Compiled by Michael Hamline / Published Aug 2015
This month, FLCAJ sought out sage counsel from many of our financial services providers. In providing succinct advice, these providers have given community associations a great head start on maintaining a sound and healthy financial footing. So, start mining their helpful commentary, and let your community be rewarded with gold.
Collections for community associations or for that matter any debt that is delinquent often deteriorates into a bitter cycle of pain. The property owner may fall into hard times and cannot afford their payments due to unforeseen consequences and an unfortunate process begins. First, there are the courtesy notes from the association and then when that fails to result into a payment, the matter is sent to either an attorney or debt collector for action.
The actions usually taken are often harsh and punitive. Demand letters go out, notice of intent to lien letters follow that and if you have sent the file to an attorney, a foreclosure is on the horizon. If you have sent the file to a collections company, there will be liens filed, skip traces performed, outbound calls made, and credit bureau reporting done. Without success, it eventually devolves into a cycle of pain for both the debtor and the community association. What can be done to end the pain and set everything right?
The answer is in the outbound call, the training of the caller, and the philosophy of the collections company. When debtors fall on hard times, sometimes a helping hand is what they need. When your expenses outweigh your income, you do have options that you may not even know about. A proper collections company will not just depend on demand letters, outbound calls, and credit bureau reporting to effectuate a recovery but will also consider ways to improve a debtor’s situation by working with them to obtain gainful employment, reduction of their debt, and even government assistance if they are qualified. Many people have not managed their finances properly and well-trained outbound callers from collections companies can turn things around to help their client the creditor (community association) and their client the debtor (delinquent owner). A little help, concern, care, and knowledge can result in a proper conclusion to a difficult problem.
A frequent question we hear is “How do you recommend associations prepare or budget for weather-related disasters?” Associations should contact their bankers when developing a disaster plan and inquire about a contingency line of credit. This would ensure that if a disaster occurred, a loan facility would already exist for the association to utilize. It is also important to have proper documentation of assets. Understanding insurance coverage, the exclusions under the existing policies, and the communication of this coverage to unit owners is essential. Of course, the standard protective devices, such as fire alarms, shutters, etc., are also recommended.
Popular Association Banking
Often the question is asked, “Why should current owners in an association have to fund reserves for a project at a later date, when they may have already moved away?” This is a very common misconception. Current owners are really not “saving” money for future replacement projects. It’s more realistic to think of each owner contributing to reserves on an ongoing basis to offset the loss of useful life of the components they enjoy while living in the building, whether or not they happen to live there when these components actually do get replaced or modernized.
Imagine an owner who has just bought into a brand new building that has a roof with an expected useful life of twenty years. If that unit owner lives in the building for 10 years and then moves away, he or she will have enjoyed the “use” of that roof for 10 years, or half of the roof’s life. As such, they should have paid in 10 years’ worth of reserve contributions, or half of its eventual replacement cost. If they haven’t, then the person who buys their unit and lives there for the next ten years will effectively have to pay double the amount for the replacement of the roof: their “share” plus the prior owner’s share. Don’t fall into the trap of thinking that funding the reserves is a game of musical chairs, where the goal is to have sold your unit and moved away prior to the work getting done!
Many property associations and management companies look to their banker for new projects like the building of a new clubhouse or pool, but many don’t realize that their banker can assist with capital improvement projects that will not only improve the value of the property but potentially attract new residents. In addition to reserve-budgeted projects such as roof replacement and painting, associations can also obtain financing for lake restoration, seawall repairs, plumbing improvements, waterproofing, and window/door replacements. If your property is aging, it may be time to update entrances with new pavers, refresh common areas, and consider elevator replacements.
While there may be reserves available for some of these projects, many associations do not wish to delay making these repairs and/or improvements until funds are fully available. However, by obtaining a capital improvement financing loan, associations can complete projects as needed and pay for it with future assessments.
Loan payment can be made by either a special assessment or by including a line item in future budgets. Financing is available for both short-term and longer repayment terms.
We invite you to contact an IBERIABANK Association Solutions representative for more information about capital improvement financing options. Member FDIC. Equal Housing Lender.
