By Kathy Danforth / Published February 2017
Editor’s Note: This is a two-part article. Part Two will be entitled Financial Fitness for Tomorrow, will focus on the topics of reserves and loans, and will be published in the March 2017 issue.
As a new board takes office, they are assuming the weighty mantle of financial responsibility: discovering and righting any previous omissions or misalignment of priorities and appropriately planning, monitoring, and responding to events going forward.
Janet Romano with Stonegate Bank shares how they help initiate new board members into their roles. “We will usually meet with a newly elected board, the manager, and their CPA to discuss some of the most important issues: cash flow, reserve funding, and keeping everything insured. It is important for new board members to take board certification classes to cover financial aspects, and the Florida Department of Business and Professional Regulation (DBPR) and Community Associations Institute (CAI) have many useful publications.”
Reviewing the financial statements for any variations is a prime method of detecting problems or trends, such as dropping income, rising expenses, or unexpected bills. Brad Schneider with CondoCPA explains that the first step is understanding the accounting method: “Usually the annual financial statements prepared by a CPA firm will be on the accrual basis [recording revenue and expenses when incurred rather than paid]. Modified cash basis usually means recording assessments when billed, but everything else is recorded when paid or received. If the association is on the cash basis, items are recorded when received or paid.” If all income and bills are paid promptly, there will be only minor differences in the methods, but that is not always the case, so board members must take the timing and certainty of some figures into account.
Schneider advises that monthly financial statements are useful to tell the board if they are spending within the budget, if cash and reserves are adequate to meet upcoming bills and scheduled projects, if maintenance fees are being paid promptly, and whether the association is behind in paying bills. “If the financial statements are on the modified cash basis, it is very important to watch the cash in the operating fund,” Schneider points out. “If this number drops to a low amount, a listing of accounts payable should be added to the monthly report to help the board and management be aware if the association is falling behind in paying bills.”
Schneider provides the following tips for reviewing monthly financial statements:
1. Look at the level of operating cash each month. The rule of thumb, which may vary with circumstances, is that the association should have a reconciled cash balance of 8–10 percent of their assessments.
2. Examine the reserve cash and investments, and see if they are where you expected, based on your capital budget for the year. Review the projects that have been completed and the ones remaining to see if any will need to be postponed. See if the reserve transfers are happening. Even if they are recorded on the income statement, the only way to see if they are truly transferred is looking into the general ledger at the reserve cash accounts.
3. Study the receivables from unit owners; if it is increasing, look at a listing of owners to see which ones are causing the increase. If there are accounts that are with the lawyer, request an update at least quarterly.
4. If there are accounts on the balance sheet that are not changing each month, consider removing them and only having them on the balance sheet of the audited financial statements.
5. If the association has a bank loan that is not just a line of credit, make sure the balance is reducing (or increasing based on the special project being funded).
6. Get a copy of the month’s general ledger, and use it in conjunction with your analysis of the balance sheet and the budget to actual financial statement (income statement). If your financials are on the accrual or modified cash basis, the assessment income should match the budget (except for minor difference caused by rounding). If they do not match, there is a problem with the billing.
7. Review other income categories to make sure that income is being billed or received for the various categories you have. For instance, if there are no late fees being billed, but they have been significant in prior months or if they have a significant budget, inquire into why they are not charged the past month. (This is sometimes missed for a month or two by management companies.) If there is laundry income, is that being received? If there is an antenna on top of the building generating revenue, that should be received monthly. If the association is charging rent or resort fees, see if that was billed and billed at approximately the same time as the previous month unless it is seasonal and a drop off was expected.
8. Go through the expenses and compare them to the budget. Any significant differences can be first investigated with the use of the general ledger. If that does not resolve the issues, you can ask the manager.
Though the issue of delinquencies has diminished, fortunately, boards should still be ready to respond to reduced income because of non-paying owners in accordance with the documents and established procedures. Melissa Nash with ARI recommends strategic pursuit of funds based on the specifics of each case. “I always recommend following an internal collection plan and recording a claim of lien,” she notes. “It’s here that the strategy needs to be developed. In most cases, foreclosure is the only recommendation offered; this is a costly and time-consuming procedure, and in some cases is completely unnecessary. Money judgements, short sales, and deed in lieu [of foreclosure] can decrease not only the out-of-pocket cost for recovery but also the period to collect—and thus possibly have the property ready for a new owner.”
Nash advises, “In developing a strategy, we look at several factors:
• Is there a mortgage on the property? What is the owner equity?
• Is the home in foreclosure? If yes, where is it in the cycle?
• Is the homeowner delinquent on other expenses (medical, credit cards, and automobiles)?
• Does the homeowner appear to have any income and/or assets?
• Is there any pending litigation in public record?
• What is the debt to income ratio/credit limits/credit available to the borrower?”
With this information about the financial stability of the delinquent homeowner, Nash states, “Communication is the key from this point forward. Remember, the goal is to collect without litigation; but if you should litigate, which court is best? In most cases, we find that with communication, we can reach resolution without litigation.”
Nash reminds boards, “You have the right to file suit for a money judgement and not lose your lien rights. If the balance is below $5,000, you could find yourself in front of a judge/court officer in 90 days or less. So many cases resolve here and never see a final judgement entered. If a judgement is obtained, immediately freeze banking accounts and get the financial statement of facts. Failure to respond and/or false information can result in contempt of court and possible incarceration of the homeowner. This is very effective!”
Knowing the situation determines which route to take. “We wouldn’t recommend a money judgement against someone without knowing in advance where the ability to pay was,” Nash notes. “If we found a homeowner with no credit, no disposable income, and no ability to pay the association, then foreclosure action might be the best avenue for collection. But never forget the short sale and deed in lieu, which can completely remove litigation.”
Janet Romano is with Stonegate Bank. For more information, call (866) 227-0441 or visit www.stonegatebank.com.
Brad Schneider is with CondoCPA. For more information, call (877) 900-1040 or visit www.condocpa.com.
Melissa Nash is with ARI. For more information, call (561) 697-4911 or visit www.4aronline.com.