M-100 - The Essentials of Community Association Management - Leader Guide

professional management development program

M-100

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instructor guide

the essentials of

community association management

© 2011 Community Associations Institute All rights reserved. Reproduction in whole or in part is not permitted without the expressed, written consent of CAI. Community Associations Institute 6402 Arlington Boulevard, Suite 500 Falls Church, VA 22042 (888) 224-4321 www.caionline.org CAI is a national, nonprofit 501(c) (6) association created in 1973 to educate and provide resources to America’s community association industry. Its members include: volunteer leaders of condominium and homeowner associations, cooperatives, and planned communities of all sizes; community managers and management firms; builders and developers; and attorneys, accountants, lenders, reserve specialists, insurance providers, and other providers of professional services and products for community associations. CAI has more than 50 chapters throughout the United States. Each chapter has its own menu of programs and services and serves geographic areas, entire states, and multiple states. In 2010, CAI estimated that there were approximately 310,000 community associations in the United States. The Association of Professional Community Managers (APCM) is a specialized member group for managers dedicated to giving you added advantages on the job, in your career, and in the community association marketplace. APCM is a home for managers in the broader CAI community—a professional society that focuses on you, your career, your job, and your professional growth, whether you’re an onsite, portfolio, or large-scale community manager. The material presented in this publication has been prepared for the general information of the course participant. While the material presented is believed to be accurate, neither CAI nor its chapters warrant the publication’s suitability other than as information guidelines. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional services. If legal advice or other expert assistance is required, the services of a competent professional should be sought. —From A Declaration of Principles, jointly adopted by a Committee of the American Bar Association and a Committee of Publishers This leader guide was created with:

a product of Great Circle Learning, Inc. www.leaderguidepro.com

Acknowledgements Community Associations Institute members were instrumental in the overall design and development of this M-100 course. As content developers, reviewers, and advisors, they devoted hours to this project, generously sharing their expertise and ensuring successful completion. Their hard work, enthusiasm, and dedication made this endeavor possible. M-100: The Essentials of Community Association Management Team Leader: Margey Meyer, CMCA, PCAM CAI is grateful to the M-100 team members who shared their expertise by designing, reviewing, editing, and writing portions of this course manual. Philip Adams, CMCA, PCAM Jo-Ann M. Greenstein, CMCA, AMS, PCAM Marge Imfeld, PCAM Debra Warren, CMCA, PCAM CAI is grateful to those volunteers who offered their assistance and shared sample materials. Sara E. Barry, CMCA, PCAM Kevin Cavanaugh, CPA Ellen Hirsch de Haan, Esq. John Hammersmith, CMCA, AMS, PCAM Steven Hurwitz, CMCA, AMS, PCAM Staci M. Gelfound, CMCA, AMS, PCAM Howard Goldklang, CPA, MBA David J. Graf, Esq. Paul D. Grucza, CMCA, AMS, PCAM James H. Main, CMCA, PCAM Kelly A. Moran, CMCA, AMS, PCAM Carole Murphy, CMCA, PCAM John P. Poehlmann, RS Loura K. Sanchez, Esq. J. David Ramsey, Esq. Clifford J. Treese, CIC, CPCU, ARM, CIRMS CAI is especially indebted to Stephen Bupp, CMCA, AMS, PCAM, and Clifford J. Treese, CIC, CPCU, ARM, CIRMS, for their extraordinary efforts in designing and developing the original M-100: The Essentials of Community Association Management.

Preface Your Instructor Guide is your organizer for this course. The course content is organized around a set of basic community association management principles. 

For each topic that we focus on in this course, there are corresponding pages that set out to familiarize students with a particular aspect of community association management.



Many topics also have accompanying activities to help students develop their ability to perform various skills.



In addition to providing instructional guidelines for the material presented in this course, this manual provides copies of the corresponding student pages for quick reference and ease of instruction.



PowerPoint slides are also included with this text to highlight key points within the course content.

In order to facilitate practical skill development for the students, they will use materials from a fictitious community association, Bayview Towers, for many of the course activities. These small and large group activities give participants the opportunity to learn from one another’s experience. Additionally, many sample documents are included in the course materials for participants to use for future reference. Work well and enjoy!

Leader Guide

Table of Contents

Table of Contents INTRODUCTORY MATERIAL Getting Started

vi

About This Guide

vi

The Program In Perspective

ix

Program Preparation Training At A Glance

xvi xviii

MODULES Day 1: Introduction

1

Welcome & Introductions

3

Logistics

6

Course Overview

7

Course Introduction

12

Module 1: Legal Basis

15

Lesson 1: Legal Basis for Community Associations

19

Overview

22

Defining a Community Association

25

Purpose of a Community Association

27

Types of Community Associations

30

Introduction to Federal Laws

39

State Statutes That Affect Community Associations

49

Governing Documents of Community Associations

54

Class Exercise

66

Summary

69

Lesson 2: Rule Development and Enforcement

78

Overview

80

© 2011 Community Associations Institute

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Table of Contents

Leader Guide

Scope of Rules and Architectural Guidelines

83

Rule Development

91

Rule Development, continued

94

Rule Enforcement

100

Work Group Exercises

118

Summary

137

Module 2: Financial Management

145

Lesson 1: Budgets and Replacement Reserves

150

Overview

152

How a Budget is Used

156

Budget Components

162

Establishing Annual Assessments

167

Development of Budget Line Items

169

Preparation of an Operating Budget

172

Budget Presentation

175

Reserve Account

177


184

Summary

193

Lesson 2: Collecting Assessments

202

Overview

203

Benefits of Establishing a Collections Policy

210

Characteristics of an Effective Collection Policy

212

Collection Procedures and Remedies

214

Bankruptcy Actions

218

Class Exercise

221

Summary

226

Lesson 3: Financial Statements, Audits, Income Taxes, & Investments

233

Overview

235

Types of Accounting

239

Financial Statements

243

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M-100: The Essentials of Community Association Management

Leader Guide

Table of Contents

Warning Signs

251

Class Exercise

253

Audits, Reviews, and Compilations

257

Income Taxes

262

Investments

265

Asset Protection

269

Summary

273

Module 3: Facilities Management

283

Lesson 1: Maintenance

288

Overview

290

Maintenance Responsibilities

295

Class Exercise

303

Class Exercise #2

308

Types of Maintenance

310

Facilities Maintenance Systems

313

Evaluating Maintenance Systems and Efforts

321

Sustainable Lifestyles

324

Summary

331

Lesson 2: Contracting

340

Overview

342

Deciding Whether or Not to Contract

345

Using Requests for Proposals (RFPs)

352

Contract Provisions

361

Negotiating Contracts

372

Summary

375

Lesson 3: Risk Management & Insurance

384

Overview

385

Insurance for Community Associations

392

Insurance Coverages

395

The Bidding Process

410


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Table of Contents

Leader Guide

Insurance Claims

414

Summary

416

Module 4: Community Management and Leadership

423

Lesson 1: Community Management

428

Overview

430

Everyone Has a Role in the Operation of the Community Association

434

Role and Responsibilities of the Manager

452

Class Exercise

455

Different Forms of Management

462

The Management Contract

465

The Employment Agreement

469


473

Managing a Developing Community

490

Human Resources for Managers

503

Creating a Human Resources Management System

505

Compliance with Applicable Laws and Regulations

507

Performance Planning and Evaluation

511

Supervision and Discipline

514

Summary

519

Lesson 2: Board Meetings and Decision-Making

530

Overview

531

Decision Making for Community Associations

534

Preparing for the Board Meeting

536

Conducting the Board Meeting

546

Owner Meetings

550

The Manager's Role

552


558

Summary

566

Lesson 3: Ethics

574

Overview

575

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Leader Guide

Table of Contents

Definitions

578

Conflict of Interest

580

Code of Ethics

583

CAI's Designation Code of Ethics for Management

584

Class Exercise

587

Summary

591

Course Conclusion

599

Course Conclusion

600

Summary

601

Course Evaluation

609

Course Exam

610


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Getting Started

Leader Guide

Getting Started About This Guide What’s the purpose of this guide? This leader guide provides a master reference document to help you prepare for and deliver The Essentials of Community Association Management program. What will I find in the guide? This leader guide is a comprehensive package that contains 

checklists of necessary materials and equipment



presentation scripts and key points to cover, and

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instructions for managing exercises, case studies, and other instructional activities.

How is this guide organized? This section, “Getting Started,” contains all of the preparation information for The Essentials of Community Association Management program, such as learning objectives, pre-work, required materials, and room set-up. Following this section is the “Training At A Glance” table. This table can serve as your overview reference, showing the module names, timings, and process descriptions for the entire program. Finally, the program itself is divided into modules, each of which is comprised of one or more lessons. A module is a self-contained portion of the program, usually lasting anywhere from 2 to 4 hours, while a lesson is a shorter (typically 30-90 minutes) topic area. Each module begins with a one-page summary showing the Purpose, Time, Process, and Materials for the module. Use these summary pages to get an overview of the module that follows.

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Leader Guide

Getting Started

About This Guide, continued How is the text laid out in this guide? Every action in the program is described in this guide by a text block like this one, with a margin icon, a title line, and the actual text. The icons are designed to help catch your eye and draw quick attention to “what to do and how to do it.” For example, the icon to the left indicates that you, the instructor, say something next. The title line gives a brief description of what to do, and is followed by the actual script, instruction set, key points, etc. that are needed to complete the action.

Page [#] Please note that all Participant Guide blocks are highlighted so you can easily determine where to focus your attention (as is this one). As you work through this manual, all notes to you as the instructor to “do this” or “say this” are outside of these highlighted blocks.

A complete list of the margin icons used in this guide is provided on the following page.

IMPORTANT NOTE You may also occasionally find important notes such as this one in the text of this guide. These shaded boxes provide particularly important information in an attention-getting format.


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Getting Started

Leader Guide

About This Guide, continued Graphic Cues Module Blocks Goal

Time

Overview

Materials

Break

Lesson Blocks Assessment

Audio

Capture

Case Study

Check

Computer

Flipchart

Activity

Handouts

Highlight

Game

Key Points

Lab

Objective

Process

Project

Q&A

Role Play

Say This

Speaker

Time

Tools

Transition

Video

Workbook

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Leader Guide

Getting Started

The Program In Perspective Why should you take the M-100: The Essentials of Community Management? The Essentials of Community Association Management was created to provide the fundamental education for a community association manager. It is a basic introduction to the unique knowledge, skills, and abilities a person must possess to become a successful community association manager. About this Course

CAI’s M-100: The Essentials of Community Association Management is designed for new community association managers or those with less than three years of experience. This course covers 10 basic functions of association management, from financial and facilities management to legal and management topics. A final exam, based on the information in this text, is administered to course students. A passing grade is required to receive credit for the course. The Essentials of Community Association Management is taught by CAI manager members who have successfully completed the course and who have a Professional Community Association Manager® (PCAM®) designation. The course and exam, offered through CAI’s 50+ chapters, may be completed without attending classroom instruction. For more information on the Home-Study option or the M-100 online course, please contact CAI. Successful completion of The Essentials of Community Association Management is required for the Certified Manager of Community Associations® (CMCA®), Association Management SpecialistTM (AMSTM), Large-Scale Manager™ (LSM™), and Professional Community Association Manager (PCAM) designations, and additionally, may satisfy state manager credentialing requirements. Criteria for community association manager licensing vary from state to state. Through its manager education program, CAI offers fourteen separate courses from basic to advanced levels that cover all aspects of management and operation of community associations of all sizes and types. For a schedule of courses in your area or for more information on the designation programs, contact your local CAI chapter or call CAI’s national office in Northern Virginia at (888) 224-4321.


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Getting Started

Leader Guide

The Program In Perspective Module 1: Legal Basis Focus: • Why we have community associations and how they are structured.

Learning Objectives: Lesson 1: Legal Basis for Community Associations • Define a community association. • Describe the purpose of a community association. • Identify the types of community associations. • Identify federal laws that affect community associations. • Identify state statutes that affect community associations. • Understand governing documents of community associations and their hierarchy of authority. Lesson 2: Rule Development and Enforcement • Understand the scope and purpose of rules and architectural guidelines in community associations. • Identify the four types of resolutions for community associations. • Develop valid and enforceable rules using formal rule making procedures. • Develop and implement a due process procedure for enforcing rules.

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Leader Guide

Getting Started

The Program In Perspective Module 2: Financial Management Focus: • How to understand the basic financial reports and activities of a community association and the community manager’s typical involvement in them.

Learning Objectives: Lesson 1: Budgets & Replacement Reserves • Use budgets as a management tool to facilitate the effective operation of the community association. • Explain the sources of budget requirements. • Identify and understand the budget components. • Recognize the purpose and benefit of the reserve account. • Identify the two types of budget line items. • Identify the two basic methods of budget preparation. • Calculate reserve account budget line items. • Present a budget to the board of directors. Lesson 2: Collecting Assessments • Recognize the sources of authority to collect assessments. • Identify the benefits of establishing a collections policy. • Identify legal remedies available to community associations for collecting delinquent assessments. • Understand the impact of a bankruptcy filing on the association. Lesson 3: Financial Statements, Audits, Income Taxes, & Investments • Identify the purpose and types of financial statements. • Identify and explain the three types of accounting methods. • Differentiate between an audit, review and compilation. • Recognize federal income tax requirements and responsibilities for community associations. • Explain investment policies and objectives for community associations.


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Getting Started

Leader Guide

The Program In Perspective Module 3: Facilities Management Focus: • How to understand the community manager’s role in operating, maintaining, repairing, and replacing the common elements and common areas—and planning, organizing, leading, and controlling your association’s resources in order to achieve its goals.

Learning Objectives: Lesson 1: Maintenance • Determine your association’s maintenance responsibilities. • Analyze your community’s maintenance needs. • Identify the types of maintenance work. • Analyze your facilities maintenance system and management tools. • Evaluate maintenance systems and efforts. • Explain the importance of sustainable lifestyles. Lesson 2: Contracting • Determine whether or not to contract for services. • Prepare a request for proposals and evaluate bids submitted for consideration. • Identify the provisions that should be included in every contract. Lesson 3: Risk Management & Insurance • Identify the four types of exposure to loss for an association. • Define risk control. • Identify four ways to control risk. • Identify the requirements for community associations to have insurance coverages. • Identify the four major insurance coverages available to community associations. • Explain the manager’s role in the bidding process. • Provide tips for filing insurance claims.

