fbpx
Let’s Play 20 Questions: Taxes and Audits

Let’s Play 20 Questions: Taxes and Audits

[ Blog/News ]
One thing is certain for community associations: An annual federal tax return. Another thing MAY be certain: an annual Certified Public Accountant (CPA) audit. If this is surprising to you, read on. If this is not surprising to you, read on anyway; as community associations are so unique in their tax treatment!

(Editor’s Note: This blog article first appeared in the March 2018 issue Community Associations Journal. It is a first in a two-part article. Part two will appear in the upcoming April issue.)

Let’s test your knowledge by playing “20 Questions”!

Question Mark in Talk Bubble Icon Green  Question Mark in Talk Bubble Icon Orange  Question Mark in Talk Bubble Icon Blue

Are associations required to file an annual federal tax return?

Answer Mark in Talk Bubble Icon GreenYES. Associations are required to file annually, even if they do not have taxable income. The return is required from the date of inception, even if assessments are not yet billed.

What type of tax return do associations file?

Answer Mark in Talk Bubble Icon GreenMost associations file a form 1120-H return, which is a special return for this industry. Some associations file a form 1120 return, which is the regular corporate return. This industry is unique in the tax law since most associations may “flip flop” back and forth each year between an 1120-H and an 1120. Some associations (such as commercial associations, and associations that don’t meet certain tests) are required to file an 1120 return. A few associations are considered a Non-Profit for tax purposes and file a form 990 tax return. This is rare and has stringent/narrow requirements.

Do associations pay tax?

Answer Mark in Talk Bubble Icon GreenYES. For the 1120-H return, they pay 30% tax on net “non-exempt function income.” Examples would be interest/investment income on all accounts, income from non-members (such as cell tower income or rental of an association owned unit), and “user fees” from members. For the 1120 return, Associations pay graduated corporate tax rates on net membership income and net non-membership income. These can be very complex issues, so it is always best to have an industry CPA advise on the best tax return choice and prepare the return for the association.

Is there a way to avoid tax?

Answer Mark in Talk Bubble Icon GreenIf the Association has interest/investment income, or income from non-members, other than the standard exemption available, it is difficult to avoid paying any tax. There are strategies to minimize tax. The association should work with their CPA on appropriate deductions that may be taken against the taxable income. If there is other taxable income, keep good accounting records of the potential direct expenses related to the production of income. Additionally, if the association qualifies for 1120 tax return filing, some tax rates are below the 30% “flat tax” for the 1120-H return. As noted above, the 1120 return is recommended in limited circumstances due to the requirements, and higher IRS audit risk.

What are some of the requirements to file an 1120 tax return?

Answer Mark in Talk Bubble Icon GreenIf the Association thinks they are planning on filing an 1120 tax return, they should consult with their CPA as this gets very complex, quickly. Generally, the association needs to follow strict accounting requirements including segregation of operating and reserve cash, and “fund accounting” is preferable. The Association should adopt and adhere to a budget that agrees with the reserve study, have minimal “transfers between funds”, document repayment plans for “due between funds” and be aware of the capital and non-capital items in the reserve study. They also need to have the association membership approve the “70-604” tax election.

What is the “70-604” tax election?

Answer Mark in Talk Bubble Icon GreenThis is a federal tax election only, and does not impact the books. As noted above, if the association files an 1120 tax return, the “net membership income” is taxable. The 70-604 allows the net membership income to be deferred from year one to year two. Since the 70-604 cannot be used two years in a row, this is only a deferral of tax. IF the association still has net membership income remaining at the end of year two, if an 1120 return is again filed, and no offsetting membership losses exist, the net membership income is taxable. Our firm recommends that each association approve the 70-604 each year at the annual meeting, regardless of the type of return filed. This is because it is not known (until the return filing) which form will be appropriate, and if an 1120 is necessary, the 70-604 may be needed. It also provides extra “IRS audit insurance”, regardless of the form filed each year. Again, this election is approved by the membership, not the board.

Is transferring monies to reserves the same as the “70-604?”

Answer Mark in Talk Bubble Icon GreenNo. Should be two separate motions.

When is the tax return due to the IRS?

Answer Mark in Talk Bubble Icon GreenThe return is due 3.5 months after the year end. For calendar year associations, this is April 15. There is an extension available, however any tax due must be paid by the tax return original due date.

What is an audit?

Answer Mark in Talk Bubble Icon OrangeAn independent CPA is engaged by the association to determine if the year end financial statements are materially correct, in accordance with Generally Accepted Accounting Principles (GAAP) and that adequate financial statement disclosures have been presented. The CPA should not be connected to the association in any way. “Materiality” is a matter of CPA judgment, however it means the CPA does not look at every transaction. Examples of “disclosures” would be litigation, special assessments, contingencies, FDIC limitation exceeded, and significant events occurring after year end but before the date of the Auditors’ Report.

Is our association required to have an annual audit?

Answer Mark in Talk Bubble Icon OrangeThis depends on the body of Washington law (RCW) that governs the association, and the size of the association. Please read the noted RCW for more clarification and consult your attorney if unclear.

  • “New Act” Condominiums (Created after 7/1/90 -RCW 64.34.372) Condominiums with 50 or more audits must be audited annually. Condominiums with less than 50 units have an annual audit requirement, however, there are annual waiver provisions.
  • “Old Act” Condominiums: (Created before 7/1/90) Generally, the requirements default to the New Act Condominiums provisions, however, if the governing documents require an annual audit, then an audit is required, regardless of the number of units.
  • Homeowners Associations (RCW 64.38.045) Associations with annual assessments of $50,000 or more must be audited annually, however, there are annual waiver provisions.

Additionally, there is an audit requirement for New Act Condominiums upon the legal transition from developer control. (RCW 64.34.312)

When is an audit recommended, regardless of the requirements?

