By Karl Mertens, M.S., P.E., Knott Laboratory, LLC
Property managers have a fiduciary responsibility to property owners to retain professionals as needed to help maintain the health of a property. Engineers can be an integral part of this team as they hold an over-arching responsibility to protect the public, specifically if hazards develop in buildings.
The confidence an owner places in an engineer should be backed by thoroughness during the site visit where an engineer uses a similar methodology during every facility condition assessment to document any issues previously known or unknown. After a problem is identified, it is the responsibility of an engineer to consider the severity of the problem. This extends beyond the obvious and immediate issue and reaches into second order thinking about what is contributing to the issue, what future issues will this cause, does it repeat at areas that are not visible, does it need to be addressed immediately, and what impact will this have on the owner and/or occupants of the building. As such, raising a life safety concern about an immediate structural failure is a last resort for engineers and is only used to protect the public from harm.
However, it is possible to prevent a building from reaching the uncomfortable discussion of life safety that neither the engineer nor the owner desires to have. Much like an annual health care checkup where physicians monitor your health for any changes or indications of a declining condition, regular engineering checkups are extremely valuable in early detection of problems. Typically, any declining condition caught early is much easier to address and provides more options for treatment. When detected early, the problems are generally less extensive and less costly to maintain. This can be achieved through maintenance and monitoring the condition of the facility over the service life of the structure. As buildings age, unaddressed problems begin to compile, increasing the risk of structural issues, failure and certainly the cost of repairs increase. These increased risks and costs are minimal at first, but typically grow exponentially as time passes when not accounted for.
As such, maintenance and monitoring have multiple elements to consider:
As outlined above, regular maintenance is vital to the performance of a building, especially as it ages. Thus, when establishing a fiduciary relationship between both property owners and property managers, an engineer can be a valuable asset.
Karl Mertens is a Structural Engineer that oversees Facility Condition Assessments for Knott Laboratory. Karl has a wide breadth of structural engineering experience including high rises, medical facilities, hotels, condominiums, higher education buildings, k-12 schools, public works, and new construction/remodel of residential homes/townhomes. Karl enjoys spending time with his family, exercising, and being outside.
By Chris Baker, FRONTSTEPS
First-time homeownership surged after COVID-19, fueled by pent-up demand and historically low mortgage rates. Many of these homeowners are young and will own homes for decades. Their loyalty is enormously valuable to management companies, but it won't come easy. Young consumers are tech-savvy, independent, and impatient. Modern tech is increasingly important in creating the community experience that residents crave. In my conversations with management company executives, they increasingly stress the importance of putting tools into homeowners' hands to manage community living on their schedules and at their convenience. Failing to meet the technological needs of young homeowners could prompt resident turnover and detached, disengaged homeowners.
Here are three homeowner expectations that we see discussed in the marketplace:
Social Connection – Millennials are the first generation with social media embedded in their personal and professional lives. This generation is motivated to stay connected and updated with news, trends, and viral media. 36% of millennial users say they use social media to get their news. It's no surprise they're looking for the same connectivity when becoming a member of an HOA. These homeowners want information on their community 24/7; they want to self-serve and have the convenience of getting things done on their own time. These types of users take advantage of updating their profiles, viewing and joining events, reserving amenities, submitting work orders, and submitting payments. In turn, all these actions completed by these tech-savvy consumers help and provide value to management companies. Providing consumers this type of important information on a unified platform will set communities apart moving forward.
Simple Payments – eCommerce and online banking have been on an upward trend for years, and the pandemic accelerated that shift. Today, 71% of banking is completed online, and 43% of transactions are done on mobile devices. Consumers expect secure and straightforward options when it comes to paying for goods and services, in all aspects of their lives through their HOA. For communities, this means offering solutions that include instant access to upcoming bills, the ability to pay with a few taps, and a log of historic payments for peace of mind. Association boards also benefit from this shift, because it gives them better visibility into theirfinances, provides recurring payment options for consistent only time dues, and helps track delinquencies.
