With a Google search, you can find a lot of information about the Internal Revenue Code 528 which discusses what constitutes a Homeowner Association and how they qualify for “tax exempt” status under this code. 

Why is this information important to know?  If you serve on a Board and “rent” out portions of common elements you will want to make sure that the percentage of income made each year from the rental (or other income) falls below a specific percentage as described in the tax code.  Also, you will want to ensure that the amount spent year has a specific percentage used towards the operation of the association or to the benefit of the association members.  This information can also be important when setting up a bank account as an HOA wants to receive as much as possible in interest while spending as little as possible in fees.

Whenever in doubt, make sure that your Board talks with a tax professional for clarification to help stay within the IRS code 528.

by Wendy Frenzel

However, to make that retirement dream a reality, what do you need to do?  Obviously, you put money away, but how do you know how much money you need to save to realize your retirement dreams?  If you don’t consider such factors as (1) how many years you are away from retirement, (2) what level of comfort you want to retire into, or (3) what the future cost of living will be at the time you’re ready to retire, how can you be certain you’re saving enough to realize your retirement dreams?  Generally, people consult with Financial Advisors to assist them with answering these questions, and provide them with a “blue print” of how these individuals need to save to realize their retirement dreams.

Reserve specialists are very similar to financial advisors.  Reserve specialists establish what the community assets are, how long each asset’s “life expectancy” is likely to be, and establishes the anticipated cost of replacing those assets at the end of the asset’s expected life cycle.  With this information, the reserve specialist establishes the dollar amount the Homeowners Association should set aside annually in savings for the future replacement of these assets as they “wear out.”  While the Board of Directors or even ad hoc committees can “establish” the annual dollar value of savings to make the necessary future replacements, on what are these “guestimates” based?  The failure to consider all the community’s assets, accurately determine how many useful years remain for each asset, and having a rational and realistic (mathematical / financial) method of determining the future replacement costs of these items will, in no uncertain terms, lead to future “Special Assessments” that are damaging to the property values within a community.

How damaging can special assessments be?  There is a community in Parker that didn’t plan adequately for the future (i.e. they didn’t save enough each year for future asset replacements).  When it was time to paint the buildings, re-shingle the roofs, and complete irrigation upgrades, this community had failed to accurately prepare (through savings) for these very expensive costs.  Consequently, each home owner within the community was “hit” with a special assessment of over $5000 (due in lump sum, immediately) “and” their dues were increased significantly to pay for the loans that were necessary to pay for the repairs not covered by the special assessment.

While this community’s home owners were working towards approving this special assessment, which took a couple of years due to the complexity of these assessments, these homes continued to exhibit continued wear and tear.  Home values within the community (which had been entirely owner controlled / managed for about 10 years), plummeted.  Owners who were purchasing homes within this community during this time were not aware of either the pending special assessment or pending dues increase (because legislation had not yet passed requiring the community to provide Board meeting minutes).  Even after the repair work has been completed to these homes, this community hasn’t fully “bounced back” from the reputation they received for their lack of planning.  While it’s difficult to say with certainty, it very well may be that it was this community that contributed to the legislation now in place requiring the disclosure of Board of Directors meeting minutes to ensure prospective home owners are aware of the financial condition of the community they’re considering.

While it’s easy to say, “Well, I’m only planning on owning here for a few years, so what should it matter to me if the HOA plans for the future?”  While you’re living within the community, are you getting the benefit of a good roof?  How about using the common green space of the community?  Are you walking the sidewalks?  Driving the streets?  Shouldn’t you be paying your fair share, now, for the wear and tear you’re placing on these common elements?  Don’t you want your home’s next owner to find your community attractive because you’re planning for the future with the help of a professional reserve specialist?

There are many savy purchasers out there.  If they don’t see a reserve study for a community, or they don’t see enough funds being placed in reserves, they’ll look for a community that is looking out for the benefit of the whole community, now and for the future.  Yes, they want a good value and to see a community that is well cared for, but they also expect a community that has a financial road map for the future, similar to a successful retirement plan.

Because so many communities are failing to adequately provide for future replacement costs of these communities’ common elements, states are recognizing the need to legislate that HOAs must have a professional reserve study in place, and updated on a regular basis.  Even the Colorado legislators have entertained this discussion just this year.  Do you want your HOA to be forced to plan for the future, or do you want the Board of Directors to look to the future and make sound financial decisions for the community as their fiduciary duty requires?

