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Practical Tips for Delinquent Account Reconciliation

Practical Tips for Delinquent Account Reconciliation

by wscai-admin | Apr 10, 2019 | Accounting, Auditing & Bookkeeping, Article, Attorneys - Governing Documents, Blog, Common Interest Communities, Community Associations, Financial: Money, Banking, Insurance, Insurance, Legal

[ Blog/News ]

Practical Tips for Delinquent Account Reconciliation

Anyone who has worked in the community association industry knows that not all owners pay their assessments in a timely manner. Sometimes, boards need the assistance of a lawyer to collect delinquent amounts. But when the file is ready to be closed, what if the amounts recovered by the law firm do not match the management company’s ledger? In situations like this, community managers and lawyers are thrust in the role of accountant. This article will provide a brief overview on how to reconcile the delinquent owner’s account and bring closure to the matter.

Where to Start

The recommended place to start is to have the lawyer create a ledger with all assessments, late charges, administrative fees, interest, legal fees, costs and payment credits. This is to ensure that all amounts are accounted for in one place and identify all amounts the lawyer recovered. This may be different than what is on the management company’s ledger. Next, compare the lawyer’s account balance to the management company’s balance. Subtract the larger figure from the smaller one to determine the reconciliation gap to be closed.

The following amounts commonly create discrepancies between ledgers and should be explored to close that gap:

Spot Art: Interest
Interest

Generally speaking, the lawyer’s ledger calculates interest on delinquent amounts and the management company’s ledger does not. This means that if the lawyer receives payment from a delinquent owner, that the payment may include interest.

This can be further complicated if there is a judgment against the delinquent owner where there is pre-judgment interest (i.e. interest on delinquent assessments included in the judgment) and post-judgment interest based on the judgment amount. Failure to put the pre- and post-judgment interest on the management company’s ledger can create an unearned credit on the owner’s account.

For example, say ABC Association has a $1,000 judgment against an owner. There is $50 in interest in that judgment. Then, $50 of interest accrues after the judgment. The owner then pays $1,050 to bring their account current. Unless the management company adds $100 interest to its ledger, it will show a $100 credit on the owner’s account. Thus, to reconcile the account to $0.00, the management company must put $100 in interest on its ledger.

Spot Art: Late Charges/ Administrative Fees
Late Charges/
Administrative Fees

Generally speaking, most associations have the right to collect late charges on delinquent amounts monthly. It is important to note that just because the management company has not put every single applicable late charge on the ledger, that is was not collected by the lawyer. Check to see how many late charges are on the management company’s ledger versus how much the lawyer collected.

Spot Art: Legal Fees and Costs
Legal Fees & Costs

Under most governing documents and Washington state law, associations can recover its reasonable legal fees and costs from a delinquent owner. Make sure all invoices from the lawyer have been put on the ledger for reconciliation purposes.

Alternatively, sometimes judges reduce the amount in fees and costs the association can recover from a delinquent owner. If that has happened, then the management company will want to remove those amounts off the ledger since they cannot be collected from the owner.

Spot Art: Accelerated Amounts/ Security Deposit
Accelerated Amounts/
Security Deposit

Some governing documents permit the association to collect in the amount of up to three months of regular assessments from a delinquent owner as a security deposit. Furthermore, sometimes up to 12 months of assessments are collectible from a delinquent owner.

If three to 12 months of assessments have been collected in addition to assessments and amounts already accrued, then note the account to make sure no further late charges are added to the account and calculate to ensure the credit balance matches the future assessments recovered.

Spot Art: Write-Off
Write-Off

If an account becomes so entangled due to consecutive collections with judgments, garnishments or sheriff’s sales, then to reconcile the account, consider writing off certain amounts on the account. Soft costs (i.e. interest and late charges) are not amounts the association has actually spent money on, so writing off those amounts to reconcile the account is an easy way to bring the collection matter to a close.

