By Caitlin La Luz, Winzenberg, Leff, Purvis & Payne, LLP
In today’s day and age, associations are looking for more convenient, flexible, and safe ways to conduct association business. The ongoing pandemic has only amplified the need for associations to explore their options to conduct business virtually. The good news is the Colorado Revised Nonprofit Corporation Act (“Nonprofit Act”) under section 7-127-108 states, “Unless otherwise provided in the Bylaws, any or all of the members may participate in an annual, regular, or special meeting of the members by, or the meeting may be conducted through the use of any means of communication by which all persons participating in the meeting may hear each other during the meeting.” The Nonprofit Act also includes a similar provision for director meetings. These provisions in the Nonprofit Act authorize an association to conduct member and director meetings virtually by any means as long as all attendees can hear each other and the bylaws for the association do not prohibit this method. There are numerous platforms to choose from, both free and for purchase, that can help associations achieve this new method of meeting. It’s worth looking into the different options and price points of various platforms as some will have more features, like enhanced security and longer time limits for meetings.
It is important to remember that an association must comply not only with Colorado law but the governing documents for the association as well, whether meeting virtually or in person. Under the Colorado Common Interest Ownership Act, associations must have a policy detailing the conduct of meetings. Though associations may be conducting virtual meetings they should remember to review their meeting policy and adhere to it. An association’s other governing documents, like the bylaws, are also important to review in order to comply with the notice and procedural requirements for both director and member meetings. If conducting a meeting with an election, the board will need to be even more careful to follow all requirements in statute and in the governing documents of the association; like the potential need for a secret ballot in a contested director election. Luckily, many associations can choose to conduct an election via mail-in ballots or join the tech savvy associations now using online election and voting platforms. If an association is unsure about what procedures are required or confused by the language in the governing documents, it should reach out to the association’s counsel for advice.
Meeting virtually requires advance planning and preparation. The association should schedule meetings with enough time to send additional instructions and guidance to those attending. For instance, if a board plans on setting up a Zoom conference for a director meeting, the meeting ID and password will need to be sent out to all potential attendees prior to the meeting. It will also be helpful to provide guidelines on the procedure of the meeting to attendees (i.e. attendees must remain on mute and ask questions via the chat box). A meeting with a clear direction and procedure will run much more efficiently than one without.
Here is a quick checklist to help associations plan to meet virtually:
Caitlin La Luz is an attorney at Winzenburg, Leff, Purvis & Payne, LLP. For nearly 40 years, the law firm of Winzenburg, Leff, Purvis & Payne, LLP, has represented homeowners associations, townhome owners associations and condominium owner associations throughout the State of Colorado.
By Taylor Spiegelberg, Knott Laboratory
For HOA’s, it can be very useful to have a tool to document a house or property to view later. Often, this would entail just taking photographs of anything relevant or particularly specific on a property. However, photos can only get you so far. Say perhaps you want to have a measurement on a wall or area but it was not documented on your initial inspection, or maybe you want to look at the roof closer but it was either too difficult or dangerous to access. Through modern technology and software, photos can be taken and processed to create a digital 3D version of the property which can be used to check measurements or view items through angles that just might not be possible by the human eye.
Let’s look at one tool that can be used to assist in the documentation of roofs, and that would be the use of unmanned aerial vehicles, more commonly known as drones. Until recently, to inspect a rooftop or even higher elevated window or siding, you would need to physically go up yourself. This can cause a lot of headache, as there is the safety concern of falls as well as the extra necessary equipment such as a ladder, a lift, harnessing, ropes, and the like. Certain properties you may not even allow access to use those, which would leave the entire roof undocumented. With drones, this takes the guesswork out of how to get on the roof and stay safe. By flying a drone, you can quickly and easily navigate the entire roof area, and with many drones having high resolution digital cameras onboard, you can take high quality photographs and video of the rooftop. This imagery is actively captured by the remote-control display while flying, so on site you can view overall and target specific areas if you see areas needing more focus. Taking the guesswork out of roofing inspections is one valuable part of using the drones, but the imagery can be transformed into a useful asset for HOA’s once processed on the software side.
So you have photographs and video of the roof and other areas on location, now what?
Say you want to measure a distance or find an angle; you couldn’t find this unless you had a tape measure or other measuring tools in the photo you are concerned with. Today, there is software that allows a set of photographs to be converted into a scaled 3D representation of your property. This allows you to later look at the property from any view you’d like, such as a top down representation which can lead to an accurate floorplan. Not only does the view help, but as this is a 3D format known as a point cloud, you can grab dimensions on anything you need. This is an invaluable tool, as often you may notice things well after the fact, and the point cloud allows you to view the property again without having to physically be there.
