Managers Only Meeting (MOM)

[ 1/27/2022 Meeting Topic ]

Association Insurance Claims – How To Keep Your Head Above Water!

Loss events at community associations are inevitable. They involve several moving parts and require multiple parties to work in sync in order to achieve the best outcomes.

Join us as we take a deep dive into the role each party plays and explain the importance of proper coordination and communication. We will guide you through a loss event from the initial response, to filing a claim, through completion of repairs.

Our goal is to provide tools that can assist with maintaining organization and efficiency throughout the process.

Presenter(s):

(Click image for full presenter bio.)

Alycia Maykovich
Project Manager - Agynbyte LLC
Brett Nebeker
Agency Principal - Rice Insurance
Joe Birkmeyer
Project Manager, Insurance Department - McLeod Construction, LLC

Pricing

Manager Members:
FREE (thru 1/24)
$20 (after 1/24)

Non-Member Managers:
$39 (thru 1/24)
$49 (after 1/24)

r
New MOM requirement: To ensure receipt of one (1) clock hour, managers must show engagement by showing up on camera, fully engaged.

MOM Sponsors:

Alliance Association Bank
Association Reserves WA
CIT – Community Association Banking
Newman Certified Public Accountant, PC
Rafel Law Group

Online Registration:

CEO Symposium 2021

CEO Symposium 2021

[ Events ]

CEO Symposium 2021

CEO Symposium - Mobile Art

CEO Symposium for Management Company & Business Partner CEOs

This event is designed for and limited to company business owners and/or key staff members.

Tuesday, December 7, 2021 8:30 to 10:30 a.m.

Building Great Teams: A Strategic Approach To Recruitment & Sustainable Employee Engagement

Mike Thomas, of M. Thomas Company, will present on the challenge of attracting and retaining top talent, and how to create an environment and culture where employees are very engaged.

Mike will lead the audience full circle through practical and actionable concepts including:

  • Current State: Do you understand your current state relative to turnover rates? How engaged are your employees? How do you measure employee engagement?
  • A, B & C Players: What makes each player an A, B or C in your organization? Why we often hold on to C players. Who does each player type regularly hire and/or promote based on their confidence type?
  • Compensation Strategy: What is a compensation strategy? Do you have an understood compensation strategy in your organization? What are some examples of compensation strategies?
  • Attrition & Attraction: Are you losing talent or having a difficult time attracting top talent that fits your culture? What are some of the reasons we believe this is happening? Is it cultural fit, a “better” offer, more opportunity for growth?
  • Career Path & Opportunity: Is there a clear understanding of career paths and growth opportunities? What makes this important?
  • Values Based Hiring: Do you have a set of working core values that authentically represent your culture? Are your values discussed during the interview and hiring process? How much weight is put on skills and expertise?

Included during the two-hour event will be an opportunity for attendees to ask questions and breakout rooms for attendees to collaborate.

Presenter:

(Click image for full presenter bio.)

Mike Thomas
President - M. Thomas Company

When & Where

Tuesday, December 7
8:30 – 10:30 a.m.

Online Webinar
Via Zoom

Management Company CEOs & Leaders

WSCAI Members:
$35 (through 11/26)
$45 (through 12/3)
$65 (after 12/3)

Non-Members:
$49 (through 11/26)
$69 (through 12/3)
$89 (after 12/3)

Business Partner Company CEOs & Leaders

WSCAI Members:
$45 (through 11/26)
$55 (through 12/3)
$75 (after 12/3)

Non-Members:
$59 (through 11/26)
$79 (through 12/3)
$99 (after 12/3)

CEO Symposium Sponsors:

Alliance Association Bank
Barker Martin
Fischer Restoration & Fischer Plumbing
HUB International NW
Newman Certified Public Accountant, PC
Pacific Premier Bank – Community Association Banking
RW Anderson Services
Ryan, Swanson & Cleveland, PLLC

CEO Symposium Registration Form

  • HUB International NW - HOA And Condo Solutions - Web Ad
  • Rafel Law Group - Banner Ad
  • Newman HOA CPA - Banner Ad
  • Barker Martin
  • The Copeland Group - Banner Ad
  • Porter Construction Inc - Building With Integrity - www.porterci.com
  • Condominium Law Group, PLLC - General Counsel & Collection Services - Partners Ken Harer & Valerie Oman - Phone: (206) 633-1520 Website: www.condolaw.net

Search WSCAI


Search Business Partners Directory


Diamond Sponsors

  • CIT - Community Association Banking - Logo
  • Transblue - Logo
  • Rafel Law Group PLLC - Logo
  • Agynbyte - Logo
  • Columbia Bank - Logo
  • RW Anderson Services - Logo
  • Superior Cleaning & Restoration - A COIT Service Company - Logo
  • Newman HOA CPA - Audit & Tax - Logo
  • CAU - Community Association Underwriters - Logo
  • SageWater - Logo
  • Association Reserves WA - Logo
  • ServPro Of Seattle NW - Logo
  • HUB International NW - Logo

Chapter Magazine

Journal July-August 2022

Jul/Aug 2022 Issue

Journal Advertising Partners:

  • Newman HOA CPA Audit & Tax
  • CIT Group Inc. - Logo
  • Rafel Law Group PLLC - Logo
  • The Copeland Group - Logo
  • Bell-Anderson & Associates - Logo
  • Community Association Underwriters - Logo
  • Ruff Construction - logo
  • Charter Construction - Logo
  • Popular Association Banking
  • SSI Construction
  • Sagewater
  • RW Anderson Services - Logo
  • Pacific Engineering Technologies, Inc - Logo

  • Pacific Western Bank - Small Ad
  • Association Reserves of Washington - Ad
Uncollected Assessments: HOA Budgeting for Bad Debt

Uncollected Assessments: HOA Budgeting for Bad Debt

[ Blog/News ]

Uncollected Assessments: HOA Budgeting for Bad Debt

Budgeting for bad debt is something that associations should consider doing even in the best of times. Saying that associations need only budget for uncollected assessments in a down economy would be as shortsighted as… well, not budgeting for uncollected assessments.

