Thou Shalt Provide A Budget Summary

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Thou Shalt Provide A Budget Summary

It is a common refrain among those who live in or work with condominium associations that the annual budgeting process consists of two parts accounting and one part voodoo. To avoid an imbalance in the recipe, it is important that members of the Board of Directors are familiar both with the Association’s governing documents and with applicable statutes in order to effectively serve the association and its members.

 

Effective January 1, 2012 changes to Washington’s reserve study laws went into effect. The changes impacted both “new act” condominiums (those governed by RCW 64.34) as well as HOA’s (RCW 64.38) and include specific and extensive reporting requirements that have been added to the budget process for both condominiums and HOA’s. This article will focus on these reporting requirements specifically as they relate to condominiums as set forth in RCW 64.34.308(4).

Understanding and Applying RCW 64.34.308(4)

For “new act” condominium associations governed by the Washington Condominium Act, RCW 64.34.308(3) requires an association’s Board of Directors to adopt a proposed budget and, then, to provide a summary of the proposed annual budget to all unit owners who must have the opportunity to reject the budget at a formal meeting of the association, if they so choose. In the past this process has been fairly straightforward and simple. Concerned that unit owners were not being sufficiently informed of the financial health and wellbeing of the condominium associations in which they lived and notified of potential exposure to increased assessments or other costs in the future, the legislature amended RCW 64.34.308(4) to include extensive reporting requirements with which all “new act” condominium associations must comply.

RCW 64.34.308(4) now requires the Board of Directors disclose the following information in the annual budget summary sent to each unit owner:

(a) The current amount of regular assessments budgeted for contribution to the reserve account, the recommended contribution rate from the reserve study, and the funding plan upon which the recommended contribution rate is based;

(b) If additional regular or special assessments are scheduled to be imposed, the date the assessments are due, the amount of the assessments per each unit per month or year, and the purpose of the assessments;

(c) Based upon the most recent reserve study and other information, whether currently projected reserve account balances will be sufficient at the end of each year to meet the association’s obligation for major maintenance, repair, or replacement of reserve components during the next thirty years;

(d) If reserve account balances are not projected to be sufficient, what additional assessments may be necessary to ensure that sufficient reserve account funds will be available each year during the next thirty years, the approximate dates assessments may be due, and the amount of the assessments per unit per month or year;

(e) The estimated amount recommended in the reserve account at the end of the current fiscal year based on the most recent reserve study, the projected reserve account cash balance at the end of the current fiscal year, and the percent funded at the date of the latest reserve study;

(f) The estimated amount recommended in the reserve account based upon the most recent reserve study at the end of each of the next five budget years, the projected reserve account cash balance in each of those years, and the projected percent funded for each of those years; and

(g) If the funding plan approved by the association is implemented, the projected reserve account cash balance in each of the next five budget years and the percent funded for each of those years.

Clearly, the job of Board members and the agents that serve them in the budgeting process has not gotten easier with these new disclosure requirements! However, the silver lining is that these additional disclosure requirements will likely provide members of the association with an important snapshot of both the current and future financial health of the association.

As another budget season rapidly approaches, it is important that you know whether these recent changes apply to your association and, if they do, that you are clear how they should be implemented. If you have questions about these changes or how to effectively and efficiently implement them, there are a host of resources available through WSCAI that stand ready to assist you! Good luck and happy budgeting.

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Special Assessments: Options For Owners, Options For Associations

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Special Assessments: Options For Owners, Options For Associations

At some point, the need to collect special assessments to cover major or unexpected costs is a fact of life for community associations. What process must an association follow when the need for a special assessment arises?

The Budget Process

The budget process for Washington community associations is constrained both by statute and by each community’s governing documents. Special assessments, even though they might sometimes be unanticipated, are themselves a budget, and therefore the same procedures must be followed to adopt special assessments as to adopt a budget. Those procedures will vary depending on the type of association and the details of the association’s governing documents.

