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Aging Associations: Helpful Strategies for Older Homeowner and Condominium Associations

Are Aging Associations different from New Associations? Maybe.

Self-Managed vs. Professionally Managed

  • Role of the Board of Directors and the management company: The Board of Directors is the main governing body of any Association.  Individuals elected to the Board are volunteers from the Community and do not always know all aspects of managing an Association.  It is important that the Board of Directors surrounds itself with experts and relies on them when making decisions.
  • Which professionals work with the Association: A professional management company is just one of those experts and provides bookkeeping services and leadership to an Association.  The management company does not have answers to all questions either; however, knows when to involve an independent professional.

Most Associations establish relationships with various professionals – attorneys, CPAs, insurance brokers, reserve consultants, and many others.  Those professionals are important to every Association and should be viewed as trusted advisors with expert knowledge in their field.   

What is an Association and what does the Board need to know?
So, you are elected to the Board.  Do you know your duties and responsibilities?  Do you know the needs of the multi-million dollar corporation you’ve been put in charge of?  Where do you start?

  • How was the Association managed in prior years?
  • Does the Association have a maintenance plan?
  • Does the budget cover all of Association’s needs?
  • Does the Association have a Risk Management Plan?
  • Do the governing documents comply with current laws? 

Maintenance Issues
The Association is generally responsible for proper maintenance of all Common Areas and in some instances must ensure individual owners maintain their Units. 

  • Routine maintenance includes regular day-to-day maintenance of common areas.  Some routine maintenance is taken care of through recurring contracts with independent vendors (elevators, HVAC equipment, fire alarms, landscaping, janitorial, etc.)  There are also non-contract maintenance needs – carpets, windows, gutters and downspouts, lighting, etc. 
  • In addition to routine maintenance, each property has its long term needs – replacement of roofs, painting of the exterior, paving of streets and sidewalks, etc.  Proper routine maintenance will pro-long the life of these major components. 

The best way to identify major components is to have a reserve study (a new law was passed in Washington on June 12, 2008 requiring Associations to have reserve studies done an independent professional).  A reserve consultant will visit the property, list major components, “inspect” them to determine remaining life, will provide a replacement estimate, and recommend a funding schedule for the Association to meet its long-term financial needs.

Financial Planning
Community Associations are non-profit corporations and must cover their expenses.  A budget should include short-term (12 months) and long-term (up to 20 years and more) financial needs of a Community. 

  • Operating or short-term expenses generally include utilities, routine maintenance, professional services, and insurance. 
  • Replacement budget includes expenses of non-recurring nature (less frequent than annual).  A reserve consultant will help with replacement budget by preparing the reserve study; however, the reserve study should be updated regularly (new law requires the reserve studies to be updated annually and at least once every 3 years by a reserve study professional) to take into account increased costs of construction and deferred maintenance of major components which may have shortened their remaining life. 

Once the upcoming expenses of the Association are known, the revenue can be calculated.  The majority of the revenue comes from member assessments.  Some Associations will have additional income – for example, interest on Association’s cash assets, move-in/out fees, use of common amenities, etc.  In addition, the Association must take into account delinquencies, if any.  Non-payment of assessments may result in Association finding itself short of operating cash.  While borrowing from reserves is possible, it should be the last resort because doing so will impact the long-term financial planning.  New “reserve study” law has some provisions and guidelines an Association must follow prior to using reserve funds for operating and/or unexpected expenses.

Insurance and Risk Management
There are various insurance policies each Association should have.  Some of them are required by State laws and governing documents.  They include property policy, general liability, D&O, Fidelity Bond/Crime, worker’s compensation, if there are employees, and an umbrella. 

Risk Management Plan of an Association should analyze Association’s exposures (physical and liability), take into account existing insurance coverage, and define ways to minimize risks. 

Disaster Planning is another component of Risk Management.  Every Association should develop a Disaster Plan and provide a copy of it to all residents.  A disaster plan would include information on where shut-off valves are located, who will shut off utilities in case of an emergency, how the evacuation will work, etc.

Legal and Governance
Governance of a Community is more than just compliance with CC&Rs.  There are multiple State and Federal Laws which govern how Associations operate and some of them may trump existing provisions in the CC&Rs.  Because laws often change, an Association must keep itself apprised of the legislature and amend the governing documents as needed. 

Staying current with industry trends is also important.  As society evolves, Associations need to revise their governing documents and the way they operate to protect their interests and their members. 

This also applies to decision making.  The Board has to identify which decisions they have the authority to make and which decisions require vote of the membership.  How decisions are made is equally important.  Before the internet and email, all decisions were made during meetings.  Now, Boards want to take advantage of modern technology and make decisions over email; however, it may not be legal.

