Capturing the Pulse of the Homeowners Association Industry

The Online Community of the Community Association Industry

Pulse Exclusives (120)

1. How many different associations does each community manager handle in your company? How many units? Do they represent different types of properties?

Association management companies are in business to make a profit. In too many instances, this has led to management companies overloading their portfolio managers with too many associations to adequately provide management services. If community manager’s portfolios are too large, some of their association clients could be underserved.

2. How long does it take for your manager or other team members to respond to calls and e-mails? Do you have an emergency, after-hours contact telephone number and procedure?

Most management companies are acutely aware that they should respond to homeowners’ and homeowner's association board members’ correspondence as quickly as possible. Twenty-four hours is a good rule of thumb, except for on weekends. Board members should have either the manager's cell phone number or another emergency contact number for after-hours emergencies.

3. Is the Association inspected regularly? If so, how often? Does the inspection include maintenance issues as well as rules compliance issues?

Many association managers perform a routine visit to the Association on a weekly basis, but it should be inspected for violations at least every other week. The compliance inspector should take a digital photo of the violation to be sent out with the violation letters.

The inspection should also include an evaluation of ongoing maintenance. For instance, does the landscape maintenance crew appear to have properly trimmed grass and shrubs? Are there any dry spots where irrigation is inadequate, or water accumulation indicating overwatering? Are any sprinklers misdirected towards buildings? Is there any peeling paint on siding? What about uneven concrete, loose fences or railings, or potholes? Catching problems early through regular, ongoing inspections can significantly reduce long-term repair costs.  

When the Association is being inspected by either the compliance inspector or association manager, notice should be given so that board members and homeowners have an opportunity to get answers to questions. This face-to-face access to the manager in a casual setting can avoid problems that often arise when board members and homeowners don’t have easy access to the manager.

4. Other than the community manager, how many people in the management company will support the overall management efforts of our Association?

An association management company typically has a team of people to properly service their association clients. A complete team may include the association manager, accounting staff, compliance staff, escrow staff, a client services representative, and a supervising manager. In a smaller management company, one individual may be handling multiple tasks. In a larger management company, these tasks are more likely to be assigned to different individuals.

5. Does the association manager have appropriate licenses or industry credentials or certifications? Does the manager take ongoing education and training courses? Does the manager have adequate knowledge of state laws affecting associations?

Association managers should have appropriate industry training and credentials. The Community Associations Institute (CAI) offers AMS (Association Management Specialist), PCAM (Professional Community Association Manager), and LSM (Large Scale Manager) designations. The National Board of Certification of Community Association Managers (NBCCAM) offers the CMCA designation. In addition, managers are required to be licensed in Florida and Nevada. California does not require licensing, but the California Association of Community Managers (CACM) offers the CCAM (California Community Association Manager) credential to recognize those individuals that have demonstrated knowledge of California’s unique laws applicable to associations.

6. Is an association website included in our monthly management fee?

An Association website not only provides information to members, but also helps to build a sense of community in your Association. Advanced site features may provide access to board reports and allow homeowners to check their account information.

7. What are the hours that the Association manager can be reached?

A community manager should be available during regular daytime business hours, and 24 hours a day on an emergency basis. Daytime access should be through office phone, e-mail, or cell phone. Evenings and weekend access should be available through an emergency answering service, should an emergency situation arise.

8. Does the management company aggressively pursue homeowners that don't make timely assessment payments?

Delinquent member assessments are an unfortunate way of life in homeowners’ associations, particularly in today’s economy. The management company should work with the Board to make sure that appropriate collection policies and procedures are established, and closely monitor receivables and send notices to members delinquent on their assessments. If an outside collection agency is used, the management company acts as a liaison to provide information to assist in collection of those funds.

9. Does the management company inspect lots/units before they are transferred from one homeowner to another?

When an escrow request is submitted by a title company, the manager or compliance specialist should visit the lot/unit, take pictures, and note any violations. Violations should be communicated immediately so that they can be resolved prior to closing of the transaction, to avoid problems between buyers and sellers.

10. Does the Association management company exhibit professionalism?

The management company should consist of a team of experienced experts demonstrating the professionalism and commitment required to provide quality service to their association clients.

 

 

Sunday, 29 November -0001 16:07

Selecting Association Vendors

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The quality of vendor services your Association receives impacts the value of member property. While this is apparent in virtually all maintenance activities, it is particularly true in landscaping, painting, roofing, fencing, streets, and parking areas. Additionally, security services (although not a maintenance activity) potentially affect ALL maintenance activities and are the most visible “personal” service provided for most Associations.