It may take some time, but reviewing amounts described in this article should help managers and lawyers reconcile pesky collection files and put them to bed for good. End Of Article

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

By Bennett Taylor, Esq.

By Bennett Taylor, Esq.

Bennett Taylor, Esq., is an associate attorney with Leahy Fjelstad Peryea, a law firm dedicated to creating clear and timely solutions for community associations so they can thrive. He counsels clients on a broad variety of legal issues pertaining to its governance and solvency. He currently lives in the Greenwood neighborhood of Seattle with his wife Lindsay, their daughter Sloane and their cat Peanut. In his free time, he likes to spend time with his family, read and golf even when it is raining.

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Underfunding Reserves: Keep Calm & Be Smart!

by wscai-admin | Aug 28, 2013 | Archive, Blog, Text Only Article

[ Blog/News ]

Underfunding Reserves: Keep Calm & Be Smart!

Society is replete with examples of intelligent people doing foolish things, especially regarding their homes and their money. Homeowners know that maintenance and repair expenses are unavoidable, that the cycle of deterioration begins the moment the last shingle is nailed in place, and that it starts afresh after each repair or replacement. They know it would be wise when buying a home to include the inevitable maintenance costs in their budget and to set aside funds to perform necessary repairs in a timely manner. Nevertheless, the reality is that even when intelligent people buy homes, the yearly costs of offsetting deterioration are often (foolishly) overlooked.

In this regard, individual homeowners typically bear the consequences of their own choices. Just as a fresh coat of exterior paint every 7-10 years serves to showcase a home in a neighborhood and put a smile on the face of immediate neighbors, failing to set aside money to replace a 20-year-old leaky roof may require the embarrassing inconvenience of a house filled with strategically placed pots and pans.

Owners of homes in Association-governed communities, however, bear collectively the burden of foolish financial decisions. If the homeowners have relied on the volunteer Board of Directors to establish a reasonable budget, they may be surprised to learn the Association is “underfunded” at a time when crucial repairs are needed.

As Association properties across the nation have aged, a growing number (70%) have insufficient reserve funds to adequately maintain their common area property. Because someone has to compensate for the prior owners unmet reserve funding obligations, new homeowners are particularly vulnerable to the consequences of an aging Association having not factored in the “true cost of home ownership” in their annual budget.

If underfunding reserves is foolish, why do so many Associations do it?

Here are three of the common reasons, followed by some tips for turning the situation around.

1) Difficulty of Collecting Current Assessments

The tough economy has devastated many Associations. Whether due to pending foreclosures or ongoing delinquencies, some homeowners do not pay their dues. Delinquent owners have a ripple effect on the community, where homeowners who can afford to pay their monthly assessments may simply decide not to. The Association will end up with less than the projected assessment income, leading ultimately to an underfunded budget—and funding the operating budget always takes priority over “funding reserves”.

TIP: Associations that operate with an assessment delinquency rate above the national average of 5-10% may be suffering from an ineffective collection procedure. There are some very creative ways to get delinquent owners to pony up the money they owe. Consult an attorney about collecting unpaid assessments directly from tenants or restricting certain owner privileges to “owners in good standing.” Make it a priority to develop, adopt, publicize, and enforce a formal collection policy.

2) State of Denial

Remember how toddlers, when playing hide-and-seek, may try (unsuccessfully!) To hide by simply covering their eyes? In the same way, Common area deterioration doesn’t stop just because it’s ignored. Funds never magically appear in the reserve account when the time comes to repaint the ironwork fencing.

TIP: At some point, hopefully well before a major common area component (the big seven in Washington are Asphalt, Decks, Painting, Roofing, Siding, Windows, and Plumbing) is nearing the end of its useful life, the Board needs to take an honest look at the Association’s current situation and figure out what to do about it. This exercise is called reserve planning, and it relies on the preparation of a formal Reserve Study by a qualified expert.