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Leader Guide

Getting Started

The Program In Perspective Module 4: Community Management Focus: • How to inform and guide your community’s owners and volunteers—and successfully perform your role as community manager and leader.

Learning Objectives: Lesson 1: Community Management • Explain the roles and responsibilities of the community association owners, board and committees. • Identify the roles and responsibilities of the manager. • Explain the different forms of community management. • Describe the scope of the management contract. • Describe the scope of the employment agreement. • Understand the manager’s role in a developing community. • Understand the manager’s role in overseeing a community’s human resource system. Lesson 2: Board Meetings and Decision-Making • Explain the board of directors’ decision-making authority. • Explain the manager’s role in preparing for the board meeting. • Provide tools for conducting a board meeting. • Understand the types of owner meetings. • Use techniques to facilitate a successful meeting. Lesson 3: Ethics • Define ethics for community associations. • Identify and resolve ethical conflicts for managers. • Understand and apply CAI's “Designation Code of Ethics for Management.”


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Getting Started

Leader Guide

The Program In Perspective Program Timing   

The M-100 course is presented over three days and includes 16 hours of scheduled classroom instruction and review plus 2 hours for the examination. The class starts each day at 8:30 a.m. and concludes on the first two days at 5:30 p.m. Please refer to the Training-At-A-Glance for a detailed course schedule.

IMPORTANT NOTE It is very important that each day’s class begins on time and ends no later than the scheduled time. Many students will have other business or personal commitments that have been scheduled in conjunction with the time frame of this course. The instructor should review this schedule with students on the first day to help avoid any misunderstanding about the time required for the course.

Target Audience The course is designed for persons with limited experience in the community association management profession. The primary focus has been for those with less than three years experience. All instructors are urged to remember this audience level as the course is presented. Because this is the first of many educational experiences through CAI, the instructor should use this opportunity to promote the PMDP courses and to provide more information on additional educational opportunities. Since the M-100 is a PMDP requirement, instructors might also find students in attendance with many years of management experience. These managers bring a wealth of knowledge to the course and can share information with the group.

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Leader Guide

Getting Started

The Program In Perspective Methods of Instruction There are a variety of methods used to facilitate the students’ learning process including: • Faculty presentations • Class exercises • Work group exercises • Role plays • Facilitated group discussions This course uses various methods as different students learn in different ways. A concept may be easier understood by working on group exercises than hearing a lecture from a speaker. The varied methods help to create breaks in lengthy presentations as well as provide the students with the opportunity to practice their new skill or apply their new knowledge during the course. These exercises and role plays also provide the instructor the opportunity to “catch up” within the recommended time allocations. If a particular session is finished earlier than expected, additional group discussions can occur about a particular exercise or scenario. Alternatively, if the instructor is “running behind,” the time spent on exercises can be limited or assigned as homework with the results presented as the first item on the following day. Instructors must familiarize themselves with the Instructor Guide format and content. Notes provide direction on when to use a PowerPoint slide, Participant Guide, or reference materials, as well as which information to emphasize. The instructor should review the “Note to the Instructor” at the beginning of each section for special instructions or requirements of the particular session. The instructor must thoroughly review the workbook and examples as well as consider other personal examples that can be used to illustrate and clarify information during the presentation and facilitated group discussions. One final note on instruction: The instructor must encourage the students to read the workbook. There is not sufficient time for the instructor to cover every aspect of the text; therefore, the students must accept the responsibility to study their workbooks.


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Getting Started

Leader Guide

Program Preparation Instructor Preparation • • •

Read the Participant Guide – provided by CAI Use this Leader Guide as your study guide to prepare to deliver the class Be familiar with the M-100 exam questions

Terminology Students from different parts of the country use different terminology. The instructor should use the terms that are most familiar with the students, but let them know that others exist.

Page xii

Terminology • Community Association – You will see and hear community associations referred to by one of several names: 1. Community Association: This term is used by Community Associations Institute, publisher of this course manual and sponsor of this class, and by the Florida Department of Business and Professional Regulation (DBPR). Instructors are encouraged to use the term “community association” as an all encompassing term for condominium, cooperative, and planned communities. 2. Common-Interest Community (CIC): This term is used by the National Conference of Commissioners on Uniform State Laws. 3. Common Interest Realty Association (CIRA): This term is used by the American Institute of Certified Public Accountants (AICPA). 4. Common Interest Development (CID): This term is used by the California Department of Real Estate (DRE). • Community Association Manager -

The term “community association manager” should be used instead of property manager.

• Community -

Page xvi

The term “community” is recommended in lieu of complex or project.


Leader Guide

Getting Started

Program Preparation Evaluation •

All students are provided evaluation forms for their feedback on the course, the instructor, and other aspects of the presentation.

•

The evaluations should be collected by a student, placed in a sealed envelope, and returned to the instructor at the end of the course.

•

All evaluations must be forwarded to CAI’s national office.

Capture your notes here.


Page xvii

Training At A Glance

Leader Guide

Training At A Glance Time

Module/Lesson

Description

DAY 1 8:30 a.m.

Day 1: Introduction (40 minutes)

9:10 a.m.

Module 1: Legal Basis (2 hours and 45 minutes) •

Lesson 1: Legal Basis for Community Associations (1 hour and 30 minutes)

10:40 a.m.

Break (15 min.)

10:55 a.m.

•

12:10 p.m.

Break for Lunch (1 hour)

1:10 p.m.

Module 2: Financial Management (3 hours and 15 minutes) •

Lesson 2: Rule Development and Enforcement (1 hour and 15 minutes)

Through a combination of faculty presentation, work group exercises, and facilitated group discussion, walk participants through the fundamental basis upon which community associations exist, why they exist, and the various elements of their governing documents. Overview the fundamental concepts of the authority by which to create a rule, how to develop a rule, and successful enforcement techniques.

Focus: How to understand the basic financial reports and activities of a community association and the community manager’s typical involvement in them.

Explain the budgeting process, including development Lesson 1: Budgets and presentation of a community association budget as and Reserves (1 hour and 15 minutes) well as understanding the importance of using the budget as a management tool.

2:25 p.m.

Break (15 min.)

2:40 p.m.

•

3:40 p.m.

Break (15 min.)

3:55 p.m.

•

4:55 p.m.

Break (5 min.)

5:00 p.m.

Day 1 review and wrap up (30 minutes)

5:30 p.m.

Conclude Day 1

Page xviii

Welcome participants, introduce yourself, and run the participant introduction activity to highlight the course objectives. Focus: Why we have community associations and how they are structured.

Lesson 2: Collecting Assessments (60 minutes)

Lesson 3: Financial Statements, Audits, Income Taxes, & Investments (60 minutes)

Overview the basic concepts of the assessment collection process.

Teach participants how to review financial statements and look for key elements that indicate the financial condition of the community.

Review the concepts discussed in Day 1 and answer any questions participants may have.


Leader Guide


DAY 2 8:30 a.m.

Day 2 Introduction (15 min.)

Overview the agenda and goals for Day 2.

8:45 p.m.

Module 3: Facilities Management (2 hours and 45 minutes)

Focus: How to understand the community manager’s role in operating, maintaining, repairing, and replacing the common elements and common areas—and planning, organizing, leading, and controlling your association’s resources in order to achieve its goals.

•

Examine the physical assets that must be maintained by the association and how to determine whether the association or the owner is responsible for such work

Lesson 1: Maintenance (60 minutes)

9:45 a.m.

Break (15 min.)

10:00 a.m.

•

10:50 a.m.

Break (15 min.)

11:05 a.m.

•

12:00 p.m.

Break for Lunch (1 hour)

1:00 p.m.

Module 4: Community Management and Leadership (3 hours and 45 minutes)

Focus: How to inform and guide your community’s owners and volunteers and successfully perform your role as community manager and leader.

•

Overview the role of the manager of a community association, including their relationship with the volunteer leadership, the members, the staff, and various contractors and vendors; the needed components of a management contract and/or employment agreement; and the role of the manager in overseeing the community’s human resource system.

Lesson 2: Contracting (50 minutes)

Lesson 3: Risk Management & Insurance (55 minutes)

Lesson 1: Community Management (1 hour and 35 minutes)

2:35 p.m.

Break (15 min.)

2:50 p.m.

•

4:10 p.m.

Break (15 min.)

4:25 p.m.

•

Lesson 2: Board Meetings and Decision Making (1 hour and 20 minutes)

Lesson 3: Ethics (50 minutes)

Discuss whether an association should use staff, personnel, or contractors to complete various tasks in the community, what should be included in the specifications of work in a request for proposal (RFP), and what provisions should be included in all contracts.

Explain how community associations are exposed to losses and what measures can be taken to manage that risk, including the purchase of insurance, and discuss the requirements for insurance coverage, the types of insurance protection available to community associations, and the role of the manager in the bidding and claims processes.

Examine the roles and responsibilities of the manager in relation to boards of directors meetings and how to prepare for and help facilitate a successful and effective meeting.

Review what constitutes a conflict of interest and how to avoid it as well as understanding how not to engage in unethical or improper behavior.


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Leader Guide

5:15 p.m.

Day 2 review and wrap up (15 minutes)

5:30 p.m.

Conclude Day 2

Review the concepts discussed in Day 2 and answer any questions participants may have.

DAY 3 8:30 a.m.

Day 3 Introduction (5 minutes)

Overview the agenda for Day 3.

8:35 a.m.

Review/Questions and Answers (55 minutes)

Review the concepts discussed in the course and answer any final questions participants may have.

9:30 a.m.

Break (15 min.)

9:45 a.m.

Course Evaluations (15 minutes)

Ask a volunteer from the class to distribute, collect, and seal the course evaluations.

10 a.m.

Examination (2 hours)

Administer the course exam.

12 Noon

Conclusion of Course

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Leader Guide

Day 1: Introduction

Day 1: Introduction


Page 1

Day 1: Introduction

Leader Guide

Day 1: Introduction Goal The purpose and goal of this module is to welcome participants and introduce them to the course content.

Time 40 minutes 

Welcome & Introductions: 20 min.



Logistics: 5 min.



Course Overview: 5 min.



Course Introduction: 10 min.

Overview Welcome participants, introduce yourself, and run the Participant Introduction activity to obtain insight about the course attendees and their expectations.

Materials Needed

Page 2



Participant Guides



PowerPoint slides



LCD projector



Flip chart


Leader Guide

Day 1: Introduction

Welcome & Introductions Allow 20 minutes for introductions

Slide 1

Open the class by welcoming the participants 

Welcome students to CAI’s The Essentials of Community Association Management: – Designed to provide the fundamental knowledge and skills needed to manage a community association.



Briefly mention the value of CAI: – Founded in 1973, Community Associations Institute is the nation’s voice for condominium, cooperative, and homeowner associations. – It is the only national organization solely committed to the community association industry. – It also is the only organization to provide an in-depth community association management education curriculum and professional designation program specifically designed to recognize community association managers across the nation.


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Day 1: Introduction

Leader Guide

Welcome & Introductions Slide 2 Introduction/Welcome • • • •

Self introduction Participant introduction Administration Logistics

2

Self-Introduction Introduce yourself to the class as the course instructor and establish your credibility as an expert. The introduction should be provided in such a way as to demonstrate your knowledge, expertise, and authority. This can be accomplished by:  Providing some background information about yourself 

Describing your experiences in the community association management field



Explaining your involvement with CAI – Briefly describe the positions you’ve held in community association management and the types of community associations that you’ve managed. – Mention any national or chapter positions you’ve held in CAI.


Page 4


Leader Guide

Day 1: Introduction

Welcome & Introductions Run the Participant Introduction activity (or feel free to substitute your favorite icebreaker here) Ask participants to introduce themselves. They may choose to include the following information in their introduction:  Name 

Job title/function



Years in profession/experience in community association management



Name of company or community



Number of communities and units/homes managed



Geographic location



Background



Specific expectations from the course



Specific questions or areas of concern

IMPORTANT NOTE Make careful notes during these introductions to obtain insight about the specific attendees and their expectations. The instructor may also wish to consider separating those students sitting together that are from the same company or association. Because there are many exercises to be completed in small work groups, it is advisable to have the work groups composed of persons other than co-workers.


Page 5

Day 1: Introduction

Leader Guide

Logistics Allow 5 minutes to cover this material

Administration Announce any administrative details. For example: 

Other upcoming Professional Management Development Program (PMDP) courses



Other CAI national or chapter activities



Any required announcements about continuing education credits. (Refer to any materials provided by CAI.)

Logistics Announce any logistics details. 

For example, length of session, schedule, breaks, and facilities, etc.



Pagers and cell phones: – The instructor is encouraged to request that all students turn off laptops and cell phones to avoid disturbing other students or disrupting the class. – While some students may need to maintain contact for emergency situations, the students should be encouraged to check with their offices during the scheduled break times and not to receive e-mails or calls during class.

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Leader Guide

Day 1: Introduction

Course Overview Allow 5 minutes to provide the course overview.

Direct participants to the Preface page in their Participant Guides. This page contains: 

Preface



M-100 exam information

Summarize the main points in the Preface: The purpose of the PMDP course curriculum is to help community association managers develop their skills. The courses use a series of activities to do so. For each skill or set of skills, the workbook: – Explains what a manager needs to know. – Offers an activity to develop the skill(s). – The arrangement of the workbook enables participants to use it as a reference book after completing the course.

Say This course covers various topics, subject matter, and principles that are needed to successfully manage community associations, as well as management company offices.


Page 7

Day 1: Introduction

Leader Guide

Course Overview, continued Explain the Importance of the Course. Participants will identify the importance of this course for themselves through a series of questions. Ask participants the following questions: 

How often do you use management skills in your role as a professional community association manager? Provide specific examples.



With whom do you interact on a daily, weekly, monthly, or yearly basis in executing your management duties? – Owners – Tenants – Volunteer leaders – Staff – Contractors – Consultants (attorney, CPA, insurance agent, engineer, architect, etc.) – Public officials – Other management company employees – Outside vendors



In what capacity do you use management skills in dealing with these people?