The process starts with the association’s board of directors. The board should, after consulting any necessary experts and considering community input, adopt a proposed budget and mail copies to all the owners. Then, if the association is a New Act COA or an HOA, the board must call a meeting for owners to ratify (or not) the proposed special assessment budget. (Old Act condos must follow the procedures set forth in their governing documents.) If the owners do not ratify the proposed budget, the old budget remains in place. For special assessments, failing to ratify the special assessment budget means that the board cannot impose the special assessment.

Lump Sum, or Payments?

Should you collect the entire amount of a special assessment as a lump sum, or should you divide the assessment into installment payments? One possibility for some communities is for the association to take out a loan which the members pay off through a special assessment spread over several years. Each option has advantages and disadvantages.

An association may have better success with installment payments; the owners might not have the cash to pay up front, and might appreciate the opportunity to make payments over time. However, one disadvantage of this is that the association may not obtain the amount needed to pay for immediate expenses. If the assessment is needed to pay for something crucial, such as a leaking roof, waiting to collect the money may not be an option. But if the association plans ahead, collecting payments over time can be a good option.

There are costs associated with collecting payments over time. Management companies may charge a fee ranging from $5 to more than $20 per unit every month. If this is collected monthly on a large number of homes, this cost can be substantial, and may be a cost the association has to pay as a common expense. If a loan is obtained, there will also be bank fees, interest due, and attorney’s fees related to the loan. And the association as a whole still bears the risk if owners fail to make payments no matter how they are structured.

If the assessment per unit is small, collecting a lump sum from the owners can be the simplest option. One way to help owners is to try to plan ahead for large expenses and give the owners lots of notice before the money becomes due. For instance, if the property will need a substantial repair in 5 months, let the owners know as soon as possible and give them time to come up with the money or sell their homes. Owners with equity in their properties may be able to secure personal loans, a line of credit, or refinance their units to pay the assessment. When an owner borrows to pay a lump sum, the costs and risks associated with the loan are borne by the individual owner instead of the association.

If a home goes into bankruptcy or foreclosure proceedings, the nature of the assessment will affect the loss the association experiences. An acquirer (bank or buyer) must pay any assessments that become due in the future, such as payments to be made periodically on a special assessment; however, an acquirer usually is not obligated to pay for a past due, delinquent assessment of one large lump sum. (See RCW 64.34.264.) With a stream of payments, only the past due payments are wiped out.

Educating Owners On Special Assessments

Possibly the most important aspect of negotiating special assessments for a community is the process of educating the owners about what the needs of the community are. One way to do this is through the use of appropriate professionals. A reserve study professional, architect, or attorney may be able to appear at a meeting, or prepare a written statement for the owners’ reference. If the owners understand that an assessment will protect their homes and their investment, they may be more willing to pay. Another consideration is to make sure the board’s actions reflect the values of your individual community; owners may prioritize the property’s appearance, or may prioritize making only the most necessary of repairs. Making decisions on behalf of the owners which reflect their values will get the most support from the owners and make this entire process easier.

When considering special assessments, educate and communicate with owners, get their input on ability to pay lump sum or a stream of payments, balance the need for funds against the risk of nonpayment for different payment options, and make the best decision you can.

By Eliza Jane Manoff

Article first appeared in the August 2013 issue of WSCAI Community Associations Journal.
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An Ounce of Prevention – The Value of Association Common Area Preventative Maintenance

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An Ounce of Prevention – The Value of Association Common Area Preventative Maintenance

There is a very old and time-tested proverb: An ounce of prevention is worth a pound of cure.

Nowhere is this more true than when it comes to preventive maintenance for common area elements for a homeowner or condominium association.  Stating the obvious, materials utilized in the construction of common area equipment and structures age over time.  With a strategy based on basic preventive maintenance, it becomes possible to extend the useful life of these common elements.

In fact, the current condition of the economy has placed additional pressure on Association budgets. Even so, studies show that it is much more cost-effective to address maintenance issues proactively rather than to seek to affect repairs after damage sets in when issues quickly turn from prevention to “emergency” repairs and responses. In fact, when maintenance is not properly conducted or is cut back due to poor planning or budgetary pressure, the failure of structures, parking surfaces, HVAC and other critical equipment will only increase over time.