3) Ignoring Logic and Letting Emotions Rule

One of the most difficult choices the Board needs to make when preparing the Association’s annual budget is whether or not to increase assessments to fund the Association’s reserve account. Like raising taxes, increasing assessments is never a popular move. The Board may fear that homeowners will not support an increase, but choose instead the easy, popular, and short-sighted alternative to keep assessments low by delaying funding the reserve account to “some other time” or “some other board”.

TIP: The desire to set aside logic and avoid an un-popular decision has a very strong emotional pull for Board volunteers. A quick review of the Association’s governing documents may be helpful to remind Board members of their responsibilities. Boards should also be well-versed in the Business Judgment Rule (BJR), because it’s intended to protect corporate directors from decision-making liability. Every day, good, intelligent Board members step outside the protection of the BJR by making decisions “without reasonable inquiry,” leaving them needlessly exposed to the risk of personal liability.

What are the consequences of under-reserving?

It is a myth that failing to set aside reserve funds is a way to “save” money. In truth, Associations who fail to offset the ongoing deterioration of the common area will pay in one of three other ways— and each alternative will prove far more expensive than properly funding reserves along the way with budgeted contributions.

Deferred Maintenance

An obvious consequence of not being able to make repairs & replacements in a timely manner is deferred maintenance. Manifestations of deferred maintenance, like a cracked asphalt driveway or peeling paint, may be readily apparent to homeowners (or to prospective homeowners). Other symptoms may remain hidden for a while, like a roof on the verge of leaking or a hot water heater on its last legs. Projects that are put on hold, repairs that are neglected, and preventive maintenance that is ignored only become more costly and complex. Deferring maintenance almost always means that the cost of making the repair is ultimately more expensive than the cost of having properly funded reserves.

Need for a Special Assessment or Loan

The need to compensate for underfunding by generating a large amount of cash in a relatively short period of time leaves Associations with two options: Special Assess the homeowners, or take on an outside loan. Because of the positive effects of compounding interest on the Reserve fund over time and the negative affect of paying interest on borrowed funds, budgeted contributions will always be the least expensive option, as shown.

Lower Property Values

Deferred maintenance, a history of special assessments, an Association that is saddled with loans, and the homeowner dissatisfaction that accompanies this type of financial track record will ultimately impact the value and marketability of the units within the Association. The new scrutiny on reserve funding levels, which could render homes ineligible for federal loan programs like Freddie Mac & Fannie Mae, will only make matters worse.

How can we know if our association is financially healthy?

The only way to determine the financial health of an Association is through a Reserve Study. A study that complies with National Reserve Study Standards will contain three important results: The Component List, a calculation of Reserve Fund Strength, and a Funding Plan.

  1. The component list serves as the foundation of the study by detailing the scope and schedule of all required repairs and replacements.
  2. Once the component has been established, a calculation can be made of Reserve Fund Strength by comparing the Reserve Funds on hand to the value of the component deterioration.
  3. The final step is crafting a Funding Plan that allows for the timely repair of all reserve items listed on the Component List. To comply with National Reserve Study Standard’s four Reserve Funding Principals, there must be an emphasis on avoiding Special Assessments and Loans whenever possible.

The importance of properly funding reserves

While many states do not legally require Associations to properly fund reserves, failing to fund reserves is never a wise decision for a Board to make. The financial health of the Association is at stake, and the negative consequences of failing to fund reserves are too great (and too expensive) to be ignored.

Board members should take reserve planning seriously and, if they have a current (credible!) Reserve Study, they should adhere to its recommended Funding Plan. Likewise, Boards without a Reserve Study should “bite the bullet” and get one done by a credentialed Reserve Specialist. If the Board discovers the Association is well-funded, by all means spread the good news among the homeowners and the local real estate agents. If the Board learns their Association-governed community is underfunded, they would be wise to take steps to start reversing the process!

By Robert Nordlund, RS

Article first appeared in the August 2013 issue of WSCAI Community Associations Journal.
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