Quorum — September 2017

Washington Metropolitan Chapter Community Associations Institute

SEPTEMBER 2017

A Magazine for Community Association Volunteer Leaders, Professional Managers and Business Partners

BUDGETS

FINANCIALS

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2 | Quorum­

SEPTEMBER 2017

­CONTENTS 12 It All Begins with a Budget...

BY BERNIE GUTHRIE, CMCA, AMS, PCAM

14 What It Means to Be a Fiduciary

BY BETSY JOHNS, CMCA, PCAM

16 Your Service Providers and Your Budget

BY SARA CROSS

18 Myths about Reserve Studies

BY DOUG WHITE, P.E.

20 Fixed Income Strategy for Homeowners’ Associations

BY THEODORE HART

22 Does Your Association’s Budget Match Your Community’s Brand?

DEPARTMENTS AND MORE 5 6 6 7 8 10 11

Message from the President Chapter Benefactor: FirstService Residential Quorum Magazine Editorial Calendar Welcome New Members Upcoming Events People & Places Event Flyer: An Evening on the Ice 21 Event Flyer: Board Leadership Development Workshop 32 Classifieds 33 Index to Advertisers 34 Cul-de-sac: The Inside Scoop from a Pooper Scooper

BY DEREK WILSON, CMCA

24 Budgeting for CAI Membership

BY GREGORY E. BROOKSHER, PCAM

26 Short on Cash? What Community Associations Can Expect When Taking Out a Loan

BY RAFAEL A. MARTINEZ, CTP

28 Should Condominium Fee Assessments Go up Every Year?

BY LEE ANN WEIR, CMCA, AMS

29 When to Dip into Your Reserves?

BY HOWARD A. GOLDKLANG, CPA, MBA

30 What it Means to Be a Member of an HOA Finance Committee

WMCCAI MISSION STATE­MENT To optimize the operations of Community Associations and foster value for our business partners.

BY RICHARD TERSELIC

Reader comments and suggestions are welcome. Address your comments to: Quorum 7600 Leesburg Pike, Suite 100 West Falls Church, VA 22043

We also wel­come ar­ti­cle sub­mis­sions from our ­members. For author guide­lines, call (703) 750-3644 or e-mail publications@caidc.org.

Articles may be edited for length and clarity.

SEPTEMBER 2017

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President Bruce H. Easmunt, ESQ. President-elect Sarah Gerstein, CMCA, AMS, PCAM Vice President Rafael A. Martinez, CTP Secretary Michael Gartner, ESQ. Treasurer Airielle Hansford, CMCA, AMS, PCAM Immediate Past President Jeremy M. Tucker, ESQ. (ex officio) Executive Director Jaime Barnhart, CMP (ex officio)

D IRECTORS Gordon Boezer, Thomas Burrell, Dorothy Firsching, PMP, Kristen Melson, CMCA, AMS, PCAM, Ted Ross, Todd A. Sinkins, ESQ., Elizabeth Schultz, CMCA, AMS, PCAM, John Tsitos, CMCA, AMS, PCAM, and Stephen Wright, CMCA, AMS, LSM, PCAM

CO U N C I L C HAI R S Communications Council Crishana Loritsch, CMCA, AMS, PCAM Education Council Jennifer Bennett, CMCA, AMS, PCAM Member Services Council Ruth Katz, ESQ.

CO MM I TTE E C HAI R S Conference & Expo William Cornelius and Donna Aker, CMCA, AMS, PCAM D.C. Legislative/LAC Jane Rogers, ESQ. Education Kevin A. Kernan, ESQ. and James Santos, CMCA, AMS Golf Elizabeth Rudolph, AMS, PCAM and David Crone, CMCA, AMS Maryland Legislative Thomas Schild, ESQ., CCAL Outreach Lenard Goldbaum, AMS, PCAM and Sara Ross, ESQ. Membership Joe Inzerillo and Jarold Martin Quorum Editorial Susan L. Truskey, ESQ. and Nicole Williams, ESQ. Chapter Events June Chulkov and Bernie Guthri, CMCA, AMS, PCAM Virginia Legislative Ronda DeSplinter, LSM, PCAM and William A. Marr Jr., ESQ.

QU O RUM Managing Editor Diane Sohn, dsohn@caidc.org Design Six Half Dozen

QU O RUM E DI TORI AL CO M M ITTE E Co-chairs Susan L. Truskey, ESQ. and Nicole Williams, ESQ. Members Beverly Alston, James Anderson, Noel Arevalo, CMCA, Sarah Auringer, Mira Brown, CMCA, AMS, Leslie Brown, Chris Carlson, PE, Deborah Carter, CMCA, AMS, PCAM, Sara Castle, Crystal Coats, CMCA, AMS, Kenny Cohn, Cheryl Crawford, Christopher Dibble, CMCA, AMS, PCAM, Bruce Easmunt, ESQ., Sarah El-Taher, Matt Gallagher, Michael Gartner, ESQ., Amy Gaynor, Sarah Gerstein, CMCA, AMS, PCAM, Rippy Gill, CMCA, AMS, Laura Goguet, CMCA, AMS, John Goins, Stephen Grant, Scott Greges, CMCA, AMS, Timothy Hipp, Mary Horner, Chase Hudson, Peter Hughes, Iman Jackson, CMCA, AMS, Shannon Junior, Ruth Katz, ESQ., Leisa Keys, Richard Kuziomko, CMCA, AMS, PCAM, Crishana Loritsch, CMCA, AMS, PCAM, Liliana Martinez, CMCA, AMS, Laura McVey, Thomas Mugavero, ESQ., Crystal Partin, CMCA, AMS, PCAM, Joycelyn Peoples, AMS, Kara Permisohn, Nicki Phenneger, Christine Rudert, Brandi Ruff, CMCA, AMS, PCAM, Lauri Ryder, CIC, CRM, CMCA, Scott Silverman, Mark Smith, Chelsie Throckmorton, Olga Tseliak, John Tsikerdanos, Ron Unger, CIC, Kim Veirs, Lee Ann Weir, CMCA, AMS, Doug White, Samuel Wiest, Lakisha Williams, Aimee Winegar, CMCA, AMS, LMS, PCAM, Jim Wisniewski, Kelly Young, Michael Zupan, ESQ. Washington Metropolitan Chapter Community Associations Institute, a 501(c) (6) organization, serves the educational, business and networking needs of the community association industry in 80 cities/counties in Maryland, Virginia and the District of Columbia. Members include community association homeowner volunteer leaders, professional managers, association management companies, and other businesses and professionals who provide products and services to planned communities, cooperatives and condominiums. WMCCAI has more than 3,000 members including 300+ businesses, 1,100 professional managers from 85 management companies, and approximately 1,500 community association homeowners. WMCCAI is the largest of Community Associations Institute’s 62 chapters worldwide.

Quorum is the award-winning premiere publication of WMCCAI, dedicated to providing WMCCAI’s membership with information on community association issues. Authors are responsible for developing the logic of their expressed opinions and for the authenticity of all presented facts in articles. WMCCAI does not necessarily endorse or approve statements of fact or opinion made in these pages and assumes no responsibility for those statements. This publication is issued with the understanding that the publisher is not engaged in rendering legal, accounting or other professional services and nothing published in Quorum is intended to constitute legal or other professional advice and should not be relied on as such.

If legal advice or other expert assistance is required, the services of a competent professional should be sought directly by the person requiring such advice or services.

IT’S BUDGET SEASON As Labor Day approaches, on behalf of WMCCAI, I would like to once again recognize and thank our volunteers and staff for the contributions you have made to the strength, prosperity, and well-being of the Chapter.

WMCCAI thrives because of your efforts, and the financial support provided by our advertisers and partners. Labor Day marks the unofficial end to summer; vacations have come and gone, children shortly return to school, and community associations get back to business. The passing of Labor Day also marks renewed focus on another season: budget season.

FROM THE PRESIDENT

O FFICE R S

WMCCAI’s Board of Directors has just wrapped up its budget planning process and will be adopting WMCCAI’s 2018 budget at this month’s meeting. Countless hours of staff preparation, planning and revisions are devoted to providing a draft budget to the board in mid-August each year.

This year, WMCCAI’s budget committee met on two separate occasions over many long hours to thoroughly examine and approve each and every line item in WMCCAI’s budget. As you can imagine, with the multiple goals and objectives of the Chapter, this is no small feat. The budget committee consisted of numerous volunteers from the board, with input provided by council chairs, committee chairs, and their respective committee members. The budget planning process was (and continues to be) open to all members of WMCCAI. I would like to personally thank all involved in this process for your participation and devotion to a prosperous future for WMCCAI. As this issue’s lead article suggests, an association’s budget provides the framework for all association operations. How thorough are you in your association’s budget planning process? Is the approval of your budget stretched out over an entire year of planning and preparation, or does it all occur in one brief meeting? Does your budget adequately reflect the needs and goals of your association? This edition of Quorum will provide you with helpful tips and guidance to aid your association through several aspects of the budget planning process. It is our hope that the community associations which we serve will be strengthened through the education provided in this edition.

BRUCE H. EASMUNT,

ESQ.

