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  • 08/01/2021 10:13 AM | Bridget Sebern (Administrator)

    By Ryan Morita, 5150 Community Management

    Any community management professional understands that one of the biggest questions raised year after year by board members and homeowners alike is “Why do we need to increase our assessments this year?” An educated manager that comes ready to answer that question is going to be able to both service the community, and at the same time, fight off the negativity that often surrounds assessment increases. There are many valid responses that can be used to communicate to communities the reasons why their specific communities need to raise their assessments.

    Let’s review some of those responses now.

    “The Association Needs to Keep Up with Rising Costs”

    Inflation and rising costs are often the biggest factors in the need for a community association to increase their assessments. Year after year, the value of a dollar decreases while costs of many goods and services increase in correlation with this inflation. A responsible community association will foresee these increases in cost and communicate to the membership that the assessments for the association will need to increase as well. If this is not planned strategically and with foresight, the association risks having an operating shortfall and having to resort to drastic measures in order to just maintain the day-to-day operation of the association. These measures could include a substantial increase in assessments that far exceeds the inflation rate. For example, an association that does not increase assessments for several years in order to artificially maintain a “low dues association” could possibly find that they cannot afford a service that is required by the declaration and must increase assessments 20-30% in order to just maintain the standard that is required by the governing documents.

    “The Association Needs to Plan for the Future”

    One of the most important aspects of operating a community association is the maintenance and replacement of the physical assets of the community association. Often, this aspect of community management can be overlooked, both by focusing too much on the short-term needs of the membership and by focusing too little on the long-term financial requirements of the community. Every asset that the community owns will inevitably need to be replaced. It is the duty of the board of directors to plan for that replacement and to maintain a reserve fund in order to pay for it. The most important steps in this process are understanding what the association owns, how much it will cost to replace each item, and how long the association has until those items need to be replaced. A reserve study should often be the go-to tool for community association boards and managers, as it provides a guideline for all  three of those factors and allows the association to come up with a realistic plan and expectation of maintaining and replacing their physical assets. With an informed plan in place, the odds of the association needing to implement a special assessment or worse, deferring maintenance, will decrease significantly.

    “The Association Needs to Defend Itself Against Stagnation”

    This response is often the simplest to explain, the easiest to implement, and yet the most overlooked by community association boards and managers. If an association begins to expect that dues will not increase, then even a small and reasonable increase could be seen as having a negative impact on the individual members. If the community association is going to be able to keep up with cost increases and save for the future, then assessments will need to be increased by a small amount every year in order to operate. The expectation should be set that a small increase is required and is beneficial to the individual members and the entire association. If the homeowners expect a small increase each year for this reason, then it is unlikely that they will ever be surprised by an increase. Also, if an association expects a small increase each year, they will inevitably avoid the pitfalls of an artificially low assessment level. Often, there is a false association with low assessment levels to being “good” while high assessments are considered “bad,” when there really are only “correct” and “incorrect” assessments. Correct assessments are going to be set at a level specific to the community, that funds for operating expenses, saves for the future, and has the flexibility to allow for fluctuations in cost year after year.

    Equipped with these three responses, a community manager will have everything they need in order to communicate to the board and membership the importance of increasing dues annually. It can be a difficult task at times for managers to maintain the balance between satisfying the membership and adequately funding their communities, but a well-informed manager will have all the tools that they need to communicate the importance of increasing dues on an annual basis and avoiding the many traps associated with under-funding a community.

    Ryan Morita is the Director of Accounting Services at 5150 Community Management. 

  • 08/01/2021 10:12 AM | Bridget Sebern (Administrator)

    By Kim Hitchcock, McNurlin, Hitchcock & Associates, P.C.

    Today’s homeowner is savvy and aware of the tax implications of homeownership. Deductions for mortgage interest and real estate taxes are common topics of conversation, however, taxes paid by the HOA are often left out of the discussion. It is easy to assume that HOAs are tax exempt, but the IRS disagrees. The HOA could be subject to tax on income from vending machines, laundry machines, clubhouse rentals, easement proceeds, roof rent, etc. This is true, even if the HOA is registered as a nonprofit corporation. 

    If, after reading this article, you are uncertain how these rules apply to you, or your HOA, be sure to enlist the support of a qualified CPA Firm. 

    Homeowner Associations can pay taxes?!

    Homeowner associations (also called HOAs, CIRAs or Associations) have a distinctive taxing structure that is complicated by multiple taxing options. To start, we will first define the HOA.

    What is a Homeowner Association?