Secure Communities – This past year we saw online shopping grow by 25%. Consumers want their shipments quickly, but more importantly, securely. Many software companies offer security options for homeowners so they can they track these important packages after they have entered communities. These types of features become essential to homeowners living in condominium or high-rise communities. Homeowners can take security measures while sitting on their phone at home, by issuing guest passes to those who need access into the community, etc. All they have to do is enter a name and phone number, and that guest is given a QR code to access the community.
Offering knowledge, communication, and ease of usability will ultimately give these businesses the competitive advantage they're craving. Management companies should focus on working with software companies that appeal to the new expectations of young owners. Mobile apps are good for business, they move more transactions online meaning less overhead, better reporting, and less effort to scale operations. By adopting and enhancing the software provided to homeowners, they’re increasing their chance of securing loyal, long-term residents.
“Chris Baker is the Chief Sales Officer at FRONTSTEPS. Chris has been working with the Community Association Management industry for over 10 years and he’s an expert on helping Management Companies optimize their business with technology. His mission is to help your company grow faster, reduce expense and do more with your existing resources.”
By Aaron J. Goodlock, Orten Cavanagh Holmes & Hunt, LLC
In the wake of the Surfside condominium catastrophe, many communities are grappling with how to address risks associated with aging and deteriorating infrastructure. Among the many lessons learned, the importance of deliberate and long-term financial planning and the avoidance of deferred maintenance may be one of the most paramount.
Boards of directors are routinely faced with prioritizing and balancing various interests when it comes to utilization and preservation of association funds and resources. A variety of factors, including pressure from owners, can influence the decisions that boards make in terms of establishing and maintaining adequate reserve funds, the frequency of conducting reserve studies, and undertaking (or deferring) capital maintenance and repairs.
The magnitude of the Surfside tragedy underscores the importance of commissioning regular, comprehensive reserve studies. Prudence dictates that such reserve studies must necessarily include an inspection and analysis of the physical structures/components as well as major mechanical equipment and systems (e.g., building foundation and structural elements, HVAC and boiler equipment, drainage facilities, utilities, elevators, fire suppression systems, etc.). Engaging professional reserve specialists, engineers, and others to regularly inspect the various structural components and central mechanical systems helps to protect associations and communities from experiencing disasters similar to Surfside.
However, simply having a reserve study performed is not sufficient. Associations must be proactive in addressing and correcting problems and concerns identified in the reserve report and setting aside necessary funds for future replacement and repairs. Associations would be remiss not to heed the professional advice of reserve specialists, engineers, etc., with respect to repairing and replacing aging, deteriorating, or damaged infrastructure. Boards that ignore or fail to adhere to such advice can put the association and the community at significantly greater risk. Alternatively, boards of directors that engage professional advisors and listen to and follow their advice substantially reduces the risk of liability.
The healthiest and safest communities (i.e., those least likely to experience disaster, get hit with large special assessments, or face significant potential liability) are also those that actively plan for the repair and replacement of aging infrastructure by: (1) establishing and maintaining fully-funded reserves (commencing after the initial construction by the developer/builder is complete); (2) periodically conducting and updating reserve studies (ideally annually); (3) budgeting for and performing regular maintenance to preserve (and possibly extend) the remaining useful life of capital assets; and (4) avoiding deferred maintenance.
The current regulatory framework in Colorado is extremely lax in terms of physical inspection requirements and/or mandatory reserve funding. There are no statutes in Colorado that require associations to undertake regular inspections or put aside funds for future repairs or replacement. Accordingly, it’s incumbent on boards of directors, as fiduciaries, to assume such responsibility and ensure that the property is regularly inspected and adequately maintained.
Despite the lack of statutory requirements, associations and boards should strive to maintain fully-funded reserves, continuously assess maintenance needs, and diligently perform regular and routine maintenance. To accomplish these objectives requires active board member engagement and owner communication regarding community needs and expectations. The association’s reserve study report, reserve specialist recommendations, and budgets are useful tools to educate owners about the importance of maintenance and financial planning.