Now not every set of photographs can be used to create these 3D point clouds. The software is looking for similar points in between photographs to be able to tell where each photo was taken from to make the point cloud. This means that the photographs need to be taken with a lot of overlap to create a high-quality point cloud of what you’re trying to capture. Drones are good at this in general, as they can be programmed to fly set paths above roofs and take plenty of photos for this specific use. For an interior space or going around an exterior, you’ll want to take a lot of photographs, maybe taking a step or two in between. Picture yourself looking at the house or room and going in a circle around it, and that’s what you want your pictures to capture. This is good for getting an overall model, and if you need more detail in spots you can take a set going in and focusing on specific areas. There is also software which can create a detailed model of an interior space using 360° cameras and taking fewer pictures by spacing the photos periodically throughout the interior.
You’ll also want to remember a tape measure while taking your photographs. This is to ensure that the resulting 3D point cloud gives you accurate measurements. You don’t necessarily need to have the tape measures in photos, however you can if you wish, but you’ll want to know several dimensions to be able to set the scale of the point cloud and check against your measurements. You only need to do this in a few spots, and don’t need to go over everything, as the point cloud scales everything together so you can measure things you did not initially measure.
These advanced tools put the freedom to explore a property well after the fact into the HOA’s hands. The value this brings is not only the ability to look at the point cloud made from the interiors or exteriors, but also the time, safety, equipment, and efficiency of looking at the property in detail. Technology moves fast, and there are more and more streamlined approaches to help HOA’s. It’s exciting to see what will come next!
Taylor Spiegelberg is a Senior Visualization Expert with Knott Laboratory, a forensic engineering firm. Mr. Spiegelberg earned a Bachelor of Fine Arts degree in 3D Graphics and Animation from the University of Colorado- Denver.
By Eric Lecky, SageWater
Are you dealing with leaks from an outdated plumbing system? Piping issues, whether defective or age-related, can be one of the worst problems a community can experience, especially given the potential damage to a building's structure and personal property that can be caused by flooding, leaks, and mold.
Facing the prospect of replacing and modernizing your piping system during COVID-19 can seem daunting. However, the pandemic has made it even more critical that you ensure your residents have access to clean, fresh water, functional drain, waste and vent piping, and efficient HVAC systems. While these have always been considered “essential,” proper sanitation and healthy air movement are critical components of minimizing the impact of this terrible virus.
Plumbing systems that were already nearing the end of their useful life have seen increased stress due to expanded use from extended quarantining and more people working remotely, using their plumbing and HVAC while they are home all day. Risking repeated or extended outages from plumbing failures when owners and residents need their plumbing to work correctly is not an option. While it may not seem easy, the best course of action is to address the issues now and not delay.
Know Your Pipe System
Most buildings have several different piping systems that should have a regular inspection to ensure they are in proper working condition and not showing dangerous signs of aging.
These systems are usually comprised of one or more different types of pipes, which range from metals such as copper, steel, and cast iron to a variety of plastics. The lifespan of each material varies considerably and is dependent on local water chemistry and climate. Knowing what's in your building, when it was installed and how well it is aging are critical data points when evaluating the length of time you may have before needing to repair or replace your pipes.
What to Look For
Sudden changes in water pressure, discolored water, or small leaks are early indicators of potentially more pressing issues. Visible signs of corrosion-such as changes in water-color, oxidization of metal pipes, or a metallic taste are equally important indicators. If water-related complaints, leaks, and other problems become more frequent, it's time for a professional inspection.
Solutions to Solving Your Piping Problems
When it comes to repairing failing pipes, there are several options, and some are better than others.
On one end of the spectrum, you can continue to have your plumber make ad hoc repairs. While each service call is not too expensive, it is a costly and time-intensive option in the long run and doesn't solve the problem.
Be wary of alternative solutions like pipe lining. While in theory the idea of lining an existing failing pipe with a plastic resin seems like a good idea, in practice it is far from perfect, and very difficult (if not impossible) to get correct. If not done properly, you will have to replace your pipes anyway, essentially paying to fix the problem twice.
Repiping represents the most permanent fix to plumbing problems. By replacing pipes altogether, you reset the clock on your building. Many new potable water supply piping products carry a 25-year warranty, so you'll have plenty of protection for years.
While some managers and owners initially believe that repiping may be too big of a project to undertake, the reality is that it can be managed very efficiently with minimal disruptions. It often costs less than you might think, given the nature of the project, and is frequently less expensive than the epoxy lining. For a solid return on investment, pipe replacement is one of the best capital improvement projects your community can undertake. Some of the realized benefits include, but are not limited to:
Waiting too long to repipe escalates your risk of catastrophic damage to your building. By acting early and planning ahead, you avoid numerous problems and gain immediate financial and structural benefits, as well as a boost to your building reputation among the real estate community.
