Committees - Consider Ad Hoc Committees

Many Community Managers and Board of Directors have a lot of tasks. Meanwhile, there are a number of things that are pressing but tedious and require a significant amount of time to accomplish. When you have homeowners who want to be involved, a great way to get participation is by suggesting that homeowners join committees based on topics those homeowners are interested in.



There are the Association's regular Committees, and then there are Ad Hoc Committees. The regular Committees are the long-standing Committees where Committee Members continue to work on projects regularly. Ad Hoc Committees are one-time committees to specifically handle a special project.



Some examples of regular Committees and the suggested function of members are:



Social Committee

Members could plan the community events. This Committee is key in creating a friendlier living environment while creating fun community events. In turn, member participation in social events actually results in members obtaining more information on what is going on in the community.



Budget / Finance Committee

Some Associations find this Committee useful for just a few months each year during the budget preparation process. The Committee members generally review the reserve study, offer guidance and feedback to the Board on the reserve study, and either review the budget draft as prepared by the manager or Board or prepare the initial draft of the budget to provide to the Board. For some Associations, the Committee members work year round by reviewing the financial statements and provide feedback or comments to the Board with respect to the Association's finances.



Rules Enforcement

Some homeowners are very concerned with governance and enforcement. Committee Members can work with a designated Board Member to determine the level of enforcement. Altneratively, Committee Members may accompany the community manager during site inspections.



Security / Safety

For Associations with camera systems, anyone who has operated the system knows that it is very time consuming to pull footage to find an incident. Committee Members can offer assistance in reviewing and burning camera footage when necessary. Members of this committee could also form a Neighborhood Watch, get City officials involved, reach out to Senior Lead Officers from the community's local Police Station, etc.



Some examples of Ad Hoc Committees would be:



Policy Revisions

If a community needs to revise Board Resolutions such as Rules and Regulations, a Committee could be formed for the sole purpose of working on the revisions. Once done, the Committee would present the final document and the Committee recommendations to the Board, and the Committee would then be disbanned.



Design Committee

A community may be undergoing some design changes, such as new carpet and wall coverings for the hallways. Chartering a design committee could give homeowners the task of researching various styles, but it also gives more members an opportunity to participate in an important aesthetic issue that everyone has to live with. Once the project is completed, the Committee would no longer be in existence.



Sometimes, it is challenging to get homeowner involvement, but knowing your residents gives you an advantage at specifically calling on people to help if you know it's an area of interest for them.



If you have any questions on this process, please feel free to contact me at Nedafirouz@gmail.com.

Adding Bad Debt and Contingency Line Items to Budgets

With the high delinquency rates in Associations, many Associations are not able to effectively collect dues from homeowners that are not paying. Several years ago, Homeowners Associations had better abilities to collect using the non-judicial collections process because more frequently, owners had equity in their units. Nowadays, not only do most not have equity, most are upside down.


What are the consequences of delinquent payments to a community? The Association's main source of income is to assess and collect from the members of the Association. Maintaining the common areas...the corporation's assets, depends on the assessments from the members. When members do not pay their portion, there are some detrimental affects to the Association:


1. Budgets have to be modified to include bad debt. In other words, the paying homeowners end up paying a bit more in order to cover the expenses for the individuals that are not paying their assessments.


2. Standard maintenance items become unaffordable. A lot of Associations have had to increase their dues but cut back on services. Homeowners who are not recognizing the adverse affects of this economy are not recognizing the reason for less service but needing more money.


3. One of the first areas that Boards....unfortunately....tend to cut back on a bit is the reserve contribution. Boards are fearful of increasing dues even when it is absolutely necessary. So, they subsequently fail to raise the dues enough to cover expenses and properly fund the reserves. Deferred maintenance becomes more prevalent, and future special assessments become eminent. I see this too often where Boards want to hold off on spending the reserves when they decrease the reserve funding. The property starts to appear run-down, but deferring maintenance is more costly in the long run! When the property is not maintained, the property values are also affected.