A crucial element with respect to maintenance is to avoid unnecessary or prolonged delay. If damage is identified during an inspection or otherwise, the association should take prompt steps to fix the problem and make any necessary repairs. Depending on the nature of the problem, repairs can be funded and paid for from the association’s operating or reserve funds. If there are significant structural concerns and the association does not have adequate funds to pay for the repairs, the association should consider alternative funding options such as a special assessment or obtaining a loan, and increasing the association’s budget to meet ongoing operating and maintenance expenditures, as well as replenishing and funding future reserves.
Lastly, safety – not frugality – is key. The safety and integrity of the community’s buildings and infrastructure must take precedence over any contrary desire to minimize assessments. Sacrificing maintenance and repairs puts associations at substantial legal and financial risk. Conversely, investing in regular upkeep and improvements will have numerous positive impacts, such as increasing the marketability and property values in the community, which is both advantageous to owners and desirable to future, prospective buyers.
Aaron J. Goodlock is an attorney at Orten Cavanagh Holmes & Hunt, LLC. He provides general counsel and transactional services to community associations throughout Colorado.
By Alicia Granados, Pacific Premier Bank
With the reality of aging infrastructure on the minds of so many today, association leaders may be wondering how to best prepare for unanticipated expenses. What if that big project we’ve been putting off can’t wait much longer due to declining property values or health and safety concerns? Is our association in the right position to fund a large renovation or critical structural repair that may not have been included as part of our reserve plan?
Thankfully, in recent years community managers and board members have become more aware that there are banks who specialize in lending to community association loans. A loan can be a great solution, often allowing an association to avoid a large, lump sum special assessment. Work can be completed in a timely manner and with less expense than a project that must be phased out over many years. Some may even assume that adequate reserve funding is less important because a loan will surely be available when the need arises.
But what if it’s not? What types of issues might prevent your association from being able to obtain a loan and what can be done today to assure your community is in the best possible position to obtain financing in the future?
Governing Documents – Some governing documents include language that prohibits an association from taking out a loan or may require prior approval by some percentage of the membership. It’s a good idea to get ahead of the game. Be sure you are aware of any provisions related to borrowing and consult your association’s attorney to determine whether a document amendment might be appropriate to allow this option in the future.
Adequate Assessment Levels - Assessment levels need not only be adequate to make loan payments, but the association must be able to meet all of its operational expenses and fund any other projects that will need to be performed during the term of the loan. Working to maintain a well-funded reserve will help to assure that your community is in a strong position to obtain a loan for unforeseen major expenses.
Financial History – Associations with inadequate accounting records or large, unreconciled adjustments may be unable to qualify for a loan. Financial records should be complete and the board should work closely with financial professionals to resolve any outstanding issues.
Delinquencies – Specific underwriting requirements vary, but banks will look closely at delinquent assessments when considering whether an association will be able to repay a loan. If a substantial increase in regular assessments or the addition of a special assessment is needed to meet loan payments, it becomes more likely that additional owners will become delinquent. In order to be in the best position, your association should actively manage its collection policy to resolve any large outstanding accounts and keep delinquencies to a minimum.
Reserve Study– The availability of a current reserve study provides the bank with a strong picture of the future financial needs of the community. Associations with an out of date study or no reserve study at all will have a more difficult time demonstrating the ability to meet expenses during the term of the loan. You can assure that your community is in the best position by regularly updating your reserve study and following the recommended project and funding plans.
None of us can anticipate every need for the future of our communities. But, considering some of these focus areas will put your community in the best position to qualify for an association loan, should the need arise in the future.
Alicia Granados is the HOA Sales Manager for Pacific Premier Bank Community Association Banking and the current Treasurer of CAI-RMC. She is a 25 year industry veteran and holds her Educated Business Partner distinction, as well as her CMCA, AMS and PCAM designations
By Meaghan Brown, CAI-RMC Editorial Committee
For over a year, our industry has been forced to endure a number of challenges as a result of the COVID 19 pandemic. With people’s homes and communities at stake, there’s little time to spare. We’ve had to rise to the challenge and come up with alternative solutions quickly in order to continue business as ‘usual.’ One of those solutions that we’ve all come to know well is the use of virtual meetings. Here,, I’ve asked four industry leaders to share their experiences around virtual meetings and ultimately examine the question we’ve all been waiting with bated breath to find out…. Are virtual meetings here to stay?
