Is there a "Right" Time for a Special Assessment?

Special assessment is a phrase that sends chills down the spines of community managers, board members and owners alike.  The term "necessary evil" is frequently used when boards are contemplating a special assessment; terms that owners use to refer to those assessments are generally not considered fit for publication.  So what is a special assessment, and why is it so commonly viewed in a negative light?

The governing documents for associations provide specific definitions for special assessments.  Generally defined, a special assessment is a one-time (or not regular) assessment, applied to owners in the same manner as other assessments, that is used to cover an expense that cannot be paid for from the operating or reserve accounts.  This expense could be one that did not exist previously (such as a capital improvement to the community like adding playground equipment to a common area or building a clubhouse or swimming pool), but most of the time special assessments occur for one of two reasons:  construction defect/deferred maintenance or significant delinquent accounts.

Construction defect/deferred maintenance.  This is probably the most common issue facing a board that is considering a special assessment.  When it happens in conjunction with construction defect, it's usually because the association sued the developer (and contractor/subs/etc.) for failing to build the community properly and received some funds in a settlement/lawsuit, but after paying the costs associated with construction defect litigation, found they had insufficient funds to do enough of the repairs.  While going through construction defect litigation does not necessarily mean a special assessment will follow, nowadays it is uncommon for an association to recoup fully for its needed/desired repairs. Older associations (those that were created prior to October 23, 1999 and thus not subject to reserve study requirements in ORS 94.595 and ORS 100.175) may find that they have significant deferred repairs/replacement but lack sufficient funds to undertake them, thus requiring the imposition of a special assessment (for more information about reserve studies, please see my article from March 2, 2012 entitled "Reserve Studies").

Significant Delinquent Accounts.  Another reason that boards find themselves in need of a special assessment is due to large and/or multiple delinquent accounts.  This is the prime reason that boards need to be vigilant whenever owners become past due, because it's much easier for an owner to get caught up with a small delinquency than when it has turned into thousands (or tens of thousands) of dollars.  An association that does not aggressively pursue past due accounts is one that may find itself facing a special assessment (which the past due owner is also likely not going to pay, continuing the problem).

When is the right time for a special assessment?  The only right time, in my opinion, is when failing to do so may cause further problems for an association.  As an example, let's say the community has a private parking lot, and the lines are worn/missing, there are large potholes in the asphalt, and it's getting unsafe for use by people and cars.  While owners and residents are probably aware that the parking lot isn't in good repair and are using caution, leaving the lot in its current condition is unwise because:  a) someone might damage him/herself and/or his/her car in the potholes, causing a potential insurance claim, b) owners looking to sell or refinance may be unable to do so because of the hazardous and unsightly condition of the parking lot, and c) owners may decide to withhold assessments or not worry about violating rules because it appears the board is failing in its duty to protect and enhance the community.

Special assessments are generally implemented for a specific purpose or purposes:  to repair a parking lot, to replace roofs, to put in a swimming pool.  Boards should always provide information as to what the special assessment funds will be used for in the notice of special assessment.  Whenever possible, owners should be given advance notice of the special assessment so that they have time to put together the necessary funds, and I personally think this notice should be not less than 30 days before the special assessment is assessed.

Remember that, like all board decisions, a special assessment must be approved at a duly noticed board meeting, which all owners must be invited to attend.  Depending on the complexity of the special assessment and the need that is requiring it, boards may also wish to draft a special assessment resolution (see my blog post from November 10, 2011 to learn more about resolutions), which must also be approved at a board meeting.

Special assessments should not be used in lieu of proper financial planning, but they are a tool for the board to use if it has found itself otherwise unable to meet the financial obligations of the community.  

Boards considering taking this step should discuss the matter with the association's attorney or community manager, who may be able to offer additional ideas/options in lieu of a special assessment or support if it is, after all, the last, best option.

Property Manager vs. Community Manager: What’s the Difference?

On a recent phone call with a prospective client, I found myself once again explaining that, at least in Oregon, there is a significant difference between property management and community management, and most of those outside my industry (and some of those it in) are surprised to hear this.  While there are firms who do both property and community management, it’s hard to do both well as these are not the same job.  So what are the differences?

Property managers deal primarily with tenants, reporting to the individual owner of a unit (or units) and doing the day-to-day tasks needed for keeping that unit maintained and rented.  This means that on any given day, the property manager might be showing a vacant unit to a prospective tenant, arranging for repairs to items inside the unit (a malfunctioning stove or washer/dryer, as an example), or simply collecting rents.  The property manager may be inspecting the unit after the current tenants move out to determine how much (if any) of their deposit will be refunded and what repairs are needed to make the property ready to rent again.  Property managers, at least in Oregon, are also required to be licensed by the state through its real estate agency, and the requirements to obtain such a license are detailed on the state’s website:  property manager licensing.

Community managers, on the other hand, deal not with individual units but with the community as a whole.  Instead of reporting to one owner, we work with a board of directors for the association, who provides us with overarching responsibilities for the community as a whole, and our responsibilities are highly dependent on what is included in the management agreement as well as the areas of responsibility in the governing documents for that community.  If the association maintains the landscaping of all of the front yards in the community, for example, the community manager may locate a landscaping firm who can do that work, pay them as the work is performed, and relay any issues or concerns that owners relate.  We may also develop an annual budget as well as run annual meetings.  Community managers are not required to be licensed by the state, so it’s very important to check to see that they have sufficient experience in the field and education (through Community Association Institute, our national professional organization:  http://www.caionline.org/Pages/Default.aspx.

While there are firms in the Portland area who provide both property and community management services, most managers do one or the other, but not both.  If you are an owner with a unit that you want to rent, a property manager is what you need.  If you are a board member of an association, though, a community manager should be your choice.

Bridgetown Community Management, LLC, provides management services to community associations and their boards.

Oregon HOAs and Corporate Minimum Tax

In January of 2010, voters in Oregon approved ballot measure 67, which increased the corporate minimum tax from $ 10 to $ 150.  Most voters at the time were likely unaware that this would not just apply to for-profit corporations but also applied to HOAs, which are also corporations.  Since the approval went into effect with tax year 2009, this left many HOAs unprepared for the massive increase in their tax liability, especially those with fewer homes to share the burden.  And, for the past three tax years, HOAs have paid the new corporate minimum.

But there is good news!  The Certified Public Accountants (CPAs) that work with HOAs have been asking the state to look into this since its approval and in spring of 2012, the Policy Systems and Estate Unit did.  In February of this year, the Oregon Department of Revenue changed its interpretation to allow HOAs to be exempt from the increased corporate minimum tax and issued Oregon Revenue Bulletin 2013-01. For tax years 2012 and beyond, HOAs will no longer need to file Oregon Form 20 (unless the HOA has taxable income) and pay the corporate minimum tax, although HOAs should still file a copy of their federal tax form (Form 1120-H) with the state.  Finally, those HOAs that did incorrectly file Form 20 and paid $ 150 in any or all of those tax years (2009, 2010 and/or 2011) can request a refund from the state by submitting an amended return.  There is a looming deadline for the 2009 amended forms; they must be filed by April 15, 2013.

All Oregon HOAs must still file federal tax returns (either 1120 or 1120-H), which are due by March 15th of each year (for HOAs that use the calendar year as their fiscal year).

For more information about Oregon Department of Revenue’s decision, refer to the Oregon Revenue Bulletin 2013-01 (https://www.oregon.gov/DOR/forms/FormsPubs/orb201301_800-012.pdf) or contact your HOA’s CPA.

Reserve Studies

Oregon Statutes 94 and 100 require boards of all but the oldest condominiums and planned unit developments to, “annually... conduct a reserve study or review and update an existing study to determine the reserve account requirements”  (ORS 94.595(3)(a) and ORS 100.175(3)(a)).  But what is a reserve study, who can do one, and it is really that important?

What is a reserve study? A reserve study is essentially a financial planning tool, a roadmap for the board to follow.  When done properly, it provides a way for the board to ensure sufficient funds will be available to fund major maintenance, repair or replacement of all items of common property* that will normally require such work over the next one to 30 years.

While there is no one proper format for a reserve study, each one should, at the bare minimum, have the following:

a.  Listing of common property/items of HOA maintenance responsibility.  This list should include the item, its year of installation, its anticipated lifespan, and the cost for this item at the end of its useful life.

b.  Listing of reserve income/expenses from current year through year 30.  This is usually a spreadsheet with income for each year as well as reserve expenses for each year, with a total showing the net anticipated balance at the end of each year.