Bruce a senior associate in the law firm of Chadwick, Washington, Moriarty, Elmore & Bunn, P.C. His practice is devoted to community association representation. He has previously served as president of a condominium unit owners’ association and as vice president of a master association, both in Falls Church, VA. Bruce was elected to serve on the WMCCAI Board in 2012, he has authored articles in Quorum, presented at CAI education seminars, and chaired the WMCCAI Outreach Committee. He was awarded the WMCCAI Rising Star in 2011, Committee Chair of the Year in 2012, and Educator of the Year in 2015.

Articles appearing in Quorum may not be reprinted without first obtaining written approval from the editor of Quorum. In the event that such permission is granted, the following legend must be added to the reprint: Reprinted with permission from Quorum™ magazine. Copyright 2017 Washington Metropolitan Chapter Community Associations Institute. Quorum is a trademark of WMCCAI. Receipt of Quorum is a privilege of WMCCAI membership for which $65 in nonrefundable annual dues is allocated. The subscription price for nonmembers is $75 per year; contact publications@caidc.org or call (703) 750-3644.

To advertise in Quorum, e-mail publications@caidc.org.

For more information about Quorum or WMCCAI, visit www.caidc.org.

SEPTEMBER 2017

|5

CHAPTER NEWS

C H A P T E R

B E N E F A C T O R

FirstService Residential Address: 3949 Pender Drive, Suite 205, Fairfax, VA 22030

Phone: (703) 679-1501

Fax: (703) 591-5785

FirstService Residential has specialized in providing management services for community associations of all types in the Washington, D.C., area since 1980. Our management portfolio is diverse in both the services we provide and the communities represented. Whether we are providing financial or full-service management and whether it is for a large-scale community, a high-rise, a homeowners association, a lifestyle community or a condominium, we understand that our fundamental role is to support the board in its efforts to operate the association, while preserving the community’s unique legacy and enhancing property values.

FirstService Residential is one of CAI’s most tenured members. We proudly support CAI as a Benefactor and through volunteerism. We also promote the education, training and industry awareness benefits of CAI to our associates and clients. FirstService Residential is an Accredited Association Management Company, a prestigious designation acknowledging FirstService Residential as one of the nation’s top community management firms. We are also a member of the Property Management Association.

FirstService Residential is a local company whose executives have spent much of their lives in the Washington, D.C., area. The services that our local clients receive are performed locally. At the same time, we offer our clients benefits associated with being part of a national, resourceful and financially secure organization. FirstService Residential is the largest manager of residential communities in North America, overseeing more than 6,000 properties and more than 1.5 million residential units across the United States and Canada. The scale of our local company coupled with our national platform allows us to provide cutting edge technology products, specialized product and service teams and industry leading training and education programs. It also provides a forum for developing and promoting best practices among a diverse group of industry professionals.

We are on a daily mission of excellence and know that we best serve our clients by recognizing the individuality of each association and working to build a mutually beneficial, long-term relationship. We understand the challenges faced by all types of communities and work closely with each client to identify their specific needs. Our expertise and guidance provides each community with a clear path for accomplishing short- and long-term goals. Additionally, our commitment to providing our services in a manner that is professional, customer-service focused and value oriented is unwavering. This commitment is accomplished on the foundation of our Corporate Values.

• •

Own It Improve it

• •

Do What’s Right Aim High

• •

Build Great Relationships Be Genuinely Helpful

These values are the foundation of the FirstService Residential culture. By leveraging best practices and hands-on expertise, we offer the professional, personalized service found in smaller organizations with the ability and extensive resources of a proven leader.

We look forward to speaking with you about your association.

QUORUM MAGAZINE EDITORIAL CALENDAR

Month Theme October Parking November Home for the Holiday December Making Connections

*Themes subject to change.

6 | Quorum­

Article/Submissions Ads Due Due August 1 August 17 September 1 September 17 October 1 October 17

CHAPTER NEWS

Welcome New Members WMCCAI proudly welcomes the following members who joined the Chapter in July 2017.

Community Association Volunteer Leaders from the Following Associations Belmont Community Association Elan Mews/Royal Courts Homeowners Association Letterman House Condominiums Reid’s Prospect Homeowners Association Somerset at Westridge, A Condominium Individual Managers Shaquida Ano, Associa-Community Management Corporation, AAMC Deborah Belote, Riverbend At Lansdowne Woods Kenya Cooper, Associa-Community Management Corporation, AAMC Lauren Freer, Associa-Community Management Corporation, AAMC Doriana Gjonaj, Associa-Community Management Corporation, AAMC Gigi Gomez, Community Association Services, Inc., AAMC Jess Herbert Stephanie Herbolsheimer, Associa-Community Management Corporation, AAMC Carmen Isler, Community Association Management Professionals Michelle Johnson, Select Community Services Jennifer Jordan, Select Community Services Nicholas J. Kohlerman, IV, Abaris Realty, Inc., AAMC Thomas S. Patti, CMCA, AMS, CAP Associates, LLC. Earl Roberts Liana S. Roberts, Montgomery Village Foundation Kerry Schmitz, Associa-Community Management Corporation, AAMC G:\Adoc\TCS\MARKETING\Advertisement -2017 Quorum Ad.061317.docx Nadia Shevchenko, Associa-Community Management Corporation, AAMC William Smith, CMCA, AMS Pamela D. Wise, Community Association Services, Inc., AAMC

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UPCOMING EVENTS

SEPTEMBER 9

D.C. Homeowner Education D.C. Homeowner Education 9 a.m. – 1 p.m.

400 Massachusetts Avenue, NW, Washington, D.C. 20001 Registration Fee: $25 (Space is limited! Register today. Refreshments provided.)

This workshop will focus on two modules from the Board Leadership Development Workshop. In addition, experienced managers and attorneys from D.C. will provide training to improve understanding of community association financial statements. The program will provide updates regarding recent legislative action in the city. This session is worth four (4) credit hours.

SEPTEMBER 21

2017 Golf Classic 9 a.m. – 6 p.m.

Bull Run Golf Club 3520 James Madison Highway, Haymarket, VA 20169

Registration Single Player $335 / Foursome $1300 / Cornhole Tournament $125

Enjoy a day on the course playing golf, winning prizes, and networking. Not a golfer? Join us for a cornhole tournament with beverages, snacks, prizes, post-play banquet, and more.

Visit www.caidc.org for more details or to register. Sponsorships are still available for both golf and cornhole events. Contact events@caidc.org.

SEPTEMBER 30

Board Leadership Development Workshop 9 a.m. – 5 p.m.

WMCCAI Chapter Office 7600 Leesburg Pike, Suite 100 West, Falls Church, VA 22043

Early Bird After September 22 Homeowner / Manager Member $65 $80 Nonmember $75 $90

The Board Leadership Development Workshop teaches the homeowner leader how to communicate with association residents, hire qualified managers and service providers, develop enforceable rules, interpret governing documents, and more.

It provides a comprehensive look at the roles and responsibilities of community association leaders and conveys information to help create and maintain the kind of community people want to call home. This session is worth seven (7) credit hours.

OCTOBER 7

Night on the Ice: Capitals vs. Canadiens Game starts at 7 p.m.

Capital One Arena (Lexus Level Suites) 601 F Street, N.W. Washington, D.C. 20004

Slap shots, power plays, and maybe even a hat trick await you at this fall hockey event. Join WMCCAI as we open the hockey season. Network with industry colleagues and friends in six party suites at the Capital One Arena (formally the Verizon Center). Registration includes game ticket, access to party suite, all you eat and drink in the suite.

Early Bird After September 7 Homeowner / Manager Member $125 $150 Nonmember $150 $175 Business Partner Member $150 $175 Nonmember $175 $200 OCTOBER 12

Manager Luncheon: Developing a Preventative Maintenance Inspection of Aging Property Infrastructure 12 – 3 p.m.

Park Place Condominium 2500 Van Dorn Street, Alexandria, VA 22302

Join us for lunch and networking. Aging property infrastructure can be a burden if you do not have a preventative maintenance plan. Join our experts as they take you through a property tour to and teach you how to identify signs of major equipment maintenance problems and aging building infrastructure issues. This session is worth three (3) credit hours.

Visit www.caidc.org for pricing and registration details.

For more information on WMCCAI meetings or upcoming events, contact the chapter office at (703) 750-3644, email info@caidc.org or visit www.caidc.org.

8 | Quorum­

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SEPTEMBER 2017

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PEOPLE & PLACES

Tidewater’s Community Management Team Continues to Grow Tidewater Property Management, Inc. continues to grow at an unprecedented rate. Within the last year, Tidewater has added seven key team members to serve its communities. Joe Jordan, Tammy Eaton, Sheila Curry, Tiffanie Royster, Aminata Camara, Kate Cornell, and Timothy Warren have joined the Tidewater family as community association managers to aid in its extraordinary stance of providing quality management services throughout the Maryland, Washington D.C., and Virginia areas.

Erika E Cole Launches Church and Faith-Based Organization Practice at Whiteford, Taylor & Preston LLP

October 25

Whiteford, Taylor & Preston LLP announced that Erika E. Cole, a preeminent nonprofit organization attorney with a significant reputation among churches and faith-based organizations, has joined the firm as a partner as of July 1, 2017. Mrs. Cole is one of only a handful of attorneys in the U.S. practicing exclusively in the area of church law.

|

Mixed Roundtable

| 12-3 p.m.

Come learn, lunch, and network with industry professionals who want to share their experiences with you.

Lunch will be provided. This event will be held at Maggiano’s Little Italy (5333 Wisconsin Ave NW Washington, D.C. 20015). On-site parking available. This session is worth three (3) credit hours.

