By Angela Hopkins, Esq, Altitude Community Law

There are times when a community association may need to explore its funding options, such as if it is considering a large construction or renovation project for the community. A loan may be an attractive option to avoid relying on increased assessments, special assessments, or reserves alone to fund the project. Ultimately, whether a loan is a good option for your community is up to the association to decide.  However, an association must review their governing documents to determine:  (1) if the association has the authority to borrow funds; and (2) whether there are any conditions related to the association taking out a loan.

Authority to Borrow Funds

Usually the association’s declaration includes language regarding the board’s authority to borrow funds or use the common elements as security.  However, for older associations, sometimes this language can be found in the articles of incorporation or bylaws.  The governing documents may grant your association the express authority to borrow, impose conditions on the association’s authority to borrow, or prohibit borrowing altogether.  If none of the documents address whether your association can take out a loan, then you can rely on the Colorado Revised Nonprofit Corporation Act (“CRNCA”), which grants nonprofit corporations the general authority to borrow funds.  

Possible Conditions to Borrow Funds

The most common condition we see on an association’s authority to borrow is the requirement to obtain owner approval; however, the declaration could also impose limitations on the amount that can be borrowed, the amount that can be borrowed without owner approval, or what collateral requires owner approval. Lenders will ask whether or not the community association has obtained all requisite approval to take out the loan; therefore, it is important that the board know from the beginning whether or not an owner vote will be required as this adds an extra step to the process.  

If you have a digital, searchable version of your governing documents, you can search for such terms as “borrow,” “collateral,” and “encumber.”  The language you are looking for may be in its own titled section, or it may be in a list of the association’s powers and rights.  Once you find the language regarding the association’s authority to borrow funds, you should verify whether there are any other conditions that must be met to obtain the loan.  There are many types of restrictions that may be apply to loans, including, but not limited to:

1. A restriction which only allows the association to borrow money for specific purposes;
2. A restriction that requires a certain percentage of owner approval before the loan can be obtained;
3. A restriction which requires owner approval under specific circumstances, such as the type of collateral the association intends to use.  

It is very important to verify your governing document language relating to the association’s authority to borrow funds to make sure you are aware of such conditions.

Collateral

Most lenders require a community association to pledge or assign its right to future income as collateral (i.e., the lender wants to be able to collect homeowners’ assessments directly in the event of default). If your community association was created on or after July 1, 1992 then Section 302(n) of the Colorado Common Interest Ownership Act (“CCIOA”) allows your association to assign its right to future income only if the declaration expressly allows such assignment. As such, the declaration must contain language allowing the association to assign its right to future income.  If the declaration is silent then the association does not have this authority and should consider amending its declaration.

If your community association was created before July 1, 1992 and your declaration is silent then your community may be able to rely on the CRNCA for authority to pledge its income without having to amend your documents.

Additionally, ownership approval might be required if the association uses the common elements as collateral.  The governing documents may place this restriction if the board intends to mortgage, pledge, deed in trust, hypothecate or otherwise encumber the common elements as security for the loan.  Therefore, the board may need to consider what kind of collateral it will use for the loan.

Conclusion

It is not an absolute right of all community associations to obtain loans.  As such, it is very important to review your governing documents to determine if there are any prohibitions or conditions for the association to seek a loan before starting the loan process.  If membership approval is needed, that should be obtained so that the lender/bank can be provided evidence that all of the governing documents’ requirements have been met.  If you review your governing documents and still are not sure whether your association can obtain a loan, it is recommended that you seek legal guidance.

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Angela has been practicing community association law since 2017 and has represented common interest communities in transactional, collection, foreclosure, and covenant enforcement matters.  As such, she has interpreted, drafted, and amended community association governing documents; addressed covenant enforcement violations and assessment delinquencies; and represented community associations in contract disputes, land use issues, and Owner bankruptcy matters.  She has represented community associations of various sizes, from a 6-unit condominium, to a master community association with over 1,100 units.  In 2022, Angela joined Altitude Community Law and is now focusing her representation of common interest communities in transactional matters.

By Amy Bazinet CMCA, AMS, PCAM 

Associations are responsible for the upkeep of common elements, and this can include everything from roofing and roads to landscaping and swimming pools. To manage these responsibilities effectively, strategic allocation of your Association’s reserve funds is essential for maintaining the financial health and longevity of the community. This process involves planning, communication, and regular review, ultimately protecting the community’s financial stability and property values. 

