Special Assessment Accounting. Aware. Diligent. Timely. Accurate. Complete.

Special Assessment Accounting. Aware. Diligent. Timely. Accurate. Complete.

[ Blog/News ]

Special Assessment Accounting. Aware. Diligent. Timely. Accurate. Complete.

Record keeping and accounting for special assessments should not be as challenging as it often is. Often, as auditors we find the accounting for special assessments is incomplete due primarily to changes of management companies, inadequate tracking of owners’ accounts and payments, accounting for special assessment receipts in the wrong fund, and/or special assessment forecasts are inadequate to determine if there will be sufficient funds to pay for all repairs or pay off a loan.
Assessment Records

We recommend a permanent file of special assessment documents, including:

  • Special Assessment notices to owners
  • Board minutes including documentation of special assessments:
    • Initial levy and approval by members
    • Monthly status
      • Amounts assessed to owners
      • Review owner special assessment amortization schedules
      • Amounts spent for the special assessment purpose
      • Financial status
        • Special assessment cash held
        • Special assessments receivable (billed but not received)
        • Remaining amounts to assess
        • Amounts spent to date
        • Projected remaining expenditure
        • Projected remaining debt service: principal and interest
        • Projected surplus or deficit
      • Conclusion regarding financial status

The information and data recommended above are critical. However, only accurate and complete record-keeping and accounting will provide a board with the data needed to understand the status of a special assessment project and the projected financial picture.

Accounting and Banking

Associations should account for special assessment activity in a separate fund from operating and reserves. A separate bank account and specific account codes should be used. An amortization schedule should be maintained for all owners who are making monthly special assessment payments. Special assessment billing and expenditures should be processed using the special assessment bank account and accounting fund. Any amounts received or paid by other funds should be reconciled and repaid to the other funds at least monthly.

Board Meeting Review

At every board meeting, boards should review the vital data systematically. We recommend that board members review special assessment reports and supporting documents and ask questions before meetings. Keep your eyes on the goals: Collection of all assessments, control over expenditures including debt service, and determining the projected surplus or deficit. Boards need to formulate a plan should there be a projected shortfall. Another special assessment? Increase the loan? Hold off on expenditures?

Boards need to actively participate in the management and accounting for all special assessments. End Of Article

By Newman CPA

By Newman CPA

Chapter Happenings Sponsor, February 2021

By: Jeremy Newman CPA, Newman Certified Public Accountant PC

Newman CPA simplifies the HOA CPA process. Our streamlined process enables us to complete your work accurately, efficiently and on time. We understand your need for reliable communication and on-time reporting. We believe that you deserve hassle-free audit & tax services. Have confidence knowing we are your responsive partner here to make your life easier.

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Year End Accounting: Loose Ends

Year End Accounting: Loose Ends

[ Blog/News ]

Year End Accounting: Loose Ends

For most associations, their fiscal year ends on December 31. If an association does not obtain an independent audit by a Certified Public Accountant, it is perhaps more imperative that boards of directors pay close attention to the year-end financial reports.

Some Areas To Consider Include:
Cash

Ensure all bank accounts have been reconciled. Obtain a copy of reconciliations and bank statements and compare, paying attention to unusual or large reconciling items.

Assessments Receivable

Review the aged receivables report. Understand the reasons for delinquent accounts and ensure that a collection plan is in place to maximize recovery of delinquencies.

Accrued Expenses

Most associations account for expenses only when invoices are paid. Boards should ensure they account for all expenses incurred during the year, regardless of when vendors are paid. Remember, you set a budget for the year. It is easy to overlook a late invoice for this year that may be recorded as an expense in the next year.

Special Assessments

Sometimes special assessment programs last more than one year. Often, special assessments are levied to repay a commercial loan. If accounting for special assessments billed, collected, outstanding or delinquent is inaccurate, a board of directors may not be able to determine if the remaining funds to be collected are sufficient to repay a related loan.

Ensure there is a report showing special assessment billing to and receipts from homeowners. Compare the aggregate of special assessment bank account balances plus amounts to be billed and collected less any outstanding special assessment expenditures to the loan repayment requirements, both principal and interest. Early determination of a potential deficit will provide boards with the opportunity to develop a contingency plan.

