Blog
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.
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:
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:
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.
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:
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
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?
When Can We Accept Gifts?
What Gifts Are Appropriate?
What Gifts Are Prohibited?
Other Items You May Want to Consider:
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.
For this edition of our Chapter magazine, our editorial team was tasked with interviewing management companies as it relates to their potential use of outsourcing services that they provide to communities. Because of conflicting schedules and busy day to day conflicts, the research was stalled and we didn’t think that we’d be able to supply an article.
And then, a light bulb went off. Why not outsource getting the information and use ChatGPT? It’s the perfect example of how outsourcing can be beneficial!
Note: From a beginner’s standpoint (someone who isn’t social media / tech savvy), it took one minute to download a top rated app and ask a simple question: what are the pros and cons of outsourcing certain management services?
Within LITERALLY three seconds, this is how ChatGPT responded. Enjoy!
Outsourcing management services can bring several benefits, such as:
1. Cost Savings: Outsourcing can often be more cost-effective than hiring in-house staff, as you can save on salaries, benefits, and infrastructure costs.
2. Focus on Core Activities: It allows your company to focus on its core competencies and strategic initiatives while leaving non-core functions to experts.
3. Access to Specialized Skills: Outsourcing gives you access to a pool of specialized skills and expertise that may not be available internally.
4. Scalability: Outsourcing allows for scalability, as you can easily adjust services based on your business needs without the hassle of hiring or downsizing.
5. Risk Mitigation: Service providers often assume some of the risks associated with managing certain functions, such as compliance or technological advancements.
However, outsourcing also has its drawbacks, including:
1. Loss of Control: You may have less control over the quality and timeliness of deliverables compared to an in-house team.
2. Dependency on Third Parties: Your business becomes dependent on the performance and reliability of the outsourcing provider, which can be risky if the provider fails to meet expectations.
3. Communication Challenges: Working with a remote team can lead to communication challenges, especially if there are language or cultural differences.
4. Confidentiality and Security Risks: Outsourcing sensitive tasks may pose confidentiality and security risks, especially if proper agreements and safeguards are not in place.
5. Hidden Costs: While outsourcing may seem cost-effective initially, there can be hidden costs such as transition expenses, contract management, and potential reintegration costs if you decide to bring the function back in-house.
Choosing whether to outsource management services should involve a thorough analysis of your business or community needs, risks, and long-term goals to determine if the benefits outweigh the potential drawbacks.
By Brad Henderson, Network Insurance Services
Lloyds of London is an insurance carrier familiar to many as the carrier who will insure anything for the right price. In the 1980s, Bruce Springsteen insured his voice with Lloyd’s for $6 million. David Beckham, former professional soccer player, insured his legs with Lloyd’s for $144 million.
Lloyds contributed to the founding of the modern insurance industry in 1652, with humble beginnings at Edward Lloyd’s coffee shop by the river Thames in the UK. Lloyds has remained an industry leader in placing hard to insure risks deemed too risky or unusual for standard insurance companies to insure. Lloyds, along with other excess & surplus lines (E&S) carriers, have the flexibility to provide coverage for unique or high-risk assets without being subject to the same regulatory constraints as traditional insurers.
As the United States Property & Casualty Insurance industry year over year faces billions in net underwriting losses, more standard market carriers are pulling back or often completely out of the marketplace, often leaving E&S carriers as the only viable solution for insuring Colorado homeowners associations.
Standard market carriers, also known as admitted carriers, are those carriers most of us have seen commercials for on TV. These admitted carriers are licensed by the states in which they write policies in and must conform to regulations and rates set by each states regulating authority. In Colorado, this is DORA’s Division of Insurance. These regulations are generally designed to protect and benefit the consumer.
Excess & surplus lines carriers, or non-admitted carriers, are not subject to a particular state’s coverage form or rate regulations. With the ability to deviate from a state’s coverage form regulations, E&S carriers can add exclusions, restrictions, and policy conditions that standard market carriers cannot. Among other things, this flexibility allows excess & surplus carriers to exclude high risk exposures, like coverage for aluminum wiring. Their ability to adjust the premium to adequately price for a unique risk enables E&S carriers to insure risks that a standard market cannot adequately price for.