    According to the IRS, the HOA is an entity that provides a benefit to the community. It can be a condominium association designed to care for property in a specific condominium project, a residential real estate association designed to care for properties in an area or a timeshare association.  The important factor is that the HOA is created as an entity designed to act on behalf of individual owners or members for the good of the overall community.  

    For that reason, the HOA is not often taxed on dues and assessments which are collected from members for the purpose of maintaining the property, even when the dues collected are greater than the current year expenses. 

    My HOA is a Colorado non-profit.  Why do we pay taxes? 

    The State of Colorado recognizes the HOA as a nonprofit corporation. It is important to note that a nonprofit corporation in Colorado is not tax exempt under the Internal Revenue Code (IRC).  To become tax exempt, the requesting organization must file complicated paperwork and report their mission to the IRS. 

    What tax form does the HOA file?

    The HOA is a legal entity and a corporation. It is required to have a tax ID number (FEIN) and file annual tax returns with the IRS and possibly with the State as well. The good news is that the HOA can often elect to take advantage of the tax benefits provided by IRC §528 by filing the shorter Form 1120-H instead of the longer Form 1120 unless the HOA is primarily commercial, not residential, or if the HOA is primarily funded by non-exempt sources.  

    Form 1120-H; U.S. Income Tax Return for Homeowners Associations

    HOAs that elect to file form 1120-H will start the process by designating each item of revenue as “exempt” or “nonexempt”. “Exempt” revenue would include member dues, assessments, and anything that is charged to members based on their ownership percentage. Everything else, such as investment income, rental income, resort fees, and vending income is “non-exempt”.  This is an important designation because the “exempt” income is also the “tax free” income.  

    Non-exempt income, less all associated expenses and a $100 statutory deduction, is subject to the 1120-H tax at a federal rate of 30% (plus State). 

    Form 1120, U.S. Income Tax Return for Corporations

    Associations that do not elect to file form 1120-H will file the full form 1120, but the HOA will still benefit from special rules for membership organizations. HOAs that file form 1120 will start the process by designating each item of revenue as received either by a member or by a nonmember. Income received from a member is “tax free” if it is used to pay for member/community expenses.  

    If the HOA collects member income, dues, or assessments that exceed community expenses, the HOA will have something called “excess membership income”. This excess must be applied to the following year budget or refunded to the members. Choosing which option, either budget adjustment or refund, is addressed through a resolution at the HOA annual meeting.  

    Income from nonmembers, less all associated expenses, is subject to federal tax on Form 1120 at a federal rate of 21% (plus State). 

    As you can see, the complexity of the tax return really depends on the activities of the HOA and the availability to file the shorter Form 1120-H vs the longer Form 1120. Talk to your tax professional if you are seeking more guidance on this subject. 

    Kim Hitchcock is a CPA in Lakewood Colorado and the managing partner of the public accounting firm, McNurlin, Hitchcock & Associates, P.C. Kim is also a member of her residential HOA and is involved with the HOA of her family’s vacation rental.  She has more than 26 years of experience in public accounting in the tax, audit, and accounting fields working specifically with CIRAs and small businesses.  To find out more about Kim and the team at McNurlin, Hitchcock & Associates, P.C. visit www.mcnurlincpa.com.

  • 08/01/2021 10:00 AM | Bridget Sebern (Administrator)

    By Russell Munz, Community Financials Inc.

    I like to say that the best practices are born out of the trials and tribulations of the worst practices. If you are a board member or community manager of homeowners associations and condominium communities, the way to learn these best practices without suffering yourself is to learn from the mistakes of others.  Over the last three years I have researched over twenty case studies of fraud and embezzlement perpetrated by board members, onsite staff, portfolio managers and management companies around the country.  In this article we’ll discuss the resulting best practices, as well as cover some good housekeeping items.

    Financial Reports: One embezzlement scheme where the management company controller stole over $2.3M from numerous communities was from doctoring the financial reports.  The report package did not include a bank reconciliation report which proves what is on the reports matches what is on the bank statements. Besides fraud, getting reports more frequently will help you spot irregularities faster.  Use the comparative income and expense report that shows the actual expenses versus budgeted and the variance for the month and year to date.  Look at the variances and then ask questions.

    Best Practice: Get financial reports monthly and make sure they include a bank reconciliation report.

    Bank Information:  In the case mentioned above, the controller also did not include bank statements with the report package, so the boards couldn’t verify the funds in the bank as to what was shown on the reports.