Ben Sloman (Associa): Boards were generally quite hesitant when we all started moving fully to virtual meetings. They had to learn new things and change. We did not just have meetings for Board and Owners, but we also started some computer skill meetings. These included getting on the phone with the owner and guiding them through opening up web browsers, reading and following instructional emails, and seeing themselves on camera!! We still complete these virtual meetings and all throughout these meetings we always have owners that would prefer to connect via phone or physically want a meeting. Over time we have seen a lot more participation via the virtual meetings platforms - a lot more people are attending and Board members are much more familiar with how to use the virtual platforms.
Kevin Lovett (Summit Resort Group): We have found that Board member response to virtual meetings is split… We have about half of the HOA Boards that have accepted (and even prefer) virtual meetings and the other half of Board members prefer in-person meetings. I do not think the perception has really changed over time… It seems that the folks that were ok with virtual meetings at the beginning of the pandemic are still ok with virtual meetings now, and those that were not fond of virtual meetings at the beginning of the pandemic, are still preferring in-person meetings.
Chris Marion (CAP Management): The majority of our Boards gladly embraced the use of virtual meeting technology to maintain Association business during the initial social distancing restrictions. Like the rest of the country, our Boards, Managers, and Homeowners all experienced some level of “zoom-fatigue” and were looking forward to resuming in-person meetings sometime in the future. Since the alleviation of the restrictions, we’ve seen a mixed response from our Boards. Some are quite eager to open up the clubhouse for the next meeting, while others are perfectly happy to continue meetings virtually.
Ben: I see a lot of benefits with virtual meetings although there certainly are pros and cons for both physical vs virtual meetings. One of the main benefits of having online meetings is that you are able to use functionality, such as sharing your screen. You can show maps, documents, budgets, and photos, for example, and all attendees can see and hear well since they sitting right in front of the computer and not 40 feet back in a conference room. We are able to follow the agenda through sharing the screen and everyone is looking at the same thing rather than having printed packets that get rustled in the background and side conversations going on for additional distractions.
Kevin: There are many benefits to the use of virtual meetings. One is efficiency for both the managers and the Board members (and owners). In today’s hectic, fast paced world, minutes add up and when managers and board members can eliminate commutes to attend meetings in person, valuable time is saved which can be put toward completing needed tasks. Additionally, virtual meetings allow for increased attendance at meetings. Here in resort communities, many board members and owners live in other parts of the countries and are unable to attend meetings in person. There are also benefits of cost-savings with conducting meetings virtually… no need for paper copy expenses, meeting venue rental fees and refreshments.
Chris: Many Board Members have appreciated a more electronic experience, including the use of digital Board packets (rather than printed), an organized homeowner forum via chat rooms, and the ability to “screen-share” RFPs and Agendas, for example. Perhaps the most noteworthy benefit is the convenience of joining and participating in a meeting from anywhere! We have received wonderful feedback ranging from working parents who can listen while cooking dinner, to off-site owners living in different states.
Ben: The biggest challenge is getting people into the meeting in the first place since they need to enable their camera, microphone, and speakers.
Kevin: The main challenge with virtual meetings is user issues… many of our homeowners are retired and lack some of the technical skills that are considered standard for the younger working population.
Chris: The occasional audio/video issues can of course be disruptive to the flow of a meeting. However, these occurrences seem to be less and less frequent as we’re all becoming virtual meeting experts. The most challenging aspects of the virtual Board meetings seem to arise during an Annual Meeting. First, for a large community, it can be difficult to record attendance, which is critical for communities that require a quorum of members. Secondly, the ability to conduct an anonymous membership vote during a virtual meeting is problematic to say the least. We are still working on an efficient solution for secret voting.
Ben: Yes, I definitely think they are here to stay, they are more convenient, can happen all over the world and have a lot of functionality that can accomplish nearly every task.
Kevin: Yes, I think virtual meetings, or at least a “hybrid,” (holding meetings both virtually and in person), are here to stay… The younger working owners are very used to virtual meetings and seem to prefer them. The retired owners still seem to prefer in-person meetings, so I see hybrid meetings becoming more popular!