Get a Reserve Study 

The first step on the strategic allocation path is getting a comprehensive reserve study completed by a reserve analyst. This study will outline all the components the Association is responsible for, evaluate their current condition and remaining useful life, and determine the cost to replace or repair those items. This study provides a roadmap for the community that can assist in preparing a plan to save the money needed to cover the future expenses as outlined in the study. Regular reserve studies typically conducted every three to five years, help ensure that the reserve fund plan remains accurate and reflects any changes in the condition of community assets or economic conditions.

Set A Funding Plan

So, you have a reserve study in hand, the next step is to develop your funding plan. This plan should outline how the community will gain the necessary funds over time.  There are three types of funding that can be used – Full, Baseline, and Threshold.

• Full funding is a commitment to accumulate 100% of the estimated future costs as outlined in the reserve study.
• Baseline funding focuses on what is needed to cover immediate foreseeable expenses.
• Threshold funding focuses on setting a minimum balance that will cover expenses and when that balance dips below the set amount, additional assessment will need to be applied.

Whichever funding plan you choose depends on the needs and the financial health of the community. 

Assess your Risks

Your decision making on reserve allocation must focus on risks: what risks might the community face that will put demands on financial resources with not enough cash on hand to address? Make a list of possibilities: a recession, a major system repair, a flood, a wildfire, a significant increase in material costs. As you develop your list, attach a probability score to each risk. Healthy reserves must be risk discipline first, and that means flagging the items on your master list of reserves that should be funded first. You need to be mindful of the fact that the major expense that hits your community before you get your reserves built up must be considered your major expense at that point in time. So, find ways to slow down and spread-out payments for your rungs, paying more cash to your first few projects than to the final few. That’s how reserves become a crystallizing tool for your community.

Communicate Your Plan

Transparency and communication to homeowners are necessary for effective reserve fund management.  Keeping homeowners informed of upcoming projects, reporting the financial status of reserve funds and notifying homeowners if there are going to be any changes to their assessments, all work to build trust and “buy in” on how their contributions are being used. 

Take Time for Review and Adjustment

Reserve fund allocation is not a one-time process and should be periodically reviewed and adjusted if necessary.  These reviews can come in the form of a reserve study review every 3-5 years, as well as noting any changes in the financial landscape of the community at any time.  This review ensures that the Association’s financial planning remains relevant and accurate. There may need to be adjustments made due to changes in inflation rates, unexpected wear and tear on assets or new community developments.  Staying proactive and adaptable is key. This will ensure a healthy reserve fund that meets the community’s needs. 

Decide How you Want to Invest

Your investment strategy is an important consideration when allocating reserve funds. You will need to balance the need for cash, for immediate expenses, with the goal of earning returns on funds that are meant to help offset future costs. Investment options should be outlined in the Investment of Reserves Policy. Options that are commonly included are money market accounts, certificates of deposit (CDs) and low-risk bond funds. Each of these involves some degree of risk and a return. It’s always advisable to find yourself a Financial Analyst who will help you walk through the options. Your strategy should align with the Association’s risk tolerance, financial goals, and timeline for major expenses. 

The benefits from choosing to strategically allocate your reserve funds are plentiful. If your reserves are properly managed, you will ensure that repairs and maintenance will be done timely, and you will preserve the property values and overall quality of the community. 

Amy Bazinet CMCA, AMS, PCAM has dedicated over 15 years to serving communities across the Denver Front Range. She currently holds the position of General Manager for the Aspen Alps Condominium Association in beautiful Aspen, CO, where she embraces the many wonders of mountain life.

By Gabriel Stefu, WesternLaw Group LLC

Covenant enforcement and foreclosures have become harder in the last few years due to legislative and economic changes. As such, certain covenant enforcement and foreclosure cases can become extremely difficult to resolve due to Owners who may attempt to delay the process or due to not following the proper processes and procedures both in the Association’s policies or in legal proceedings.

The following are recommendations to ensure that these cases can be successfully brought to a resolution:

COVENANT ENFORCEMENT

Associations need to follow the steps below to ensure that covenant enforcement matters are resolved and funds are collected from the Owners:

1. Adopt a Covenant Enforcement Policy pursuant to CCIOA that is clear and concise, that can be enforced evenly, and that is fair to all Owners.
2. Ensure that all communications with the Owner regarding the covenant enforcement matter provides as much information as possible: include pictures, clear processes for hearings, disclosure of the fine amounts, consequences of not curing the covenant violation, etc.
3. Ensure that all deadlines are adhered to and that the next steps in the compliance process are followed timely. If needed, enlist the Board of Directors, the Architectural Committee or another committee created for this purpose to perform inspections of the property to determine the state of the violation, document the violation with pictures, etc. 
4. Offer hearings in every communication with the Owner even though only one opportunity for a hearing is required. This way, the Owner cannot claim that they had no knowledge of a hearing opportunity.
5. Apply the fines as soon as legally allowed. Many Boards of Directors are hesitant to apply fines but considering that fines are now limited or capped, applying the fines when allowed may help the Association resolve the matter with the Owner who may not be willing to pay fines and may be open to negotiation and resolution of the matter.
6. If the compliance is not cured, transfer the matter to legal counsel for a Covenant Enforcement legal matter. The actions taken by legal counsel could include filing a covenant lien and filing an injunction with the appropriate Court. If the injunction is obtained, the Owner will be ordered by the Court to address the covenant violation, or the Association would have the right to cure the violation and recover the expenses based on the Court Order. While this step may seem aggressive, again, considering how the current legislation has made the covenant enforcement process arduous and difficult, this may be the only option available to the Association to ensure that the covenant issue is resolved and fines and legal fees are awarded to the Association.

JUDICIAL FORECLOSURES

Foreclosures by Homeowner Associations are a last resort in collecting assessments when an Owner refuses to pay delinquent assessments.  This is never an easy process and as Owners are becoming savvier, the Association must ensure to follow all steps necessary for successful foreclosures.  PLEASE NOTE THAT A FORECLOSURE IS ONLY POSSIBLE IF ASSESSMENTS ARE DELINQUENT AND CANNOT BE PERFORMED IF ONLY FINES, INTEREST AND LATE FEES MAKE UP THE DELINQUENT BALANCE. The steps involved are as follows:

1. Adopt a Collections Policy that complies with current statutes.
2. Ensure that the Collections Policy is followed religiously. One incorrect notice or process can derail the entire foreclosure process later.
3. Transfer the file to the Association’s attorney as soon as the law allows. Delays and failure in transferring the file will result in hardship in trying to foreclose, especially provided the cumbersome processes required by law.
4. Pursue a County Court judgment to obtain a money judgment prior to the foreclosure action. A money judgment against the Owner on the balance owed is helpful in proving the delinquency in a foreclosure action. 
5. Properly identify and serve the first mortgage holder with the foreclosure action so that the statutory six (6) month superlien is collected from that entity timely. 
6. If the Association’s attorney is asking for information, corrections to ledgers, Board decisions, signing documents, etc., ensure that these are provided to the attorney timely. Again, the process is cumbersome as is, and delays will only make it harder for the Association’s attorney to complete the foreclosure process. 
7. Beware of any potential challenges that an Owner may bring.  These may include, but are not limited to, pointing out procedural errors in the delinquency process, challenging the Association’s right to foreclose and citing violations of state and federal laws. 
8. Be prepared for a possible bankruptcy by the Owner.  This is often filed to Stay the foreclosure and to provide the Owner more time with which to deal with the situation.  If this occurs, ensure to file the proper Entries of Appearance, as well as the Proof of Claim to provide the Bankruptcy Court with notice of the Owner’s debt to the Association. 
9. If a bankruptcy is filed, check the Owner’s account monthly to see if post-bankruptcy payments are being made as required under the bankruptcy filing. If they are not, the Association’s attorney may possibly take steps to dismiss the Owner’s bankruptcy and immediately continue the foreclosure process.

In the end, covenant violations and foreclosure actions require a great deal of attention. The Board of Directors, manager, management company and Association’s attorney must work closely together to resolve these types of issues successfully, following the proper steps and procedures outlined in policies and the law.

  

Gabriel Stefu is the managing partner of WesternLaw Group LLC, a law firm dedicated exclusively to Homeowner Associations in Colorado and Wyoming. WesternLaw Group has been in existence for over 16 years and proudly serves many Colorado HOAs.

By Joseph A. Bucceri, Orten Cavanagh Holmes & Hunt, LLC

The Board of Directors of an owner’s association wears many hats: decision maker, mediator, judge, and community organizer. Quite possibly the most important role a Board member serves is that of a fiduciary. A fiduciary is a person or entity put in a position of trust to protect the interests of a third party. While establishing and enforcing community design guidelines and use restrictions are essential actions for a Board of Directors, the primary need for a Board is to collect assessments from their members and spend that money for the benefit of the community. As with any situation where someone has access to other’s money, it is important to take steps to protect the community from the misuse or misappropriation of the association’s funds. 