Loans

Ensure the correct loan balance is presented on your financial statements. Compare to the loan statement provided by lenders.

Income

Review assessments and other income accounts to ensure all income appears to have been recorded. You will need to know if the financials are prepared on accrual or cash basis. Under the accrual basis, assessment income should match budget.

Expenses

Compare actuals to budget. Inquire about unexpected variances. Ensure all current year expenses have been recorded. End Of Article

By Newman CPA

By Newman CPA

Chapter Happenings Sponsor, January 2021

Newman CPA simplifies the HOA CPA process. Our streamlined process enables us to complete your work accurately, efficiently and on time. We understand your need for reliable communication and on-time reporting. We believe that you deserve hassle-free audit & tax services. Have confidence knowing we are your responsive partner here to make your life easier.

By: Jeremy Newman CPA. Newman Certified Public Accountant, PC

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The Longest Life For Your Pavement

The Longest Life For Your Pavement

[ Blog/News ]

The Longest Life For Your Pavement

While we do not often think about the blacktop beneath our tires and under our feet, having a proper maintenance program for your asphalt can extend its life significantly, therefore pushing out the replacement date and saving thousands of dollars.

Asphalt paving is done with a mix of asphalt binder and construction aggregate (rocks and sand).  From the moment it is installed, it starts to deteriorate.  You may think the deterioration is mostly from traffic, however the most impactful elements are sunshine (especially UV), rain, moisture and harsh chemicals like oils, gasoline, etc. 

Asphalt works by providing a “waterproof” skin to vehicle areas, which does not allow water to get underneath it.  With regular crack sealing and sealcoating you can keep the water from causing damage like “alligator bellying” and potholes, which can accelerate damage to the surface if left alone.  When there are breaks in the asphalt the result is that water infiltrates below the surface of the paved area and causes subterranean erosion as well as damage caused by the freeze-thaw cycle in winter.

Remember to sealcoat your asphalt 6 months after installation and again every two to three years for best results and longest life.  Sealcoating protects against oxidation, blocks UV damage and prevents the sun’s drying effects which cause reveling, cracking, and deterioration.  It helps keep water from infiltrating below the surface (the fastest way to damage asphalt.)

Save Money

The binder in asphalt is a petroleum product and has tripled in price over the past forty years—replacement is a cost which every association should have in their reserve study and budget for.  You can push the date out on your replacement from less than 10 years for completely unmaintained asphalt to 20+ years for well-loved pavement, more than doubling the lifespan!

Save Hassle

With a seasoned provider that has years of experience working with community associations, multifamily, and hospitality clients you can be assured that the work will be executed with a detailed plan to ensure all areas are treated with minimum hassle to the occupants. End Of Article

Transblue offers free asphalt consultations!

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By Transblue

Chapter Happenings Sponsor, January 2021

Transblue provides Asphalt & Concrete Services to community associations, as well as a variety of residential, public and commercial properties. A smooth, freshly painted parking lot is a thing of beauty and function. Assure your customers that their safety is a priority by refreshing your asphalt, concrete, and other hard surfaces with Transblue.

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The Best 4 Financial Reports For HOAs & Condo Communities

The Best 4 Financial Reports For HOAs & Condo Communities

[ Blog/News ]

The Best 4 Financial Reports For HOAs & Condo Communities

I hear 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:

Best 4 Financial Reports

[1] Aged Delinquency Report

Aged Delinquency Report Example

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!

[2] Comparative Income & Expense Report

Comparative Income & Expense Report Example

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.

[3] Balance Sheet

Balance Sheet Example

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.

[4] Bank Reconciliation Report

Bank Reconciliation Report Example

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

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. End Of Article

This article first appeared in the Jan/Feb Issue of Community Associations Journal.

By Russell Munz, CMCA

By Russell Munz, CMCA

Russell Munz, CMCA is the  founder 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.

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Hitting a Moving Target: How to Stay on Budget this Fiscal Year

Hitting a Moving Target: How to Stay on Budget this Fiscal Year

[ Blog/News ]

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.
Target IconBudget Adequately

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.

Target IconReview 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.

