Fire! Fire! Fire! Now What?

With huge thanks to Will Anderson, Senior Fire Inspector, Whatcom County, we enjoyed an informative and provocative session on September 3, 2013.

Fire and water can be considered the most damaging of natural resources to assets owned by common interest associations and their investors. Water is insidious and not always visible immediately. Fire, however, is unmistakable and requires immediate attention.

As owners of residences in common interest communities — and of commercial spaces — we owe a higher obligation to our community to be vigilant when it comes to fire. Common sense dictates that associations lead smoke detector testing and regular battery replacement efforts. As well, inspections of gas appliances, including gas fireplaces.

Educating residents about fire, and smoke detectors in particular, is also key. One resident who set off smoke detectors in her unit while cooking simply smacked the detector with a broom handle, thus knocking it off the ceiling and disabling it, then continued to live there with her family — and her neighbors — essentially smoke-detector-less.

Boards who lack this sense of leadership can be said to fail their communities, based on the state law that requires boards to protect association assets and the community.

Here then, details from our session.

Thirteen Separate Fire Departments in Whatcom County

Will reported that there are 13 fire departments in Whatcom County, with staffing vagaries differing among those located on the ‘east side’ and the ‘west side’ of the county. What this means is that every association is charged with calling their local fire department and working with their local authority to assure that the association’s assets are known, visible, locate-able and available to the department as required, in order to respond to a fire.

Forty-Three Separate Water Districts in Whatcom County

Contact your local water district to verify that hydrants are flushed regularly and that there is access to water within a reasonable distance from your property. There are some small districts with access to only well water. You can expedite putting out a fire if you know in advance that it is necessary for the fire department to haul the water to the event.

Exteriors

You know the layout of your buildings, roadways and property: Firemen do not. When you see firemen ‘standing around’ in front of a fire, often they are deciding as best as they can how to get in, how to get out, how to address the fire, how to ascertain all the data points necessary in order to fight a fire, save lives and not die themselves. That’s dramatic, but it’s true.

One option for an association is to prepare a pre-fire plan. This plan includes an overhead view of each floor showing all exits, for example. In addition, you can document:

·         Stand-pipe locations, if any — and physically mark them.
·         Sprinkler system schematics — tanks, valves.
·         Fire hydrant locations.
·         Master key boxes, if any.
·         Gate codes, if any.

Then, on the property, label every building with visible numbers that can be read at night. Identify unit numbers, too. There can be blue road reflectors embedded in front of hydrants. Lacking the details above about the property, you may lose a gate, front doors and so forth — which you’d prefer to losing lives.

Be mindful of where you stow your garbage, including recycle-able materials. Arsonists prefer to find easy targets: locations where the only equipment they need to bring to satisfy their need is a match. Cardboard recycle and plastic recycle materials are especially interesting to arsonists. Stow them away from buildings and so that they are not easily accessible.

Smokers who pitch butts into planters in front of the exit/entry door, or into the beauty bark around the building cause fires. Offer exterior ash trays that smother cigarette butts, and service them regularly. Move beauty bark a foot away from buildings, and insert stones in the bare patches.

If your tree branches droop lower than about 10 feet from bushes, or other flammable material, this means that fire can travel up through trees, then jump to other trees. You’ve seen in forest fires, how quickly and with enormous devastation how fires travel through tree tops. Prune your low-hanging branches.

Where possible, give your building a three-foot fire-break distance between combustibles and the building.

If your locale permits fireworks, as much fun as they may be, they are also a major fire hazard. Be prepared to offer water-filled buckets to revelers, and watch for flying, burning matter landing on roofs. In Whatcom County during 2012, millions of dollars’ worth of real estate was burned up by fireworks. Check your local municipality for fireworks periods and publish them to your residents.

If you use surveillance equipment, buy the best that the association can afford. Test it to confirm that the video results are usable.

Interiors

Smoking, cooking and candles are the primary fire starters in residences. Also be aware of using gas appliances and electricity.

Smoking

Smoking may not be allowed in common areas in your community. But unless your community is a non-smoking community, people will smoke within the homes. Most smoking-based fires are started by smokers who smoke in bed. Will explained that our modern furniture materials are significantly more combustible than were those used in homes 50 years ago. Today, you may have up to one full minute to evacuate a burning room: 50 years ago, you had several minutes — simply based on the combustible nature of the furnishings.

Cooking

Will’s Number One guideline is this: Never leave your cooking fires unattended. When, however, one occurs, if it is small enough, wet a towel, wring it out, expand it and smother the fire. This action takes courage, quick thinking and common sense. Never use powder — it may combust. Never use water — that may spread the fuel.

Even electric appliances can start fires. Keep your eyes open for recalls — check out the history of that electric appliance you bought at a garage sale.

No amount of heroic action is worth your life. When the fire is out of control, get out.

Candles

Be vigilant in your use of candles. If you must use them, put a substantial base under any glass container, so that if it breaks because of the heat, the wax and flame won’t spread onto the furniture or floor. A ceramic bowl is suggested, one large enough to contain the liquid in the candle mass.

Gas Appliances

Other elements include gas appliances, including gas fireplaces. Bring in inspectors and service personnel on a regular basis, to inspect and service interior gas equipment. Ask your association to mandate these services and inspections and add the cost to the budget. Look at the vent for the fireplace on the exterior. Is there a hood that deflects the heat away from the building? If not, this heat can dry out the wood and thus lower its ignition point.

Electricity

Don’t use electric extension cords. Don’t use plug multipliers. Throw them away. Their manufacturing standards are not adequate to prevent fires. Use power strips instead, those with true breaker-switch capability. When you feel power cords that are hot or warm, those are signals that there is fire potential there. You can use two power strips in one electrical outlet with two fixtures. No more. You can detect excess heat in electrical outlets if the colour of the outlet is brown or black. This may signal electric overload inside the walls.

Be aware that if Jacob, the handyman, who is not licensed, bonded and insured, inspects or services electric or gas equipment in your unit — or performs gas or electric work for you, your insurance may not cover any fire damage that occurs.

