1. Utilities. Associations with high utility costs should commission a utility audit. Utility auditing companies verify the accuracy of utility bills, notes discrepancies and assists in refund claims.

2. Insurance. Associations can save on insurance premiums almost dollar for dollar by raising deductibles.

3. Landscaping. Save on water and maintenance costs by replacing turf with drought-tolerant native species.

4. Pools & Spas. Adjust heater temperature and pump cycle times for savings. A two degree drop in temperature can significantly decrease the heating bill. Use a pool solar blanket to conserve water temperature and reduce heating costs. Consider solar heating panels if feasible and repair them annually for proper operation.

5. Lighting. Use high-efficiency outdoor lighting like compact fluorescent, metal halide, halogen and mercury vapor. Installations usually pay for themselves in one to two years in labor and energy savings while providing better security.

6. Preventive Maintenance. A preventive maintenance program is your biggest money saver since it catches problems when they are small enough to resolve cheaply. Pay to have a knowledgeable consultant inspector perform this service.

7. Owner Related Repairs Associations can save money in owner generated expenses like power, water and sewer, which are included in the monthly assessments. It’s often cheaper to have the association to fix faucets and leaky toilets than to wait for owners to take action.

8. Review Contracts Annually. Fixed costs like insurance, management, landscape and pool contracts should be reviewed annually. Physically communicate with these vendors to inquire of ways to trim costs. It may not always be possible but ask the question.

9. Review Variable Costs. Variable costs like gutter cleaning, plumbing and electrical repairs change depending on circumstances. Is there an identifiable trend that can be handled better? For example, by trimming trees away from the roof, can gutter cleaning be reduced? Look for "causes and effects" that are driving up costs.

The Board is responsible for large budgets and the care of often millions of dollars of owners’ assets. When spending other’s money, it’s easy to get complacent. As Senator Everett Dirksen said, "A billion here, a billion there...pretty soon you’re talkin’ real money!" As with any business, the Board should carefully watch the bottom line, the margin of profit or loss. Easy money is there waiting to be found. BACK

Budget Crunching
Fall is the time when most homeowner associations go through the ritual of counting last year’s cost and crunching next year’s numbers hoping to squeeze blood out of the community turnip. Often it’s so dry, there isn’t even any turnip juice left much less any O positive. But crunch you must. Here are some of the ways to make the cash flow more freely.

Adjust by Inflation This is a no brainer. Check the area Consumer Price Index - CPI (governmentese for "tax increase") and raise all budget items by at least that amount An exception is utilities which enjoy a larger and incomprehensible rate increase based on the utilities the utility companies expect not to sell added to the cost of maintaining antiquated power generation plants plus a fudge factor they hope to slip by the utility rate commission (just a little budget humor ).

Add a Contingency aka Slush Fund A special budget item equal to 5-10% of all other expenses. Used to cover all those things you forgot to include.

Looking Back for Future Savings. Often next year’s budget is based on last year’s. Do a side by side comparison of the last three years’ budgets. You may learn something...like seeing large and unnoticed utility cost variances. The Board three years ago may have been entirely different and totally indifferent to the budget. You may catch a cost savings that got passed through unscrutinized.

Leave Out Potential Income Late fees may not happen so don’t count on them. Besides, it’s a bit insulting to plan on owner irresponsibility.

Divide Expenses by Category Assign expenses to either Administrative (like Management Contract, Legal, Reserve Study, Accounting, Office Supplies, Postage) Utilities, Maintenance (Landscape Contract, Gutter Cleaning, Pool Maintenance, etc.) and Capital Reserves (Painting, Roof Replacement, etc.). Make sure to include significant expense items. Instead of lumping everything into "General Repairs" divide it among "Plumbing Repairs", "Electrical Repairs" and "General Repairs", for example. It’s important to know where significant monies are being spent. If this hasn’t be done in the past, start doing it in the future. In other words, when a significant bill is paid, assign it a proper description so that next year the Budget Committee can assess whether there is a trend.

Reserve Wisely Reserves are funds collected to pay for periodic maintenance and repair to roofs, siding, paint, pools and other common area components. It’s critical that these costly events be forecast at least 30 years out so that this year’s budget collects a fair share of future expenses. Failure to forecast and collect from all owners inevitably leads to special assessments, the product of poor planning. Since costs can be accurately predicted, why not let all share the expense instead of penalizing a few? The "Reserve Study" as it is called, analyzes these future costs and provides a reasonable maintenance and funding plan that can be included in the budget. It is probably the most fundamental factor for homeowner association success.

Include Board Education While the Board members are volunteers, the association should invest in educating them to improve performance. Subscribing to and buying related resources, attending seminars and joining CAI-Community Associations Institute will all return enormous dividends to the association as director competence levels are raised.

