Blog
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.
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.
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.
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 building’s 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.
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.
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.
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 association’s attorney files a lawsuit against the property and homeowner pursuant to CRS 38-33.3-316, The Colorado Common Interest Ownership Act (CCIOA). The homeowner’s 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 property’s 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 estate’s 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 association’s 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 property’s 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 estate’s 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.
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:
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.
By Devon Schad, Schad Agency
Every year, an association must renew or select a new insurance policy for the association. Often boards struggle with choosing one of the most expensive line items on the budget. Here are some quick tips associations can use for some basic guidelines in selecting a policy.
It may sound cliché to use someone with experience, but this is the most critical place to start. Does the agent or agency have experience writing associations? Check if they are a member of CAI by selecting FIND A SERVICE PROVIDER on our chapter website. Inexperienced agents often lack the knowledge to effectively diagnose the coverage requirements or miss critical coverage components which may leave the association and manager compromised. An experienced agent should be able to read the association Covenants, Conditions & Restrictions and make sure all proposed coverage complies, as well as recommending coverage to meet DORA, FHA, mortgage companies, and the secondary mortgage market. Don’t be caught with your Decs down.
The most expensive part of any association policy is the property coverage. The limit chosen is in direct correlation with the cost of that portion of the policy. Associations should ask if the limit proposed is adequate, how was the rebuild calculated, and are all the buildings and property covered? Most policies today are replacement cost, but policies with extended replacement cost or guaranteed may have clauses that require the association be first insured to value before those coverage extensions apply or the policy may have a co-insurance clause that causes a penalty if the insured value is below that required amount. If the value is too low, or not shown be sure to ask more questions. Coming up with the value of rebuild is not a perfect science, but care and thought should be used when evaluating the rebuild amount the association selects, and the parameters of the policy being considered.
As insurance has matured, so has the coverage forms. A basic form policy will only cover a loss if one of the named perils such as fire, windstorm, hail, or vandalism. Broad form includes all of the basic perils plus weight of snow, ice, or sleet and sudden and accidental water damage. In reality both forms leave associations exposed to losses not named and should only be used in the rarest of cases such as when a special form is simply impossible to purchase. Most policies today are Special-form that cover all losses unless excluded.
Replacement cost (RC) is the cost to replace the damaged property with materials of like kind and quality without any deduction for depreciation. Actual cash value (ACV) is the cost to repair or replace minus depreciation. Most mortgage companies and FHA loans require a replacement cost policy although exceptions may be made for roofs to use ACV. If considering an ACV policy for the roof, the association should consider the actual cost to replace the roof, the deductible, and the potential exposure.
A scheduled policy will list a limit that is specifically assigned to that building or structure. That limit is the most the insurer will pay for the item listed. A blanket policy will have a single limit listed, rather than assigned, and could be used for one or all structures/buildings reducing the exposure. Generally, a blanket policy will cost more than a scheduled policy.
As most homeowners still wish for a hailstorm to cover the cost to replace their roof, associations now cringe at the thought as carriers continue to increase the wind/hail deductible and the potential exposure to the association and the homeowners. Generally, policies come with a straight deductible (one deductible that is applied to the entire loss), a per building set limit, or a percentage which is either based on the total insured value (total of all property and business income limits) or per building (based on the rebuild value of that building). Regardless of the deductible selected the association should have a plan in place in which they will handle a loss, balancing the likelihood of the loss versus the actual cost of the loss itself.
Admitted carriers must comply with state regulations, be approved by the state’s insurance department including its rates, and be backed by the Colorado Insurance Guaranty Association (CIGA) (A fund to help pay claims of insolvent carriers). A non-admitted carrier does not have to comply with state regulations. Mishandled cases cannot be appealed to the state insurance department, and they do not participate in the CIGA. However, non-admitted carriers may provide options for harder to place associations, lower wind/hail deductibles or unique coverages not afforded by the admitted market. If using a non-admitted market, make sure they have a high AM as to reduce the risk of insolvency.
Understanding what the total will be is an important factor but is often overlooked. Some companies allow for payments over time and may charge for doing so and others require the payment in full which may require the association to use premium financing. Also, agencies may charge additional fees over and above the insurance costs such as for certificates.
When going to bid it is important to utilize not only the new agent, but also the incumbent. Often the new agent will have the prior insurance information and can utilize that to craft a policy that they believe will win the account. Allowing the incumbent agent to see what is being proposed can provide an additional perspective and the agent may adjust coverage options for comparison. Be sure to bring in both agents to speak as insurance is generally not apples-to- apples. This will ensure the association can see all points of view and select what is best for their circumstances.
Selecting a policy does not end the relationship, rather it is the beginning. Understanding how the agency will help during claims, help answer an owner’s questions, and help with creating information for owners to know what coverage they should have is critical in understanding when the relationship begins.
Devon Schad took over the helm of the Schad Agency six years ago. This family owned & operated agency began in 1976 and today insures hundreds of associations across Colorado. Outside of insurance you can find Devon spending time with his family, skiing or snowboarding, coaching his daughters in soccer or serving as a volunteer for CAI, Highlands Metro District #1, and the ZBT Foundation.
