Blog
By Rob Kabza and Nate Skrdla, ASR
Fire safety is a critical aspect of building design and construction. Understanding fire ratings for building materials and adhering to best practices can significantly reduce the risk of fire-related incidents and enhance occupant safety.
Fire Ratings for Building Materials
Fire ratings are a measure of a material's ability to withstand fire and limit its spread. These ratings are essential for ensuring that buildings can resist fire long enough to allow safe evacuation and to minimize structural damage. Key fire ratings include:
Best Practices for Fire Safety
Implementing best practices in fire safety involves a combination of proper material selection, design considerations, and maintenance procedures. Here are some essential practices:
Conclusion
Fire safety is a multifaceted discipline that requires careful consideration of building materials, design, and maintenance. By understanding fire ratings and adhering to best practices, building owners and occupants can significantly reduce the risk of fire-related incidents, ensuring a safer environment for everyone.
About Rob Kabza, President of ASR Companies – Rob has over 30 years of construction management experience in Colorado, with a primary focus on project management, construction operations and reconstruction projects. He oversees production and quality management, and provides leadership for all projects from the preparatory planning phase through the construction completion. Rob received his B.S. in Construction Management from Colorado State University.
About Nate Skrdla, Director of Construction at ASR Companies – Nate has over 25 years of Construction Management in Project Planning, Project Management and Purchasing experience. His focus is on Trade Partner, Vendor and Supplier relations. He supports the production team in meeting project goals, timelines, and budgets. Nate received his B.S in Construction Management from the University of Nebraska at Kearney.
By Greg Kelly, Senroc Technologies
In an era where our personal and work lives are more connected to digital technology than ever, it is crucial to establish a strong first line of defense to protect our virtual worlds. Fortunately, you have access to tools that make learning the basics of cybersecurity easy and effective.
Cybersecurity is the implementation of safeguards to protect our digital assets, including ourcomputers,networks,anddatafromcyberattacksaimedataccessing,altering,ordestroying sensitive information. Picture a scenario where a property manager receives an email requesting payment from a well-trusted security vendor for a homeowners’ association in their portfolio. Unbeknownst to this property manager, the email account of the security vendor has been compromised and a threat actor is sending invoices with wire transfer information to their own bank account. Without safeguards to assist in verifying the authenticity of the email, there is a higher chance this property manager could inadvertently send funds to the threat actor resulting in financial losses for the HOA. With proper cybersecurity practices and tools in place, this scenario is avoidable!
The Importance of Cybersecurity for HOA Property Managers
For HOA management companies and their property managers, implementing a cybersecurity plan is not just a “should do”, but a “must do”. It is their fiduciary duty to their clients to take the steps necessary to protect the client’s interests. Property managers are highly trusted professionals who require an elevated level of access to perform everyday functions for their customers. With this high level of access comes a high level of responsibility. The consequences of a failed security effort can be devastating for a management company as well as their clients. Potential consequences can range from access to HOA bank information, unauthorized approval of money movements such as wire transfers as well as submittal and approval to pay invoices.
The Importance of Cybersecurity for Board Members
Board members are the lifeblood of an HOA and provide important decision making to ensure the health and financial vitality of their community. With this influence, they also take on a level of risk and face potential consequences when not taking steps to improve their cybersecurity stance.The most common result of a poor cybersecurity stance is a compromised identity. Once a threat actor has access to an email account, they are now the digital representation of you. For typical HOA tasks such as submittal and approval of invoices or check signatory authority, a compromised account could lead to money being stolen from the HOA through seemingly normal means.
Some Simple Ways to Implement Cybersecurity
The first step is to grasp how essential cybersecurity is. Check!
The next steps are to implement practical protective measures that can greatly diminish the threat of being the next victim of cybercriminals. Here are a few useful tips everyone should use.