Chris: Yes, we believe some version of virtual meetings will become a norm in the industry because of the many benefits discussed. The problem we are seeing is the configuration of a hybrid meeting. Without proper audio/video technology, the hybrid meeting model can be very frustrating and largely ineffective for virtual participants. For now, we have invited our Boards to utilize our company’s tech-enable conference room for hybrid meetings while we slowly decide which format is truly the best for each community.
About our Participants:
Ben Sloman is a Supervising Community Association Director and oversees the Associa Community Association Management team in Colorado Springs. Ben holds both CMCA® and AMS® credentials from the Community Associations Institute and is currently completing his Real Estate license and working towards his PCAM credential. Ben has worked as a licensed Community Association Manager in major cities and resort areas throughout his career. He enjoys getting outside every day to enjoy the sunshine and everything nature has to offer, he is an avid mountain bike rider, but will take anything in step to have fun with friends.
Kevin Lovett is President of Summit Resort Group, which is a full-service property management company serving the Summit County, Colorado area. Summit Resort Group specializes in HOA management as well as short-term and long-term rentals and has a number of experienced Real Estate Brokers.
Chris Marion is the Chief Sustainability Officer of CAP Management, serving community associations around the Denver Metro Area. Chris holds a Masters Degree in Sustainability Planning and Management, bringing many years of experience working with buildings and landscapes to the industry. Chris primarily works with Boards on development of long-term, comprehensive plans to modernize community infrastructure in a cost-effective way.
About the author:
Meaghan Brown is an Account Executive at EmpireWorks Reconstruction, working with HOAs, multifamily, and commercial properties for their exterior, community-wide reconstruction projects. As an Account Executive, Meaghan acts as the liaison between their production team, the community/property manager, board of directors, and residents throughout the course of each project. Some of their core services include roofing, carpentry, EIFS/stucco, concrete, painting, decks/walkways, steel fabrication, and construction defect services.
By Geneva Cruz La-Santa, CP&M
Our communities are like our bodies; all the stress alleviation endeavors in the world won't help us if we aren't taking care of ourselves or our communities. Reflection or Meditation will not do us any good if we aren't getting sufficient sleep. When we try to reflect or meditate, we might doze off because we are not taking care of our body's need for sleep. If we doze off on the care and maintenance of our communities, we are allowing the exterior breakdown of our building, our core strength, our foundation. Similarly, hitting the gym occasionally won't relieve much stress if we only fuel our bodies with junk food. We need to take care of our basic needs first if we want our stress relief activities to be practical. Like our communities, band-aiding or patching a concern does not alleviate the problem but temporarily hides the prolonged issue.
As we provide self-care for our bodies, a conscious act we take to boost our physical, mental, and emotional health, we provide for our long-term well-being. We must interject the same type of self-care into our communities. Many forms of community self-care can be taken. Like we do for our bodies, we ensure we get enough sleep every night or take a moment to step outside for a few minutes for fresh air. We must provide our communities with routine maintenance of roofs, gutters, siding, windows, painting, grading & drainage, foundation & concrete, patio & decks, crawlspaces and landings, and steps & railings.
Community self-care is crucial for maintaining our communities' resilience towards stressors in life that we cannot eliminate. When we take steps to care for communities' buildings' interior & exterior, we set our communities up to be better prepared to handle other issues that may arise. Unfortunately, however, some communities view community self-care as an indulgence rather than a priority. Consequently, managers are left feeling overwhelmed and ill-equipped to handle a community's inevitable maintenance challenges. Managers need to assess how they and their HOA boards are caring for communities in different areas to ensure the building structure, and surrounding areas are being well taken care of and regular maintenance is transpiring.
You need to take care of your buildings if you want them to provide a strong foundation. Remember that a strong connection between your building's exterior and interior helps the community become an efficient and desirable place to live. The best way to cultivate and maintain a great community is to put time and energy into building: your relationships with your board, your service team, and your contractors. There isn't a certain number of hours you should devote to these relationships; the key is to figure out the community's ultimate goal and set the path to achieving it. A community self-care plan is not a one-size-fits-all strategy. A community self-care plan needs to be customized to each community's needs. Assess which areas of your community need more attention and address it, then reassess your community often. As your community ages and itsneeds change, your community self-care needs are likely to alter too. When you discover that you're neglecting a specific aspect of your community, create a plan for change. You don't have to tackle everything all at once. As communities get older, more repairs and replacements are required.
