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.