Answer Mark in Talk Bubble Icon OrangeBecause the board is charged with governance of the association, they need to think through carefully whether the waiver of an audit is advised. Some of the reasons to have an audit include:

  • The CPA may also issue a “Report of Internal Control.” This contains recommendations that protect the board and association.
  • Provides significant disclosures to current and future owners.
  • Construction defect settlements.
  • Insurance proceeds/settlements.
  • Large special assessments.
  • Large construction projects.
  • Change in management companies.

If there is suspected fraud, a separate “forensic audit” may be appropriate.

What is needed in an audit?

Answer Mark in Talk Bubble Icon OrangeThe auditor will ask for the financial records and reports for both the audit year and subsequent year. If it is a new client, the auditor will ask for the financial records of the prior year end. Additionally, the auditor will also ask for governing documents, reserve studies, tax returns, budgets, and board minutes.

How long will the audit take?

Answer Mark in Talk Bubble Icon OrangeIn our firm, IF all information is provided when requested, the process is about six to eight weeks.

Who receives the audited financial statements?

Answer Mark in Talk Bubble Icon OrangeThe Auditors’ Report is addressed to the association board and membership. Other users include future owners (in the re-sale certificate) and current or possible association lenders. (The “Report of Internal Control” is addressed to the association board and management.)

What do we do if an audit discloses an issue?

Answer Mark in Talk Bubble Icon OrangeDiscuss the audit results with your management company and CPA, if you don’t understand the issue. Then, the board should discuss their plans to rectify the issue, and document this in the board minutes.

Are there more questions?

Answer Mark in Talk Bubble Icon BluePossibly, this article has raised more questions for you, than answered. Consult your association CPA, as there are numerous exceptions/details that are beyond the scope of this article.

 

Was this really 20 questions?

Answer Mark in Talk Bubble Icon BlueNo. Apparently the CPA cannot count.

By Catherine Kuhn, CPA

Owner, Cagianut & Company, CPA

Catherine Kuhn, CPA, manages the Bellevue office of Cagianut & Company, CPA, which is devoted exclusively to serving the financial needs of over 800 Community Associations in Washington. C&C has over 25 years of experience in serving Community Associations and currently has 18 employees. Prior to joining Cagianut & Company in 2006, Cathy was a partner in a large Bellevue CPA firm and served clients in various industries there for 20 years. Cathy teaches classes and writes articles for WSCAI. In addition to being “Mom” to 2 active teenagers, she serves as Treasurer of the Newport High School Girls Basketball Booster Club, and a financial volunteer for Bellevue Young Life.

  • Barker Martin
  • The Copeland Group, LLC
  • Charter Construction
  • Newman & Associates CPA, PC - Banner Ad
  • Condominium Law Group, PLLC - General Counsel & Collection Services - Partners Ken Harer & Valerie Oman - Phone: (206) 633-1520 Website: www.condolaw.net
  • Rafel Law Group

Follow Us

Search Business Directory

Diamond Sponsors

  • JJ2 Building Consultants Logo
  • Superior Cleaning & Restoration - Diamond Sponsors
  • ServPro of Edmonds, Lynnwood, and Bellevue West - Diamond Sponsor
  • Barker Martin - Diamond Sponsor
  • Community Association Underwriters (CAU) - Diamond Sponsor
  • Association Reserves Logo
  • Rafel Law Group Logo
  • Charter Construction - Diamond Sponsor
  • RW Anderson Services - Diamond Sponsors
  • ServPro of Seattle NW - Diamond Sponsor
  • HUB International - Diamond Sponsor
  • Columbia Bank - Diamond Sponsor

Chapter Magazine

Community Associations Journal - June 2019 Issue - Cover

Calendar

June 2019

Sun Mon Tue Wed Thu Fri Sat
1
  • Board Leadership Development Workshop
2
3
4
5
  • Communications Comm Conf Call
6
7
8
9
10
11
  • Education Comm Mtg - WSCAI
12
  • Board Meeting
13
  • CA Day Committee Mtg
14
15
16
17
18
  • Membership Committee Meeting- Chapter Office
  • MFMD Comm Mtg
19
  • Community Outreach Committee Mtg - WSCAI
20
21
22
23
24
25
  • Business Partners Comm Mtg
  • Social Committee Mtg
26
27
28
29
30
Advertise With Us - Click to find out how! WSCAI

5 Tips for Running an Association Board Meeting

5 Tips for Running an Association Board Meeting

[ Blog/News ]
Running an effective homeowner’s association (HOA) board meeting is like mastering the zipper merge. When it’s performed properly, everyone knows what they’re supposed to be doing and it looks effortless. It just takes preparation and some practice to get it right.

Whether your association is new or has been around for a while, keeping a meeting running smoothly does not happen by accident. This writer has been in the unique position of having served on the board of her association, and is also an association manager. In both aspects, there are common factors which can affect HOA board meetings. Long, noisy and chaotic meetings cause misery for boards, managers and members alike. There are ways to reduce and even avoid the dilemmas that plague HOA board meetings.

Different types of meetings will have specialized items to be addressed, but no matter what kind of meeting is being held, here are five tips to optimize meeting efficiency.

[1] Agenda

Tip 1 - AgendaJust like real estate is about “location, location, location” effective meetings must have (and stick to) an agenda. Repeat it three times if needed, but remember, “agenda, agenda, agenda.” To that end, take an extra few minutes when planning and be sure to arrange the agenda into simple items and identify which items will require a decision/vote.

Be aware of the items that may invoke passionate and long-winded discussion. This too, can be addressed via the agenda. For those who wish to speak, a time limit of two minutes is advised, and an advance directive at the beginning of the meeting to let attendees know that discussion is limited to new information on the topic.

[2] Time

Tip 2 - TimeWhen planning the meeting, be conscious of time on two levels. The time needed altogether for the meeting, and available time for the attendees. The agenda is a great tool for time management, and time goals should be stated at the outset.

While it’s great to think, “We’ll cover all the topics on the agenda to completion” the reality is, the most productive meetings will produce an action item list with tasks for future follow-up. Again, it’s about time. Some decisions require more time and information than is available at the time of the meeting, and it’s okay to note that; and table the item for further review.