Visit www.caidc.org for pricing and registration details.

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10 | Quorum­

An Evening on the ICE Capitals vs. Canadiens

WHAT

WHEN

Slap shots, power plays, and maybe even a hat trick await you at this fall hockey event. Join WMCCAI as we open the hockey season. Network with industry colleagues and friend in six party suites at the Capital One Arena (formally the Verizon Center). Registration includes game ticket, access to party suite, all you can eat and drink in the suite.

October 7, 2017 7 p.m. game

REGISTRATION RATES EARLY BIRD RATE BEFORE: 9/7/17

WHERE Capital One Arena (Lexus Level Suites) 601 F Street, NW Washington, D.C. 20004

REGULAR RATE

HOW Check WWW.CAIDC.ORG for details on registration and ticket pick up time.

HOMEOWNERS / MANAGERS MEMBER

$125

$150

NONMEMBER

$150

$175

MEMBER

$125

$150

NONMEMBER

$175

$200

BUSINESS PARTNER

WHO This event will benefit: BUSINESS PARTNERS, HOMEOWNERS, MANAGERS

SPONSORS Sponsorships are available. Please contact Carla Cobos Hull, Events Manager, at EVENTS@CAIDC.ORG

7600 Leesburg Pike, Suite 100 West

E-mail: education@caidc.org

Falls Church, VA 22043

Web: www.caidc.org

T: 703.750.3644 F: 703.941.1740

By Bernie Guthrie, CMCA, AMS, PCAM Bernie is a portfolio manager at FirstService Residential. She began her career in 2002 as an architectural inspector for a large-scale association and used her prowess in management to progress through the successively more responsible roles of site manager, portfolio manager, and division director.

As a member of WMCCAI, she stays active as a lecturer, co-chair of the Chapter Events Committee, and member of the Virginia Legislative Action Committee.

It All Begins with a ...

first meeting of the budget team should be used for creating a timeline for the process with checkpoints and assigned tasks clearly detailed. A set path keeps you focused!

Most often, the community manager or accountant will lead this process along with an assigned liaison board member, or a committee. Decide who is on the team at least six months before the due date. This will ensure they have time to educate and prepare for the process by reading the governing documents, creating a timeline, evaluating current contracts, reviewing audits for recommendations, understanding the reserve study, reviewing current/prior year financials, and investigating past budgets variances.

5 Months to Budget Deadline – Contract for Success

A

hh, the dreaded community association budget. It’s hard for anyone to be excited about the responsibility to plan and forecast expenses for an entire year.

Let’s not make it worse by failing to recognize that it’s a process and not just another task to cross off your to-do list. By planning your attack—you can not only complete the budget on time but also showcase that you’re a master of the association finance universe!

A budget provides the framework for all community operations, planning, and dreams over the next year. Recognize that they build upon each other year after year creating a stairway to a healthy association.

They can be your ally by supporting funding for a much-needed enhancement project, an exciting series of social events, or even an outstanding rotation of flowers at the entry.

Conversely, a budget can be your worst foe by not permitting staff salary increases, from the hiring of a top-rated contractor, or underfunding reserves.

You must recognize that community associations are a business and should function as one. They are subject not only to Federal and State law but also their own internal governing documents. It is important for

12 | Quorum­

an association’s directors to understand and appreciate their fiduciary obligations concerning an association’s finances. The relationship of trust and responsibility for the property of an association’s membership must be managed with appropriate care and loyalty. The directors should seek education and advice from professionals whenever possible. Every time you enter budget season, it’s an opportunity to forge the community’s future. How do you strike the right balance while completing the budget process in a timely manner? Let’s see how the pieces of this puzzle fit together…

6 Months to Budget Deadline – Properly Prepare While board members are elected to run a business, most do not come with experience.

Therefore, the budget legwork is usually performed by others instead of the board.

The first step in crafting a budget process for a community is to determine who will be responsible. This is an excellent time to use the strength of owners who may not desire a long-term commitment, but wish to support their community in a meaningful way. By agreeing on who’s in charge sets expectations for not only the current cycle but also for future changes in board members. The

You have your team and timeline in place.

Now what? First, review your current contracts. These are fixed expenses for which the association is legally obligated to pay. Make a spreadsheet listing all contracts, the terms, the associated costs, and any non-renewal terms to be followed. The board should review this list and determine if any contracts need to be updated for the next budget cycle. Your budgeting should include fixed expenses for contracts, not “this is what we want to spend” figures.

While cost is always a factor, taking the time to choose the perfect fit when hiring professionals will ensure that disappointments are rare. Spend time creating a Request for Proposal (RFP) for services which represents the desires and needs of the community. Don’t be afraid of asking for too much—it’s easier to remove services than to re-bid the entire contract and add things back. Review the submissions carefully and evaluate all factors with cost being last. By hiring cheaply and budgeting for that “steal of a deal” contractor, you may not have the funds available to correct a mistake. Choose your service partners wisely while remembering that there is a learning curve with almost every change of provider which can be an agonizing adjustment period for the community.

4.5 Months to Budget Deadline – Review the General Ledger The general ledger records the financial transactions of the community. Most likely you’ll have this system of codes and descriptions already set up to capture the various income and expenses. However, that doesn’t mean it’s correct! If you review the financials and have no clue what would be attributed to a line item, how will anyone else? Time spent reviewing current and past years expenses in detail will ensure you’ve captured everything needed for the next year and avoid surprises.

Remember, budgets build upon one another; if a previous plan was poor, it will clearly show in the financials. If a ledger code isn’t clear, ask your managing agent or accountant to revise it, so you’ll have exactly what is needed moving forward.

4 Months to Budget Deadline – The Draft Unlike home budgets where you know your income and then figure out how much you can afford to spend on various items, association budgets work in the reverse. For this reason, we begin with assigning expenses.

The first entries you make to the budget will be mandatory spending. Some are fixed expenses such as contracts, agreements, and other financial commitments. Additional mandatory items include reserve contributions, audit recommendations, taxes, general operations, equipment contracts, and professional advisors. Do your best to capture EVERYTHING to need to spend money for during the year! Expenses should carefully be reviewed across past financial statements to ensure they are included and adequately funded.

Next, add your discretionary spending.

These are the “we’d love to have” items and they vary from large figures such as landscape enhancements to smaller amounts for social activities and are most often the first to be eliminated in budget concessions. It’s a nice touch to try and add a few frills where finances allow.

Now, let’s figure out if you have the money to spend, and if you don’t, how to obtain it! Income lines determine your ability to pay for the expenses. Start with the income

you know will be received and enter those figures—this will include interest, third-party assessments, late fees, parking, laundry, vending, etc. These may not all be easy to determine, but history should reveal a good approximation. This is an excellent time to review the necessity of increasing fees charged for non-assessment items, even if it’s small.

Review the expenses and income to determine what additional income is needed to balance the budget to zero. This number will most likely be very large—don’t panic! You will use this number to calculate the member assessments. Take the figure of required funding and divide it by how many payments are made by owners over the course of a year. Divide that by the total number of units or pro-rata portions paid. This may involve some tricky calculations if there are service assessments or some other cost-sharing agreements in place.

Once you’ve determined the total annual assessment, calculate the amount of each payment made during the fiscal year. Check your math! You don’t want to find out you miscalculated and have a shortfall that follows you all year long! How does this number compare to the previous annual assessment? Smaller figure? Great! Don’t immediately decide to lower the assessments.

This is an opportunity to set aside additional funds in reserves. Look at the “want” list and consider if other improvements can be made, or creating an operating reserve for those surprise expenses for which you did not budget.

What if that figure is higher? Determine how much and review the governing documents to understand the limits for an assessment increase. Even if the increase is permissible— will it cause a hardship to your members? If yes, it’s time to review all expense and look for savings to trim them down. Repeat the evaluation process until the income and expenses balance. This is often the most challenging part of the process and tempers may flare. Keep calm and balance on!

3 Months to Budget Deadline – Presenting and Approving You’ve toiled away to arrive at this moment,

savor the success and prepare to present the budget to the owners and/or board. Some governing documents may require owner approval of the budget while others require only board approval.

Remember that it’s impossible to create a budget to satisfy all. Adjust your thinking and don’t expect a standing ovation. Just be proud of what you have accomplished and know that you did your best! Creating visual presentations with charts and bullets for important areas or some other presentation aide should be considered for the unveiling.

Prepare and practice! There will likely be adjustments requested, this is normal. Remember to balance your income and expenses then recalculate the assessments. Double check the math every time.

2 Months to Budget Deadline – Finalizing Once approved, the final budget and assessment must be shared with owners and added to resale disclosure statements. How you do this can be customized to fit your association and adhere to the governing documents, but we recommend you place a copy on the website for reference and include an explanation for any assessment increases or large expenses.

1 Month to Budget Deadline – Finishing Touches Enter the approved budget into the accounting system and educate staff on what each line represents so they know how to code the expenses. Ensure all contracts are fully executed. Send payment reminders to owners and alert them to verify amounts of automatic payments.

After Budget Deadline – Prepare Again The budget is behind you, and this signals the best time to plan for next year! Spend the next six months reviewing the financials to consider the cause of variances, read the audit and comments, observing vendor performance, and planning the next step in the future of the association.

Your new fiscal year will be a success—all because it began with a strong budget.