    Best Practice: At a minimum get bank statements as part of the boards’ financial report package and even better is for boards (more than 1 person) to have online access to view bank accounts so it can spot irregularities faster and for greater checks and balances.

    Old Bank Accounts: In some cases, board members changed and an old bank account was not reported on the financial reports and a former board member was spending money from this account.  Even when there is no fraud I’ve dealt with boards where the original signers on the account moved or died and the new board could not access their money until they filled out a lot of paperwork and had to go through numerous phone calls and meetings with the bank for over nine months!  Plus, fewer bank accounts make the financial reports easier to read and will cost you less to have someone prepare.

    Best Practice: Close old bank accounts.

    Checks and Balances:  Another embezzlement case involved a board president who had the community checkbook and wrote out checks, forged a second board member’s signature, and pocketed the money.  Even having two signers required for checks did not work.  

    Best Practice: Systematize the association’s accounts payable.  We use an online system where the manager and/or two board members have unique logins to review and approve bills before a payment gets processed.  This also increases the board’s control over expenses and reduces surprises when reviewing the monthly financial reports.

    Debit & Credit Cards and Petty Cash:  One onsite manager in Colorado had a debit card and withdrew money from the ATM at the Black Hawk Casino!  The Board did not have access to the bank information and this went unnoticed for several years.  

    Best Practices: For Debit cards the best practice is to set up a separate account and then limit the amount of money in that account to say $1,000.  Otherwise, someone could withdraw the daily limit every day and that can add up.  Credit cards are better as you can put a cap on them but make sure you have a process in place to track the credit cards when board members or staff change.  Petty cash is just a bad idea.  We recommend not accepting cash as payment as it can easily “get lost.”  The best way to avoid all of these scenarios is to use a supply house that will invoice the association or if the purchases are infrequent for a board member to make the purchase and then submit reimbursement through an online approval system as mentioned above.

    Payroll:  A community had onsite staff and chose to “save money” having that staff use Quicken to run payroll.  The person doing payroll ended up giving themselves extra pay checks as well as additional bonus checks!  Additionally, if withholding rates change and you don’t change the rates in your software you may incur a shortfall.  Depending on how quick the state is to notice this, the association could be liable to pay the shortfall as well as stiff penalties.

    Best Practice:  Use an outside payroll company to reduce risk.

    Good Housekeeping

    Separate Operating Funds from Reserve Funds: Many communities use only one bank account.  We recommend that your association have a second bank account for its reserve funds.  This will help you track these more clearly on the balance sheet monthly to see exactly how much you have put aside for capital replacement projects.

    Operating Expenses Paid from Reserve Account:  I’ve seen where communities use the reserve account as a slush fund for operating account shortfalls.   If you have to use these funds, we recommend borrowing them for a short term and then replenishing with a special assessment.  Levy the special assessment quickly after the cause of the budget shortfall so it is fresh in owners’ minds - think more snow than anticipated in a year assessed while it’s still cold instead of during mid-summer. 

    Collections:  If your community doesn’t have a collection policy that outlines what will be done at what time and the associated fees owners will pay (and you should, because it is required!) put that on your to do list.  This will help the board, management, accounting staff and homeowners get clear guidance on the association’s process.  Additionally, a best practice for home loans, car loans and credit cards are reporting delinquent payers to the credit rating agencies and now this is available for community associations.  This lights a fire under owners to put their association dues bill on the top of stack of bills to pay and not the bottom.  

    Russell Munz is a Licensed / Certified CAM in 7 states and Founder and President of Community Financials, Inc. a nationwide financial management company that provides monthly accounting services to Community Associations based in Boulder, CO.  For more financial best practices and to see the actual embezzlement case studies check out our blog at www.CommunityFinancials.com.

  • 08/01/2021 9:59 AM | Bridget Sebern (Administrator)

    By Craig Huntington, President Alliance Association Bank

    A few days ago several of my community manager colleagues and I were talking about how several of their associations had a great deal of deferred maintenance and were concerned about the cost to have it completed.  We started talking about borrowing the money for the repairs.  One of the managers was the on-site manager of a large adult community and his board was dead set against borrowing money for the repairs. This got me to thinking about how low the cost of borrowing was right now and how quickly the cost of items, like lumber and oil that is used for asphalt and roof shingles, is going up.   