[3] Venue

Tip 3 - VenueThis is an area that can have negative or positive impact on the meeting. If the meeting is scheduled for evening, be aware of travel times and potential traffic considerations for attendees getting to the venue. Give advanced thought room size, temperature and adequate seating. Overcrowded rooms can be detrimental to meeting productivity.

Another venue consideration is acoustics. Community meeting rooms with hard floors have a greater level of echo and sound bounce back. It can be managed with effective direction from the presiding officer, and limiting side conversations. Keep these considerations in mind when seeking and selecting locations for board meetings.

[4] Side Conversation

Tip 4 - Side ConversationDon’t. Just, don’t. Whether in the gallery, or at the directors’ table, side communications are distracting and disruptive to a meeting. Even if it’s topic-related, if it’s not new information to be presented on the floor, it can wait until after the meeting. If you don’t have the floor, take it out the door.

[5] "Pancake"

Tip 5- PancakeNo, not the food. (Although this writer would absolutely attend a meeting that serves pancakes.) Remember the adage, “No matter how flat you make it, a pancake has two sides.” Not everyone at a meeting will agree on how to address an issue, but it’s important to be respectful of others’ positions as members of the association. Homeowners feel passionately about their homes and neighborhood, and in that passion, can lose track of the board’s responsibility to the entire association, not just the individual. So, like a pancake, flip the situation and try to view the other side of a matter.

As the season for annual meetings comes into full swing, these tips will serve to help associations achieve meeting mastery. Now, let’s all take turns…merge out of the parking lot and head to get some pancakes with some side conversation.

By Joy Steele, CMCA

Community Manager, Trestle Community Management

Joy Steele, CMCA is a Community Manager at Trestle Community Management. A devoted community volunteer for over a decade, she has also served her Condo Association for 7+ years, both on the Board and on various committees. A member of the both the SPJ and the NSNC, Joy is a columnist and contributor to the South King Media group, and various online and print periodicals. She currently resides in Des Moines with her husband Dan and their two rescue dogs.

  • Barker Martin
  • Newman & Associates CPA, PC - Banner Ad
  • Rafel Law Group
  • Charter Construction
  • Condominium Law Group, PLLC - General Counsel & Collection Services - Partners Ken Harer & Valerie Oman - Phone: (206) 633-1520 Website: www.condolaw.net
  • The Copeland Group, LLC

Follow Us

Search Business Directory

Diamond Sponsors

  • Community Association Underwriters (CAU) - Diamond Sponsor
  • Superior Cleaning & Restoration - Diamond Sponsors
  • RW Anderson Services - Diamond Sponsors
  • Charter Construction - Diamond Sponsor
  • Columbia Bank - Diamond Sponsor
  • ServPro of Edmonds, Lynnwood, and Bellevue West - Diamond Sponsor
  • ServPro of Seattle NW - Diamond Sponsor
  • Association Reserves Logo
  • Barker Martin - Diamond Sponsor
  • Rafel Law Group Logo
  • HUB International - Diamond Sponsor
  • JJ2 Building Consultants Logo

Chapter Magazine

Community Associations Journal - June 2019 Issue - Cover

Calendar

June 2019

Sun Mon Tue Wed Thu Fri Sat
1
  • Board Leadership Development Workshop
2
3
4
5
  • Communications Comm Conf Call
6
7
8
9
10
11
  • Education Comm Mtg - WSCAI
12
  • Board Meeting
13
  • CA Day Committee Mtg
14
15
16
17
18
  • Membership Committee Meeting- Chapter Office
  • MFMD Comm Mtg
19
  • Community Outreach Committee Mtg - WSCAI
20
21
22
23
24
25
  • Business Partners Comm Mtg
  • Social Committee Mtg
26
27
28
29
30
Advertise With Us - Click to find out how! WSCAI

Boundary Issues: Associations and Owners Often Face Problems Involving Damage and Repairs that Straddle or Cross Property Lines

Boundary Issues: Associations and Owners Often Face Problems Involving Damage and Repairs that Straddle or Cross Property Lines

[ Blog/News ]

A defining moment in many people’s lives is when they purchase their first home. The promise and potential as a new homeowner feels unlimited. What many don’t realize is that the issues you may face as a homeowner—or indeed as a community association— often cross property boundary lines. This article addresses several boundary issues that owners and associations frequently deal with concerning trees, surface water, fences, party walls, retaining walls and boundary lines in general.

Note that the first inquiry to make in a situation in which an improvement appears to be on a boundary line is often whether the improvement is located on one parcel or another, or whether it straddles the two. This may involve examining legal descriptions and maps, and ultimately may require hiring a surveyor. 

Boundary Lines Spot ImageBoundary Lines

Boundary line disputes are often emotionally charged matters that can last for years. The most certain way to determine “on-the-ground” boundary lines is to hire a surveyor, which can be expensive. The surveyor can map boundary lines on the ground based on surveyor stakes and the legal descriptions of the properties.

But two legal doctrines may allow people to move those boundaries based on the conduct of the people who have owned the property on either side of the line:

  1. Adverse possession
  2. Mutual recognition and acquiescence.
Adverse Possession

To establish a claim of adverse possession, the burden is on the person claiming adverse possession to prove by a preponderance of the evidence (i.e., more likely than not) that the claimant’s possession is:

  1. Exclusive
  2. Actual and uninterrupted
  3. Open and notorious
  4. Hostile

[Nickell v. Southview Homeowners Ass’n, 167 Wn. App. 42, 50 (Div. 2, 2012)]

Each of the necessary elements for an adverse possession claim must have existed for ten years. A claimant can satisfy the open and notorious element of adverse possession by showing either:

  1. That the title owner had actual notice of the adverse use throughout the statutory period
  2. That the claimant used the land such that any reasonable person would have thought he owned it

Hostility for an adverse possession claim requires that the claimant treat the land as his own as against the world throughout the statutory period.