Target IconCheck 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.

Target IconConsider Delinquencies

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.

Target IconTrack 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.

Target IconDon’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.

Target IconBudget 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!

Target IconCheck 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. 
End Of Article

This article first appeared in the Jan/Feb Issue of Community Associations Journal.

By Karen McDonald, CMCA, AMS, PCAM, RS

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.

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Condominium and HOA Insurance – Risk Management Budgeting

[ Blog/News ]

Condominium and HOA Insurance – Risk Management Budgeting

Each year an association’s board of directors is entrusted with budgeting for the upcoming fiscal year. This would typically be spearheaded by the management firm, if one is retained, and would be predicated on historical information, known increases in pricing of goods and services, and other factors material to your specific needs. One thing is for sure, if you are a condominium association, invariably the insurance premiums can be one of the largest line items on your budget. This is because of the requirement to insure the property.

Past Premiums Are Not Always A Predicator For The Future

You should consult with your agent to understand the trending in the industry as the market place is cyclical. Don’t just plug in say a 5% increase with no consultation. Right now we are in a soft market and the premiums are usually as expiring or sometimes even less based on no changes in exposures or frequency of claims. However high risk insurance such as Earthquake is still subject to change because of new earthquake modeling subscribed to by insurance companies, competition, and if there are catastrophic losses elsewhere in the country such as a hurricane. For an HOA the likelihood of any volatility in premiums for General Liability, Director & Officers, and Crime coverage is minimal.

While the primary focus for insurance is on the premiums, is your association budgeting for up to the amount of the property policy deductible or for uninsured losses? This is recommended and it is suggested that such monies not be lumped in with maintenance or your operating account but be clearly identifiable. Whether you fund this annually or not is a decision you’d need to make, especially if your association carries Earthquake coverage where the association’s deductible could be substantial and is never funded.

Listed below are some other considerations associated with your insurance that  may have budget implications.

[1] Know What Needs To Be or Should Be Covered

It is imperative that you know what your association documents require you to insure and what is prudent. For condominiums, the number of associations I come across that don’t know whether their insurance is supposed to include coverage for the fixtures, equipment, and appliances in the residential unit is astounding. What about the betterments and improvements made by the unit owner? This is critical to know and impacts both the association and the unit owner from both a coverage and cost standpoint.

In your declaration or CC & R’s there’s often no guidance or requirements for  limits of liability coverage or other insurance. If your association has amenities such as a pool, fitness center, play ground, etc. carrying a $1,000,000 liability limit would seem very unwise in this day and age. Being frugal to the detriment of the association benefits no one. Have your agent provide you with optional coverages and limits of insurance so that the board can make an informed decision and include any approved changes in the budget.

[2] Insurance To Value

Condominiums have a requirement to be insured to full replacement cost value (see #1 to address the determination of what property should be considered), a responsibility that rests solely with the board of directors. Relying on your insurance company or a guaranteed cost provision doesn’t negate your responsibility, good though this option might be.

For example, I’ve seen property policies that are written with a guaranteed replacement cost provision but the Earthquake insurance has been written with a separate insurance company with a specified property limit and with penalties for underinsurance. How was that value established? Isn’t an earthquake loss more likely to result in a potential total loss in some cases?!

Remember too, the property coverage you purchase must enable you to rebuild or repair the damage to meet all of the current building codes applicable in your area. Such considerations would normally be factored in to any third party insurance replacement cost valuation appraisal. Wouldn’t budgeting for a periodic appraisal or having an annual update be a worthy consideration and a defense for a board in their efforts to comply with the declaration?

[3] Association Declaration – Insurance Section Amendment

Many condominiums and HOAs have amended the insurance section of their association declarations to bring clarity to what is to be covered by the association’s insurance; to shift the burden of the association’s insurance deductible or otherwise uninsured amounts to unit owners affected by a loss under certain circumstances; and, in some cases, to mandate unit owner insurance. These have cost implications to the association and the unit owner that can be beneficial.