    The Bureau of Labor Statistics, part of the Department of Labor in Washington, DC maintains records of costs of products over time.  These records are called the Producer Price Index (PPI).   It is important to understand the difference between the Consumer Price Index (CPI) and the (PPI). The difference between them is that the CPI gauges only four very specific “baskets” of prices: 1. Food Cost; 2. Fuel Cost; 3. Electricity Cost; and 4. Rent. The PPI gauges the costs of finished goods in manufacturing and construction.  In February of 2003, the PPI for lumber was 170.5, in 2008 161.9 and this year 195.6.  The PPI for oil was 114, 199 and 214 respectively.  

    We all know the cost of labor always goes up. With the economy turning around and congress talking more about additional taxes, etc. on small businesses, we can safely assume that the cost of labor for any major repair is going to be more in the future.  

    Let’s talk about a $400,000 paving project.  For this example we are going to project $300,000 for material and $100,000 for labor.  All things being equal, the material will cost us 87.7% more or $563,157 in ten years; or 7.5% more or $322,613 in 5 years.  For this example we will say labor will remain the same (we all know that is not the case).

    If you were to borrow the money for this project, an average interest cost over a 5-year period would be $52,891.40, and over a 10-year period it would be $109,114.40.  Without any additional labor cost, if we did the project today and borrowed the money over 5 years, the work would cost an additional $30,278.40, and over 10 years we would save $154,042.60.

    Of course, both these examples are only estimates.  While we all know costs of items like lumber and oil are going up and labor seems to always go up, at the same time the cost of borrowing money is the lowest it has been in decades.  Today, many loans to homeowner associations are in the 5% interest rate range.  

    So do the math, not only will you be saving money by borrowing and doing those repairs today, you will be increasing the value of your property.  Isn’t that what this it is all about? 

    Craig Huntington is President Emeritus of Alliance Association Bank (AAB), overseeing all aspects of service to homeowner associations and community management companies.

    Since 2008, Mr. Huntington has worked with the AAB team to provide superior service as well as the banking tools and innovative solutions that meet the needs of the community management industry.

  • 08/01/2021 9:57 AM | Bridget Sebern (Administrator)

    By G. Michael Kelsen, Aspen Reserve Specialists

    I am sure you have heard the expression,“If you don’t like the weather, wait ten minutes and it will change.”  As scary as it may sound, we in the Reserve Study and Construction businesses have had a similar expression lately: “If you think the costs are high now, wait just one day and they will be more.” Yes, one day may be an exaggeration, but while we have seen product increases exponentially from last year, we have seen some costs increase month to month. 

    According to various publications, the current inflation rate for construction labor and goods is running between 5% - 6% in the Rocky Mountain Region. From what we have seen with contracts, we think the actual number is closer to 7% - 8%. The national core inflation rate, which does not include volatile oil prices, is running about 3.8% over the past 12 months. As of the writing of this article, even though wood prices have seen a decrease over the past week, a slight change in production or product availability will cause those prices to increase again.  

    As long as I have been in this business, there have always been outside forces that impact product costs. Believe it or not, a natural disaster in another part of the country will affect replacement costs here in Colorado. Why? Because those building materials are needed where the disaster occurred. Also, sub-contractors and labor tend to go where the work is. As the cost of precious metals soars, so do costs of assembling mechanical equipment. After fires raged in the Pacific Northwest and Canada, in forests where we get our wood for construction, the results were less product, higher demand, and (the basic principle of Economics 101): higher costs. Let’s not forget that with the increase of hourly wages, fuel costs, insurance premiums, commercial rent, etc., those additional costs to run a business will get passed down to the consumer.  Bottom line, no matter how you look at it, things are only getting more expensive, and will continue to get more expensive in the coming years. 

    So how do we plan for these increases? In my 30 years of industry experience, I have never seen expenses decrease, and rarely have I seen them stay stagnant from the previous year. This is why if association assessments are not increased annually, then the financial strength of the association is ultimately falling behind and digging themselves a hole.  We in the Reserve Study business see this all the time: budgets are established, and rather than following the recommendation of your professional and increasing the Reserve contribution, the budgeted Reserve contribution is actually decreased to prevent the board from having to raise the dues. 

    With a healthy Reserve balance, associations are able to have some wiggle room in their funds for projects that increased more than anticipated, or for additional labor caused by deferred maintenance. Take wood fence replacement for example: A few years ago, we were seeing replacement of a privacy fence cost around $30 per LF, depending on total area, location, and types of posts being installed. If you take the average inflation rate of 5% for construction related projects, the cost to replace the fence would be around $35 per LF today. However, because of factors beyond our control, the actual cost of a fence today is about $45 - $50 per LF. When an association follows the advice of their professionals and adequately contributes to the Reserve fund, then typically there are sufficient funds available to address the shortage.  