Mutual Recognition and Acquiescence

Claims based on mutual recognition and acquiescence arguments involve purported boundary lines demarcated by things like fences and roads. The elements of mutual recognition and acquiescence include:

  1. The line must be certain, well defined, and in some fashion physically designated upon the ground, e.g., by monuments, roadways, fence lines, etc.
  2. In the absence of an express agreement establishing the designated line as the boundary line, the adjoining landowners, or their predecessors in interest, must have in good faith manifested, by their acts, occupancy, and improvements with respect to their respective properties, a mutual recognition and acceptance of the designated line as the true boundary line.
  3. The requisite mutual recognition and acquiescence in the line must have continued for that period of time required to secure property by adverse possession.

[Lamm v. McTighe, 72 Wash.2d 587, 593 (1967)]

The burden of proof is on the party asserting mutual recognition to show, by clear, cogent and convincing evidence, that both parties acquiesced in the line for the same period required to establish adverse possession—10 years. [Muench v. Oxley, 90 Wn.2d 637, 641, 584 P.2d 939 (1978)]

Timber Trespass/Trees Spot ImageTimber Trespass/Trees

A common boundary dispute neighbors contend occurs when a tree located wholly on one party’s property that overhangs onto another. To cut down a tree or other plantings belonging to another without lawful authority is known as “timber trespass.” The trespassing offender is potentially subject to treble damages if it was done willfully. This means the statute allows the aggrieved party to obtain triple the damages amount suffered.

The key phrase with respect to timber trespass is “without authority.” Generally speaking, under Washington law, a landowner has legal authority to engage in self-help at his own expense and trim branches and roots that encroach upon his property. However, that does not give the landowner the right to cut down the tree on the adjacent land.

But what if the tree is located on the boundary line? The Washington State Court of Appeals addressed this issue in 2017. If a tree straddles the boundary line between two properties, the owners of each property own the tree as tenants in common and are each entitled to use, maintain and possess the tree without interfering with the other’s use of it, as set forth in the 2017 Herring v. Pelayo appellate case. The court reiterated that the common owners of the tree may lawfully trim vegetation overhanging their property, but not in a manner that the common owner knows will kill the tree.

So if you are considering cutting the branches of a tree near your property, the best practice would be to speak to the adjacent owner first if there is a chance the tree is not entirely located on your property. If there is an objection, consult a surveyor to determine the tree’s location. Since timber trespass carries such potentially stiff penalties, homeowners should proceed with caution if they are considering cutting down some or part of a neighbor’s tree.

Surface Water Spot ImageSurface Water

In parts of the Pacific Northwest, it is a way of life to deal with rain most of the calendar year. Besides making commuting difficult, rain can cause a variety of problems for homeowners and potentially their neighbors. One common example: When accumulated rain or other surface water runs off one person’s property onto another’s, causing damage.

As explained by the state Supreme Court in Currens v. Sleek, Washington law recognizes the “common enemy doctrine” with respect to surface water. Surface water is “vagrant or diffused [water] produced by rain, melting snow, or springs.” The common enemy doctrine allows landowners to dispose of unwanted surface water in any way they see fit, without liability for resulting damage to a neighbor. The idea is that “surface water … is regarded as an outlaw and a common enemy against which anyone may defend himself, even though by so doing injury may result to others.”

This seemingly counterintuitive doctrine is not absolute and has a few exceptions. First, landowners may not inhibit the flow of a watercourse or natural drain way, such as a stream or gully. Second, landowners may not collect surface water on their property, only to dispose of it on a neighbor’s land. Finally, landowners who alter flow of surface water on their property must exercise their rights with due care by acting in good faith and avoiding unnecessary damage to the property of others.

Fences Spot imageFences

Our state does not appear to have any cases that directly address maintenance of boundary fences. But across the country, it is generally understood that ownership of and responsibility for a boundary fence is determined by who “uses” the fence. A fence built on the boundary and used by only one owner, belongs to the person who built it. It does not become a “shared” fence until the neighbor actually “uses” it as his own fence. What does it mean to “use” the fence as your own fence? There are a number of definitions applied by the states:

  1. Occupancy: To “use” means to use the land right up to the fence line;
  2. Join: To “use” means to hook up your fence to the boundary fence.
  3. Enclosure: To “use” means to hook up to the boundary fence to entirely enclose your property.

By statute in our state, if someone builds a boundary fence that helps enclose a neighbor’s property, that neighbor is responsible for half of the value of the fence. [RCW 16.60.020.] (In other words, our state appears to focus on the “enclosure” aspect of the “use” concept.)

Community association and other property covenants also may provide guidance on who is responsible for fences, though such guidance is often lacking in detail. Look at the language of the covenants to help determine whether an association is in charge of fence repair and replacement—which helps ensure a uniform appearance of fences in the community—or whether it is an owner responsibility. Rarely is it a good idea for one entity to maintain one side, and another entity to maintain another, as a practical matter. More commonly, one entity repairs a shared fence with prior notice, and the two parties may ultimately split the cost.

Shared Walls Spot ImageShared Walls

Responsibility for maintenance and repair of retaining walls located on a shared boundary is somewhat counterintuitive. The general rule is that the landowner who cuts away land from the natural slope is responsible for the retaining wall. But the landowner who builds up fill behind a retaining wall—such as an uphill neighboring community who added fill to level the land to construct a parking lot— is responsible for the retaining wall. Accordingly, to figure out responsibility for a retaining wall that needs repair, a party will likely have to investigate the history of property development concerning the involved lots. If it is not possible to determine responsibility, one reasonable option is to draft an agreement regarding who will undertake the work and to split the costs: This reduces uncertainty about responsibility down the road and sets forth a procedure to follow when future repairs are needed.

Fortunately, party walls (i.e., walls between dwelling units) are often addressed in association or property covenants. Those covenants typically give either neighbor the option to fix the wall, and then the party undertaking the work may charge back. In a condominium situation, the wall may also be a common element that the association fixes as a common expense.