[4] Risk Management

All too often a board of directors believes that the premiums being proposed are derived by the insurance company and that they have no say in them. Of course the limits of coverage and policy terms are all negotiable but have you ever thought of the long term benefits of improving the risk i.e. reducing the likelihood of a loss occurring? Consider having a long term ongoing risk management plan that really makes your association more attractive to a prospective insurance company and will reduce your potential for a loss. The benefits may be realized at the front end in lower premiums and over the long term by reducing the number of claims and the associated expenses.

Examples of cost effective measures might include an emergency plan, home owner education on what if scenarios (where are the water shut-offs for example), contractual requirements for service providers or contractors on site, ensuring compliance with your declaration, or installing seismic gas shut-off valves to prevent fire following an earthquake. Any such measures undertaken by you need to be conveyed to your insurance company. The costs associated with any risk management program might be next to nothing at the outset but the implications can be far reaching for your budgeting process.

Insurance Due Diligence

In conclusion, when working on your budget for next year and you drill down to the line item for insurance premiums do a little soul searching. Is the premium based on the required and prudent coverage? Are there circumstances that might cause a big change in insurance premiums? Are funds elsewhere in the budget for deductibles, uninsured losses, or proactive risk management? Has your agent met with you to discuss how risk management can help you prevent losses, reduce costs, or even impact the budget currently being worked upon?  The consequences of not doing a little due diligence up front can easily become an unbudgeted expense item later. The English saying penny-wise, pound-foolish rings true!

by Duncan Kirk, CIC, CIRMS

Agent/Owner, The Unity Group - Insurance & Employee Benefits

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Exterior Lighting for Community Associations

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Exterior Lighting for Community Associations

As we work our way through fall and into the winter months here in the Pacific Northwest, the days become shorter and shorter. Many of us are heading to work in the dark and returning home in the dark. There are, however, some things that we can do to help our associations through this time of the year which will not only improve the aesthetics of our communities, making them more inviting and pleasant, but can also improve safety and reduce crime.

The Element of Crime

The criminal component isn’t often considered when planning revisions to a landscape or the exterior lighting system very often, but how does a criminal choose their place of activity? Often times the decision to commit a crime is more influenced by the criminal’s perception of whether or not they will be caught, rather than ease of entry into a location or the “reward” from committing the crime. One way to reduce crime in our associations is to employ the strategies emphasized by CPTED or Crime Prevention through Environmental Design.

CPTED Principle #1: Natural Surveillance
  • “See and be seen” is the overall goal when it comes to CPTED and natural surveillance. A person is less likely to commit a crime if they think someone will see them do it. Lighting and landscape play an important role in Crime Prevention Through Environmental Design.
  • Proper planning and lighting of parking areas, walk ways, and common areas can reduce or eliminate criminal activity by forcing criminals to label your association as a “bad” target.

Safety by Way of Light

The perception of safety at night can be affected by several factors. The color of the light, lack of glare, lighting levels, and uniformity of the light.

Outdoor lighting doesn’t just keep the ‘bad guys’ away, it can also help us get around our community safely. Illuminated walkways reduce the possibility of trip hazards. Lighting on roadways managed by the association creates safety for residents enjoying time outdoors and vehicles returning after a day at work. Some safety issues can be regulated by increased lighting or a revised exterior lighting plan.

The Ooh’s and Ah’s of Exterior Lighting

Even if safety and crime prevention aren’t at the top of your list, property value must certainly be in consideration. Properties with well maintained landscapes are certainly beautiful to behold in the daytime, but have you seen them at night? Often when we see a community at night that holds our attention and causes us to lean over to our spouse and say, “Wow. They really take care of that place,” it’s usually because they have exterior lighting that illuminates trees and shrubs, exterior pathways, water features, etc. Creating and maintaining such a system can draw good attention to the association and increase property values for the owners.

New Technology in Lighting Systems

As communities and their structures age, the existing lighting systems become outdated as technology and developments improve. We are always looking for ways to employ more efficient systems, green technology, etc. into new constructions as well as retrofitting existing structures. New fixtures often produce more light and require less wattage to operate.

LED systems and fixtures have been drawing a lot of attention lately and for good reason. LED, or light emitting diode, is about 85% more efficient than traditional incandescent bulbs and about 10% more efficient than CFL’s or compact florescent bulbs. Not only are they more efficient, but LED fixtures have a dramatically longer life expectancy which reduces the maintenance requirements. Consider the frequency that a simple porch light has to be replaced. Then consider an LED bulb operating in the same fashion theoretically could last approximately 20+ years.