Practice recognizing phishing
Phishing is an attempt to steal personal information or break into online accounts using deceptive emails, messages, ads, or sites that look like sites you already use. Threat actors will use your trust with reputable companies, friends, or acquaintances, to get you to access fraudulent websites, or files, designed to capture your sensitive data. These attempts can be difficult to spot, but taking some extra time can help identify potential scams. Here are a few quick points of things to pay attention to:
Take steps to secure your accounts
All of us are probably guilty of using some variation of the same password across many of our accounts. While it is convenient, it can also be an easy way for threat actors to gain access to one or more of your accounts. If they know you login to your email account with one password, they can try that same combination of email address and password for other common accounts (ex. banks, shopping websites, etc.). For this reason, it is a good idea to use strong and unique passwords for each service you use. Since it can be daunting to have so many different passwords, you can use a trusted password manager to help you keep track of passwords across different services. In addition, you should always take advantage of multi-factor authentication (MFA) whenever a service offers it. It’s an easy way to help keep a threat actor out of your account even if they have gained access to your password.
Verify with a call
This one almost seems too easy, but simply making a call when questioning the validity of something can be the most effective way of thwarting a fraud attempt. Some threat actors are smart to put a phone number on their medium of choice, so if you are looking for a phone number for a provider use known good sources such as a company website or your own known contacts to ensure you have a real phone number.
So, there you have it! Ensuring the safety of data and information is a collective duty that needs constant watchfulness and proactive security measures. Those in charge of managing and governing HOAs must take this obligation seriously so those living in their community can thrive. The very nature of the HOA industry in the digital age makes property managers and board members a prime target. Takingtheproperstepstoestablish a strong cybersecurity stance ensures you fulfill your fiduciary responsibilities of HOA communities you lead.
Greg Kelly is the founder of Senroc Technologies, a Managed IT Services company in the Denver area since 2013. With over 13 years of experience working within the HOA Management industry, he brings a unique perspective to marrying the HOA and IT worlds.
By April Ahrendsen, First Citizens Bank
As a homeowner, making sure your dues are paid on time is crucial. Timely payments ensure everything runs smoothly and you avoid late fees or penalties. But with so many payment options available, how do you choose the best one? In this article, we'll dive into four popular methods: mailing a check, using an eCheck, setting up an ACH transfer, and paying with a credit card. We'll break down the pros and cons of each for homeowners, and even touch on how Positive Pay can help prevent fraud for HOAs with a business account.
Let’s get started!
Primary Methods for Paying Homeowner Dues
When it’s time to pay your homeowner dues, you have several options. Here’s a quick look at each:
- Mailing a Check: The traditional way of sending payments.
- eCheck: A digital version of the paper check.
- ACH Transfer: Direct bank-to-bank transfers.
- Credit Card: Quick and easy payments.
Now, let's take a closer look at each method, starting with the good old-fashioned check.
Paying Dues by Mailing a Check
Pros
1. Familiar Method: Sometimes, the old ways are the best ways. Mailing a check is familiar and straightforward, especially if you’re not too keen on digital payments.
2. Record Keeping: Physical checks give you a tangible record of your payment, which can be handy for personal accounting.
3. No Additional Fees: Generally, there are no extra fees when you send a check. It's a cost-effective method as long as you have checks and stamps.
Cons
1. Time-Consuming: Writing and mailing checks can take time. Plus, there’s the wait for the check to be delivered and processed.
2. Risk of Loss or Theft: Checks can get lost or stolen in the mail, potentially delaying your payment and exposing you to fraud.
3. Delayed Processing: Mail delays can push your payment date, and the recipient might take a while to process the check.
4. Lack of Tracking: There’s no way to know exactly where your check is or if it will arrive on time, adding some uncertainty to the process.
Mailing a check is like sending a letter — it has its charms but also its risks. Let’s see how eChecks stack up in comparison.
Paying Dues via eCheck
1. Convenience: eChecks can be issued online, so you don’t need to worry about writing or mailing physical checks.
2. Lower Fees: Typically, eCheck transactions come with lower fees compared to credit card payments.
3. Security: eChecks are processed through secure online platforms, reducing the risk of loss or theft.
4. Efficiency: eChecks are generally processed faster than mailed physical checks, with funds often transferred within a day or two.
5. Control: eCheck payments offer greater control since you can schedule payments and manage them easily online compared to ACH.