Fire Extinguishers

Finally, if you keep a fire extinguisher, preferably one coded 2-A: 10-B:C. They are inexpensive, not rechargeable and best kept if everyone in the home knows how to use one. Take a class. Mount it on the wall so that moisture does not collect under it and compromise its effectiveness. Keep it up to date.

Summary

In preparation for this session, we asked you to view a video showing a propane barbeque fire that took place in Seattle in June 2012. The video lasts six minutes, from the time the videographer could be heard reporting the fire to the 9-1-1 operator to the time the firemen extinguished the flames.

In our county — one of the largest In Washington — we can expect at best an average of ten minutes travel time for the firemen to travel from where they are to the event. In high-density, multi-family housing, any fire will affect more than one unit.

Action

Take the time to discuss this matter within your community. As a board member, you can use this checklist to elevate the protection you offer to your association, which is your responsibility:

·         What does our local fire department known about us? What would they like to know?
·         How does our local water district service fire hydrants near us?
·         Are our stand pipes marked?
·         Do we have a sprinkler system schematic showing tanks, valves, etc.?
·         Does the local fire department have access to our master key box?
·         Does the local fire department have our gate code? Over-ride or emergency code?
·         How visible are our address numbers and unit numbers at night?
·         How visible are the nearest fire hydrant markers at night?
·         How accessible are our buildings through alleys, side roads or main road for fire trucks?
·         Can we pass an inspection of flammable elements around our buildings?
·         How do we engage revelers during fireworks periods, and otherwise be vigilant during these times?
·         What is the status of our surveillance equipment, who tested it last, who is responsible for its maintenance?
·         How and how often do we educate residents about fire potential in units?
·         What action do we take as a board to address smoke detector maintenance, gas fireplace maintenance and so forth?

Please feel free to share this post with friends and family: the tips are excellent and can save lives.

Reserve Studies and How to Read One in Five Minutes

Reserve Studies and How To Read One in Five Minutes

Introduction

Jim Talaga, President of Association Reserves Washington, presented an extremely informative, useful and insightful series of topics about reserve studies in our state. And he should know. Having grown up in the construction industry, and after having earned commissions selling real estate, his knowledge and leadership contributed to the collaborative efforts that resulted in Washington State's Reserve Study law. See RCW 64.34.380-392 (condominium associations and RCW 64.38.365-390 homeowners associations)

You can follow the links, above, and educate yourself using Association Reserves' free library and the applicable state law.

What is a Reserve Study?

Key to any reserve study is its definition: 

"A Reserve Study is a planning document and budget model for the Association’s expenses whose infrequent and significant nature make them impractical to be included in an annual budget."

A reserve study is useful because its purpose is to prepare the association economically for the significant maintenance, repair and replacement expenses they can expect to face over time, while minimizing or eliminating surprises and special assessments.

At the risk of repeating myself, our buildings will survive us all. Reserve studies give owners a truer sense of the cost of ownership, because it gives boards a way to budget annual contributions to reserve accounts that accommodate the pay-as-you-use theory of building ownership.

Low assessments can be time bombs, because it's possible that they do not reflect effective contributions to  reserve accounts. As of January 2012, condominium state law, above, requires reserve studies and their financial results be included in budgets adopted after that date, and disclosed to owners and prospective buyers of condominium units.

Lenders, insurance companies and educated buyers involved in common interest communities generally and increasingly require copies of current reserve studies in advance of any purchase.

A reserve study specialist can evaluate significant real estate assets and list them in the component list. Ideally, this is accomplished with knowledgeable board members. The condominium law requires six components and Jim has added the seventh. The list includes:

• Asphalt
• Decks
• Painting
• Roofing
• Siding
• Windows
• Plumbing (the seventh)

Excluding any listed component requires an explanation of the exclusion: a downtown high-rise may not own any asphalt, for example.

Both condominiums and homeowners associations are required to list or consider any component for which repair or replacement would exceed 1% of the association's annual budget.

Everything has a useful life, after which the component must be replaced or maintained at a significant level. There is no 'if' -- there is only 'when'. 

Budgets adopted after January 1, 2012 must disclose:

• The percentage of budgeted assessments targeted for the association's reserve account
• Pending special assessments
• Whether the reserve account balances will be sufficient to meet projected expenses over the next thirty years
• If not sufficient, the additional assessment schedule necessary to ensure adequate funding during that period.

If the board refuses to produce a reserve study, in condominiums, 20% of the owners can demand one in writing, and summarily sue the board for its production should the board refuse to produce one. In homeowner associations, the percentage is 35%.

A current reserve study coupled with an adequate level of funding in the reserve account can enhance the attractiveness of a unit to a potential buyer. In Washington State and in Whatcom County, more and more buyers are aware of this requirement, and drill down into the economic health of a community before making an offer.

Unit sellers can point to reserve accounts as equity in their ownership, and enjoy higher returns on their common interest community investments.

As well, unit owners can sleep better knowing that their bank accounts will not be liable to a surprise and potentially draining special assessment.

How to Read a Reserve Study in Five Minutes

Yes, this is math, numbers and all that, but it's also basic economics of owning real estate. Elevate this exercise to the level of an investment, and it can be fun. You'll want to look for three things in your review:

1. A list of components included in the study.
2. A measurement -- the percentage is calculated for you -- of the adequacy of funding.
3. A plan to prepare to pay for expenses at the ends of the useful lives of the components.

Component List Review

For each component, you'll see Useful Life and the Remaining Useful Life, both expressed in years, the Current Average Cost and a projected Future Average Cost. 

     How to read the Component List:

Look for what you know could be missing. In a high-rise, for example, if there are no elevator components on the list and you know there is an elevator, ask why the elevator components are not listed. This is mostly a common-sense test, given everything else you've learned about the property.

