250: Condominium Association Bylaw Amendments
Summary of Bill: Revises the condominium act with regard to voting requirements when amending the bylaws of the association.
Prime Sponsor: Sen. Karen Keiser
Senate Bill 5377: HOA Budget Ratification Voting Requirements
Summary of Bill: Removes provision that a budget is ratified unless a majority of the ballots cast in the association vote to reject – and instead, adds requirement that the majority of ballots cast by those in the association present, by person or by proxy, determines the proposed budget vote.
Prime Sponsor: Sen. Tim Sheldon
Senate Bill 5428: Condo Association Litigation Costs
Summary of Bill: Revises the condominium act regarding costs of litigation for condominium associations by changing the definition of constructional defect and prohibits the board of directors from taking action on behalf of the association to: institute, defend, or intervene in litigation or administrative hearings.
The parties to a construction defect dispute must engage in mandatory binding arbitration.
Prime Sponsor: Sen. Mike Padden
Substitute Senate Bill 6001: Amendments to Bylaws
Brief Summary: The bylaws of a condominium may be amended by applying the minimum percentage of affirmative votes to the number of votes received rather than the total number of votes allocated if: 1) the proposed amendment is not seeking to amend the method of amending the bylaws; and 2) three notices are sent by certified mail, at least ten days apart, to the unit owners in advance of the vote either at a proposed meeting or other voting method authorized by the governing documents.
Prime Sponsor: Sen. Karen Keiser
Substitute Senate Bill 6005: Protecting Lienholders' Interests While Retaining Consumer Protections
Brief Summary: County treasurers, at least 180 days before the issuance of a certificate of delinquency, must provide notice to the record owner of residential property that contains information regarding the potential for the homeowner to access mediation under the Foreclosure Fairness Act.The fee a person may charge a non-natural person to locate abandoned property is 35 percent of the value returned to the owner.
Prime Sponsor: Sen. Mark Mullet
We Need Your Support!
The LAC thanks all the members who have stayed involved and diligent this year. We will continue to fight for all community associations throughout the State, but we will still need your support.
In 2019, housing will be one of, if not the most, debated issues at the Washington State Legislature. Please keep a look out for CAI’s “Calls-to-Action” and let your lawmakers know how important it is for them to support our industry. We are essential to a thriving and prosperous Washington.
If you are not receiving emails for CAI’s “Calls to Action” and would like to get on the distribution list, please contact Dawn Bauman at Dbauman@caionline.org.
Written By WSCAI's Legislative Action Committee (LAC)