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 Uncollected Assessments?

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.

Uncollected Assessment Scenario

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.

Levying Special Assessments

Another important situation where budgeting for uncollected assessements 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. This 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 Uncollected Assessments

Because all communities are different, there is no set amount or percentage that an association should budget for uncollected assessments.  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 backward 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.  You can find a list of WSCAI member service providers in their Business Partner Directory.  

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. End Of Article

By William Justyk, Esq.

William Justyk, Esq., is an Attorney with 12+ years experience in real estate transactions, nonprofit corporate law, and civil litigation.
  • Barker Martin
  • Rafel Law Group - Banner Ad
  • HUB International NW - HOA And Condo Solutions - Web Ad
  • Condominium Law Group, PLLC - General Counsel & Collection Services - Partners Ken Harer & Valerie Oman - Phone: (206) 633-1520 Website: www.condolaw.net
  • Newman HOA CPA - Banner Ad
  • Porter Construction Inc - Building With Integrity - www.porterci.com
  • The Copeland Group - Banner Ad

Search WSCAI


Search Business Partners Directory


Diamond Sponsors

  • Transblue - Logo
  • RW Anderson Services - Logo
  • ServPro Of Seattle NW - Logo
  • HUB International NW - Logo
  • Newman HOA CPA - Audit & Tax - Logo
  • CIT - Community Association Banking - Logo
  • Agynbyte - Logo
  • Association Reserves WA - Logo
  • Columbia Bank - Logo
  • CAU - Community Association Underwriters - Logo
  • Superior Cleaning & Restoration - A COIT Service Company - Logo
  • Rafel Law Group PLLC - Logo
  • SageWater - Logo

Chapter Magazine

Journal July-August 2022

Jul/Aug 2022 Issue

Journal Advertising Partners:

  • Newman HOA CPA Audit & Tax
  • CIT Group Inc. - Logo
  • Rafel Law Group PLLC - Logo
  • The Copeland Group - Logo
  • Bell-Anderson & Associates - Logo
  • Community Association Underwriters - Logo
  • Ruff Construction - logo
  • Charter Construction - Logo
  • Popular Association Banking
  • SSI Construction
  • Sagewater
  • RW Anderson Services - Logo
  • Pacific Engineering Technologies, Inc - Logo

  • Pacific Western Bank - Small Ad
  • Association Reserves of Washington - Ad

Smoke On The Water (Faucet): The State Of Smoking In Condominiums In The Age Of Legal Recreational Marijuana

[ Blog/News ]

Smoke On The Water (Faucet): The State Of Smoking In Condominiums In The Age Of Legal Recreational Marijuana

Washington State has become greener, yet smokier, with the recent passage of laws legalizing the personal use of marijuana. The question is: Will one be able to remain pot-free if one’s neighbor in our condominium complex is abiding by the law and smoking marijuana in the unit below/above/next to/or even down the hall from ours?

The bare bones of the new marijuana law are the following:

RCW 69.50.401 states, in pertinent part:

(1) Except as authorized by this chapter, it is unlawful for any person to manufacture, deliver, or possess with intent to manufacture or deliver, a controlled substance.

(3) The production, manufacture, processing, packaging, delivery, distribution, sale, or possession of marijuana in compliance with the terms set forth in RCW 69.50.360,69. 50.363, or 69.50.366 shall not constitute a violation of this section, this chapter, or any other provision of Washington state law.

(Initiative Measure No. 502, approved November 6, 2012), effective Dec. 6, 2012.

RCW 69.50.360, regarding marijuana retailers states:

The following acts, when performed by a validly licensed marijuana retailer or employee of a validly licensed retail outlet in compliance with rules adopted by the state liquor control board to implement and enforce chapter 3, Laws of 2013, shall not constitute criminal or civil offenses under Washington state law:

(1) Purchase and receipt of useable marijuana or marijuana infused products that have been properly packaged and labeled from a marijuana processor validly licensed under chapter 3, Laws of 2013;

(2) Possession of quantities of useable marijuana or marijuana infused products that do not exceed the maximum amounts established by the state liquor control board under RCW 69. 50.345(5); and

(3) Delivery, distribution, and sale, on the premises of the retail outlet, of any combination of the following amounts of useable marijuana or marijuana infused product to any person twenty one years of age or older:

(a) One ounce of useable marijuana;

(b) Sixteen ounces of marijuana infused product in solid form; or

(c) Seventy two ounces of marijuana infused product in liquid form.

How do these new and evolving laws fit within the current framework of our laws that govern smoking in condominiums and other multi-family residences?

Current Laws Regarding Smoking

Washington State statutory law, RCW 70.160.030, entitled “Smoking prohibited in public places or places of employment,” states: “No person may smoke in a public place or in any place of employment.” The definitions section of this statute also states, in pertinent part, at RCW 70.160.020:

(1) . . . “[S]moking” means the carrying or smoking of any kind of lighted pipe, cigar, cigarette, or any other lighted smoking equipment.

(2) “Public place” means that portion of any building . . . Used by and open to the public, . . . And includes a presumptively reasonable minimum distance . . . Of twenty-five feet from entrances . . . . A public place does not include a private residence unless the private residence is used to provide licensed childcare, foster care, adult care, or other similar social service care on the premises.