Adequacy of Reserves

This measurement is given as a snapshot. Here is an example:

"Results as-of 1/1/2013:
"Projected Starting Reserve Balance: . . . . . . . . . . . . . . . . . . . . . . . .$100,000
"Fully Funded Reserve Balance: . . . . . . . . . . . . . . . . . . . . . . . . . . . . $444,547
"Average Reserve Deficit (Surplus) Per Unit: . . . . . . . . . . . . . . . . . . .$    6,891
"Percent Funded: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22.5%
"100% Full Funding 2013 Monthly Reserve Contribution . . . . . . . . . .$    6,030
"70% Threshold Monthly Reserve Contribution . . . . . . . . . . . . . . . . .$    5,280
"Baseline Contribution (min to maintain reserves above $0) . . . . . . $    3.800
"Recommended 2013 Special Assessment for Reserves: . . . . . . . . . .$          0
"Most Recent Reserve Contribution Rate: . . . . . . . . . . . . . . . . . . . . . $   4,000

[Please forgive uneven column.]

NB: Full Funding means having enough in the reserves account at the end of the component's useful life to pay for its replacement or significant repair.

Notice that the difference between the Most Recent Reserve Contribution Rate and the higher funding levels -- 70% - 100% -- isn't that great.

     How to read the Adequacy of Reserves in the example:

Reserves are currently funded at the 22.5% rate. As a comparison, statistically, associations with funding levels at the 70% to 130% levels enjoy fiscal stability with  low risk of special assessments and/or deferred maintenance.

Risk of Special Assessment in Funding Percentages

Here's a table of percent funded and the risk of special assessment from the data provided by Association Reserves, Inc, gleaned from thousands of reserve studies:

• Zero -- 51%
• 10% -- 40%
• 20% -- 29%
• 30% -- 18%
• 40% -- 10%
• 50% -- 5%
• 60% -- 2%
• 70% -- 1%
• 80% -- LT 1%
• 90% -- LT 1%
• 100% -- LT 1%

KEY: First number is percent funded, second number is risk percentage of a special assessment, LT means less than.

Plan to Pay at the End of Useful Life

Again, this is a common-sense test. Ask the questions and get the answers that make you comfortable -- or uncomfortable.

Final Tip

Work with real estate agents who are knowledgeable about common interest communities, and who can help you assess the financial health of an association. Look beyond the granite countertops and believe that knowing more about your association's financial health means more in the long run that the first blush vanity appeal that you can see at a showing.

Condominium Maintenance and Building Repair Market Trends

Our first quarter 2013 session began with a return of our Forum friends, J2 Building Consultants, specialists in multi-family, high-density real estate buildings.

Jens Johanson, Principal and Travis Brammer, Senior Project Coordinator, began their session with this analogy: How often do you go in for your annual physical? How often do you have your teeth cleaned? How often do you change the oil in  your car? Clearly, the point is, if there is trouble 'inside', finding it early is better than finding it later.

Everything Has a Useful Life

Everything, including our buildings, has a useful life. Yes, your reserve study gives you the useful life of all your real estate assets -- "roofing, painting, paving, decks, siding, plumbing, windows" -- but what about the condition of the structure? What does the association know about the structure, including framing supports, sheathing, water barriers and so forth?

As an example, one client association responded to a ground-floor unit owner who complained of standing water in front of her sliding glass doors. The board brought in a cement specialist, believing that somehow the water under her carpet was related to the underlying cement was in contact with the ground. The cement specialist sealed the cement under the floor, the area re-carpeted, and within weeks, the unit owner complained again of water in front of her door.

The board brought in J2 as building consultants and with an intrusive inspection, revealed the cause of the standing water. The cause was traced to a nail-head size hole on the third floor above the complainant's unit, which had apparently been leaking since initial construction. The rot pattern formed a pyramid that terminated in front of the sliding glass doors.

Every building leaks. Over time, the water intrusion will become visible.

The take-away in this story is this: don't assume that you know what causes the visible damage being caused by water. Calling in contractors or specialists in repair will of course result in a repair of the apparent damage. Best practices dictate calling in building consultants -- and there are others who compete with J2 who are competent -- who can find the source of the water intrusion.

Another possibility is damage caused from inside a unit, such as a plumbing eruption, or a water heater failure. The full extent of the damage to the structure must be understood and addressed.

A visual inspection by a building consultant who specializes in condominiums, and who is familiar with our Northwest weather patterns can produce the information the association needs in order to be fully informed as to the condition of the buildings' structure.

Owners call in cable television vendors who drill holes through siding, weatherproofing layers, sheathing and into the unit's wall board; uninspected areas of the building in low-traffic areas can contain gaps in flashing, animal intrusion sites -- as small as bees or wasps -- that can invite water into the structure. Damage may only appear years later, but at the risk of repeating . . .

"Every building leaks. Over time, the water intrusion will become visible."

Today's Market for Repairs

In today's market, professional fees and the costs of construction materials are remarkably lower than they were during the real estate construction boom times that peaked here in 2007. Some rates and costs are down 15%-40% depending on the specialty.

With a visual inspection, the association's board can become aware and learn more about the condition of their structures. This inspection may lead to an intrusive inspection, which can reveal the total, true condition.

A consultant can work with the board to understand funding issues, whether funding is from owners, insurance proceeds, or tax-incentive rebates. Tax-incentive rebates are useful and can be substantial when an association replaces a roof, windows or other water barrier components.

Association Valuation and Owner Liability

When board members realize the value of the association they lead, often this number underscores the weight of the responsibility they carry as volunteers. For example, 33 units valued roughly at US$150,000 each, means that the association's real estate assets are worth about US$4,950,000.

[You can calculate the approximate value of the real estate assets in your association here.]

As an owner, be aware that the total cost of your ownership in a condominium community includes your financial responsibility to maintain assets you own in common with all other owners. Without great and current Reserve Studies, funding reserves commensurate with owners' financial health, consistent and effective maintenance, the buildings will deteriorate until only a special assessment can pay for the required repairs.

Generally, not only is a special assessment tied to your ownership status, you may also be personally liable for paying a special assessment. Your governing documents will explain your total financial responsibility.