Add Cable TV Costs In many areas, "Bulk Rate Agreements" are available to homeowner associations who agree to pay for Basic Cable Service for all owners. This can result in a significant savings for an expense that almost 100% of all owners pay retail for. Call your local cable provider and check out the options.

§ Irrigation Water Costs. Does your system have a rain override that kills the sprinkling cycle when appropriate? If not, budget for and get it installed before the next irrigation season.

§ Control Pool Temperature A solar blanket can pay for itself very quickly. A 3-5 degree reduction in pool temperature heating can result in significant savings.

§ Lighting Conservation If you haven’t already, swap all exterior incandescent lighting for compact fluorescent or other higher lumen/lower wattage alternatives. Lots of savings here.

§ Offer to pay for leaky faucets and toilets. Even though not technically an association responsibility, the resulting water bill is.

Crunching the budget is not near as hard as you thought, now is it? When you see the savings pile up, that "crunch" will sound oh so sweet.  BACK

Picture Perfect Reserves
A reserve study identifies the association's future repairs and replacements like a snapshot in time. Imagine that you could picture the buildings and grounds as they would be in five, ten, even thirty years. A reserve study acts just like that by estimating the useful life of the common elements and the cost to replace them in the future.

A reserve study uses a detailed component inventory analysis of the association's common elements having useful lives of 3 to 30 years to project maintenance scheduling and a funding plan. Those "elements" consist of the obvious, like Roofing, Painting, Paving, Pool Plastering, and the not-so-obvious like Treework, Landscape Renovation and Safety Inspections (elevator, fire sprinklers and alarms, tripping hazards). Even the smallest associations have at least 15 items that should be included. Large communities could have hundreds.

Your common elements change and the assumptions made for a reserve study change as well over time. Reserve studies can be affected by new labor-saving techniques, building designs and materials that reduce projected costs or extend useful lives. As these changes take place, so should your reserve study. Annual review and updates confirm that the schedule and costs are still accurate. And it’s not always bad news that affects the review. Age, condition and rate of deterioration can be positively impacted by preventive maintenance implemented by the association which increases useful lives. Changes in area inflation and the actual interest earned from invested reserves need to be revised as well. The good news is the annual review is a snap compared to the initial reserve study which requires significant field work to compile data. The annual review merely tweaks certain elements unless there is a significant issue that requires professional review, like structural dryrot or drainage problems.

Now that you’re focused on reserves, it’s time to load the film and start shooting. Snapshot by snapshot, the results will develop picture perfect.  BACK

Reserve Phenomena
As community associations across the nation discover the advantages of adopting a long range reserve plan, opportunities to multiply the rewards present themselves. Reserve planning identifies predictable expenses like painting, roofing and paving and charts a 30 year plan for maintenance and funding. It is a roadmap that the Board can follow from year to year and establishes a funding plan which will avoid the need for special assessments. So what’s the phenomena all about?

One of the big advantages of advance planning is that current owners can pay a fair share of the cost. This is as it should be. Since current owners are "using up" these assets, they should share in the cost to repair or replace them. If all owners put in their share...guess what?... No More Special Assessments! Hurray!!!

There’s more good news. Reserve funds should be kept in a separate, interest bearing account of some kind. While the association can theoretically invest in stocks and mutual funds, usually the Board chooses some safe and insured investment like a Certificates of Deposit or Money Market Account. But, if the Board follows the plan indicated by the Reserve Study, it allows many more investment options because the Board will know when the money is needed. For example, if the next reserve expense isn’t going to take place for three years, why not purchase a 3 Year CD to maximize the interest yield?

Take our mythical Nottacare Condominiums for instance. Nottacare is a 53 unit property that is underfunded, reserve-wise. They have $35,000 in the bank which is only 18% of what they should have according to their professional Reserve Study. The Board currently has reserve funds invested in a 3% Money Market Account. It is committed to following the recommended owner reserve contribution and maintenance plan. Based on the plan, 3% interest yields $199,793 over 30 years. Not bad, you say! But wait! 3% only matches the current inflation rate so the net effect is ZERO. But one year 7% CDs are available. If the Board invested the same reserves at 7%, all other factors remaining the same, the interest yield would be...hold on to your calculators...$541,738. After taxes, this translates into a $239,356 reduction in owner contributions or almost $8000 per year average! That’s not chump change.

This is the phenomena of compound interest: Increasing the interest yield only a couple of percentage points can translate into HUGE savings for the owners. So, reserve planning is not only fair to all owners, it can actually save you a pile of cash. Phenomenal!     BACK

Ounce of Fraud Prevention
Fraud is a criminal deception. Embezzlement is the act of diverting money fraudulently for one’s own use. Does this happen in community associations? You bet it does! And when it does, large sums are usually involved. Embezzlement is a violation of trust by people often regarded as friends and confidants. When it happens, it is often swept under the carpet due to embarrassment by those that should have been watching more closely.