As was stated last year, the result of this statute’s specific exclusion of private residences from the locations where one can legally prohibit smoking is that the courts will not order the prohibition of smoking in private residences, even when the private residences are condominium units that share walls, floors, and/or ceilings with other private residence condominium units, and even if the smoke from one private residence is causing harm in another private residence.2

Our laws currently recognize the carcinogenic quality of secondhand smoke from cigarettes. RCW 70.160.011 states:

The people of the state of Washington recognize that exposure to secondhand smoke is known to cause cancer in humans. Secondhand smoke is a known cause of other diseases including pneumonia, asthma, bronchitis, and heart disease. Citizens are often exposed to secondhand smoke in the workplace, and are likely to develop chronic, potentially fatal diseases as a result of such exposure. In order to protect the health and welfare of all citizens, including workers in their places of employment, it is necessary to prohibit smoking in public places and workplaces.

While Washington has not yet legislatively pronounced its view of the quality of secondhand smoke from marijuana, the American Lung Association states on its web site: “Marijuana smoke contains a greater amount of carcinogens than tobacco smoke.” As such, we can expect that there is at least an equal risk of contracting cancer from secondhand exposure to marijuana as there is from the same exposure to cigarettes.

Current Case Law

There is a bit of hope on the horizon regarding the courts upholding our right to be free from unwanted second-hand smoke in our condominium units.In a recent southern California trial court victory, in Chauncey v. Bella Palermo Homeowner Association, a condominium owner has won a case based on the harm being caused to the owner by their neighbor’s cigarette smoke. Unfortunately for Washingtonians, in California, there is no statutory provision that exempts residences from the “no smoking” laws. The phrase, “A public place does not include a private residence” in Washington’s statute creates a barrier to the Washington courts’ adoption of a similar stance regarding second- hand smoke exposure in Washington.

The Plaintiffs in Chauncey pursued their claims, and prevailed, based on the boilerplate statements found in most every condominium declaration:

Offensive Activity. No noxious or offensive activity shall be carried on in any Unit, Limited Common Element, or Common Element, nor shall anything be done therein which may be or become an annoyance or nuisance to other owners or to the public; including, but not limited to, noise and odors from any Unit.

Unfortunately, the Washington Courts have yet to be swayed by this argument, stating, in one case, that at the time this provision was drafted that cigarette smoking was not contemplated as such a “noxious or offensive activity.”3

Folks that Smoke vs. Folks that Toke

In 1973, Steve Miller wrote:

“I’m a joker, I’m a smoker, I’m a midnight toker, I sure don’t want to hurt no one . . .”4

For you youngsters, “toking” was a reference to smoking marijuana. The distinction between smoking (a cigarette) and toking (a marijuana joint) pointed out in a song that also references the “pompatus of love,” may sound amusing, but it also points out the societal and generational differences between those who regularly partake of a cigarette rather than roll a joint or hit a bong. How will a cigarette smoker take to a barrage of pot smoke and the corresponding smell of marijuana? How will those young enough to have been raised with the very clear awareness that it was always known that smoking a cigarette will cause cancer accept chastisement for their choice to smoke a joint rather than imbide a cocktail, a beer, or a glass of wine. We are on the cusp of finding out.

Legislative Cure

I suspect that there will be a substantial increase in the number of disputes and lawsuits stemming from the smells and smoke from bongs and joints, as they mingle with the cigarette smokers’ smoke and smell, or just permeate the air with the smell of “ganga.”5 While the second hand smoke issue has not yet been as heavily researched as cigarettes, sufficient scientific evidence is available to raise the specter of concerned neighbors, even if they are not immediately affected in their breathing. The long history of marijuana being deemed the “gateway drug” scares many people, who likely will not tolerate the unknown as much as they tolerate the known carcinogens in a cigarette.

If the governance of these matters is left to local jurisdictions, we are going to end up with a migrating population of smokers,tokers, and jokers . . . Which leads me back to where I left off when I last wrote about these issues.6

The time has come to bring forth legislation to ask our state to protect us in our homes, if those homes are condominiums, as forcefully as it has been willing to protect us in bars, restaurants, and our offices. One should be able to purchase a home in a condominium complex without that home being made unsafe and unhealthy by a next-door neighbor’s cigarette or marijuana smoke.That neighbor has the option of purchasing a home in a site condominium or other single family home structure that does not share walls, ventilation, or a crawl space with the neighboring homes. The right to be free from the intrusion of secondhand marijuana smoke into ones’ condominium unit exists. We just need to have our state legislators help us codify that right.The Washington State CAI Legislative Action Committee (“LAC”), of which I am a Co-Chair, will be commenting as a stakeholder organization on the revised version of the Condominium Act, which will be put forth to the State Legislature in the next legislative session. Your thoughts on this issue are welcomed, as we assess how best to deal with this issue.

Please let me know of any of these issues as they arise in your communities so that we can work together to find the balance between personal freedoms and quality community ving. Association living.

References

1 1972 song title by Deep Purple.

2, 6 Washington State Anti-Smoking Law, from the article “It’s Time for Washington Anti-Smoking Legislation Governing Condominium Living,” by Michael D. Brandt, WSCAI Community Associations Journal, June 2012.