Shine On!

Whether your association is intent on improving safety for owners and guests, reducing the possibility of criminal behavior, increasing property values, or making the community a little more environmentally efficient; looking into exterior lighting solutions can help take some of the gloom out of a typical Pacific Northwest winter.

By Troy Brogdon

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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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Establishing Your Reserve Funding Plan: Considerations & Strategies

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Establishing Your Reserve Funding Plan: Considerations & Strategies

Association approaches to preparing for major repair and replacement projects have varied widely over the years—from completely ignoring, to detailed analysis of building components and their related costs, and all variations in between. While next year’s operating expenses and the resulting regular assessments are rarely viewed as “discretionary,” reserve expenses and the offsetting Funding Plan often are, particularly when projects are slated more than a few years away.

Sarah Anderson, PCAM, Director of Marketing & Operations of EMB Management, Inc., AAMC, discusses some of the challenges of reserve planning with industry veteran Jim Talaga, RS, President of the Association Reserves – Washington regional office. Their goal is to present some new ways to view and approach this important task and establish some best practices.

Best Practice 1

Because of the havoc of special assessments and their disruptive effect on the community, boards should address the reserve funding plan early in the annual budget process. Being overly optimistic about a monthly landscape budget, for instance, rarely causes financial challenges. But years of underfunding Reserves will almost certainly result in the need for a Special Assessment.

Sarah: Why do you think it has been difficult for many associations to increase their reserve contributions and follow the recommendations within their Reserve Study?

Jim: There are three reasons for this in my view. First, many associations began their lives in an era where little to no reserve planning was ever undertaken. The misconception among board members and homeowners (that continues to this day) is that the Reserve Fund is for some far off future expense. In reality, funding reserves is necessary to offset ongoing common area deterioration as it occurs. The second reason is that addressing the reserve contribution is often left until the end of the budget process and board members are often unprepared to make wise funding plan decisions. In most instances, the reserve contribution is one of the largest budget line items, and an increase in the rate often means an increase in overall assessments, which is always viewed as unpopular. Finally, we have found there is a general misunderstanding of how to read and use the Reserve Study.

Although there is a statutory requirement in Washington for a 30-year reserve funding plan, the expense projections can and should be broken down into five- and ten-year action plans. With simple addition and subtraction, an association can clearly see how much reserves they currently have in the bank, and what expenses they need to prepare for in the near term. There is also confusion and emotion surrounding the concept of “% Funded” and “Fully Funded”—industry terminology that should not get in the way of a simple planning task.

Sarah: Can you suggest some other ways for association boards to explain what their reserves are for and, if an increase is necessary, how to get them moving in the right direction?

Jim: Boards can use the information in the Reserve Study to create a summary of specific projects that will be completed during the next five or ten years. It will become much clearer to homeowners when, for example, they see there is a need to paint the buildings, replace the fence, and reseal the decks. This makes the expenses tangible, not just a list of meaningless numbers on a page. When we have clients facing a special assessment in order to afford timely repairs, we often counsel that those funds be allocated to specific projects, or a combination of specific projects and rebuilding their reserves. People like to know how their money is being used.

The current budget disclosure requirements that were implemented within the RCW (both the Condominium and HOA Acts) in 2011 for budgets adopted on or after January 1, 2012 are also a wonderfully illustrative tool. The disclosures clearly show the cash flow path the community is on by comparing their current budgeted reserve contribution rate to the funding levels recommended in their Reserve Study.

Homeowners need to appreciate that reserve expenses are inevitable and should be a question of when, not if. There are only four ways to pay for the expenses listed in the Reserve Study: 1) set aside sufficient reserves (many Declarations actually require this) 2) levy a special assessment 3) obtain a bank loan 4) endure deferred maintenance and the decline in property values associated with doing nothing. When you include compounding interest over time with regular reserve contributions, properly funding reserves is always the least expensive funding option by a significant margin.