SEPTEMBER 2017

| 13

By Betsy Johns, CMCA, PCAM

•

Betsy is a partner and CFO with National Realty Partners LLC AAMC, located in Herndon, VA. She has been a management company owner since 1981, with a strong background in financial management and degrees in accounting and economics. She is a long-time member of the WMCCAI Education Committee and chairs the CAI PAC Virginia.

What It Means to Be a

Fiduciary T

he directors for our Common Interest Community (CIC) Associations are referred to as “fiduciaries.” What does that mean? It means you have taken on the responsibility for protecting the assets of others. These assets include not only the funds the members have entrusted to the association through the board but also the value of what is probably the biggest asset each member has, their home. Sitting at the top of the organization chart of responsibility is the president and treasurer.

Board volunteers making the hard decisions deserve recognition from fellow community members for all their hard work and efforts!

In the community association world, with respect to financial responsibilities, the governing documents anticipate that the treasurer will handle the financial tasks, such as paying bills, collecting assessments, compiling financial statements, making sure the audit and tax returns get done, and so on.

The president will sign all contracts, share signature authority over association funds with the treasurer, and sign other corporate documents. The president is also responsible for making sure the financial duties are performed, the association has proper coverage to protect itself in the case of a breach of fiduciary duty or fraud and to make sure the association complies with all laws governing the association.

14 | Quorum­

The board makes the decisions on how and through whom these responsibilities are carried out and which of these tasks can be delegated, typically to a sub-contractor such as a management company or accounting firm.

What does “delegation” really mean? It does not mean a handoff of ownership of responsibility. It should be considered a sharing of responsibility, but ultimately it still sits with the board. It is common to delegate many responsibilities to a management company.

The level of financial expertise the management company has will dictate how much you should delegate. No matter what, the president and treasurer should at a minimum make sure they accomplish the following: •

•

•

Have an audit done, whether required or not by your governing documents.

An audit will protect you when a disgruntled member raises unsubstantiated charges of financial wrong doing against you. Make sure to read the management recommendations letter that comes with the audit.

Have a fidelity bond/crime policy covering all association funds and naming your management company as an additional insured. (Required by law in certain jurisdictions.)

Make sure all bank accounts are reconciled to the bank statements, and the board receives the statements and reconciliation every month.

Receive monthly financial statements and READ them! Make sure you understand the statements and that someone trained in accounting at the management company has reviewed them as well and can answer any of your questions.

What is the most difficult responsibility the board has? I would have to say it is making sound business decisions to accomplish the association’s responsibilities, as required by the fiduciary code.

This is because the majority of people who serve on CIC boards truly have the best interests of the community at heart. But executing that is another matter. When a board very proudly states they have had no increases in assessments in 10 years, I see a board making poor business decisions.

Keeping assessments low is not the sound goal. Maintaining the community to reasonable expectations and to maximize property values is. Setting assessment rates in the budget process starts with building the picture of need, not want.

The most difficult action for a board member to take personally is having to vote for an assessment increase, knowing it will be a hardship on their neighbor, or perhaps themselves. This is what making sound business decisions as a fiduciary is about— making decisions for the benefit of the whole community, not individuals.

The president and the treasurer, who most often have the tenure on the board, need to lead the charge for sound business practices and decisions by the board, especially when seeking assessment increases. They should engage their hired professionals to educate the board and the members. These professionals will add integrity to the “sell.” Real estate agents who market the local area can help add to the story as well. Those in the audience who are there for the long haul will understand and most likely support the decisions, and those who are there only for the near future will understand but often object.

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SEPTEMBER 2017

| 15

By Sara Cross Sara is the Loudoun County marketing representative at Heritage Landscape Services (HLS) in Sterling, Virginia. She is a member of the Events and Quorum Committees. Sara has played a key role in WMCCAI projects such as the Ronald McDonald House Landscaping Day and the Anniversary Cruise. Sarah won the “Rising Star” award in 2016.

Your Service Providers and Your Budget

N

ow that budget season is in full swing, it is the time to talk budgeting with your vendors. Of course, the board has several goals for their property, but at what cost? Are they willing to increase their association fees or a special assessment?

What can we do with your current budget?

The best way to answer these questions is to do three things: understand which service provider you need and what they can offer you, visit the property with your service provider, and share your budget with your business partners.

The right business partner can offer you deals that can help your budget and give you the expertise it takes to make your property the best it can be.

Understanding the difference between service providers is crucial to your budget management. There are two types of service providers: those that provide reoccurring services and those that provide project specific services. Reoccurring business partners are the service providers that are on your property on a daily to weekly basis. Exam16 | Quorum­

ples of reoccurring business partners are landscapers, pool maintenance services, trash collection, and property management. Working with an ongoing business partner allows you to have long-term plans in place for projects. Project specific service providers are ones that are required for certain projects that only happen periodically. Examples of project specific service providers are roof replacement services, parking lot striping, or concrete repair services. To ensure that you have competitive pricing, it is good to have three bids from trusted service providers.

In addition to finding the right business partner, walking the property and identifying property needs are vital when deciding where your budget dollars are going. From a service provider’s standpoint, having the opportunity to see and discuss problems with the board is a must in making decisions on what takes priority. Property walks provide the board with an expert opinion and allow everyone to see areas that can be improved, and they open discussions about priorities in the property. Many of these jobs can be evaluated on the spot. However, if a community has multiple needs that may

exceed their annual budget, then these projects can be scheduled over a period in order to take care of the board’s budgetary needs. There is a multitude of projects that can be addressed through a multi-year plan.

Most business partners can create a multiyear plan that can be budget friendly, but get the top priorities of the community done.

Lastly, don’t be afraid to share your budget with your business partners. Although it may seem like too much information is being shared, it can get you what you want faster. Finding business partners you can trust with an open dialogue about budgets is vital in this industry. It allows your vendors to have a goal to work toward. If they want your service, they will talk with you about ways to change the scope of work to get the services you need at a budget that fits everyone.

Finding a balance between your budget and your preferred business partners can be challenging. However, using these tools can help find this balance faster and easier and can build a stronger relationship between you and your service providers.

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By Doug White, P.E. Doug is a principal at Thomas Downey, Ltd., Consulting Engineers. He has over 30 years of diversified experience in engineering design of buildings, structural engineering, building investigations, reserve studies, forensic engineering, construction project management and administration, and construction cost estimating.

Myths about Reserve Studies T

he reserve study is an essential guide to fortifying your community’s economic strength, but it is not written on two stone tablets that came from the top of Mount Sinai. It demands attention to adapt to the evolving needs of your com-

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munity. To be the commander of the community that is your vessel, you must fully understand the purpose of reserves studies, and this article attempts to debunk a few myths about reserve studies.

Myth #1 – There is a correct amount of funding for your reserves.

The reserve assessment will evolve over time with changing community priorities and conditions. Engineering, management, and the board of directors are all involved in evaluating these factors, and the net result is that there is no “right” answer.

For example, a reserve study report might reasonably estimate the normal service life of shingle roofing as 30 years, but after a severe wind storm that blew off many shingles, the community may decide to replace the roof after only 20 years rather than make extensive repairs.

Myth #2 – There is one preferred method of calculating reserves.

There are many ways to evaluate reserves: (1) In the component or straight-line method, the estimated cost of each component is divided by its normal useful life. The values for all the components are added up to calculate the annual assessment. (2) Using the cash flow method, the estimated costs for all the reserve items are added up for each year. This creates a projection of future expenses. Different levels of assessments can be applied to calculate if enough money is collected to fund the projected expenses over time. (3) For an accrued fund balance, the amount of funds that should have accu-

mulated are calculated by components, and the values are added up for all reserve items.

The total is what should have been accumulated for reserves at a particular time, which can be compared to the amount currently in reserves to yield a percent funded value. (4) Baseline funding is when a cash flow projection is used to find the assessments needed so that the reserve fund never has a shortfall during the study period. (5) Under threshold funding, a cash flow projection is used to find the assessments needed so that the reserve fund never falls below a certain level (the threshold) during the study period.

on physical conditions at the time, not if it appears in the reserve schedule for that year.

This should highlight the importance of continually updating your reserve study.

Myth #6 – All states have laws that require reserve funding.

Some states have requirements for reserves.

Virginia mandates that a reserve report is updated at least every five years and reviewed annually, but the statute does not mandate that reserves be funded.

Maryland requires that community budgets include something for reserves. There are

no requirements for funding or what items should be included in reserves. The District of Columbia currently has no specific requirements for reserves.It is always important to keep up with your local legislation for any changes that may have occurred.

In sum, your reserves study can be the most useful tool for budgeting and maintaining your community, but it cannot go unattended because it is a living and breathing document that if left to stale, becomes less effective.

Myth #3 - Reserves are only for capital cost items.

Reserves can include capital expenses but also other large maintenance or repair expenses. Items that are capitalized for tax purposes are based on expenditures, not the funding source. Accountants can decide which items are capitalized based on whether or not the expenses qualify for depreciation under tax law.

The operating budget is normally for items that occur annually like mass mailings and pool cleaning. It is easier to plan budgets and assessments when line items do not vary by large amounts each year. Reserves are a useful budget tool for handling large costs that do not occur every year, like roof replacement and road sealing. By calculating the assessments needed on an ongoing basis to fund large projects that occur at irregular intervals, the reserve assessment line item in the budget also becomes a stable and predictable amount.