3 A Snohomish County trial court matter.

4 The Joker by the Steve Miller Band

5 Yet another slang term for marijuana, often associated with Rastafarians.

  • Rafel Law Group - Banner Ad
  • Porter Construction Inc - Building With Integrity - www.porterci.com
  • Barker Martin
  • HUB International NW - HOA And Condo Solutions - Web Ad
  • Condominium Law Group, PLLC - General Counsel & Collection Services - Partners Ken Harer & Valerie Oman - Phone: (206) 633-1520 Website: www.condolaw.net
  • The Copeland Group - Banner Ad
  • Newman HOA CPA - Banner Ad

Search WSCAI


Search Business Partners Directory


Diamond Sponsors

  • Association Reserves WA - Logo
  • CAU - Community Association Underwriters - Logo
  • Transblue - Logo
  • CIT - Community Association Banking - Logo
  • Columbia Bank - Logo
  • HUB International NW - Logo
  • ServPro Of Seattle NW - Logo
  • Agynbyte - Logo
  • Newman HOA CPA - Audit & Tax - Logo
  • SageWater - Logo
  • RW Anderson Services - Logo
  • Superior Cleaning & Restoration - A COIT Service Company - Logo
  • Rafel Law Group PLLC - Logo

Chapter Magazine

Journal July-August 2022

Jul/Aug 2022 Issue

Journal Advertising Partners:

  • Newman HOA CPA Audit & Tax
  • CIT Group Inc. - Logo
  • Rafel Law Group PLLC - Logo
  • The Copeland Group - Logo
  • Bell-Anderson & Associates - Logo
  • Community Association Underwriters - Logo
  • Ruff Construction - logo
  • Charter Construction - Logo
  • Popular Association Banking
  • SSI Construction
  • Sagewater
  • RW Anderson Services - Logo
  • Pacific Engineering Technologies, Inc - Logo

  • Pacific Western Bank - Small Ad
  • Association Reserves of Washington - Ad

Thou Shalt Provide A Budget Summary

[ Blog/News ]

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.

  • Porter Construction Inc - Building With Integrity - www.porterci.com
  • Condominium Law Group, PLLC - General Counsel & Collection Services - Partners Ken Harer & Valerie Oman - Phone: (206) 633-1520 Website: www.condolaw.net
  • Newman HOA CPA - Banner Ad
  • Rafel Law Group - Banner Ad
  • Barker Martin
  • HUB International NW - HOA And Condo Solutions - Web Ad
  • The Copeland Group - Banner Ad

Search WSCAI


Search Business Partners Directory


Diamond Sponsors

  • ServPro Of Seattle NW - Logo
  • RW Anderson Services - Logo
  • Newman HOA CPA - Audit & Tax - Logo
  • CAU - Community Association Underwriters - Logo
  • Columbia Bank - Logo
  • Transblue - Logo
  • Association Reserves WA - Logo
  • Superior Cleaning & Restoration - A COIT Service Company - Logo
  • SageWater - Logo
  • Agynbyte - Logo
  • Rafel Law Group PLLC - Logo
  • CIT - Community Association Banking - Logo
  • HUB International NW - Logo

Chapter Magazine

Journal July-August 2022

Jul/Aug 2022 Issue

Journal Advertising Partners:

  • Newman HOA CPA Audit & Tax
  • CIT Group Inc. - Logo
  • Rafel Law Group PLLC - Logo
  • The Copeland Group - Logo
  • Bell-Anderson & Associates - Logo
  • Community Association Underwriters - Logo
  • Ruff Construction - logo
  • Charter Construction - Logo
  • Popular Association Banking
  • SSI Construction
  • Sagewater
  • RW Anderson Services - Logo
  • Pacific Engineering Technologies, Inc - Logo

  • Association Reserves of Washington - Ad
  • Pacific Western Bank - Small Ad

Budgeting Insurance Costs: Rocket Science Or Guess Work?

[ Blog/News ]

Budgeting Insurance Costs: Rocket Science Or Guess Work?

For the majority of associations, September and October are budget season. This can be a stressful time, particularly if the association has run over budget or the board has already pre-determined that the net result should be no increase in monthly assessments to unit owners for the upcoming year. In reality, this is a time for a reflection on the financial health of the association and an opportunity to right the ship if the prior budget had been unrealistic, had been impacted by unexpected expenses, or is unsustainable based on the reserve study or other considerations.

As a manager or board of directors peruses each line item that makes up the budget, rest assured the cost for insurance will be right up there as one of the largest expenses. This applies only if you are a condominium or an association required by your documents to insure the real property (a few homeowner associations with townhouses are required to insure their property as if it were a condominium). In some cases, where the association purchases earthquake insurance, this line item may actually be the association’s largest expense. This big number draws extra scrutiny and unfortunately is sometimes given the hatchet treatment or given less than a dose of reality. So what might be the considerations when establishing estimated insurance premiums to be used for the upcoming year?

Let’s start with the basics

As a board member or a manager do not just plug in a number for the upcoming insurance premiums in a vacuum, be it the same as expiring or a percentage increase. Your insurance agent should be consulted. Their crystal ball is likely to be less foggy than yours as they would be familiar with the changes in rates or premiums that they’re seeing from the current insurance company(ies) as well as trends and appetite in the market if other companies are being asked to provide a proposal. However there are many other considerations aside from market trends that can have an impact on the premiums for the coming year. Let’s look at some of these:

Increased Property Replacement Cost Value.

You would be remiss in using the same replacement cost values for your buildings or property as per your current insurance policy. These costs are trending up right now. Changes in property values are sometimes automatic and triggered by an inflation guard endorsement built in to your policy. This typically would range anywhere from 2 – 8% depending on the insurance company. Remember, almost universally, you are required to insure the property to 100% of replacement cost so it is in your best interest to know what these numbers should be. Having an Agreed Amount policy, Extended Value, or Guaranteed Replacement Cost endorsement does not negate the responsibility although it is helpful. If unsure, you have nothing to lose and everything to gain by having a third party insurance replacement cost appraisal done which should include all of the property to be insured (some reports I read exclude the costs of property intended to be insured). The bottom line: if the property replacement cost value is increased by 4% then the premium is likely to be going up 4% assuming that the property insurance rate is as expiring. A 4% increase in property replacement cost value and an estimated increase in insurance rate of 4% will result in an increase in property premium of over 8%.

Claims history.