What kind of a manager do these people expect you to be? – Ethical – Clear – Direct – Respectful – Friendly



Page 8

How does your ability to manage effectively impact your community association and/or your company?


Leader Guide

Day 1: Introduction

Course Overview, continued Review the following information with participants 

Course outline – Briefly review each session that will be covered



Methods of instruction used – Class exercises – Group exercises – Role plays – Other interactive methods to support the faculty presentation



Participant Guide – Participants should read the workbook as a supplement to the course – All information cannot be covered in the class – Participants should use the workbook in the future as a resource



Examination – 100 multiple choice questions – Two hours to complete – To pass: – Read the workbook – Listen and participate in class – Ask questions – Get clarification of any item – Correctly answer at least 70 questions


Page 9

Day 1: Introduction

Leader Guide

Overview the course agenda with the class.

Slide 3

Slide 4

Page 10


Leader Guide

Day 1: Introduction

Course Overview, continued Slide 5


Transition to the Course Introduction.


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Day 1: Introduction

Leader Guide

Course Introduction Allow 10 minutes for the Course Introduction.

Discuss the incredible growth of community associations in the United States during the past 4-5 decades.

Page 5

The number of community associations in the U.S. has exploded in the past 40 years. This chart reflects the estimated number of U.S. association-governed communities and individual housing units and residents within those communities: Year

Communities

Housing Units

Residents

1970 1980 1990 2000 2002 2004 2006 2008 2009 2010

10,000 36,000 130,000 222,500 240,000 260,000 286,000 300,800 305,400 309,600

701,000 3.6 million 11.6 million 17.8 million 19.2 million 20.8 million 23.1 million 24.1 million 24.4 million 24.8 million

2.1 million 9.6 million 29.6 million 45.2 million 48.0 million 51.8 million 57.0 million 59.5 million 60.1 million 62.0 million

The number of people living in associations today makes the need for leadership in the community management profession extremely important. Discuss the need for leaders in the community management profession. 

Help students to see that as managers: – They are leaders—not secretaries – They are expected to be professional advisors

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Leader Guide

Day 1: Introduction

Course Introduction Say One way for managers to become industry leaders is to seek and obtain the highest credentials in the community management profession. The first step is the CMCA – Certified Manager of Community Associations.

Slide 6

Slide 7


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Day 1: Introduction

Leader Guide

Say There are also other credentials for managers offered through CAI—including the AMS, LSM, and PCAM—and AAMC for management companies. For more information, please visit CAI’s website: www.caionline.org.

Slide 8 Other CAI Designations – for Community Managers and Management Companies • Association Management Specialist® (AMS®) • Large-Scale Manager® (LSM®) • Professional Community Association Manager® (PCAM®) • Accredited Association Management Company® (AAMC®)

8


Transition to Module 1.

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Leader Guide




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Leader Guide

Module 1: Legal Basis Focus Why we have community associations and how they are structured.

Time 2 hours, 45 minutes (total) 

Lesson 1: 1 hour, 30 minutes




Overview This section of the program will cover:  The legal nature of a community association, including the scope and limits of its authority (Legal Basis for Community Associations—Lesson 1) 

Proper rule development and enforcement (Rule Development and Enforcement—Lesson 2)

Materials Needed

Page 16



PowerPoint slides



LCD projector



Remote advancer



Flipchart


Leader Guide


Review the Focus of Module 1 with the class.

Slide 9

Module 1: Legal Basis Focus Why we have community associations and how they are structured.

9

Overview the lessons covered in Module 1.

Slide 10 Legal Basis This section of the program will introduce you to: • The legal nature of a community association, including the scope and limits of its authority (Legal Basis for Community Associations—Lesson 1) • Proper rule development and enforcement (Rule Development and Enforcement—Lesson 2) 10

Transition to Lesson 1


Page 17


Leader Guide

Capture your notes here

Page 18


Leader Guide


Lesson 1: Legal Basis for Community Associations


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Leader Guide

Legal Basis for Community Associations Goal At the end of this lesson, students will be able to understand the foundation upon which community associations exist, why they exist, and the various elements of their governing documents.

Time 1 hour and 30 minutes Session Time Breakdown 60 minutes—Faculty presentation 20 minutes—Class exercise 10 minutes—Summary/quiz

Overview In this first lesson, you will work with the students in teaching them about the legal basis of community associations. It is critical they comprehend and understand the basic legal concepts before leaving this session as all other sessions will either refer to information contained herein or will be built upon the principles in this session. Of equal importance to the novice manager is understanding that every state has different statutes affecting community associations and that every set of governing documents are unique to the specific association. The students must understand that they may apply similar principles to every community association, but not the specifics of its governance. As this is the first lesson of the course, you should ensure the students understand these basic concepts. Remember that the course is designed for the fundamental knowledge needed to manage a community association. While you are not encouraged to drag out this lesson, it is important that you not rush through the material. The time frame established should provide adequate time to present the information at a comfortable pace.

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Leader Guide


Legal Basis for Community Associations Materials Needed 

LCD projector



Remote advancer



Flip chart



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Leader Guide

Overview Introduce the lesson Say 

The topic of this lesson is the legal basis of community associations and the principles under which community associations exist.

Overview the session Say We will discuss: 

The characteristics, purposes, and different types of community associations.



Various laws and legal documents which affect community associations.



The different types of resolutions that a community association may adopt.


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Leader Guide


Go through the Lesson 1 learning objectives with the class.

Slide 11

Lesson 1: Legal Basis for Community Associations Session Overview Learning Objectives • • • • • •

Define a community association. Describe the purpose of a community association. Identify the types of community associations. Identify federal laws that affect community associations. Identify state statutes that affect community associations. Understand governing documents of community associations and their hierarchy of authority. 11

Point out the Key Terms on PAGE 13 in the Participant Workbook. These words are defined within the lesson on the specified page.


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Leader Guide

Key Terms: • • • • • • • • • • • • • •

Page 13

Articles of incorporation Bylaws CC&Rs (Covenants, Conditions, and Restrictions) Community association Condominium Cooperative Declaration Equal Employment Opportunity Commission (EEOC) Fair Debt Collection Practices Act (FDCPA) Fair Housing Act Fair Labor and Standards Act (FSLA) Family and Medical Leave Act (FMLA) Federal Communications Commission (FCC) Telecommunications Act of 1996 Federal Insurance Contributions Act (FICA)

• • • • • • • • • • • • • • • • •

Governing documents Indemnification Lien Master deed Master association Mixed use development Occupancy agreement Occupational Safety and Health Act (OSHA) Planned community Proprietary lease Public offering statement Resolution Soldiers’ and Sailors’ Civil Relief Act of 1940 (SSCRA) Statute Umbrella association U. S. Bankruptcy Code 55 and older community

Community associations derive their basic legal authority for their existence, activities, and actions from state statutes (laws) and certain legal documents. In order to effectively manage a community association and inform and advise its owners, a manager must: •

Understand the legal nature of the community association(s) he or she manages, as well as the scope and limits of its authority.

•

Recognize when to consult with the community’s attorney concerning the interpretation of statutes and documents.

This lesson explains:

Page 24

•

What a community association is

•

The state statutes that enable a community association to operate

•

The legal documents that enable a community association to govern its member owners


Leader Guide


Defining a Community Association Say Community associations have three characteristics. 1. Mandatory membership Emphasize the mandatory nature of each characteristic and note that individual owners cannot decide whether or not to be a member. Note also that membership is automatic and occurs at the time of closing/settlement. 2. Mutually binding documents. 3. Lien-based assessments.

Slide 12 Characteristics of a Community Association • Mandatory membership • Mutually binding documents • Lien-based assessments

12

Discuss with the class the difference between voluntary membership “dues” and mandatory lien-based assessments.


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Page 15

Leader Guide

What You Will Learn After completing this lesson, you should be able to explain and understand the: • Definition of a community association • Types of community associations • Purpose of a community association • Three types of residential community associations • Master or umbrella association and mixed use development • Sources of legal obligations for a community association • Federal statutes for community associations • General, specific, and uniform state statutes for community associations • Purpose of governing documents • General hierarchy of authority for governing documents • Recorded map, plat, or plan • Declaration • Covenants, Conditions, and Restrictions (CC&Rs) • Proprietary lease or occupancy agreement • Articles of incorporation • Bylaws • Resolutions • Public offering statement In this first section of the lesson, we will discuss the: • Definition of a community association • Purpose of a community association • Types of residential community associations

Definition of a Community Association A community association is a legal entity in which the owners enjoy the protection, enhancement, maintenance and preservation of their homes and property. A community association has three defining characteristics: 1. Membership in the community association is mandatory and automatic for all owners. This is unlike other associations whose membership is voluntary. 2. Certain association governing documents bind the owner and the association to each other through mandated actions. These “mutually binding documents” also create the automatic lien which provides for severe consequences if the owner fails to pay his or her assessments and other charges. 3. Mandatory lien-based assessments (maintenance fees) are levied on each owner in order to operate and maintain the community association.

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Leader Guide


Purpose of a Community Association Say The community association has several purposes. One of the most important, yet often forgotten purposes of a community association is the sense and spirit of community in dealing with its members, the community in general, and with the greater surrounding community. (Focus on the positive aspects of associations.) Examples to cite:  Provide social functions—holiday events 

Provide member programs—aerobics or card games



Provide educational programs—swim lessons



Provide help to the greater community—recycling program

Slide 13 Purpose of a Community Association

Business

Community

Government

Ask students to name other examples of the association providing the community aspects.


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Leader Guide

Purpose of a Community Association Say A second purpose of a community association is to operate as a business. This involves taking care of the physical aspects of the community to protect every owner’s financial investment and to make sure the association remains fiscally sound. Examples to cite:  Provide care, maintenance, and upkeep to the buildings and grounds 

Provide adequate income to operate the association



Provide sound financial planning for future

Ask students to name other examples of how the association fulfills the role of a business.

Say A third purpose of a community association is to govern its members. It must make and enforce rules and regulations and enforce the governing documents that protect all members and enhance the overall community. Examples to cite:  Protect the common property—clubhouse use rules 

Protect the members—speed limits in the parking areas



Protect the overall value—exterior appearances

Ask students to name other examples of how the association acts as a government.

Transition to Types of Community Associations

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Leader Guide

Page 17


A lien is a legal claim by one party (community association) on the property of another (delinquent owner) to obtain the payment of a debt or the satisfaction of an obligation. Placing a lien on an owner’s property protects the community association’s interests. It encourages payment of the debt. Among other consequences of a lien, the owner cannot sell or transfer the unit without settling the debt. The recording of a lien against an owner’s unit must be authorized by your community association’s applicable statutes or governing documents. Most statutes enabling the establishment of a community association or governing documents require that assessment liens be subordinate to any mortgages or government claims—such as taxes or assessments—against an owner’s property. Subordinate means that these other claims would be satisfied before that of the association’s assessment lien. In most states and governing documents, the recording of the declaration/CC&Rs/master deed constitutes an automatic, prior-recorded assessment lien against the unit owner’s interests. Some state statutes have authorized a “super lien” or community asset protection lien. It provides a specified (usually up to six-months) priority for the community over the lien of a first mortgage holder, which means that if the lender forecloses, it must pay the association up to the specified period of delinquent assessments owed by the foreclosed owner. When an association has an automatic lien, it may not be necessary to file the lien of record in order to pursue collection. However, having the association’s attorney manually file the lien provides public notice of the debt and is usually required before foreclosing on the home. Your attorney can handle the recording of any liens against the title to a unit in the land records. The form used varies by state.

Purpose of a Community Association The primary purpose of a community association is to provide for the community, business, and governance aspects of the association. This is achieved by administering, maintaining, and enhancing a residential real estate development, and through the establishment of a system of property rights, binding covenants and restrictions, and rules and regulations. As you work through this class, you will recognize that a community association combines the characteristics and activities of a local government, a business, and a community.


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Leader Guide

Types of Community Associations When describing the types of community associations throughout this section, use the graphic examples of the associations to help demonstrate the differences.

Slide 14 Types of Community Associations • Planned Community • Condominium • Cooperative

14

Say: There are three types of community associations, based upon how the homes or units and the common areas are owned, and not the architectural style. The type of community association cannot be determined according to its architectural style or appearance. 1. Planned community. In a planned community:  The owner owns the lot and/or unit. 

The association owns the common areas.


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Leader Guide


Types of Community Associations Slide 15 Types of Community Associations: Planned Community

15

Say 2. Condominium. In a condominium:  The owner owns the unit. 

The owner has an undivided interest in the common areas.

Slide 16 Types of Community Associations: Condominium “A”

16


Page 31


Page 19

Leader Guide

Types of Community Associations There are three basic types of residential community associations: 1. Planned Community—The National Conference of Commissioners on Uniform State Laws uses the term “planned community” to refer to the most common type of community association. In a planned community: • An owner owns his or her lot and/or living unit • The community owns any common areas, such as tennis courts and roads for the use and benefit of the lot owners Other names for planned communities include— • Homeowner Association (HOA) • Owner Association • Townhouse Association • Property Owners Association (POA) • Planned Unit Development (PUD) 2. Condominium—In a condominium, an individual owns: • His or her living unit, and • An undivided interest in the common elements of the community Each owner owns a percentage of the common elements—which consist of everything except the living units, for example, a pool or lobby. The community association itself owns no real estate as an association. 3. Cooperative—In a cooperative, an individual: • Owns stock or membership in the cooperative • Holds a proprietary lease or occupancy agreement for his or her living unit A proprietary lease or occupancy agreement defines the member or stockholder’s rights and obligations in relation to the living unit. For most cooperatives, the community association owns all of the real estate as a not-for profit corporation. However, there are a few cooperatives set up as for-profit entities. Notice how an owner in a cooperative has two legal relationships—one as someone who shares in ownership of the corporation and one as someone who holds a lease for a living unit. Another name for a cooperative is a stock cooperative. The three basic types of residential community associations—planned communities, condominiums, and cooperatives—focus on ownership instead of architectural style. It is important not to define the types of community associations by appearance or the name of the association, as there’s always an exception.

