Yalnes, Inc. Blog

A Resource for Condo Owners

Why does an Association need reserves?

Equipment and major components (like the roofs) must be replaced from time to time, regardless of whether the expense is planned for. Most Association members prefer to set the funds aside now instead of having to pay a Special Assessment to cover cost of a major project such as a roof replacement. Reserve funds aren’t an extra expense – they just spread out expenses more evenly. Funds for a particular project are accumulated over a period of several years instead of a one-time Special Assessment levy. There are other important reasons why Associations put monies into reserves every month:

1. Reserve funds meet legal, fiduciary, and professional requirements. A replacement fund may be required by:
– Any secondary mortgage market in which the association participates (e.g. Fannie Mae, Freddie Mac, FHA, VA);
– State statutes, regulations, or court decisions;
– The community’s governing documents;
2. Reserve funds provide for major repairs and replacements that will be necessary at some point in time. Although a roof may be replaced when it is 25 years old, every owner who lives under or around it should share its replacement costs.
3. Reserve funds minimize the need for special assessments or borrowing. For many association members, this is the most important reason.
4. Reserve funds enhance resale values. Lenders and real estate agents are aware of the ramifications for new buyers if the reserves are inadequate. Reserve Study bill passed in Washington just recently requires Associations to disclose the amounts in their reserve funds to prospective purchasers. It also contains specific requirements for Reserve Studies.


March 26, 2009 Posted by | Accounting | , | Leave a comment

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.

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