Develop a Community/Building - Self-Care Plan
The importance of community self-care cannot be spoken about enough; working with a good core team is the first step to success.
My name is Geneva Cruz-La Santa, I have been with CP&M (Community Preservation & Management, Inc.) and its many entities for 17+ years. I have enjoyed watching CP&M grow into a full-service General Contractor with an in-house roofing division (R3NG). CP&M specializes in providing solutions for commercial property managers, HOA managed multifamily and single-family communities, REO rehabilitation, apartment industries and government housing entities.
By Ryan Morita, 5150 Community Management
Any community management professional understands that one of the biggest questions raised year after year by board members and homeowners alike is “Why do we need to increase our assessments this year?” An educated manager that comes ready to answer that question is going to be able to both service the community, and at the same time, fight off the negativity that often surrounds assessment increases. There are many valid responses that can be used to communicate to communities the reasons why their specific communities need to raise their assessments.
Let’s review some of those responses now.
“The Association Needs to Keep Up with Rising Costs”
Inflation and rising costs are often the biggest factors in the need for a community association to increase their assessments. Year after year, the value of a dollar decreases while costs of many goods and services increase in correlation with this inflation. A responsible community association will foresee these increases in cost and communicate to the membership that the assessments for the association will need to increase as well. If this is not planned strategically and with foresight, the association risks having an operating shortfall and having to resort to drastic measures in order to just maintain the day-to-day operation of the association. These measures could include a substantial increase in assessments that far exceeds the inflation rate. For example, an association that does not increase assessments for several years in order to artificially maintain a “low dues association” could possibly find that they cannot afford a service that is required by the declaration and must increase assessments 20-30% in order to just maintain the standard that is required by the governing documents.
“The Association Needs to Plan for the Future”
One of the most important aspects of operating a community association is the maintenance and replacement of the physical assets of the community association. Often, this aspect of community management can be overlooked, both by focusing too much on the short-term needs of the membership and by focusing too little on the long-term financial requirements of the community. Every asset that the community owns will inevitably need to be replaced. It is the duty of the board of directors to plan for that replacement and to maintain a reserve fund in order to pay for it. The most important steps in this process are understanding what the association owns, how much it will cost to replace each item, and how long the association has until those items need to be replaced. A reserve study should often be the go-to tool for community association boards and managers, as it provides a guideline for all three of those factors and allows the association to come up with a realistic plan and expectation of maintaining and replacing their physical assets. With an informed plan in place, the odds of the association needing to implement a special assessment or worse, deferring maintenance, will decrease significantly.
“The Association Needs to Defend Itself Against Stagnation”
This response is often the simplest to explain, the easiest to implement, and yet the most overlooked by community association boards and managers. If an association begins to expect that dues will not increase, then even a small and reasonable increase could be seen as having a negative impact on the individual members. If the community association is going to be able to keep up with cost increases and save for the future, then assessments will need to be increased by a small amount every year in order to operate. The expectation should be set that a small increase is required and is beneficial to the individual members and the entire association. If the homeowners expect a small increase each year for this reason, then it is unlikely that they will ever be surprised by an increase. Also, if an association expects a small increase each year, they will inevitably avoid the pitfalls of an artificially low assessment level. Often, there is a false association with low assessment levels to being “good” while high assessments are considered “bad,” when there really are only “correct” and “incorrect” assessments. Correct assessments are going to be set at a level specific to the community, that funds for operating expenses, saves for the future, and has the flexibility to allow for fluctuations in cost year after year.
Equipped with these three responses, a community manager will have everything they need in order to communicate to the board and membership the importance of increasing dues annually. It can be a difficult task at times for managers to maintain the balance between satisfying the membership and adequately funding their communities, but a well-informed manager will have all the tools that they need to communicate the importance of increasing dues on an annual basis and avoiding the many traps associated with under-funding a community.