There are many other items that may be included with a reserve study.  These typically include definitions of terms, assumptions about inflation, interest or other income, written evaluations of the components by the experts who assessed them, and sometimes also photographs and detailed information about each common property item.  In addition, most reserve studies also include a maintenance plan.

A maintenance plan is a critical component of a reserve study.  While it is not required to be updated annually, it is intended to be used in conjunction with the reserve study to help the reserve items last for their anticipated lifespans.  To give an example, let’s say the roof on your building is expected to last for another 25 years.  To help ensure that the roof actually lasts that long, the maintenance plan will call for periodic (probably at least annual) inspections of the roof and the removal of moss, cleaning of gutters (to avoid water backing up under the roof), etc.  Failing to clean the moss off the roof may not only void any warranty it has but will certainly shorten its lifespan.

Who should perform a reserve study?  Statute does not currently specify who may or may not produce a reserve study, but that does not mean that the board should just hire anyone.  Since the reserve study is a financial planning tool, it should be done by someone with knowledge of the maintenance, repair and replacement needs of the association’s common property or someone who has experts who can provide this knowledge.  Experts would include individuals/firms with the Reserve Specialist designation, a professional designation from Community Association Institute, the national community management organization (to learn more about this designation, please see:  http://www.caionline.org/reservespecialist).  There are several local reserve study providers who have this designation; follow this link for more information:  http://www.caioregon.org/Reserve-Studies-~232872~17084.htm.

Board members sometimes ask about self-performing reserve studies.  Even if one or more of the board members has construction/maintenance industry experience or education, it is not prudent for the board to try to take on this responsibility themselves.  There is simply too much potential risk if an error is made.  In good conscience, I cannot recommend it.

How important is it to update a reserve study every year?  Actually, it is extremely important that the reserve study is updated annually, and not just because statute says so.  The reserve study is a snapshot of the reserve income and expense over the next 30 years, and so each reserve study has a different window of 30 years.  So the 2011 reserve study should show income and expenses from 2012 through 2032, while the 2012 one shows 2013 through 2033.  If there is a big expenditure that happens in 2013 (say the roofs need to be replaced that year) and the board only relies on the figure from the 2011 budget (which doesn't show that big roof expense because it’s not required to since it happens in 31 years), the board is going to find itself seriously underfunded when it has to replace the roofs or whenever it does update its reserve study.  If the study had been updated in 2012 and the roof expense caught, the board would have much more time to consider how to get their funding to the proper level.  Even though it’s not an insignificant expense to have a reserve study prepared, it’s a small price to pay in the long run to help ensure the community has the proper funds to do what’s needed and avoid special assessments.

One final thought about reserve studies:  boards shouldn’t wait until they’re trying to put their annual budgets together to have a reserve study done.  Boards should plan to have the reserve study in hand at least four months prior to the beginning of the fiscal year (so if the fiscal year is the calendar year, that means by September 1).  Waiting on a reserve study to determine the amount to contribute to the reserves for the next year may delay the adoption of the budget, so the board should even consider contacting reserve study professionals now for quotes and getting the ball rolling for next year.

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* The term "common property" is being used to designate any items within the community that the association has maintenance responsibility over, regardless of who actually owns the item.

Should Board Members Receive Compensation?

This question is posed to me again and again:  why, if a board member spends his/her personal time to do association business, cannot he or she be compensated for that time?Both ORS 94 and 100 provide that the bylaws for an association should include any compensation for the directors.  In my experience, though, the bylaws as written do not allow for any compensation to directors (that is, renumeration for their time and effort).  So why, if ORS 94 and 100 do not outright ban compensation to directors, do the documents almost always do so?  I believe that the primary reason that HOA and condominium board of directors are not compensated for their time is due to the fiduciary duty each director is obligated to observe.  Directors owe fiduciary duties of fair dealing, good faith and loyalty to the association.  If directors are getting paid for their time, then there is a question about whether or not they are acting in good faith or only in their own self-interest.What if a director is not compensated in cash directly but instead in some other form?  Even if the board members are simply not required to pay their dues, this is indeed compensation and I would argue is in direct violation of their fiduciary duty.  After all, that lack of income will result in a budget shortfall, and allowing a known reason for a budget shortfall is not acting in good faith.

I’m sure some will argue as to why any owner would want to serve on the board without compensation.  The reason, besides the annoying answer that “It’s the right thing to do,” is that board members get to make 95% (or more) of the decisions for all owners in their community, and those that serve on the board should be motivated by knowing they are making the best possible choices for the benefit of all members of the association, including their own.  Serving on the board is also the absolutely best way for an owner to understand the inner-workings of the association and seeing the struggles and challenges to be faced.  All owners should take a turn at serving on their boards at some point during their tenure in that community.  It does mean giving up some free time, but having a properly running community can be well worth it.

So compensation for board members?  Unlikely.  Owners should serve on boards for the experience and to keep their community running smoothly and properly.  Seems like that should be compensation enough, no?

The Ever-Important Meeting

Meetings are a critical part of the proper functioning of an association.  It is the time and place that all decisions should be made for the association as well as a great place to disseminate information.  There are three types of meetings an association can hold:  annual, board, or special meeting.  Each of these will be discussed in turn.

Annual Meetings.  This are meetings of owners, and the time at which owners are elected to the board.  As the name implies, it occurs annually.  The timing of the meeting is dictated in the governing documents, but generally occurs in the same month every year.  Prior to the annual meeting, an agenda, copies of last year’s meeting minutes, and a proxy (or a directed proxy or ballot) are mailed out to all owners at the address on record at least ten but not more than 50 days (unless the governing documents state otherwise).  The annual meeting is one of the few occasions that owners have an opportunity to vote (the rest of the time, decisions are made by the board on behalf of all of the owners).  Most annual meetings include approval of the previous year’s annual meeting minutes, election of one or more owners to the board, adoption of IRS Revenue Ruling 70-604 (for more information on this, see this fascinating article by Gary A. Porter, a CPA:  http://www.revenueruling70-604.com/), as well as a report of the current financial state of the association.

Special Meetings.  These are meetings of the owners and are held due to a specific need or desire.  For example, a common use of the special meeting is to discuss a proposed amendment to the governing documents or the removal of a board member.  The chair/president of the board can call a special meeting at any time, as can a majority of the board or a written request by a minimum percentage of the owners (this “minimum percentage” is in the Bylaws or, if none is provided, then at least 30% of the owners).  There is no requirement that any special meetings be held.

Board Meetings.  These meetings are the place that most of the decisions of the association are made.  Although board meetings (in the State of Oregon) are open to all owners, only board members may actively participate in discussions and vote on issues.  Board meetings usually begin or end with a time for owners to voice their concerns, but outside of these times owners should listen and watch.  The board is responsible for making fiscally responsible decisions on behalf of all of the owners, and the board meeting is the place where these decisions are discussed and made.

All three types of meetings should be run using Robert’s Rules of Order (which I discussed in my November 16, 2011, post entitled, “Running a Proper Meeting”) and meeting minutes must be taken and retained for future reference (as well as any ballots or proxies used).

Meeting minutes can be thought of as the lasting record of each type of meeting.  While the minutes will look somewhat different for each kind of meeting, at minimum they should all have the following:

• Date and time of the meeting
• Location of the meeting
• Type of meeting (Annual, special, board)
• Members present (if this is a meeting of owners, so annual or special, this may be accomplished with a sign in sheet)
• Members absent (this is optional with owner meetings but mandatory for board meeting minutes)
• Motions made (this can be thought of as decisions made, as each decision should be a motion)
• Time of adjournment

Meeting minutes should not be a verbatim report of the meeting.  Instead, they should focus on the decisions made.  For example, who was elected to the board, which landscaper did the board hire, the adoption of the annual budget.  The discussions surrounding the latter two decisions need not be recorded unless the decisions were not unanimous, and then each board member’s vote should be recorded individually.  I like the minutes to look a lot like the agenda, with each item having an approved motion.  That way, someone reviewing the minutes later on knows what decisions were made.

If the board is unsure if the meeting minutes being produced are acceptable, it’s prudent to review them with either their community manager or with their attorney.  Either expert should be able to review them and suggest any changes or improvements.

Remember, meetings are when all of the association’s business is done, so it is critical that the meeting minutes accurately reflect the decisions rendered.