E&S carriers used to be primarily for communities with high-risk characteristics like aluminum wiring, hazardous circuit breakers, polybutylene plumbing, wildfire risks, or poor claim history. In today’s insurance market, it is more common for communities without these unfavorable risk characteristics to be pushed into the E&S market with no standard market carriers willing to offer a quote. Without the E&S carrier solution, the community may otherwise be uninsurable.
Securing a quote from an E&S carrier is a very different process than securing a quote from a standard market carrier. Standard market carriers commonly offer online quoting platforms where you can secure a quote without much or any interaction with an underwriting professional. A clever commercial quip suggests obtaining a quote can be done in less than 15 minutes by homeowners with no insurance experience.
Securing an E&S quote typically involves many layers of insurance professionals. E&S carriers like Lloyds don’t work directly with the retail insurance brokers that community managers and their boards work with. Instead, they work with surplus lines brokers or wholesale intermediaries with whom retail brokers work to secure quotes for their clients. This distribution system serves an important function. With so much flexibility to adjust premium and coverage forms, interpersonal relationships are key in negotiating E&S quotes. E&S quotes cannot be built in 15 minutes or less, but the premium can certainly vary by 15% or more.
With so many Colorado communities now insuring with E&S carriers, premium increases are not the only change communities need to be prepared for. E&S carriers have incredible flexibility to manuscript coverage forms. These forms can be detrimental to a community if the broker isn’t thoroughly reviewing the coverage language. Below is an example of a manuscript coverage form our team recently identified in a carrier’s renewal quote.
We will not pay for loss or damage caused by or resulting from a fire that is lit in any outdoor cooking vessel, including but not limited to gas or charcoal grills, hibachis, kettle or drum grills, rotisseries, smokers, deep fat fryers and any other device intended for, or adaptable to, outdoor cooking, wherever used, including but not limited to inside the insured premises, outside of the insured premises on a balcony, patio, interior walkway, or outside and within ten feet of the insured premises.
The carrier including this coverage exclusion did not require grills to be prohibited from use as a condition of the renewal, nor did they draw attention to this exclusion being added to the renewal quote. Our long-standing relationship with our wholesale intermediary partner combined with their relationship with the carrier allowed for this unreasonable Outdoor Cooking Exclusion to be removed from the renewal quote with no change in premium. This was a big win for the community that avoided a potentially detrimental gap in coverage.
A common inclusion in E&S policies is the ‘Minimum Earned Premium Endorsement’. The minimum earned premium is the least amount of money an insurance carrier will accept for writing a policy for any period of time. A 25% minimum earned premium endorsement means the community is obligated to pay 25% of the annual premium regardless of how long they keep the policy in force. This helps the insurance carrier manage risk and cover administrative costs while also deterring policyholders from binding coverage only to cancel shortly thereafter.
In addition to the minimum earned premium endorsement, most E&S carriers include a short rate provision in their policy. This allows the carrier to charge a penalty when a policy is canceled before the expiration date. The short rate penalty is generally applied as a percentage of the unearned premium and can vary between policies and carriers.
Negotiations with E&S carriers often continue right up until the renewal date, leaving many boards wondering “Where is our renewal quote?”. As the insurance market continues to harden, often no single E&S carrier is willing to insure the total property value of a community. Your broker must work with their wholesale partner to build a ‘tower’ of insurance carriers to share in insuring your community, splitting the coverage into different layers. This is a complex process that takes time, switching carriers and their positions in the coverage tower to secure the most favorable combination for a community. A reputable broker experienced in insuring HOA’s will be able to provide the community with a realistic premium estimate within 30 days of the renewal, but a firm quote may not be ready until a few days before renewal.
The insurance market is cyclical. Excess & surplus lines carriers will not be the only viable option for so many Colorado communities forever. Standard market carriers will inevitably reenter the market, and competition will drive premiums down. Until then, insuring your community in the E&S marketplace should be done with care and in partnership with a broker with the experience and attention to detail needed to navigate the complexities of the surplus lines marketplace. Just as icons like Bruce Springsteen and David Beckham trusted the E&S marketplace with their most valuable assets, your community can find confidence in the E&S market. With experience and attention to detail, a reputable broker can guide you through the unique challenges of the surplus lines marketplace, ensuring your community's assets are properly protected.
Brad Henderson is the Executive Vice President at Network Insurance Services and leads their Community Association Division. His passion for problem-solving and building relationships led him to his niche focus in Community Association Insurance, where he enjoys a consultative approach to partnering with property managers and board members in navigating the complexities of commercial insurance.