    Some associations also believe that spreading out an expense, or “phasing” a project as we refer to it, will save them money. In reality, phasing out a project is actually costing you more money for several reasons: 

    First off, the average interest earned on a Reserve account is ranging anywhere from 0.1% to 1.0% if you are lucky.  As mentioned above, inflation rates are averaging about 7%. Therefore, for every year a project is deferred, it becomes more expensive. Another way to think of this is that your Reserve dollars are literally losing value while sitting in the bank. 

    Secondly, for projects that are phased over a period of time, the cost of that project will continue to increase for the duration of the phase period. So, rather than spending $150,000 in year one to address the entire project, the same project could cost about $161,000 by the time the project is completed three years down the road. 

    While we realize raising assessments is never a popular topic, it is a necessity in today’s world. If an association does not increase their annual assessments by at least 3% - 4% every year, then the financial strength of the association will surely fall behind.  As a result, it will only get more difficult to get caught up and be able to address major projects when they need to be performed. 

    G. Michael Kelsen is celebrating 30 years of preparing Reserve Studies in 2021, as well as acknowledging the 20th anniversary of Aspen Reserve Specialties being in business. Personally being accountable for completing over 5,600 Reserve Studies, Michael has had his fair share of experience with condominium associations, large scale communities, townhome properties, high-rises, commercial properties, private schools, and worship centers throughout the United States. 

  • 08/01/2021 9:55 AM | Bridget Sebern (Administrator)

    By Lee Freedman, PWF Legal

    It began about 40 years ago when the Champlain Towers South condominiums, the Surfside, Florida condominium complex that became a news story in June, was first developed.  Internal documents apparently contend that the driveway on the top of the buildings garage had very poor drainage (design flaws) which exposed the garage to water intrusion for 40 years.”

    The Chaplain Towers South community association grappled with what many Colorado community associations grapple with – members fighting over deferred maintenance, increases of assessments, and the levying of a special assessment.  At least since 2018, the members were advised of the need to remediate the poor drainage, which was likely to cost approximately $7 million, which started infighting among the members and the Board.

    What many members in community associations fail to acknowledge is that assessments are the lifeblood of community associations.  This is why Colorado law, along with statutes in many other jurisdictions, provide that members must pay assessments and may not withhold such payments just because they have a dispute against their association.  The levying of general assessments, whether monthly, quarterly, or annually, is a necessity for community associations to raise sufficient capital in which to operate.  Assessments are used to pay for the general expenses of community associations and to provide sufficient funds in reserve accounts in order to help pay for deferred or emergency maintenance.

    However, assessments are often used as political fodder for those running for director positions on the executive board, whether it is argued that the current board is levying too much in assessments, which is harming the members financially, or is charging too little which is causing harm to the components of the common elements and the values in the community.

    Those boards that fall in the board is charging too much” category tend to care about appeasing the members by keeping assessments low.  Many times, these types of boards will refuse to increase assessments for many years and argue that is what the membership wants as they continue to re-elect the same board members.

    However, failing to increase assessments, especially for a lengthy period of time, can impact an association in several very troubling ways including not having sufficient funds to provide additional benefits to members such as community events, to pay for the expenses related to the provision of recreational facilities, to perform necessary or recommended maintenance on components for which the association has the responsibility, or to provide sufficient reserves to cover expenses for future anticipated reserves.

    These Boards generally prefer to push the maintenance responsibility or costs upon future boards – basically taking the position that it is their problem, not ours.”  They tend to look at the immediate financial benefit of the community, while ignoring the future consequences of their reckless financial decisions, disregarding contractors or reserve specialists recommendations, and ignoring their own potential legal liability for such future consequences.

    Ultimately, such decisions may have serious, and even devastating, consequences.  The lack of maintenance can result in the early failure of components or worsening damage of the components, which can also result in damage to persons or other property.  These board decisions can invalidate insurance coverage for such injury or damage.  If there are not sufficient reserves to cover the repairs, in whole or in substantial part, the association could end up having to immediately come up with thousands, to hundreds of thousands, to even, as in the Champlain Towers South community situation, millions of dollars to perform the requisite repairs.  This can result in the Board having to propose a special assessment.  However, since many declarations require owner or member approval of the levying of a special assessment, there is not any guarantee that the association can raise the funds quickly or in a reasonable period of time, which can result in continued deterioration or threat of further injury and damage.