Owners Who Don't/Won't Pay

When meeting with boards, one of the things that I inevitably hear they are struggling with is what to do about the owners that simply don’t pay.  This has always been a problem and with the downturn in the economy it’s just gotten worse.  While there is no sure fire way to make everyone pay on time, the board can certainly take some steps to encourage owners to pay while allowing recourse for those who don’t.  Boards should first look to their governing documents to find out what is already laid out for delinquencies.  When are the assessments due and how long is the grace period?  Are there provisions for late fees or interest?  If so, the board already has a good backbone for enforcement.  If not, there are provisions in ORS 94 and ORS 100 that allows associations to impose reasonable late fees and interest against account that are past due.  Also per ORS, owners are personally liable for all assessments imposed.When the board has the basic information, the next step is to formally adopt a payment resolution that provides all of this information in a written form to all owners.  For more information about this resolution, please see my article entitled, “Resolutions!” posted on November 10, 2011.  It is prudent to have an expert in this field prepare the resolution for the board (the HOA’s attorney or community manager are best suited to this task).  This resolution, once adopted, should be sent to all owners of record before any new enforcement steps are undertaken.

At this point, the best thing the board (or the management company) can do is follow the steps outlined in the resolution exactly.  If the assessments are due on the 1st day of each month and late if not received by the 10th day of that month, then within the next few days follow up should be done.  At minimum, a statement should be send (via first class mail) showing the assessment, late fee, and any other penalties that the payment resolution provides for.  This statement should also include contact information - phone number, e-mail address - in addition to the payment remittance address, in case the owner has a question about the delinquency.  Owners are entitled to understand their account and any charges on it, so it’s better to make it easier for them to get their questions answered.

If owners continue not to pay, eventually the board will have to get a law firm involved.  Boards should talk to their law firm to determine if they do collections, and if so how they are compensated for their work.  Some firms bill as they go, so the association pays the legal charges up front and then is reimbursed those costs by the delinquent owner when s/he brings the account current.  Other firms will do the work and not charge the association anything up front but simply collect it from the owner as part of the delinquency.  Both arrangements have their advantages and disadvantages, so if the board doesn’t already have a relationship with a law firm (which it should; it’s better to know an attorney and not need him/or then suddenly discover one is needed and have no idea who to contact), both options should be explored to determine which will be best for the association.

Before the delinquent owner and his/her account are turned over to the law firm for collections, however, it is prudent to make one last attempt to collect the debt.  Management companies like to call this a ten-day demand letter, and that’s exactly what it is:  a letter that gives the owner ten days to pay his/her account in full before it is turned over to the attorney.  This letter should always include the following language, “This letter is an attempt to collect a debt and any information obtained will be used for that purpose.”  I also think it is prudent to include in the letter an opportunity for the owner to get on a payment plan, just in case s/he cannot pay the full amount due.  This payment plan cannot simply be, “I’ll pay when I can.”  A payment plan is a specific, written agreement, entered into by the owner and the association, that puts forth concrete deadlines that the owner must meet as well as the consequences for the failure to meet those requirements.  For example, let’s say an owner is behind by $500 (including assessments, late fees, interest, etc.).  A reasonable payment plan would be for that owner to pay the regular assessments on time and before the end of the month each month pay an additional $50.  This payment plan would bring him/her current within 10 months.  Once the payment terms have been worked out and are agreeable to both parties, a written agreement should be mailed (or e-mailed) to the owner, signed, and returned to the association.  This agreement should also detail what will happen if the owner fails to make a payment as agreed upon (or goes into foreclosure); in that case, normally the account is immediately turned over to the law firm for collections.  Likewise, the association should have a deadline on when the signed payment resolution should be returned by (10 days is generally considered reasonable) and the date it goes into effect.  These things are necessary to protect the association's interests.

Boards should remember that, even though their fellow owners are their friends and neighbors, they are charged with a fiduciary duty, which in this context means that personal feelings and relationships can’t be allowed to get in the way of doing what is right for the association, and holding all owners responsible for returning their assessments.

Wintertime Maintenance Planning (for Summer Maintenance Needs)

It’s raining in the Willamette Valley today (and it has been for a week).  So it’s hard to think about those glorious, sunny days to come later in the year, but now is the time to start planning for just such a time.  Why?  Well, for many maintenance responsibilities, the best time to undertake them is when the weather is most conducive.  Sure, roofs can be replaced in the rain, but it’s not when most of us would recommend the work be done (unless, of course, there’s no other option because it’s raining inside your building!).  Likewise would you want your windows washed in the rain?  Probably not.  But now, in the midst of this wet weather, is the perfect time to plan for the association’s maintenance needs for the year.The governing documents for each association delineate items that are the responsibility of the association to maintain, repair and replace.  ORS 94.595 and ORS 100.175 require associations to obtain and annually update a reserve study, which is to include those items over the next 30 years (there are some caveats to this for very small condominiums or developments created before 1999).  Statute also requires a maintenance plan to be developed, which should work in conjunction with the reserve study to help an association plan for and undertake its maintenance obligations.  These are the best places to look when planning the maintenance strategy for next year.

Maintenance Plan.  At a minimum, the maintenance plan is to include a) descriptions of the maintenance to be conducted, b) include a schedule for the work to be done, c) be appropriate for the size and complexity required, and d) address issues including warranties and the useful life of the items (per statute).  The most practical format I’ve seen this in is a one page (for simple associations) calendar that shows what month each item should be undertaken in.  There are many other formats, but as long as it has the information it’s acceptable.  These are the first items that should go on the list of obtaining request for proposals (RFPs).

Reserve Study.  It’s also important to take a look at your reserve study to determine which larger projects need to be completed this calendar year.  This is not the time for the board to decide they do not want to take on a particular reserve item this year; if it’s on the reserve study for 2012, the board has an obligation to undertake it unless they receive compelling evidence that the work can reasonably be delayed (for example, two of the three painters who provide bids for the work tell you the current paint is still in fine shape; that might be an authentic reason for delaying another year or two, but then that change needs to be reflected in the updated reserve study).  Better yet, if the board thinks there are fallacies on its reserve study, the time to correct that is before it’s been accepted for the new year.  Take whatever reserve projects are listed as being accomplished this year and also put them on the list.

Other Maintenance Tasks.  There may be maintenance tasks that are not specifically called out in the governing documents but the board may consider undertaking for the greater good of the association.  The board should determine (and consult with their attorney, if there is any doubt) if there are such items and also include those on the list.  The board should also consider whether or not these “missing” items should be included in the maintenance plan or reserve study in future revisions.

Once the list is together of the maintenance needs for the year, written RFPs should be completed.  Remember, the more detailed and comprehensive, the easier it will be to determine if the bidders are providing “apples to apples” figures.  At a minimum, the RFP should include:

• Name of the Association
• Date the RFP is Sent
• Physical Address of the Association (also consider including a map, if the community is large or confusing in any way)
• Desired Timing of the Job (March, Summer, etc.)
• Deadline for Returning the RFP
• Contact Person for the RFP and Several Contact Methods (minimum two phone numbers or a phone number and an e-mail address)
• Specifications (this should include things like the number of items or buildings, products desired to be used, etc.  Remember that the more detail you provide here, the easier it will be for the bidders to bid on the same job!)

Also be sure that as part of the RFP package, bidders provide their licenses and insurance.  Association’s don’t need to take on the liability of an under- or uninsured vendor working on their property.

I recommend that bidders be given at least two weeks (but not more than 30 days) to get their proposals turned in.  This gives the board plenty of opportunity to review the proposals at the next board meeting and if there are any questions or negotiations that need to be done, there is still plenty of time to undertake those before the work needs to be completed.

Now is the time to get prepared for the maintenance obligations for the year.  By taking the time to get everything ready and lined up now will allow the board to focus on more critical and time sensitive issues throughout the rest of the year.

Year End Responsibilities

Many associations have their fiscal year as the calendar year (January 1 - December 31).  If that is the case with your association, it’s time to start getting the year end financial work done.  What does that mean?  Well, like any business, an HOA is responsible for providing 1099s, filing its taxes and preparing and distributing an annual financial statement.  Depending on the amount of income, a financial review may also be required.  Let’s look at each of these issues in turn.

Form 1099-MISC.  Most HOAs will have to file at least a few of these forms.  Any vendors paid for services of more than $600 (with the exception of corporations; these are mostly exempted from this requirement) should receive a Form 1099-MISC from the HOA.  All law firms must also have a Form 1099-MISC, whether or not they are a corporation.  There are very specific rules and instructions for the completion of these forms, which can be reviewed at this link:  http://www.irs.gov/pub/irs-pdf/i1099msc.pdf.  If you have additional questions, contact a CPA.