4. Any budget deficits are added to the next year's budget. However, once again, the first thing that is not paid when you have insurance, water, trash, electricity and other essentials, is your budgeted reserve contribution. So, not only did the Board slash the reserve contribution, now you can't afford to actually make the reserve contributions that were budgeted. At the end of the year, the Association has to notify the membership of this, but the following year leaves a bigger gap for the Association to catch up on. Again, more deferred maintenance, more of a need for a special assessment, and more appearance of the property being run-down.


5. Some Associations, if they have really failed to budget properly, will start borrowing money from the reserves to pay the operating expenses. The Association is required to pay back the monies borrowed within a year, or otherwise disclose to the members that the money was borrowed, the purpose of borrowing the funds, and notifying members as to why the money will not be paid back. Items 3 and 4 listed above just get worse.


6. Now Associations may turn to lenders to try to get loans to deal with capital improvements. The members have to vote to approve the loan, but often times, members are given somewhere around 1-7 years to pay off the loan. Some owners choose to pay off their portion of the loan up front, while others choose to maximize their payment options. This feels like a dues increase, because loans will usually add a big chunk to monthly assessments. The community value reduces with respect to sales prospects.


7. The quality of life of residents / owners suffers. People struggling with finances and deteriorating buildings are not happy. Usually, when a community gets to this point, this is when the politics among the members begin. These situations create rifts, adversarial groups, and a hostile environment for neighbors, managers and Board Members.


As managers reading this blog, we can all relate to this, and I sympathize with any going through this. As residents in a Homeowners Association, you may have experienced this and may have a better understanding of how things get unbearable. You may also have a better understanding now of why a 3-7% increase may not be ideal but is much better than continued cut-backs and improper budgeting just to keep members happy and in the dark about the true financial conditions.


All in all, those creating the budgets should be conscientious of bad debt expenses. If you currently have delinquencies, start factoring that in the budget. I always advise my communities that do not have fully funded reserves to maximize the reserve contributions. A few of my communities have asked me whether I advise them to decrease their dues or avoid increasing dues when it's necessary when looking at the real figures. I always advise my clients that proper funding and planning is the right way to go.


If you have any questions or would like to provide me with any off-line comments, please feel free to email me at NedaFirouz@gmail.com.

HOA Restrictions on Signs

I was recently at a Community Association Institute seminar for California, when the subject of resident rights to post signs, flags and banners was discussed. Surprisingly, most of the managers in the room were unaware of the resident rights to display an array of signs and posters from their windows. Many managers assumed that because the signs / posters / banners were visible from the common areas, that the Associations had the authority to restrict signage. Civil Code 1353.6 - Displaying of Noncommercial Signs or Flags, is the section that pertains to the resident's right to display the signs, flags and banners. The Civil Code is actually very broad in that it permits just about any type of sign, and the size limits are pretty liberal as well. The Civil Code does permit Associations from prohibiting any penetration in to common surfaces in order to install a flag holder. Before Associations attempt to require the removal of a sign, flag or banner from a residence, I suggest that Associations review this Civil Code. If this section is still unclear, Associations may want to consult with legal counsel to determine the Association's authority. If you have any questions regarding this subject, please feel free to email me at Nedafirouz@gmail.com.

Protecting Assets

We all have assets that we have invested in and cherish. That may be your home, your car, or even an ipod. Just like we all have our own assets, businesses have assets as well. A Homeowners Association is, in fact, a business. Those that are incorporated are non-profit Corporations.

Some of the assets in a Homeowners Association can be obvious, such as the chaise lounges at the pool, the computers in an on-site office, furniture in the clubhouse, etc. Most of us don't recognize the largest assets of the corporation, which are the components that are the most costly to replace. For example, we tend to personally take care of our largest investment, such as our homes or our cars, a lot better than a pair of sandals, right? So, what are some of the largest assets in a Homeowners Association? These could include the vertical plumbing lines in stacked condominium units, the roofs, roads (in planned unit developments), structural components (beams, posts, catwalks, decks), paint to protect wrought iron, stucco and wood, etc.