Selecting vendors can be a challenging process. There are different sets of criteria for selecting each of the above described services. Many Associations hire a professional management company just to handle the vendor selection and oversight process. With experienced professional managers representing the Association, you can generally have confidence that a vendor will be selected only after a rigorous qualification process.

In addition to specialized criteria that relate specifically to a particular service, the following general criteria are very important.

Specialization of Services

The quality of vendor services is often determined by their specialization. This can be evaluated on two levels: (1) the vendor’s overall background and experience in the services they offer, and (2) the vendor’s experience in working with homeowners’ associations. Working with an Association of 100 members is not the same as providing the same services for a single homeowner. Membership in CAI should often be one of the first questions to ask a vendor. If a vendor does not value CAI membership enough to join, it is often a sign that the company does not have experience working with associations or an interest in specializing within the homeowners’ association industry. Some management companies will not even consider selecting vendors unless they are members of CAI.

Reputation

Before a business is considered as a candidate for the job, an HOA service professional reviews the company's reputation using a variety of resources, such as customer references, Better Business Bureau (BBB) records, and the business history of the company. Only the most reputable companies become candidates to receive a contract. An even more important indicator of reputation is previous work provided for other associations. Managers gain confidence in vendors that provide good services on a regular basis.

Insurance

A business must carry insurance that covers injuries to residents, injuries to its employees, and damage to the property of either residents or the vendor that occurs during the fulfillment of the contract. Proper insurance protects both the vendor and the community from financial damages that occur in relation to the work performed. This is an often overlooked criteria, as too many managers assume that proper insurance is carried without ever requesting proof of insurance.

Licensing

Some states require a business to be licensed before it performs a particular service. Before a contract is executed, a professional management company should make sure that any vendors requiring licensing do, in fact, have the appropriate licensing to legally render their services.

Contracts

Contracts should only be executed when they contain the proper provisions and information. This includes credentials of the contractor, the start and end date of the contract, compensation and terms of payment, description of work to be performed, provision for the termination of the agreement, provision for warranties for services and materials, proof of insurance, and provision for legal costs. It is generally wise to have Association legal counsel review contracts prior to execution. This is one of those areas where the saying “an ounce of prevention is worth a pound of cure” really applies.

Conclusion

Unless an Association uses its own employees to perform ongoing services, it must generally outsource to third-party vendors to provide the necessary services. If the board of an Association is inexperienced at selecting vendors, the best first step is to select a qualified management company that has experience in the vendor selection process. With years of experience in performing the vendor selection process, such companies ensure that vendors are chosen based on their specialties, excellence in working for other communities, financial protections, and licensing, and that they have appropriate contract provisions.

 

 

Sunday, 10 November 2013 16:00

Director's Financial Responsibilities

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The new Association director is often thrust into the job with little idea of what his or her duties and responsibilities are, other than the conceptual knowledge that s/he is obligated to serve in the best interest of the Association. Unless s/he has been an active member of CAI (which is not likely if s/he is a first-time director), s/he is not even aware of the educational resources that are available for guidance in learning what a director's responsibilities are. Further, many directors serve only a one-year term and therefore have little incentive to go through the effort of getting the education necessary for performing their job, since their term will be completed before they can even begin to learn everything they should know.

The purpose of this article is to attempt to provide guidance to the director on his or her financial responsibilities. The most important rule with respect to financial transactions is that they should be well-documented. While the Association may produce monthly financial statements and an annual budget, it is also important to document, (preferably in the minutes of the Board of Directors) the following types of financial decisions:

1.         Authorization for new bank accounts

2.         Authorization of changes in signers of bank accounts

3.         Approval of transfers of cash between accounts

4.         Authorization for purchases of major equipment, or major expenditures

5.         Approval of the annual budget

6.         Acceptance of monthly treasurer's report

7.         Acceptance of monthly interim financial statements from the management company

8.         Approval of the annual audit or review report and tax return

9.         Authorization for an officer of the Association to sign the annual income tax returns

10.       Documentation of board actions and responses with respect to the accountant's management letter that accompanies the annual audit report

11.       Collection actions(authorization to lien member property, authorization to foreclose on member property)

12.       Documentation of board decisions regarding insurance coverage

13.       Adoption of a conflict of interest policy

14.       Authorization of contract for preparation of a reserve study

15.       Authorization of reserve expenditures

16.       Adoption of reserve policies

17.       Adoption of Revenue Ruling 70-604 Election (This election should be made annually and should preferably be made at the annual membership meeting, then ratified at a Board of Directors meeting.)

Accounting is a complex, technical subject in which very few people have an active interest. However, the impact of financial transactions is something that permeates every aspect of our lives, and certainly that of a community association. While no individual can be given a complete accounting education in a short enough period of time to enable them to gain a complete understanding during their term of office, there are certain things that the director can and should do on a procedural basis that would allow him or her to adequately exercise the oversight of financial responsibilities of the members of the Board of Directors of an Association.