Understanding the structural integrity of your buildings is a key piece of data that you need to know in order to appreciate your total cost of ownership.

The question then becomes: What's it worth to the association to pay for a structural inspection based on the total value of the investment that we own in common?

Recommendations

What holds us back? Generally, it's the fear of discovery. We don't want to know that that lump may be something cancerous; that the toothache might mean a dead tooth requiring extraction and replacement; that the ping under the hood means a failing engine part.

Commissioning a structural inspection now can lead to a reasonable process that matches the association's requirements. For example, once an inspection is complete, a vendor such as J2 prepares a Scope of Repair. Then J2 continues to advise the board through the bid process, whereby the Scope of Repair is let for bid, three qualified bidders identified, and a rough estimate given for the price of repairs.

Once repairs are complete, evidence of structural integrity can highlight the stable and underlying value of units, which can mean dramatically improved unit valuations for resale. By some documented evidence, this increase can be about 18% in today's market.

Here are a few parting tips:

• Don't ignore maintenance
• Don' fall for cheap advice
• Understand the structure of your buildings and its condition
• If there are problems, prepare a Scope of Repairs and send it out for bids
• Get the work done within the funding parameters set by the association

Final, Blatant Commercial

J2 Building Consultants will prepare a proposal for services at no cost. Whether you need a second opinion for an inspection you've already commissioned, a visual inspection, and more, J2 nearby and interested in working with boards by making them their clients.


Our buildings will outlast us all.

Who, Why, What, When and Where do I Perform Due Diligence When Buying or Selling Real Estate in a Common Interest Community?

With a Very Special thanks to attorney Brian McLean, who expanded on our published question list and with helpful contributions from other Forum attendees, several useful tips appeared in our October session. Since attendees represented condominiums only, that's became our discussion focus.

Who's Responsible?

Whether you're about to purchase a unit for yourself, your college student dependent, or your mum/dad, there are several  entries that you can add to your checklist of what to look for in order to perform the due diligence necessary to make an educated buy.

If you're selling a unit, you, too, can develop a checklist of facts so as to maximize the transparency and 'inspect-ability' of your association's documentation.

If you're a board member, you can hereby be reminded that the condition of your association's documents must bear scrutiny, whether by owners, prospective buyers or the legal community.

High-level Overview: What's Important to Explore as a Buyer or Seller?

Regardless of the nature of the community, Brian recommends looking particularly at two items: the building structures and the association's finances and governing documents.

1. "Hire an analysis of the building structure." There may be other analyses or documents prepared by others that address the structure, but if you commission and pay for your own analysis, you are more assured that your interests are being protected.
2. "Review the financials and governing documents." 

• Request the most recent financials and the past couple of years' worth of audits, as a way to assess the financial health of the association. Use your business judgement to spot abnormalities or irregularities that signal caution and more investigation.
• Does the association possess 'healthy reserves'? Compare reserve funding to a current reserve study. Do your homework and reach out to professionals if necessary.
• It's hard to tell good from bad governing documents without experience. You can compare covenants to what you find in the Resale Certificate, for example, to find matches. If there is a difference, the covenants govern the issue.

What is a Resale Certificate, who prepares it, how do I trust it?

In Washington State, the condominium law dictates that a Resale Certificate be prepared by the owner prior to any resale of a unit. In practice, however, the association's management company is best prepared to provide the bulk of the data required, and generally, the owner commissions and pays for the certificate.

Use your critical thinking to review what is presented there, so that you're confident that you are comfortable with all the data. Review everything, so that if there is an attachment referenced in one of the entries, you understand fully what is implied in the attachment. Again, reach out to professionals if necessary.

Tip: Brian recommends that if you are a seller with an interested buyer at hand, that you commission a Resale Certificate and review it. In your review, verify that there is no point of view or language that will 'kick the slats out from under' your sale.

What is a Reserve Study, what questions should I ask about it?

A Reserve Study is a financial planning tool that associations can use to put away money to pay for repairing significant real estate assets owned by owners in common with other owners. Questions you can ask include:

• How current is the Reserve Study?
• Who prepared it?
• What is the contribution level recommended?
• What is the funding level that the association has in the bank?

What should I look for in association financials that I inspect -- three years' worth?

Brian's first caveat is that a potential buyer is only given access to association records through the seller/owner. In fact, the buyer only as a right to deal with the seller: not the board or the association manager. 

One way to obtain financials -- and meeting minutes -- is to prepare a written request detailing what you want to inspect, and passing it along to the owner/seller, who then exercises their right to examine and copy the business records of the association. You can expect to pay for any copies that you make.

You can ask for past audits if they are available, or financials for several years: three years will give you a good idea of the trend of the association's financials.

What should I look for in board meeting minutes that I inspect -- three years worth?

Association board meeting minutes are not included automatically in a Resale Certificate, but a potential buyer can request them, as above in writing, for review.

You can look for transparency and form in the meeting minutes. The caveat, however, is that a properly formed set of meeting minutes may not reflect a dis-functional board -- which you want to look out for, and newsletter-length minutes detailing every comment made may not reflect a properly functioning board that makes sound business decisions and exercises its duty of care of the association's business affairs -- which you also want to look out for.

What you can look for is explanation of agenda items, motions, seconds, and votes that detail the actions of a cohesive board that conducts business in a transparent manner and for the benefit of the association.

 What questions should I ask of the board?

Again, a prospective owner cannot approach any director or board directly, but must work through the owner/seller. If you gain access and the director lives in the community, you can ask about how the director likes living there, and open an informative dialog.

How can I attend a board meeting in advance of buying?

You  may be able to attend a board meeting at the invitation of the owner/seller, depending on the board meeting and the agenda items listed. There may be meetings where the board wants to limit the dissemination of data, such as a meeting where a construction defect attorney makes a presentation about pursuing a developer for defects, which you may not be invited to attend.

The spirit of a board meeting often reflects the spirit of the community, so attending one can be deeply informative.