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Leader Guide


Types of Community Associations, continued Say A condominium can take almost any architectural style, not just the high-rise style previously shown. Emphasize the following:  The association does not own the common areas; all owners, as a common group, own everything except the units. 

The unit and its assigned undivided interest cannot be separated. For example, the plot of land in front of a condo unit belongs to all the owners, so the unit owner cannot landscape the area or enclose it.

Slide 17 Types of Community Associations: Condominium “B”

17



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Leader Guide

Types of Community Associations, continued Say 3. Cooperative. In a cooperative:  The owner owns stock or membership in the cooperative corporation. 

The owner has a lease or occupancy agreement for the unit.



The association (corporation) owns the building and the units.

Emphasize that in a cooperative, the association owns all the property including the common areas, and that the owners do not own any property or units.

Slide 18 Types of Community Associations: Cooperative

18


Page 34


Leader Guide


Types of Community Associations, continued Use your flip chart to recreate the table below. This exercise will help the class better understand the relationship between type of association and ownership. Have the students respond to questions such as, “In a planned community, who owns the common elements?”

Type

Association Owns

Unit Owner Owns

Planned Community (PUD) Common

X

Unit

X

Condominium Common

X (Undivided)

Unit

X

Cooperative Common

X

Unit

X


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Leader Guide

Types of Community Associations, continued Say There are many forms of associations – including master or umbrella associations, mixed-use developments and “55 and older” communities.

Slide 19 Other Types of Communities • Master (Umbrella) Association – More than one residential community association • Mixed-Use Development – Mixture of residential and commercial and/or industrial use grouped together • “55 and Older” Communities – Must have one person who is 55 years of age or older living in at least 80% of its occupied units

19

Describe “55 and older” communities and their incredible growth in recent years. Say: •

Page 36

Technically, there’s a difference between “active adult” and “55 and older” communities. “Active adult” may mean just a lifestyle, and not a community legally governed by the Fair Housing Act.


Leader Guide

Page 21


These three types of residential community associations can exist by themselves or they can be grouped in clusters called: • Master or Umbrella Associations—A master or umbrella association consists of more than one residential community association. • Mixed-Use Developments—A mixed-use development usually consists of a mixture of residential and commercial and/or industrial uses grouped together. Their marketing slogan is often “live, work, play.” • “55 and Older” Communities – Must have one person who is 55 years of age or older living in at least 80% of its occupied units One of the fastest growing segments of our society today is active adults. The National Association of Home Builders estimates that by 2014 there will be 85 million people who are 55 years of age or older. Official “55 and older communities” must have one person who is 55 years of age or older living in at least 80% of its occupied units. The community must be designated “55 and older” to qualify as this type of housing that legally prohibits children and limits occupancy to a certain age span. The designation process involves submitting applications and obtaining approval before any enforcement of the ages of residents commences. Approval from the Department of Housing and Urban Development (HUD) must be received before construction begins. On the other hand, an “active adult” community may or may not be legally designated “55 and older.” When working with a developer on the creation of a community, a manager should make sure the developer understands the difference and obtains the appropriate approvals if he decides to pursue the “55 and over” designation. For the purpose of this course, however, we’ll use the terms interchangeably. As we age, we look for a place to live that is located in an area that will allow us to be involved with our children and grandchildren but will also give us independence. In years past, retirement facilities were designed to provide safety and care. Today, the baby boomers, the most financially stable group in our society, are very concerned with health and fitness and are showing that getting older does not mean acting old. Many boomers continue to work during their retirement. According to the 2005 Merrill Lynch New Retirement Survey, 71% of the adults surveyed plan to work after what has been traditionally known as retirement age. These adults believe continuing to work and staying active contributes to their mental and physical well being. Developers have observed these statistics and are building more active adult communities to cater to the lifestyles of these individuals. These communities allow residents to stay near their hometowns and families and develop new friendships and activities. These communities are springing up all over the country, not just in Florida and Arizona where they were previously predominately located. While not all of these communities are associations, many are being built as condominiums and planned developments. They are not a separate type of association, just a variation on the usual styles. Onsite activities may include golf, hiking trails, restaurants, fitness centers, art and/or craft studios, salons, bridge, paddleball, dancing, support groups for singles, transportation, sporting activities, entertainment, and many more. These communities are serviceoriented and focused on amenities.


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Module 1: Legal Basis Page 22

Leader Guide

Active adult communities require a much higher level of service than those of the traditional retirement communities. They provide services geared more toward personalized support and quicker responses. These services range from transportation to shopping and medical appointments to trips to entertainment venues and even multi-day excursions away from the community. Residents usually demand a quicker response than residents in traditional housing communities. At the same time, they are highly cost conscious and demand frugality and penny-pinching while providing many services and amenities. Managers of active adult communities must be able to provide the specialized expertise far beyond that which is expected of a typical portfolio or onsite manager and may require additional training. Often, the management team is on site, and consists of a full staff ranging from the onsite manager and an activities director to the facilities maintenance personnel and support staff for all activities. Every year the National Association of Home Builders sponsors an International Builders’ Show catering to active adult community developers. This trade show attracts more than 100,000 guests each year, and features many events and programs that are focused on the 50-plus housing industry. We in the association management industry must keep up with the growing trends of these active adult communities and this is an excellent venue in which to learn about best practices and new products and services.


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Leader Guide


Introduction to Federal Laws Say: There are many sources of legal obligations for community associations—including federal laws, state statutes and regulations, lender requirements, standards set by governing bodies, and the association’s own governing documents.

Slide 20 Sources of Legal Obligation for Community Associations • • • •

Federal, state, and local statutes, regulations, and case law Legal documents unique to the community association – called “Governing Documents” Lender requirements Standards set by professional bodies – for example, auditing standards set by the American Institute of Certified Public Accountants (AICPA)

20

Page 23

Sources of Legal Obligations for a Community Association A community association derives its legal obligations from several sources: • Federal, state, and local statutes, regulations, and case law (court decisions) • Legal documents unique to the community association that bind the association and its owners • Lender requirements—for example, requirements set by secondary mortgage institutions (FHA, Fannie Mae, Freddie Mac, etc.) • Standards set by professional bodies—for example, auditing standards set by the American Institute of Certified Public Accountants (AICPA) We will discuss these various sources of legal obligations throughout the class as we consider different areas of community association management. In the remainder of this lesson, we will focus on the three types of legal sources that define the basic legal authority for the existence, activities, and actions of a community association—federal laws, state statutes and governing documents.


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Leader Guide

Introduction to Federal Laws, continued Briefly overview the major federal laws that affect community associations with the class.

Slide 21 Types of Federal Laws Applying to Community Associations • • • • • • • • • •

Equal Employment Opportunity Commission (EEOC) Fair Debt Collection Practices Act (FDCPA) Fair Housing Act Fair Labor and Standards Act (FSLA) Family and Medical Leave Act (FMLA) Federal Communications Commission (FCC) / The Telecommunications Act of 1996 Federal Insurance Contributions Act (FICA) Occupational Safety and Health Act (OSHA) Soldiers’ and Sailors’ Civil Relief Act of 1940 (SSCRA) U. S. Bankruptcy Code 21

IMPORTANT NOTE Failure to comply with these laws may result in significant penalties against the association and your company, especially if the onsite staff is the management company’s employees.

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Leader Guide

Page 25


Introduction to Federal Laws Federal laws impact community associations. Many states have additional laws that may add another layer of compliance requirements. Be sure to check with your Human Resource representative and/or legal counsel to ensure that your association(s) fully comply with all federal, state and local mandates. In this lesson, we will summarize the provisions most relevant to community association operations. Since laws are continually changed or tweaked, be sure to follow the link provided for the most updated information on each law. Failure to comply with these regulations may result in significant penalties against the association and your company, especially if the onsite staff is the management company’s employees.

Equal Employment Opportunity Commission (EEOC) (www.eeoc.gov) The federal government prohibits discrimination against otherwise qualified people in hiring, promotion, dismissal, compensation, and working conditions based on specific personal characteristics including— • Race and ethnicity • Color • National origin • Age • Gender • Religion • Pregnancy • Disability

Fair Debt Collection Practices Act (FDCPA) (www.ftc.com) The purpose of FDCPA is to protect debtors from unscrupulous debt collectors and to impose a consistent and fair method to collect debts. See Module 2 in this manual for more information on this Act.

Fair Labor and Standards Act (FSLA) (www.dol.gov) FLSA dictates standards for the basic minimum wage and overtime pay. It affects most private and public employment. It requires employers to pay covered employees who are not otherwise exempt at least the federal minimum wage and overtime pay of one-and-one-half-times the regular rate of pay. Some states have higher basic minimum wage amounts. You should check with your HR representative or HR attorney to ensure that you comply with all requirements.

Family and Medical Leave Act (FMLA) (www.dol.gov) Administered by the Wage and Hour Division of the Department of Labor, FMLA requires employers of 50 or more employees to provide up to 12 weeks of unpaid, job-protected leave to eligible employees for the birth or adoption of a child or for the serious illness of the employee or a spouse, child or parent.


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Leader Guide

Federal Insurance Contributions Act (FICA) (www.ssa.gov) This act requires employers and employees to make matching contributions to Social Security. The employer must withhold the employee’s share of the tax from his or her wages or salary and pay it timely to the federal government. Big penalties await those companies that do not submit their employees’ withholding within the prescribed time! The Department of Labor also clarifies the difference between an employee and a contractor. As long as the management company controls when the worker is on site, what work the worker must do and when, and provides tools to perform the work, the association must treat the worker as an employee. See www.dol.gov for additional criteria and discussion on the employee vs. contractor issue.

Occupational Safety and Health Act (OSHA) (www.osha.gov) OSHA’s mission is to “prevent injuries and protect the health of America's workers by ensuring safe and healthful workplaces.” If your association has employees, it must comply with all OSHA requirements. When the association contracts with a company whose employees will be working on the property, the contract should contain a provision requiring the contractor to comply with all provisions of OSHA. Some OSHA requirements include: • • • • •

Specific working conditions Specialized training Safety equipment Posting of warnings related to products and work site conditions Reporting of accidents

If you don’t think and talk safety and health, your employees will not, either.

Soldiers’ and Sailors’ Civil Relief Act of 1940 (SSCRA) http://www.defense.gov/specials/relief_act_revision/ Of particular interest to community associations, SSCRA impacts American forces on active duty by requiring the delay of all civil court actions, such as bankruptcy and foreclosure, until the service member returns from active duty. SSCRA also protects active service members’ dependents from being evicted if the rent does not exceed $1,200 per month by requiring the landlord to obtain a court order authorizing eviction.

U.S. Bankruptcy Code http://www.uscourts.gov/FederalCourts/Bankruptcy.aspx The purpose of bankruptcy laws is to help honest people and businesses find a way to pay their debt or get a fresh start. Bankruptcy laws help people who can no longer pay their creditors start anew – by liquidating assets to pay their debts or by creating a repayment plan. Among many other corrections and revisions, and with the strong lobbying efforts of CAI staff and volunteers, the Bankruptcy Prevention and Consumer Protection Act passed in 2005 contained a small provision benefitting community associations. It clarified that associations have the authority to collect assessments that come due after the date the homeowner filed for bankruptcy.

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Leader Guide Page 27

Module 1: Legal Basis Federal Communications Commission (FCC) http://www.fcc.gov/mb/facts/otard.html The Telecommunications Act of 1996 As charged by Congress, in 1996 the FCC adopted the Over-the-Air Reception Devices (“OTARD”) Rule concerning restrictions on viewers' ability to view programming from direct broadcast satellites, wireless cable and television broadcast stations. It overrides a community association’s deed restriction that bans satellite dishes and antennae from property that is exclusively used, controlled or owned by the resident, including tenants. The rule applies to video antennas including direct-to- home satellite dishes that are less than one meter (39.37") in diameter (or of any size in Alaska), TV antennas, and wireless cable antennas. The rule prohibits most restrictions that: 1) unreasonably delay or prevent installation, maintenance or use; 2) unreasonably increase the cost of installation, maintenance or use; or 3) make it impossible to receive an acceptable quality signal The rule authorizes community associations to impose rules that do not affect the installation, maintenance or use of a satellite dish or antenna, such as preferred placement. It also permits community associations to prohibit satellite dishes and antenna from common areas such as exterior walls, limited common area balconies, patios and roofs and to ban installations that may affect residents’ safety and for historic preservation.

Fair Housing Act http://www.hud.gov/offices/fheo/FHLaws/index.cfm Title VIII of the Civil Rights Act of 1968 (Fair Housing Act) prohibits discrimination in the sale, rental, financing, insuring and other housing related services of dwellings based on race, color, religion, or national origin. The original law was broadened in 1974 to add gender. In 1988, Congress further amended the law to protect people with disabilities (handicap) and familial status. Children under the age of 18 and women who are pregnant are also protected under familial status. The Act also includes design and construction accessibility provisions for multifamily dwellings (4 units or more) with first occupancy on or after March 13, 1991. Many states and local governments have adopted their own version of a Fair Housing Act that expands the protected classes to sexual orientation, age and sources of income, so every manager should be aware of all laws relating to discrimination in housing.


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Leader Guide

Introduction to Federal Laws, continued Briefly summarize the significant provisions of the Fair Housing Act.