Best Practice 2

Provide access to the entire Reserve Study to each owner, along with links to video tutorials, webinars and articles. You’re all in this together, sharing expenses and creating your community. Also, have your studies prepared and therefore available for distribution well in advance of the budget process, allowing time for owners to digest and formulate questions.

Sarah: But what if the Funding Plan in the Reserve Study requires a large increase, which the association cannot financially tolerate?

Jim: The Funding Plan is based on a scope and schedule of reserve expenses, as determined by the actual condition of each item on the component list. The repair and replacement costs won’t go away, and in fact are likely to increase during the life cycle of the association. Remember that all reserve components are inflating over time, and the lower the association’s current reserve fund strength, the harder it will be for them to meet those expenses if they don’t get going now.

With many of our client associations, we are able to craft a strategy of lower initial increases followed by some periods of time with larger than typical (e.g., 5% to 10%) annual increases. This type of “ramping” as we call it can get an association moving in the right direction more effectively rather than trying to implement a large leap in assessments. If some combination of reserve contributions and Special Assessment is inevitable, the earlier in the process the board can communicate the funding strategy to the homeowners, the better.

Because Community Associations are volunteer organizations with comparatively high turnover of board and committee members, financial transparency and basic education will likely always be at the center of successful communities. Many boards do not provide homeowners with a copy of the Reserve Study, nor utilize many educational resources and tools. We see this as a huge mistake.

Sarah: We have seen Washington state go from little or no guidance for Reserve issues, to requiring mandatory Reserve Studies and disclosures. What do you think the future may hold?

Jim: Well, the trend has clearly been for more scrutiny of an association’s financial health, not less, and more encouragement for the board to “do the right thing” on behalf of the homeowners. This trend is a good thing in my opinion. There is no reason for homeowners to be surprised by a repair or replacement expense that gradually approached over many years, often in plain sight! Association-governed communities are most successful with owners who are a good fit, including their ability to afford the “true cost of ownership.” If they can’t, delinquencies and foreclosures can result in major impacts to the cash flow and financial wellbeing of the association. We review association budgets every day, and often see “collection costs” as one of the largest line items in the operating budget.

I think it will continue to be important to educate and create a system where good financial stewardship of an association is rewarded, not punished. There has been a misperception in the real estate world that lower monthly assessments are, by themselves, very attractive, and is often a selling point in a buyer’s purchase decision. However, if a comparable property nearby has higher monthly assessments but sufficient reserves and a solid Funding Plan in place, the property with the lower monthly assessments may not be the better deal financially. Reserves “% Funded” is a fair way to compare property to property. Washington could follow the lead of California, where one of the mandated disclosure requirements is to show a per-unit reserves deficit or surplus.

I recently presented an educational seminar to an influential group of real estate professionals in the downtown Seattle core to illustrate these concepts. They warmly embraced the message, knowing that the ability to provide some basic financial insight into an association for their buyers would set them apart, resulting in happier customers and referrals. Board members and Managers should do the same—make sure you understand basic Reserve Funding concepts and that real estate agents and prospective homeowners are aware that you have a current Reserve Study, a strong reserve fund, and are pursuing a reasonable Funding Plan. That will set your association apart from competing properties in your market area.

Best Practice3

You should be continually recruiting volunteers— those who take time to read and understand the Reserve Study may be your next community leaders.

Sarah: To circle back to the beginning, and put you on the spot a little, what Funding Objective should an association pursue: Baseline, Threshold, or Full Funding?

Jim: Most people who debate this issue are unaware that reserve contributions associated with the higher-risk “Baseline” objective and the more conservative “Full Funding” objective averages only a 13% difference. Having said that, this is a question that will likely be debated until the end of time!Unfortunately, it’s been our experience that people who get caught up in this funding plan detail often miss the bigger picture.

After establishing a well-conceived budget and disclosing the association’s complete financial picture to the homeowners (of both current and future needs) the board will want to be sure that their decisions and actions comply with their Declaration and state law, as well as fall under the protection of the Business Judgment Rule: Made in “good faith,” in the “best interests of the association as a whole,” and “with reasonable inquiry.” That’s the bottom line.