The director needs complete financial information in order to perform an adequate review of transactions. Accordingly, the monthly financial reporting package for a community Association should generally include the following documents:

1.         Monthly financial statements

a.         Balance Sheet on an accrual basis

b.         Income Statement on an accrual basis with budget-to-actual comparisons ( The income statement should include both current month and year-to-date amounts.)

2.         General Ledger

3.         Cash Disbursements Journal

4.         Aged Assessments Receivable Listing

5.         Copies of all bank reconciliations

6.         Copies of all bank statements

7.         Copies of paid invoices

While the above list may seem like overkill to some, these documents should be distributed to the board members prior to the Board meeting so that they have an adequate opportunity to review them and be ready at the time of the meeting to either approve the reports or ask the necessary questions. It is not reasonable to expect even a CPA to be given a set of financial statements during a Board meeting and on the spot, have to review, understand, and approve the financial statements and, by inference, the underlying transactions.

For the director to competently review this financial package, he must have a basic understanding of each of the documents.

The balance sheet is a statement that reflects the financial status of the Association at a specific point in time (generally month-end or year-end). Common components of a balance sheet are:

Assets

Cash - Petty cash on hand or in checking accounts, savings accounts, or other types of accounts with a financial institution

Assessments Receivable - Amounts owed by members to the Association as of the date of the financial report

Fixed Assets - Property acquired by the Association with a useful life greater than one year and of significant cost

Prepaid Expenses - Payments of expenses in the current period that will benefit more than one period, such as insurance, which is often paid in a single payment for an annual premium

Liabilities

Accounts Payable - Expenses incurred, but not yet paid

Prepaid Assessments - Dues/assessments paid in advance

Income Taxes Payable - Income taxes due for the current year and any prior years

Fund Balances

Operating Fund - Accumulated earnings or losses of the Association from the current and prior years.     

Replacement Fund - Amount set aside for future repairs and replacements (this balance should have an equal amount of cash set aside to accumulate for major expenses).

The income statement reflects, for a period of time, the income and expense activities of the Association. A preferred format would reflect both the current month’s and year-to-date budgeted and actual activities. Revenues generally consist of member assessments, fines, vending machine, parking, or other income and interest income. Expenses would include operating maintenance costs, utilities, management company fees, and other administrative and operating fees. Amounts transferred to reserves are generally reflected as an expense of the operating budget, unless financial statements are prepared on a fund basis.

The general ledger is a document which underlies the financial statements and summarizes all activity by account. For instance, if three different checks during the month were written for repairs, they would be grouped into the repairs expense account (even though the checks were not in sequential order). The total of those three checks would represent the current month’s total repair expense, which should agree with the income statement. This document can be used by the director to research questions such as "what is in utility or repair expense this month?", and "why is it so high compared to prior months or prior years?" The general ledger should provide sufficient detail for you to find the answer to that question.

The cash disbursements journal is simply a listing of checks in numerical order for the current month, listing the date, payee, and amount.

The other reports are self-explanatory.

The procedures that the director might employ in analyzing these documents should consist of:

1.         Examine the balance sheet and compare it against prior periods to see that cash balances and assessments receivable balances appear reasonable. Note if there are any significant fluctuations between restricted reserves in the current period versus prior periods.

2.         Examine the bank reconciliations and see that they agree to the amounts reflected as cash on the balance sheet. Investigate any differences. Also, make sure they agree with the bank statements. The bank reconciliation should begin with cash per bank and reconcile down to cash per financial statements and general ledger. The reconciling items will generally consist of deposits in transit and outstanding checks. Investigate and question any large or old outstanding checks.

3.         Review the bank statements to ascertain that all interest income has been recorded in the financial statements.

4.         Make sure that all bank accounts are recorded in the general ledger of the Association.

5.         Examine the aged assessments receivable listing and compare it to the balance sheet. The total of assessments receivable should agree with the balance sheet.

6.         Review the aged assessments receivable listing and question any assessments receivable that are more than 30 days old. The Association should adopt a strict collection policy that would consist of assessment of late charges, warning letters, filing of a lien, and ultimately foreclosing on member property for non-payment of assessments. There should be no exceptions to these rules, especially for directors of the Associa­tion.

7.         Review the income statement comparison of budgeted to actual activity both for the current month and the year-to-date, and question any significant variations.

8.         For any questioned income or expense items, trace the account to the general ledger and review the detail for that account.

9.         Review the cash disbursements journal for the month and challenge the propriety of all expenses. For instance, if any checks are written to any director of the Association, find out why. If the management company is being paid more than their contractual fee, find out why.