Slide 22 Fair Housing Act • “55 and Older” Communities • Reasonable Accommodations/ Modifications • Maintenance • Pets/Service Animals • Disruptive Residents

22


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CAI's policy on fair housing states that it "supports the right of all individuals to be free from illegal discrimination on the basis of race, creed, color, sex, national origin, familial status or handicap." CAI says it will "progressively pursue fair and reasonable interpretations and administration of, or changes to, Fair Housing Acts and related legislation and regulations." Following is a brief summary of the significant provisions of the Act that impact community associations. 1. “55 and Older” Communities “55 and older” communities must have one person who is 55 years of age or older living in at least 80% of its occupied units. The Act requires that the community advertise accordingly and publish and follow policies and procedures that demonstrate an intent to be housing for persons 55 and older (rather than just a marketing term “active adults”). If the community is established as a 55 and over community, it is not violating the Fair Housing Act by excluding children. 2. Reasonable Accommodations/Modifications In 1988, the Fair Housing Act created a new class of protected individuals – those with disabilities. The Act’s intent was to allow those with disabilities to have an equal opportunity to use and enjoy their home. In many situations, that may mean that the community association must allow variances to rules, policies and services so that the person with the disability can use and enjoy his home and common facilities. Examples of such accommodations/modifications could be: 1) Reassigning an undeeded parking space so it is closer to the home of the resident with a disability 2) Authorizing a disabled resident to construct a ramp from the parking area to the sidewalk There are three considerations when determining if a request for a reasonable accommodation is valid: 1) Is the individual’s disability covered under the Fair Housing Act? In general, the Act addresses both mental and physical disabilities which substantially limit a major life function. 2) Is the requested accommodation reasonable? The Act does not intend to impose an undue burden on the association or require major alterations to the unit. 3) Is the requested accommodation necessary for the individual to use or enjoy his/her home? There must be a connection between the requested accommodation and the resident’s disability. The requested accommodation must improve the resident’s quality of life of which the disability deprived him/her.


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Page 29 Who pays for the modification? Under the Fair Housing Act, the resident would pay for the modification if the housing provider desires. The association may require him/her to pay to remove the modification when s/he moves out of the community. If the association offers public access (other than just to residents and their guests) to an amenity such as a golf course, retail stores or restaurants, then the American with Disabilities Act (ADA) would apply. The major difference between the Fair Housing Act and ADA is that, under ADA, the association would bear the cost of the accommodation, while under the Fair Housing Act the person with the disability would pay for the modifications. 3. Maintenance Under the Fair Housing Act, a person with a disability could sue the association for failing to maintain physical components of the community needed by the resident. For example, a consistently inoperable elevator or sidewalks full of snow for an unreasonable length of time can impede a person with a disability related to mobility. 4. Pets/Service Animals There’s no dispute that the Act requires community associations to approve the request of a person with a disability for a trained seeing-eye or signal dog when s/he can provide verification of their disability and need of the animal. Questions arise, however, when a resident in a community that prohibits pets requests approval for a companion pet to help him cope with a proclaimed but unproven mental disability. There is no distinction under the Act between those with physical disabilities and those with mental disabilities. Very often, the animals which assist these persons with their disabilities are called a variety of names including service, assistance, companion and therapeutic animals. In the end, if the person meets the definition of disability and can show a need for the animal, the animal should be allowed and not considered a pet. Many see these animals as auxiliary aids, much like a wheelchair. If an owner submits a request for approval of a companion dog in an association that prohibits pets or limits their size, weight or type, the board should treat the request with care and due diligence. Grant a temporary waiver while verification of the disability and need of the animal is sought. If it is determined that the request is valid under the Fair Housing Act, with the involvement of legal counsel, develop a special resolution that details the specific circumstances under which the board approved the pet so that the pet ban or limitation is still applicable to all other residents. 5. Disruptive Residents A person with a mental disability who behaves in a disruptive or threatening manner is still entitled to reasonable accommodations under the Fair Housing Act. Even if the resident presents a health or safety threat, the association may have to go to court for approval to have him/her removed from the community.

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Module 1: Legal Basis Potential Fair Housing Complaints 1. Associations may not discriminate against children with regard to recreational facilities—unless it is a 55 and older community. That means you cannot designate one pool for children and one pool for adults, or limit times in which children may swim or use the tennis courts. Additionally, associations cannot prohibit babies under 3 or children wearing swim diapers from using the pool, or prohibit children from playing in the common area where adults are allowed to do so. 2. If a person claims to have a disability under the Fair Housing Act but does not appear to be disabled, do not dismiss his/her request for a reasonable accommodation/modification. Every request should be seriously considered and reviewed in a timely manner. 3. The Fair Housing Act makes it illegal to direct abusive, foul, threatening or intimidating language or behavior toward tenants, residents or potential home buyers because of their membership in a federally protected class. Board members must realize the potential impact of their words spoken in the heat of the moment, and always think before they speak in their role as a leader in their community. 4. One neighbor harasses another neighbor with racial and sexual epithets and threats of personal injury. The offended neighbor asks the association to intercede, but the board refuses, saying that disagreements between neighbors are not within the association’s realm of responsibility. On the contrary, in Reeves v. Carrollsburg Condominium Unit Owners Association, a Washington, DC, case, the appeals court ruled that the association’s failure to intervene created a "hostile housing environment" for the resident being harassed and threatened. The appeals court found that the association’s bylaws authorized the board to address illegal behavior but it failed to do so. However, similar situations have occurred in other jurisdictions in which the court found just the opposite – that the association was not responsible. This is an evolving issue with no clear, consistent direction from the courts. If a similar circumstance arises in an association you manage, contact the association’s legal counsel immediately for a written opinion on how to respond appropriately. However, in similar circumstances, other courts have uniformly agreed that the association is not responsible for the behavior of one resident towards another. 5. Many boards and managers believe it is okay to enforce deed restriction violations only when a resident complains about a situation or a neighbor’s behavior or action. Scott Carpenter, a CCAL (College of Community Association Lawyers) member in Tempe, Arizona, disagrees. "Do all of your enforcement off of routine, objective and scheduled site visits and not off of individual complaints because you don't know another homeowner's motivation”, says Carpenter. “That way, if someone says that he or she is being targeted for enforcement because of race, the board can respond with evidence of transparent, objective policies.” 6. In most situations, if authorized in the governing documents, a board may approve a resolution limiting the number of occupants per bedroom but cannot limit the number of children.


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Page 31 Implications for Community Associations According to Richard S. Ekimoto, in Journal of Community Association Law, Vol. 4, No. 2, 2001 “An Overview of Reasonable Accommodations Under the Federal Fair Housing Act,” “It is vitally important for community associations to comply with the fair housing laws. Discrimination can have a devastating impact on disabled individuals. Moreover, violation of the Fair Housing Act can result in substantial penalties, damages, and attorneys' fees. Community associations should take a balanced approach in their consideration of requests for accommodations. An association's concern that a non-disabled individual is misusing reasonable accommodation to get preferential treatment should not outweigh its concern that disabled individuals be afforded equal enjoyment of their dwellings.” “Sometimes it's more important to resolve a problem amicably than to stand firm, especially when the disagreement has the potential to escalate into a discrimination allegation.” “Be open to finding a resolution that protects the association's interest and also addresses the individual complaint. You'll probably be better off in the long run." As written in the Common Ground™, September/October 2009 article, “Discriminatory Behavior”, by Anna Stolley Persky, “The simple solution is to have lawyers look over all association rules. After all, it's easier to amend the rules than to go through a discrimination complaint battle, lawyers say. Even better, let the attorneys review proposed regulations before they are enacted.”


Transition to State Statutes that Affect Community Associations

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State Statutes That Affect Community Associations Emphasize each of the following. Say: 

Each state's statutes are different and the student is strongly encouraged to obtain a copy of their respective state's laws governing community associations.



The laws governing community associations are complex and the students should always seek competent legal advice from an attorney who is experienced with community association law.

There are three types of state laws which may affect community associations: 1. General state statutes: Apply to community associations as well as other organizations, such as the not-for-profit corporation statute.

Slide 23 Types of State Statutes Applying to Community Associations • General State Statutes – Applies to all types of associations, including community associations • For example, regular corporate or not-for-profit corporate statutes

23


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State Statutes That Affect Community Associations Say 2. Specific state statutes: Apply only to community associations such as the state condominium act. Remind the students that statutes vary greatly from state to state. Many are quite complex while others are not. Note also that all states have a condominium act, but not everyone has a statute for planned communities or cooperatives.

Slide 24


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Introduction to State Statutes Statutes are laws written and adopted by legislatures or administrative agencies. In this section, we will discuss three types of state statutes that apply to community associations: • General state statutes • Specific state statutes • Uniform state statutes

General State Statutes A general state statute is one that applies to community associations, as well as to other types of organizations. The general state statutes that most often apply to community associations are the regular corporate or the not-for-profit corporate statutes. Most states have these types of laws. Community associations are eligible for incorporation unless they are specifically excluded by the statute itself.

Specific State Statutes A specific state statute is one that applies only to one or more types of community associations. For example, all states have a condominium act which provides for the establishment and operation of condominiums as legal entities. These acts vary in terms of their complexity. The simplest ones just allow for the creation of condominiums, while others go into great detail dictating what the condominium association must do and not do for its members, including the specific process for enforcing the governing documents. The more complex laws may: • Regulate the development and sale of condominiums • Provide protection for purchasers, owners, or tenants • Regulate the operation of condominiums (for example—open meeting requirements) Not all states have statutes that provide for the establishment of planned communities or cooperatives. If you are managing one of these communities, check to find out if your state has a specific statute that applies to it.



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State Statutes That Affect Community Associations, continued Say 3. Uniform state statutes: Created to standardize laws in various states that affect community associations. Note that all state uniform acts are not exactly alike. Some may be called a uniform act, yet are modified from the recommended uniform provisions and are different from other states' uniform acts. 27+ states currently have some version of the UCIOA.

Slide 25 Types of State Statutes Applying to Community Associations, continued • Uniform State Statutes – National Conference of Commissioners on Uniform State Laws draft generic, content-specific wording for topical issues to encourage uniformity among the states • For more information, visit www.nccusl.org

25

Transition to Governing Documents

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A specific state statute for a certain type of community association takes precedence over any general statute that applies to the community association. Furthermore, a specific state statute takes precedence over a community association’s governing documents unless it is written to allow for flexibility. For example, the statute might say, “…unless the documents provide otherwise.” Specific state statutes can also be amended over time. In addition, their provisions can be retroactive (apply to past activities), as well as prospective (apply to the future). As community managers, you should stay informed about any specific state statutes that apply to your type of community association— either on your own or through CAI and/or your community’s attorney. Any community association that is incorporated must be careful to follow the statutory requirements under which it is incorporated.

Uniform State Statutes The National Conference of Commissioners on Uniform State Laws has attempted to standardize specific state statutes that apply to community associations. To date, the Conference has developed a: • Uniform Condominium Act • Uniform Planned Communities Act • Model Real Estate Cooperative Act • Uniform Common Interest Ownership Act More than half of the states in this country have adopted some form of these statutes.



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Governing Documents of Community Associations Say The purpose of the governing documents of a community association is to provide for the legal structure and operation of that specific community.

Slide 26


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Governing Documents of Community Associations, continued Say There is a general hierarchy of authority of the governing documents in a community association.

Slide 27

Emphasize that each community type and each state may have different requirements for a specific hierarchy of authority of the documents.



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Introduction to Governing Documents The purpose of a community association’s governing documents is to provide for the legal structure and operation of the community. The documents: • Define the rights and obligations of both the community association and its owners • Create a binding relationship between each owner and the community association • Establish the mechanisms for governing and funding the community association’s operations, including the establishment of the automatic lien • Set forth rules and restrictions for the: o Protection of both owners and the community o Enhancement of property values o Promotion of harmonious living In this section of the lesson, we will discuss the: • General hierarchy of authority for governing documents • Specific governing documents for community associations

General Hierarchy of Authority for Governing Documents The general hierarchy of authority for governing documents is important to know because each document addresses different issues involved in operating a community association. However, on occasion, there may be conflicting information in these documents, so community managers must know which document prevails. For example, the declaration may state that there will be five board members, while the bylaws may call for seven board members. The document that is higher in the hierarchy would prevail. For operating a community association, the general hierarchy of authority among governing documents consists of: • • • • • •

Recorded map, plat, or plan (to show the precise location of units, lots, and/or common area) Declaration, CC&Rs, master deed Proprietary lease or occupancy agreement Articles of Incorporation (if incorporated) Bylaws Board resolutions – Board resolutions cannot conflict with documents above it in the hierarchy.

Each of these documents is discussed in some detail in the pages that follow. The higher a document’s place in the hierarchy, the greater its legal weight in a court of law. Documents lower in the hierarchy cannot conflict with or change the terms of those above them. Whenever there is a conflict, the higher document will prevail. For example, if the declaration requires the imposition of a $5 late fee, the board cannot vote to raise the amount to $25. Only the owners can amend a clearly-stated provision in the governing documents other than the rules and regulations, unless otherwise provided in that document.

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Governing Documents of Community Associations, continued Say The general hierarchy is:

• Recorded map, plat, or plan to show the precise location of units, lots, and/or common area.

Slide 28 Recorded Map, Plat, or Plan • Recorded before first parcel sold/title transferred • Plat sets development’s boundaries

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Governing Documents of Community Associations, continued Say •

Declaration or CC&Rs includes all aspects affecting the ownership of the units, lots, and/or common area, such as the right to lease the property, mortgage it, build on it, and occupy it. It also regulates use of the common areas and behavior of the residents. Note that this document is typically called the Declaration of Condominium, Master Deed or Condominium Declaration. In a planned community, it is typically called the Declaration of Covenants, Conditions, and Restrictions (CC&Rs). In a cooperative, it is typically called the proprietary lease or occupancy agreement.

•

Proprietary lease or occupancy agreement is only for a cooperative association, and includes all rights and obligations of the member in relation to the unit.

Slide 29 Declaration, CC&Rs, Proprietary Lease or Occupancy Agreement • In community developments, deed restrictions are recorded in one document instead of the deed/title for each lot or unit • Condominium = declaration/master deed • Planned Community = declaration of covenants, conditions, and restrictions (CC&Rs) • Cooperative = proprietary lease/occupancy agreement 29

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Recorded Map, Plat, or Plan Some form of map is an essential document for all three types of community associations. A map or plat or plan is recorded in the County or Parish (or similar jurisdiction) Recorder’s office before any lots or units shown on it are sold. The purpose is to show the precise location of each lot or unit, as well as the common areas. The format and content will differ according to local requirements. A map or plat or plan may help define an owner’s or a community’s title to property. On an operational level, the map can help clarify: • Who is responsible for maintaining a particular piece of property • Whether a property improvement is properly located Some states require cooperatives to submit a legal description of the land involved and an architectural drawing.