A Professional Reserve Study that is updated regularly is truly a necessary tool for all communities that own any common element property.  It is a great way to protect your biggest investment (your home), today and tomorrow.

To read more, visit the Hindman Sanchez web site where they have a Best Practices Report describing Reserve Studies in more detail.  You can find this 18 page report at www.hindmansanchez.com/files/bpr1.pdf

By Wendy Frenzel

Some of the items that the communities we work with have done to help watch costs include working with collection attorneys that work on a contingency basis and having a very strong collection policy that is followed closely.

How are foreclosures effecting your community?  Have they really increased over the last couple of years or are people just paying more attention to them?

How is your community working within the budgets they have?  Are they raising dues?  Changing service providers?  Putting less away in reserves?  Delaying repairs?

As a whole the home owners within the communities we work with are happy with their lives, their community, and the way their community is operated (i.e. you rarely hear from them).  However, there are always some people within each community that have a different perspective, a view that very little is right, and it’s up to them to correct things (i.e. the vocal few).

Over the years of working in HOA management, I have come across some interesting people who have distinctly different views of the world around them.  One example that comes to mind is Mr. Jones (whose name has been changed to protect the guilty – strike that, the innocent).

Each month I have a pretty good barometer of how Mr. Jones’ month is going.  Mr. Jones pays his monthly association dues on time, and shares a little bit of himself with each payment.  On the really bad months, I’ll find from half a dozen to as many as 15 staples holding his check to the coupon (evidently Mr. Jones lives in a drafty home where he has to secure his payments).  Well, he must be having a bad month.  When I see either 1 or no staples, it’s a good month.  Unfortunately, most months I spend more time than I’d care to removing the  staples so I can cash that 1 check that doesn’t even go into my account.

While it might be easy to complain about pulling staples, doesn’t it make more sense to just smile about it and move on with a positive attitude?  After all, without a few lemons, would we really understand how pleasant lemonade was?

However, returning to Mr. Jones, “the community is ugly and in shambles.”  “How could you let the community fall into such ruins?”  My first attempts centered around involving Mr. Jones with the “pulse” of the community.  Why not involve this citizen with identifying ways to improve the community?  After all, he was concerned.

Easier said than done!  When asked what was “specifically” wrong with the community, and what could be done to make improvements, the resounding answer was, “everything is wrong, and you made it that way.”  Wow!  We just started working with the Mr. Jones’ community 2 months ago, and we’ve ruined everything already.  As a child I’m sure my mom could have easily related to Mr. Jones.  I had fun as a kid, and that meant playing hard (on mom’s furniture, through her garden, and sometimes swinging on her laundry line).  But how could I have ruined this community so quickly?

While I could elaborate on the plan “B,” plan “C,” plan “D,” etc, etc, etc, as much as I tried to extract details regarding Mr. Jones concerns, the less rational the reasons Mr. Jones’ gave.  At that point I realized that Mr. Jones wasn’t interested in change.  If Mr. Jones was truly interested in change, that change must come from within.  That change within would only happen if Mr. Jones chose to clearly and concretely identify the concerns he had, and why they were concerns to him.  If he didn’t know what bothered him and why, I’m sure I’d ruin his concerns if I tried to help him.  Right!??

My 1^st response to “concerned citizens” is to ask for concrete issues, the reasons that lead to these issues, and asking for clear explanations to resolve these issues.  My 2^nd response is to acknowledge I can’t consume 99% of my time on 1% of the community population that just want to complain, regardless of what may come from their complaining.  I believe this complaining is simply their “release mechanism” that allows them to act out their frustrations towards innocuous people (i.e. the Management Company, the Board of Directors, etc.) they don’t even know.

For those home owners who have legitimate concerns, I’m looking for people who:

·         Are positive.

·         Can think beyond themselves.

·         Look to what is the best for the community.

·         Are concise in describing their concerns.

·         Can provide clear and reasonable solutions to the issue.

·         Will volunteer their time and energy to correcting the issue.

·         Will solicit support from their neighbors to lighten the load.

·         Have reviewed their governing documents, first, to see why things are done as they are, or to conceive of ways to improve the processes in place.

While it may be easy to complain about how the community arrived at where it is, it’s the people who are willing to contribute to the success of the community that deserve the time, effort, and resources of the community.

So, what kind of community member will you be?