It will take some time for the director to perform all of the above procedures, but it will provide you with insight as to the financial transactions of the Association, and a greater understanding of how your Association operates. While this may seem like too much work to be done on a monthly basis, you as a director have an obligation to the members of the Association to safeguard the assets of the Association. Only through diligence and a step-by-step procedural review of transactions can this be done.

Tuesday, 05 November 2013 16:00

Making the Revenue Ruling 70-604 Election

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Revenue Ruling 70-604 states that “a meeting is held each year by the stockholder-owners of the corporation at which they decide what is to be done with any excess assessments...”.  

This wording is generally interpreted literally to mean that only the members can make the election. The board of directors cannot make the election. This interpretation places the election approval process directly in conflict with state law (for at least every state in which I have researched this issue), which prescribes that only the board of directors may make decisions regarding disposition of association funds; the members cannot do so. That’s why directors were chosen to represent them.

Associations continually tell me that they can’t get a quorum of members to make a legal vote, or that they have difficulty getting the members to approve an election under Revenue Ruling 70-604. The follow-up question is, “Can’t we just have the Board of Directors make the election?”

The answer is probably yes, but that depends on how much risk you want to take or how much money you want to spend fighting the IRS on this issue. An argument made out of context to the IRS that “the board must make the election because only they have the authority to do so” is a losing one. (If you don’t believe me, just ask any IRS agent.)

The IRS interprets this Ruling very literally to mean that the stockholder-owners must make the decision, because that’s what the Ruling says. The IRS is bound by the Internal Revenue Code and Federal Court cases, but is not bound by state law, non-judicial precedent, or any other precedent except those of their own making. The IRS must follow its own Revenue Rulings whenever they apply to a given situation.

The IRS doesn’t care what state law stipulates, or who has the actual authority to make a decision regarding the disposition of association funds. They only care what their Ruling says, and it says “stockholder-owners,” not directors. However, the phrase as stated by the IRS makes sense ONLY if the members have the authority to determine the disposition of association funds.

It takes only a subtle change in interpretation to change the face of the argument entirely. When working under Revenue Ruling 70-604, pay careful attention to the subtleties of phrasing: “A meeting is held each year by the stockholder-owners of the corporation at which they decide what is to be done with any excess assessments . . .” The phrase “they decide” clearly implies that the stockholder-owners have the authority to make the decision. In fact, they don’t. The IRS was simply unaware of this aspect of association governance at the time the Ruling was issued.

I discussed this issue several years ago with the national office of the IRS, and they conceded that their only interpretation was a literal one, meaning the members had to make the election. I suggested an alternate interpretation: “A meeting is held each year by the individuals in the association who have the authority to make the decision (the board of directors) at which they decide what is to be done with any excess assessments...”. The IRS agreed that my interpretation had merit because the Ruling has no basis if the individuals making the election do not also have the authority to determine the disposition of association funds.

Winning an argument with the IRS isn’t done by telling them that their Revenue Ruling is wrong. Winning the argument is done by showing them how their Revenue Ruling really conforms to the facts. The board makes the election because they are empowered to do so, and that’s what the Revenue Ruling says (in substance, not literally).

Having now discussed the issues, what is an association to do? Well, do you want to comply with what the IRS requires and have the members make the election, or would you prefer to fight them and have the board of directors make the election?

The fact is, you can take a simple action to satisfy both state law and IRS requirements.

I recommend to clients that the members make the election, usually at the annual meeting, although any legal vote of the members will suffice. Then, have the Board ratify that election at their first meeting after the annual meeting. That way, you’re covered no matter how you interpret the ruling.

Tuesday, 05 November 2013 16:00

Timing of the Revenue Ruling 70-604 Election

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It’s getting to be that time of year again when associations are thinking about year-end procedures, one of which is making the annual election under Revenue Ruling 70-604.

I have been asked a number of times what those numbers mean. “70” signifies the year in which the ruling was issued (1970), and “604” simply represents the numerical sequence of the ruling for that year. This was ruling number 604 issued in 1970.

As a CPA, I receive more questions about the application of Revenue Ruling 70-604 than on all other tax issues combined. Several of my articles on the subject of Revenue Ruling 70-604 are posted in various places on the web, so I routinely get “found” and questions are routed in my direction. One question I receive over and over is “when do we make the election?”

While Revenue Ruling 70-604 is one of our most powerful tax planning tools for associations filing Form 1120, it also is the one most subject to interpretation. One reason for this is that the Ruling itself is so brief - only two paragraphs in length. The absence of internal definitions within the Ruling means that readers have to interpret it and make their own definitions for almost all critical issues within the scope of the Ruling, including the timing of the election.