Declaration, CC&Rs or Master Deed An understanding of the declaration, Covenants, Conditions, & Restrictions (CC&Rs) and master deed requires comprehension of the rights of ownership. The terms CC&Rs, master deed and declaration are sometimes used interchangeably. Under Anglo-American common law, the ownership of land has been characterized as a “bundle” of rights. In the absence of any restrictions, the landowner traditionally has the full bundle of rights regarding the use of the property. (For example—right to lease the property, build on it, mortgage it, and occupy it—or do whatever else with it s/he wanted to.) When people buy a parcel of real estate, the bundle of rights is defined or referred to in the deed to the property, as it is in the previous deeds for the same parcel. All deeds should be recorded in the land records to create what is called the “chain of title.” The provisions in the declaration which define or limit the rights of ownership are often called deed covenants or deed restrictions. The legal community speaks of these covenants or restrictions as “running with the land.” That is, they attach and apply to the land, no matter who owns it now or in the future. Instead of inserting all of the same covenants and restrictions into each individual deed in a community association, the developer’s attorney draws up a declaration which he records in the County, Parish or other jurisdiction’s Recorder’s Office before any of the real estate is transferred to a new owner. This means that the declaration is in the chain of title for each piece of real estate. Its terms are binding on the real estate itself, as well as on its original and succeeding purchasers. As a result, the declaration defines the bundle of rights of each owner in the community association.


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More than any other single document, the declaration brings the condominium or the planned community into existence because it spells out the essential elements of ownership. The condominium or planned community comes into existence when the declaration is filed in the office of the local recorder of deeds or registrar of titles. The Declaration, Master Deed or CC&Rs generally: • Defines the portions of the development owned by the individual owners and those owned by the community association—if any • Creates interlocking relationships binding all the owners to one another and to the community association for the purposes of maintaining, governing, and funding the development • Establishes standards, restrictions, and obligations in areas ranging from architectural control to prohibitions on various activities in order to promote harmonious living • Creates the administrative framework for the operation and management of the community association—although many of the specific administrative details are spelled out in the bylaws • Provides the mechanism for financial support of the community association through assessments • Provides for a transition of control of the community association from the developer to the owners

Proprietary Lease or Occupancy Agreement As we said earlier, a proprietary lease or occupancy agreement in a cooperative defines the member or stockholder’s rights and obligations in relation to the living unit. (In a cooperative, this document serves generally the same purpose as the declaration or CC&Rs in other community associations.) The proprietary lease or occupancy agreement: • Identifies the premises that the stockholder is permitted to occupy exclusively • Defines the term of the lease and the rent (sometimes called maintenance) that is payable by the stockholder • Establishes the powers and obligations of the cooperative’s board of directors, including assessment rights • Defines the events which would result in the termination of the proprietary lease


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Articles of incorporation may or may not be required for every community association. Cooperatives must be incorporated because it is the corporation that owns all the property. Condominiums and planned communities may or may not be incorporated either because of state mandate or attorney preference. Note the potential benefits of incorporation: o Limits the liability of the owners for acts of the association. o Entitles the community association to rights granted all corporations, such as borrowing money or obtaining insurance. o May make it easier to deal with contractors, vendors, or utility companies. o Grants the board of directors the same rights as all board members of incorporated entities under state statutes.

Slide 30 Articles of Incorporation • Brings corporation into existence • Cooperatives must incorporate – why? • Other types of communities may incorporate – varies by state • Benefits of incorporating: - Limit liability of individual owners - Right granted all corporations - Easier to deal with utility companies, vendors, etc. - Grants the board the same rights as all board members of incorporated entities under state statutes


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Articles of Incorporation Incorporation may or may not be a legal requirement for a community association. It is essential for cooperatives because the corporation owns all the property. The cooperative comes into existence when its articles of incorporation are recorded or filed. If a community association is incorporated, it is typically as a not-for-profit, or nonprofit, corporation. Stock usually is not issued for incorporated condominiums and planned communities, while stock may be issued to cooperative owners. Condominium associations often are incorporated, depending upon the requirements of applicable state law and attorney preference. In some states, condominium associations do not have to be incorporated because they are protected by a state condominium statute. A community association’s corporate structure is established when a developer’s attorney creates the association’s governing documents. The attorney may file articles of incorporation—sometimes called a corporate charter—with the appropriate state corporation agency. Different states have different names for this agency. The articles of incorporation: • Bring the corporation into existence • Define its basic purposes and powers • Indicate whether stock will be issued • Indicate the number of board members and identify the initial board There are a number of benefits to incorporating a community association. Incorporation: • May help to limit the liability of individual owners for acts of the community association • Entitles the community association to the rights granted to all corporations under state law—this could be useful in areas such as obtaining financing, obtaining insurance, or bringing suit against another party • May make it easier to deal with other parties, such as utility companies or vendors • Grants the board of directors the same rights as all board members of incorporated entities under state statutes


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Bylaws contain formal procedures for the administration and management of the community association, such as board member election, member voting rights, calling and conducting meetings, and duties of the board members.

Slide 31 Bylaws • Bylaws: Formal procedures for administration and management of the governing entity • Examples: - Meeting procedures – including voting rights - Board powers and duties - Indemnification of officers and directors

31



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Governing Documents of Community Associations, continued Say

• Resolutions are used to formally memorialize adopted rules, policies, procedures, or other actions of the board of directors. Slide 32 Resolutions • Resolution – A motion following a set format and formally adopted by the board. • May enact rules and regulations or formalize other board decisions

32

Discuss the purpose of the Public Offering Statement.

Slide 33 Public Offering Statement • Public Offering Statement – Provides association information to first prospective buyers • Required by state statute • Not considered a governing document

33

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Bylaws Bylaws are formally adopted regulations for the administration and management of a community association. Sometimes bylaws are developed as part of the declaration although usually, they are a separate document. While bylaws should be included in the original set of governing documents prepared by the developer’s attorney, they are sometimes overlooked and must be created and adopted by the board after control of the association is turned over to the homeowners. Bylaws address such topics as: • Requirements for membership in the community association • Requirements for membership meetings • Voting rights of member owners • Procedures for electing the board of directors; qualification of directors • Procedures for the board of directors to elect officers (in a very few associations, the association members elect the officers in addition to the board members.) • General powers and duties of the board • Provision for indemnification of officers and directors—except in cases of gross negligence or willful misconduct To indemnify and hold harmless means: • To exempt an individual or entity from responsibility for claims made against the organization and • To reimburse or directly pay for the individual or entity for damages or expenses incurred as a result of such claims

Resolutions Rules and regulations for all three types of community associations are usually established by means of board resolutions. A resolution is a motion that follows a set format and is formally adopted by the board of directors. Resolutions may enact rules and regulations or formalize other types of board decisions.

Public Offering Statement Because it is often accompanied by copies of the governing documents, some people think of the public offering statement itself as a governing document. However, this is a misconception; the public offering statement is not a governing document. Instead, it is simply a disclosure statement that provides information on the community association to the first prospective buyers in a new development. It is also mandated by state statute.


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Class Exercise Allow 20 minutes for this Class Exercise.

Run the Class Exercise. As a large group, have the class decide how to address the following question. Allow 5 minutes for the class to read the scenario and brainstorm responses. “A new owner within the community calls you. She has received a delinquent assessment notice in the mail. She is angry. She did not know her home was in a community association and does not understand why another governmental bureaucracy is bothering her. As the manager, how would you respond?” As for volunteers from the class to share how they would respond to this situation.


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Class Exercise, continued Answers to be considered: •

Explanation of purpose of the association: - Community - Business - Government

•

Focus on positive aspects of community associations

•

Explanation of mandatory membership and assessments

•

Explanation of benefits of the association

•

Explanation of services provided by the association



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Work Group Exercise A new owner within the community calls you. She has received a delinquent assessment notice in the mail. She is angry. She did not know her home was in a community association and does not understand why “another governmental bureaucracy” is bothering her. As the manager, how would you respond?

Answer:

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Summary Say You have learned: • • • • • •

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The fundamental legal concepts of a community association. The purpose of a community association. The different types of community associations. The sources of legal obligations for community associations. The different types of governing documents. How these items all impact you in your role as a community association manager.

Once again, review the Key Terms with the participants.

Key Terms: • • • • • • • • • • • • • •

Articles of incorporation Bylaws CC&Rs (Covenants, Conditions, and Restrictions) Community association Condominium Cooperative Declaration Equal Employment Opportunity Commission (EEOC) Fair Debt Collection Practices Act (FDCPA) Fair Housing Act Fair Labor and Standards Act (FSLA) Family and Medical Leave Act (FMLA) Federal Communications Commission (FCC) Telecommunications Act of 1996 Federal Insurance Contributions Act (FICA)


• • • • • • • • • • • • • • • • •

Governing documents Indemnification Lien Master deed Master association Mixed use development Occupancy agreement Occupational Safety and Health Act (OSHA) Planned community Proprietary lease Public offering statement Resolution Soldiers’ and Sailors’ Civil Relief Act of 1940 (SSCRA) Statute Umbrella association U. S. Bankruptcy Code 55 and older community

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Summary Encourage the class to review the Discussion and Focus Questions to reinforce their learning. Ask the class to briefly complete the Lesson 1 Quiz and go over the answers with them as a class. (The answers are included in your Instructor Guide only.) Allow 10 minutes for this review. Refer participants to the additional resources listed in their Participant Guides. Ask for any other questions or clarification of any item before leaving this session.

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Focus Questions Use the following questions to help you identify and review the core concepts in this lesson. (Hint: Once you look up the answer to a question, you may want to jot down the page number next to the question for future reference.) 1. Define a community association and its three key characteristics. 2. What is the purpose of a community association? 3. Define the three basic types of residential community associations in terms of ownership rights. 4. What sources create legal obligations for community associations? 5. Describe some of the federal laws that affect community associations. 6. Explain the difference between general, specific, and uniform state statutes and give an example of each. 7. What is the purpose of governing documents for a community association? 8. List the basic governing documents for a community association. 9. What is the purpose of a recorded map, plat, or plan in terms of the legal rights and obligations of owners and the community? How does this document affect a community association’s activities? 10. What purpose does a declaration, CC&Rs, or a master deed serve for a condominium, cooperative or planned community? How does this document affect a community association’s activities? 11. What is the purpose of a proprietary lease or occupancy agreement in a cooperative? How does this document affect a cooperative’s activities? 12. What is the purpose of articles of incorporation? What are the benefits to incorporating a community association? 13. What areas of community association activity do bylaws typically address?

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Thought/Discussion Questions Use the following questions to help you apply the information in this lesson to your own situation. 1. Is your community association part of a master or umbrella association—or a mixed use development? 2. Find out which general state statutes apply to your community association. (Hint: Ask your community’s attorney.) 3. Find out which specific state statutes apply to your community association, if any. 4. Find out whether your state uses any uniform statutes for community associations. 5. Look at a copy of any recorded map, plat, or plan for your community association. What can you learn from it? 6. Review your community’s declaration, CC&Rs, or master deed, if it has one. What does it tell you about: • Ownership of different portions of the community association? • Owner-to-owner relationships and community-to-owner relationships? • Administration of the community? • The transition of control of your community association from the developer to the owners? 7. Review your community association’s proprietary lease or occupancy agreement, if it is a cooperative. What does it tell you about the maintenance of the unit? 8. Review your community association’s articles of incorporation, if it is incorporated. What general topics do the articles address? 9. Review your community association’s bylaws. What general topics do the bylaws address?



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Lesson 1 Quiz 1. Each of the following are key characteristics of community associations EXCEPT: a. Mandatory lien-based economic charges or assessments are levied on each owner in order to operate and maintain the community association. b. Membership in the community association is mandatory and automatic for all owners. c. A requirement of community association ownership is attending board meetings. d. Certain documents bind all owners to be governed by the community association. RATIONALE: This is one of the three key characteristics common to all community associations. Members of an association are not legally required to attend board of directors meetings; however, the overall success on the community is dependent upon the members’ involvement in its affairs. 2. True or False. The primary purpose of a community association is to provide for the governance, business, and communal aspects of the association. (True) RATIONALE: Providing for the governance, business, and communal aspects of the association is achieved by administering, maintaining, and enhancing a residential real estate development, and through the establishment of a system of property rights, binding covenants and restrictions, and rules and regulations. 3. Each of the following are basic types of residential community associations EXCEPT: a. Planned community b. Townhouse c. Cooperative d. Condominium RATIONALE: While many communities are indeed townhouse design, not all such developments are necessarily legally-structured community associations. A community association is defined in terms of ownership rights—not architectural style. 4. A _________________ is a motion that follows a set format and is formally adopted by the board of directors. a. Governing Document b. Plat c. Public Offering Statement d. Resolution RATIONALE: Resolutions may enact rules and regulations or formalize other types of board decisions.

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Lesson 1 Quiz, cont’d 5. True or false. The purpose of a community association’s governing documents is to provide for the legal structure and operation of the community. (True) RATIONALE: The governing documents define the rights and obligations of both the community association and its owners, create a binding relationship between each owner and the community association, and establish the mechanisms for governing and funding the community association’s operations. 6. True or false. According to the general hierarchy of authority for governing documents, the bylaws would control in a conflict with the recorded map, plat, or plan. (False) RATIONALE: As a general rule, documents lower in the hierarchy of authority cannot conflict with or change the terms of those above them. The recorded map, plat, or plan is above the bylaws in the hierarchy, and therefore would prevail in such a conflict. 7. Complete the following sentence: A __________ state statute is one that applies only to one or more types of community associations. a. general b. complex c. specific d. uniform RATIONALE: A specific state statute is one that applies only to one or more types of community associations. For example, most states have a condominium act which provides for the establishment and operation of condominiums as legal entities. These acts vary in terms of their complexity—the simplest ones just allow for the creation of condominiums. 8. True or false. A proprietary lease or occupancy agreement in a cooperative defines the member or stockholder’s rights and obligations in relation to the living unit. (True) RATIONALE: In a cooperative, the proprietary lease or occupancy agreement serves generally the same purpose as the declaration, CC&R, or master deed in other community associations. Among other things, the proprietary lease or occupancy agreement identifies the premises that the stockholder is permitted to occupy exclusively, defines the term of the lease and the rent that is payable by the stockholder, and establishes the powers and obligations of the cooperative’s board of directors, including assessment rights.