Federal Taxes.  HOAs, although sometimes mistakenly thought as non-profit corporations (truly, they’re really not-for-profit, which is not the same from the government’s standpoint), must annually file taxes with the IRS.  HOAs file either Form 1120 or Form 1120-H.  Federal taxes are due March 15 for HOAs on a calendar fiscal year (a month earlier than personal returns are due).  There is generally a significant tax benefit to HOAs who qualify for and file Form 1120-H, but in addition to other qualifications, an HOA must annually adopt IRS Revenue Ruling 70-604 at the annual meeting.  This ruling allows HOAs to roll over any excess member income to the next tax year without being taxed on that income.  This should be done every year at the annual meeting (it should be a standing agenda item) and must be done by the owners (the board cannot approve this ruling on the owners’ behalf).  For more information on this, see this fascinating article by Gary A. Porter, a CPA:

http://www.revenueruling70-604.com/index.php?option=com_content&view=article&id=3&Itemid=14

For more information about Form 1120-H, see http://www.irs.gov/pub/irs-pdf/i1120h.pdf.

Oregon State Taxes.  Most Oregon HOAs are no longer required to file Form 20 (as of the 2012 tax year).  HOAs that may need to do so are ones that have non-trivial income from interest and other non-member-assessments.  For more information, see my article from March 1, 2013 entitled, "Oregon HOAs and Corporate Minimum Tax."

I do not recommend that HOAs, even small, self-managed ones, have a board member take on the liability of filing the HOA’s taxes, either federal or state.  Instead, have a CPA familiar with HOAs take over that potential liability for you.

Annual Financial Statement.  Regardless of income received in the year, each year the board is responsible for having an annual financial statement, consisting of at least a balance sheet and an income/expense statement, prepared and a copy distributed to each owner within 90 days of the end of the fiscal year.

Annual Review.  Oregon statutes now require that an association who has income in excess of $75,000 must have a review by an independent CPA.  Many boards know about this clause but misunderstand it.  To determine if the HOA is subject to this requirement, total income for the year must be evaluated, not just income from owner assessments.  So if there was a special assessment applied or if the HOA received an insurance settlement, these funds are also considered income and for the purposes of determining the review must also be added to total income for the fiscal year.  Likewise, any income for the HOA, whether from coin op (laundry facilities), rental of HOA-owned parking spots or otherwise, must be included in this total to determine if the income exceeds $75,000.  If it does, an HOA must have the review done unless 60% of the owners vote not to do the review.  This vote only applies for a single fiscal year and must be repeated each year the owners do not want to have the review done (Note that it is the owners who must make this affirmation, not just simply the board.  From this fact alone, and with the inherent difficulty most associations face simply trying to reach quorum, I suggest boards simply comply with the statute and have the review done).

For more information, please consult a CPA.  CPAs familiar with HOA rules and regulations may be found through the CAI-Oregon website:  http://www.mydigitalpublication.com/publication/?i=71867.

For more information about requirements in statute, please also see:

Condominiums (ORS 100.480):  http://www.leg.state.or.us/ors/100.html
Planned Unit Developments (ORS 94.670):  http://www.leg.state.or.us/ors/094.html

Granting Variances

Once a month, I receive a publication from Community Association Institute called, “CAI Law Reporter.”  This newsletter provides updates on current lawsuits throughout the country that may have an impact on HOAs.  I am continually surprised at the many ways in which a board can get itself embroiled in a lawsuit that it so easily could have avoided if that board had simply considered a variance (to allow something that would otherwise not be permitted due to conflict with the rules of the HOA).  Now, I am not suggesting, as could be interpreted, that boards, when faced with a potentially litigious owner, should simply cave in and allow that owner to do whatever he or she wants (or has already done).  What I am suggesting, however, is that boards should use some common sense when faced with a gray area.

What are some of the gray areas that seem worthy of a variance?  Certainly anything that pertains to a disabled or handicapped resident’s needs.  Another possibility is with active duty military personnel, who may need a variance while they are serving overseas.  Finally, an owner with a significant crisis in his/her life (sudden death or terminal/critical illness of a loved one) may need a variance while he/she copes with that reality.  The variance may be something as simple as waiving late fees for a month or two, or it may be as complex as permitting a companion animal, the installation of a ramp, or the use of a golf cart for those with mobility challenges.

When one of these gray areas appears before the board, what should the board do?  First, the board is within its rights to ask for documentation.  In the case of military personnel, we might ask for copies of the deployment paperwork.  For a medical issue, a letter from the doctor confirming the need for the variance (although boards should use caution - the doctor doesn't have to disclose the patient's diagnosis nor why, for example, that patient requires a companion animal for his/her treatment and/or health).  Second, the board must give the requested party time to get that paperwork together (30 days should be sufficient) and to them before taking further enforcement steps.  Finally, it is wise to offer the owner an opportunity to present his/her case before the board, whether or not the owner chooses to exercise that opportunity.  Finally, if the board grants the variance, the variance granted should be put in writing and should include clear and specific language about what exactly this variance allows, for example:

• Mr. Smith may install a ramp for access to and from his unit.  Mr. Smith is responsible for the cost of the installation and the ongoing maintenance required for it as long as he owns his unit.

• During her period of deployment in Iraq, Ms. Jones’ monthly assessment may be received within thirty days (in lieu of ten) of the due date to be considered received on time.  Once her deployment period has expired, Ms. Jones’ assessments will be considered late if not received by the tenth day of the month due.

If the board is not going to grant a variance, especially for a disabled or handicapped owner or resident, the board should discuss the matter with their legal representative prior to denying that variance.  There may be legal ramifications to such a decision that the board may be unaware of, including violating the Fair Housing Act.  It’s cheaper to spend a little money to get the attorney’s opinion now than to fight a bad lawsuit in the future.

Should the board be in the habit of granting variances?  In my opinion, no.  But variances should be carefully considered if there are significant, substantiated reasons for doing so.

Architectural Review

Most homeowners associations and all condominium associations have provisions in their governing documents for an architectural review committee (sometimes called architectural control committee and abbreviated as ARC or ACC), which is responsible for reviewing and accepting or denying proposed changes to the property within the association’s jurisdiction.  While these areas are community- and document-specific, some generalizations can be made about what might fall within the ARC’s area of responsibility.  In single-family detached subdivision, where owners are responsible for the grounds and structures, the ARC is generally responsible for reviewing and approving any changes to the landscaping (front, back and side yards), fencing, house color or design, additions, and any additional structures (shed, pool, greenhouse, gazebo, windmill, deck, etc.).  For attached townhomes, the ARC likely reviews any exterior additions like flagpoles, satellite dishes* or other permanently affixed or placed items.  In condominiums, in addition to things listed under townhomes, the ARC may also have responsibility for reviewing items inside the units that may affect neighboring units or the common elements like changes to plumbing, installation of flooring, installation of an air conditioning unit, etc.  It’s important for owners to check with the governing documents (and any ARC resolutions) prior to making any changes to their units.

The governing documents for each community outline the basic information about the ARC:  how many members, when a response must be provided by, what types of applications they review.  Many documents give the board the ability to serve as the ARC.  It is also very helpful to have an ARC resolution in place, which can provide much more detail about the process and an application form as well as any items that have been preapproved by the ARC (for example, a certain type of storm door or screen or light fixture).  If there are design guidelines for the community (whether created before or after the developer set the community up), it is useful to include these as well.

One of the things I’ve run into time and time again with ARCs is a misunderstanding about the purpose of the ARC.  The ARC is not responsible for ensuring whatever is built is built properly; the ARC is an aesthetic body only.  It is, however, responsible for ensuring any and all changes made that fall within its jurisdiction are applied for and decided upon.  When this comes into play most is when an owner has made a change to his/her property without obtaining proper ARC approval (usually innocently not realizing he or she was required to do so) and the ARC is satisfied with the change.  Many times, the board and the ARC have felt that since the alteration was acceptable, there was no harm and thus no foul.  However, by not requiring this owner to submit for approval (albeit after the fact), the ARC is potentially revoking its power because it is selectively choosing what it will or will not enforce.  This comes into play when several owners have made acceptable changes to their property without obtaining approval (and without the ARC requiring them to after the fact) and then an owner makes an unacceptable change that the ARC denies and requires the owner to restore things to how they were.  If the owner refuses to do so and can demonstrate that other owners have made changes without approval, the ARC, the board and the association will have little or not power to disallow this owner’s changes.  Certainly if a lawsuit ensued, the outcome for the association would be grim.