Yes, this does factor into the potential for a change in premium. This is more so if there has been a frequency of events rather than one large loss. In cases where the recent loss record has been exemplary and a frequency of losses that occurred more than three years ago is now dropping off the radar, a good case can be made for reducing premiums, gaining a lesser increase, or potentially getting alternative proposals from an insurance company that might otherwise have declined the risk. Also, if your association buys high risk insurance such as Earthquake or Flood coverage you are unfortunately going to be impacted by events outside of your control such as a hurricane that causes billions in damage or a new unfavorable earthquake modeling study of the Puget Sound area, the results of which are adopted by many insurance companies.

Reserves and/or monthly assessments.

Changes in these numbers will have an impact on the limit of insurance required for Crime insurance based on the mortgagees requirements. While likely a small premium adjustment in the big picture, there are times when increase in limit may result in an increased deductible too. Does your association budget for a Crime deductible let alone Property, Earthquake, or Directors & Officers coverage where deductibles can be substantial?

What else can impact insurance costs?

What has the association done this past year in terms of proactive maintenance (examples: new roof, all hot water tanks replaced); risk management (examples: seismic gas shut-off valve installed, barbecues banned from decks, railings with 6 inch gaps have been replaced and brought up to code); or generally done to make the risk more desirable by either mitigating, transferring, assuming, eliminating or financing risk? Every insurance company has its unique appetite for risk and bandwidth of credits and debits they can use. Your agent should be the messenger of changes that can help your association gain the ‘best of class’ rates and premiums.

To summarize, it is important that due diligence is used in establishing the estimated premiums to be used for the proposed budget. Your insurance agent should definitely be a party to such discussions as one of your trusted advisors. If there is concern about a turbulent history of significant unbudgeted insurance premium changes, there’s a simple solution. Your annual policy period can run from whatever date you choose. Why not have the association’s insurance renew around the time of your budgeting process so that you can use real numbers and, if necessary, spread the cost over two budget periods? Many of our firms’ community association clients have elected to do this and are all the better for it.

Here’s to a successful and smooth budgeting season!

By Duncan Kirk

Article first appeared in the August 2013 issue of WSCAI Community Associations Journal.
  • Rafel Law Group - Banner Ad
  • Condominium Law Group, PLLC - General Counsel & Collection Services - Partners Ken Harer & Valerie Oman - Phone: (206) 633-1520 Website: www.condolaw.net
  • Barker Martin
  • HUB International NW - HOA And Condo Solutions - Web Ad
  • Newman HOA CPA - Banner Ad
  • The Copeland Group - Banner Ad
  • Porter Construction Inc - Building With Integrity - www.porterci.com

Search WSCAI


Search Business Partners Directory


Diamond Sponsors

  • CAU - Community Association Underwriters - Logo
  • RW Anderson Services - Logo
  • CIT - Community Association Banking - Logo
  • SageWater - Logo
  • HUB International NW - Logo
  • ServPro Of Seattle NW - Logo
  • Newman HOA CPA - Audit & Tax - Logo
  • Superior Cleaning & Restoration - A COIT Service Company - Logo
  • Agynbyte - Logo
  • Association Reserves WA - Logo
  • Rafel Law Group PLLC - Logo
  • Columbia Bank - Logo
  • Transblue - Logo

Chapter Magazine

Journal July-August 2022

Jul/Aug 2022 Issue

Journal Advertising Partners:

  • Newman HOA CPA Audit & Tax
  • CIT Group Inc. - Logo
  • Rafel Law Group PLLC - Logo
  • The Copeland Group - Logo
  • Bell-Anderson & Associates - Logo
  • Community Association Underwriters - Logo
  • Ruff Construction - logo
  • Charter Construction - Logo
  • Popular Association Banking
  • SSI Construction
  • Sagewater
  • RW Anderson Services - Logo
  • Pacific Engineering Technologies, Inc - Logo

  • Pacific Western Bank - Small Ad
  • Association Reserves of Washington - Ad

More Housing Uncertainty in 2012

[ Blog/News ]

More Housing Uncertainty in 2012

CAI members know that 2011 saw the beginning of the federal government’s effort to rebuild our mortgage finance system in the wake of the worst housing and economic crisis since the Great Depression. As Congress and a host of federal agencies worked through this process, hundreds of pages of proposed regulations were drafted and issued for public comment and analysis. From new Federal Housing Administration (FHA) condominium lending guidelines, to pending regulations on Qualified Residential Mortgages (QRM), to Qualified Mortgages (QM) and to the Federal Housing Finance Administration’s transfer fee rule, tomorrow’s mortgage market began to take shape. As we move into 2012, this process will enter a critical final phase and may trigger another round of uncertainty and confusion in the housing markets.

First, in early 2012, CAI expects the federal government to release the final draft regulations on QRM and QM. QRM regulations deal with the structure of mortgages and QM deals with qualification criteria for future borrowers. As drafted, both present a set of challenges to the housing markets in general and to community associations in particular.

As reported by CAI, the pending QRM proposal would have a significant impact on potential buyers. New requirements would mandate minimum down payments of 20 percent prevent financing of closing costs and realtor fees and would disqualify buyers with just one late payment on any installment account. It is estimated that 70 percent of currently qualified borrowers would not meet this standard. While it is expected that the QRM draft will be significantly revised, the ongoing uncertainty hangs like a dark cloud on the horizon.

Revised draft QM regulations will also be released in 2012. These regulations focus on a borrower’s ability to repay a mortgage and contain provisions that include community association related expenses. On the positive side, QM will require that a lender qualify a borrower not just on the mortgage amount, but also on other mandatory fees like association assessments. This should help reduce assessment delinquencies. On the downside, QM requirements may also take action on association transfer fees and require the inclusion of special assessments in the qualification calculation on the basis that the assessment will be in place for the life of the loan.