Who else should I speak with, such as the association manager?

Attendees suggested returning to a community without a realtor, and asking people who live there -- someone publicly visible -- how they like living there and what a buyer needs to know about the community. Again, buyers only have access to the association manager through the seller/ owner.

What Else Do I Need to Know?

An attendee recommended asking for a Condominium Purchase and Sale Agreement, to best understand what's involved in the transaction. Especially for first-time or inexperienced buyers, buying into a condominium association can be revealing as to what's included in the purchase.

Assessments, Budgets, Money: The Heart of Any Association

     INTRODUCTION

In case you need a reminder, the center of any association's business is based in money: the dollars owners pay as assessments into accounts dedicated to the maintenance, preservation and protection of the real estate assets owned in common. (Other monies are also key: settlement awards, judgements and so forth.)

Finances are one of the first criteria that any association-savvy buyer will inspect, before buying into an association. Any failure to account for monies spent, plan for predictable expenses, or follow the law is a red flag to this kind of buyer. Potential buyers are entitled to review the past three years' financials for any association.

In our meeting invitation, we promised to cover the subjects below. We learned from several related conversations during the session, but here are the highlights for the topics promised.

     THE ASSOCIATION BUDGET PROCESS

Best practices dictate that a budget plan be prepared in reverse of these steps, starting at the end date, which tops the list below. Then work backwards through your calendar to determine these dates:

• For some, produce assessment coupons. Work with your association manager to ascertain how long this process takes, which is usually three to four weeks.
• Hold the Budget Ratification Meeting
• Give proper notice for the Budget Ratification Meeting according to your governing documents
• Finalize the budget, based on input from the association's long-term strategic plan
• Hold the board meeting to give the board an open forum for discussion of final line item budget numbers
• Give proper notice for the budget discussion board meeting
• Hold the board meeting to give owners an open forum for discussion of line items
• Give proper notice for the owners' budget discussion board meeting
• Build the model for the planned expenditures given vendor research for next year's costs, owner  values' input, and review of the association's longer-term strategic plan
• Gather next year's increases from vendors; price new vendors
• Survey owners to confirm satisfaction with preservation, security, maintenance, and 'look-and-feel' of the property 
• Inspect this year's invoices to identify vendor costs
• Develop a matrix of line item expenses across budget period planning window (12 months).

If your fiscal year ends in December, you can begin the budget process anytime, but July and August are the months when you can begin in order to avoid any 'crunch' or excess of volunteer work required to complete the budget process on time. This makes budgeting about a half-year process.

NB: If no budget work is performed, the next fiscal year's budget will continue forward based on the current year's budget, which is also true when owners fail to ratify a proposed budget.

     UNDERSTANDING CURRENT EXPENSES AS PREDICTORS OF FUTURE EXPENSES

Expenses drive association budgets/ assessments. This means that the board must be aware of both practical and legal requirements necessary to operate the association according to the owners' expectations, and the law.

If the strategic plan anticipates that this is the year for 'the rental cap' amendment, the 'collection resolution', the major preventative maintenance project, and so forth, its expense falls into this budget.

Current expenses may expose or verify strategic plan timing. For example, if more than 10% of the units are rented, it may be time for the rental cap amendment, especially if the association expects to qualify for FHA or other common funding sources for unit sales.

     FINANCE COMMITTEE TIPS AND TRICKS

The Finance Committee is generally a standing committee, described in your governing documents. Every effective board enables this committee, and delegates tasks to it. Owners interested in how assessments are established and spent can participate. Your governing documents explain committees and how they operate within the realm of board work.

For example, when the committee reviews invoices, the committee can spot mis-categorized charges, inappropriate charges, and unexpected charges that should not be paid. 

NB: Crawling through invoices for every association regularly is a board obligation. Without this task,  the board can fail to earn a trustworthy rating from owners.

A competent committee meets as frequently as monthly, reviews the association's finances and discusses expenditures as indicators of the association's financial health. The committee may make recommendations to the board for actions to be taken, based on financial indicators.

     INTERVIEWING VENDORS FOR NEXT YEAR'S RATES

Often, when you contact a vendor in summer and ask about next year's increases, you'll catch the vendor off-guard. If you cannot tease an answer from a vendor, you can estimate the increase based on last year's increase, a new series of tasks for the vendor, for which the vendor will give you a new quote, or chose an arbitrary number, such as five percent.

Maintaining contact with the vendor to glean the new rates, up to the date of the board vote is wise, given that predictable budget numbers are more realistic than SWAG estimates.

     FLOAT, BAD DEBT, 'SUGAR JAR' FUNDS

As a past association president, I can tell you that getting the call from the manager asking whether to pay the master policy premium or the water bill is an uncomfortable position. Cutting a budget 'to the bone' makes unrealistic assumptions including that every owner will pay their assessment on time and in full, and that expenses will never exceed their budgets.

Commonly, new condominiums are sold requiring that two-months' worth of assessments be paid at closing, to afford the association a reasonable float. Best practices for cash flow management dictate that a float amount be present in the operating account, so that the association can pay all its bills as they are due. A review of past years' cash flow requirements may dictate a float percentage to include in the budget.

In addition, there are owners who do not pay assessments, and over time, this income must be 'written off' the books, because it will not be collected. Bad debt write-offs are always difficult to predict. One strategy is to review past years' late payments or non-payments and include an average of this amount in a line item titled 'bad debt'.

Either of these amounts -- float or bad debt -- can be considered 'sugar jar' funds: you've got them even if you don't need them.

     CARRY-OVER, YEAR-TO-YEAR

Amounts that you carry over from the end of one fiscal year to another can appear as such in your budget.

The worst idea is that the board refund unspent assessments. This sets up unreasonable expectations for future years, since refunding assessments, and generally lowering assessments, is rarely wise.

NB: Be aware that a negative carry-over from the past year should dictate an informed and positive budget for the next year, so that negative carry-over doesn't continue year-to-year.