Co-Authored By Sarah Anderson, PCAM

Director of Marketing & Operations, EMB Management, Inc., AAMC

Co-Authored By Jim Talaga, RS

President, Association Reserves

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Bad Debt – Planning for Uncollected Assessments

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Bad Debt – Planning for Uncollected Assessments

Introduction:

For the past 35 years, Lake Superior State University publishes a list of “banished” words and phrases.  The annual list includes words and phrases that are misused, over-used, and generally useless.  The 2010 list includes such gems as “sexting”, “tweet”, “app”, and “too big to fail”.  Also included on the 2010 list is probably the most overused phrase in recent memory:  “In these economic times”.  It’s everywhere.  So in writing this article about budgeting for bad debt, I decided to see I could write it without using the banished phrase.  Why, you ask?  Because budgeting for bad debt is something that associations should consider doing even in the best of times, and saying that associations need only budget for bad debt in a down economy would be as shortsighted as… well, not budgeting for bad debt.

One of the things I let collection clients know right off the bat is that they are not alone.  According to RealtyTrac, 20,960, or 1/33 of all homes in Washington have received a foreclosure notice during the first six months of 2010 (this does not include properties that are already bank-owned).  Considering that associations make up approximately 25% of the total housing market, this means that over 5,200 association lots/units in Washington are subject to bank foreclosure.  If homeowners are having that much difficulty paying their mortgage, it follows that association assessments are going unpaid.  If your association does not have any delinquencies, consider yourself fortunate, but don’t stop reading.  Budgeting for bad debt may increase the amount owners pay each month in the short term, but in the long term helps alleviate the need for special assessments, which can cripple or destroy the finances of the owners and families that make up our communities.

Why Budget for Bad Debt

Except for a few common denominators like insurance, taxes, and utilities, different associations spend their money on different items for maintenance, services, and the like.  Unless an association has an external revenue stream such as rental income, all of the money that an association uses to pay its expenses comes from the assessment payments from the members that make up the association.  If even one association member’s assessments go unpaid or short-paid, anticipated projects cannot be carried out, the association may have to withdraw from its reserves to pay for operating expenses, and eventually the membership is required to pay special assessments to make up for the loss in revenue.  Condominiums in Washington are “encouraged” to establish a reserve account to fund major maintenance, repair, and replacement of the common elements.  Associations that are not meeting their operating budgets are likely not funding their reserve accounts.  Further, if a condominium association withdraws from its established reserve fund, the Washington Condominium Act requires that the association notify its members in writing and replace the money in the reserve fund within twenty-four months unless replacing the funds would be an unreasonable burden on the owners.  How will an association raise the money to pay back the reserve fund?  By levying a special assessment.

Let’s assume a ten-unit condominium association assesses its units an average of $400.00 per month and has an annual budget of $48,000.00.  In Month 1 the owners of one unit run into financial difficulty and stop paying their assessments and mortgage.  At around Month 6, the bank will start foreclosure, and the trustee’s sale will take place sometime between Month 10 and Month 14.  After the trustee’s sale, the unit could sit vacant and on the market for another six months or more.  If the association was formed under the Washington Condominium Act, or if formed under the Horizontal Property Regimes Act and has amended its declaration to provide for lien priority over foreclosing deeds of trust, the association can recover the assessments that became due in the six months before the trustee’s sale from the purchaser.  Assuming someone buys the unit from the bank in Month 20, the bank will pay the association the assessments during the six months before the foreclosure and the assessments through the date the new owner takes title (Months 9-14 plus Months 15-20).  In this scenario, the association suffered a ten percent reduction in revenue for twenty months, only to recover 55% of the total amount owed by that unit.  If the association decides against suing the former unit owners and collecting on a judgment, or if the former unit owners file bankruptcy after the foreclosure, that is all the association will ever get.  The remaining 45% of the unit’s share of the common expenses spread out among the remaining nine units is $400.00 per unit.  Had the association a bad debt contingency of 7.5% of the total budget, the monthly assessments for the units would average $430.00 per month, but the members would not have had to come up with an additional $400.00 per unit on short notice so that the association can pay its electricity bill.