Most owners who have made changes to their homes without obtaining approval first simply did not realize that they were required to do so, and most comply immediately with the request to submit (it’s generally easier for them because they can simply complete the form and submit a photo of the finished change).  It is still prudent to give them a written deadline (as is wise in any enforcement proceedings) and follow up immediately after the deadline has passed if no submission has been provided.  Failure to submit an ARC application for a change should be treated like any other rules violation, regardless of the acceptability of the change.  If the owner continues not to submit the required information and the board has adopted a fine resolution, fines should be imposed (after sufficient notice and the right to be heard has been provided to the owner).  While this may seem excessive to some, the board should realize that failure to enforce one section of the governing documents may also hinder its ability to enforce other requirements of those documents.  While it’s unlikely an assessment obligation would be overthrown by the courts due to failing to enforce architectural review standards, it is a possible outcome that would be disastrous to an association.

The other area that ARC’s seem to get into trouble in is when they try to overstep their authority.  ARCs (and boards) should absolutely enforce regulations within their jurisdiction, but should try to avoid compelling enforcement for items that they do not (or do not clearly) have authority over.  I ran into this for one of my clients last spring (a condominium project that was also part of a master association).  Many of the homes were in need of repainting (the initial paint job was failing) and the board was in the midst of negotiating a contract with their desired painting contractor.  In the midst of this, I received a letter from the master association requiring the homes to be repainted (which was already planned for that summer) with an application and a request to submit the paint colors, the application, and a $ 100 review fee.  As it so happened, I had worked on behalf of the master association early in my career as the ARC administrator and compliance enforcement, so I was very familiar with their documents, and so I sent a letter back stating that as the condominium was not altering any of the colors, there was no requirement to submit any paperwork or a fee.  The master association responded that they were now requiring any and all repainting to resubmit and pay the fee, and required again that the condominium provide what they’d previously requested.  Well, that didn’t sit right with me.  It wasn’t about the money (the condo could easily afford the fee) and it wasn’t about the time to put together the paint colors (there were about 40 buildings all painted with different colors so this was not an inconsequential task) but it seemed that the ARC, rightly or wrongly, was overstepping its authority.  The master association and I went back and forth a few more times and in the end they backed down because they did not, in fact, have the authority to require this.  This is important to remember because, if the ARC had insisted and taken the condominium association to court (as unlikely as that seems), they would likely have lost and needlessly spent the association’s money in a frivolous manner (that could then get the board sued - possibly successfully! - for breach of fiduciary duty).

ARCs are a critical component of a successful community and care should be taken to ensure any and all changes within its jurisdiction are submitted and reviewed.  Documentation about those changes and approvals should be maintained for the duration of that change and maybe even for the duration of the association.  ARCs must also be cautious not to exceed its authority or jurisdiction, make all of its decisions in writing and require the same of all submissions to its aesthetic judgment.

* Although many governing documents, especially those written before the mid-90s, limit or prohibit the placement of satellite dishes, FCC regulations (known as the OTARD rule) allow owners to install a dish one meter in diameter or smaller.  ARCs cannot prohibit installation nor require a lengthy approval process.  Dishes must be permitted to be placed in a location with good reception.  For more on how the OTARD ruling might affect your association, please contact the association’s attorney.

Intro to Community Rules Enforcement a.k.a Compliance

My first role in this industry was doing rules enforcement and architectural review committee administration for a large planned unit development.  What I found out very quickly is that in order for rules to be effectively enforced, the enforcement has to be done in a consistent and timely manner and the rules themselves (as well as the consequences) must be clearly delineated.

First, let’s talk about the rules themselves.  The initial rules for the community are set by the developer/builder (also known as the declarant) in the governing documents themselves.  These are generally put together in a section with the words “rights” or “restrictions” and may be in the Declaration or Bylaws (depending on whether the community is a condominium or a PUD).  These are the most basic rules that all owners implicitly agreed to when they closed on their home and a board cannot opt to ignore violations of these rules (note, if there is a rule that is generally considered not to reflect the desires of the neighborhood, the board, with the consent of an appropriate percentage of the owners, can pass and record an amendment to remove that rule).  The documents usually also give the board the authority to pass additional rules that are deemed to the benefit of the owners, provided that these new rules do not conflict with the governing documents.

Once the rules are identified, the next step is to determine how the community will respond to infractions of these rules. Some communities choose to send a friendly reminder notice first before sending a formal violation letter.  I have had others opt to speak to the owner first (either by phone or in person).  Whatever process the board determines is best for the community, this process should be a) in writing and b) followed each and every time (this is where a compliance resolution can be very helpful).  A typical process looks like this:

a.  A compliance violation is reported to the board.

b.  The board confirms the violation exists.

c.  A compliance letter is mailed to the owner.  This compliance letter must include the nature of the violation, the date by which the violation must be corrected, what must be done to correct the violation, and, if a fine is to be imposed upon failure to correct, the fine amount and the right to be heard.

d.  If the violation is corrected within the specified period, the violation and correction are filed away and the matter ends.

e.  If the violation is not corrected within the specified period, a written notice of the intent to fine and the right to be heard is mailed to the owner (unless the initial notice included this).

f.  If the matter is still not resolved within the specified period and the owner has not requested a hearing, the fine amount indicated in the letter is applied to the account.

g.  Fines continue to accrue if the matter is still not resolved, until the matter is turned over to the association’s law firm or until the owner has resolved the violation.

It is important to remember:  fines cannot be imposed unless the owner has been given the right to be heard.  Fines also cannot be imposed if the board has not adopted and published a fine schedule.  It is also critical to remember that fines are not an appropriate way for the association to make money and must not be unreasonable.  Instead, the purpose of the fine is to be a deterrent and to cover any costs associated with gaining compliance.

The absolutely best way for the board to set themselves up for rules enforcement is by adopting a compliance resolution.  This resolution includes the authority of the board to make and enforce rules, how infractions are enforced, the fine schedule, and the appeal process.  It is also prudent to include (as an exhibit or attachment) the rules being enforced.

It is also useful to determine how rules violations will be identified and followed up on.  As a manager I have done many compliance reviews (both by myself and with board members).  This can be good for spotting initial violations but is problematic for follow up as the board usually doesn’t want to pay the management company to drive back out in a week (or whatever the deadline is) to check on the status of the issue.  What I think works much better is for a committee to be established by the board (which can include less than a quorum of board members) to periodically inspect the community for infractions and return to those locations after the correction date to determine if the problem has been rectified or if further compliance action needs to be taken.  Unless the committee is very vigilant with its paperwork, I prefer that the management company sends the enforcement letters since we are normally the ones who receive the calls from the violators.  However, a thorough committee (or a self-managed community) can be successful with rules enforcement provided it is consistently and frequently done.

One final note:  board members are not exempt from following the rules.  If a board member has an infraction at his/her home, she or he should receive a notice just like everyone else.  It’s uncomfortable to have to enforce against a board member (for rules violations, failure to pay dues on time, etc.) but the board has a responsibility to treat all members equally.

Rental Restrictions

With the current state of the economy, I have been hearing more and more often that my boards are interested in rental restrictions, which usually means limiting the number of homes that can be rented out within the HOA.  There is a feeling, true or not, that renters do not take as much pride in the community they live in as an owner would.  Of course this has always been the perception of renters (at least as long as I’ve been in this industry), but with the economy being slow, there is also the added burden of lenders not wanting to approve mortgages in associations that have a lot of rental properties.  This basically means that an owner may find it hard to refinance in a community with many renters or a prospective owner may not qualify for a mortgage within that renter-filled association.
So how should a board determine if it’s worthwhile to pursue rental restrictions?

One thing boards often underestimate with rental restrictions is the time, effort and cost involved in adopting rental restrictions, which always* requires an amendment to the governing documents of the community.  Before a board begins the expensive and lengthy process of an amendment, it is prudent to determine if sufficient interest exists in the community:

Discuss the proposed rental restriction at a board meeting.  While owners generally do not participate at a board meeting, the president has the right to allow any owner to participate during the board meeting.  The best and easiest way to do this is for the board to discuss it’s proposal and then take a straw poll of the owners present to see if they would approve such an amendment.  Depending on the number of owners present at the meeting, this may not be 100% conclusive of how a vote would go, but at least this gives the board a reality check from those present.