Let's think of relating to this idea like we would our cars. We have routine maintenance, like changing our oil regularly, to protect our engines. We monitor transmission fluids to protect the transmission (both are two of the more costly components in a car, so we try to prolong the need to replace them). The same goes for our components. In order to prolong the life of the roads, for example, preventative maintenance is necessary. Planned Unit Developments should plan to add a slurry coat to the roads once every three or so years. In doing this, you are adding a protective layer to the roads to prevent premature deterioration. When compacted properly, a new road can last up to 15 years, but the lack of proper car can require replacement as soon as 10 years after it is done. A lot of communities consider painting to be an aesthetic component and usually put off the painting to get other projects done. Painting actually adds a protective coating on elements. On wrought iron, properly applied paint will help prevent rust and corrosion. On wood, the paint prevent dry rot.

Many homeowners struggle with the concept of slight increases in dues to properly fund for these types of projects. Just as we each don't want to have to replace our engines or transmissions within 7 years of having a car, the components in a community can also be maintained properly to avoid larger expenses when things completely deteriorate.

If you have any questions, please feel free to email me at Nedafirouz@gmail.com.

Operating Expenses vs. Reserve Expenses vs. Capital Improvements

Many residents and even Board Members do not know the difference between operating expenses, reserve expenses and capital improvements. Once people grasp the difference between the three, many don't know when homeowner votes are required for funding and/or expenditures. I'll be explaining the fundamentals of each.







Operating Expenses



These are the Association's day-to-day expenses. People should think of this as "repair" not "replace." Operating expenses include contracted services (i.e. landscaper, pool contractor, gate maintenance, management), insurance, utilities, taxes, administrative expenses (i.e. accounting fees, office expenses), and maintenance expenses (building repairs, plumbing repairs, lighting supplies). Association's use the pro forma budget to help create a map for the upcoming year's operating expenses.





The Association is required to distribute the budget package to the members every year. In California, the Board of Directors has the authority to increase the dues by 20% each fiscal year to cover operating expenses. Any increase beyond 20% will require the vote of the membership. The Board also has the authority to special assessment the members 5% of the gross annual income without the membership's vote. Anything beyond that would require the approval of the members. The Association would maintain a bank account as the designated operating account. The Board has the authority to enter into agreements and maintain the day to day operations...operating expenses.

Reserve Expenses

Reserve expenses are the replacement of existing building components; not the repairs. So, we can compare a component and demonstrate whether it is an operating or a reserve expense. If a homeowner relays they have a roof leak and the roof is repaired, that would be considered an operating expense. If the Association replaces the roofs, the roof replacement is a reserve expense. Associations use the reserve study as a guide on how much the components would cost to replace, and what the useful remaining life on each component would be. Associations must also maintain a separate bank account that is deemed the reserve account. The best way of distinguishing the operating and reserve accounts is to think of the operating account as a checking account while thinking of the reserve account as a savings...or even almost a CD account. There are many restrictions on the Association's ability to use the reserve funds, as the reserve funds should be used for reserve expenses. If the funds are used for non-reserve items, there are a set of Association requirements that will not be explained in this article. The Board has the authority to cause the replacement of existing components as needed, assuming that the funds are available.







Capital Improvements



Capital improvements are projects where a new component is introduced to the community. It is a project that, once installed, will then create operating expenses and future reserve expenses. An example would be a community's desire to install a spa when that ammenity does not already exist. The rule of thumb for a capital improvement project is that the Association should obtain membership approval before undertaking a capital improvement project. Because this component does not already exist within your community, the Board will have to re-allocate existing funds to pay for this component, or the Board may need to special assess members to obtain the funds to undertake the project. This new component will have to be added to future reserve studies, and additional reserve funding will be required to maintain the component.





If you have questions on these topics, please feel free to email me at NedaFirouz@gmail.com.

Budget Preparations - Start From Scratch or Not?

There are really two starting points in preparing your Association budgets. The first is to start from scratch and zero out all line items from the previous year. From there, contracts would be reviewed to determine the amounts to input in the line items, and all other known income and expenses would be inserted. The other starting point would be to use your prior history. In other words, you would work with your prior year's budget and tweak the figures depending on any known modifications to services.