The term preventive maintenance (also known as preventative maintenance) implies the systematic inspection and detection of potential failures before they occur.  This term is the polar opposite of unplanned maintenance which is a response to an unanticipated problem or emergency.

A preventive strategy in addressing HOA and Condominium Association maintenance is meant to achieve at least three results: a safer environment due to common areas remaining free from defects, a lower cost of replacement, and a more efficient use of time, manpower and materials.

A Safer Environment

Certainly safety for all residents is a key criterion for association boards when considering what and when to implement maintenance activity.  Rough or significantly uneven sidewalks, loose steps on stairways or wooden porches and decks, low-hanging tree limbs near parking spaces, broken tile around pools, and other such items simply must be granted priority attention on any repair list.  Similarly, replacing broken or failed street and parking structure lighting, repairing video surveillance equipment, or addressing inoperable entry gates or security entrances, must also be the focus of first-priority repairs.  Every such situation needing repair, especially those that could adversely affect the safety of the residents or guests of the community, must be given the prompt attention of those overseeing the common area elements of the association.

With such safety factors in mind, preventive maintenance is an essential tool that can actually look-ahead to those items which, if not kept in proper repair and appropriate working order, could result in excessive risk to people who live in or visit the association property.  With these types of items, preventive maintenance is a tool that can keep adverse conditions from ever developing in the first place.  As we commonly hear, this boils down to a matter of placing safety first.

A Lower Cost of Replacement

Having preventive maintenance programs can help to minimize or even eliminate sudden “emergency” repairs that result in after-hour or rush-order and extra costs to the association.  Such a strategy can help to avoid major unplanned repairs and unknown malfunctions in the association’s common areas or common area equipment.

In contrast to urgent and unplanned repairs, preventive maintenance can help to maintain a constant work flow thus keeping labor and vendor costs in line with an annual budget plan since they can actually be scheduled on a seasonal basis, in accordance with a planned work schedule, and during normal work hours.

Preventive Maintenance Checklist:

  • Gutter cleaning
  • Power washing
  • Touch up painting
  • Siding repairs
  • Water prevention (caulking)
  • Deck and fence repairs
  • Wood rot repair
  • Dryer vent cleaning
  • Drywall repairs
  • Tile sealing and grout repair
  • Changing light bulbs
  • Irrigation repair
  • Pest control
  • House cleaning (common areas)
  • Window cleaning
  • Gutter cleaning
  • Carpet cleaning (common areas)
  • Duct and furnace cleaning and repair

This strategy should also include regularly scheduled inspections that follow routine seasonal schedules. These inspections can also be based on the annual budget, one that includes preventative maintenance; thus eliminating or at least drastically reducing surprise and reaction-based repairs that result in equally surprising costs or cost overruns.

Yet another way that preventive maintenance can save costs is that taking good care of existing common area elements can often extend the useful life of such elements. With simple routine maintenance it is often possible to expand the amount of time that key equipment and structures are able to be used in a productive manner.  This can reduce the cost of replacement which more than justifies the minimal cost of the preventive upkeep that is routinely provided along the way.

Efficient Use of Time, Manpower, and Materials

Scheduled Inspections and scheduled preventive maintenance can be choreographed in a much more time and labor efficient manner.  These efficiencies can save significant costs with both labor and materials.  Obviously, when work is scheduled well in advance, the use of manpower can be coordinated and tasks can be group into common categories which can reduce wasted time and partial day trip or hourly charges.

In a similar manner, materials for maintenance and routine repairs can be ordered well in advance thus saving on rush-order charges or deliveries that are not properly matched to the availability of the workers assigned to the task.

Most, if not all, reserve studies will suggest or even specify items that need attention in the form of maintenance and repair.  These elements can be translated into a seasonally appropriate time-efficient schedule that includes item-by-item checklists that make addressing each item a matter of a scheduled routine.  In cases where the reserve study provider’s report does not include items that may need attention for maintenance, replacement, or repair in a given annual cycle, most quality service vendors will provide options that include inspections and proposed schedules to address elements that need attention.  Simply make certain that such reports or service providers produce not only a list of needed repairs, but that they also supply the association with items where preventative maintenance would be recommended.