By Tressa Bishop, Alliant Insurance Services
Over the past two years, community associations in other parts of the country have been dealing with what Florida and California residents have complained about for years - - - dramatically increasing insurance premiums with skyrocketing deductibles and more limited coverage.
Severe wildfires, hailstorms, hurricanes, tornadoes, and the like, all in more heavily populated areas than in decades past, have resulted in an increase in multi-billion-dollar property losses. Insurance carriers have experienced huge financial strains due to the sharp increase in the costs of labor, materials, as well as the reinsurance they must carry to protect against such catastrophic losses. With reinsurers impacted by catastrophic losses more frequently in recent years, reinsurance rates have seen double-digit increases year-over-year. These increased costs to the carriers are passed along in their pricing. In addition to the increased cost of doing business, carriers are redrawing wildfire maps, and looking at the risk of wildfire quite differently. The Marshall Fire (December 30, 2021) severely impacted how carriers looked at wildfire risk for all communities, paying particular attention to nearby open areas with tall grasses, instead of just those nestled in the foothills or surrounded by a forest. The Lahaina Fire (August 10, 2023) caused additional carrier scrutiny around highly dense vegetation and above ground power lines both within and surrounding communities.
Many insurance carriers have exited this class of business altogether or changed underwriting guidelines to limit the amount of non-sprinklered frame construction on the books and instead write newer, 100% sprinklered, “better” construction. Most carriers have reduced the limit of insurance offered per location. For example, a carrier that would have written a limit of $80 million in 2022 is now offering only $20 million in 2024, and another carrier that would have written a limit of $50 million in 2022 is now offering only $5 million in 2024. This reduced capacity is having a drastic impact on the cost of insurance for most condominium and townhome communities as the requirement to insure to 100% replacement cost values remains.
What to consider when your insurance budget is grossly inadequate for the current market conditions and what is offered by carriers?
Amending the governing documents to reduce the amount of interior unit coverage required by the association is one strategy. Moving from all-inclusive coverage (insuring the value of all improvements and betterments made to units by any owner over time) or original specification/single entity coverage (insuring the value of the original interior finishes only) to studs out or bare walls coverage may reduce the limit of insurance needed to fulfill the association’s insurance requirement. A few associations have elected to reduce the association’s requirement all the way down to the building shell only, with no coverage by the master property policy carrier for any interior partition walls, plumbing, electrical, etc.
All things being equal, a reduced limit of insurance multiplied by the carrier’s rate results in a reduction in premium. A few wrinkles to consider: the carrier must agree to reduce the limit by policy endorsement mid-term, and/or the likelihood/severity of a rate increase needs to be considered at renewal. The association’s legal counsel should be consulted before going too far down this road, however. If applicable to the community, the Colorado Common Interest Ownership Act (CCIOA) requires that condominium associations with horizontal boundaries between units cover some portions of the interior of the units regardless of the language in the governing documents (see CO Rev. Stat. § 38-33.3-313(2) for details).
Another strategy is to remove the responsibility of insuring the buildings from the association altogether. Depending upon the language in the governing documents, this change may require a vote of all owners, as well as advance notice to mortgage lenders. Careful consideration should be given when discussing this type of a change. Below are a few notable things to think about:
While we don’t expect premiums to fall to pre-2022 levels and carriers have not increased their capacity per location as of this writing, there are some positive signs in the community association insurance market. We’re seeing more carriers offer excess property quotes than this time last year. This increased competition is helping to keep percentage premium increases much more reasonable than in 2023 for many communities. Additionally, a significant increase in reinsurance capacity is helping those rates on the carrier side year-over-year.
As you consider various strategies to help with your community’s insurance program, working with a specialist in this niche is extremely important and there are many who are active members of CAI. Helpful resources available through http://www.caionline.org such as the Directory of Credentialed Professionals and CAI Exchange (online discussion forum) can help guide you in the right direction.
Tressa Bishop is a Senior Vice President at Alliant Insurance Services, a CAI Educated Business Partner, and is one of 125 insurance brokers to hold the Community Insurance and Risk Management Specialist (CIRMS) designation through CAI. Tressa enjoys working closely with board members and managers to ensure a solid risk management program is in place for their community. A frequent presenter on community association insurance topics, she enjoys providing education and advocating for her clients through the claims process.