1. Setup Required: Similar to ACH, setting up eCheck payments means you’ll need to provide your bank account information, which can be a concern for some people.
2. Processing Time: While faster than mailing checks, eCheck processing can still take a day or two, which might not be quick enough for urgent payments.
3. Bank Charges: Some banks might charge for eCheck transactions, although these fees are usually lower than credit card fees.
eChecks offer a convenient middle ground between traditional checks and more modern digital payments. But what about ACH transfers?
Paying Dues via ACH
1. Low to No Fees: ACH transfers typically have lower fees compared to credit card payments.
2. Automated Payments: Can be set up for automatic withdrawals, ensuring timely payments and avoiding late fees.
3. Security: ACH payments are securely processed, minimizing the risk of loss or theft associated with mailing checks.
4. Direct Transactions: Money is directly transferred between bank accounts, making it a straightforward option.
1. Setup Process: Setting up ACH payments may require providing sensitive banking information to your management company, which can be a concern for some.
2. Processing Time: ACH transactions may take a few days to process, which can be an issue if immediate payment confirmation is needed. The homeowner does not get to choose the payment date.
3. Potential for Overdrafts: Automated withdrawals can lead to overdrafts if the account balance is insufficient.
4. Availability: As restrictions and regulations increase more management companies are opting not to offer ACH as a payment option. In addition, there is the task of receiving and securing the payment information from cybertheft.
ACH transfers are secure and low-cost, but setting them up requires a bit of preparation. Let’s explore how credit cards compare.
Paying Dues via Credit Card
1. Convenience: Just type, click, and you’re done! This method saves the time and effort needed to write and mail checks.
2. Rewards and Cashback: Many credit cards offer rewards points or cashback for purchases, which can add up over time.
3. Immediate Confirmation: Transactions are processed quickly, giving you immediate confirmation of your payment.
4. Payment Tracking: It’s easy to track and manage payments through monthly statements or online accounts.
5. Safety: Credit card transactions are generally secure, and many cards offer fraud protection that can help resolve unauthorized charges quickly.
1. Fees: Some service providers charge a convenience fee for credit card payments, which can add up.
2. Interest Charges: If you don’t pay the balance in full each month, interest charges can accrue, leading to higher overall costs.
Using a credit card for payments is fast and convenient, but it’s important to be aware of potential fees and interest charges.
Positive Pay for Homeowners Associations
Positive Pay: This is a fraud prevention service that many banks offer to businesses and HOAs.
Here’s how it works: You provide your bank with a list of the checks you've issued, including details like check numbers and amounts. When a check is presented for payment, the bank compares it against your list. If the details match, the check is cleared. If not, the bank flags it for review. This way, only checks you’ve authorized get processed, helping to prevent fraud
Choosing the Best Payment Method
Choosing your payment method depends on your priorities.
- Convenience: If this is your top priority, credit card payments or eChecks might be your best bet.
- Cost: If you're looking to save on fees, ACH transfers or mailing a check are generally cheaper.
- Security: For the highest security, consider eChecks or ACH transfers.
- Speed: Need quick processing? Credit card payments are usually the fastest, followed by eChecks.
- Control: Want to keep tight control over your payments? eChecks and credit card payments offer excellent tracking and management options.
Ultimately, the best method is the one that fits your lifestyle and needs. Evaluate the pros and cons, and choose the option that gives you peace of mind.
Paying and managing homeowner dues doesn’t have to be a hassle. Whether you prefer the traditional method of mailing a check, the convenience of a credit card, the security of an eCheck, or the reliability of an ACH transfer, there’s an option that’s right for you. And with tools like Positive Pay, your HOA can add an extra layer of security to your payments. Choose the method that best suits your needs, and stay on top of your dues with ease.
This information is provided for educational purposes only and should not be relied on or interpreted as accounting, financial planning, investment, legal or tax advice. First Citizens Bank (or its affiliates) neither endorses nor guarantees this information, and encourages you to consult a professional for advice applicable to your specific situation.