Eric Lecky (email@example.com) is an Executive Vice President at SageWater, North America’s leading pipe replacement contractor. SageWater is headquartered in Alexandria, Virginia, with offices nationwide. Over the past 30 years, they have replaced more than 35 million feet of pipe in over 100,000 occupied residential units.
By Jonah Hunt, Orten Cavanagh Holmes & Hunt, LLC
In today’s coronavirus climate, all community associations should consider implementing and utilizing technology to conduct community association business, including annual meetings and board member elections.
Online or electronic voting provides the ability to conduct director elections at annual meetings when a significant portion of the owners are unable to attend a live, in-person meeting. Resort and mountain communities have been successfully using this technology for years.
This year, associations throughout the state are conducting annual meetings on numerous virtual platforms (i.e. Zoom, WebEx, GoToMeeting, etc.). These virtual platforms permit owners to attend meetings by phone or videoconference and vote on director candidates while staying compliant with state and local public health orders.
Colorado law provides that associations may utilize electronic voting, unless expressly prohibited by its bylaws. Owners are permitted to participate in any annual, regular, or special member meeting by any means of communication or technology so long as the owner can be heard by the other participants. There is no statutory requirement, however, that all participants be able to see each other.
So how does an owner cast his or her vote? Any owner virtually present at the meeting may submit his or her vote by voice, raised hand, email, text, etc. While this may work fine for smaller associations, it may be cumbersome in larger ones.
To better facilitate the voting process, many associations are turning to third party service providers to handle the voting portion of the meeting. The benefits of doing so can include the following:
The mechanics of voting at meetings are flexible so long as they comply with the bylaws and Colorado law. Voting usually takes place after the business of the meeting is conducted and the Board candidates are introduced. When it is time to vote, owners log in to the account assigned to them by the association and cast their vote. The association should make volunteers available to assist any owner who may need assistance with the technical aspects of electronic voting.
Don’t forget that Colorado law requires associations to maintain ballots, proxies, and other voting records for at least one year after the election to which they relate.
If you are considering employing online voting in your community, review your governing documents and consult with your community manager and legal counsel before doing so.
Jonah G. Hunt is a partner at Orten Cavanagh Holmes & Hunt, LLC, providing strategic general counsel and litigation services to community associations throughout Colorado.
By Ashley Douglas, Reconstruction Experts
If I were to ask you to picture a thriving older HOA community near you, chances are you could bring one to mind easily. This type of community appears to age gracefully with residents who are happy to live near one another. They have flags of their favorite sports teams out front, their patios are decorated beautifully, and they have great participation in their monthly board meetings and community events. They have clearly attracted residents who want to invest in where they live.
The one that comes to mind in my neighborhood has always looked like a place that I would want to live--even before I worked in the HOA industry. Their siding is painted nicely, their roads are smooth and clear, and the landscaping is flawless. Whenever I drive by, I see a team of people working on some area of the property to keep it looking its best. In town they are known as one of the premier communities to live in, and units are always in high demand.
These types of HOAs make it look easy, but all of us know that maintaining high property values takes a tremendous amount of planning, effort, and money. And I’m not just talking about the work it takes to make things look nice.
Over the years I have gotten to know the HOA I mentioned above, and they’ve set the bar in my mind for how an HOA should approach caring for their community.
So, what have they done from a maintenance perspective to keep homes selling and residents happy over decades of time? The answer may surprise you because they do not focus most of their attention on flashy aesthetic repairs.
It’s easy to put up a coat of paint and keep the flowers looking nice, but what takes real effort and attention is what’s done regularly to keep the important systems of the building in good condition over the long haul. You know, the typical list of issues building inspectors come back with when a unit is getting ready to sell.
When I asked this community’s Board of Directors how they approach maintaining their property, I was refreshed to hear their reply. (The things I’ve included below aren’t an exhaustive list but will give you an idea of what I’m referring to.)
Life safety issues are always the top priority. Things to plan for in this category include:
Next, it’s important to consider what types of things could be causing the building damage right now. Most of these types of repairs center around keeping water out of your building.
*The ranking list of repairs should be evaluated by a reserve study specialist and a design professional that you can find through your membership with CAI. Your reserve study should be updated regularly.
Once the HOA has gotten to the point where they have maintained all the important building systems, aesthetics can then be considered. This is where fun updated paint schemes and creative landscaping plans can come into play.