Send out a postcard/flyer advertising a town-hall meeting to discuss the amendment or to solicit comments/concerns. Sometimes owners who don’t normally attend board meetings (too busy, don’t prioritize them, don’t care) will attend a meeting if it will directly impact them and those that do not may be willing to send in a e-mail with their thoughts.  This also can give the board a better idea if the amendment has support or not. If the HOA has a website or a social media site, information about the meeting and the proposed amendment should also be provided there.

Check your figures.  Boards sometimes overlook the obvious, especially when it comes to rental restrictions or caps.  If the community already has 40% of its homes rented, it is unlikely those owners will vote in favor of a rental restriction, and as such the amendment has little chance of passing.  Just to be very clear, let’s say there are 100 homes in the community.  Of these, 40 are rented.  Assuming the other 60 are owner-occupied and would vote in favor of such a restriction, that only provides 60% of the needed approval for an amendment to pass.  It is unlikely that from those 40 rented home the board will get an additional 15 homes (or more, as your governing documents may require) to vote in favor of the rental cap, especially if it means those owners may not continue to rent their homes out.

The amendment process is a lengthy and expensive one and should not be undertaken without significant interest in and support from the owners.

(For more about the amendment process itself, please take a look at my posting on December 1, 2011, called “Amending Governing Documents”).

All of the documents that I’ve come across over the years have always required an amendment to put in a rental cap, but boards should check with their attorneys to confirm before pursuing this matter further.

Using Social Media to the Association's Advantage

We’re in the age of the geek, or so the communications industry keeps telling us.  According to Facebook’s statistics, there are over 800 million active users on their site and over half of those are logged in on any given day.  While Facebook is currently dominating the social networking scene, this is only one of many sites where people can interact with others in a variety of ways.  So why aren’t HOAs using this and other social networking more often?

I took a quick look on Facebook and found that there are homeowners associations across the country that are using it to a greater or lesser extent to disseminate information to its owners.  Some pages had very little on them (a picture and some links) while others were quite robust with details about board meetings, election results, rules reminders, etc.  The benefit of using something like a Facebook page is that non-confidential information can be posted and anyone who has liked the page is notified of the posting in his or her feed (the feed is the first page that a Facebook user sees when logging onto the site).  This may give the community a better chance gaining compliance on common rules infractions or improving attendance at meetings.  It can be a great place for reminders about dues increases or special assessment due dates.  The potential downside with Facebook or other non-secure social networking is that nothing confidential or proprietary may be shared on it, and boards (or whomever the board appoints to be responsible for the content and posting) must be prepared to review and remove anything inappropriate from the page (for example, a complaint about a specific neighbor or a reference to a delinquent account).  I have also seen these used as a breeding ground for dissension and to bash the board or other owners for decisions made.  Even with these potential downsides, I think that social networking can be an incredibly powerful tool for boards to use to communicate with the owners at large.  Right now, Facebook particularly intrigues me because it’s free, easy to use, and will probably reach 90+% of owners who use e-mail or the internet with any regularity.

What does the board need to do to set up a Facebook page?  Like with any decisions of the board, the board must discuss this at a duly-noticed meeting with this topic on the agenda:

1.  Follow Roberts Rules of Order and have a motion to make a Facebook page for the association.  If the motion is approved;

2.  Appoint one or two owners to be moderators for the page (at least one of the two should be a member of the board); and

3.  Determine the content to be included on the page (meeting dates, times and locations, reminders about rules, election results, late payment information, links to local governmental agencies and/or utility providers, etc.).  All information should be general in nature and should avoid targeting a specific owner or home.  Even with something like the announcement of board election results should be done with caution; it certainly makes sense to announce names, positions, and term lengths but I would use caution before posting property addresses, telephone numbers or e-mail addresses.  Facebook pages have the downside of not being secured, so nothing personal or confidential should be posted (or be permitted to remain) on the page.

Once the page is up and running, all Board members should “like” the HOA’s page so that each of them receive the postings too.  This will help not only those appointed to be the moderators for the page but also keeps the entire board in the loop when there is activity on it.

Also important is to let the rest of the owners know about this page. Any time there is a communication to the owners, it should include a reminder to “like” the Facebook page. Immediately after the page is live, owners should be notified via first class mail (a postcard is the ideal candidate for this) so as to encourage as many owners as possible to join.

It is critical to remember that once the Facebook page has been created, the moderator(s) needs to post to it regularly with important information to ensure it is effective. For example, once the next board meeting is announced, the date, time and location can be posted to the Facebook page, but a follow up (a day or two before the meeting) should also be posted to remind owners. Like many things, this page will only be effective if time and energy is investing into keeping it informational and current.

This posting isn’t an endorsement for Facebook (or for any other social networking site, for that matter), but I think that it and other sites like it can be used in a positive way to easily inform and communicate with the owners in the HOA.  This is the way of the future and the sooner HOAs embrace technology and use it to their benefit, so much the better.

Winter Preparedness - No Burst Pipes!

The weather has been getting colder and colder, so now is the time to prepare our homes for freezing conditions to help prevent burst pipes.  Each association’s documents are a little bit different, so owners should check theirs to see which of the following items are their responsibility versus the responsibility of the HOA.  In general, if the suggested action can only be taken from inside the home, it is the responsibility of the owner.

Shut off and drain exterior hose bibs and cover them with a styrofoam cover.  Exterior water sources have their piping along the edge of the home, making them more likely to freeze and burst than pipes inside the home.  Turn the hose bib off (these should have individual shutoffs; if not, you may want to consider having a plumber install one), go outside, turn on the faucet and allow all the water inside to escape.  Once that is done, leave the faucet open and install a cover, which can be purchased for $2 or less, at a home improvement store.  That way, even if the small amount of remaining water in the pipe freezes, it has room to expand and is unlikely to burst.

When you leave, leave the heat on.  Many owners go on vacation or out of town around the holidays and do not consider that the temperature may drop rapidly.  Experts recommend that the thermostat always be set to at least 50 degrees during this time of year.  Even being away from your home for a few hours when the temperature drops sharply may leave your pipes vulnerable to freezing.

Open doors under sinks to allow air flow.  Although location of the pipes vary, whenever possible and especially when a home will be empty for a length of time, open the cabinet doors beneath all of the sinks to encourage air flow.  There is some speculation that leaving the taps dripping may also be useful, but experts seem to be divided on whether this is truly helpful or simply a waste of water.

Arrange for someone to check on your home every few day if you’re out of town.  The last thing anyone wants is to come home to a disaster.  Owners should have a family member, friend or neighbor stop by and go into their home periodically (at least every few days) to ensure nothing is amiss.

Know where the main water shutoff to your home is and know how to use it.  Even when owners take every precaution, sometimes water lines freeze and break.  If so, the owner needs to know how to turn off the water to the home to prevent additional damage.

With these few simple steps, owners can help lessen their chances of having to deal with broken pipes and the subsequent damage and potentially expensive repairs.

Amending Governing Documents

The board has discussed it and decided:  it’s time to amend those out-of-date, confusing or incomplete governing documents.  Maybe they want to enact a rental restriction or prohibit basketball hoops; maybe they want to set term limits.  Whatever changes the board wants to make, the road to amending governing documents is a long and arduous one, requiring a serious commitment by each board member.  The board needs to be prepared and plan ahead to avoid the pitfalls that can happen when working towards getting an amendment approved.

What are the common pitfalls board encounter?

Lack of support.  In most cases, governing documents require at least 75% of all owners to vote in favor of an amendment.  If 75% of the owners are not likely to vote in favor of the amendment, then it’s not worthwhile using the time, energy and funds towards drafting it.  For example, the board is concerned about the number of rentals in the community and wants to limit them.  If rental homes already make up 30% of the association, it’s very unlikely that those owners would vote in favor of the amendment, thus the association will not obtain the votes it needs to pass.

Delaying involving the manager/attorney.  The association’s manager and attorney should be part of the process of developing and reviewing the language of any proposed amendments.  Why?  Managers can help the board determine the practicality and enforceability of the changes, while attorneys can help ensure the board does not make any changes that violate laws or that contradict other sections of the governing documents.  They can also help you determine the correct percentage of owners required for the amendment to pass.  An attorney can also ensure that the format of the amendment is correct; if the spacing is wrong, the county won’t record it, and that’s a lousy thing to discover at the end of this grueling process!