Ryan Morita is the Director of Accounting Services at 5150 Community Management.
By Kim Hitchcock, McNurlin, Hitchcock & Associates, P.C.
Today’s homeowner is savvy and aware of the tax implications of homeownership. Deductions for mortgage interest and real estate taxes are common topics of conversation, however, taxes paid by the HOA are often left out of the discussion. It is easy to assume that HOAs are tax exempt, but the IRS disagrees. The HOA could be subject to tax on income from vending machines, laundry machines, clubhouse rentals, easement proceeds, roof rent, etc. This is true, even if the HOA is registered as a nonprofit corporation.
If, after reading this article, you are uncertain how these rules apply to you, or your HOA, be sure to enlist the support of a qualified CPA Firm.
Homeowner Associations can pay taxes?!
Homeowner associations (also called HOAs, CIRAs or Associations) have a distinctive taxing structure that is complicated by multiple taxing options. To start, we will first define the HOA.
What is a Homeowner Association?
According to the IRS, the HOA is an entity that provides a benefit to the community. It can be a condominium association designed to care for property in a specific condominium project, a residential real estate association designed to care for properties in an area or a timeshare association. The important factor is that the HOA is created as an entity designed to act on behalf of individual owners or members for the good of the overall community.
For that reason, the HOA is not often taxed on dues and assessments which are collected from members for the purpose of maintaining the property, even when the dues collected are greater than the current year expenses.
My HOA is a Colorado non-profit. Why do we pay taxes?
The State of Colorado recognizes the HOA as a nonprofit corporation. It is important to note that a nonprofit corporation in Colorado is not tax exempt under the Internal Revenue Code (IRC). To become tax exempt, the requesting organization must file complicated paperwork and report their mission to the IRS.
What tax form does the HOA file?
The HOA is a legal entity and a corporation. It is required to have a tax ID number (FEIN) and file annual tax returns with the IRS and possibly with the State as well. The good news is that the HOA can often elect to take advantage of the tax benefits provided by IRC §528 by filing the shorter Form 1120-H instead of the longer Form 1120 unless the HOA is primarily commercial, not residential, or if the HOA is primarily funded by non-exempt sources.
Form 1120-H; U.S. Income Tax Return for Homeowners Associations
HOAs that elect to file form 1120-H will start the process by designating each item of revenue as “exempt” or “nonexempt”. “Exempt” revenue would include member dues, assessments, and anything that is charged to members based on their ownership percentage. Everything else, such as investment income, rental income, resort fees, and vending income is “non-exempt”. This is an important designation because the “exempt” income is also the “tax free” income.
Non-exempt income, less all associated expenses and a $100 statutory deduction, is subject to the 1120-H tax at a federal rate of 30% (plus State).
Form 1120, U.S. Income Tax Return for Corporations
Associations that do not elect to file form 1120-H will file the full form 1120, but the HOA will still benefit from special rules for membership organizations. HOAs that file form 1120 will start the process by designating each item of revenue as received either by a member or by a nonmember. Income received from a member is “tax free” if it is used to pay for member/community expenses.
If the HOA collects member income, dues, or assessments that exceed community expenses, the HOA will have something called “excess membership income”. This excess must be applied to the following year budget or refunded to the members. Choosing which option, either budget adjustment or refund, is addressed through a resolution at the HOA annual meeting.
Income from nonmembers, less all associated expenses, is subject to federal tax on Form 1120 at a federal rate of 21% (plus State).
As you can see, the complexity of the tax return really depends on the activities of the HOA and the availability to file the shorter Form 1120-H vs the longer Form 1120. Talk to your tax professional if you are seeking more guidance on this subject.
Kim Hitchcock is a CPA in Lakewood Colorado and the managing partner of the public accounting firm, McNurlin, Hitchcock & Associates, P.C. Kim is also a member of her residential HOA and is involved with the HOA of her family’s vacation rental. She has more than 26 years of experience in public accounting in the tax, audit, and accounting fields working specifically with CIRAs and small businesses. To find out more about Kim and the team at McNurlin, Hitchcock & Associates, P.C. visit www.mcnurlincpa.com.
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.
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.
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