The importance of taking care of deferred maintenance cannot be overstated. A community that does not properly increase dues thereby only allowing themselves the ability to make bare minimum repairs won’t attract the best buyers for their neighborhood. Things like painting over rotted siding and deteriorated wood handrails, or not repairing hail damage promptly is a recipe for disaster for home values.
Quality home buyers want to see that the HOA has a plan for taking care of the important systems of the structure. If your HOA can show prospective buyers a good track record of maintenance, or a plan to make things better if this hasn’t been done in the past, they have a much better shot at maintaining and improving home values over time by attracting good buyers who want to live in a great community and participate in keeping it a nice place to live.
As the VP of the Colorado Region, Ashley utilizes her experience to manage the overall success of the Colorado Region of Reconstruction Experts, and works closely with RE’s Senior Management of each division to ensure that our core values of Safety, Quality, Schedule, Cost and Communication are fully utilized in the procurement, planning and the execution of each project. Ashley has worked at Reconstruction Experts for 10 years serving in many different roles along the way.
By Chase Carmel and Katie Conely, OSG
What do Millennials actually want? This question has been front and center in recent years for anyone who is interested in marketing services or products to the globe’s largest rising group with purchasing power. Millennials have been accused of being “flighty” and “killing off” everything from “the concept of the starter home” to “napkins,” according to Business Insider. Millennials began their experience in building their financial savings and their resumés at a time when finding employment was difficult. As a result, they became the “Boomerang Generation,” who in large numbers found refuge by moving back into their parents’ homes or in delaying purchasing a home longer than previous generations.
To cast them in a slightly different light: Millennials are financially careful. They, along with Generation X, are the first group of adults accustomed to having the entire world at their fingertips on their mobile phones. They sift through multiple options before making decisions—they don’t mind taking the time to find the right solution, and they do their research. They believe, often rightfully so, that there might always be something better out there for whatever they are pursuing if they just keep looking. Most importantly, Millennials are wary of being taken for a ride.
So, how do Millennial attitudes and behaviors affect forward technological trends in the HOA market?
A major benefit property management companies and homeowners associations would gain from the Millennial perspective is a greater insistence on integrated, one-stop-shop, technologically savvy solutions for payment processing and reporting. Your younger homeowners and renters want options in paying their bills, from the ability to pay using any device they like to payment automation or scheduling. They already have access to multiple payment channels for utilities, online purchases, flights, insurance, and nearly anything else you can think of. Why not rent or association fees as well?
A significant factor that results in late bill payments is the level of accessibility in bill payment channels. Your customers have busy lives. They may remember to make a payment while waiting in line at the store, for instance, but get distracted on the way home before they can dig out their checkbook. An obvious benefit to creating more digital payment channel options for your busy homeowners and renters is a better likelihood of on-time payments. The customer waiting in line at the store would pay on their phone through a mobile-responsive website, a mobile app, a text-to-pay solution, or by calling in to engage with an interactive voice response menu—if they could.
Paper bills, while sometimes necessary for customers who prefer not to opt in for paperless billing, also present obstacles including mail delays, lack of visibility of when your payers receive and open their bills, and decreased communications interaction from your primarily online audience. Automated electronic billing clears every one of those obstacles and greatly increases your ability to track and make informed projections for incoming payments.
Cutting edge technology in the HOA and property management world is highly focused on digital integration right now. In consolidating information by integrating payment channels and customer details on one searchable reporting platform, your payments vendor can create a simplified command center for your company. Using this, you can access one central source of information about your customers, their preferred payment channels, the type of payments they are making, their interaction with your communications, and your incoming or outgoing payments. The chief end of all of this is to provide you with greater visibility and control over your money.
The more your customers expect from you in terms of digital communications and transactions, the more you ought to require out of your billing company. Property management is one of the last industries to digitize the payment experience for their customers, which means there is a fantastic opportunity for advancement. By streamlining your payments processes across all channels, you can spend more time growing your business and less time on billing organization.
Chase Carmel works for OSG, an international company specializing in billing and communications for multiple vertical markets, including HOA and property management. For the last 13 years he’s been working on improving technology in the HOA space, and is currently serving as the CAI Rocky Mountain Chapter Norther Colorado Committee Co-Chair to bring more educational programs to Northern Colorado.
By Kelly K. McQueeney, Esq., Altitude Community Law
The Colorado Common Interest Ownership Act (“CCIOA”) establishes a turnover process for most new common interest communities whereby control of the community transitions from the declarant to the owners. CCIOA’s transition process occurs over a period of time during which the owners gradually become more involved in the governance of the community, which includes transferring control of the board of directors to the owners, the financial operation of the community association, and common properties originally maintained and owned by the declarant. Nevertheless, CCIOA also establishes a specific time at which declarant control terminates, unless a community’s declaration provides for an earlier termination date.