Summary

A preventive strategy in addressing HOA and condominium association maintenance can produce three productive results: a safer environment, lower repair and emergency replacement costs, and more efficient use of time, manpower, and materials.

As stated previously, the current condition of the economy has placed additional pressure on Association budgets. Keeping in mind that it is much more cost-effective to address maintenance issues proactively rather than to instituting repairs after damage sets in can help to save precious human and financial association resources.

When it comes to association maintenance and repairs, it truly is correct that an ounce of prevention is worth a pound of cure!

By Sean Hughes

Director of Operations, RW Handyman

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The Team Approach to Community Association Management

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The Team Approach to Community Association Management

Before reading this article, I want you to grab a pen and paper and write down the top five to ten things that make you a successful manager.  What skills do you bring to the table that make you unique in your job?  I know, I know, it’s more paperwork, just trust me.

Now write down the top three things you want to work on. Maybe it’s time management, maybe it’s your organizational skills.

Now think of your colleagues, work partners, and staff. How many of them seem to possess the skills you seek to improve?  How often do you seek advice from them?

The point I am trying to convey is that we are not perfect. Where we come up short in one area, others may gracefully succeed.  In these times where managers are expected to be lawyers, architects, engineers, CPAs, and sometimes miracle workers, it is not always the wisest thing to go it alone, guns blazing.  Sometimes we need to pause and take into account the pure talent that you as a manager have at your fingertips.  You have your colleagues, your staff, your boss, and, if you trust it, maybe even your magic eight ball.

When a complex situation comes up, I know I can go to one of my colleagues for their thoughts.  Different personalities and experiences often dictate the answers I receive.  Are you an A-type personality?  Get the opinion of a B-type.  Are you a good cop?  Ask the bad cop for what they would do.  Oftentimes you will get an idea you would not have thought of on your own.  From there you can give your community an answer or a plan that suits (and hopefully benefits) them.

The Recipe for a Successful Team

A hint of humility, a dash of insight, and a cup of faith…

“A group in itself does not necessarily constitute a team. Teams normally have members with complementary skills and generate synergy through a coordinated effort which allows each member to maximize his/her strengths and minimize his/her weaknesses. Team members need to learn how to help one another, help other team members realize their true potential, and create an environment that allows everyone to go beyond their limitations.” (Davis, 2009)

Let’s dissect this description.

As stated earlier, the team needs to have complementary skills and synergy.  Where I may be good at handling and scheduling the aspects of a building-wide maintenance project, my team members may have ample communication skills available to assist with notifying the residents and coordinating with the vendors.  In utilizing their skills, I am able to provide the level of service expected by my communities.

In order to have a successful team, you need to also have open communication.  Everyone involved needs to be on the same page.  There is nothing worse than being partially responsible for a project and being left in the dark.  As stated in this description, team members need to help one another.  Open lines of communication are an integral part of that.  The best way to do this is to hold regular meetings with your team members to bring everyone up to speed.

Another integral part is a) being able to admit when you need help; and b) knowing when someone else needs help.  As Community Association Managers, we are often expected to have a dense backbone, backed up by thick skin and an uber-A-type personality.  This presents a huge obstacle when it comes time to ask for help.  Pride can easily become a factor, and that pill can be hard to swallow.  If you do manage to keep it down and seek help, you will find that it can take a huge weight off of your shoulders.  Delegating tasks to a willing and capable team member can be a beautiful thing.  Just make sure to return the favor.  Be sure to say thank you.  And smile.

Finally, you need to be able to tell when someone needs help.  Sometimes all it takes is the gesture of asking to get them back on their feet.  If someone knows they can rely on you in their time of need, that refreshing energy gives them the strength to press on and ultimately succeed.

Avoiding Dysfunction

As stated earlier, human beings are not perfect.  Not all of us are meant to work together in peace and harmony.  However, that does not mean we cannot avoid conflict.  There are signs to look out for when choosing your team members.  One of the questions I ask is “would I get along with this person outside of the office?”  The answer, for the most part, is “yes.”

If you are of a more detail-oriented mind, there are five things to really look out for.