Allowing insufficient time.  Amendments do not happen in a day or  a week and shouldn’t even if they could.  An amendment affects the association and its owners from the date of the recording onwards, so it’s critical to ensure it is exactly what the board wants and the association needs.  There are also many hands that need to be involved:  the board to determine the need, the manager/attorneys to draft it up, the manager to mail the draft and ballot out to all owners, the board members to walk the neighborhood and collect ballots (yes, the board should plan to have to do this if you want an amendment to pass!), and the attorney submitting all the documentation plus amendments to the county for recording (condominiums may also need to obtain approval from the Oregon Real Estate Agency).  This process takes time and effort.

Failing to provide sufficient information.  Owners are critical in the success or failure of an amendment since they are the ones who decide (whether they cast their ballots or not) if the amendment will succeed.  The board needs to provide written rationale and reasoning - maybe applicable board meeting minutes - about why this amendment is necessary and desirable for owners.  The manager should work with the board to help them determine what information owners might need or want to know so that this can be provided as part of the amendment mailing.  Boards need to communicate with their owners in advance of the mailing so that owners know to watch for the ballot and amendment and return it promptly; this can be done at a board meeting, on the association’s website or Facebook page, on the community notice board, or any other common communication method.

Amending governing documents can be highly frustrating but very worthwhile in the end.  Boards can make this process less burdensome by ensuring they have the support of their owners, involving their manager and attorney early on in the process, providing plenty of information and rationale to all owners, and allowing plenty of time to get it all done.

This article was previously published in the CAI-Oregon newsletter in 2010.

Holiday Decorations

It’s the time of year again when many homes are being decorated for the holidays.  Strings of lights are on the homes or in the windows (and trees and bushes) and the inflatable Santas are sitting on the front laws.  There may be candy canes, sleigh bells and mistletoe.  Rudolph may be hiding among the greenery, and possibly even some elves.  While many people enjoy the holiday decor, most are ready for it to be down after the new year.  If your association don’t have a policy in place, now is the time to adopt one, to avoid Christmas (lights) in July.

The first step always in adopting new rules or regulations is to check the governing documents.  Does the board have the right to adopt a policy about holiday decorations?  If so, great.  There may even already be specifications in the declaration or bylaws that states when these decorations may be put up and when they must be taken down.  In that case, the board may not need to do anything else (assuming the board has already adopted a compliance resolution).  If, however, the documents give the board authority to adopt rules but nothing specifically addressed holiday decorations, now is the time to determine what is appropriate.

So what time frame is appropriate?  Most people have their own thoughts about what is the correct length of time for decorations to be in place, and they are probably different for different holidays (Halloween or St. Patrick’s Day, for example, versus Christmas).  Many boards that I’ve dealt with over the years felt that, for holidays between January 2 and Thanksgiving, it was sufficient to allow owners 10 days before and after the holiday to have decorations out.  For holidays between the day after Thanksgiving and the January 1, most boards wanted to allow owners from the day after Thanksgiving until January 10 to have those decorations in place.

Another good question is what decorations are permissible?  Again, check your documents, but the board may want to limit the wattage of lights or require that they cannot be directed into a neighboring home.  The board may want to allow strings of lights but prohibit those inflatable Santas (or Rudolphs or snowmen).  This may be a question of aesthetics or may be an issue of harmonious living, so the board should consider both.

Should the board have any restrictions on the installation or placement of the decorations?  If the exterior of the homes are the responsibility of the association, the board may want to prohibit any installation that penetrates the exterior siding or envelope of the home.  If the association maintains the landscaping, the board may want to restrict what may be placed on the lawn or in the bushes.

Ultimately the purpose of decorations is to celebrate and enjoy the holiday more, so while I think it is prudent for the board to consider these issues (and take action, if no rules or restrictions are in place), I also think the board should adopt rules cautiously and with the desires of the owners thoroughly considered.  If your community looks like Peacock Lane, it would be imprudent to ban holiday lights.  Whatever guidelines the board decides to adopt (whether for decorations or not), be sure to be in compliance with the governing documents and consider the desires of the majority of the owners in your community.

Financials 101

If meetings are the backbone of a community, the place that all decisions of the board are made (as required by Oregon statute), then financials are the muscles that help hold those decisions in place.  It is critical that each and every board member read and understand the financials provided every month.  Without the review and an understanding of the association’s fiscal state, how can the board determine if the business of the association can proceed normally?

Each month, the management company (or the association’s treasurer, if the community is self-managed) should produce a financial report for the previous month.  While each management company may provide different items in its package, a basic financial report (at minimum) must include these reports:

Balance Sheet.  This report provides a snapshot of the current financial health of the association.  It shows how much cash the association has as of the end of the current period and is generally broken down into different asset accounts (such as checking/operating and money market/reserves) and also shows the current liabilities, which are also broken down into separate accounts (such as reserves and retained earnings).  If the association has a loan, this should also be reflected on the balance sheet.

Budget Comparison/Income and Expense.  This report may have different names but ultimately it should show current income and expenses versus budgeted income and expenses as well as yearly income and expenses versus budgeted amounts.  Boards should scrutinize this closely to see where the actual expenditures are exceeding the budgeted amount and determine why this is occurring.  The reason for the variances could be quite reasonable (for example, water usage tends to be greater in the summer due to irrigation requirements) or it could be the frequency of the payments (maybe two monthly insurance bills were paid in the same month) or it could be that the board simply didn’t budget enough for that expense in the current fiscal year.  More important than the number itself is obtaining an understanding of why the variance occurred so as to help determine what, if any, action needs to be taken.

Income Received.  Again, this report has many different names, but whatever it’s called it should be a listing of owners, their payment amounts and dates the payments are received.  If there is other income received (let’s say from a coin-op washer and dryer in the basement of the building), that should also show up on this report as a receivable.  About the only income you wouldn’t expect to see on this report is interest from a financial institution.  (Note:  this report generally has confidential information on it and as such should not be shared with any non-board-member owners.)

Expenses Incurred.  This report may be called “Check Register” or may have any number of other names, but it is a listing of all of the checks written in the month, including the number, the payee, the amount paid, and the expense account they were paid to.  Many management companies also try to provide a note with some additional description (for example, an invoice paid to the landscaper for monthly contract maintenance may have the month paid noted).  The checks should be sequentially numbered and any voided checks should also show up on this report.

Delinquencies.  This should include the name and amount owed for all owners with a past due balance as of the end of the period.  Usually this includes a breakdown of current, 30 days, and 60-90 days.  This report is sometimes also called “Aged Receivables” or “Receivables” and is also confidential and must not be shared with any owners who are not board members.

Bank Statements and Reconciliations.  The board should receive a copy of the bank statements and the reconciliations for each bank account.  While the balances shown on the balance sheet may not match the bank account ending balances, they should match the ending balances shown on the reconciliation.  (The reconciliation - and the balance sheet - takes into consideration checks that have been written but not yet cashed.)

It is not required to be provided, but I believe managed associations deserve to have their managers review the financials and provide some sort of recap.  I find that going through the financials in order to write up my report helps me notice trends and potential issues before they become full-scale problems (such as chronic overspending in a budgeted line item) as well as helps me to correct any minor errors in the financials (an invoice for insurance accidentally coded to building maintenance, for example).

So now that you know what should be in your financial package each month, what do you do if you’ve looked it over and still have questions?  Ask them!  Too many board members are unnecessarily bashful about asking questions either because they feel they should know the answer already or maybe they assume another board member will ask the same questions.  As a manager, though, I want my boards to ask me if they have questions.  If you don’t understand the financials, you should ask to sit down with the manager and go through them (if you are self-managed, you should ask to sit down with the treasurer).  A good manager will take the time to help you understand your financial report and its implications.  It’s not a nuisance or an inconvenience to us, even though of course we are busy people, because part of our job is to help you do your fiduciary duty, and how can you do that if you don’t understand the HOA’s finances?

(If you are unsure what fiduciary duty means, here is a link to the Wikipedia article:  http://en.wikipedia.org/wiki/Fiduciary_duty)

Board members are entrusted with making responsible decisions on behalf of the owners that elected them.  A proper understanding of the association’s finances is critical to being able to do so.  Board members must each take the time to review and understand them as well as seek assistance when needed.  There is no shame in asking questions.

Running a Proper Meeting

Meetings are the backbone and foundation of the association.  This goes back to an earlier entry, where I talked about open meeting laws (entitled “Welcome to My Blog!”).  The truth of the matter is that, in Oregon, all business (with four exceptions, which I’ll discuss in another posting) of the association is to be conducted at a board or an owners meeting.  When I say conducted, I mean that all discussions and all decisions should be made in front of all owners who opt to attend the meetings.  This can be as significant as determining to impose a hefty special assessment or as simple as whether or not to plant annuals by the monument this year.  Owners are entitled to not only be present at board meetings but to hear (but not participate in) the discussion and the subsequent motion, second and vote.