    Basically, one boards decision to not raise assessments can create a slippery slope which can put persons and property at serious risk of harm.  The Surfside, Florida condominium garage collapse, resulting in the destruction of at least 55 condominiums and counting, is an extreme example of what could happen in a common interest community should the board fail to levy reasonable assessments or stay on top of necessary or recommended maintenance.  It is a strong lesson to all voluntary board members of the consequences of poor association maintenance.

    Board members and community managers must take the financial needs of their communities seriously when determining budgets and the amount of general assessments to levy and learn from the mistakes of others.

    Lee Freedman has been practicing HOA Community Law for over 20 years. Lee is an active volunteer in CAI and the Colorado Legislative Action Committee. His passion for education and productive community governance is a driving force in his firm.

  • 08/01/2021 9:53 AM | Bridget Sebern (Administrator)

    By Joel Massey, NexGen Roofing

    Lumber. Insulation. Steel. Gas. Unfortunately, current rising material prices, tariffs, and disruptions in supply chain could mean your project just got a lot more expensive! But what does this mean if price escalation occurs and your community is already under contract for a large construction project? 

    Most construction contracts include provisions to protect the company from circumstances outside of their control. These circumstances include: labor strikes, weather events, acts of God or acts of war, and material price escalation.  Material price increases in the construction industry are very common and materials can increase in price, on average, 5-7% each year. For the smaller and more frequent price increases, contractors plan the material price increases ahead of time and figure the additional costs into their estimate based on start date and potential completion time.  However, if the project start date is delayed by the community, then the community may be liable for additional fees or surcharges. These surcharges and fees can range from 1-2% of the contract price for each month the project is delayed, so it’s important to understand that “time is of the essence,” adhere to project start dates, and avoid these additional fees. 

    In rare cases of extreme price escalation, most contractors have a provision in their contract to protect themselves if material prices increase beyond a certain pre-budgeted margin. For example, the price of lumber has increased 288% percent in 2021.  Prices for oriented strand board (OSB) are selling for roughly $65-80 per sheet. If the contract was executed prior to lumber inflation, the dramatic price increase would allow the contractor to terminate the contract without liability; however, the contractor must meet certain conditions to justify terminating the contract. For example, if the contractor had ample time to purchase materials prior to the price escalation, then the contractor could still be liable and pay out of pocket for the increase. Timeline clauses work both ways for the customer, and the contractor deadlines are equally important for the contractor to ensure their scope of work and pricing is met. 

    If your project is related to an insurance claim, insurance carriers may update their price lists to current market conditions and pricing. Waiting on approval from the insurance carrier is half the battle when it comes to insurance restoration work. Sometimes these price escalations can happen when waiting for approval on additional construction items related to the claim. If this is the case, then your carrier understands the market conditions and will typically allow the approval of the price increase; however, this also depends on following reconstruction timelines set forth by your carrier. If you wait a year or two to start the work after the claim, and supplement items have been approved, there is a chance your insurance company may deny the additional benefits. We recommend contacting your insurance carrier to review your policy and guidelines regarding material price increases, and their timeline to file and complete a claim. 

    Material price escalations are also very hard on contractors. These unforeseen increases in pricing puts contractors in a tough position understandably, not only the value of maintaining a relationship, but also honoring the price set forth at the time the contract was executed. We understand the potential burden it may have on a community who set an expected budget and now may be subject to additional costs or change orders. Having and maintaining an open conversation with your contractor is the best way to resolve any of these dramatic material price escalations.  Understand the terms and conditions up front in order to protect your community from additional fees, change orders, or potential cancellation. 

    Joel Massey is the Co-Owner of NexGen Roofing, specializing in multi-family and commercial roof replacement in Denver and the surrounding areas. NexGen has been operating since 2014 and is listed on the Inc. 5,000 fastest growing companies in the United States. 

  • 08/01/2021 9:51 AM | Bridget Sebern (Administrator)

    By Nicole Bailey, RBC Wealth Management

    Boards of directors and community managers rely on policies and procedures to guide community operations. The governing documents serve as the law of the land and the policies provide the roadmap.  Each area of community operations likely has a corresponding policy to see that the board can make decisions fairly and efficiently. Just as covenant enforcement and assessment collections processes are guided by their respective policies, investment decisions are guided by the investment policy. 

    The use of investment policies is not specific to community associations. Many other entities use policies to guide their decisions. Some examples include college endowment funds, pension funds, and charitable organizations. All of these organizations have one thing in common: they are responsible for other people’s money. The board of directors of a community association is elected by the homeowners to make decisions in the best interest of the association. With this responsibility, each director assumes a fiduciary duty of the association – not unlike those that govern the entities listed above. 