This article focuses on a particular part of the transition process, the Turnover Audit. For common interest communities established on or after July 1, 1992, C.R.S. § 38-33.3-303(9) of CCIOA requires that within 60 days after the end of declarant control, the declarant turn over certain documents, records and an audit of the association’s financial statements. A list of the documents, records, and other items to be turned over can be found in Section 303(9) of CCIOA and includes, ”an accounting for association funds and financial statements, from the date the association received funds and ending on the date the period of declarant control ends.”
These accounting and financial statements must be audited by an independent certified public accountant (“Turnover Audit”). The CPA’s audit must be accompanied by a letter from the CPA expressing the CPA’s opinion that the association’s financial statements either present fairly the financial position of the association in conformity with generally accepted accounting principles, or a disclaimer of the CPA’s ability to attest to the fairness of the financial information presented. If such disclaimer is provided, the CPA must explain its reasons why it cannot assert an opinion as to the fairness of the financial statements.
CCIOA states that the expense of the Turnover Audit shall not be paid for or charged to the association. Depending upon the length of the time it takes the community to transition from declarant control, the Turnover Audit could be an expensive process. For larger communities or communities where it may take more than two years to transition, the declarant may want to perform annual audits while still under declarant control; however, this is not required as part of the Turnover Audit.
Once the owner-controlled board receives a copy of the Turnover Audit, the board can consider having its own accountant for the association review the Turnover Audit and all other financial information provided by the declarant. The association’s accountant may then assess whether the Turnover Audit fairly reflects the status of the Association’s finances, but also whether there are any outstanding obligations, such as payments for and collection of assessments and other amounts (e.g., working capital) that arose during the declarant control period. The board or its accountant should also review the Turnover Audit and financial statements provided by the declarant to identify any irregularities and whether the financial records are complete.
If the CPA performing the Turnover Audit cannot attest as to the fairness of the financial information presented and/or the association discovers any discrepancies, missing documents, or failure to pay or collect amounts owed during the declarant control period, the association should consult with its legal counsel and address these issues as soon as possible with the declarant.
While CCIOA imposes a duty on the declarant to provide the Turnover Audit at its expense, the owner-controlled board has a fiduciary duty to the association to review the audit and address any issues raised in a timely manner. The longer an association waits, the harder it may become to get the information and remedy the association needs to reconcile its accounts and financial standing after transition.
By Bryan Farley, Association Reserves
Fully Funded Balance, Annual Asset Deterioration, Percent Funded, Total Annual Reserve Contribution Rate…
In trying to explain Reserve Study concepts for clients, Reserve Study companies and their lingo may have created some unintended consequences. Unfortunately, this just makes a board’s job more difficult.
The board hires a Reserve Specialist to put together a budgetary action plan, the board reviews, then distributes the findings and votes on an action plan. If a Reserve Study is shrouded in language that is foreign to the members of the community, then it will be hard for the board to do their job successfully.
What are some examples of this?
When we are hired to help a community out, I usually find that the board of directors is doing so under the encouragement of their community manager. This is great and we recommend this action. However, most of the time, the board is not really sure what they signed up for. They tend to understand that the Reserve Study will help them with their budget, but how?
Most of the board members that I interact with tend to think of the Reserve Study as a special cash flow statement, and by special they mean, “why are we paying someone to do this?”
A reserve specialist should make sure that the board fully understands why they hired a firm to complete their Reserve Study as well as how to utilize the final product. A reserve specialist’s job is to educate the board on the ‘Why’ of Reserve Studies.
Well, then why have a Reserve Study completed?
The reason a board needs a Reserve Study is to understand the annual deterioration costs of the property and make sure that all owners, today and in the future, pay their fair share each and every month.
“The reason a board needs a Reserve Study is to understand the annual deterioration costs of the property and make sure that all owners, today and in the future, pay their fair share each and every month.”
All boards understand the importance of their operating costs (landscaping, snow removal, water, gas) because these expenses occur on a daily/monthly/yearly basis. These costs are easy to understand because the board knows that if they neglect to pay their cost for the service, then that service will not occur. Meaning, if the board decides to not pay their water bill for the month, then they will immediately see the consequences of their choice.
However, the same board will neglect their two-million-dollar asphalt parking lot deterioration, even though the asphalt is failing every single day in front of their eyes. Yet, once the board sees a bid proposal to resurface their asphalt, the most common reaction is shock, denial, and then anger that no one had planned for this expense.