Oregon law requires that HOAs use Robert’s Rules of Order to conduct meetings of the board and of owners, including the annual meeting, unless other rules of order are required by the governing documents (or the board opts to adopt by resolution some other rules of order).  This provides a framework for the running of the meeting and, while it can feel stuffy and stilted to some at first, actually helps to accomplish the business of the association in a straightforward and simple manner.  Board members who do not have any experience with Robert’s Rules of Order can purchase a simplified guide through the CAI website:

https://cai.caionline.org/eweb/The_A-B-Cs_of_Parliamentary_Procedure

Using Robert’s Rules of Order helps ensure that the board spends its time considering items that a sufficient number of board members want to consider.  To give an example, let’s say “late fees” is on the agenda (and yes, every meeting should have an agenda).  One of the board members makes a motion to increase the late fee from $ 10 to $ 25.  If another board member does not second this motion, the motion is off the table.  At that point, the option is to a) make a new motion or b) table the discussion, presumably to the next meeting.  If instead this motion is seconded by another board member, then at that point the entire board can discuss the pros and cons of raising the late fee by $ 15.  When there is no additional discussion, the vote is taken and a decision made.  What this does is prevents one board member from monopolizing the meeting with an item no other board members are interested in or concerned about.

As I mentioned above, another critical component of the meeting is having and following a written agenda.  This is smart for any meeting but is necessary for a properly-functioning HOA one.  At a minimum, the agenda should have the following:

a. Call to Order
b. Verification of Quorum
c. Approval of the Meeting Minutes of the Previous Meeting
d. Old Business
e. New Business
f. Adjournment

Any items tabled at the last meeting should be placed under “Old Business” for the new meeting.

In addition to the agenda, it is prudent to have all items to be discussed or used at the meeting provided to all participants in advance of the meeting.  For a board meeting, that would mean that all board members should be sent the agenda, draft meeting minutes for the previous meeting, and any other items to be discussed (for example, proposals for maintenance or other services, draft budgets, or architectural review committee forms) several days prior to the meeting so there is sufficient time for all board members to review them.

If at all possible, it is also a good idea to hold meetings at a usual time, day and location.  The location, as I’ve already mentioned, should be convenient to the community and accessible.  Planning to meet, for example, the last Tuesday of every other month also allows owners to plan ahead and schedule that time to attend.  It also provides concrete deadlines for various tasks assigned to board members at previous meetings, such as obtaining bids or drafting meeting minutes.

To conclude:  meetings are a critical component of a community association and the place where all business is transacted.  To make meetings as useful as possible, set a usual meeting time and location, be prepared with an agenda and all items necessary to make well-informed decisions at the meeting, run the meeting by Robert’s Rules of Order, and ensure you’ve complied with all of the open meeting law requirements.

10 Things to Consider When Selecting New Management

Sometimes it is time to make a change.  This could be because the board isn’t happy with the services being provided by the management company or it might be that the board is doing everything themselves (with our without management).  So how to find a community manager and firm to run your community?

I recommend that boards start by considering companies that are members of the two professional organizations in Oregon (and southwest Washington):

CAI-Oregon:  http://www.caioregon.org/link/linkshow.asp?link_id=232780
OWCAM:  http://www.owcam.org/

While belonging to these organizations does not necessarily mean that these companies are better than others, it does mean that they are interested in continuing education and the professionalism of our industry.

In addition to looking for those affiliations, I recommend that boards also consider doing some or all of the following:

Interview both the firm AND the community manager who will be responsible for your community.  I am always surprised when a client signs on without talking to me first.  The manager is the person that the board will be dealing with, perhaps exclusively, for the foreseeable future.  This means that it is critical for the board to understand the manager’s philosophy and style of management as well as feel comfortable with the person and how he/she presents him/herself.  If the board likes a management company but isn’t sure the manager offered is a good fit, you should feel perfectly free to ask to meet with another manager.

Ask about the manager’s professional designations and continuing education.  This can be community management specific or not, but part of what a community manager has to do is continually educate him- or herself on the changes to the law and in practice that may affect the communities in his/her care.  A community manager should be interested in educational opportunities that will help grow his/her experiences and professionalism and should want the boards to educate themselves as well.

Inquire about staffing and work-flow.  Whether a management company is small or large, there should be a specific way that things are handled in all but a very few unusual situations.  What are owners expected to do to report a problem?  Should they e-mail or call?  Who does the triage for these calls/e-mails?  What kind of a response is received in return (especially in the case of voice mail message or e-mail) and in what time-frame?  Does the manager have an assistant and if so what things should the board expect from the assistant instead of the manager?  If the assistant is responsible for most of the work for the community, who is overseeing those tasks?  While the manager (and ultimately the owner of the company) is responsible for ensuring clients are taken care of, understanding who is doing what can be very useful, especially to the board, when questions or issues arrise.  This can also give you an idea of the current workload of the staff, which of course will help you understand how much time they may be able to devote to your community.

Determine the average number of client meetings the manager attends per month.  Most boards know to ask the manager the number of communities they currently manage.  While this gives an idea of the manager’s workload, I think the number of meetings is more telling about how busy the manager is.  A manager who already has six or more meetings with other clients per month is likely to be pretty heavily committed, especially if these are evening meetings, and may not have sufficient time to devote to your community.  This depends on the manager, of course, and should not be a deal-breaker in and of itself.

Ask for samples of their work.  Boards should have an opportunity to see what the management company can produce.  Copies of letters, newsletters, budgets, financials, and other company-produced documents (with all proprietary or confidential information excised, of course) should be made available to the board for your consideration.  It is not enough for a management company to be able to speak competently; it is critical that they can also clearly and effectively communicate in writing.

Visit the management offices, preferably unannounced.  Get a tour of the whole space and see the state of the filing room, reception desk, managers’ offices, etc.  While this does not conclusively tell you whether or not it’s a good management company, it can certainly give you an idea of how busy everyone is and whether or not there is sufficient staff to meet your community’s needs.

Have the manager demonstrate his/her competency.  Give them a hypothetical rules enforcement issue and ask them to walk you through the steps of compliance.  Or provide them with one month’s financials (with the confidential or proprietary bits marked out) and have him/her point out and explain potential reasons for any concerns or deviations from the norm.  In either of these situations, a good manager should be able to provide you with concrete steps or concerns, even without knowing much about your community.  Even better, ask them to do both or more!

Ask questions about the contract and its exclusions.  One thing I am constantly surprised by is board members that haven’t looked at the management contract or don’t understand the provisions in it.  The contract (and any exhibits) should be reviewed thoroughly (and the association’s attorney should be paid to look them over) and the board should not only ask about any provisions or clauses that are unclear but should request additional written information for anything that is unclear.  I also think it’s important for the board to consider whether the contract is based on an allocation of hours versus completion of tasks.  Either can work out to the benefit of the community, but these contracts are very different in nature and so need to be thoroughly understood.  And the exclusions to the contract are also very important to discover.  Many communities now are going through construction defect litigation/remediation/special assessments, and most (if not all) management companies charge extra for this, so if this is something you’re facing (or shortly will be), the board needs to have a clear understanding of those extra (out of contract) costs.

Have the potential manager and management company representative attend a board meeting.  This gives interested owners an opportunity to ask questions and provide feedback to the board.  It also provides owners with a level of buy in and avoids some of the concerns owners may otherwise feel at suddenly discovering the old management company is out and a new one is in.

Ask around.  Many boards feel that they need to ask for references for the management company and manager, but I personally think this isn’t very useful.  What management company or manager is going to have you call someone who says anything but glowing things about them?  No one.  So instead what I recommend is that the board ask the professionals it already has, knows and trusts.  Who is that?  Well, it could be your landscaping firm (the supervisor or owner of the company), the attorney who handles your collections or general counsel, the insurance agent, or maybe even the CPA.  Our industry (especially in the Portland/Metro area) is small and connected.  If you’re using professionals within the industry, which the board absolutely should be, then chances are your professional will know the manager or the company (or both) and those professionals are more likely to give you their honest opinion and what they know or have heard.

Although there is no guarantee of a perfect fit, following these suggestions should help boards find and engage a community manager and firm that they can have a long and positive relationship with.