Enforcement of Rules and Regulations – the Boards used to be able to send a violation letter to the owner and start levying fines or take other actions.  This is no longer true.  The industry trends have changed and so did the laws.  Majority of Associations now must give notice to an alleged violator and give them the opportunity to be heard before any enforcement action can be taken.  Boards also need to know which rules can and cannot be enforced.  Restrictions which were ok in the past may not be legal anymore.

So, are Aging Associations different from New Associations?
Proactive Associations do not find themselves in Stone Age

Forward looking Associations will stay on top of their maintenance needs and ever changing society, will keep their governing documents updated with industry and legislature changes, and will have enough funds to ensure smooth operations.  Community Associations Institute is an excellent resource for information and networking opportunities.

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December 15, 2008 Posted by | Aging Associations | , , , , , , | Comments Off on Aging Associations: Helpful Strategies for Older Homeowner and Condominium Associations

Methods of Accounting

There are three commonly known methods of accounting: 

  • in “Cash Basis”, income is recorded when it is received and expenses are recorded when they are paid;
  • in “modified accrual basis”, income is recorded when it is earned, and expenses are recorded when they are paid
  • in “accrual basis”, income is recorded when it is earned and expenses are recorded when they are incurred.  Accrual basis provides the most accurate financial reporting and is in compliance with GAAP (Generally Accepted Accounting Principles). 

There are several ways to determine the basis on which the financial statements are presented.  Accounts Receivable, Prepaid Assessments, Accounts Payable, and Prepaid Expenses will appear on the Balance Sheet if financial statements are prepared on an accrual basis.  Accounts Receivable and Prepaid assessments will appear on the Balance Sheet if financial statements are prepared on a modified accrual basis.  Since expenses are recorded when they are paid in a modified accrual financial statement, neither Accounts Payable nor Prepaid Expenses will appear on the Balance Sheet.  A Balance Sheet prepared on a cash basis will not contain any of these line items.

Accounts Receivable is an Asset and indicates the total amount of income earned (i.e. assessments levied against owners) but not yet received as of the date of the financial statement. 

Prepaid Assessments represents assessments, which owners paid in advance.  Prepaid Assessments are a Liability to the Association as this is income already received but not yet “earned” (or not charged against owner’s accounts).

Accounts Payable represents expenses incurred but not yet paid and is a Liability to the Association.  Accounts Payable may consist of actual expenses for which an invoice was received but not paid as of the date of the financial statement, and expenses accrued but for which an invoice was not yet been received (or paid).

Prepaid expenses are expenses, which were not yet incurred but already paid as of the date of financial statement.  Prepaid expenses are an Asset to the Association.  An example of a prepaid expense is an insurance premium, which is paid in full for the entire year when an invoice arrives.  When the insurance premium is paid, it appears on the Balance Sheet under Assets but it does not appear as an expense on the Profit and Loss Statement.  The premium would then be “expensed” on a monthly basis in equal monthly installments.

Profit and Loss Statement (P&L) can also help determine on which basis the financial statements are prepared when a budget comparison/variance is shown on the statement.  Because income and/or expenses are recorded when they are incurred, items such as “Homeowner Assessments” in the income section of the P&L, and all “Contract” line items in the Expenses Section of the P&L, should have zero variance from the budget in an accrual basis.  Member of the Association are charged based upon a budget prepared in advance, so 100% of income for a given period will be recorded at the time it is budgeted for and charged to owners’ accounts.  Expenses based upon contracts should also match the budget and have a zero variance because they are recorded when incurred whether or not an invoice is received from the vendor.

December 12, 2008 Posted by | Accounting | | Leave a comment

Taking Meeting Minutes

Meeting minutes are an official corporate record of a Condominium or a Homeowner Association and are considered to be legal documents by the IRS, courts, auditors, etc. The purpose of the minutes is to record decisions made and actions taken at a Board or general membership meeting. It is important that minutes preserve the full history of an Association and include all decisions made and all actions taken. A decision or action may be considered null and void if not recorded in the minutes.

Minutes should always reflect:

  • who was in attendance at the meeting;
  • whether or not a quorum was present as required by Association’s governing documents;
  • when (including time of calling the meeting to order and adjournment) and where the meeting was held;
  • type of the meeting (regular Board meeting, special Board meeting, annual general membership meeting, etc.);
  • approval of prior meeting minutes (as presented/written or with amendments/corrections);
  • provide a record of every matter brought before the Board and what decision was made (approval, denial, dismissal, postponing of action, etc) regarding each matter;
  • exact wording of each motion and name of the person who made and seconded the motion, whether or not the motion was approved or denied (in case of non-unanimous voting, names of persons voting in favor, opposing, and abstaining).