 

Because so many areas of this Ruling are subject to interpretation, many years ago I contacted Mr. Ransom (who drafted Revenue Ruling 70-604) at the Internal Revenue Service (IRS) National Office, to discuss this and other matters. When I pointed out the ambiguity in the Ruling with respect to the timing of the election, Mr. Ransom stated that he felt that there was no ambiguity, as the matter was purposely worded so that the Ruling would be flexible. I specifically asked Mr. Ransom if an association could make their election after their fiscal year had ended, and he affirmed that they could. He agreed that the only limitation on the timing of the election is that the election must be made before the tax return is filed, and must be made on a timely filed return.

 

I also asked Mr. Ransom if it was possible for an association to make an election before the fiscal year had ended. He agreed that it would be possible to make the election in this manner, since the Ruling was purposely drafted to be flexible by stating that “any” excess could be carried over from one year to the subsequent year. That means that one does not have to state a specific amount that would be carried over from one year to the next, nor does one even have to know if there will be any excess.

 

There is no downside risk to making an election under Revenue Ruling 70-604. If an association does not have an excess of membership income over membership expenses, the election will simply not apply to that year. It would be the same as if no election had been made. If an association files Form 1120-H instead of Form 1120, then no election is needed, so again, the election will simply not apply to that year.

Tuesday, 05 November 2013 16:00

The History of Veterans’ Day

November 11, 1918 sparked the origins of Armistice Day. It was on that date that the Armistice (truce) was signed by the Allies and the Germans, ending the four years of conflict of World War I. This day began not only with the laying down of arms, but also with much celebration of the promised peace in the form of blowing of whistles, impromptu parades, and closing of places of business. Demonstrations were made all over the world. In November of 1919, President Woodrow Wilson issued his Armistice Day proclamation. The last paragraph set the tone for future observances: “To us in America, the reflections of Armistice Day will be filled with solemn pride in the heroism of those who died in the country’s service and with gratitude for the victory, both because of the thing from which it has freed us and because of the opportunity it has given America to show her sympathy with peace and justice in the councils of the nation.” In 1927 Congress issued a resolution requesting President Calvin Coolidge to issue a proclamation calling upon officials to display the Flag of the United States on all government buildings on November 11, and inviting the people to observe the day in schools and churches. But it was not until 1938 that Congress passed a bill stating that each November 11 “shall be dedicated to the cause of world peace and ...hereafter celebrated and known as Armistice Day.” That same year President Franklin D. Roosevelt signed a bill making the day a legal holiday in the District of Columbia. For 16 years the United States formally observed Armistice Day, with ceremonies at the Tomb of the Unknown Soldier, where the Chief Executive or his representative placed a wreath. In many communities, the American Legion was in charge of the observance, which included parades and religious services. After World War II, there were many new veterans who had little or no association with World War I. Leaders of veterans’ groups decided to make November 11 the day to honor all who had fought in various American wars, not just in World War I. On November 11, 1953 the town of Emporia, Kansas held a Veterans’ Day observance instead of an Armistice Day program. This was so well-received that a bill was introduced into the House to officially change the name of the holiday to Veterans’ Day. After this bill passed, its author wrote to all state governors and asked for their approval and cooperation in observing the changed holiday. The name was officially changed to Veterans’ Day by an Act of Congress on May 24, 1954. In October 1954, President Eisenhower recognized the change of name to Veterans’ Day in honor of the servicemen of all America’s wars, and called on all citizens to observe the day by remembering the sacrifices of all those who fought so gallantly to gain an enduring peace. While some wars have been very unpopular, that emotion is based on political positions and should not ever reflect on the nation’s warriors that fight the battles. Our service men and women serve the political class, and don’t make the decisions of what battles to fight. They simply “do or die,” and deserve the appreciation of all citizens for the sacrifices they make.

Tuesday, 29 October 2013 17:00

Halloween Safety Tips

No one knows the exact beginning of Halloween as various countries’ legends have developed about the evolution of Halloween. Most people agree, however, that Halloween originally evolved from, and was influenced by, the roots of Celtic Christianity. Originally, it was believed to have marked the end of the harvest season. Halloween falls on the evening before the Christian holy days of All Hallow’s Day, also known as All Saints Day on November 1, and All Souls Day on November 2. This resulted in October 31 being given the name of All Hallow’s Eve or Halloween. The roots of all Saints Day can be traced back to the year 609, so Halloween has been around for a while.

Tuesday, 29 October 2013 17:00

California Tax Issues

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California taxation of homeowners associations is still a mystery to many people. That's because the rules are a little complex, especially as compared to taxation of individuals in the state of California. Let's look at the basic rules that apply to taxation of California homeowners associations.