     RESERVE STUDY DISCLOSURE
     REQUIREMENTS, NEW FOR 2013 BUDGETS

Washington State Legislators discussed association reserve studies for several years, and enacted a law requiring associations to budget for a Reserve Study beginning with the 2013 budget. Savvy boards budgeted for reserve studies in their 2012 budgets, where possible, so that the 2013 budget could reflect up-to-date reserve contributions.

You can read this legal opinion about the effect of the new Reserve Study Law, as it affects reserve study/ reserves funding reporting for associations formed after July 1, 1991 (new act condominiums) and Home Owners Associations, and discusses the content of any Reserve Study.

Here are a few comments about Reserve Studies:

• A Reserve Study affords an association a means for saving up monies for major asset repair or replacement, which avoids owner-sinking special assessments often required without them. It follows the notion of 'pay as you go' use of real estate assets. 
• Owners and boards that resist this common sense task, desiring to 'push off' this requirement to new owners/ boards, demonstrate a certain lack in common sense thinking, because assessments in future will be higher overall, and potential buyers will cross units off their lists which belong to associations that demonstrate the lack of a current Reserve Study and/or underfunded reserves.
• Owners and potential buyers are interested in their personal financial requirements for the next five years, which can be documented -- okay, as estimates: sound, solid estimates -- by a Reserve Study. 
• Reserve Study vendors can also prepare annual Preventative Maintenance Plans based on details established in the Reserve Study. This strategy is one of the most effective for boards so that they can preserve and maintain real estate assets, which are board charters under state law.

     BUILDING THE MODEL, TWEAKING THE MODEL

One suggestion is to use a digital, commercial spreadsheet software product, such as Google Docs, Spreadsheets, or Microsoft^© Excel^© to develop the budget model.

It's simple to architect the digital spreadsheet with a top, summary page, and with separate tabs for Landscape, Utilities, Professional Services, Preventative Maintenance, Reserves Funding, and Miscellaneous categories. Then you can list the detailed line items, accordingly, in the left column, and add the months across the top in a row.

The top sheet summarizes each major category and contains the income line item, which represents total monthly assessments.

You can connect cells from the tab sheets to the top sheet, so that your model can be exercised, adjusted and modified as you proceed through the several iterations of gathering data from vendors, and finalizing approvals from owners, board members, and association manager.

Finally, you can produce a graph -- a pie chart works -- of the budget categories, for presentation to owners. One suggestion included listing all expenses by unit, starting with the highest expense, and explaining the total amount by category and purpose, by month. An entry in this list, for example, read "$26.51 pays our Master Insurance Policy premium."

     PRESENTING THE DRAFT BUDGET TO OWNERS

When possible, in September -- four months before the Budget Ratification Meeting, add an agenda item to a board meeting to discuss next year's budget. You can present what you've learned from vendors and lead an open discussion with owners about the overall state of the property. Because the board has developed a long-term strategy for the community, you can discuss items such as next year's painting project, changing landscape vendors, increasing the community charity contribution, projects that didn't take place this year, put off until next year, and so forth. 

The goal in this presentation is to verify and ascertain the values of owners relative to the community's reputation, its 'look and feel' and so forth. This may also be a good time to discuss security, parking, pets and other community-centric values.

In this draft budget, you can include expenses to cover all the items you discuss, so that owners can help prioritize what to pay for next year, and what to include in this budget. 

Often, this is the best chance for an open dialog with owners about the 'state of the community', since it involves values and how to pay for them.

     PRESENTING THE BUDGET PROCESS TO OWNERS

Your CC&Rs specify that a budget for common expenses be prepared and ratified by owners each year.  Too many condominium owners, -- whether they be 'apathetic' about their ownership:  they pay their assessments, live their lives and expect that 'everything will be okay'; or 'ignorant' of assessments, their purpose and genesis -- don't understand the budget process.

Explaining the process to owners is vital in engaging owners in it. Budget ratification by pro-active non-ratification by owners -- see your CC&Rs -- may appear backward. But, this style of budget ratification gives boards the funds required to complete their legally-mandated tasks, regardless of owner resistance, unless such resistance is the majority specified in your CC&Rs.

You may want to include this education in your draft budget meeting with owners.

NB: Associations which hold Annual Meetings that contain Budget Ratification can confuse themselves and owners. Here's why. Agenda items at Annual Meetings requiring a membership vote can be voted by proxy, except Budget Ratification, which cannot be voted by proxy.

     HOW OWNERS CAN OPPOSE A BUDGET/ ASSESSMENTS

Owners who are not willing to approve -- ratify -- any budget, must appear at the Budget Ratification Meeting in person and cast a negative vote. The majority of owners required in the CC&Rs must appear in person and vote similarly in order to defeat a proposed budget.

NB: Commonly, this is 51% of owners, but your CC&R percentage may be different.

     HOW **NOT** TO OPPOSE OR PROTEST ASSESSMENTS

Some owners believe that if they don't agree with a board, a board action, or otherwise wish to protest, simply do not pay their assessments. This is not a smart position for any owner to take. Why?

Your governing documents -- which you agreed to when you purchased your property -- specify that your clear title is involved in your requirement to pay your assessments. You may also be personally liable for them. 

When you don't pay your assessments, your association can pass your obligation along to a collection agency, or an attorney, to file a lien on your title. When it takes this step, you are also obliged to pay fees and expenses of collection. As a final and drastic step, the association can sell your property in order to satisfy the debt that you legally owe.

     SUMMARY

Since money is at the heart of every association, engaging and educating owners as to the expenses of ownership, demonstrating trustworthy and thoughtful work in developing budgets, and taking the most care in spending association funds is one of the best ways to keep association members generally calm, content and happy with their common interest community ownership.

Transparency regarding money can represent the integrity required of boards, as they exude their power over multi-million dollar associations.

Violating money matters offends all owners, and a few may take issue with these violations. Mis-use and abuse of OPM -- other people's money -- can become a criminal matter. 