Myth #4 - You must fund reserves according to the reserve report.

Reserve analysts have no authority to decide how to fund reserves. They can calculate future funding needs, but how to raise the money is decided by the board.

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Myth #5 - The reserve report is a spending plan.

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By Theodore Hart Ted is the senior vice president and portfolio management director with The Hart Group at Morgan Stanley. He began his career with Dean Witter in 1989. His clientele includes foundations, endowments, municipalities, associations, and high net worth individuals. Mr. Hart has focused his work on helping associations develop Investment Policy Statements and managing assets effectively and efficiently.

Fixed Income Strategy for

Homeowners’ Associations

B

oards and board treasurers often have questions about how to most optimally structure their replacement reserve portfolios. Especially during periods of rising interest rates, there is significant focus on the Federal Reserve, their decision to raise rates, and the effects of rate hikes. Even if the Fed decides to raise rates, this decision does not mean that all interest rates will rise.

Having a disciplined investment strategy in place can help manage the risk associated with changing interest rates.

Portfolios structured with only short-term fixed income securities may appeal to many associations as assets are generally liquid and readily available. However, as shortterm securities are continually rolled over, the maturing principal is exposed to two main risks: interest rate changes and reinvestment risk. Therefore, we often recommend an investment strategy that does not rely solely on short-term investing.

During various economic cycles, the slope of the yield curve will change. The yield curve plots yields and maturities of fixed income securities such as U.S. Treasuries and corporate bonds.

There are three basic shapes that the yield curve can take: normal, inverted, or flat. In

20 | Quorum­

a normal or “upsloped” yield curve, higher yields are available from longer-term securities, and yields on longer-term bonds may continue to rise.

However, holders of long-term securities are exposed to greater market volatility and price fluctuations prior to maturity than investors with short-term securities. In an inverted or “down-sloped” yield curve, the expectation is that yields on longer-term securities may fall over time, and an increased demand for these maturity dates drives the relative yield on long-term securities down.

Inverted yield curves often correspond with periods of recession. A flat yield curve usually arises during changing economic conditions, such as from recession to recovery.

In an attempt to boost returns in any kind of interest-rate environment, our investment recommendations are derived from one yield curve strategy.

As financial advisors to homeowners associations, we recommend that associations adopt a diversified portfolio of CDs or Treasuries with different maturity dates to increase a portfolios potential return and reduce exposure to reinvestment risk while maintaining liquidity. Blending investments in short, intermediate, and long-term securities may allow an association to take advantage of the liquid aspects of shorter

term securities while attaining the higher yields typically available through longer term securities. Using this strategy, an investor can lock in higher coupon income in longer maturities during a declining interest rate environment, while offering periodic reinvestment opportunities to capture attractive yields when rates are rising.

Most community bylaws prohibit the use of non-guaranteed securities (stocks, mutual funds, or corporate and municipal bonds, etc.) which we support. As history proves, no one can accurately and consistently predict when or how much interest rates will change, which is why we recommend laddered portfolios equally weighted from one through seven years. Considering the need for preservation of capital and adequate liquidity to meet planned and unplanned reserve expenditures, the ladder approach is a reliable strategy in both the short term and over time.

Although each association has its own unique investment policy, replacement reserve schedule, and cash flow needs, the laddered portfolio frequently remains the centerpiece of our recommendations to the associations we advise.

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WHEN

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Saturday, September 30, 2017 9 a.m. — 5 p.m.

Registration opens at 8:30 a.m.

Chapter Office – Conference Room 7600 Leesburg Pike, Suite 100 W, Falls Church, VA 22043

This program will benefit Homeowners

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By Derek Wilson, CMCA Derek is an onsite community manager with Community Association Management Professionals (CAMP). He is part of the team that oversees the operations at Oak Creek Club Homeowners Association located in Upper Marlboro, Maryland, the WMCCAI “2016 Community Association of the Year” in the large-scale category. Derek has worked in various roles in the real estate industry since 1999 to include real estate sales, multifamily and mixed-use property management, and homeowner associations.

DOES YOUR ASSOCIATION’S BUDGET MATCH YOUR

COMMUNITY S BRAND?

E

ver wonder what goes into preparing the budget for your association each year? In addition to knowledge of maintenance contracts and their relation to the community’s maintenance calendar, knowledge of your community’s infrastructure, a thorough and up-to-date reserve study, knowledge of your leadership’s vision and your community’s goals, those responsible for the preparation of the budget be mindful of the community’s brand.

For this article, I am defining a community’s brand as the defining characteristics that convey the essence of the community and its residents, to those within the community as well, as those outside of the community. Branding requires established goals and direction on the process of achieving the goals. For effectiveness, the brand must be maintained consistently in all areas of maintenance and operations. One example of branding in the retail industry that may resonate with most is the operations of a well-known coffee retailer. You will see consistency with the layout of their retail stores, menu items offered as well as displays and signage at each location. There are standards and procedures for providing a consistent level of customer service and for the upkeep of their locations. In return for their branding efforts their customers know and have expectations of what to expect when they

22 | Quorum­

visit any one of the coffee retailer’s locations.

If your budget does not speak to the branding for your community, you may find that your association is missing out on opportunities to retain existing homeowners as well as attract new buyers. Branding is important as it speaks to the standards that have been established and provides a guideline for what is acceptable for your community.

Branding also minimizes disruption in the progress when there is a change with board members, committee members, the onsite manager and management agents.

Branding is instrumental in maintaining and enhancing the infrastructure, facilities, and common areas of your community.

Deferred maintenance can derail your community’s branding efforts. It is important to not only plan for the long-term expenditures but to budget for the small maintenance needs and enhancements. Some of the items that get overlooked when budgeting include touch up painting in your clubhouse, signage updates, common area fencing repairs, carpet cleaning, and replacement landscaping.

As part of a good branding strategy, your

association should have a proactive plan in place that allows for items to be replaced before the item no longer being operable or when the maintenance cost exceeds the value of the item. As an example, if the life cycle for the treadmill in your fitness center is ten years is your community waiting until year ten to replace the unit or are they planning to be able to replace the equipment in year eight. At this point, there most likely would be updated equipment on the market, and you may be able to trade the current unit in or sell it for more than you would be able to obtain for the item at the end of its lifecycle.

For your community’s branding efforts to be successful, it will require appropriate budgeting, operational management, and positive assessment income to support the branding goal. Your association may find it beneficial to have small assessment increases annually instead of larger increases less frequent.

Effective budgeting to match your branding will allow your community to be more competitive in your market, allowing for your community to remain current for years to come. You may also see some benefit from your branding efforts with the improvement of participation of the residents within your community. Residents tend to be more active, and the delinquency rate tends to be lower in well-operated communities.

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If your community is not currently budgeting for your community’s brand the good news is that it’s not too late. It’s possible that this idea of “branding” has not been brought forward. I encourage you to be a part of the process. If you are a board or committee member, bring it up as a talking point at your next meeting. If you are not involved in your community, become involved and lend your voice to the process. Join a committee,

become a candidate for the next open board seat, attend the meetings, and stay engaged.

If you are unable to serve in an official capacity, share your insights as part of the owner’s forum of your next board meeting.

Many great initiatives are born from comments and insights shared during these meetings.

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| 23

By Gregory E. Brooksher, PCAM Greg is the general manager of 22 West, A Condominium, located in Washington D.C. He has been an active member of WMCCAI since 1989 and currently serves as a volunteer on the Outreach Committee.

Budgeting for CAI Membership

I

t is budget season for many communities.

In preparing budgets for your community, remember to include Community Associations Institute (CAI) memberships for your board members! It is simple, it is effective, and it is the way to increase board member exposure to the benefits of being a CAI member.

In your first budget draft, include funding in a budget line item to support enrolling board members for their annual membership. Often the funding is included in a line item such as “Education and Training”, “Dues & Subscriptions”, or “CAI Membership”. In your budget narrative, explain the proposed funding supports annual membership fees for board members to be members of CAI. Each community association should have at least one board member join.

It is great if the budget can support all board members joining.

How much do I budget? Annual membership dues are $110 per individual homeowner leader. But, there are discounts for multiple board members joining.

2 Member Board—$200 3 - 15 Member Boards—$250 Thats right, join up to 15 board members for only $250!*

Why Should They Join?

Membership Provides Value.

As a manager, you have benefited from membership in CAI. Likewise, your board members benefit too. The Community Associations Institute (CAI) provides information, education and resources to the homeowner volunteers who govern communities and the professionals who support them. CAI’s primary mission is to help homeowner leaders and professional community managers protect property values, preserve the character of their communities, and meet the established expectations of all residents.

At the local level, the Washington Metro Chapter of the Community Associations Institute (WMCCAI) mission is to optimize the operations of community associations and foster value for our business partners.

CAI’s education inspires effective governance and management. CAI’s best practices help leaders build and sustain more harmonious communities. CAI’s advocacy promotes practical legislative and regulatory policies. CAI’s ethics guidelines inspire fairness, transparency, and integrity.

WMCCAI is an active chapter - the largest of all 62 CAI chapters internationally. It is at the local level where you and your board members will find even more value in the membership through the multitude of networking and educational opportunities, including the annual Conference & Expo.

Membership also provides a subscription to the award-winning Quorum magazine published monthly by WMCCAI.