1)   All corporations in California are automatically subject to the franchise tax unless they are exempt from taxation under one of the subsections of revenue and  taxation code section 23701. The franchise tax is essentially a tax on gross receipts less allowable deductions. One of the key applications of this concept that potentially affects homeowners associations is that U.S. Treasury interest, which is generally considered exempt interest income under income tax rules, is taxable under the franchise tax rules.

2)   Corporate homeowners associations can apply for exemption under Revenue and Taxation Code section 23701t. This requires filing exemption application Form FTB 3500, which is a significant process in itself. It also means that the Association must meet the qualifications set forth in that section of California code. The benefit is significant because exempt associations are subject to the income tax rules rather than the franchise tax rules. What this means is that U.S. Treasury interest for an exempt Association is not considered taxable income.

 3)   Qualification under Revenue and Taxation code section 23701t is roughly equivalent to qualification under Internal Revenue Code section 528 for federal tax purposes. That means if an Association can qualify to file form 1120-H, it generally can also qualify for exemption under California law.

 However there are some differences between federal and California law. One difference is that cooperatives may not file form 1120-H, but will still qualify under Revenue and Taxation Code section 23701t for California purposes.

 Another difference relates to unincorporated associations, which are automatically subject to the income tax rules rather than the franchise tax rules for purposes of California taxation.

4)   All corporations are required to file Form 100, which reports all taxable activities. Exempt Associations are also required to file Form 199, which reports all exempt activities. While FTB allows a “postcard” filing of Form 199 online, many associations still prefer to file the paper form both as proof of filing and for an internal record.

The California Franchise Tax Board (FTB) has long had a policy of suspending corporate status for associations that either failed to file tax returns, or failure to file the biennial statement of officers with the Secretary of State's office. Failure to file any of the tax forms or officer notice can result in suspension of the Corporation. While that has certain legal implications, such as the inability to legally contract for services, and the loss of rights to the name of the corporation, it also has a financial impact.

The Franchise Tax Board in recent months has been very aggressive and also revoking exempt status for corporations that have been suspended for any reason. The impact of this is that the Association must not only supply any missing tax returns or statement of officers, but they must also file a “Certificate of Revivor” and a new application for exempt status on Form FTB 3500.

Exacerbating the situation is the fact that the Secretary of State is not particularly timely in posting its receipt of the statement of officers. This has resulted in two situations in our firm where associations have had their exempt status revoked and have been suspended, when in fact they had made all timely filings. We recently dealt with an association that had its exempt status revoked and placed on suspension in July, because the Secretary of State failed to post notice that the statement of officers had been received in May. In this case there was about a six week time delay in the posting of the notice, and FTB happened to take action during that six week period. The matter was easily resolved by a single phone call to the tax practitioners Hotline with FTB and working through the situation. However, if someone were relying strictly on the positions taken by FTB without challenging them, it would have resulted in an extensive effort by the Association and significant cost in re-applying for exempt status.

The caution to associations is to not blindly accept the positions of the Franchise Tax Board if you believe you have filed all necessary forms with the State of California.

Associations can check their corporate status on the California Secretary of State website at http://kepler.sos.ca.gov/

This does not allow you to check exempt status with Franchise Tax Board. but it will at least let you know whether your corporation is active or has been suspended.

 

As a homeowner, you have a big investment in your neighborhood. In addition to your own dwelling unit, your Association may have common amenities, such as a clubhouse, pool, sidewalks, roads, and more. How do you make sure that your Association is properly maintained and cared for?  One way is to volunteer with your homeowner’s Association as a committee or board member.

Protecting your own investment is just one reason to serve as a volunteer for your Association, though. Below is a list of 10 important reasons to serve on an Association board.  

1. Protect Your Property - One of the top priorities of all board members should be to protect the value of all homes in the community. This is not a self-serving act; it is an obligation to all members of the Association.  Being involved on the board puts you in a better position to make and implement rules that directly affect property value, especially if they require decisions about the Association’s budget or routine maintenance.

2. Correct Problems – If you notice problems in your community, such as parking violations, maintenance issues, or situations with unruly neighbors, you can help to correct them by serving on the board.

3. Meet Expectations – Everyone has certain expectations when they move into an Association. Are those expectations being met? It is unlikely that an Association will meet everyone’s expectations, but by serving on the board, you can help balance competing expectations to create a better community.

4. Gain Better Understanding of Applicable Laws - Volunteering as a board member forces you to become better-versed in laws and regulations related to community Associations.

5. Learn New Skills – Most members who volunteer to serve on the board don’t possess all the skills necessary for this management / leadership position. Most will learn on the job. This is an opportunity to learn about maintenance issues, finances, and budgeting.