• The first, and simplest, step a Board can take to protect their community’s funds is to be transparent with both income and spending by creating (and maintaining) a budget process. Transparency with your members about where association money is coming from and how it is to be spent protects against misappropriation of funds. For example, if $20,000.00 is budgeted for landscaping every year, it is easier to observe overspending than if no budget is set at all. 

• Additionally, a Board should avoid hiring its own board members or their board members’ companies for association business. This presents a conflict of interest and exposes the association to unnecessary risk of overcharging or self-dealing. While there may legally be no issue, assuming all necessary steps are taken, when a board member is in a position to benefit financially from the association it has a tendency to raise red flags that are best avoided.

• Another way to protect the association’s funds is to properly supervise who the Board has selected to manage the funds (i.e. a property manager, accountant, or treasurer). As the fiduciary, it is not sufficient for the Board to merely hire an accountant or manager, and review summaries produced by the same. Instead, the Board should be active in managing their own affairs. They should review actual invoices, balance sheets, and bank statements. A summary can be falsified, but a bank statement will show every transaction that has occurred. There are few in this industry who haven’t heard the horror stories of associations realizing too late that the bank account is empty and the reserves have been spent. If an association’s Board reviews the above-mentioned documents regularly, it is much less likely for any funny business to slip through the cracks.

• Management or accounting contracts should always require that the Board of Directors sign off on all expenditures over a specified minimum amount. Requiring a manager to get the Board’s sign-off on significant spending will help to prevent improper or unauthorized outlays. Whomever is hired to maintain the association’s books should also be willing to provide statements and invoices with minimal notice and quick turnaround time. Stonewalling or delays in accessing the underlying financial data is a major red flag and should be grounds for seeking a new financial vendor. 

• In addition to being proactive in reviewing documents to prevent the misuse of association funds, a Board should maintain proper insurance to protect the association in the event that the unthinkable should happen. Few embezzlers are caught at the first withdrawal. Proper fidelity and crime fraud insurance policies are necessary ways to protect the association if funds are misused. However, the Board must be sure that the policy is set at a level that will cover their actual risk exposure. A $50,000.00 policy may be cheap, but it won’t refill $500,000.00 in reserves that are needed to replace the community roof. In addition to the association’s policies, the Board of Directors must require that their accountant or management company also maintain proper insurance to cover misappropriation of funds by their employees. 

Just as with personal finances, a Board of Directors must maintain vigilance with the association’s finances to protect the interests of their community and not place themselves in the untenable position of needing to explain to their neighbors that all the money is gone, but the costs are still there. 

Joseph A. Bucceri is an attorney at Orten Cavanagh Holmes & Hunt, LLC. He provides covenant enforcement services to community associations throughout Colorado. 

By Elizabeth Caswell Dyer, Sopra Communities Inc.

To begin, a budget’s purpose is to plan out what is needed for cash flow for a period of time. It can also function as a planning tool, depending on the template used. Some associations function on a calendar year (January-December), and some function on a fiscal year, which is any twelve month period, such as June 1^st to May 31^st. Every budget should have these components to it: Income (Assessments), Expenses, Savings (Capital Reserve Transfers), and Debt Service (if applicable). 

There are four main methods or philosophies that inform budgets:

Incremental: Incremental budgeting takes the previous years’ numbers and adds a set percentage increase or decrease across the all line items to arrive at the new numbers. It’s the most simple format, but is really only appropriate if what are called “cost drivers” don’t change. The cons are noteworthy, in that this type of budgeting encourages inefficiencies, overstatements of needs, and ignores variables such as inflation.

Activity Based: This is a top-down approach that begins with revenue projections and then looks at expenses through the lens of achieving the revenue goal set by the projections. This is a common approach in other multi-family situations, such as apartments. As HOAs are generally expected to budget to get to zero as of midnight on the final day of the budgeting period, this approach is backwards of what is needed, as expenses tend to drive an HOA budget and assessments are calculated based on what is needed to properly run the association.

Value Proposition: This method is more a philosophy, and it’s all about value -  anything included in the budget must deliver value to the corporation. It’s a lens of justification and looks to eliminate anything unnecessary.

Zero Based: This is a very common approach and starts from scratch each year, with all line items beginning at zero. There is a value proposition component, where every expense must be justified. This is often referred to in the common slang as a “tight” budget with only what is actually needed included. It’s also an expense driven viewpoint, which is the opposite of the Activity Based approach.

Over the years, I have found it to be beneficial to take a blended approach. For example, if the equipment that drives the utility numbers has not dramatically changed, it is very accurate to get a sense of what percentage increase to expect from the various utility providers for your association, and then overlay that percentage on top of the previous years’ actual numbers. Our team does this by month, and it has resulted in variances being minimal as long as the expected percentage we’ve been given ends up being the actual increase.