By Azra Taslimi, Altitude Community Law
The good news is that there is a COVID vaccine, the bad news is that COVID is still around and it will take time before we as a community vaccinate enough people to the point where herd immunity kicks in. While information changes daily, at this point in Colorado, all people who want a vaccine are able to register and get one. Which leads to questions from Associations about whether facilities can be opened, and how to treat people who have received the vaccine versus those who have not, especially as it relates to residents making use of the common elements like the gym and pool. While definitive answers are hard to come by, we can offer guidelines as to what the Associations should and should not do as the country surges forward to vaccinate the population.
The first question is whether Associations can now open their facilities safely and without the risk of litigation. While there are legal arguments in favor of opening up and returning to the norm, we advise against doing so. The main reason is that there are concerns about the effectiveness of the vaccine and its limited availability those under 16 years of age.
While we know that the vaccine can help prevent serious symptoms of the virus, studies do not yet support that the vaccine prevents the spread of transmission. We also do not know how long the vaccine lasts. Pfizer’s ongoing trial indicates that the company’s vaccine remains effective for at least six months - leading to the idea that the vaccine is not good forever and it’s quite possible that additional shots may be required to maintain the protection. If that wasn’t enough, there are new strains of COVID and it remains unclear/unknown whether the current vaccine is fully effective against the new strain.
In early January of 2021, the United Kingdom went into another lockdown based on the new, and what scientists are calling the more contagious strain of COVID-19. Germany, as of April 26, 2021, implemented a lockdown to curb a third wave of infections based on the new strain of COVID. Earlier this month, a member of President Biden’s coronavirus advisory board warned that the new strain of COVID infects children more easily than previous strains. Given that a vaccine is not yet available to children, the prospect of a new strain spreading through children remains a serious concern.
Despite the continued unknowns pertaining to the virus and the vaccine, Associations are facing extreme pressure from homeowners to open up the facilities. For homeowners, the virus scare seems to have dissipated and they want to see life return back to normal, especially as more and more of them become vaccinated. As a result, it is expected that more Associations will be opening up the facilities this year than last year. However, the general consensus amongst HOA counsel is that it is safest for Associations to keep their facilities closed for now. From a legal standpoint, the litigation consequences of opening facilities are the same as they were last year.
The biggest reason that attorneys are advising Associations to keep their facilities closed is due to the lack of insurance coverage for claims based on transmission of a disease. This means that if a resident was to bring a claim against an Association for having contracted COVID as a result of using an Association maintained facility, the Association would be looking at an out-of-pocket cost to the tune of hundreds of thousands of dollars to defend against the claim. Even if the court was to find no liability on part of the Association – simply to defend against the claim would be a huge cost for the Association. This is different than other suits where Associations can simply submit the claim to insurance, pay their deductible and have insurance bear the remaining cost of the litigation.
On the other side, Boards have advised that homeowners have threatened to bring claims against the Board members for breach of fiduciary duty should they keep the facilities closed. Therefore, Boards feel like they are facing litigation from both directions. While that may be the case, claims for breach of fiduciary duty by board members would generally be covered by insurance. Therefore, if Boards had to make a choice as to which litigation to take on, the preference would be for claims that are covered by insurance as opposed to the ones that are not.
Earlier this year, HB21-1074 was introduced by Mary Bradford(R) to provide immunity for entities such as restaurants, stores, or homeowners from Covid-19 claims so long as they are following public health guidelines. In essence this bill would have protected associations from legal claims if they were to open their amenities to the homeowners. Unfortunately, as of March 11, 2021, the bill had been postponed indefinitely.
Should Associations decide to move forward and open the facilities, the next concern is whether Associations can make vaccines contingent upon use. Since Associations would be legally obligated to have exceptions for certain unvaccinated individuals and must allow them access to the facilities, the “vaccinated-only” rule would simply be rendered ineffective.
Vaccines are not available to anyone 16 years old and younger. Therefore, an Association’s attempt to keep children from using the pool could lead to claims against the Association for familial discrimination under the Fair Housing Act. Associations would then need to have exceptions for all individuals for whom a vaccine is not available. Associations would also have to create exceptions for individuals who are prevented from getting the vaccine due to medical reasons as well as provide an exemption for those requesting it for religious reasons. Therefore, unvaccinated people would have to be allowed into the pool.
This creates concerns about giving residents a false sense of security - that using the facilities with only vaccinated people will keep them safe from contracting the virus. However, given that unvaccinated people must be allowed into the facilities and studies do not show that the vaccine prevents the transmission of the virus, the risk of spread remains just as much a concern.
An elderly person who has been quarantining since last year and is unable to get the vaccine due to medical reasons, finally decides to use the pool because they believe it will be safe since everyone who is using the pool is vaccinated. Yet, the number of exceptions means that the threat of a spread remains just as likely as before. The false sense of security may lead some to use the pool that would not do so otherwise. As a result of using the pool, should there be an outbreak and this elderly person without a vaccine ends up in the hospital or worse, the Association could find itself in serious litigation. Therefore, Associations should not adopt rules making the vaccine a condition of use of the facilities.
While all of us are eager for life to return to normal and to be able to relax at the pool this summer, the fact is that too many unknowns remain. The legal considerations of whether the facilities should be opened are not much different than what they were last year. Vaccines have changed the game quite a bit and many people feel safe enough to return to their pre-COVID lifestyle. However, from a legal standpoint, we are not there yet, and we advise Boards to continue with caution.
Azra Taslimi is a lawyer with Altitude Community Law.