Most states have laws that impose significant responsibility on the association account holder or property manager for preventing and detecting fraud. By not acting prudently and quickly, legal options may be limited.

Separate Responsibility Maintaining adequate checks and balances is essential in protecting your association from embezzlers. There are several ways to do this: Involve more people in the process to reduce the chances of it happening; Separate responsibility for issuing checks from that of reconciling the bank statement; Reconcile your bank statement within two or three days after receipt, and; Make sure you adequate supervision for office employees.

Account Information Security Safeguarding key information is critical:

> Always store blank and canceled checks and bank statements in a secure location.
>  Always verify the check number, date, amount and payee.
>  Never use a rubber signature stamp or a signature that is illegible or easily forged.
>  Notify the bank immediately when financial officers (President and Treasurer) or employees change.
>  Periodically review bank signature cards and access codes.

Prudent Personnel Practices Make sure that directors or employees handling association funds are trustworthy and have no criminal record. Always verify references and the last place of employment of any new employee. And be alert to major changes in spending patterns or financial circumstances.

Fraud Prevention Checklist

>  Are bank account statements reconciled in a timely manner?
>  Are bank statements reviewed by someone other then the person who issues checks?
>  Are employees or directors involved in positions of trust bonded?
>  Are all financial employees or directors required to take annual vacations to break the cover-up cycle?
>  Is there adequate supervision of employees at all times?
>  Is the mail opened by someone other then the bookkeeper?
>  Is the list of checks received prepared by someone other than the bookkeeper?
>  Are cash receipts deposited daily?
>  Is the bookkeeper prohibited from signing checks?
>  Is the supply of unused checks secured?
>  Is signing blank checks prohibited?
>  Are signed checks mailed out without being returned to the preparer?
>  Do you issue checks in numbered order? A check way out of sequence could have been stolen.
>  Are all invoices approved for payment and, when paid, canceled or noted as having been paid? This prevents the same bill being paid over and over.
>  Are invoices checked for unexplained past-due notices?
>  Is the integrity of bank PINs - Personal Identification Numbers, passwords and access codes maintained?
>  Has the association considered using a "lockbox" service that allows assessments to be deposited directly to the bank?

Part of the Board’s fiduciary duty is good stewardship of association funds. Protecting them from crooks is a basic. Following these procedures will reduce your losses. Additional suggestions from your accountant may be helpful. Remember, an ounce of prevention...    By Alan Crandall-Union Bank of California  BACK

Excerpts of an article by Christian Scott of Landye, Bennett, Blumstein, LLP.   BACK

A properly funded Reserve Study is an invaluable tool for maintaining value and promoting harmony. When HOA member assets are properly maintained, members profit from higher market values of their homes. Since major maintenance is done consistently and uniformly, no one is getting a better deal then anyone else. The HOA is more livable and improved curb appeal engenders community pride. When the members like living there, they stay longer and are more willing to volunteer. Oh, one other amazing benefit: No More Special Assessments! Hooray!    BACK

Owner Bankruptcy & HOA Assessments
Many homeowner associations (HOA) have been hit hard by owner bankruptcies and foreclosures. Although the bankruptcies and foreclosures can occur together, there are differences on how an HOA may be affected if they occur separately. A foreclosure will likely affect the homeowner association’s lien on a property but not the ability to collect from an individual personally. The opposite is generally true in bankruptcy.

Filing for bankruptcy to discharge a debt is an age-old practice. When a person successfully completes a bankruptcy, any HOA fees or assessments that were due prior to filing are discharged. But, importantly for homeowner associations, any assessments that accrue after the date of the bankruptcy filing are not discharged and still must be paid. Most owners who file for bankruptcy but plan to continue to live in their home in an HOA know that they still have to pay assessments incurred after filing for bankruptcy. Notably, even if an owner/debtor plans to surrender his or her home as part of the bankruptcy proceeding, post-bankruptcy HOA assessments are not dischargeable and must be paid as long as the owner/debtor or the trustee has a legal, equitable, or possessory ownership interest in the property. In fact, even if an owner/debtor has vacated the unit, he or she still owes post-petition assessments.

The varying types of bankruptcies available to owners/debtors complicate the situation too. The most common bankruptcy for individuals is Chapter 7 and Chapter 13. Chapter 7 is a liquidation, whereby the owner/debtor must generally liquidate his/her assets to pay creditors as much as possible. In a chapter 7 bankruptcy, pre-petition debts are discharged subject to a variety of exceptions, including the exception discussed above in relation to assessments. A Chapter 13 bankruptcy filing provides for financial reorganization for individuals. In a Chapter 13 bankruptcy, a debtor creates a payment plan in which the debtor still pays creditors, but at a discounted rate. Once the debts have been paid according to the plan, the debtor is discharged of the remaining debts (that were included in the plan). Importantly for HOAs relying on assessments, the Chapter 13 owner/debtor is responsible for all assessments incurred after the filing of bankruptcy and during the pendency of the bankruptcy plan.