April Ahrendsen - Vice President – Regional Account Executive First Citizens Bank, is responsible for the business development of Association Banking products and services. With over 19 years of experience in the HOA banking industry, April is a native Idahoan and an active member of the Community Associations Institute, where she chairs one committee in Colorado and is the Idaho CAI board President. She is dedicated to continued education and industry improvement, presenting to associations across multiple states and writing articles on HOA lending and investments for CAI chapter magazines.
By Kevin Lucas, RealManage
Nobody LIKES to have those hard discussions with board members and homeowners on the reality of the Association’s financial health, but it is increasingly becoming a necessity within the HOA industry. Over the past 10 years, we have endured dramatic price increases across the board, including basic labor rates, material price increases in some industries of more than 100%, and insurance premiums that have skyrocketed. It is a rarity for an HOA board to adjust assessments in a timely manner when these increases occur, as most often the increase is realized after an annual budget has already been ratified. So, each year the board is faced with not only planning for another unknown increase, but also trying to make up for previous increases that were realized after the last budget ratification process. In most instances, a board is stuck playing catch-up when it comes to financial health.
It is imperative that CAMS and boards have those hard discussions on the reality of the financial impact of previous increases and potential future increases, when preparing for the upcoming budget process and ongoing conversations with homeowners. Simply stated, within an HOA, there are two ways to balance a budget – 1) Reduce costs incurred to reduce the cash outflows of the association; and/or 2) Increase inflows of cash through the increase of assessments.
Most associations have already been working on reducing costs, and as a result, most associations are at the BARE MINIMUM of services being provided. This “tightening of the belt” by most boards has worked in reducing the overall assessment increase, but many homeowners are now noticing the reduction in the services performed by the HOA.
The only other way of balancing a budget is to increase the cash inflow, by increasing assessments, to cover the additional costs and recoup the previous unbudgeted increased costs that most associations have already incurred. The conversation of increasing assessments always comes with negative connotations, as nobody likes to pay more for the same services (or even reduced services), but just as homeowners are now paying much higher prices for gasoline, bread, and beer, the vendors that perform the services are all paying for higher priced gasoline, labor, and insurance.
When CAMS and boards sit down to discuss the upcoming budget, a discussion based in reality is required. Review the costs incurred that were higher than the budget, to determine the total amount of previous year’s shortfall that needs to be recouped, have a legitimate discussion on anticipated costs for the upcoming year on those items that historically have been higher than anticipated, and then also have a conversation regarding service level changes that have occurred (or are still on the table to occur in the future), before any budget discussions are held. By documenting the shortfalls realized, service level reductions instituted, and cost increases anticipated, the board can then list out the necessity of an assessment increase in black and white when presenting a proposed budget to homeowners. There is nothing wrong in being cordial when having those discussions, but laying out the facts of the association’s current financial position is necessary to avoid rumors, differences of opinion, and assumptions.
The discussions are never easy when it comes to the financial impact of increased assessments on individual homeowners, as it will have a very personal impact on each individual differently. It is important to remind homeowners that the HOA is a business that is in charge of running a community, versus a community trying to run a business. Hard decisions are the responsibility of the elected board members to move the organization in a positive direction to help the overall health of the community. By presenting the FACTS in a very concise and easy to understand presentation, it is easier to educate the homeowners on the reasoning behind the proposed assessment increase, along with the alternatives of not making the hard decisions. Showing compassion of the impact these decisions have on individuals is a necessity, but it is important to stay focused on the overall impact on the community, as opposed to the individual.
This can be considered a harsh approach, but the presentation of FACTS, ALTERNATIVES CONSIDERED, and the ANTICIPATED IMPACTS of those decisions can be considered a “Tough Love” approach when presenting information to homeowners. When decisions can be boiled down to basic math – more funds need to come into the HOA to pay for the higher costs incurred to avoid the reduction in the level of services – homeowners may not LIKE the results, but they can understand why decisions were made as they were.
Kevin Lucas CPA is a Financial Manager for RealManage and has been in the industry as a Management Company Owner for 20+ years, before joining the RealManage team. Financial Stewardship has always been my priority, with individual compassion sprinkled in, but I feel that Association Financial Health is our industry’s top responsibility.
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:
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.
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.
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:
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:
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.
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 1st to May 31st. 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:
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.