Finally, in response to CAI members’ ongoing pressure, FHA will be making additional changes to its condominium insurance guidelines. FHA has indicated that they will be issuing additional guidance to address issues with project certifications, transfer fees and management company fidelity bonding. This is good news for CAI members as FHA accounts for up to one-third of all condominium loans. On the downside, due to a pull back in bank lending and the insolvency of Fannie Mae and Freddie Mac, FHA has been forced to fill the vacuum in the mortgage market. This has stressed the agency and pushed its financial reserves to dangerously low levels. If the economy stumbles and FHA’s reserves tip into the red, the agency could need a congressional bailout. With the heated political climate super-charged by election year politics, any solvency issues with FHA would likely set of a firestorm that could sideline the critical lending role FHA is now playing.

There is one point we can be sure of among all this uncertainty and that is that CAI will be working to make sure that CAI members voices are heard in this debate.

As part of our ongoing Mortgage Matters Program, CAI is working to protect homeowners in community associations and to ensure access to fair and affordable mortgage products for all current and potential community association residents. You can follow our work and share your thoughts at www.caimortgagematters.org.

  • HUB International NW - HOA And Condo Solutions - Web Ad
  • Rafel Law Group - Banner Ad
  • Barker Martin
  • Porter Construction Inc - Building With Integrity - www.porterci.com
  • The Copeland Group - Banner Ad
  • Condominium Law Group, PLLC - General Counsel & Collection Services - Partners Ken Harer & Valerie Oman - Phone: (206) 633-1520 Website: www.condolaw.net
  • Newman HOA CPA - Banner Ad

Search WSCAI


Search Business Partners Directory


Diamond Sponsors

  • CAU - Community Association Underwriters - Logo
  • Transblue - Logo
  • Rafel Law Group PLLC - Logo
  • HUB International NW - Logo
  • Superior Cleaning & Restoration - A COIT Service Company - Logo
  • Agynbyte - Logo
  • Columbia Bank - Logo
  • SageWater - Logo
  • Association Reserves WA - Logo
  • ServPro Of Seattle NW - Logo
  • Newman HOA CPA - Audit & Tax - Logo
  • RW Anderson Services - Logo
  • CIT - Community Association Banking - Logo

Chapter Magazine

Journal July-August 2022

Jul/Aug 2022 Issue

Journal Advertising Partners:

  • Newman HOA CPA Audit & Tax
  • CIT Group Inc. - Logo
  • Rafel Law Group PLLC - Logo
  • The Copeland Group - Logo
  • Bell-Anderson & Associates - Logo
  • Community Association Underwriters - Logo
  • Ruff Construction - logo
  • Charter Construction - Logo
  • Popular Association Banking
  • SSI Construction
  • Sagewater
  • RW Anderson Services - Logo
  • Pacific Engineering Technologies, Inc - Logo

  • Association Reserves of Washington - Ad
  • Pacific Western Bank - Small Ad

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

[ Blog/News ]

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

  • HUB International NW - HOA And Condo Solutions - Web Ad
  • Rafel Law Group - Banner Ad
  • Porter Construction Inc - Building With Integrity - www.porterci.com
  • Newman HOA CPA - Banner Ad
  • The Copeland Group - Banner Ad
  • Condominium Law Group, PLLC - General Counsel & Collection Services - Partners Ken Harer & Valerie Oman - Phone: (206) 633-1520 Website: www.condolaw.net
  • Barker Martin

Search WSCAI


Search Business Partners Directory


Diamond Sponsors

  • Rafel Law Group PLLC - Logo
  • CAU - Community Association Underwriters - Logo
  • Superior Cleaning & Restoration - A COIT Service Company - Logo
  • Newman HOA CPA - Audit & Tax - Logo
  • RW Anderson Services - Logo
  • ServPro Of Seattle NW - Logo
  • HUB International NW - Logo
  • Columbia Bank - Logo
  • Agynbyte - Logo
  • CIT - Community Association Banking - Logo
  • Transblue - Logo
  • SageWater - Logo
  • Association Reserves WA - Logo

Chapter Magazine

Journal July-August 2022

Jul/Aug 2022 Issue

Journal Advertising Partners:

  • Newman HOA CPA Audit & Tax
  • CIT Group Inc. - Logo
  • Rafel Law Group PLLC - Logo
  • The Copeland Group - Logo
  • Bell-Anderson & Associates - Logo
  • Community Association Underwriters - Logo
  • Ruff Construction - logo
  • Charter Construction - Logo
  • Popular Association Banking
  • SSI Construction
  • Sagewater
  • RW Anderson Services - Logo
  • Pacific Engineering Technologies, Inc - Logo

  • Association Reserves of Washington - Ad
  • Pacific Western Bank - Small Ad

Federal Housing Administration’s (FHA) Condominium Guidelines

[ Blog/News ]

Federal Housing Administration’s (FHA) Condominium Guidelines

The ever-changing FHA Condominium Guidelines continued to create problems for many CAI members in 2011. Despite the challenges, CAI was able to work with FHA to amend some of the FHA lending criteria even as FHA released new policy that created new obstacles for condominium associations.

In June of 2011, FHA issued major revisions to the Condominium Guidelines, which, according to FHA, would address concerns raised by CAI. While the new guidelines added some flexibility on assessment delinquencies, commercial space and rental restrictions, it also imposed new and troubling criteria on fidelity insurance, project certifications and assessment delinquency calculations.