    In order for a policy to be valid and enforceable, the policy must be consistent with the governing documents and within the board’s rule making authority. The board’s rule making authority is specifically outlined within the governing documents and should be cited within the policy. The policy should also state the purpose or objective and any restrictions. Confirming that essential components are contained in each policy reduces ambiguity and provides for fair and consistent processes. 

    The goal of the investment strategy should be detailed in the policy so that all parties subject to the policy (the board, the finance committee, and the investment advisor) are able to work towards a shared objective. Sometimes the investment objective is to preserve principal. This means that the priority of the investment strategy is to preserve the original investment. Another example of an investment objective could be moderate growth. In this situation, assuming a level of risk to the original investment may be necessary in order to achieve a moderate level of growth in the account. Clarifying the purpose of the investments informs the other considerations within the investment policy.  

    When defining the investment objective, it is important to consider the types of risk and how risk is defined. Most define risk as the potential for loss of principal. Loss of principal can be a result of market fluctuations, however it can also be a result of the loss of purchasing power due to inflation. If the investment objective is preservation of principal, the advisor and the board need to discuss the difference between market risk and inflation risk. If the objective is moderate growth, a level of market risk might be required in order to achieve that objective. Discussing the potential impact of each type of risk is critical to establishing a risk profile. The risk profile for an association is often established in a conversation with the board and an investment professional who specializes in community association investment strategies.

    Just as the objective guides the determination of the risk profile, the risk profile can guide the investment selections. By establishing the level and type of risk the association is willing to expose the funds to, the investment professional can provide recommendations that are in accordance with the objective and the risk tolerance of the association. 

    An important consideration when investing community association funds is the timeframe in which the funds will be spent. Whether the funds are earmarked for reserve expenses or repairs resulting from an insurance claim event, the schedule of spending and the liquidity needs will impact the investment strategy. Some policies outline provisions for short term funds and long term funds. Doing so can help provide adequate liquidity while also targeting better returns on the funds that won’t be spent for several years. 

    When creating guidelines around investment decisions, boards should also be aware of market conditions. With record low interest rates at play, what impact does this have on an association’s earnings? Strategies that were proven effective in the 1980’s may no longer generate the same results on an account. Because of the dynamic nature of investment circumstances, policies should be reviewed regularly so that necessary changes can be made in order to achieve the stated objective.

    Considering the board’s fiduciary duty to the association, establishing a comprehensive investment policy encourages a proactive and thoughtful approach to community association financial management. 

    Nicole brings a broad background in community management in the Atlanta and Denver areas to her role on the West Wealth Management team. She actively volunteers with the Rocky Mountain Chapter of Community Associations Institute on the Marketing and Membership Committee. 

    Disclaimer: Investment and insurance products offered through RBC Wealth Management are not insured by the FDIC or any other federal government agency, are not deposits or other obligations of, or guaranteed by, a bank or any bank affiliate, and are subject to investment risks, including possible loss of the principal amount invested. RBC Wealth Management does not provide tax or legal advice. All decisions regarding the tax or legal implications of your investments should be made in consultation with your independent tax or legal advisor. RBC Wealth Management, a division of RBC Capital Markets, LLC, registered investment adviser and Member NYSE/FINRA/SIPC.

  • 08/01/2021 9:49 AM | Bridget Sebern (Administrator)

    By Ryan Gulick and Heather Nagle, The Receiver Group, LLC

    The financial aspects and workings of receiverships can be difficult to explain, let alone fully grasp if you are not dabbling with receiverships day-in and day-out.  More so, you can almost guarantee each receivership matter you come across will differ from the previous one.  That said, below is short synopsis of how receiverships work through their financial hardships.   

    Associations often utilize receivership as a form of relief to collect from delinquent and non-responsive homeowners when other collection efforts have failed.  To obtain a receiver, the associations attorney files a lawsuit against the property and homeowner pursuant to CRS 38-33.3-316, The Colorado Common Interest Ownership Act (CCIOA).  The homeowners property becomes the asset of the receivership estate” and is used to produce income while it is in the custody of the court.  In a perfect world, the propertys rental income is used to pay the debt owed to the association and the case is closed.  But when costs arise that need to be covered, such as clean-up of a vacant property or repairs, the financial aspects of the receivership are often misunderstood, especially in instances where money is not available from the property; here are the basics. 