Conclusion

Issues involving or crossing over property lines can be contentious and time-consuming. Cooperation and compromise are often key to keeping costs down and obtaining prompt resolution. Many problems can be circumvented by providing prior notice and doing your homework to pinpoint the ownership of a boundary line improvement, and by entering into agreements ahead of time before and issue arises.

Co-Authored By Bennett Taylor, Esq.

Associate Attorney, Leahy Fjelstead Peryea

Bennett Taylor is an associate attorney at Leahy Fjelstead Peryea.  He lives in the Greenwood neighborhood of Seattle with wife Lindsay, their new daughter Sloane, and his cat, Peanut.

Co-Authored By Allison Peryea, Esq.

Shareholder Attorney, Leahy Fjelstad Peryea

Allison Peryea is a shareholder attorney at Leahy Fjelstad Peryea in Seattle, Washington. Her law firm almost exclusively focuses its practice on serving community association clients. Allison’s practice includes litigation, covenant enforcement, and general counsel assistance to clients. She is a member of the WSCAI Communications Committee and a former editor of the WSCAI Journal. She is also a humor columnist for national website Above the Law.

  • Charter Construction
  • The Copeland Group, LLC
  • Condominium Law Group, PLLC - General Counsel & Collection Services - Partners Ken Harer & Valerie Oman - Phone: (206) 633-1520 Website: www.condolaw.net
  • Newman & Associates CPA, PC - Banner Ad
  • Barker Martin
  • Rafel Law Group

Follow Us

Search Business Directory

Diamond Sponsors

  • Rafel Law Group Logo
  • Association Reserves Logo
  • ServPro of Edmonds, Lynnwood, and Bellevue West - Diamond Sponsor
  • RW Anderson Services - Diamond Sponsors
  • Charter Construction - Diamond Sponsor
  • HUB International - Diamond Sponsor
  • ServPro of Seattle NW - Diamond Sponsor
  • Community Association Underwriters (CAU) - Diamond Sponsor
  • Barker Martin - Diamond Sponsor
  • Columbia Bank - Diamond Sponsor
  • JJ2 Building Consultants Logo
  • Superior Cleaning & Restoration - Diamond Sponsors

Chapter Magazine

Community Associations Journal - June 2019 Issue - Cover

Calendar

June 2019

Sun Mon Tue Wed Thu Fri Sat
1
  • Board Leadership Development Workshop
2
3
4
5
  • Communications Comm Conf Call
6
7
8
9
10
11
  • Education Comm Mtg - WSCAI
12
  • Board Meeting
13
  • CA Day Committee Mtg
14
15
16
17
18
  • Membership Committee Meeting- Chapter Office
  • MFMD Comm Mtg
19
  • Community Outreach Committee Mtg - WSCAI
20
21
22
23
24
25
  • Business Partners Comm Mtg
  • Social Committee Mtg
26
27
28
29
30
Advertise With Us - Click to find out how! WSCAI

A Checklist For Selling Your Condominium

A Checklist For Selling Your Condominium

[ Blog/News ]
You’ve been reading countless articles in the paper about overwhelming demand for real estate and, after much thought, you have decided to take advantage of the strong seller’s market and sell your condo. While many local media stories suggest that selling anything in today’s market is as easy as snapping your fingers, the purpose of this blog post is to help you with some of the important considerations that, if planned properly, will help to ensure a smooth sale.

First Things First

Why are you selling and where will you go? If you are selling a condo that is your primary home with an intent to rent your next home, the answer is easy. If you are selling an investment property because timing is right, the answer is easier still. If you are selling to buy something else, understand that you will be entering a very competitive market (think bidding wars) and you might have to bridge the gap between selling your current place and buying a new one. I will stop right here as that’s a completely different topic that I only wanted to mention to get you thinking and planning ahead.

Next, Do Your Best to Properly Time the Market

While it goes without saying that fewer buyers shop around the holidays, there is more to timing the market. Understanding current inventory levels and estimating demand will help you list during the time when you are more likely to attract qualified buyers. If an owner currently has a listing in your Association, have a chat with them; ask them to share their experience with you. If someone recently sold, talk to them if you are keeping in touch (if not, talk to the new neighbor to find out exactly what the market conditions were at the time they bought).

Be Ready to Disclose What you Know and Research What You Don’t

The “Sticking your head in the sand” approach is unproductive 100% of the time, due diligence can keep you out of legal trouble should there be issues later. There are several disclosures that are a part of a condo sale. Many are significantly different than those of single-family homes. Some of the simple ones are “lead-based paint” (for condos built prior to 1978), FIRPTA (US residency/citizenship status) and utilities (mostly important for rural/vacation HOAs). Two major disclosures to know about are Form 17 (homeowner disclosure of what you already know about your unit) and the Resale Certificate (Condo Association disclosure).

If you are a Board member or an active committee member, you likely know what’s going on within your Association and potential issues that the buyer (or at least the real estate agent) needs to know about. If you are not very familiar with current standings of the Association, it’s often worth it to order a resale certificate in advance (learn about that process in advance as cost and turnaround time will vary depending on whether your Association is professionally managed or self-managed).

Some of the things that buyers worry about the most are current (and future) special assessments. A special assessment can make a unit unfinanceable and must be disclosed. When properly explained, and dealt with in advance, a special assessment doesn’t have to be a deal killer.

Make Sure Your Condominium Unit is Financeable

A number of things can make your unit unfinanceable for a buyer including: association delinquencies, litigation, the number of rentals, the number of units owned by a single entity, and percentage of commercial ownership, among others. When you know about those in advance, appropriate steps can be taken to resolve the issue, properly explain the issue to a buyer, adjust marketing strategies accordingly or find specialized lenders that can help a potential buyer with a portfolio loan on short notice.

If you live in an Association where demand is above average, consider doing an inspection and sewer scope (if applicable) early and provide those to potential buyers. Not only will you avoid having a dozen pre-inspections dirtying up your place, you will have an opportunity to address some of the things that can possibly kill a sale. Know about your smoke detectors and install a CO2 detector in advance to avoid issues with an appraisal later (appraisal is another important topic but we will leave it out for now as current market conditions helped decrease the number of low appraisals and other issues, though still possible).