When would you start from scratch on your budgets? My personal choice is to start from scratch once every three years, and to do the budget from scratch the same year the Association is conducting the full reserve study with the on-site inspection. There is a reason why statutes require Associations to conduct full studies every three years, and that is to maximize the accuracies of the report. We know the report will never be perfect. I can understand why statutes don't put such stringent requirements on operating budgets, as replacement of reserve components are far more costly than a lot of these operating line items. Nonetheless, it is good management practice and is a pro-active approach to budgeting.

At minimum, if a new Board is taking over from a prior Board, or if a new management company is in place, we should not assume that the work of the prior Board or company is accurate. We should be budgeting from scratch to verify that the budgeted figures are reasonable, and to see if we need to add or remove certain line items altogether.

I heard a story today where a community had been self managed for about 20 years and then hired a property manager. The professional manager worked for the community for 4 years and really assisted the community in conducting their reserve studies and help map the community's financial direction. After 4 years, the manager moved on to a different community. Meanwhile, the Board of Directors had noted that the reserve funding percentage was not in a desirable range. They arbitrarily decided to remove the reserve line item for their roofs, which of course substantially increased the reserve study funding. The Board instructed the reserve study company to completely remove the roof from the reserve study component list, and the reserve study company responded and advised against doing this because this would be blatant inaccurate reporting. The Board chose to disregard the reserve study company's advisement and pressed to remove the roofs. Another few years passed and the various new Boards and managers did not catch this removal. The Board's fiduciary duty is to rely on professionals to guide them, and instances where the Board of Directors opt to act in a manner that contradicts professionals is when Board Members can be deemed to be acting negligent or in bad faith. When the roofs finally needed to be replaced and homeowners were assessed over $25,000 each to fund the project, the Association pursued filing a claim on their D&O Insurance. When the insurance carriers subrogated the claim, the carriers were pursuing those individual ex-Board Members, who were personally liable. Remember that as long as Board Members use the business judgement rule and are acting in good faith, Board Members do have protections from being personally liable. In cases like this where they clearly took actions to cover up their funding percentages for whatever reason, they were acting in bad faith and were considered personally liable. My point in this story, is that had this community started from scratch when the new Board / Management came in, this would have been discovered well before the roofs became dilapidated.

The moral of the story is, while it may take us a little extra time to start from scratch, we should be pro-active and use our reasonable judgement to determine when it is necessary to prepare a budget from scratch.

If you have any questions regarding community management, feel free to contact me at NedaFirouz@gmail.com.

Delinquencies

Delinquencies are troubling Association budgets these days. When the real estate market was thriving, it was relatively easy to pursue collections on an owner that was not paying their HOA dues. Most had enough equity in their units, which permitted the Associations to pursue non-judicial foreclosure when necessary.

In today's market, however, collecting has been very challenging. Property Managers, Board Members and collection agencies have had to be more creative and resourceful in determining methods of effectively collecting dues. Most homeowners do not have any equity left in their homes and are very comfortable with walking away and allowing lenders to foreclose on the units. Most often, once a lender forecloses, the Association cannot transfer the debt to the new owner. You should check your Governing Documents about this, because some do permit Associations to transfer a portion of debts (it's not common).

A lot of Associations are left helpless. Some continue to pursue non-judicial foreclosure, but once the lender forecloses, not only do the Association dues get wiped out, so do the incurred legal fees. Some HOAs have been discouraged in even pursuing collections in fear of incurring more debt, but at the same time, the Association needs to protect its assets and make an attempt to collect the debts.

Our solution, while it creates more work for us, has been to handle each situation on a case by case basis. We do solicit the assistance of collection agencies to let us know if a Notice of Default or liens have been filed by any other entity. If it appears that the lender is at the final stage and is moving in to foreclose, we don't bother with the non-judicial system (to pursue the debt by attempting to collect from the unit's value by way of foreclosure to receive payment from the sale). Alternatively, the cheapest way is to pursue collections against the unit owner directly by way of filing a small claims suit. Often times, the debt does not exceed the small claims limit. If it does though, it still may be worth considering just pursuing small claims depending on how much is actually owed to the Association (again, check with legal counsel if there is a question about this). The easiest way to serve a unit owner is to attempt this while they still reside in the unit as opposed to when they have already moved out.