Protecting the Association When Banks Do (or Do Not) Foreclose

Thanks to Jeremy Stilwell, a partner in Barker Martin, with offices in Bellingham, for a deeply knowledgeable and engaging interaction with Forum members on this topic.

First, let's acknowledge that these kinds of matters are expert matters that are best guided and handled by association counsel, while preparing the materials so that legal action can be taken is a key task for the board.

Jeremy delivered an appropriate disclosure at the beginning of the meeting and further explained that he would never develop a Handy-Dandy Foreclosure Kit to sell to associations, because of the pitfalls and errors that can take place in this process that will defeat the association's ultimate goal.

Jeremy explained that condominium associations have a statutory lien on each unit based in their governing documents, and based in state law. See RCW 64.34.364. This is not to be confused with recording a lien, which gives notice to all third parties researching the real property records that a lien exists on the title. The board must decide when and how to record a lien against a unit owner's title. Recording a lien will be done correctly, if done by counsel.

Within the subject of collections and liens, Jeremy discussed debts, collection policies, and the lien statute of limitations. He wrapped up the lien topic explaining the board's responsibilities regarding extinguishing a lien once the debt is satisfied.

A collection policy is a formal board Resolution, usually prepared by association counsel, that protects the association and establishes actions to take when assessments are not paid. Given the consumer protection provisions in today's world, a Collection Policy is well-advised for every association. The Resolution sets forth the definitions for being in arrears, the steps that both the unit owner and the association take in order to satisfy the debt. Lacking such a formal, adopted and published collection policy, an association or its manager can fail in collecting past-due assessments, because of unintentional yet illegal collection procedures.

Discussions followed detailing the difference between voluntary transfers of title -- a market sale or deeded transfer, and involuntary transfers -- i.e., foreclosure, and how each type of title transfer operates relative to an outstanding lien.

An association receives notice of a judicial foreclosure -- this is rare and is usually based in a lawsuit, and a non-judicial foreclosure, which is evidenced by a Notice of a Trustee's/ Sheriff's Sale of a unit.

There's not much the association can do given a judicial foreclosure, except to review its budget to determine how it can continue to pay its bills with the reduction of this unit's assessment income -- if that's the case.

For a non-judicial foreclosure -- a bank-ordered sale of the property: a foreclosure -- the board can continue to pursue the debt. The debt is owed not only as its connected to/ secured by the unit, but the debt is also owed by the unit owner, personally. In this scenario, Jeremy advises ramping up collections according to the collection policy in place, and gleaning information about the unit owner. Where does the owner work? What are the bank accounts owned by the owner?

"A trustee's sale does not eliminate prior owner's personal obligation to pay amounts owed," he reported.

Usually a lender who forecloses is interested in selling or renting the unit. While the bank owns the unit, work to collect assessments from them: they are owed to the association. As well, ask the bank to keep up the unit, paying utilities, keeping the unit warmer than 52 degrees F, so that there is no risk of freezing pipes in cold periods. See your governing documents for owner's responsibilities for upkeep within the unit.

When the bank doesn't foreclose -- and the owner is not paying assessments, the association has several options: collections, small claims court, money judgement, foreclosure, or do nothing, which is not really an option.

The association must decide on a goal for the unit before beginning any action. Here are few scenarios:

• Sometimes banks step up and pay the debt, to protect their interests. 
• A new owner may take ownership subject to an existing mortgage. 
• The association can take the issue to small claims court -- beware of being accused of practicing law if you appear as an association manager or a board member.
• The association can file to collect a money judgement, which is less expensive and takes less time than a foreclosure process, and is limited by the owner's ability to pay.

The key is communication with the debtor.

If the declaration provides, the association can proceed with a non-judicial foreclosure. The unit owner is named by the judge in a receivership process, and it could be a trustee. The judge could order a Sheriff's Sale. There is with this type of foreclosure, a redemption period of 12 months, when the owner/ debtor can redeem title given satisfaction offered in the foreclosure process.

The situation may devolve into a bankruptcy filing, in which case the association may not continue collection activities. However, the association is owed assessments going forward from the date of any bankruptcy filing and can collect those monies if they are not paid.

Bankruptcy in a Chapter 7 filing discharges the pre-filing debts if there is a discharge. If there is no discharge, then the debt remains outstanding.

A Chapter 11 (corporate) or Chapter 13 filing include plans for reorganization and restructuring debt -- Jeremy advises that the association participate in the plan.

The last topic covered occurs when the developer doesn't pay assessments on units it owns, once the association begins collecting assessments. The association can treat this as a collection matter. If the developer sits on the board and the board discusses collecting developer's past-due assessments, the developer cannot participate in the discussion, that being a conflict of interest.

Bottom line, no association board or board member can wave assessments. But the board can work with an owner so that the owner admits that the assessments are due, establish a payment plan to catch the owner up on past-due amounts, and ask the owner to sign a Money Judgement that the association can file if payments are skipped, late or not made. How the association wants to negotiate the money necessary to satisfy the money judgement is up to the association.

Finally, here is a link to more details about Jeremy, including at the bottom, several cogent and accessible Articles and Presentations that he's delivered and published for owners that you will find useful.

Governing Documents, Who, Why, What, When and Where

With many, many thanks to Tony Rafel, Managing Partner, The Rafel Law Group, we spent the evening discussing all the governing documents, as above.


Since attendees represented condominiums, this is the 'flavour' of common interest community that we focused on in our discussion, there being no need to cover HOAs or co-ops at the session. Be aware that different state laws apply to HOAs and to co-ops.


When one buys a condominium, one looks at the view, the exterior, the amenities and falls in love with the space. Maybe it's the granite counter tops, the hardwood floors, or the tricked-out bathroom fixtures.


But, what you're really buying is a lifestyle that will only become visible when you read the governing documents. In Washington, condominiums are sold with Resale Certificates (or as new condominiums, with a Public Offering Statement), which includes governing documents. (Currently, in Washington, warranty rights are robust for buyers of new construction.)


Buyer beware of not reading and understanding the governing documents for the community where you've decided to build a life in the space you'll purchase. These define your legal rights and obligations as an owner.