After the release of the new Guidelines in June, CAI worked with our members to escalate our efforts to persuade FHA to engage in a more rational and transparent process in developing condominium guidelines. First, CAI sent a letter summarizing concerns about the new Guidelines to the FHA commissioner. CAI noted that the requirements FHA imposed on fidelity insurance and project certifications were in conflict with many state laws and with the best practices of condominium associations. CAI also chided FHA for putting the burden of collecting assessments from bank-owned properties on association boards rather than on the banks that get a subsidy from FHA under the condominium loan program. CAI also filed an administrative challenge against the new Guidelines, arguing that FHA failed to do minimal due diligence when drafting the new requirements. Then, working with our state Legislative Action Committees, we took our concerns directly to members of Congress in August. Additionally, when FHA announced during a public training session that it would be looking at the issue of deed-based transfer fees, CAI sent a strongly worded letter urging it to engage in outreach and research before taking any unilateral action.

The arrival of fall saw the return on the investment in our Congressional Outreach. First, FHA backed away from their costly and duplicative management company fidelity bonding mandate. This was followed a few weeks later by key members of Congress and the Senate sending letters critical of the FHA Guidelines and the lack of transparency in their development. It is through these efforts that CAI will continue to move FHA policy to more rational and fair criteria.

As the year end approaches, FHA’s financial position showed significant deterioration, with the organization well below its statutorily-mandated reserve requirements. There were whispers in Washington of a pending bailout, which would be bad news for potential condominium buyers as FHA continues to be the pre-eminent lender for condominium mortgages. This also will likely make CAI’s task for pushing for reforms of FHA lending criteria even more challenging. At the close of 2011, it looks as if 2012 will be yet another year filled with challenges on the mortgage front.

As part of our ongoing Mortgage Matters Program, CAI is working to protect homeowners in community associations and to ensure access to fair and affordable mortgage products for all current and potential community association residents. You can follow our work and share your thoughts at www.caimortgagematters.org.

  • HUB International NW - HOA And Condo Solutions - Web Ad
  • Newman HOA CPA - Banner Ad
  • Rafel Law Group - Banner Ad
  • Barker Martin
  • Porter Construction Inc - Building With Integrity - www.porterci.com
  • The Copeland Group - Banner Ad
  • Condominium Law Group, PLLC - General Counsel & Collection Services - Partners Ken Harer & Valerie Oman - Phone: (206) 633-1520 Website: www.condolaw.net

Search WSCAI


Search Business Partners Directory


Diamond Sponsors

  • Agynbyte - Logo
  • SageWater - Logo
  • CIT - Community Association Banking - Logo
  • HUB International NW - Logo
  • Association Reserves WA - Logo
  • ServPro Of Seattle NW - Logo
  • Rafel Law Group PLLC - Logo
  • Newman HOA CPA - Audit & Tax - Logo
  • CAU - Community Association Underwriters - Logo
  • Transblue - Logo
  • Superior Cleaning & Restoration - A COIT Service Company - Logo
  • Columbia Bank - Logo
  • RW Anderson Services - Logo

Chapter Magazine

Journal July-August 2022

Jul/Aug 2022 Issue

Journal Advertising Partners:

  • Newman HOA CPA Audit & Tax
  • CIT Group Inc. - Logo
  • Rafel Law Group PLLC - Logo
  • The Copeland Group - Logo
  • Bell-Anderson & Associates - Logo
  • Community Association Underwriters - Logo
  • Ruff Construction - logo
  • Charter Construction - Logo
  • Popular Association Banking
  • SSI Construction
  • Sagewater
  • RW Anderson Services - Logo
  • Pacific Engineering Technologies, Inc - Logo

  • Pacific Western Bank - Small Ad
  • Association Reserves of Washington - Ad

Bad Debt – Planning for Uncollected Assessments

[ Blog/News ]

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
  • The Copeland Group - Banner Ad
  • Condominium Law Group, PLLC - General Counsel & Collection Services - Partners Ken Harer & Valerie Oman - Phone: (206) 633-1520 Website: www.condolaw.net
  • Rafel Law Group - Banner Ad
  • Barker Martin
  • Porter Construction Inc - Building With Integrity - www.porterci.com
  • HUB International NW - HOA And Condo Solutions - Web Ad
  • Newman HOA CPA - Banner Ad

Search WSCAI


Search Business Partners Directory


Diamond Sponsors

  • Transblue - Logo
  • SageWater - Logo
  • CIT - Community Association Banking - Logo
  • CAU - Community Association Underwriters - Logo
  • RW Anderson Services - Logo
  • HUB International NW - Logo
  • ServPro Of Seattle NW - Logo
  • Agynbyte - Logo
  • Columbia Bank - Logo
  • Association Reserves WA - Logo
  • Rafel Law Group PLLC - Logo
  • Superior Cleaning & Restoration - A COIT Service Company - Logo
  • Newman HOA CPA - Audit & Tax - Logo

Chapter Magazine

Journal July-August 2022

Jul/Aug 2022 Issue

Journal Advertising Partners:

  • Newman HOA CPA Audit & Tax
  • CIT Group Inc. - Logo
  • Rafel Law Group PLLC - Logo
  • The Copeland Group - Logo
  • Bell-Anderson & Associates - Logo
  • Community Association Underwriters - Logo
  • Ruff Construction - logo
  • Charter Construction - Logo
  • Popular Association Banking
  • SSI Construction
  • Sagewater
  • RW Anderson Services - Logo
  • Pacific Engineering Technologies, Inc - Logo

  • Association Reserves of Washington - Ad
  • Pacific Western Bank - Small Ad

Preventing the Ultimate Nightmare: The Legal Dissolution of Your Condominium

[ Blog/News ]

Preventing the Ultimate Nightmare: The Legal Dissolution of Your Condominium

The nation’s financial crisis has turned the dream of home ownership into a nightmare for many owners where dissolution of the condominium could become the best resolution.  Other Associations inadvertently subject their condominiums to dissolution by failing to follow required procedures in the Declaration after damage to the property.