6. Learn Life Lessons - As an Association board member, you must learn to work as a team. A one-man-show is effectively a dictatorship. While this type of leadership can be very efficient, the Association is usually better off if board members share their interests and responsibilities with others, as the job is too big for one person. At the same time, you will appreciate the importance of valuing others’ opinions before making decisions.

7. Have Fun - Serving on the board doesn’t have to be boring. The interaction with your fellow board members and active members who get involved is also a socialization process. You get to meet and know your neighbors and develop friendships. The collaboration that occurs during the decision-making process of the board often brings out the creative side of people as they strive to create outcomes that work for all members. In the process, you cause your community to run better.

8. Develop Leadership Skills - Serving on the Association board gives you a chance to hone your leadership skills. Organizational skills are generally improved as you deal with coordination of board activities and membership social functions.

9. Give Back to the Association - By volunteering on your Association’s board, you are also giving back to your neighbors and community. Many people derive a great sense of satisfaction in volunteering.

10. Meet Neighbors - An Association board meeting can be one of the best places to meet your neighbors and to learn more about them. It gives you a chance to socialize and make friends with others living in your neighborhood. Many friendships start right here.

Polls of community Association lifestyles consistently remind us that the vast majority of homeowners in Associations have a positive view of their Association – but that doesn’t make the news. If you rely solely on the large media outlets for information about Associations, you could easily develop the opposite viewpoint, since what makes the news are the very small number of incidents where things go wrong.

Too many people describe what’s wrong with Associations rather than talk about what’s right with Associations. This article attempts to present some of the benefits that you can derive from volunteering to serve your Association. Serving on your Association board puts you in a better position to have a positive influence in your community.

 

Monday, 14 October 2013 17:00

Who Owns the Reserve Study Report?

Written by

There are differences of opinion within the reserve study industry as to who “owns” the reserve study report, what degree of responsibility the reserve professional has, and how situations like the one described in Chuck Miller’s article “Board Held Hostage by Reserve Study” should be reported.

One thing is clear - national reserve study standards do not provide adequate guidance in this area.

Many reserve preparers take the position that they have been engaged to perform an independent study resulting in a report of their findings, and that the reserve professional “owns” the entire reserve study report. These individuals also often take the position that their reserve study is the basis for the Association’s long-term maintenance plan.

Unfortunately, national reserve study standards do not address this issue. For instance, there is no requirement that the reserve professional make any sort of statement regarding the work performed other than the vague reference to a site visit, nor any statement of opinion regarding the accuracy of the data presented or the degree of responsibility for the report. National standards only require comments on:

Completeness:Materialissueswhich,ifnotdisclosed,wouldcauseadistortionoftheassociation’s situation

 

Relianceonclientdata:InformationprovidedbytheofficialrepresentativeoftheAssociationregardingfinancial,physical,quantity,orhistoricalissueswillbedeemedreliablebytheconsultant.”

 

These are required disclosures that fall far short of expressing a clear, positive opinion regarding the accuracy of the reserve study report or the actual work performed.

Others believe that the reserve study report is “owned” by the Association, and that the role of the reserve professional is to assist in compiling the data and preparing the report. These individuals generally take the position that the reserve study report should be a financial reflection of the Association’s long-term maintenance plan; it does not establish the long-term maintenance plan.

Again, national reserve study standards do not provide guidance on how the reserve professional should report on his involvement with the reserve study process, nor on his opinion of the conclusions reached.

If a reserve professional chose to add “his” report to the “Association’s Reserve Study Report, what might that report by the reserve professional look like? Within the confines of current national reserve study standards, it might look something like this:

 

We have prepared the accompanying Reserve Funding Forecast of AssocName as of and for the thirty-year period beginning StartDate as a Level I Reserve Study. This forecast is the responsibility of Association Management.

We conducted our engagement in accordance with National Reserve Study Standards of the Community Associations Institute and the Association of Professional Reserve Analysts. Those standards require that we perform a site visit to visually observe and assess the condition of the significant common area components of the Association. A Level I Reserve Study also includes assessing the significant estimates used by management, as well as evaluating the overall forecast report presentation.

This report presents, in the form of a financial forecast, information that is the representation of management of the Association. We do not express an opinion or any other form of assurance on the accompanying report or assumptions. Furthermore, there will usually be differences between the forecast and actual results because events and circumstances frequently do not occur as expected, and those differences may be material. We have no responsibility to update this report for events and circumstances occurring after the date of this report.

While satisfactory, the above sample report wording still falls short of actually describing the work performed or of clearly stating the conclusions reached and the degree of responsibility assumed by the reserve professional. But to get to that point, reserve study standards probably need to be modified.

The subject of Chuck Miller’s article is a dilemma presented to an Association board when a reserve professional takes a position related to appropriate maintenance activities of roads that is at odds with other professionals’ recommendations.