Meeting minutes should never include full details of all discussions (e.g. transcript), comments, etc. because they are an official corporate record of an Association. Instead, the minutes should reflect the name of the person and a topic discussed (for example: John Smith, on behalf of the Landscaping Committee, reported on landscape maintenance for the past month). For decisions and actions, minutes may include a brief statement describing how the Board reached a particular decision.

The minutes are also a “public record”, available upon request to members of the Association, Buyers, Real Estate Agents, etc. Minutes should be taken at every meeting of the Board of Directors and general membership with the exception of Executive Session meetings. Different states have different laws on whether or not Board meetings are open to the membership and which topics could be discussed in an Executive Session. In general, matters involving contract negotiations, employment issues, and legal matters are permitted and should be discussed in an Executive Session.

There are multiple laws which govern employment issues and any and all employment matters should be kept confidential between Management and the Board of Directors. Providing employment-related information to general membership carries significant liability and may give employees a legal cause of action against the Association.

Any and all legal matters, whether a potential lawsuit against one of the contractors of the Association, or enforcement of Rules and Regulations of the Association, should also be kept confidential. Hearings on alleged violations should be held in an Open Meeting; however, the Board should adjourn the regular meeting and convene an Executive Session to discuss information/evidence presented during the Hearing. Legal issues are complicated in their nature. They may involve attorney-client privileged discussions between the Board of Directors and the Association’s attorney, development of a strategy to prevail in a lawsuit, etc. Having such information made available to the general membership may jeopardize Association’s position in a legal matter and may potentially waive attorney-client confidentiality protection.

Roberts Rules of Order do not permit decisions to be made in an Executive Session; however, some states have specific laws, which govern Executive Sessions and may permit decision-making in a closed meeting. Full transparency of Board actions to the membership is very important for every Association. The best approach is to hold discussions in Executive Sessions and then make decisions in an open meeting immediately following the Executive Session. If minutes of Executive Session are taken, they should only state topics which were discussed (for example: The Board of Directors discussed employment of Mr. John Doe) and not include details or summary of the discussion. Minutes of the Open Meeting following the Executive Session should then reflect motion and action taken on the topic (for example: John Smith moved to terminate employment of Mr. John Doe effective immediately. Mary Stewart 2nd the motion. The motion was unanimously approved.)

Because Executive Sessions are closed meetings, minutes, if taken, should be privileged and not be made available to anyone other than Board members and Management. However, if no decisions are being made in Executive Sessions, there is no need to take the minutes. “Corporate history” would be properly recorded in meeting minutes where decisions are made.

Since minutes of Open Meetings are an official record of an Association, they should accurately describe actions taken to preserve the corporate history of the Association. Oftentimes, questions come up regarding actions taken several years ago. Minutes are a permanent record of an Association and any person and/or judge, should be able to understand exactly what action was taken on a specific matter. For example, if the Board (or Architectural Committee) is approving an alteration request, the minutes should identify the Unit/Home submitting the request, state what is being altered, and whether or not the request was approved as submitted (for example: The Board of Directors reviewed a request from Unit 500 to replace all windows. John Smith moved to approve the request as submitted. Mary Stewart 2nd the motion. After a brief discussion, the motion was unanimously approved).

December 12, 2008 Posted by | Meetings | , | Leave a comment

Being a Board Member

If you’re considering running for the Board, ask yourself the following three questions:

Do I have the time?: As a Board member, you will need to devote at least several hours of your time each month to Association business. In addition to regular Board meetings, you will need to be active in email discussions and occasional special meetings. During special projects, you may need to spend a little extra time on Association business. Some board members may also spend a little more time than others if they work with a committee

Can I make tough decisions when it’s required?: The primary role of the Board is to conduct the business of the Association. This doesn’t just mean approving the budget, but also developing and enforcing policies. Board members are required to step outside their immediate circle of family and neighbors and make decisions based on the greater good of the community.

Can I do all this and have fun, too?: It isn’t all about policies and tough decisions. An Association is only as good as its owners make it, and establishing and maintaining a sense of community is a part of a Board member’s responsibility. Planning and attending functions such as picnics and being a presence in the community are as important as any policy decisions you may make.

Being a board member can be frustrating at times, but it may also be one of the most rewarding ways you’ll find to volunteer your time.

December 12, 2008 Posted by | Board of Directors | , | Leave a comment