Here are a few nuggets about each of the governing documents. In the hierarchy of applicability, if the governing documents are silent, the state law applies.

Articles of Incorporation

This is the least frequently used document, written by the developer's attorney, and establishes the association as a business entity. It is filed with the Secretary of State and its validity updated annually by the payment of an annual filing fee. In Washington, some condominiums are incorporated as non-profit corporations.


The purpose of this document is to establish the state, corporate-business guidelines under which the community leaders operate the business of the association. 

Declaration Containing the Covenants, Conditions, Restrictions and Reservations

Nicknames for this document include decs and CCandRs. This document is written by the developer's attorney based on state condominium law -- Revised Code of Washington §64.35 -- and establishes the real estate entity known as the condominium.


CCandRs are filed with the local county records office and they detail the land-use parameters for the community.


Generally, initial editions are designed to protect the developer in the beginning stages of community development, so this version preserves development rights and identifies the developer as Declarant.

By-Laws

By-laws are prepared -- again by the developer's attorney -- as a template by which the association's business is to be conducted and managed. Generally, these are based on the guidelines established in the corporate guidelines for the style of corporation identified in the Articles of Incorporation, such as a non-profit corporation.


Association affairs are managed by a board, not by directors. Officers are different from directors. Officers carry out the directors' decisions. Owners elect directors, then the board appoints among all the directors elected, who serves in each officer role. Each director has responsibility to the association, the duty of care*, a fiduciary duty, and owe a loyalty to the association.


Directors vote, roles to not vote. Generally, proxies of board members are not allowed; but By-laws can be amended to accept unanimous e-mail votes, called 'consent in lieu of meeting'. All directors must sign the decision in writing. The board makes a record of this decision, and may choose to make a motion at a future board meeting to ratify such a decision. As well, decisions made in executive sessions can be ratified at an open board meeting, which protects the board by documenting business decisions.


If there is a conflict between what's written in the decs and what's written in the By-laws, what is written in the decs prevails.

Generally, unless stated otherwise, Washington State condominium board meetings shall be open to all members.
__________
*Duty of care means that a director must decide in favour of the association if there is a conflict of interest.

Rules and Regulations

Once the association begins operations, the board of directors can define rules and regulations for the association. These generally address, specifically, the behaviour required of residents, owners, guests, visitors, in addition to parking and animals. Generally, these are crafted by an attorney based on the requirements outlined by the board.


This is a smart place to include a fine schedule. Your fine schedule can be based on one used by the local municipality. Fines must be reasonable according to the geography, and to the violation.


Generally, if something is not prohibited, it is permitted. However, it's always wise to request advice or guidance from your board or from your association manager if you plan something that could affect your neighbors or the community.


Rules apply when they are sent or by a later effective date, and cannot be retroactive.

Resolutions

Boards can craft resolutions to address specific policies, such as assessment collections, master insurance policy, deductible-liability in the case of owner or unit-caused damage, or other policy guideline. Resolutions are published to owners, and have the same general effect as Rules and Regulations.

Resolutions must be reasonable and are best crafted by association counsel, based on guidance by the board.

Minutes

Although minutes are not governing documents per se, they do document the business actions of the association. There are basic requirements for board meeting minutes -- and for some meetings, there are special elements to include. The board approves minutes of board meetings; the association approves association meeting minutes. 

Owners can object to the contents of board meeting minutes, but they have no standing.

Association Progress  of Governing Documents Over Time

When the developer -- who wants to sell units -- controls the board, s/he may appoint members to the board. Your governing documents are specific about the duties of these appointed board members. Generally, there is a higher fiduciary duty required of these directors, who are required to put the interests of the association above all other interests. Depending on your governing documents, it's possible that the developer can remove board members that s/he appoints.


At some point, the control is passed to the association. The developer must convey control when 75% of the planned units are sold, or earlier, and there must be a termination date to the declarant's rights. Turnover is not a magic date, and in Washington State may be conducted unceremoniously. (Oregon requires a formal Turnover Meeting with the developer required to pass along materials to the owner-elected board.)


At turnover, the owner board may reject contracts -- usually within a 90-day period after turnover. Some associations use this option to change management companies, or invalidate too-long and developer-favoured contracts.


All governing documents can be amended, and should be as the association develops its community standards. Best practices dictate that amendments be prepared by the association's counsel, based, on guidance from the board.

Amendments to Governing Documents

Each governing document usually contains the percentage vote required, either by the board or by owners, to amend each. Generally, if an amendment is not challenged within 12 months of its adoption by the board, it becomes law.

For example: 

• Decs can be amended by 67% of the voting power of the association, or more may be required, depending on the amendment.
• By-laws can be amended by 51% of the total votes in the association, or as otherwise noted in the association's By-laws. There are times when the board can amend them: association counsel can advise the board in particular.
• Articles of Incorporation can be amended by the corporation, according to law for that style of corporation.
• Rules and Regulations can be amended by the board.

How Owners Can Employ Governing Documents

Owners can challenge a decision of the board by sending notice to the board. Owners can also call special meetings of owners, by written petition to cover a stated subject. For example, owners can remove a board member at such a meeting according to its voting requirements.

Decs contain a due process guideline that is useful in the case of a violation -- whether by an owner or a tenant. (Tenants must follow the governing documents and live in the community as owners, except that they cannot vote on association matters.) Due process contains guidelines for notices, hearings and ruling.

Decs define committee work, which is an easy way to become involved in the association's business, and focus on a topic of interest, such as finance, maintenance, safety, landscape and so forth. There are two types:

• Advisory committees have no power, but do advise the board, commonly only one director is required
• Authority committees are delegated authority by the board to perform certain tasks, such as rule on proposals. Two directors must sit on authority committees.

Best practices dictate that a committee be established by a resolution, or by a motion with stated authority.


There are some contents of the governing documents which can be 'abandoned' in place, because they are never enforced. However, when money is involved, the impact may be different and the board may want to act to amend those contents.