As quoted from Chuck’s article, in this instance,the facts are that “an engineering firm specializing in geotechnical studies and pavement studies has rendered a comprehensive report on a very thorough study conducted over some period of time, including analysis of core samples, which directly refutes the conclusion of the reserve professional. In addition, a company with decades of road construction and maintenance experience that has, for many years, maintained the subject roads, has offered an opinion that directly refutes the conclusion of the reserve professional. Lastly, the predecessor reserve professional had apparently reached a conclusion concurring with the engineering firm performing the pavement study, and did not consider that complete removal and replacement of all road surfaces was a necessary maintenance activity.”

It appears that the current reserve professional, giving all due respect to his professional engineer credential, is taking an unreasonable position in this instance. It is very difficult for a reserve professional spending only one or two days on what is a relatively superficial evaluation on a reserve study site visit to ever gain the same level of knowledge as the individuals that actually maintain the various components on a daily basis. Often, those individuals are experts in their own right. The evidence appears overwhelming that the reserve professional has taken an unreasonable position based upon insufficient facts.

The reserve professional has demonstrated a level of intransigence that bears a strong resemblance to the current budget negotiations of Congress – “my way or the highway” (pun intended). Refusal to modify a weak position in the face of strong evidence to the contrary should also cause a lack of confidence in other parts of the reserve study. If this is the case, then the Association would be wise to seek another reserve professional for their reserve study.

I have long expressed the sentiment that a reserve study is based on a series of assumptions about future events, and except for known maintenance activities occurring in the very near future, it is unlikely that any of the assumptions will prove to be 100% accurate. One purpose of the reserve study is to guide the Association to have approximately the right amount of money at approximately the right time. This can be achieved even though the underlying assumptions are not completely accurate; they just have to be relatively accurate.

The reliance on assumptions makes it easy to challenge the reserve study. However, those reserve professionals holding the RS (Reserve Specialist) or PRA (Professional Reserve Analyst) designations have demonstrated training and experience, and their opinions should be valued. The normal process of preparing a reserve study, and its review by Association management, will typically include a challenge of assumptions used in the study, especially of those assumptions potentially affecting estimated cost, estimated or remaining life, and level of maintenance work to be performed. In most circumstances, it is relatively easy to confirm the assumptions and reach agreement. It is usually only when someone adopts an unreasonable, unsupportable, position that disagreements occur.

Our firm did have such an incident occur several years ago when our Association client( more specifically, the chair of the finance committee responsible for budgeting and overseeing the reserve study) demanded that proposed future roofing expenditures be removed from the study. He stated he had spoken with a roofing consultant and was advised that it was never necessary to spend money on tile roofs, as they lasted a lifetime. We believed that replacement of underlayment was a necessary cost to maintain ability to repel water. He was charged with sole responsibility to deal with us in the preparation of the reserve study, and would absolutely not accept inclusion of the proposed roofing costs, nor would he approve forwarding the report to the full committee or board of directors unless we removed the proposed roofing costs. Our response to resolve this impasse was to remove the proposed roofing costs, include it as the first line item of components excluded from the reserve study, and modify our report to indicate that we believed the funding study proposed by the finance committee to be significantly understated because of the omission. Once this report was exposed to the full finance committee and board of directors, they agreed with our position, and the roofing costs were added back into the study.

If the reserve study report is perceived as the summation of an independent study by the reserve professional, then it is appropriate for him to take reasonably supported positions. The question presented in Chuck Miller’s article is whether or not in this instance, the professional’s opinion is considered to be a reasonable position. Also, support for positions that vary significantly from an existing, well-documented maintenance plan should be explained in the report.

If the reserve study report is perceived as being a report ON the financial forecast and underlying long-term maintenance plan, then the reserve professional’s “report” would be a document (part of the overall reserve study) that describes his analysis OF the financial forecast and underlying long-term maintenance plan. It would be, in this document, clearly identified as being the reserve professional’s “report,” that the reserve professional would express an opinion about the adequacy of the road maintenance plan and the resulting financial forecast.

If the above-described reporting incongruity was resolved, it would be much clearer as to what position the reserve professional was taking, and would give some guidance to the Association in how to resolve the situation in which they find themselves. For instance, it would be clear that either:

  • The reserve professional believes the reserve study report to be “his” independent report of the Association’s funding plan for long-term maintenance projects, or
  • The reserve professional believes that the reserve study report belongs to the Association, and could issue a one-page report, similar to the language above, but with an added paragraph to highlight his disagreement with certain aspects of the reserve study report.

Either position would be an improvement over the current position, where there is no indication of either the work performed by the reserve professional or the conclusions reached.

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