By: Jeff Frenzel

While it may seem unusual to refer to the Allied landing on D-day or a cult of dissatisfaction, all too often home owners who are impassioned about an experience they’ve had or who have unrealistic expectations of living in a covenant controlled community react in the heat of the moment by lashing out, versus taking the time and effort to look for ways to improve the situation.  Which approach is more productive, constructive, and positive?  Which approach is more likely to bring about a solution to the concern?

If you’re confronted with a concern you feel the Association isn’t appropriately addressing, here are some steps to follow before leaving that questionable phone message to the management company, sending that heated e-mail, or otherwise acting on your emotions:

• Communicate to the Association: If the Association is unaware of your concerns, there’s no way the Association can address your concerns.  Allowing your concerns to build and fester isn’t constructive or healthy.  Find a way to share your concerns with the Association so progress can be made.
• Communicate in an Appropriate Manner: Living in a covenant controlled community is similar to living in a large family in a single home.  You might not always get what you want, when you want it, or how you want it.  However, you still need to “get along” with your family members if you’re to achieve a peaceful coexistence.  Throwing tantrums, being rude, and / or aggressively attacking your family members is NOT an effective way to build relationships with or gaining the results you’re looking for.  Such negative behavior is far more likely to alienate you as the local hothead that’s unreasonable.  A far better approach would be to give yourself some time to calm down, understand the rules of the community, and then look for ways to build a win-win compromise with the community.  It is critical to understand the Board of Directors have your interest in mind, but must first balance the needs of the community as a whole.
• Tone is Everything: If you’re interested in persuading the Association to action, it’s important for the Board of Directors to know you’re ready and willing to listen, to understand, and to assist with developing solutions.  Threats, tantrums, and ultimatums should be avoided at all costs.
• Listen: It may appear overtly simple, but if you ask a question of the Association, listen to the answer with an open mind.  If you’re already anticipating the answers you’ll get and how you’ll respond to them, you’re not listening, you’re anticipating.  From the answer you receive, avoid looking for the leaks in the boat that you can exploit to serve your interest.  There may be no leaks in the boat, it may be the Association didn’t fully understand your question, or you’re not familiar with the governing documents, the history of the community, or the important initiatives (large issues faced by the community and affecting the community as a whole) of the community.   Clarify your questions, constructively.  HOAs have the best interest of their community at heart, but HOAs are not equipped to satisfy all home owners all the time.  Home owners may simply have unrealistic expectations of their Association.
• Know Your Governing Documents: This would include the Declarations, Bylaws, Articles of Incorporation, and the rules, regulations, policies, and procedures for your community.  Simply put, if you don’t know the rules you agreed to at the time you closed on your home, it’s easy to misunderstand why the Association is acting as it is.  A lot of understanding can be gained by simply reading the rules the Association must abide by.
• Become Informed: Does your community have a web site and / or newsletters?  Usually community web sites will provide you with an immense amount of information and background regarding the community’s rules, finances, concerns, and initiatives.  Another wonderful source of information comes by attending the Board of Directors meetings.  Attending these meetings provides home owners the opportunity to learn straight from the horse’s mouth what is going on within the community, and how the community is dealing with the issues it faces.  An old adage comes to mind, “If you don’t vote, you can’t complain about the politicians in office.”  The same adage holds true regarding a home owner who refuses to become involved in their community.  If you’re not working to solve concerns, you’re becoming a concern.
• Look for Solutions: Brainstorming may be the best alternative, pulling ideas from others.  While 1 solution may be the best for you, it may not be best for the community.  Be prepared with multiple solutions that may work for both parties.  Also, focus on a satisfactory conclusion for both parties, and not upon the positions (what each party wants).  Solutions are found in reasonable compromise versus focusing on the wants of 1 party.  While you may aim high on your expectations, realize that you also need to be realistic on the anticipated outcome by asking for solutions the other party will find realistic.

by: Jeff Frenzel

Perhaps having a better understanding of the role of the Board might explain why the Board acts as it does.  Did you know that Board meetings are meetings that allow the Board to conduct the business of the association (corporation)?  These Board meetings are open to the membership of the corporation (owners) to allow the members to experience, first hand, what is going on in the corporation.

Additionally, have you ever been to a Town Council or a Town Board Meeting?  Have you watched how they move through the agenda from one item to the next?  Have you tried to stand up and discuss a topic that was not on their agenda?  Did you try and speak about something that was on the agenda without being first recognized?  Chances are, you didn’t get very far.