So, now the problem remains that if the unit owner did not have the funds to pay the debt and allowed the unit to foreclose, what will prompt them to pay the judgement? A judgement is valid for 10 years. Once a judgement is obtained, you can turn that over to a collection agency that will specifically work with the Association to monitor that individual and will search for assets. You may be able to garnish wages or pursue other assets that are founds. And, if you work with a strong collection agency, perhaps they won't be able to collect today, but 2-3 years from now when thing hopefully pick up with our economy, people will start to re-build assets and may be able to pay off their judgement at that time. The judgement may be worthless and may never be collected, but it's a better option then completely giving up once the lender has foreclosed.

Finally, another very effective option is suspending common area privileges when there are actually ammenities that residents rely on. I work with a high-rise in Century City that provides valet service, a gym, cable television and DSL connections for their residents, etc. Their policy is that if a homeowner is 30 days or more delinquent, the Board provides another 15 days to become current, or all common area privileges are suspended. For owners with tenants, this is disastrous. The tenant no longer receives internet connections, television service, use of valet services, the gym, etc. The threat of the loss of rent really keeps owners paying their dues.

In another Association I work with, we just instituted a whole new system. The community consists of 320 homes, so the only real ammenities are the pools. The pools were originally accessed with keys, but we modified it to a key card system. This allows us the ability to de-activate the key cards when common area privileges are suspended. Once again, owners and/or their tenants will not have access to the pools if they are not current on their dues. We also created a parking program that requires all resident vehicles to be registered with the Association. Any guests must use visitor permits to be parked on the streets. In order to obtain the guest parking permits, owners must also be current on their dues. So now, we have restricted those behind on their dues from using the pools OR having guests park on the streets. We issue new visitor parking placards at the start of each year, so we can have control over accounts if they start accruing more debt. This may be of interest to know that this Association in particiluar went from a 20% delinquency rate (undesirable to lenders and was considered high-risk) down to 12% now. FHA will consider approving an Association if delinquencies are 15% or better, so our delinquencies have drastically improved since the implementation of these projects. Sometimes it's worth spending a bit of money to expect a bigger return. The program is far more detailed than what I will share in this blog, but if you are interested in obtaining a copy of the parking rules or getting more suggestions on creative ways to get your delinquencies paid, leave me a comment on the blog, and I will contact you.

Neda Firouz

Transparency - Open Session Information

Many Associations I manage are concerned about the content of what is discussed in open session versus executive session. The Board of Directors of communities are faced with homeowners who request more transparency and the ability to hear more of the decisions that are being made, but then the Board Members must contend with the Civil Codes and requirements for Executive Session discussions.

I would like to preface this portion by stating that I am not an attorney. You may want to consult with your Association's legal counsel or your community manager for procedures with executive session information. I would suggest maintaining the standard executive session categories in executive session, which includes but is not limited to:
Personnel matters, member disciplinary issues, legal issues, delinquencies when discussing specific homeowners.

The area that I tend to recommend to discuss in open session is the formation of contracts, but within reason. If, for example, my Association is in need of terminating services with one vendor to retain another, this sensitive information should be discussed in executive session. If homeowners hear this information in open session and then discuss with the vendor in question in passing, this may be disruptive and cause issues with your vendors. If you were merely discussing proposals for a plumbing repair or adding a new service, talking about insurance renewals, etc., why not discuss in open session? Homeowners feel that they know more about the extraoridnary expenses, and it is specified in open session minutes. Contracted services are the fees that recur each month and are standard, so for any special projects that do not fall under the legal category or are not linked to an existing contract may be considered to be discussed in open session.

Again, you should proceed in a manner that is best suited for your community, but in my experience, homeowners are appreciative of the opportunity to be made aware of community decisions.

Neda Firouz