Why does this happen? This happens due to human nature. Researcher George Ainslie found that, “humans tend to opt for immediate rewards instead of rewards down the pike, even if the later rewards are greater. For example, when offered $50 now instead of $100 in a month, most people will choose the fifty bucks.” *
If you live in an HOA, then you have probably noticed this. You may have asked yourself, “Why should I be paying for new asphalt in 15 years when I won’t be living here in 15 years?” Like most people, you would rather not pay now and not pay later - or basically get your cake, eat it, and have your neighbor pay for it too.
What is there to do?
Here are a few tools to help boards and their owners understand their Reserve Study needs in just a few minutes so they can put their Reserve Study findings into action:
#1 - Annual Deterioration Rate:
If you take a look at your Reserve Study, then look for the table that explains the annual rate of deterioration.
Think of the annual rate of deterioration as the ‘bill’ or ‘cost’ of your reservable assets. The reason that this number is so powerful is due to the fact that it is a static number. That means that regardless of whether an owner lives in a community for one year, or twenty years, that owner needs to pay the deterioration cost for every single year that they live in that community. This will allow an equitable spread of the community’s costs over the lifetime of the property's assets. It forces the board to look at the current annual cost, rather than the future estimated cost. If the board can frame the reserve expenses as a current and necessary cost, then the ownership cannot just pass the buck along to the future owners.
In this example, the property has about $38,000 in annual deterioration costs. Let us say that there are (35) unit owners that contribute into the reserve account. That means each owner needs to offset at least ~$1,100 per year in deterioration costs. To break it down even further, every single day the cost of this property’s deterioration for each owner comes out to ~$3 a day.
Therefore, in order to just keep pace with the deterioration, each homeowner at this property needs to contribute ~$3 per day into the reserve account to break even with the ongoing maintenance deterioration.
This is the cost or the bill of the reserves for the property. If the current group of ownership decides to either not contribute to reserves or to significantly underfund reserves, then the costs will just compound year over year and the community will get further and further behind.
#2 - Recommended Contribution Rate:
Once the annual deterioration rate has been established, the next step is to offset the inevitable deterioration with ongoing reserve contributions that get the property financially ahead.
On average, a well-funded property contributes about 30% more than their annual rate of deterioration. Using the example above, a property that has about $38,000 in annual deterioration costs should be putting away around $49,000 a year into reserves.
The difference between the annual deterioration rate and the recommended contribution rate, in this case $11,000, represents the amount needed to outperform inflation and shortfall due to prior underfunding.
It is more important for the board to pursue adequate ongoing reserve contributions then try to time their expenses. In other words, if the monies are predictably contributed on an ongoing basis, then the board will be prepared for a premature failure of a heater, or any other asset.
#3 - Percent Funded:
If the association begins to contribute at the amount recommended needed to adequately cover the annual deterioration and inflation costs, they will soon be considered a ‘well-funded’ property. We determine which properties are well funded by their percent funded. Percent funded is found by a simple calculation:
It is easy to figure out the numerator of this equation: It’s the amount of reserve funds (if any) that have already been set aside within the reserve account.
The denominator translates deterioration into monetary terms. It requires a calculation, combining the fraction of deterioration that has occurred to each and every component each year.
Percent funded tells us statistical risk for a property’s reserves. If a property has a low percent funding level, for example between 0%-30%, then we know that statistically the property is at a high risk for special assessments, deferred maintenance, and cash flow deficiencies. However, when a property has a high percent funding level, 70% and above, then the property has a less than 1% risk of special assessments, deferred maintenance, and cash flow deficiencies.
The percent funded is a simple way to describe the current health of the property’s reserve fund. A low percent funded does not mean that a property is ‘bad’. A high percent funded also does not mean a property is ‘good’. Percent funded just tells us current statistical risk. Each year, the percent funded of a property will change, either lower or higher, depending on the reserve contribution rate and whether or not reserve projects are completed on time.
Although we used a little math along the way, the hope is that this article can be used as a simple cheat-sheet at the next board meeting when there are questions on interpreting the data from the recently completed Reserve Study.
*George Michelsen Foy (2018, June 25). Humans Can't Plan Long-Term, and Here's Why https://www.psychologytoday.com/us/blog/shut-and-listen/201806/humans-cant-plan-long-term-and-heres-why
Bryan Farley, RS is the president of Association Reserves, CO/UT/WY. Bryan has completed over 2,000 Reserve Studies and earned the Community Associations Institute (CAI) designation of Reserve Specialist (RS #260). His experience includes all types of condominium and HOAs throughout the Rocky Mountains.