According to Patrick Lencioni’s book, The Five Dysfunctions of a Team, these are:

  • The Absence of Trust
  • Fear of Conflict
  • Lack of Commitment
  • Avoidance of Accountability
  • Inattention to Results

Some of these speak for themselves.  If you don’t trust the person, don’t work with them.  If they are not committed to the team effort, then there is a lesser likelihood of success.  Some of these are fairly ambiguous.  Fear of conflict pertains to going along with the team’s flow, even if you disagree with the team’s path.  If you feel things should be done differently, speak up.  Make your voice heard.  Even if your ideas are shot down, you may gain a better understanding as to why the rest of your team is heading down that particular path.  Avoidance of accountability also sets the stage for failure.  If the plan goes awry, don’t point fingers.  Remember, it is a team effort.  Instead, focus on how to make things right.  The idea of inattention to results brings to mind the famous business fable, The Stag Hunt.  In this fable, a group of hunters are tracking a stag and must work together to capture the beast.  If they are able to work together, they will conquer the animal and all will eat.  However, the hunt is not guaranteed to succeed and could take days.  The hunters also have the option of individually hunting a hare, which makes itself present and available for the taking.  The chance for success is greater, but also not guaranteed.  The hare can also only feed one as opposed to the group.  If one of them breaks off and hunts the hare, the stag will scare and the rest of the hunters will go hungry.  In summation, this idea is about the problem of going for personal success before team success.

These can all be huge detriments to the team dynamic, so be on the lookout.

In Summary

With everything taken into account, having a strong team of willing and experienced individuals backing you up can help you and your communities succeed. Their combined experiences and personalities offer a unique perspective into almost any problem that may arise.  Just be sure to avoid the potential dysfunctions that may come up.

The most important take away from this: You are not alone.

Citations:

Davis, Barbee. 97 Things Every Project Manager Should Know: Collective Wisdom from the Experts. Beijing: O’Reilly, 2009. Print.

By Mike Hilfer CMCA, AMS

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Tying Up Loose Ends: End of the Year Checklist for Self-Managed Communities

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Tying Up Loose Ends: End of the Year Checklist for Self-Managed Communities

As we near the end of the year, it’s time to take care of loose ends and prepare for the upcoming year. This can often prove a difficult balancing act, especially without the help of professional management. However, just because you’re a self-managed community doesn’t mean you must do without professional assistance. In fact, under the Washington Nonprofit Corporation Act, a board of directors is allowed to do just that: rely on information, opinions, reports, and statements from professionals in a given field. What follows is a basic primer on what you, as a self-managed community, need to do at year-end.

Balancing the Books — Financial Statement, Budget, Audit & Tax Return

Whether you’re a homeowners association or a condominium owners association, year-end means it’s time to balance the books and take stock financially.

Annual Financials & Budgeting

Both the Condominium Act and the HOA Act require every association to prepare, at least annually, a “financial statement.”  A financial statement consists of a balance sheet and an income-and-expense statement.  The Condominium Act provides that the statement must be prepared in accordance with generally accepted accounting principles (GAAP).  This means that all figures have to be shown on an accrual basis, which records income when earned and expenses when incurred, as opposed to a cash-basis model, where income and expenses are recorded when cash actually flows in and out.  The HOA Act does not mandate compliance with GAAP, but doing so constitutes best practices.

In addition to the financial statement, associations should prepare an annual budget that projects anticipated operating costs and reserve contributions for the coming year.  This is required by the bylaws of most associations, although it is not a statutory requirement.  However, before a new schedule of assessments may be used, there must be a budget that supports the assessment amounts.  If a budget proposed by the board of directors is not ratified by the association, the last budget that was ratified must remain in effect.

What’s an audit, and can I waive it?

Audits, which are conducted by certified public accountants (CPAs), verify the accuracy and fairness of an association’s financial activity and reports.  Condominiums with 50 or more units are required to have their financial statements audited annually by a CPA.  Condominiums with fewer than 50 units can waive the annual audit if 60% of the units (not including units owned by the declarant) vote to waive.  Homeowner associations with annual assessments of $50,000 or more are required to have an annual audit, unless waived by a 67% vote at a meeting at which a quorum is present.  Waiver must be done one year at a time: multi-year waivers are not allowed under the statute.