CAI members have access to information in this rapidly changing industry with practical knowledge and insights from leaders in the field, best practices, research, and tools you can use every day. CAI provides information, resources, and education programs to help you keep current on the latest news, laws and issues affecting community associations, condominiums and cooperatives, and the homeowners who call them home.

Who WMCCAI Serves Community Association Leaders, Business Partners, CAI National, Community Association Members, Developers/Builders, Financial Institutions, Government Agencies, Insurers, Legislators, Managers, Media, Realtors, Sister Associations.

Joining one board member or your entire board is an excellent way to help your board members achieve the results, respect, and recognition they deserve. For their benefit and the benefit of the entire association, remember to budget for board memberships!

*Membership fee does not include mandatory advocacy support fee and optional Foundation contribution.

24 | Quorum­

What WMCCAI Does:

HOW HAVE YOU MANAGED WITHOUT US?

Advocacy:

Establish and enhance/maintain relationships with legislators and government officials and to advocate on behalf of community associations.

Member Development:

Boost membership and participation through enhanced outreach.

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Maximize value provided to our current members, including business partners (events, conferences, materials, etc.)

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SEPTEMBER 2017

| 25

By Rafael A. Martinez, CTP Rafael is the community association segment manager with Access National Bank. He brings years of industry experience in community association treasury management and lending. Rafael studied economics at George Mason University, is a U.S. Army veteran and serves on the board of directors for the Washington Metropolitan Chapter Community Associations Institute.

What Community Associations Can Expect When Taking Out a Loan

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ommunity associations should never have to borrow. Homeowners are paying regular assessments to ensure that daily operations are funded and that the future needs of the community are met.

Things don’t always go according to plan; think back to the great recession of the late ‘00’s that caused extreme pressure on real estate markets and the worldwide economy. Borrowing money can become a necessity as a result of events or circumstances in or out of an association’s direct control.

An unforeseen repair is required and cannot be deferred, or it becomes apparent that replacement reserves are inadequate to support full project funding. When the association finds itself short on cash, it is usually faced with two options: levy a special assessment, or take out a loan from a third-party and spread the cost over time.

Although a special assessment can fill the funding gap, it is often impractical from a timing and collection standpoint. In such circumstances, third-party financing may be a viable alternative and will usually involve procuring a loan from a community bank.

The following is a partial list of factors that

26 | Quorum­

are commonly reviewed by banks when considering a loan request from a community association: 1. Does the association have the legal authority to borrow funds and pledge assets?

2. Is membership approval required and if so, by what percentage?

3. Are the association’s governance documents consistent with current laws?

4. Is the owner to investor ratio at an acceptable level?

5. Are appropriate funds allocated to service debt?

It is important to examine the realities of the situation from the perspectives of both parties involved. A properly structured loan to a community association can be a sound investment for a bank. Unfortunately, these types of loans aren’t well understood by many bankers. By the same token, a bank’s business considerations in making these types of loans are not well understood by the borrower. The association must always remember that banks are in business to make money.

Most community associations believe that since a loan makes good common sense, the bank should jump right in, make the loan, and provide a preferred interest rate. Since the association is a collection of homeowners with diversity of cash flow and the organizational structure to support repayment, it stands to reason that the bank should offer a superior interest rate over what a homeowner gets on a residential mortgage and there would never be any strings attached once the loan closes. Not a chance! Residential loans are easy to process for the bank, and consume little overhead on a loan-byloan basis.

No two loans to a community association are alike.

Borrower organization may be lacking, assembly of a complete application package can take time, and the consumption of bank overhead in the processing can be enormous.

Therefore, smaller banks are often more receptive to consider a community association loan. Community banks may be better organized and able to facilitate getting the deal in the hands of the right person. There is also a stronger sense of community responsibility to do the “right thing, “ however, beware, “doing the right thing” from the bank’s point of view can be a double-edged sword. The public goodwill earned on the front end can be destroyed twice over if the loan goes bad and the bank must enforce its rights.

So how does one find out whom to talk to about an association loan?

Banks are organized around major business lines: consumer lending, commercial loans, and real estate finance. A loan to a community association does not fit neatly into any traditional departments.

Engaging a CAI member bank is a great place to start. These financial institutions have committed themselves to understanding the local community association landscape and the challenges faced by the volunteer leaders and are versed in current terms and pricing metrics for loans. Associations can also look to other trusted centers of influence for referrals such as their legal counsel, property manager, and other resources. These professionals are usually engaged with the local banking scene and can share firsthand knowledge of recent transactions and best practices when seeking a loan.

Remember, this is more like a commercial loan than anything else.

Once the loan is made, the bank and the borrower are financially married. Residential mortgage loans are financial commodities that banks sell into a secondary market to replenish cash and do it over again. Commercial, or portfolio loans, are held in the bank’s loan portfolio for the duration of the loans. This means the loan is funded with deposits drawn from the community. Deposits such as retail savings, money market accounts, and certificates of deposit are used to fund the loan. Because of the returns that depositors demand, the bank must charge a fair interest rate on loans in the portfolio to get an adequate return to cover the overhead and take care of bank stockholders. It also means the bank will need to monitor the investment by obtaining periodic financial reports.

An association approaching a bank must ask itself—what do we have to offer that will make the relationship worthwhile for the bank? The better prepared an association is to explain the funding need and present accurate financials to validate repayment assumptions, the more interested the bank will be and the better the terms and rates the association will command. If the association does not offer it from the beginning, most banks will require the association checking account and reserves to be moved to that bank. The more the association approaches the financing request as a first step in building a long-term relationship, the more receptive the bank will be. Often, banks that specialize in community association financing will also have great products for the treasury management needs of the association and can provide better yield on interest bearing accounts. The bottom line is— be ready to prove that the loan is a good investment and the association’s business represents a good business relationship for the bank.

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HIGHER LEVEL of ATTENTION

to Your Association “My job is to help your board balance keeping down operating costs while maintaining property values and improving quality of life for homeowners. We have a strong community presence, independent advising and full transparency. ” – Katie, Sentry Manager

4401 Ford Avenue, Suite 1150 Alexandria, VA 22302 (703) 642-3246 northernvirginia.sentrymgt.com 602 S. King Street, Suite 400 Leesburg, VA 20175 (540) 751-1888 loudoun.sentrymgt.com

SEPTEMBER 2017

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By Lee Ann Weir, CMCA, AMS Lee Ann has been in the community association industry for 27 years. She is currently the general manager of Lionsgate at Woodmont Corner Condominium in Bethesda, MD.

Should Condominium Fee Assessments Go up Every Year?

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sychologically, it hurts less to have a 2 or 3% increase every year than go three years without an increase and then get hit with a 6 or 9% increase.

We tend to forget the prior years and focus on the present.

People tend not to question small increases that they pay every year. In the field of psychology, cognitive dissonance is defined as the mental discomfort experienced due to two or more contradictory beliefs, ideas or values. How does this relate to

annual condominium fee increases? Discomfort or stress increases when there isn’t an increase for three years, and then there is one. Most owners believe they live in a good place and that there is a need for an increase in dues, but there is a conflicting belief if the increase is large. This may cause some owners to question line items where an increase is notable enough to justify their discomfort. Often, finance committees take pride in keeping condo fees flat or very small. They do not think about the psychological stress the inevitable increase will cause the residents in the near or distant future. That is the emotional reason, but there is a financial reason as well.

AAB_Innov_Burkhammer_HorzQtrPg_120115.pdf 1 12/1/2015 5:46:30 PM

I don’t know about all associations, but the finance committees with whom I’ve worked, request the manager to put together a “zero-increase” budget. CAI teaches managers to prepare a budget that will include actual contract costs; utility costs based on historical data, payroll based on actual wages and hours to be worked; insurance, repair and maintenance, and equipment costs based on historical data and professional projections.

Once all these figures are gathered and totaled, the new condo fee can be calculated.

Understandably, if the increase amounts to an 8 or 9 % increase, you better go back and take a look because the residents will experience significant stress (see above). Typical annual increases will be about 3%. If a manager and finance committee work together to schedule preventive maintenance and Reserve expenditures every year, there should not be a year when there is no increase in condo dues. If there is, then it would be a wise management practice to build in a small increase to add funds to the owner’s equity line item. This gives the association some breathing room if in a year or two, for example, a large, routine maintenance item comes up the same year that utility prices increase. Instead of hitting the residents with a large, stressful increase, the finance committee and manager can use the excess from owner’s equity to pay for part of the condo fee increase.

It isn’t just about numbers. It isn’t just about psychology. Condominium fee increases are also about the residents’ perception of where they live and how it is managed.

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By Howard A. Goldklang, CPA, MBA Howard is the founder and president of Goldklang Group CPAs, P.C. He possesses more than forty years of experience in the auditing of community and condominium associations. Mr. Goldklang is a founder and a past-president of the Washington Metropolitan Chapter of Community Associations Institute (CAI).

When t o Dip int o You r R e se rv e ?

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ssociations must maintain a sound financial balance sheet. There are three major areas of a financially healthy balance sheet low delinquency levels, adequate operating funds and reserves, and adequate replacement reserves.

It is recommended that delinquency levels be maintained at 3% or less of annual assessments. Operating reserves should be maintained at levels of 10% to 20% of annual assessments. Replacement reserves should be maintained at levels recommended by its reserve study. For more information see Reserve Funds How and Why Community Associations Invest Assets, A Guide for Association Practitioners (available at www. caionline.org/Publications).