By Nicole Bailey, RBC Wealth Management
The chart above illustrates the interest rate movement of the U.S. ten year Treasury note. The historically low rates we have today signify borrowing rates that can benefit homeowners and other borrowers. Mortgage rates are at new lows and many homeowners and buyers are taking advantage of more affordable financing options. The benchmark U. S. ten-year Treasury Note hit an all-time low yield of 0.398% on March 9th. While this is great news for many, community associations and other savers are now being forced to re-evaluate their investment strategies. This article aims to provide context around the current interest rate environment, how it will impact community associations, and strategies to consider moving forward.
On September 21, 1981, the U.S. ten-year Treasury Note was 15.68%. As shown in the charts, interest rates have been declining ever since. In December 2019, the rate had fallen to 1.92%, and on March 9th, the benchmark rate traded during the day at 0.398%. The global demand on United States fixed income has been largely driven by the roughly fifteen trillion dollars of international sovereign debt that offers negative interest rates. In Germany, for example, if you want to buy a ten year German bond (called the Bund), you have to pay the government to take your money. This sounds crazy, but it has been this way for some time now. Investors worldwide seeking to purchase fixed income have been drawn to the United States because our bonds are still, for the time being, offering positive rates of return. In addition to this fundamental change in interest rates worldwide, the Coronavirus and its impact on global economies has further exacerbated the low interest rate environment through a ‘flight to quality’ where investors sell ‘riskier’ assets and buy ‘risk free’ assets such as government bonds. In an effort to provide stimulus and liquidity to the U.S. economy amid the concerns for our economy, on March 3rd, the Federal Open Market Committee cut the Federal funds rate (overnight rates charged between banks) to 0%--0.25%.
It is common knowledge that the price of goods and services increase over time and thus the value of the dollar (your purchasing power) decreases over time. The rate of these changes is calculated by the rate of inflation, or consumer price index (CPI). When considering the effect of inflation on a community association, it is important to consider the types of goods and services the association is purchasing. While, hypothetically, the CPI in a particular geographic area may be 2.00% +/-, the inflation rate for a community association may be considerably higher due to costs unique to our industry, such as insurance or the cost of contractors.
The impact of inflation rates should be considered in the context of association investment policies. If a community association has an Investment Policy restricting their investments to certificates of deposit (CDs) and other U.S. government securities, the board has a responsibility to consider the effects of inflation on those assets. Assumptions made in our industry starting decades ago would consider earnings on reserve funds and the inflation on those reserve fund assets to be a wash. This ‘theory’ has not been accurate for many years now and going forward could even be a bigger problem. For example, the deficit of earnings rates vs. the inflation rate for community associations can no longer be assumed to net zero. What does this mean to your association? It means the board needs to be more diligent than ever in keeping the reserve study and projected costs up to date. Instead of updating the reserve study every three to five years, these numbers may need to be updated every year or two. The consequences of not doing so may result in a reserve fund being unexpectedly underfunded. As we all know, this is a surprise no board would welcome.
Many boards over the past ten years or so have decided to amend their Investment Policy statements to incorporate certain other asset classes that historically have provided higher returns than traditional CDs. The goal in doing so is not to try and ‘get rich’ or be an investment ‘guru’, but rather to simply try and keep up with the rate of inflation, and thus protect the association’s purchasing power of reserve fund assets. We only need to allocate a small portion of a reserve account to accomplish this. For example---a $100,000 reserve account is invested as follows: $70,000 in ‘laddered’ CDs or other government securities that earn 1.5% and $30,000 in other another asset class or classes that earn 5%. The blended return for the Reserve account is 3%. This is far closer to the rate of inflation, and has the potential of maintaining your purchasing power versus the 1.5% you would have earned on traditional CDs.
Many may argue that associations should not ‘risk’ association assets at all. Others argue that the real ‘risk’ may be losing purchasing power. These points are both valid discussion points. Drawing an example from a different industry, the Employee Retirement Income Security Act of 1974 (ERISA), which provides guidance on investment strategies for pension plans, requires diversification among all asset classes. This would include traditional asset classes like stocks, bonds, and real estate. Why should we look at this law when considering how to invest association assets? What is the purpose of a pension fund? It is to provide a reliable source of retirement income to many people. Most would agree this is a very important responsibility. The people charged with the duty of managing these assets are ‘managing funds, on behalf of other people, to be used on a future date.’ Does that responsibility sound familiar? Generally speaking, this is what boards are doing when they manage the investments of a reserve fund. Both parties are seeking to provide funding for a later dated purpose.
Some states have specific statutes that govern the investment of association assets. Most do not. Investment Policies should be used by all associations, regardless of their statutes. In addition to state statutes, associations need to review their governing documents to determine if there is any language pertaining to investment of funds. Generally, a ‘policy’ (Investment or otherwise) can be changed anytime by a board vote. As with other services associations receive from their vendors, we believe it is very important to use investment advisors who are well versed in providing services to Community Associations. Critical to any association investment strategy is first and foremost understanding liquidity needs, both short and long term. When providing investment services to an association, a qualified financial advisor will also be versed in the servicing aspect (administrative) and communication aspect, (both with boards and managers) of providing investment services for an association.