Know Your Associations Rules For Selling Your Unit

It’s important to know any House Rules that might affect the sale. Here are a few rules worth mentioning that are important to know in advance. Are “For Sale” signs allowed? Is there a designated spot where key boxes should be installed? Is there a rental cap and has it been met? Are pets allowed and, if so, what are the restrictions? What is the move-in/out process, how much does it cost and does it need to be coordinated up front? Is there an ACC process and, if so, is there a waiting list to have an ACC application reviewed/approved? Are there other rules that restrict or otherwise play a major role in your use of your condo? Your Association might have unique policies that could be important or should be disclosed. Having these answers early can help your sale go smoother.

Here are a few rules worth mentioning that are important to know in advance. Are “For Sale” signs allowed? Is there a designated spot where key boxes should be installed? Is there a rental cap and has it been met? Are pets allowed and, if so, what are the restrictions? What is the move-in/out process, how much does it cost and does it need to be coordinated up front? Is there an ACC process and, if so, is there a waiting list to have an ACC application reviewed/approved? Are there other rules that restrict or otherwise play a major role in your use of your condo? Your Association might have unique policies that could be important or should be disclosed. Having these answers early can help your sale go smoother.

Prepare A Strategy

Finally, figure out the marketing strategy and decide whether you are selling yourself or hiring a real estate agent. If you go with the latter, do your due diligence. Pick out a real estate agent the same way you’d select a major contractor. Interview multiple people and select someone with condo experience and a proven success record in the condo industry. Your agent will assist you with many of the topics covered above as well as other recommendations, such as staging and photography. You should also consider doing what it takes for maximum buyer exposure, such as a very flexible showing schedule or, ideally, having the place vacant.

With a little research and prep work, selling a condo should be a fun process. Good luck with your sale!

By John Petrov

Managing Broker, Washington Condo Brokers, Inc.

John Petrov is a Condominium Association Industry veteran with a wide-range of experience in management and direct sales. Having managed Associations as small as two units and as large as hundreds of units, in two different states, John has a unique perspective in an industry that requires very special skills. John has been very active in Seattle’s condominium real estate market for the past 4 years and has founded Washington Condo Brokers, Inc., a Condo/HOA exclusive realty company, in January of 2016. As a Managing Broker, his current specialty is condominium real estate sales, consultations and professional resale certificate reviews.

  • Barker Martin
  • Newman & Associates CPA, PC - Banner Ad
  • Charter Construction
  • Condominium Law Group, PLLC - General Counsel & Collection Services - Partners Ken Harer & Valerie Oman - Phone: (206) 633-1520 Website: www.condolaw.net
  • Rafel Law Group
  • The Copeland Group, LLC

Follow Us

Search Business Directory

Diamond Sponsors

  • ServPro of Seattle NW - Diamond Sponsor
  • Superior Cleaning & Restoration - Diamond Sponsors
  • Community Association Underwriters (CAU) - Diamond Sponsor
  • Rafel Law Group Logo
  • RW Anderson Services - Diamond Sponsors
  • JJ2 Building Consultants Logo
  • ServPro of Edmonds, Lynnwood, and Bellevue West - Diamond Sponsor
  • Association Reserves Logo
  • HUB International - Diamond Sponsor
  • Charter Construction - Diamond Sponsor
  • Columbia Bank - Diamond Sponsor
  • Barker Martin - Diamond Sponsor

Chapter Magazine

Community Associations Journal - June 2019 Issue - Cover

Calendar

June 2019

Sun Mon Tue Wed Thu Fri Sat
1
  • Board Leadership Development Workshop
2
3
4
5
  • Communications Comm Conf Call
6
7
8
9
10
11
  • Education Comm Mtg - WSCAI
12
  • Board Meeting
13
  • CA Day Committee Mtg
14
15
16
17
18
  • Membership Committee Meeting- Chapter Office
  • MFMD Comm Mtg
19
  • Community Outreach Committee Mtg - WSCAI
20
21
22
23
24
25
  • Business Partners Comm Mtg
  • Social Committee Mtg
26
27
28
29
30
Advertise With Us - Click to find out how! WSCAI

Reserve Study Washington: “The Top Six Components”

Reserve Study Washington: “The Top Six Components”

[ Blog/News ]
A reserve study is a budget and disclosure document, supplementing operating & maintenance budgets for the large expenses that don’t occur each year. In this busy world, focusing on a handful of key items in your reserve study may keep you out of costly trouble.

A typical condominium Reserve Study in Washington has 30 to 50 components that meet the criteria for reserve funding, with their associated expenses occurring at varying intervals throughout the 30-year study period. Planning for this somewhat complicated array of expenses can much more easily begin by simply focusing on the “The Top Six” as they apply to your community. Put together a solid funding plan for these components and you’re likely to avoid special assessment and the myriad of problems that come with it.

Inflation is a key factor in reserve studies and having enough money to complete your projects on time and within budget. Construction is booming again around the Seattle area – a 1% change in inflation can result in a need to revise your contributions about 13%! Work with your provider to ensure your reserve studies are up to date so you have the information you need to be proactive and bring your project costs in at the best value.

Reserve Study Components, What are “The Top Six”?

While reserve studies address all common elements of an association, at minimum if you create a solid funding plan for the “Top Six”, you’re likely to avoid special assessments and the headaches that come with them:

  • Painting
  • Roofing
  • Asphalt
  • Siding
  • Windows
  • Decks

If your community in Washington is a mid or high-rise, you can substitute elevators and mechanical equipment for asphalt; in some cases, plumbing needs to be on that list as well. If you live in an HOA in Washington, your short list is different; likely to include fencing, playground and other recreation equipment, perhaps landscaping items, lighting, signage, a clubhouse, etc…

I took a random sampling of four recently completed condominium reserve studies in preparation for this article to determine just how significant the percentage of the total association assets these components are:

%

8 Units Tacoma Washington

%

12 Units in Seattle Washington

%

35 Units in Renton Washington

%

58 Units in Big Sky Montana

  • 8 units in Tacoma did not have decks
  • 35 units in Renton–the owners are responsible for windows
  • 12 units in Seattle had all of the top six components
  • 58 units in Big Sky Montana–I met a brown bear face to face on the road doing this one…

You can see most assets in these examples fall within the Big Six classification.