Similar to the way a Town Council or Town Board runs their meetings, the Association’s Board will conduct their meetings.  The HOA Board will systematically work through their agenda items.  Depending on the laws in your state and/or the governing documents for your community, you may have the opportunity to speak on the topic being discussed, once you are recognized.  While members may be able to share their ideas with the Board, members must  remember that the decisions made at Board of Director meetings are still the responsibility of the Board of Directors, and what they believe will be best for the entire community.  In other words, while you may get to share your thoughts, it’s still the Board’s decision.

Unlike Town Council or Town Board meeting, many HOA Board of Director meetings will include a section entitled “Open Forum,” allowing owners to discuss items not on the agenda.  Generally if an owner wishes to speak in the Open Forum, that owner must sign in, list the topics that they would like to discuss, and be in good standing with the community.  Depending on the laws in your state and/or the governing documents of your community, there may be a time limit and / or a maximum number of topics you may be allowed to share during the meeting.

Sometimes when people talk about a concern or something that is on their mind, they just need an avenue to share it in with others, including the Board.  Other times people may be looking for an answer.  Members should be aware, however,  that in most cases the Boards of Directors for Associations are volunteers who may not have all the answers at their fingertips.  Consequently, the Board may need to conduct further research before providing members with an answer.  Often this research is completed on the Board members’ time.  At times there may not even be an answer.

So the next time you believe you’re not being heard by the Board of Directors for your Association, ask yourself if you are approaching them properly (look to your governing documents), if you are asking them to do something for your benefit versus for the benefit of the entire community, and whether you are asking a question or just sharing your thoughts.  Remember, the more constructively you work with the Board of Directors, the better your relationship can be.

by Wendy Frenzel

The purpose of a Board Of Directors (BOD) meeting is to conduct BOD business.  During a BOD meeting there is an open forum where owners have a limited amount of time to speak which is a way for them to discuss a concern but not where the BOD must provide an answer necessarily.  When the BOD votes on an item while they are conducting business, owners have the right to speak for a limited time either for or against what is being voted on, similar to a town council meeting.  It is very important to remember, that this is where the BOD conducts the business of the association.  Many, many associations (and other types of corporations) do not publish when BOD meetings are as the meetings minutes are public record.  The BOD may add anything to the agenda to be voted on in their meeting.  Towns and government agencies are required to publish anytime a meeting is held or there is a gathering where a quorum of members may be present because of the sunshine law.  Again, HOAs are corporations.

The purpose of Owner meetings, per the governing documents, is twofold.  One meeting should be held to ratify the budget by the owners.  Budget ratification does not require quorum so attorneys recommend holding it separate from the annual owner meeting where elections take place and quorum is needed.  Nowhere, in the governing documents does it state that there is any other required business of the association to be conducted at these meetings, including opening the floor up to owners to discuss anything else – just the budget during the budget meeting and the owners they would like to see on the Board during the Owner meeting where that is voted on.  Many associations, at owners meetings, do not have a time for owners to speak about anything else except the items on the agenda, as it’s not required by most governing documents.  The governing documents usually state that only items within the agenda (with the agenda forwarded with meeting notice) may be voted on at an owner meeting as well, so owners can’t bring something up in the meeting to be voted on, the BOD does not have to discuss what they have done over the last year or plan to do in the future.  At Owner meetings, the BOD does not need to be present, there does not need to be quorum of the BOD, there just needs to be either the Pres or VP to chair the meeting.

The Meeting Policy states that the committees appointed by the Board of Directors, when in good standing and requested by the Board of Directors, may be allowed to participate in BOD meetings when requested by the BOD to assist the BOD in decision making.  So your question about committees being able to speak at any time in either meeting, is not accurate based on the governing documents.

I have been to some Owner meetings where there was only a sign in sheet for name and address, but nowhere to put down that you wanted to speak for or against the item being voted on.  By not having a sign in sheet of that nature, the association basically shut down the ability for owners to speak at the Owner meeting for or against what was being voted on, they just voted and no questions were asked.  At these meetings, there was no owner forum where owners could talk about items that they had questions on as well.  It was all about the required business of the Association, per the governing documents, and nothing else.

Please note when I speak governing documents I include the CC&R, the ByLaws, the Articles of Incorporation, and the Policies / Rules.  The governing documents for your community may be different but this is a good example of the differences between the two for many communities.

by Wendy Frenzel