For contracts, these are also constant expenses where the expected increase )either due to union rates changing or increases noted within the contract) can be added to the previous years’ actual numbers and reasonably entered into the budgeting template. 

Other items, such as landscaping, are informed by the goals of the Board of Directors in terms of long-term planning (and sometimes hopeful thinking). 

There are line items nobody really wants to spend money on, but it has to be done. These are your mechanical components, such as HVAC, Plumbing, Electrical, and Roof. These are best budgeted by looking back in those line items in financial reports over a series of a few years, if possible, to see an average of the association’s needs in these areas. Contingency planning in these line items can also be an approach to saving, because funds not needed for contingencies during the budget year can be transferred to reserves at the end of the year if the association comes in under budget.

Getting Started

If an association has been with you for a year, pulling a report called a 12 Month Trend or a General Ledger for the previous twelve months is an excellent place to start and to see how the actuals line up to the current budget in place. You may find you don’t need any funds in some line items, and you need quite a bit more in others than planned in the previous year.

Put everything in that you want AND need, and see what that expense total does to calculate the association’s dues. At that point, our team usually gives it to our CFO and then myself to look over and tweak before sending to the Board of Directors as a draft. The time to back things out is in a working session with the Board to reach “what the market will bear” in terms of the dues increase. Involving the Board in the editing process not only gives them the opportunity to exercise its fiduciary duty, it allows for buy-in from the directors that will be presenting to their neighbors, and many board members bring excellent insights and creativity to helping their association get where they want it to go for the next budgeting timeframe. 

Elizabeth Caswell Dyer is the CEO of Sopra Communities, Inc. She’s passionate about Board and Manager education, especially good budgets.

By Bryan Farley, Association Reserves - Colorado

Over the last three years, inflation has reached 40-year highs. As a result, board members of homeowners associations have been put in a difficult position when trying to optimize their community’s expenses.  Inflation was resulted in the expenses incurred by your property increasing in addition to more expense rates when it is necessary for the community to borrow money from banks. 

So, what is the good news?

As of May 2024, the Federal Reserve has set the Federal Fund rate at ~ 5.33% which means a board will finally see some return on interest on their Reserve account. As of May, we are seeing FDIC high yield accounts and 12-Month CDs at over 5%.

What does this mean for your HOA dues? 

If your Reserves are sitting in account earning less than 1%, then now is the time to talk to your investment professional and move your monies to an investment vehicle that can help your owners save money.

Based on recent analysis, Association Reserves found that for every point of interest increased, there is an almost 7% decrease, averaged, in the fully funding reserve contribution recommendation.

For example, let’s assume a Reserve Account currently has $1,000,000 sitting in a 1% interest bearing account, and $20,000 is contributed monthly into the Reserve Account.  By moving the monies over to an account that returns 3%, the association may be able to reduce their contribution rate from $20,000 to ~ $17,298!

Why is that? The reason is that the reserve account now earning an additional $20,000 each year (or $1,666 each month) in interest.  Remember, as mentioned in the beginning of the article, inflation is still going, so the reserve contributions will still need to be increased each year. Inflation is expected to exceed interest earnings. Boards need to understand that that interest earned will not offset inflation. 

The best way to plan for higher costs in the future due to inflation is to:  

1. Create a multi-year Reserve Funding Plan (one of the three results of every Reserve Study) that provides for the anticipated needs of the association, including the very real effects of interest and inflation.
2. Regularly update that Reserve Study. 

Boards need to be proactive and talk with their investment professional to take advantage of the current rates. Investment professionals are available to help associations manage their Reserve funds, keeping those funds safe and insured while maximizing interest earnings. 

Reserve investment counselors serve as agents of the association, expertly managing and placing the higher returns of commercially available investment vehicles, serving the needs of smaller investors (HOAs are usually too small for the “big institutions” to handle themselves). 

In return, those large financial institutions provide an underwriting fee to those investment agents for placing their commercial investment vehicles in the hands of smaller clients the large financial institutions are not equipped to serve. This allows these “niche” investment agents to serve the needs of their client associations at no charge to the association. For the association, the owners receive expert counsel and management plus higher returns, at no cost.

Bryan Farley is the President of Association Reserves, CO and has completed over 3,000 Reserve Studies and earned the Community Associations Institute (CAI) designation of Reserve Specialist (RS #260). His 12+ years of experience includes all types of condominium and homeowners’ associations throughout the United States, ranging from international high-rises to historical monuments. 