Planning for Reserves

It is difficult for many of us to look 20 to 30 years into the future as it relates to planning for our residence. An effective strategy is to begin your focus and discussion with the membership on the next 10 years. Typical ownership periods are often within that 10-year period and one or more of those top six expenses are likely to occur in that time frame. If your community is 11 to 20 years old, more than one is likely to occur. If it is 21 to 30+ years old, you may have to face many of these projects within that 10-year planning window.

Communities focusing on these items will illustrate most of near and mid-term cash flow needs without getting mired in the debate over whether or not the mailboxes should be in the Reserve Study, or why anyone in their right mind would plan for 30 years worth of projects…

Once you determine you community association’s needs,  then you can move on to addressing the other components in the study.

Strategies to Simplify the Process

  • Ignore these confusing terms within the Reserve Study (for now): Percent Funded, Fully Funded Balance, Full Funding, Threshold Funding and Baseline Funding.
  • Open the study to the 30-year income and expense detail, tear out the pages that show the next 10 years of income and expenses year by year and set the rest of the study aside as light reading for a later date.
  • To determine a starting point for a stable reserve contribution rate over that time period, review and sum the expenses projected over the next 10 years, divide by ten, then again by 12 if you are seeking a monthly reserve contribution rate.
  • Now ask yourself how much of a minimum balance in any given year you feel comfortable leaving the community with to guard against surprises, cost overruns, projects needing to be done sooner or at a larger scope than estimated.

You can view this minimum balance question as a percentage of expenses. For example, you might have a policy that states; the ending reserve balance in any given year should not be less than 25% of the projected expenses in that year. Or, you may consider a policy of not letting the reserve balance go below $50,000 or similar (I like the first of these two approaches better). Once you have your beginning point, discuss with the rest of the board, then the entire community, what years 11 thru 20 might bring your way and how it might affect your plan. Communicate and disclose should be your mantra for reserves planning.

Final Thoughts from a Reserve Study Professional

I am somewhat surprised by the number of associations who do not clearly understand their maintenance, repair and replacement responsibilities for the common and limited common elements of their community. Many times, they’re different than what the association believes they are. I strongly advise all associations that have not previously done so, engage a knowledgeable law firm to review their governing documents and draft an association Responsibility Matrix. This legal review and resulting responsibility matrix can be a critical component to the planning process.

Legislation was enacted into law in 2011 requiring the study to be disclosed to all owners during the budget process as well as the board’s funding plan in comparison to the reserve study recommendations to be disclosed and ratified by the membership.

The lessons I’ve learned during the last few years, particularly in my own planning, have resulted in a simplification of my thought process. Consider doing the same for your association and I think you will be on the path to a successful community. I wish you all the best for the time period of 2017 thru 2026, and beyond.

By Jim Talaga, RS

President, Association Reserves Washington, LLC

Jim is president of Association Reserves Washington, LLC and he and his staff have performed over 7,500 Reserve Studies for clients throughout the Pacific Northwest since 1997. Association Reserves, Inc. is the nation’s largest Reserve Study provider.

  • Newman & Associates CPA, PC - Banner Ad
  • Charter Construction
  • The Copeland Group, LLC
  • Condominium Law Group, PLLC - General Counsel & Collection Services - Partners Ken Harer & Valerie Oman - Phone: (206) 633-1520 Website: www.condolaw.net
  • Barker Martin
  • Rafel Law Group

Follow Us

Search Business Directory

Diamond Sponsors

  • Columbia Bank - Diamond Sponsor
  • Association Reserves Logo
  • Charter Construction - Diamond Sponsor
  • Community Association Underwriters (CAU) - Diamond Sponsor
  • ServPro of Edmonds, Lynnwood, and Bellevue West - Diamond Sponsor
  • Superior Cleaning & Restoration - Diamond Sponsors
  • JJ2 Building Consultants Logo
  • RW Anderson Services - Diamond Sponsors
  • Rafel Law Group Logo
  • Barker Martin - Diamond Sponsor
  • HUB International - Diamond Sponsor
  • ServPro of Seattle NW - Diamond Sponsor

Chapter Magazine

Community Associations Journal - June 2019 Issue - Cover

Calendar

June 2019

Sun Mon Tue Wed Thu Fri Sat
1
  • Board Leadership Development Workshop
2
3
4
5
  • Communications Comm Conf Call
6
7
8
9
10
11
  • Education Comm Mtg - WSCAI
12
  • Board Meeting
13
  • CA Day Committee Mtg
14
15
16
17
18
  • Membership Committee Meeting- Chapter Office
  • MFMD Comm Mtg
19
  • Community Outreach Committee Mtg - WSCAI
20
21
22
23
24
25
  • Business Partners Comm Mtg
  • Social Committee Mtg
26
27
28
29
30
Advertise With Us - Click to find out how! WSCAI

Plat Maps – A Series For Homeowners Associations

Plat Maps – A Series For Homeowners Associations

[ Blog/News ]
As a child I was fascinated by maps. My mom would buy the Thomas Guide every year and I would actually spend hours thumbing through it just for fun (for you young pups out there, the Thomas Guide is what your parents would use to find a Saturday garage sale before GPS was invented). If I had a class in school that involved marking up a map with landmarks, capitols, rivers and mountain ranges, I was confident I’d be acing that project. Dora the Explorer and her map have nothing on me. So how lucky am I, as an adult, to have a job where I can spend time pouring over maps; plat maps that is!