Whatever investment strategy your association uses, the board needs to be keenly aware of the effects inflation has on the future purchasing power of the reserve fund assets. We recommend all associations at a minimum, have a discussion regarding their long-term investment strategy and the impact of inflation on the reserve fund assets in the future.
Nicole brings a broad background in community management in the Atlanta and Denver areas to her role on the West Wealth Management team. She actively volunteers with the Rocky Mountain Chapter of Community Associations Institute on the Marketing and Membership Committee.
By Diane Holbert & Beth Warning, Pacific Western Bank
Now more than ever, organizations across all industries are re-evaluating their payment processes and working capital cycles. With remote working and imposed social distancing practices comes a greater risk for fraud and difficulty managing paper-intensive processes. Just in the past few months, 65% of organizations have reported they are shifting from paper to electronic formats, and 38% of organizations have implemented changes in their internal check issuance procedures to ensure payments are still delivered on time while going through the appropriate approval channels.* So, what does this mean for the HOA industry? How can property managers leverage technology to safeguard their business in a cash-strapped economy and drive productivity by improving their cash management practices? Whether you are managing one community or hundreds, the below tips can allow your organization to save time, mitigate fraud, manage risk, and create a foundation for strategic growth.
1) Moving Paper Payments to Electronic
As the payments landscape continues to evolve, protection and efficiency remain some of the top priorities for how operational cash is managed. The movement to electronic payments from paper continues to signify that organizations believe faster payments will have a positive impact on their working capital processes, vendor and customer relationships, and more. The use of checks has been cut in half since 2004, and this trend continues today.** Utilizing electronic payment options such as ACH and merchant processing offers more than just faster payments – processes such as reconciliation, researching payments, and more become quicker and simpler.
2) Application Programming Interface (API) Integration
As your business grows, managing payment processes can significantly impact the success of your business. As technology dramatically improves, the integration between your accounting, ERP, bank, and other software applications can provide a holistic solution to access your consolidated financial information to not only extract data, but make payments, reconcile dues, and more.
3) Integrated Payables
Changing technology has provided organizations more ways to create effective working capital cycles. Depending on what stage your organization is in, there are different solutions to streamline processes and/or open up time to allocate resources to other projects. Integration between accounting and bank systems can allow you to provide your bank with one file that consolidates checks, ACH, wire, and even card payments which ultimately, saves your team time from executing many separate types of transactions.
4) Purchase & Virtual Corporate Cards
Credit cards continue to be an increasingly used form of payment; they are also accepted by more and more organizations each year. Creating a formal corporate card program provides control, security, and opportunity for return on spend that is traditionally a complete cost. Purchase and virtual cards are issued to employees on behalf of the company to make designated purchases either in person or directly from their accounting system under previously approved industry codes.
5) Same-Day ACH
Same-Day ACH is a form of payment that serves as a cost-effective substitute to wires or even re-issuing lost checks. It is extremely useful in several scenarios, such as emergency payroll, business to business payments, and business to consumer payments as it offers same-day settlement at a fraction of the cost while using the secure ACH network.
6) Dual Approval
Managing the audit flow process for outgoing payments can often be overlooked or a clunky, sometimes manual process if original signatures are required. Through working with your accounting and bank systems, an electronic audit trail can provide transparency into where funds have been sent and who provided the authority. Ensuring separation of duties by defining roles of initiator and approver is an easy, simple way to protect your funds.
7) Positive Pay
In 2019, 58% of organizations reported payments fraud in the form of a forged check, attempted ACH Debit, stolen card, or other external human act.** Despite the consistently decreased use of the check, it continues to be one of the simplest ways to access sensitive account and routing number information to ultimately create a fake check or pull money from an unauthorized account. By working with your bank partner, you have the ability to ensure all checks and electronic transactions are pre-approved and saved in a secure environment to not only protect your funds but provide insight into how attempted fraud has occurred.
Diane Holbert and Beth Warning work with Pacific Western Bank as VP, Treasury Relationship Manager, and VP, Treasury Sales and Services Officer, respectively. In their roles, they serve as CAI certified Business Partners to HOA Organizations by bringing expertise and customized solutions to each of their unique clients. Pacific Western Bank and its executive team joined the Denver market in the summer of 2017.
*2020 AFP Survey: Impact of the COVID-19 Pandemic
**2020 AFP Electronic Payments Survey
***2020 AFP Payments Fraud and Control Survey Report
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