Taxes, Taxes, Taxes

An association must file a federal tax return each year, even though it is a nonprofit corporation or association.  The return is due March 15, unless an extension is requested.  One of two IRS forms is used.  Form 1120 is considered the “Corporate Method,” and graduated tax rates begin at 15%.  Form 1120H is the “Exempt Method” and uses a flat tax rate of 30%.  If the association has no taxable income, the tax rate may be irrelevant.  Form 1120 can save you money if there is taxable income to report, but it is more complex to fill out and requires advance planning.  Form 1120H is easier to complete but the following four criteria must be satisfied: (1) 85% of the units must be for residential use; (2) at least 60% of gross income must be tax exempt income; (3) 90% of expenses must be to acquire, build, manage, maintain, and care for property; and (4) residual income must not be used for members’ benefit.

Given the complexities of tax laws, consult with a tax professional to ensure compliance with federal requirements and the most favorable tax treatment for your association.

Preserving Your Investment – Reserve Study and Maintenance Plan

Next on the list are those items which keep your buildings and improvements in good repair over the long term: reserve studies and inspections.

Confused about Reserve Studies?

Under a law passed in 2008, all Washington condominium associations (including old-Act condos) must conduct a reserve study and update it annually.  Non-condo homeowner associations are not subject to this requirement.  A full reserve study includes a physical assessment of all building components and improvements that are expected to require replacement, and a financial analysis.

The purpose of annual updates is to ensure that reserve funding is on track and, if not, to adjust the funding schedule. This means comparing actual wear of components to anticipated wear, adjusting estimates of remaining service life as needed, and checking actual funding and investment returns against expected revenues and investment returns. The update must include an onsite inspection every third year; interim-year updates do not require onsite inspections.  Annual updates are not required for associations with ten or fewer units.

Inspect and Repair Every Year

Annual inspections and regular maintenance and repair are key to the long-term well being of any association.  The reserve study may include physical inspection of buildings and improvements, but inspection is not the same as maintenance.  As board members, it is your responsibility to make sure that regular maintenance and repairs are carried out to preserve the condition of the buildings and improvements.  Since board members change year, having a maintenance plan that specifies the schedule for maintenance of each component helps provide continuity as members rotate off the board – particularly in self-managed associations.  Most reserve study analysts can also prepare maintenance plans.

Legal Housekeeping – License Renewal

The reserve study and annual inspections help preserve the physical well-being of your buildings, but ensuring the legal life of your association is important as well.  Nonprofit corporations must register annually with the Secretary of State.  An Annual Report must be filed with the Secretary of State.  This can be done online and includes verifying the names and addresses of all officers and directors, the principal place of business, your corporation activities, a signature from an authorized board member, and paying a fee. (See http://www.sos.wa.gov/corps/).  Failure to renew your registration will trigger an administrative dissolution of the corporation.  The corporate license can be reinstated for three years after dissolution, but there is an extra fee for reinstatement.  A corporation must be in good standing with the Secretary of State to maintain any court action – such as a collection action – so annual renewal is important.

Fostering a Sense of Community – the Annual Meeting

The above items are needed to keep your association in good order, but remember what creates a sense of community: the people.  While the law (and probably your bylaws) requires every condominium and homeowner association to have an annual meeting, the annual meeting is also a great opportunity to strengthen your community.  Adding a social element to the meeting, by having food and beverages, brings people in and creates a positive atmosphere for participation.  If alcoholic beverages are involved, it is prudent to complete the annual meeting business before opening the bar!  Putting photos from the annual meeting on the association website reinforces the sense of community and fun.

Conclusion

Managing your own association can be a daunting task.  Knowing the things you have to do at year-end to satisfy legal requirements is critical.  By getting started early in the fall on financial matters, annual inspections and reserve study updates, and license renewal, you will keep your association on track and be ready for a productive and fun annual meeting.

By Tony Rafel

Managing Partner, Rafel Law Group PLLC

Tony Rafel is the Managing Partner of Rafel Law Group PLLC, a law firm that represents community associations
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