By Matt Hall, Alliance Association Bank

In the rapidly growing community management space, association managers are responsible for a wide range of projects to maintain and improve the communities they serve. From routine maintenance to large-scale initiatives aimed at enhancing property values and resident satisfaction, each project needs a financial plan as well as a logistical one. 

Budgeting for community associations requires a blend of day-to-day planning and long-term preparation. Regular homeowner fees typically cover routine maintenanceand other essential operational costs, while reserves can be a healthy backstop for future project expenses.  Larger-scale improvements, repairs, or capital maintenance may look daunting, and may or may not have been planned for or outlined in a capital maintenance plan or reserve study. When facing larger-ticket items (either expected or unexpected), financing may be an essential tool to keep the community on the right track.

How do you know what projects can be financed and what a bank wants to know before it extends a loan? Read on to find out.

What projects can a loan finance? 

Examples of projects that can typically be financed with a loan include: 

• Exterior repairs such as façade restoration, siding and masonry work
• Roof repair and replacement
• Risers and chillers
• Window replacements
• Balconies and decks
• Elevators
• Boilers
• Asphalt

What approval criteria does a bank consider? 

Most banks evaluate several criteria when considering if an association loan is feasible for any given community. Some of these include:

1. Delinquencies. In a healthy community, homeowners are current on their HOA fees. To qualify for a loan, no more than 10% of the community’s units can have delinquencies of assessments and any current special assessments older than 60 days. This does not include items like fees, fines, or other non-assessment related charges.
2. Balance sheet. The HOA will have a minimum of 20% of its regular annual assessments on its balance sheet as cash. This includes operating, reserves, time deposits, and any other ancillary cash funds.
3. Community size. It can be trickier for small communities to repay loans. Typically, lenders require a minimum of 25 units for project financing. 
4. Loan amount. Most lenders will enforce a minimum loan amount of $100,000 or more. 
5. Owner mix. For a community to qualify for a loan, at least 60% of the units should be owner-occupied, with less than 10% owned by one entity or person. In newer communities, developers commonly still own units. In these cases, there are ways to carve out developer units so that an association can still qualify for financing.
6. Capital planning. It’s important to demonstrate to the financial institution your community’s long-term plan to cover future expenses for other projects throughout the duration of the loan. A reserve study can serve as a critical tool to showcase the HOA’s future projects and projected expenses. 

Prepare before applying 

The loan application process truly begins with laying the groundwork for healthy borrowing and repayment. Before applying for a loan, community associations can put their best foot forward by reviewing their financial affairs and putting them in order. 

• Review and, if necessary, amend governing documents to ensure the feasibility of borrowing and to ensure your documents include specific language allowing for securitizing future income/assessments.
• Reduce HOA fee delinquencies to meet lender requirements (no more than 10% delinquency).
• Build liquidity in reserves to show financial health.
• Consider necessary assessment increases to cover loan repayments.
• Update the reserve study for accurate financial and maintenance assessments.
• Resolve any outstanding legal issues to demonstrate stable management.
• Generate community support and clearly communicate with homeowners. Proactively review documents and bank requirements to determine if a homeowner vote is required to move forward with lending. 

Understanding the loan application process

When applying for a loan, remember that while your association is seeking financing, you are also looking for the most suitable banking partner for your needs. To find that partner, you may wish to obtain several competitive bids. The loan application process then involves six key steps: 

1. Prepare and submit a Request for Proposal (RFP) and current financial statements to potential lenders.
2. Review and receive term sheets and proposals from the lenders.
3. Evaluate each proposal’s terms, rates and repayment process to identify the best option.
4. Sign the selected term sheet, pay the commitment fee and complete the underwriting process.
5. Receive loan approval and necessary documentation from the lender.
6. Obtain loan proceeds upon closure and funding by the bank.

About the Author: Matt Hall serves as vice president of HOA lending for Alliance Association Bank and focuses on clients' needs in the Central Region.  Through years of working with countless community associations, combined with an extensive banking career, Mr. Hall provides supportive loan structures and tailors loan products to meet a community's unique needs. 

Elizabeth Caswell Dyer, Sopra Communities 

To begin, a budget’s purpose is to plan out what is needed for cash flow for a period of time. It can also function as a planning tool, depending on the template used. Some associations function on a calendar year (January-December), and some function on a fiscal year, which is any twelve month period, such as June 1^st to May 31^st. Every budget should have these components to it: Income (Assessments), Expenses, Savings (Capital Reserve Transfers), and Debt Service (if applicable). 