As HOA boards well know, assessment collection can be extremely difficult at times. A lender’s foreclosure sale will extinguish (nullify) junior liens like an HOA’s lien and, unless the property is sold for more than the lender is owed, the HOA will likely receive nothing. Moreover, an owner’s bankruptcy also reduces and complicates the recovery of an HOA debt. When an owner files for bankruptcy or is in foreclosure, legal advice should be sought regarding the HOA’s collection rights.

By Amanda Anderson - Ball Janik LLP    BACK

Reasons for Reserves
Homeowner association boards are tasked to plan for common element repairs and maintenance and to raise the money to get the jobs done. The part of that responsibility that deals with long range planning to get cyclical events like painting, roofing, fencing, etc. done is called a "reserve study". The money needed to pay for those events is called "reserves" since the board should be collecting and setting aside money in reserve as years go by so it will be there when needed. The reasons for reserves are many but the reasons and motivations vary depending on whether you are an HOA manager, board member or resident.

There are a number of reasons why reserves should exist:

To Protect and Enhance. This cut-to-the-chase principle is adequately funding reserves protects and enhances the commonly held assets and enhances the investment that each owner has made. Reserving money makes sure that funds are available to replace worn out components on a timely basis while avoiding the need for special assessments.

Fairness. The most fair and equitable means to fund reserves is by making sure that everyone is contributing their fair share over the period that they benefit from these commonly-owned assets. A properly done professional reserve study determines what that "fair share" should be.

Sound Financial Planning. As a practical matter, the funding for the eventual replacement of the commonly-owned components should be included in the annual budget. If it is not, then a large and vital part of the budget is not being addressed. If reserve funding is not properly planned, then special assessments will be necessary when the funding is needed.

Fiduciary Duty. A fiduciary is someone that is responsible for holding, maintaining or investing assets on behalf of others. HOA board members have the same fiduciary responsibility to their "stockholders" (members) as does any corporation director. As such, there is fiduciary duty to operate the corporation using the Business Judgment Rule standard which is "did the directors exercise their duties with the judgment of a prudent business person?" When considering reserves, ignoring or under funding a critical part of the budget will not meet the standard of good business judgment and board members may be held financially liable for their failure to act.

Contractual Duty. Homeowner association managers have contractual responsibility to advise assist their clients about how to properly manage business. Budgeting and planning represent an important aspect of this responsibility. Therefore, a manager failing in this charge is breaching a contractual responsibility. In fact, several lawsuits have already arisen from this issue.

Statutory Duty. A growing number of states have passed legislation requiring homeowner associations to do Reserve Studies including Virginia, Ohio, Illinois, California, Florida, Hawaii, Nevada, Oregon, Washington and others. And since HOAs are now the "development model" preferred by most municipalities, we are sure to see more states develop legislation addressing the issue of reserve planning and funding.

Given the logic and responsibility of the homeowner association to adequately fund reserves, it's difficult to ignore the need. If you don't adequately fund the reserves, future owners end up paying more than their fair share.

By Peter B. Miller - Miller-Dodson Associates, Inc. BACK

Budget Red Flags
Money is, of course, a primary component of any budget. But for many owners, it’s the only component of the budget that they care about. "How much do I have to pay?" is their one and only concern.

Unfortunately, homeowner associations budgets are often adopted based on what the members want to pay ratther than what they should pay. Here are a few red flags that might indicate a board is letting the tail wag the dog:

Raising assessments by "X" percent. The board sometimes approves budget increases by applying a percentage increase to the prior year budget without getting into deeper analysis. A percentage increase is a bit like throwing darts in the dark. You might get close but only by luck or accident.

Comparing assessments levels with other HOAs. This discussion often focuses on the desire to make the members’ property attractive to potential buyers. It’s a legitimate issue and one that should be considered, but it should not dictate the budget needed to pay for the HOA’s needs.

Hardship from raising assessments. Raising assessments inevitably creates a hardship on some members. Board members should be sensitive to this reality. However, it’s important to have a realistic budget based on actual expected expenses and reasonable reserves. Anything less fails to represent the true cost of ownership.
Whenever budget discussions shift away from the actual expected expenses and reserves, make sure the focus eventually comes back to the fundamentals. It’s not always the most popular, but it’s the only way to do it right.

By Jeremy Stillwell - Barker Martin, P.S.  BACK

Even though these mind sets are largely emotional, they are very real and don’t go away. They must be overcome for the board to move business along. These people are the HOA’s customers and if they aren’t buying what the board is selling, business comes to a standstill. Change attitudes through patience and prodding. It’s a mind bending experience.   BACK