 

A condominium’s dissolution, or termination, converts all the units back to a single piece of property, no longer governed by the Condominium Act. The drafters of RCW 64.34.268 envisioned dissolution at the end of the building’s life or following a catastrophic event, like a major fire; however, terminations can occur under other circumstances.   Dissolution of a condominium can be voluntary or involuntary as described below.

Voluntary Termination: In Washington, 80% of the ownership can vote to dissolve their condominium.  The owners collectively sell the building and distribute the proceeds.  This could occur when the land value exceeds the unit values, or when major repairs are necessary, but it does not make economic sense to complete them.

Voluntary dissolution could be an option for condominiums suffering because of excessive delinquent assessments.  As more owners fail to pay, cash flow dries up, forcing a shrinking number of non-delinquent owners to cover more fixed costs like insurance and management fees. This can require special assessments and lead to more delinquencies.  The association can pursue collections, but there is often little chance of recovery.  Unit values spiral down due to delinquencies, foreclosures, poor cash flow, and distress sales.  At some point, Associations could find it beneficial to terminate the condominium, sell the building to a single owner who rents the units as apartments, distributing the proceeds to unit owners.  Under some circumstances, dissolution becomes the lesser of two evils, but we know of none in our state

Involuntary Termination:   This occurs automatically after some triggering event (like a fire) that causes significant damage to the condominium building.  For condominiums built before July 1, 1990, termination is automatic if the owners do not agree to repair, reconstruct, or rebuild within 90 days after the triggering damage event.  For condominiums built after July 1, 1990, the declaration typically addresses how decisions about damage are handled, and often include provisions that mandate termination if required procedures are not followed.  Termination may automatically follow a decision not to repair, which may be implied by a Board’s inaction after a damaging event, like failure to hold a meeting within a certain period of time.  Follow the Declaration’s provisions to avoid unintended dissolution.

Consequences:  The results are the same whether dissolution is voluntary or involuntary. Ownership converts to a “tenancy in common” and continues until the property is sold to a new owner.  Owners who previously owned units then share the entire property.  This is not an attractive option for owners who want to stay in their units.  Costs can rise, and their allocation is difficult. Each owner becomes responsible for all expenses. The market value of an owner’s share is likely to drop substantially.  Other consequences affect the owners’ association, which must wind up the affairs of the Association until it is sold by the owners.

When the owners sell the property after termination, all creditors’ liens on the (former) units must be satisfied before any distribution to owners.  This can produce absurd results where owners’ distributions have little relationship to their equity in the property, and may be based on fair market value rather than percentage of ownership. We can envision no “winners” in an involuntary dissolution, with banks getting the best protection.

Preventing Dissolution:  Dissolution is an unfortunate solution to an Association’s problems.  To prevent the involuntary dissolution, you must strictly adhere to Declaration requirements.  This is especially true after any damage which could trigger automatic termination.  You must understand how your declaration defines “damage”, and what steps must be taken if “damage” occurs.

To prevent termination related to Association debt, condominium assessments (regular and special) must be collected on time.   Associations must ensure that they have the money necessary to maintain the community, including contingencies for delinquent owners. Boards should consider ways for owners to remain “current” even in an economic downturn.

Associations considering voluntary dissolution need to make that decision when it still makes economic sense, understanding all of the consequences.  Associations burdened with debt may alternatively consider bankruptcy.  Bankruptcy might allow Associations to restructure debts until they can resolve delinquency issues, but requires some workable plan.

The dissolution of a condominium is an extreme measure with upsetting results, especially if it occurs involuntarily. If you are a Board member or Association manager facing serious financial problems or if you are uncertain about the procedures required by the Association’s governing documents, you should consult the Association’s attorney to assist in these matters.

By Ken Harer

Managing Attorney at Condominium Law Group, PLLC

Ken Harer is the managing attorney at Condominium Law Group, PLLC.  He has degrees in architecture, business and law from the University of Washington.  He has worked with condominiums as an attorney on all types of legal work, including construction defect litigation, since 2000.
  • Newman HOA CPA - Banner Ad
  • Barker Martin
  • Rafel Law Group - Banner Ad
  • Condominium Law Group, PLLC - General Counsel & Collection Services - Partners Ken Harer & Valerie Oman - Phone: (206) 633-1520 Website: www.condolaw.net
  • HUB International NW - HOA And Condo Solutions - Web Ad
  • Porter Construction Inc - Building With Integrity - www.porterci.com
  • The Copeland Group - Banner Ad

Search WSCAI


Search Business Partners Directory


Diamond Sponsors

  • Association Reserves WA - Logo
  • Rafel Law Group PLLC - Logo
  • SageWater - Logo
  • RW Anderson Services - Logo
  • Columbia Bank - Logo
  • HUB International NW - Logo
  • ServPro Of Seattle NW - Logo
  • CAU - Community Association Underwriters - Logo
  • CIT - Community Association Banking - Logo
  • Superior Cleaning & Restoration - A COIT Service Company - Logo
  • Agynbyte - Logo
  • Newman HOA CPA - Audit & Tax - Logo
  • Transblue - Logo

Chapter Magazine

Journal July-August 2022

Jul/Aug 2022 Issue

Journal Advertising Partners:

  • Newman HOA CPA Audit & Tax
  • CIT Group Inc. - Logo
  • Rafel Law Group PLLC - Logo
  • The Copeland Group - Logo
  • Bell-Anderson & Associates - Logo
  • Community Association Underwriters - Logo
  • Ruff Construction - logo
  • Charter Construction - Logo
  • Popular Association Banking
  • SSI Construction
  • Sagewater
  • RW Anderson Services - Logo
  • Pacific Engineering Technologies, Inc - Logo

  • Pacific Western Bank - Small Ad
  • Association Reserves of Washington - Ad