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.

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.

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.

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.

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.

Finding a Team of Experts

Today I’d like to talk about the importance of the board having a team of experts.  In Oregon, members of the board must be individuals and owners of a property in the community in order to serve on the post-turnover board (there are other allowances if the property is owned by a corporation or a trust, but I won’t cover that here).  Owners elected to serve on the board come in only knowing whatever they might have experienced in their personal and professional lives, which may or may not be helpful in the performance of their board duties. That means that board members - like community managers - either have to know a little bit about pretty much everything or have to know where to obtain that information.  

I believe it is critical for a board to get as many of its experts lined up before any of them are truly necessary.  What kind of experts am I talking about?  At a minimum, I think all associations/boards should have a relationship with:  a community manager, an attorney (for general counsel as well as collections), an insurance agent and a certified public accountant.  It is preferable too if these folks have a working relationship with other associations, and not simply just experience in their field.  This does not mean that you use these services all the time, just that you have a relationship with them so that if you need their help (and it stands to reason you’ll need their help at some point, and maybe quite urgently!), you know who to call when the time comes.  If the association is responsible for maintenance of common property, like landscaping or buildings, then I also recommend you have a relationship with a landscape firm and a professional building consultant.

Why is it important to develop relationships with these experts?  The most basic answer to that question is that when association stuff happens, it generally happens very quickly.  Let’s take an experience out of my own management life:  a tree falls through a condominium building.  If this happens at your community and the board is responsible for action, do you know what to do?  If you don’t, but you have a community manager, he or she can get the ball rolling for you (call the insurance agent, file a claim, contact a restoration company).  In this scenario, if you also have a good insurance agent who has helped you get a good policy, he or she will not only be an asset in filing the claim but will also make sure you get the full coverage you’ve been paying for.  Hopefully it won’t be necessary to involve a lawyer, but if the owner of that unit then files suit against the association for failing to properly maintain the trees, you don’t want to be stuck trying to find an attorney to defend you - and what’s the point of having an attorney that doesn’t know association law or doesn’t know you?

Obviously when dealing with an insurance claim it’s helpful to have your experts lined up, but even with a more mundane experience like resolving delinquencies it’s useful to have an established relationship.  The American economy is tight right now and has been so for some time, which means that many associations are seeing delinquency levels (that is, the number of owners who are not paying their dues on time or at all) rise steadily.  Until there is a significant shift in the economy, there’s no reason to think but this trend will continue.  So what to do?  The best thing is to be prepared!  Your two best allies in this situation are your community manager and your collections attorney.  A community manager can help you put together a collections resolution (in keeping with your governing documents and state statute) that reminds all owners of the need to pay their assessments in a timely manner as well as the consequences for failing to do so.  The attorney can use this resolution with the nonpayment to perfect liens, obtain judgments, and get the association any assets of the debtor.  Even if the debtor has no assets now, a judgment can follow him or her for several years, so when he or she begins to earn again, the association can recoup its costs then.  While no one wants to have to sue another owner, boards should remember that they have a fiduciary duty to uphold the governing documents of the community (more about this on another blog).  Why should those who do not pay get the same benefits as those who do not?!

The two best places to find your experts are within our local organizations:  CAI-Oregon and Oregon Washington Community Association Managers (OWCAM).  Here are links to their websites:

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

I have had the privilege to work with many of these experts and would be happy to share my experiences of them with you.  Feel free to give me a call at 971-258-2826 should you be interested in my perspective.

To recap - boards should find their experts and develop a relationship with them so that when the time comes they have people on their side who are ready and able step in and help as needed.