    A receiver has an enormous fiduciary responsibility while administering the receivership estate.  They must track the estates income and expenses and are accountable to the court and parties involved.  Receivers first use income generated from a property to pay for hard costs but may need the associations help when deficiencies exist.  This is key when a property is vacant and needs some work.  In these instances, the association must understand that they are the bank” for the estate and may need to loan money to the Receiver (but are not required to) for the matter to proceed.  Receivers can borrow money anywhere, but since the association has a vested interest and must approve the request, this is most common.  

    Upon approval, the association loans funds and increases the propertys debt balance to correspond with the loan; it also earns interest until paid back.  Repairs are made, and the property is either rented or continues to produce income, which is in turn is paid over to the association to repay costs, including the attorney fees and receiver fees.  Additionally, in some cases, there are other costs that must be paid for the receivership to proceed, i.e., delinquent water bills, property tax liens, and in rare occasions, evictions costs.  In all these instances, a good receiver will work with the association for the best solution so that these costs are funded and collections efforts can continue.      

    Receivers remain transparent throughout the process and will keep the association updated on the estates financials and any progresses made towards the debt balance.  Once the debt balance is satisfied, all accounting and financial statements are submitted to the court for approval.  Afterwards, the property can then be turned back over to the homeowner and the receivership estate closed. 

    The Receiver Group is an equitable solutions-focused firm that specializes in all types of receivership appointments regarding equity disputes, real property preservation (foreclosure, rents & profits), asset liquidation and post-judgment collection matters.

  • 08/01/2021 9:46 AM | Bridget Sebern (Administrator)

    By April Ahrendsen, CIT Community Association Banking

    The board treasurer manages the association’s finances and must exercise prudent judgment with investments, evaluate the maintenance costs, and ensure that association funds are always protected. It is a crucial role that comes with large responsibility. While there are several nuanced aspects of the board treasurer position, the following can provide a foundational understanding of the role: 

    Tools of the Trade 

    The board treasurer has a wealth (pun intended) of information at their disposal to assist them with keeping the community’s finances on track. This includes budgets, bank statements, balance sheets and delinquency reports. These pieces of information provide a holistic overview of the financial health of the community. Balance sheets help determine association liquidity and cash flow. Budgets keep a running tally of any overages or shortfalls. Bank statements give a detailed account of where association funds are being spent, and delinquency reports offer an excellent overall picture of the financial health of the community. Notice a sharp increase in unpaid assessments? The delinquency report allows boards and management to proactively work with homeowners to keep them from sliding further into arrears.  

    Choosing Where to Place Reserve Funds

    A healthy association reserve balance can contain more money than many people will see in a lifetime. Volunteer board members, some who may be financial novices, are often tasked with the security and placement of dollars that can number into the millions. When choosing where to place these funds, three key considerations are safety, liquidity, and return: 

    • Safety is a top priority as most association investment policy statements require that reserves be placed in FDIC-insured, principal-protected accounts, such as Certificates of Deposit or Money Market accounts. 
    • Liquidity must also be evaluated, as capital improvement or deferred maintenance costs require cash on hand to complete the work. 
    • In terms of return, no association will become rich from the interest earned from principle-protected accounts. However, they are low risk/low yield financial instruments, designed to emphasize safety over the potential greater yields (and greater losses) of more high-risk vehicles.  

    A Reserve Study is Your Buddy

    While the reserve study is a great resource for all board members, it plays an enhanced role for the treasurer. As the treasurer is tasked with maintaining community finances, it’s important to know what lies ahead to effectively deploy funds for investment.  

    For example, if the reserve study indicates the association’s roofs are one year away from the end of their useful life, it wouldn’t be prudent for the treasurer to recommend placing all of the HOA’s funds into a three-year investment. While not an absolutely accurate barometer of the community’s financial future, the reserve study provides an excellent roadmap for the major shared components of the HOA and allows for more concise forecasting, budgeting and investing.  

    Healthy Finances Equal Healthy HOAs

    The role of board treasurer is vital to the overall health of an association. The care and deployment of community funds can mean the difference between an HOA that thrives and one that languishes. Board treasurers should consult with their financial partners in the community association space, such as CPAs, HOA partner banks and reserve analysts to educate themselves and ensure that they are consistently acting in the best financial interests of the community.   

    April Lynn Ahrendsen is a vice president and regional account executive for CIT’s Community Association Banking business, supporting community management companies and homeowner associations in Colorado, Idaho, Montana, and Wyoming. The views and opinions expressed in this article are those of the author and do not necessarily reflect the views CIT.

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