Another important situation where budgeting for bad debt comes up is when there are insufficient funds in reserves and an association takes out a loan from a lender to fund a maintenance project or capital improvement.  An association needs to levy a special assessment to pay back the lender, and will typically allow the owners to either make a lump sum payment of the full special assessment, or pay over the period where the association repays the lender the balance of the loan plus interest.  A bad debt contingency should be included when the association determines the amount of the special assessment.  In these cases, an association should get input from its owners to determine who can afford the special assessment and remain in the property.  If owners are already underwater on their property they may decide to walk away, so the Association will need to make sure that it generates enough income during the life of the bank loan in order to maintain the monthly payments to the lender during the time where one or more unit’s assessments are going unpaid.

How to Budget for Bad Debt

Because all communities are different, there is no set amount or percentage that an association should budget for bad debt.  Instead, an association should consider the following factors when deciding on what amount to budget for bad debt:

  1.  The total amount needed to pay for the operating expenses and fund the reserve the account.  In adopting a budget, associations need to consider how much it will cost to pay the operating expenses and fund a reserve account, plus account for bad debt, and then work backwards to determine each unit’s assessment liability, rather than starting with an “acceptable” amount per unit.
  2. The percentage of delinquent units.  Communities with a high percentage of delinquent units should budget a greater amount for bad debt.
  3. The delinquent amount per unit.  The higher the delinquent amount per unit, the less likely it is for the association to recover its expenses.
  4. The amount that can reasonably be collected from the owners.  Associations should consult their attorney to determine the feasibility of collecting delinquent assessments from owners.

Should an association have questions about budgeting for bad debt, it should consult its attorney, CPA, or manager when configuring its budget.  A properly adopted budget that includes a line item for bad debt will protect an association and its members from special assessments that can lead to financial difficulty for an association’s members, and ultimately the association itself.

By William Justyk

Associate Attorney at the Law Offices of James L. Strichartz

William Justyk is an Associate Attorney at the Law Offices of James L. Strichartz.  His practice is concentrated on counseling and litigation with respect to assessments and collection, covenant enforcement, and other association matters.  William can be reached at 206-388-0600 or william@condo-lawyers.com
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Start Community Association budgets early and enjoy the holidays

[ Blog/News ]

Start Community Association budgets early and enjoy the holidays

Believe it or not, it’s already mid July and time to start budget preparations.  Most associations are “multi-million dollar non-profit corporations.”  This means that the board of directors of an association is often running a small to midsize business.  Like other businesses, Homeowner Associations and Condominium Associations need to prepare their annual budget for the following year.

Gather Requirements. Get out those governing documents and review the budget requirements.  Is there a maximum assessment increase?  Who approves the budget?  Is a meeting required?  Many communities have requirements in their governing documents that specify the budget be adopted 30-60 days before the end of the fiscal year.  Draft a timeline to ensure the notice requirements are met.  Avoid late November and December budget confirmation meetings so volunteer leaders can enjoy the holidays. Starting early gives the committee and/or board members time to prepare a thoughtful and comprehensive budget for the community and can reduce the workload.

Anticipate Changes. Utility costs typically increase every year.  Contract services are also subject to increases. Call your service providers to check if there will be an increase in the coming year.  Determine your goals for next year and review your projects so that funding is included in the budget.  Solicit input from committees and owners on their priorities for the community.  Communication during the budget process is essential.  This is especially important if you are considering a rate increase.

Review Current Year. July is also an ideal time to review the expenses for the first half of the current year to see how the community is tracking to the current budget.  Identify needed adjustments for the rest of the year.  Complete the income and expense estimates for the balance of the year so that any surplus or deficit can be included in next year’s budget.

Checklist for July

  • Form Budget Committee
  • Review Reserve Study updates
  • Determine annual reserve contribution
  •  Identify goals/projects for next year
  • Solicit budget requests from committees
  • Submit budget requirements to Manager
  • Solicit bid estimates for projects, contract increases, utility increases, etc.

By Trestle Community Management

Trestle Community Management is a full-service manager of condominium and homeowner associations with headquarters in downtown Redmond, WA. Trestle’s serves associations in Redmond, Kirkland, Bellevue and other nearby communities.
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Chapter Magazine

Journal July-August 2022

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  • SSI Construction
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