Replacement reserves are for future major capital expenditures, and it is important that they are kept intact for planned major expenditures. Only planned expenditures specified in the replacement reserve study should come out of the replacement reserve.

The replacement reserve fund is not a contingency fund; it is not an excess operating fund; it is not a special project fund. The association in certain circumstances could temporarily borrow from the replacement reserves to fund unusual situations. This should only occur in unique circumstances, and there should be a formal plan for the refunding to the replacement reserves.

There are three elements to the replacement reserve study inventory of components, cost to replace, and remaining useful lives.

The major difficulty is the inventory of com-

budget includes a line item with an adequate amount for the funding of the replacement reserve.

Following are financial situations that might occur where replacement reserves should not be touched deficit in operations, unbudgeted operating expenditure, and unplanned special projects—such as a new playground or a new parking area. ponents. Sometimes important components are overlooked. Associations should work closely with the reserve specialist and their management company to make sure all large and financially significant components are assessed and included. Some examples of unusual components are mechanical equipment, bridges and tunnels, ponds, and retaining walls.

It is important to update the reserve study every three to five years to allow for changes in replacement costs and remaining useful lives. Also, special projects which have been funded separately such as a new playground or a new shed can now be added to the replacement reserve program. It is also very important to make sure the annual

An example of a frequent misuse of replacement reserve funds is an association planning a redecorating project. On the surface, a redecorating project may appear to be an appropriate replacement reserve project. It is a major expenditure—it lasts for an extended period—and it adds life and value to the property. However, if it is not part of the replacement reserve study, it is an inappropriate expenditure out of reserves. The redecorating project should be treated as a special project and funded separately.

In summary, the easy way to determine if the expenditure is appropriate to be charged to replacement reserves is to go to the replacement reserve study and make sure it is included there.

SEPTEMBER 2017

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By Richard Terselic Rich holds degrees in engineering and public administration. He worked for NASA in the early period after Sputnik before moving on to science management jobs, ending with the human drugs program of the Food and Drug Administration. After retiring from the federal government, Rich managed a family auto parts business and spends many hours volunteering within his community, professional society, and church. He has also written columns for local newspapers in western Maryland.

What it Means to Be a Member of an HOA Finance Committee

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usinesses and families have to live within their financial means. When they don’t, trouble can be predicted ahead. The same is true for homeowners and condominium associations.

An HOA must address its finances on an ongoing basis. While the job can be left up to the community management staff (CMS), one of the fundamental values of HOAs is that residents have a “hands-on” role in financial management. This is usually done by the elected board or a volunteer finance committee (FC). I have had the honor and pleasure of serving on a volunteer FC for several years and will share some of my observations and conclusions about how the FC can best serve their fellows residents.

Leadership: The finance committee needs a strong leader who receives competent and timely support from CMS. The FC chair should not be a person whose intelligence is used to overwhelm the committee members, or who would like to give the impression that he or she always knows the best answers. Without going into specifics, he simply has to be a wise manager who seeks to get the most out of the committee as a whole. The committee members do not need to have a background in finance or accounting, but rather a willingness to learn the ins and outs of how their community raises and spends its money.

Data: Effective management of community finances should be the goal of the FC. Doing

30 | Quorum­

so needs access to complete and timely data.

Each committee member should receive full statements of operating financial data—for most communities, that is at least monthly. The FC also needs to meet often enough to “steer the ship” lest it confronts surprise “icebergs.” While some people are more comfortable dealing with accrual-based data, I find cash-based data more useful, and better adapted to making adjustments from the plan laid out in the annual budget.

Having an annual budget, and using it to guide day-to-day financial management is a must.

Short-term variations from the budget, prompted by adverse as well favorable events, can usually be accommodated, such as weather-related incidents. A serious “nono” to be avoided in dealing with such incidents is the need for a special assessment.

Once an HOA has been in operation for a few years, the pattern of needs and development of unexpected events can be incorporated into a budget model, that can serve as a basis for next year planning. Developing shorthand measures is also helpful, such as knowing how much in added or reduced expenditures it takes to trigger $1 + or - in assessments.

Reserves, Taxes, and Legal Requirements: Homeowners would probably prefer to not spend current assessment dollars on fu-

ture purposes. However, HOAs that don’t “sock away” money for future asset repairs or replacements are on a path to serious problems. An HOA of any age is on the road to ruin if it does not face up to the prospect that a pool structure or roof will eventually need expensive repairs or replacement. If an HOA commits to building up adequate reserves, depending upon how large the fund becomes, a point may be reached where FC management of the funds should be turned over to a bonded financial advisor.

The FC needs to be attuned to the fact that tax obligations may arise that must be addressed. Further, the FC must recognize that community residents have a right to know that the financial matters are being conducted in a competent—and honest manner—prompting the need for annual audits. In turn, the FC members have a right to be covered from personal financial risk related to their volunteer service. The FC and other volunteer positions should be covered by a broad form personal liability insurance policy.

Accountability to Residents: Volunteering has a downside; being questioned and subject to criticism for volunteer service. It would be a rare HOA that didn’t have residents ready and willing to criticize what their FC does. The best defense is openness.

The annual budget formulation process should be open, with opportunities for resident participation. Similarly, the results of the preceding year’s financial outcome should also be publically shared. Secrecy is a dangerous approach to follow. Finally, it is quite likely that a community will have a person who criticizes what the FC does with great dedication and force. Whether their basis for criticism is valid or not, the FC is obliged to treat the source with respect, including sharing pertinent data.

Serving on the FC involves embarking on a learning process with an intended outcome of service to one’s community. It can prove highly rewarding, but this may not be easy to convince residents to come forward to serve.

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INSURANCE

MANAGEMENT SERVICES (CON’T)

Espina Paving, Inc. Asphalt/Concrete 15441 Farm Creek Drive T: (703) 491-9100 Woodbridge, VA 2191 F: (703) 491-9101 Serving: MD, DC, VA info@espinapaving.com

Griffin Owens Insurance Group Offices Throughout Northern Virginia 847 Station Street T: (571) 386-1000 Herndon, VA 20170 www.GriffinOwens.com

CFM Management Services, AAMC 5250 Cherokee Ave, Suite 100 T: (703) 941-0818 Alexandria, VA 22314 F: (703) 941-0816 Christiaan Melson, ams, pcam c­­­­­­­­melson@cfmanagement.com

ATTORNEY

JANITORIAL

Thomas Schild Law Group, LLC www.schildlaw.com 401 North Washington Street, Suite #500 T: (301)251-1414 Rockville, MD 20850 Thomas, C. Schild, CCAL tschild@schildlaw.com Scott J. Silverman ssilverman@schildlaw.com

Clean Advantage Corporation 4000 Pen Belt Place District Heights, MD 20747 www.cleanadv.com

T: (800) 315-3264 F: (301) 595-3331

info@cleanadv.com

LAKE AND POND MANAGEMENT BANKING AND FINANCIAL SERVICES

Alliance Association Bank T: (703) 856-7463 Direct Tracy Burkhammer tburkhammer@AllianceAssociationBank.com

Mutual of Omaha Bank Community Association Banking/CondoCerts Noni Roan T: (301) 639-5503 Noni.Roan@mutualofomahabank.com

SOLitude Lake Management 12522 White Drive info@solitudelake.com Fairfax, VA 22030 T: 540) 371-4382 Kevin Tucker www.solitudelakemanagement.com LAUNDRY ROOM EQUIPMENT

Caldwell & Gregory, Inc. Your Commercial Laundry Professionals 129 Broad Street Road Manakin-Sabot, VA 23103

T: (804) 784-6100 F: (804) 784-7418

ENGINEERS MANAGEMENT SERVICES

ETC Engineering and Technical Consultants Inc. Water intrusion, roofing, exteriors, windows, balconies, property studies, structural & architectural services www.etc-web.com T: (703) 450-6220 Mindy Maronic mindy@etc-web.com Falcon Engineering, Architecture + Energy Consultants 7361 Calhoun Place, Suite 325 Rockville, MD 20855 www.falconengineering.com T: (240) 328-1095 Stew Willis info@falconengineering.com TRC Engineering 9210 Wightman Rd., Ste 110 www.tedrossconsulting.com Gaithersburg, MD 20886 T: (301) 869-6446 Ted Ross ted@tedrossconsulting.com

Comsource Management, Inc. AAMC www.comsource.com 3414 Morningwood Drive T: (301) 924-7355 Olney, Maryland 20832 F: (301) 924-7340 Tony Martella, cmca, ams, pcam tmartella@comsource.com FirstService Residential DC Metro LLC, AAMC 11351 Random Hills Road, Suite 500 T: (703) 385-1133 Fairfax, VA 22020 Robert Teeling robert.teeling@fsresidential.com KPA Management, AAMC 6402 Arlington Blvd., Suite 700 Falls Church, VA 22042 Offering personalized service Ed Alrutz, CPM, CMCA, PCAM

www.kpamgmt.com T: (703) 532-5005 F: (703) 532-5098 ealrutz@kpamgmt.com

Legum & Norman, Inc., AAMC 3130 Fairview Park Drive, Suite 200 T: (703) 600-6000 Falls Church, VA 22042 Direct: (703) 970-8811 John Rhodes jrhodes@legumnorman.com

