I was working in our Association office one day when I overheard my office manager's half of a telephone conversation. I was surprised at what I was hearing, because I thought the misunderstanding was a thing of the past these days.

The caller was a new owner in a rural, sprawling, single-family home community. He was calling because he had just received a notice of delinquency for nonpayment of Association assessments. The issue? This new owner did not have a clue that he was a member of the Association. Ironically, this happened to be in California, where disclosures to buyers have been mandated for decades. How did this happen? When asked by the office manager, the new owner explained that he had purchased this property directly from the previous owner without the benefit of a professional real estate agent or an escrow company. The previous owner had simply executed a deed to the new owner in exchange for money - a classic private transaction. Neither the seller nor buyer had had any knowledge of the disclosure requirements mandated by law.

Had either a professional real estate agent or an escrow company been utilized as part of this transaction, both buyer and seller would have been informed of the disclosure requirements, and there would have been no surprise to the new owner.   As it was, the new owner was not just surprised, he was downright angry. The only target remaining in sight was the Association office, as the seller was long gone. So the new owner decided he needed to visit the Association office.

The new owner came into the Association office to "get to the bottom" of this situation. He was apparently convinced that he was going to find a way to get out of paying these assessments. I suspect this gentleman was just used to getting his own way. The office manager provided him with all the documents he should have received in a disclosure statement, including the CC&Rs, rules and regulations, Member's Handbook, and Association budget. The new owner looked these documents over while in the office and asked for an explanation of their content . The office manager patiently and politely explained that the CC&Rs (Covenants, Conditions, and Restrictions) were recorded documents, and indicated that if the gentleman would examine his recorded deed, he would see that it made reference to these recorded CC&Rs. These CC&Rs are a part of his property and may not be separated from the property acquired.

The rules and regulations explained the operating rules established by the Association. The Member’s Handbook explained the amenities provided by the Association. Once the new owner realized what amenities existed and quickly looked at the budget, he demanded that his assessment be reduced, since he had not been aware of, nor would he be using, any of the Association amenities. Again, the office manager patiently explained that the assessment was not a buffet where owners could pick and choose what amenities they wanted to use or pay for. All members shared the cost of the amenities, whether or not they used those amenities.

The new owner then challenged the "exorbitant" amount of "General and Administrative" costs in the budget, stating that the cost was simply too high. (This is really good feedback coming from someone who never even knew he was a member of the Association and had had the budget for all of 15 minutes). Again, the office manager explained the basis for the costs and assured the new owner that the Board of Directors, who were also dues-paying members, did everything within their power to keep assessments as low as possible. Perhaps if the new owner would like to attend a board meeting and discuss this with the Board of Directors, he would get some answers? He would be allowed five minutes to make a statement. The owner declined, stating that he didn't have time to waste with this Association.

Interestingly, the man's comments caused me to look at the budget numbers again from a different perspective. The budget was essentially laid out by department, and He was right: the total for general and administrative expenses was a large amount. I asked our outside accountant about this, and wondered if there was possibly any different way to present the information that could be more informative and less confusing.

Our accountant explained that he had previously tried to introduce the concept of ABM (Activity-Based Management) to a group of Association managers as an alternate manner of presenting financial information, but that there had been little interest in the topic. He also explained that in the nonprofit organization world, their practice of presenting a required "Statement of Functional Expenses" was a similar concept.

He described how a manager's salary, shown by department, ends up in the “General and Administrative” section. However, upon analyzing how the manager actually spends his time, one realizes that his salary should instead get spread around to Maintenance, Recreational Amenities, Security, Member Services, and Governance.   Except for the Governance portion, none of that manager's salary remains in the General and Administrative section. If all expenses were examined in the same manner, one would see a completely different picture of how the Association spent its money. The accountant also explained that, with planning and the correct software, it would be possible to present the same information in both the traditional departmental format as well as the activity-based management format.

Maybe that's something to consider.

Thanks to Gary Porter, CPA for insight on activity-based management.