In my day job, I primarily manage homeowners associations versus condominiums. Instead of being focused on the buildings themselves, I find myself more focused on the land on which they are built. I often tell people I am a “plat manager”. My day is filled with terms like easement, shared side yards, Native Protected Growth Areas, critical areas, ingress and egress, tracts and a whole slew of various LID BMP. What’s that crazy acronym, you may ask? Low Impact Development Best Management Practices- a relatively new set of land use management strategies that not only mandate development that emphasizes conservation, but implements the use of on-site natural features like bioretention, rain gardens, permeable pavement and rainwater harvesting. Natural site features with which the average board member or community manager may not have experience.

Whats a Plat Map?

A plat is a map, usually drawn to scale, showing the divisions of a piece of land. A developer will take a piece of real estate, or assemble several parcels together and have a survey of the land done to identify lot and plat boundaries, easements, flood zones, roadways, rights of way, critical areas and other important property details. It is part of the legal description of a piece of real property and it is required by a jurisdiction if the land is to be divided for the building of homes, creating parks or setting aside rights of way. If your eyes are glazing over, fear not! Plat maps are fun and often contain hidden gems of information, especially for your homeowners association. Plat maps detail where you can find various covenants and “rules” put in place for those mysterious critical areas, detention ponds and weird strips of open space that no one can seem to remember who is responsible to mow.

Deed Restricted Plat Maps

For a very short moment in time, I crossed over to the dark side and worked for a homebuilder who primarily built deed restricted plats – or HOAs. Once our company became the property owner, the platting would begin. Professionals who are much better with numbers and with amazing technical skills like measuring stuff and drawing straight lines would review local city codes, public rights of way, any old easements or covenants recorded on the titles and put together, almost as if it were magic, a plat map. These magicians actually understood where 38 degrees into the northeast quadrant east of north actually was located. With preconstruction meetings with various planning, building and public works officials, input from specialized engineers and just a little bit of fairy dust… shazam! A preliminary plat map was produced.

The Preliminary Plat Map

A preliminary plat is an approximate drawing of a proposed subdivision. It shows the general layout of the streets and alleys, lots, blocks and other elements of the community about to be built. This draft version of the map is the basis for the approval or disapproval of the general layout by the local municipality. This document is reviewed by city staff to ensure that the lots are the right size, that the use is appropriate for the area of town in which it is being built, low impact development requirements are met and assignment of who controls what is detailed and agreed upon. While most declarations will state something akin to, “The common areas include Tract 998 which is a native growth protection area part of which is covered by a Category III wetland area…” the plat map is where the magic happens as it clearly depicts the location of this tract.

The Final Plat Map

Our little preliminary plat map may go through quite a process from here depending on the scope of the project, the city or county in which it’s being built and how many unique features like rivers, lakes or wetlands the area contains. Eventually though, a Final Plat comes forward and is recorded with the county. This binding site plan is drawn to the scale specified by local ordinance. It identifies and shows the areas and locations of all streets, roads, improvements, utilities, open spaces and any other matters specified by local regulations. It’s first page will contain the dedication language that sets forth the limits and conditions for the use of the land and will detail provisions required for development. It’s from these limits and conditions that the Common Area section of your Declaration will be culled. Tracts will be granted and conveyed to the homeowners association upon the recording of the map. Emergency, utility and access easements as well as landscaping buffer zones, critical area setbacks and assignment of responsibility for certain portions of the HOA will also be specified. It’s from all these details that you may happily find that the giant open space that needs to be mowed is actually the responsibility of the city.

Next month’s lesson: The Joy of Color Coding your Plat Map using Sharpies.

By Melissa Musser, CMCA AMS

Suburban Growth Practices Director, Trestle Community Management

As the Suburban Growth Practices Director with Trestle Community Management, Melissa focuses on developer and declarant community formation through transition to owners for homeowner and master Associations. As an elected City Councilperson for the City of Des Moines since 2010, she chairs the city’s Environment Committee and brings her extensive knowledge of plat management, low impact development standards and surface water management to the clients she serves. Melissa is part of the Education Committee and in her spare time she is an avid marathon runner. By marathon, she means Netflix marathons that she enjoys with the love of her life that she met at a WSCAI Business Partners Social. So you could say that Association Management truly is her whole life.

  • Barker Martin
  • The Copeland Group, LLC
  • Newman & Associates CPA, PC - Banner Ad
  • Rafel Law Group
  • Charter Construction
  • Condominium Law Group, PLLC - General Counsel & Collection Services - Partners Ken Harer & Valerie Oman - Phone: (206) 633-1520 Website: www.condolaw.net

Follow Us

Search Business Directory

Diamond Sponsors

  • Charter Construction - Diamond Sponsor
  • RW Anderson Services - Diamond Sponsors
  • JJ2 Building Consultants Logo
  • Community Association Underwriters (CAU) - Diamond Sponsor
  • HUB International - Diamond Sponsor
  • ServPro of Edmonds, Lynnwood, and Bellevue West - Diamond Sponsor
  • Barker Martin - Diamond Sponsor
  • Rafel Law Group Logo
  • Association Reserves Logo
  • Superior Cleaning & Restoration - Diamond Sponsors
  • ServPro of Seattle NW - Diamond Sponsor
  • Columbia Bank - Diamond Sponsor

Chapter Magazine

Community Associations Journal - June 2019 Issue - Cover

Calendar

June 2019

Sun Mon Tue Wed Thu Fri Sat
1
  • Board Leadership Development Workshop
2
3
4
5
  • Communications Comm Conf Call
6
7
8
9
10
11
  • Education Comm Mtg - WSCAI
12
  • Board Meeting
13
  • CA Day Committee Mtg
14
15
16
17
18
  • Membership Committee Meeting- Chapter Office
  • MFMD Comm Mtg
19
  • Community Outreach Committee Mtg - WSCAI
20
21
22
23
24
25
  • Business Partners Comm Mtg
  • Social Committee Mtg
26
27
28
29
30
Advertise With Us - Click to find out how! WSCAI