Associa-Community Management Corporation, AAMC 4840 Westfields Blvd., Suite 300 T: (703) 631-7200 Chantilly, VA 20151 F: (703) 631-9786 11300 Rockville Pike, Suite 907 T: (301) 692-1700 Rockville, MD 20852 F: (240) 221-0443 Nick Mazzarella, mba, cmca, pcam, lsm NMazzarella@cmc-management.com

Sentry Management www.sentrymgt.com 4401 Ford Avenue, Suite 1150 T: (703) 642-3246 Alexandria, VA 22302 602 South King Street, Suite 400 T: (540) 751-1888 Leesburg, VA 20175 Dave Ciccarelli, ams, pcam dciccarelli@sentrymgt.com

Barkan Management Company, Inc 8229 Boon Blvd., Suite 760 Tyson Corner, VA 22182 Michael Feltenberger, cmca, ams, pcam

Sequoia Management Company Inc., AAMC 13998 Parkeast Circle www.sequoiamanagement.com Chantilly, VA 20151-2283 T: (703) 803-9641 Craig Courtney, pcam ccourtney@sequoiamgmt.com

T: (703) 388-1005 F: (703) 388-1006

Capitol Management Corporation 12011 Lee-Jackson Highway, Suite 350 T: (703) 934-5200 Fairfax, VA 22033 F: (703) 934-8808 L. Peyton Harris Jr., cmca, cpm lph@capitolmanagementcorp.net Cardinal Management Group 4330 Prince William Parkway, Suite 201 T: (703) 569-5797 Woodbridge, VA 22192 cardinal@cardinalmanagementgroup.com Thomas A. Mazzei, cmca, ams, pcam cardinalmanagementgroup.com

32 | Quorum­

CAMP (Community Association Management Professionals) 1921 Gallows Rd., Suite 320 T: (703) 821-CAMP (2267)Tysons Corner, VA 22182 Heathergraham@gocampmgmt.com Susanblackburn@gocampmgmt.com

Zalco Realty Inc., AAMC, AMO 8701 Georgia Ave., Ste. 300 Silver Spring, MD 20910 Arthur Dubin,cmca, pcam, cpm Z.J. Chelec, cpm

www.zalco.com

T: (301) 495-6600

adubin@zalco.com zchelec@zalco.com

­­I NDEX TO ADVERTISERS A Alliance Association Bank...............................................................................................................28 Associa-Community Management Corporation, AAMC....................................................................23 B Barkan Management, LLC, AAMC..................................................................................................31 C Caldwell & Gregory, Inc...................................................................................................................18 Capital Painting Co.........................................................................................................................35 Clean Advantage Corporation............................................................................................................7 Community Advantage a Wintrust Company.....................................................................................2 Cowie & Mott. P.A...........................................................................................................................35 D PAINTING SERVICES AND RETAILERS

Capital Painting Co. 5520 Oakwood Road Alexandria, VA 22310 George Tsentas

www.capitalpainting.net T: (703) 313-0013 F: (703) 922-1826 george@capitalpainting.net

Ploutis Painting & Contracting Co., Inc. T: (703) 360-0205 8365 Richmond Hwy F: (703) 360-5439 Alexandria, VA 22309 info@ploutispainting.com Stella Ploutis www.ploutispainting.com Reston Painting & Contracting 619 Carlisle Drive Herndon, VA 20170 David Hamilton

T: (703) 904-1702 F: (703) 904-0248

Doody Calls......................................................................................................................................9 F Falcon Engineering, Architecture & Energy Consulting......................................................................9 FirstService Residential, AAMC.......................................................................................................36 G Griffin Owens Insurance Group.......................................................................................................19 L Legum & Norman, Inc., AAMC.......................................................................................................15

dave@restonpaint.com

Williams Professional Painting 110 S. Floyd Street VA: (703) 768-8143 Alexandria, Virginia 22304 DC: (202) 751-2026 williamsprofessionalpainting.com Rick Williams Rick@williamsprofessionalpainting.com

M Mutual of Omaha Bank.....................................................................................................................9 P Ploutis Painting & Contracting Co., Inc............................................................................................35

PET WASTE REMOVAL

R DoodyCalls Pet waste management solutions and services 13923 A Willard Road Chantilly, VA 20151 T: (800) DoodyCalls (366-3922) www.DoodyCalls.com

Reston Painting Company................................................................................................................2 S SageWater......................................................................................................................................17 Sentry Management, Inc.................................................................................................................27

RESERVE STUDIES

PM+ (Specializing in Reserve Studies Since 1990) A Veteran Owned Company T: (703) 803-8436 www.pmplusreserves.com engineer@pmplusreserves.com or Ben Ginnetti, pra, rs, p.e. pmplusreserves@cox.net RESTORATION SERVICES

SOLitude Lake Management...........................................................................................................15 T Thomas Schild Law Group, LLC........................................................................................................7 Titan Restoration Company.............................................................................................................10 TRC Engineering............................................................................................................................23

Titan Restoration Co Warrenton, VA www.titanrestoration.com Anita Puckett

T: (540) 349-1503 F: (540) 349-1512

apuckett@titanrestoration.com

TWC Services, LLC..........................................................................................................................27 W Williams Professional Painting.........................................................................................................19

WINDOWS & DOORS

Windows Plus, LLC 14230 Sullyfield Circle, Suite F T: (703) 956-6172 Chantilly, VA 20151-1660 F: (703) 956-6744 Kimberly Wayland kknight@windowspls.com

Windows Plus, LLC...........................................................................................................................4 Z Zalco Realty, Inc., AAMC................................................................................................................25

SEPTEMBER 2017

| 33

CUL-DE-SAC

By Chris Goodman Chris is a CAI educated business partner and a certified community pet waste management expert with DoodyCalls. He has helped hundreds of communities throughout the metropolitan Washington area successfully develop and implement comprehensive pet waste management plans.

The Inside SCOOP from a POOPER SCOOPER

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olks can’t help it. Whenever I tell them what I do for a living, you hear it again and again, “Man, I thought I had a crappy job.” “I bet your job really stinks, ha ha! What made you wake up one day and decide you wanted to pick up dog poop for a living?” My response is always the same, “Well, business is always picking up,” I say with a smile.

If you want to take on this dirty job, be prepared to wake up early.

It’s almost too easy to crack jokes at the pooper scooper’s expense. At the heart of these jokes though is genuine interest in what it’s like to live the life of a pet waste management professional. With over 17 years of field experience, I’m here to bring you the inside scoop. Did you catch that?

Yes, I too like to indulge in the occasional pun.

As the old adage goes, the early bird catches the worm! It also avoids rush hour traffic, beats the peak summer heat, and gets in a full day of work before the sun sets; as darkness makes it almost impossible to spot piles of dog waste.

After all, no one wants to step in it, even the most seasoned pet waste pro34 | Quorum­

fessional. It takes a certain motivation to do what we do, and ours is knowing that we’re making a difference in the quality of life for our communities. After all, picking up pet waste doesn’t just save our customer’s time and help them avoid the “ick” factor.

Scooping the poop also protects the environment. When left on the ground pet waste breaks down and washes into the water supply. The EPA estimates that two to three days’ worth of droppings from a population of about 100 dogs can temporarily cause a ban against swimming and shellfishing in a bay, as well as all watershed areas within 20 miles. Proper pet curbing practices coupled with the help of your pet waste professional help to keep communities green and pet-friendly. Working closely with communities to tackle one of their most aggravating issues allows them the ability to welcome the parents of “fur babies” without alienating non-pet owners in their communities.

In addition to helping communities stay “green” and avoid ugly missteps into piles of discarded poop, proper disposal of pet waste also aids property managers, HOA, and condominium boards in their efforts to abate pests. Rodents love dog waste! It’s disgusting, we know, but critters are attracted to the dog food that is broken down and left behind.

A day in the life of a pet waste management professional is not glamorous but is very necessary work. We spend more time then we’re proud to admit, making corny jokes about dog poop. We are out and about no matter the weather conditions or time of year. On the plus side, we always get our steps in for the day! We know the science and stats behind pet waste and its impact on the environment, making us a unique kind of nerd.

It takes a special type of individual to be a pet waste management professional. Not only do you have to love the outdoors, adore pets, drive daily through D.C. traffic with nerves of steel, but you must have a genuine interest in making a difference in the lives of people and pets.

Business is picking up every day, and we love it!

SEPTEMBER 2017

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CHAPTER BENEFACTORS

C

WMCCAI 7600 Leesburg Pike Suite 100 West Falls Church, VA 22043 www.caidc.org (703) 750-3644

PRESORT STANDARD US POSTAGE PAID WASHINGTON, DC # 3070

OUR MISSION To optimize the operations of Community Associations and foster value for our business partners.

Enhancing Property Values and Lifestyles Preparing your community association’s annual financials might seem overwhelming, but with the right tools, information and partner, you can ensure the short- and long-term financial stability of both your association and community. Download our free, comprehensive white paper, “Budgets, Reserve Funds and Financial Planning 101” to learn how partnering with the right management company can help preserve not only the value of your property, but the lifestyle that you and your fellow residents expect.

Visit: https://www.fsresidential.com/budgetdc As D.C. Metro’s property management industry leader, we know what it takes to create great communities that residents are proud to call home.

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11351 Random Hills Road Fairfax, VA 22030 703.385.1133 www.fsresidential.com Making a Difference. Every Day.