There are four main methods or philosophies that inform budgets:

Incremental: Incremental budgeting takes the previous years’ numbers and adds a set percentage increase or decrease across the all line items to arrive at the new numbers. It’s the most simple format, but is really only appropriate if what are called “cost drivers” don’t change. The cons are noteworthy, in that this type of budgeting encourages inefficiencies, overstatements of needs, and ignores variables such as inflation.

Activity Based: This is a top-down approach that begins with revenue projections and then looks at expenses through the lens of achieving the revenue goal set by the projections. This is a common approach in other multi-family situations, such as apartments. As HOAs are generally expected to budget to get to zero as of midnight on the final day of the budgeting period, this approach is backwards of what is needed, as expenses tend to drive an HOA budget and assessments are calculated based on what is needed to properly run the association.

Value Proposition: This method is more a philosophy, and it’s all about value -  anything included in the budget must deliver value to the corporation. It’s a lens of justification and looks to eliminate anything unnecessary.

Zero Based: This is a very common approach and starts from scratch each year, with all line items beginning at zero. There is a value proposition component, where every expense must be justified. This is often referred to in the common slang as a “tight” budget with only what is actually needed included. It’s also an expense driven viewpoint, which is the opposite of the Activity Based approach.

Over the years, I have found it to be beneficial to take a blended approach. For example, if the equipment that drives the utility numbers has not dramatically changed, it is very accurate to get a sense of what percentage increase to expect from the various utility providers for your association, and then overlay that percentage on top of the previous years’ actual numbers. Our team does this by month, and it has resulted in variances being minimal as long as the expected percentage we’ve been given ends up being the actual increase.

For contracts, these are also constant expenses where the expected increase )either due to union rates changing or increases noted within the contract) can be added to the previous years’ actual numbers and reasonably entered into the budgeting template. 

Other items, such as landscaping, are informed by the goals of the Board of Directors in terms of long-term planning (and sometimes hopeful thinking). 

There are line items nobody really wants to spend money on, but it has to be done. These are your mechanical components, such as HVAC, Plumbing, Electrical, and Roof. These are best budgeted by looking back in those line items in financial reports over a series of a few years, if possible, to see an average of the association’s needs in these areas. Contingency planning in these line items can also be an approach to saving, because funds not needed for contingencies during the budget year can be transferred to reserves at the end of the year if the association comes in under budget.

Getting Started

If an association has been with you for a year, pulling a report called a 12 Month Trend or a General Ledger for the previous twelve months is an excellent place to start and to see how the actuals line up to the current budget in place. You may find you don’t need any funds in some line items, and you need quite a bit more in others than planned in the previous year.

Put everything in that you want AND need, and see what that expense total does to calculate the association’s dues. At that point, our team usually gives it to our CFO and then myself to look over and tweak before sending to the Board of Directors as a draft. The time to back things out is in a working session with the Board to reach “what the market will bear” in terms of the dues increase. Involving the Board in the editing process not only gives them the opportunity to exercise its fiduciary duty, it allows for buy-in from the directors that will be presenting to their neighbors, and many board members bring excellent insights and creativity to helping their association get where they want it to go for the next budgeting timeframe. 

By Cameron Stark, VF Law

The Corporate Transparency Act is a major new federal law that imposes strict reporting requirements on nearly all business entities in the US, including community associations. This new law is significant, as it will impact every community association and every individual homeowner who serves on an association’s board of directors. Compliance with this new law is mandatory, and failure to comply can lead to severe penalties, which include fines of up to $500 per day and/or imprisonment of up to 2 years.

Congress passed this law to enhance transparency in business structures in an effort to combat money laundering and other financial crimes. The law is enforced by the Financial Crimes Enforcement Network (called “FinCEN”), an office within the U.S. Department of Treasury. The law requires existing associations to file a report called a Beneficial Ownership Information (“BOI”) report by December 31, 2024. After the initial report is filed, community associations have an obligation to file amended reports within designated timeframes.

A beneficial owner is defined as an individual who directly or indirectly exercises “substantial control” over the business entity. Under this standard, every board member of an association is likely to be considered a beneficial owner who must provide their personal information to FinCEN as part of the BOI report. Depending upon the individual circumstances of an association, additional individuals may be classified as beneficial owners and required to report their personal information. Professionals who provide ‘arms-length’ services to community associations, including attorneys and accountants, are not generally considered beneficial owners as they do not exercise “substantial control” over the community association.