Sara Dewberry Bremerman
Many board members, and managers alike, ask “When is the appropriate time to start a conversation with our lender about an upcoming capital improvement project?” My recommendation is to contact your lender as soon as a project that potentially needs financing is identified. This way the lender can help the association navigate the process and direct them to a solution that best fits the needs of the association. The lender will be invaluable to the association by sharing their knowledge of how community association capital expense funding works with the manager, board, and membership. Early contact will allow the association to receive the full benefit of the lender’s experience. After all, a community association lender has been through this process many times while most managers, boards, and associations may have a limited understanding of today’s community association lending environment. Communicating with your lender early and often will ensure a well-planned financial solution and an overall positive experience for everyone involved with the project.
Mutual of Omaha Bank/CondoCerts
Your condominium or HOA has not properly funded the reserves or you have an unexpected, catastrophic facilities expense. In order to secure that loan, you must make a special assessment. Such is the life in community associations.
If you don’t obtain a loan, then everybody in the community will be hit hard and suddenly with a special assessment bill, and the association runs the risk of delinquencies and possibly default. You may not even be able to get a loan from a bank, but there are specialty lenders who will provide you with a loan at a higher rate than the bank.
Through innovation and out-of-the-box thinking comes a new concept called “crowdfunding.” The association needs this money so why not let the beneficiaries of this loan also have the opportunity to receive a return on a capital investment. Those who can afford to pay the special assessment can step up and pay it with no interest costs; those who cannot pay in one shot can spread the payment out over three (or more) years, and those who wish to see a return on their money equal to what a loan would cost can invest in their own condominium or HOA through a crowdfunding platform. Right now you are receiving less than one percent from your savings in the bank, but with an investment in your own community, you can receive a 5–10 percent return that is very secure and directly affects the value of your property.
Crowdfunding for special assessments…It’s the 21st century way to raise money for a special assessment.
Community association managers wear many hats and manage all aspects of the community’s operations, but by far, the highest ranked responsibility by board members and owners is good financial management. Since financial management is a very broad subject, I have listed these important banking procedures:
Rumpelstiltskin of Once Upon a Time says, “Magic always comes with a price dearie…” In the association world, our magic is in the many ways HOAs and condominiums are generating income through association-owned units (AOU). For clarity, an AOU means the association has the power to execute a lease, directly earn rental income, and maintain the unit including purchasing appliances, repairs, utilities, etc. So from this one type, at a bare minimum, you can receive rental income of $500 per unit per month. Annually that is a low annual amount of $6,000 per unit! Imagine if your association had five units or more. Take a moment and consider the dues of most associations are $600 per year with a few associations reaching $6,000. AOUs can be “magic” money!
So what’s the price? Well dearie, it is subject to taxation at least by the Internal Revenue Service (IRS) if not also the state of Florida! If you take the magic money, here are three action steps to make sure you pay Rumpelstiltskin. First and most important, do not spend 30 percent of the leftover profit. That amount may be owed to the IRS. Next, have accounting create unique and separate accounts to track any direct expenses for rental unit(s), for example, legal expenses, repairs, appliance purchases, etc. All of those expenses are absolutely deductible as you are in the rental business. Lastly, clearly track the revenue of each unit separately.
Mapili CPAs, LLC
Condominium and HOA association boards and their managers have the fiduciary responsibility and the legal requirement to properly insure the association-owned buildings, site improvements, and other tangible property to protect unit owners from losses resulting from fire, flood, and windstorm events. This important duty is best accomplished in cooperation with reputable insurance agents and appraisers. Make sure that the professionals you deal with give you the benefit of their experience and knowledge in arriving at the correct amount of insurance to buy. Inadequate coverage resulting from understated building values may result in some savings in current premiums but at the time of a loss, when you need it most, your claims may be severely reduced due to a co-insurance clause in your policy.
Allied Appraisal Services
For community association board members, managers (CAMs), and owners who are interested in maintaining a superior community, reserve studies are an essential planning tool. A reserve study provides assurance to property owners that future, major property expenses are identified and that a funding plan is in place to pay for those expenses. By budgeting for capital improvements, the community will continue to maintain is value and aesthetic appeal.
Reserve Advisors has worked with more than 1,200 clients in Florida. During our 24 years of conducting studies in Florida, we’ve learned the unique effects that our environment has on buildings and infrastructure. Our value comes from the highly experienced engineers who apply their knowledge and expertise to your property, eliminating surprises and saving money.
If you are an existing partner, thank you for the opportunity to be a resource. If we have not had the opportunity, please just give us a call to learn how Reserve Advisors can help your association.