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Lesson 1 Quiz, cont’d 9. Complete the following sentence: The __________ bring the cooperative into existence, define its basic purposes and powers, and indicate whether stock will be issued. a. recorded map, plat, or plan b. declaration, CC&Rs, or master deed c. proprietary lease or occupancy agreement d. articles of incorporation RATIONALE: A community association’s corporate structure is established when a developer sets up the association. The developer files articles of incorporation—sometimes called a corporate charter—with the appropriate state corporation agency. 10. True or False. The public offering statement is a governing document. (False) RATIONALE: The public offering statement is not a governing document; instead, it is simply a disclosure statement that provides information on the community association to prospective first buyers of a newly-constructed or converted development.


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Additional Resources For further information on the legal basis for community associations, we suggest the following: Community Association Law: Cases and Materials on Common Interest Communities, Second Edition, by Wayne S. Hyatt and Susan F. French. An ideal introduction to this important area of the law. Community associations bear similarities to not-for-profit corporations, municipal governments, and trusts, but are different. Community association law draws from all these fields but reflects the unique character and needs of common interest communities. The book combines academic rigor and practical knowledge. Primary materials include important cases, statutes (including proposed revisions to UCIOA), the Restatement (Third) of Property, Servitudes, and references to literature on common interest communities. (Carolina Academic Press, 2008.) Community Association Law Reporter, Wayne S. Hyatt, ESQ., Editor. A monthly newsletter that reports on current laws and legal decisions affecting community associations. (Community Associations Institute.) Community Association Legal Counsel: How to Select & Use An Attorney, (Guide for Association Practitioners, Report #13), Second Edition, by Thomas J. Hindman, ESQ. and Loura K. Sanchez, ESQ. Contains information on how to get the best out of your association attorney as well as what to consider when searching for a new one. Offers guidance for working out various fee structures and includes a five-part appendix consisting of a sample request for proposal, interview questions, evaluation criteria, billing statement, and more. (Community Associations Institute, 2002.) Condominium and Homeowner Association Practice: Community Association Law, Third Edition, by Wayne S. Hyatt, ESQ. Contains a comprehensive overview of the basics of community association ownership, including creating associations, governance, financing, design standards, enforcement, liability, and amending documents. Appendices contain a document drafting checklist, a sample table of contents for the declaration of a condominium association, and a sample table of contents for the bylaws of a condominium association. (American Law Institute-American Bar Association, 2000.) The Homeowners Association Manual, Fifth Edition, by Peter M. Dunbar, ESQ. Excellent overall guide for leaders and board members of community associations. Covers rules, meetings, elections, committees, volunteer leaders, budgets, insurance and amending documents. Includes sample documents. (Pineapple Press, 2004.) Developer Transition: How Community Associations Assume Independence, A Guide for Association Practitioners, by Amanda G. Hyatt Guides the reader through the transition process, methods and legal requirements. Covers how to draft documents, structure committees, develop leaders, and involve residents early. Includes a transition checklist. (Community Associations Institute, 2004.)


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Take a Break for 15 minutes

Transition to Lesson 2: Rule Development and Enforcement

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Lesson 2: Rule Development and Enforcement


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Lesson 2: Rule Development and Enforcement Goal At the end of this lesson, students will understand the fundamental concepts of the authority by which to create a rule, how to develop a rule, and successful enforcement techniques.

Time 1 hour and 15 minutes Session Time Breakdown 45 minutes—Faculty presentation 20 minutes—Work group exercises 10 minutes—Summary/quiz

Overview This session focuses on rules enforcement, which is one of the more stressful duties of a community association manager. Rules enforcement may create opportunities for direct conflict between the manager and an alleged violator. Many times alleged violators look at the enforcement process as harassment or an attack on them personally by the manager. You should focus on teaching the manager to develop “good” rules—those that are necessary, yet fair and reasonable. These rules should benefit the entire community, be fully explained before they are enforced, and be easily understood. A good rule will be easy for everyone to comply. You should also focus on creating rules with positive rather than negative wording and tone. An effective enforcement policy is one that resolves issues to everyone’s satisfaction—not necessarily enforcing every rule to the exact “letter of the law.” Managers should understand that having compliance with the intent and spirit of the rule is much more desirable than exact enforcement. Whenever possible, encourage the board to look for compromise and be empathetic to the owners’ efforts to balance the rules with a desire to personalize their unit.

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Lesson 2: Rule Development and Enforcement The court systems are overloaded and most judges feel that rules enforcement cases are petty and an unnecessary use of their time. You should urge managers to have an equitable enforcement procedure with due process in place as well as an alternative dispute resolution mechanism. The role play should focus on solving the issues and creating harmony in the community as opposed to strictly enforcing the rules. The exercises should be used to demonstrate the positive effect of appropriate, well-written, and easily understood rules. One final note to this session: The poorly written rules example in Work Group Exercise #3 is an exact excerpt from the rules of a community association in Phoenix, Arizona. Materials Needed 

LCD projector



Remote advancer



Flip chart


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Overview Introduce the lesson. Say: The manager:  Must understand the authority by which a rule is created, the process by which the rule is developed, and the effective methods of enforcement. 

Must understand due process and appeals in the enforcement process.



Must understand the concept of alternative dispute resolution in resolving rules violations.



Must know when variances to the rules are acceptable.

Overview the session. Say: We will discuss:

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

How rules are created and the benefits of using the resolution format in creating rules.



The benefits of alternative dispute resolution and how it can help you as a manager as well as your community associations.



Why variances to the rules are sometimes acceptable and how to create a variance to apply to certain specific situations.


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Slide 34

Lesson 2: Rule Development and Enforcement: Session Overview Learning Objectives • Understand the scope and purpose of rules and architectural guidelines in community associations. • Identify the four types of resolutions for community associations. • Develop valid and enforceable rules using formal rule making procedures. • Develop and implement a due process procedure for enforcing rules. 34



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Key Terms: • • • • • • •

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Alternative dispute resolution Appeal Arbitration Architectural guidelines Cease and desist letter Default hearing Due process procedure

• • • • • • •

Eviction Hearing Hearing notice Mediation Resolution Rule Self help

Community associations use rules and architectural guidelines to: • Promote harmonious community living • Maintain, preserve, enhance, and protect the property values and assets of the community Careful rule making and enforcement are essential for community associations for several reasons: 1. There is the need to create a sense of fairness and equity among residents (owners and tenants). 2. In contemporary society, people are more likely to question and challenge authority. 3. In cases where rules have been poorly developed or enforced, the courts are ruling against community associations. Responsibility to make and enforce rules rests with the board of directors in a community. But the manager is expected to: • Lead the board in making appropriate decisions for their specific community • Give the board practical, technical, and administrative assistance in developing and enforcing rules • Maintain records which can furnish legal support if board actions in adopting or enforcing rules are challenged • Provide practical, technical and administrative advice This lesson explains: • Authority to make and enforce rules for a community association • Development of rules • Enforcement of rules Whenever the term “rules” is used in this lesson, it refers to “rules, regulations and architectural guidelines.”

What You Will Learn After reading and reviewing this lesson, you should be able to explain and understand: • What rules and architectural guidelines are • Scope of rules and guidelines • Relation of rules to the hierarchy of authority in community associations • Sources of community association authority to make and enforce rules

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Scope of Rules and Architectural Guidelines Say: In this lesson, we will use these definitions: 

A rule is a statement of required behavior.



An architectural guideline is a rule that applies to the appearance or exterior of a lot, home, or unit.

For this session, we will refer to both rules and architectural guideline simply as rules. Rules are adopted to promote harmony—both in living and design, to protect property values, and to limit the impact one person’s behavior may have on his or her neighbors. In a community association, the scope of the rules cover the following areas: 1. Use of common property. Such as: • Pets (number of pets, size of pets, kind of pets) • Parking (number, size or type of vehicles) 2. Use of individual lots or units. Such as: • Leasing of units • Residential use only • Changes to the interior structure or floor covering 3. Changes in the appearance of the lots or units. Such as: • Paint color • Landscaping • Exterior doors • Window treatments • Flags and signs 4. Behavior of residents (owners and tenants) as well as guests. Such as: • Excessive noise • Disruptive or illegal behavior


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Scope of Rules and Architectural Guidelines Slide 35 Scope of Rules and Guidelines Rules cover the following areas: 1. The use of common property 2. The use of individual lots/units 3. Exterior appearance of homes or units 4. Behavior of residents, guests, and visitors

35


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• • • • • • • • • • •

Criteria for a valid and enforceable rule Steps in developing a rule Benefits of using a resolution process to adopt rules Resolution format Development of architectural guidelines Use of a due process procedure to enforce rules Alternative dispute resolution Internal resources for enforcing rules External resources for enforcing rules Enforcement of architectural guidelines Architectural variance or change requests

In this section of the lesson, we will discuss the: • Definition of a rule and guideline • Scope of rules and guidelines • Typical areas of rule making • Relation of rules to the hierarchy of authority in community associations • Sources of authority to make and enforce rules

Definitions Let’s begin with some basic concepts: • A rule, also called a regulation or resolution, is a specific statement of required behavior or action, a violation of which carries a penalty (sometimes called a sanction). • An architectural guideline is a rule that applies to the appearance of an owner’s lot or the exterior of his or her unit or improvements.

Scope of Rules and Guidelines In a community association, rules and guidelines outline expected behavior, identify limitations, and govern the community in four areas. These areas include: 1. The use of common property. Rules and guidelines are developed in this area to promote harmonious living. 2. The use of individual lots or units. This helps promote conformity within the association. 3. Changes in the architecture, the construction, or the appearance of lots or units. Rules and guidelines are developed in this area in order to: o Establish and preserve a harmonious design for a community o Protect the value of the property 4. The behavior of residents (owners and tenants), guests, and other visitors. Rules are developed in this area because of the possible impact one person’s behavior may have on another person.


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Scope of Rules and Architectural Guidelines, continued

Typical Areas of Rule Making Introduce the areas frequently addressed by community association rules. Ask the class to share their ideas and record them on your flip chart. Common examples include: • Pets • Children • Parking • Solicitation • Maintenance of units • Noise • Garbage and trash • Use of common areas and facilities • Renting and leasing of units Ask for any other areas not listed here.

Architectural Guidelines Introduce the topics commonly addressed by community association architectural guidelines. Ask the class to share their ideas and record them on your flip chart. Common examples include: • Fencing • Decks and patios • Exterior lighting • Landscaping • Doors • Window treatments • Location of improvements upon lots • Exterior materials • Color of exterior surfaces • Outdoor equipment, such as play sets • Roof protrusions, such as skylights Ask for any other topics not listed here.

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Scope of Rules and Architectural Guidelines, continued

Types of Resolutions for Community Associations Describe the four types of resolutions for community associations: 1. Policy resolutions: Affect owners’ rights and obligations, such as a rule about the use of the common areas or amenities. Usually clarify ambiguities or omissions in the declaration. Example: Pool rules 2. Administrative resolutions: Address internal operations of the associations, such as a collection policy for owners delinquent in the payment of their assessments. Usually clarify ambiguities or omissions in the bylaws. 3. Special resolutions: Address an individual situation, such as a specific alleged violation of the architectural guidelines. 4. General resolutions: Involve routine events such as the adoption of the annual budget or approval of minutes. Note there may be special uses of resolutions to clarify ambiguous or vague provisions of the governing documents or to address areas not mentioned. In some cases, the community association may be able to use resolutions in lieu of amending the governing documents. However, if the documents are clear, such as the requirement to impose a $5 late charge, then the only means to change the amount is by the amendment process which involves a vote of the owners. For example: • The governing documents may not state when assessments are past due. The board, through an administrative resolution, could adopt a reasonable past due date. • The governing documents provide that the association is responsible for the exterior maintenance and painting of the unit door and that the owner is responsible for the interior maintenance and painting of the unit door. However, they do not specify who is responsible for replacing the door itself or painting its edge. The board, through a policy resolution, could adopt a policy requiring the unit owner to be responsible for the replacement and edge painting of the door. Discuss the purpose of a Book of Resolutions and how it can be used to document past board decisions. Explain that the Book of Resolutions can be electronic or written.


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Scope of Rules and Architectural Guidelines, continued Slide 36 Resolutions • Resolution – A motion following a set format and formally adopted by the board. • Kept in a Book of Resolutions • Four types of resolutions: 1. Policy resolutions – owners’ rights and responsibilities, i.e., use of recreation facilities 2. Administrative resolutions – internal operation, i.e., where board meetings will be held 3. Special resolutions – apply a policy or rule to an individual owner, i.e., decision about alleged rule violation 4. General resolutions – routine events, i.e., adoption 36 of annual budget


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Typical Areas of Rule Making To give you an idea of the scope of rules and guidelines, here are some typical areas of rule making. Community associations frequently develop rules that address: Pets Noise Children Garbage and trash Parking Use of common areas and facilities Solicitation Renting and leasing of units Maintenance of units Community associations frequently develop architectural guidelines that address: Fencing Decks and patios Exterior lighting Landscaping Doors Window treatments

Location of improvements upon lots Exterior materials Color of exterior surfaces Outdoor equipment, such as play sets Roof protrusions, such as skylights

Types of Resolutions There are four types of resolutions for a common interest community: 1. Policy Resolutions: affect owners’ rights and obligations and usually address ambiguities and omissions in the declaration. (For example— rules for the use of common areas and recreational facilities, architectural guidelines, and enforcement procedures.) 2. Administrative Resolutions: address the internal operations of the community association and usually address ambiguities and omissions in the bylaws. (For example—operating procedures, collection procedures, and where board meetings will be held.) 3. Special Resolutions: These are resolutions stating board decisions that apply a policy or rule to an individual situation. (For example—a decision about an alleged architectural violation.) 4. General Resolutions: These are resolutions which involve routine events. (For example—adoption of the annual budget or approval of the minutes.) The power of the board to enact rules and regulations is generally defined in the declaration, bylaws and/or state statute. Sometimes, the board’s right to enact rules is limited by the requirement that the members approve the rules. Resolutions should be kept in a Book of Resolutions. This is an orderly, indexed record of the resolutions adopted by the board. In some communities, it includes the resolutions adopted by the architectural guidelines committee as approved by the board. If your community association doesn’t already do so, consider creating a Book of Resolutions by dividing a three-ring binder into sections by type of resolution. Enter resolutions under their designated category in the order of their adoption, or subject, or by unit address. This system makes the use and updating of a Book of Resolutions as simple as possible. You might also consider creating an electronic copy or version of your Book of Resolutions.