Beneficial owners must provide sensitive personal information to FinCEN, which includes, but is not limited to, their full legal names, address, and driver’s license or passport information. It is important for associations and beneficial owners to consider the security risks related to this sensitive information. For example, if one board member volunteers to collect all of this information from the other board members and complete the reporting, how is this information being collected and stored? Management companies and law firms will need to consider the same question in order to protect this information. It is important to note that the individual completing the reporting must provide their personal information as well.

The best solution to this problem may be to use an independent, third-party entity to collect and report beneficial owners’ sensitive personal information. Third-party entities that specialize in this type of reporting may also be able to efficiently update the reports as needed, as the CTA requires an amended report every time a beneficial owner’s information changes. This means an amended report is required to be filed within 30 days of certain changes, including whenever a new board member is elected, a board member resigns, when or if their personal information changes, or after an error in a previous report has been discovered. It is imperative for associations to maintain accurate and up-to-date records in order to fulfill these reporting requirements.

Community associations must familiarize themselves with the specific requirements of the CTA and take the requirements seriously. Any beneficial owner who refuses or otherwise fails to comply with reporting requirements puts themselves and the association at significant legal risk. Associations should review their governing documents with their attorney and consider amending provisions related to the qualifications of directors. We recommend working with your attorney to consider adding provisions that automatically disqualify any director who refuses to comply from serving on the board in order to protect the association.

Cameron Stark is an attorney with VF Law, representing community associations in various matters. VF Law is a full-service, multi-state firm, providing trusted legal guidance to community associations for over 35 years.

By Caitlin Traub, RealManage

Gift-giving in the workplace amongst managers, management companies and vendors can be a thoughtful gesture, but it can also be complicated by the untrue perceptions or lack of understanding where “the line” is. To ensure a positive and ethical environment, management companies need clear gifting policies that managers and our vendor partners understand and abide by. When your company or Board is considering creating a formal policy, here are a few key things to consider:

Who Can We Consider Accepting Gifts From?

• Vendors: Generally, gifts of minimal value can be accepted, but a clear limit needs to be set (e.g., $25 or less). Food items shared amongst colleagues are usually okay. By communicating a clear limit, it is harder to view these gifts as an item that may influence a business decision.
• Colleagues: Gifts for birthdays, holidays, or special occasions are usually acceptable, if they abide by the set limit.
• Superiors: Gifts from supervisors can be perceived as an attempt to unduly influence behavior. Group gifts for special occasions are generally okay, but individual gifts should be discouraged.
• Direct Reports: In the same way that gifts from direct supervisors can be perceived as an attempt to influence behavior, the same goes for “gifting up,” which for both that reason and general gifting etiquette should be discouraged.

When Can We Accept Gifts?

• Special Occasions: Birthdays, holidays, work anniversaries, or farewells are appropriate times for gift-giving.
• As a Token of Appreciation: A small gift can be a nice way to thank a colleague for their help.  
• Promotional Events: Vendors may offer small gifts at trade shows or conferences.
• As Part of a Larger Whole: Gifts that are experiences, like a local attraction or event, where the whole team is invited, are often viewed as more acceptable than when only one or two individuals are included.

What Gifts Are Appropriate?

• Focus on the Thought: A homemade treat or a personalized note is often more meaningful than the cost of the item.
• Work-Specific Gifts: Gifts related to the recipient's professional interests are generally safe.
• Experiences: Experiences like a local attraction or event, as mentioned above can be a fun option for the entire team to feel included.
• Charitable Donations: Consider suggesting donations to a charity in the recipient's name.

What Gifts Are Prohibited?

• Cash: This can be seen as a bribe.
• Gifts of Significant Value: A gift, priced above that clearly outlined minimal value can be seen as creating an obligation or conflict of interest.
• Gifts That Could Be Misconstrued as Personal: Clothing, jewelry, or overly personal items are best avoided.
• Gifts That Violate the Greater Company Policy or Law: Always check for specific restrictions within your company, our industry or state.

Other Items You May Want to Consider:

• Transparency: Require employees to disclose any gifts received from vendors or clients.
• Documenting Gifts: A simple log can track gifts and their value, ensuring transparency and adherence to the policy.
• When in Doubt, Err on the Side of Caution: Encourage your team to remember that if they are unsure about the appropriateness of a gift, it's best to decline.

By implementing a clear and well-communicated gifting policy, managers, management companies and Boards can foster a culture of ethical behavior and avoid potential conflicts of interest. Remember, the goal is to maintain a professional environment where gestures of appreciation are appropriate without compromising integrity.