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There may be special uses of resolutions to clarify ambiguous or vague provisions of the governing documents or to address areas not mentioned. In some cases, the community association may be able to use resolutions in lieu of amending the governing documents. However, if the documents are clear, such as the requirement to impose a $5 late charge, then the only means to change the amount is by the amendment process which involves a vote of the owners. For example: • The governing documents may not state when assessments are past due. The board, through an administrative resolution, could adopt a reasonable past due date. • The governing documents provide that the association is responsible for the exterior maintenance and painting of the unit door and that the owner is responsible for the interior maintenance and painting of the unit door. However, they do not specify who is responsible for replacing the door itself or painting its edge. The board, through a policy resolution, could adopt a policy requiring the unit owner to be responsible for the replacement and edge painting of the door.

Sources of Authority to Make and Enforce Rules Check all the community association’s legal documents to verify the board’s authority to make and enforce rules. The most important sources of a community’s authority to make and enforce rules are: 1. State statutes and court decisions—Often statutes or case law empower the board to make and enforce rules. Consult with legal counsel periodically to ensure rules are proper under current law. 2. Governing documents—Governing documents provide general powers, which consist of the broad authority to adopt and enforce rules in order to carry out the purpose of the community association. That purpose is to preserve, maintain, protect and enhance the community’s property (not the individual residents or guests). Governing documents also provide specific powers—the authority to adopt and enforce rules in specific areas. Governing documents may be silent as to the ability to adopt rules; however, general corporate power in the Notfor-Profit Act or Business Code may provide this right. Please check your state statute for this authority. Final authority and responsibility to adopt and enforce rules rests with the board of directors—unless the governing documents specify otherwise. A board may delegate the task of drafting or enforcing rules to standing or ad hoc committees or to other sources such as the manager when the governing documents allow. The board should include the owners in the formation of rules. The use of town meetings or focus groups to review proposed rules may be helpful. Normally, a board will receive limited input from owners for a proposed rule unless it is controversial. Owners may offer a very important and different perspective of the proposed rule that the rule-makers did not consider. Finally, soliciting input assures the owners that the board values their opinion.

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Rule Development Say All rules must be valid and enforceable. Let’s examine the criteria. •

Must not have a component that violates fundamental constitutional rights such as discriminating on the basis of: o Race o Religion o Disabled persons

•

Must be consistent with applicable laws, statutes, and governing documents. Possible rule creation areas such as: o Towing laws o Swimming pool regulations Must be reviewed for local ordinances or state laws that could conflict with an association’s planned change to their rules. For example, a rule cannot be adopted in violation of law. If a municipality passes regulations regarding towing, then the association must comply.

•

Must be reasonable and fair and cannot create a separate class or group. If a proposed rule does the following … o Treating owner occupants differently than non-owner occupants o Limiting children’s access to the pool to certain hours … it will most likely be invalid since it creates a separate class of residents/owners.

•

Must be capable of uniform enforcement. o No selective enforcement procedures o No exceptions For example: “All front doors must be blue,” is capable of uniform enforcement. “All front doors must be blue, except for rental units” is not capable of uniform enforcement.

•

Must be necessary.


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Rule Development Slide 37 Criteria for Valid Rules • Must not violate constitutional rights • Must be consistent with laws, statutes, and governing documents • Must reasonably relate to purpose of community • Must be reasonable and fair • Must be capable of uniform enforcement • Must be necessary

37


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Introduction to Development of Rules In this section, we will discuss the: • Criteria for a valid and enforceable rule • Steps in developing rules • Benefits of using a resolution process to adopt rules • Resolution format • Development of architectural guidelines

Criteria for a Valid and Enforceable Rule In general, the courts recognize the following list as characteristics of a valid rule. Furthermore, people are more likely to accept and cooperate with rules with these characteristics. Encourage your community association to use the following criteria when developing or reviewing its rules: • The rule must not violate a fundamental constitutional right. • The rule must be consistent with applicable federal, state, and local statutes and the community’s governing documents. • The rule must reasonably relate to the operation and purpose of the community. • The rule must be reasonable—a reasonable rule is one that is just, sensible, and not excessive. • The rule must be fair. It must not create a separate class or group of people. (For example—a rule that treats resident owners and nonresident owners differently.) • The rule must be capable of uniform enforcement. • The rule must be uniformly enforced—this means there must be no selective enforcement or exceptions. • The rule must be necessary. Do not make rules as a knee-jerk reaction to a single instance that has little possibility of recurrence.

IMPORTANT NOTE When in doubt about the legality of a rule, consult an attorney. It is always a good idea to have your community’s attorney review the wording of all rules and regulations—as proposed and as adopted—to ensure that they are legally sound and avoid conflict with other governing documents and the law.


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Rule Development, continued Say: Develop rules using the following steps: 1. Justify the need for the rule. o Make sure the rule has not been addressed in another rule or in the governing documents. o There needs to be a justification for adopting the rule. 2. Look at both immediate impact as well as long-term implications of the rule. o Make sure future problems will not occur as a result of adopting the rule. For example: - Pool restrictions: Only 4 guests are allowed per unit in an age restricted community, but how do you deal with grandparents who want to invite more than 4 grandchildren to the community pool? - No trucks are allowed – but what about pickup trucks that are the primary vehicle for transportation? - No home office – but how can this be enforced? 3. Locate the authority in the governing documents to make the rule. o Ensure the board is not overstepping its authority. 4. Define the scope of the rule: o Define who is covered. o Define what is covered. o Define what is expected. o Define how it is enforced. o Define the penalties. o Define the due process procedure. o Define any “grandfathered” considerations, if any Provide specific language in the scope of the rule. 5. Justify the validity of the rule. When in doubt, consult your legal counsel. o Check the validity issues noted above. 6. Give notice of any proposed rule to the membership. o Get input prior to the actual adoption. 7. Act promptly on a proposed rule. o Approve, amend, or reject at the next board meeting. 8. Give notice of any adopted rule to the membership. o Mail the rule to all owners and residents. o Publish the rule in community newsletters or websites.

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Rule Development, continued 9. Revise the Rules and Regulations document to include the new rule. 10. Record the new set of Rules and Regulations in the land records, if required or desired.

Slide 38 Steps in Developing Rules 1. Justify the need for the rule

2. Look at the immediate and long-term impacts

3. Find the authority to make the rule

4. Define the scope of the rule

5. Justify the validity of the rule

6. Give notice of the proposed rule

7. Act promptly on the proposed rule

8. Give notice of the adopted rule

9. Revise the Rules and Regulations document

10. Record the new rule in the land records

38

Adopting rules using the resolution process has several benefits. • Provides a thorough, deliberate approach to making rules. • Provides consistency in making rules. • Provides a formal record of all rules made. • Protects the association from arbitrary board actions. • Protects against the adoption of invalid rules.


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Steps in Developing Rules Use the following steps to develop rules for your common interest community: 1. Determine the need for a rule in the specific area. Answer the question, “Why?” Then check to be sure that your community association’s existing rules and governing documents are inadequate to address the issue. 2. Consider both the immediate impact of such a rule and its long-term implications. How is the rule likely to be received? Will it create a solution to a current problem or create future issues for the community? 3. Identify the source(s) of your community’s authority to make a rule in the specific area involved. 4. Define the scope of the rule. Specify “who” and “what” will be covered by the rule. The “what” of a rule includes: o Required steps, procedures, acts, or prohibitions a person is expected to follow o Enforcement procedures o Penalties for violations o Due process procedures

5. 6.

7.

8.

9. 10.

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It is a general rule of law that if something is omitted from a list of items, it was intentionally omitted. An acceptable solution is to use language such as, “…to include, but not to be limited to…” It is important to keep the language of a rule simple and specific. Apply an “enforceability test.” Check to be sure the proposed rule has the eight characteristics of a valid and enforceable rule. Give notice of any proposed rule. Build consensus and support for the rule before it is adopted in order to gain acceptance and compliance. For example, make owners aware that the board is considering a particular rule. Invite written comments. Schedule a hearing on a proposed rule if it is a major matter. Act promptly on a proposed rule. Once a proposed rule has been published and input received, the board should act on it at its next regularly scheduled meeting. The board’s options are to either approve or reject the proposed rule—as it is, or as amended. Failure to act will cause the board and the rule to lose credibility. Give notice of an adopted rule. Actual notice of an adopted rule is necessary if people are to voluntarily obey it. Send a notice to the owner’s last known address in the community’s records. Send a notice to the unit or lot address, too, in case the occupant is a non-owner. Use a first-class mailing, either with a billing notice or separately, to maximize the likelihood of people receiving the notice and reading it. Publish the rule in the community newsletter and website, and/or post it in the common area, if any. Provide copies of the revised rules to local real estate professionals and to all new owners and residents. Whatever notice you give, use a positive “tone of voice.” Avoid sounding demanding or condescending. Revise the Rules and Regulations document to include the new rule. If required or desired, record the newly-revised set of Rules and Regulations in the land or deed records in your jurisdiction to provide public notice to all future owners of homes in the community.


Leader Guide


Rule Development, continued, continued Resolution Format Say There are four sections to a resolution: 1. The purpose section states why the rule is being adopted. The purpose is usually to fill a void where no rule currently exists, clarify an existing rule that may be ambiguous, add specificity to an existing rule, or change an existing rule. 2. The authority section provides proof of the board’s authority to adopt the rule. 3. The Scope and Intent section determines who and what will be affected by the rule, the extent of the rule, and penalties for noncompliance. 4. The Specifications section will clearly and completely set forth all provisions of the rule.

Point out the acronym PASS (Purpose, Authority, Scope and Intent, and Specifications) to help your students remember the four sections of a resolution.

Write the four sections of a resolution on your flip chart to help the class absorb the content.



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Benefits of Using a Resolution Process to Adopt Rules As we said in Lesson 1, a resolution is a motion that follows a set format and is formally adopted. There are several benefits to using the resolution process to adopt rules as opposed to using the simpler process of making motions. The resolution process: • Provides a thorough, deliberate approach to making rules • Provides for consistency in making and wording rules • Provides a formal record of all rules made As a result, the process: • Protects owners from arbitrary board actions • Protects the community from charges that could result in invalid and unenforceable rules

Resolution Format A resolution contains four sections. The acronym PASS is a helpful mnemonic device (Purpose, Authority, Scope and Intent, and Specifications). 1. Purpose—This section states why a rule is being adopted. For example: “WHEREAS, there is a need to adopt specific rules on parking...” 2. Authority—This section cites the primary source(s) of a board’s authority to make a rule on the topic. Possible sources include statutes, declaration, articles of incorporation, and bylaws. For example: “WHEREAS, the board of directors of _____ Homeowners Association, Inc. is empowered to govern the affairs of the homeowners association pursuant to Article IX of the bylaws...” 3. Scope and Intent—This section states: o Who will be affected o For what period of time o The reach or range and extent of the rule o Penalties for noncompliance For example: “WHEREAS, it is the intent that this rule shall be applicable to all owners, tenants, guests, invitees, or any others who have vehicles entering upon the common areas and this resolution shall remain in effect until otherwise rescinded, modified, or amended by a majority of the board of directors…” 4. Specifications—This section states clearly and completely what those bound by the rule will be expected to do. For example: “NOW, THEREFORE, BE IT RESOLVED THAT the following rules on parking are hereby adopted by the board of directors: Revised Article IV, Section D of the parking rules will read: Parking spaces which are not marked “Reserved” shall be available on a “first-come-first-served” basis for visitors, guests, second cars, etc. No inoperable vehicle or vehicles with invalid registrations may park in these spaces. Owners of such vehicles are subject to the vehicle being towed at the owner’s expense.

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Module 1: Legal Basis Development of Architectural Guidelines Development of architectural guidelines should begin with a review of the governing documents to determine in what areas the board can allow a change. Usually a community association’s declaration, CC&Rs, or master deed provides for architectural changes. It is in the community’s best interests for a board to establish written architectural guidelines for two reasons: 1. Written guidelines indicate to owners what types of changes will be allowed under normal circumstances. 2. Written guidelines are a way to avoid claims of arbitrary or selective treatment of owners. It is in the board’s best interests to establish an architectural guidelines committee. A committee can concentrate its effort and attention on this major task alone. It can also act as a buffer between the requesting owner and the board.



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Rule Enforcement Define “Due Process Procedure”: A due process procedure is a formal process designed to protect the rights of all parties involved. Due process procedures should be used in rule enforcement to protect the rights of the association, the owners and the renters. Discuss the benefits of using a due process procedure: • • • • •

All alleged violations are handled in the same manner. Courts look favorably on this process. Resolution can usually be reached through the process. It gives the alleged violator the opportunity to be heard. It allows for alternative methods of resolving the alleged violation.

Slide 39 Due Process Procedure A formal process to protect the rights of all parties. • Alleged violations all handled the same way • Courts recognize and value the procedure • Majority of violations can be resolved • Non-threatening environment furthers voluntary compliance • Provides opportunity to explore alternative means of resolution

39

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Module 1: Legal Basis Introduction to Enforcement of Rules In this section of the lesson, we will discuss: • Use of a due process procedure to enforce rules • Alternative dispute resolution • Internal resources for enforcing rules • External resources for enforcing rules • Enforcement of architectural guidelines • Architectural variance or change requests As a manager, remember that your board has the responsibility to enforce rules. It may delegate to a committee the authority to review situations and make recommendations. Your responsibility as a manager is to : 1. Provide guidance to the board in the rule enforcement process 2. Help the board develop reasonable resolutions 3. Present infractions to the board and make recommendations 4. Encourage the board to consider the implications of their decisions From time to time, managers may have a board that expects them to handle all aspects of rule enforcement. As a community manager, you must help your volunteer leaders understand and accept your role as supporter and advisor to the enforcement process. A Compliance/Conciliation Committee can provide support to both the manager and the board by reviewing proposed rules and by initiating the enforcement process by regularly inspecting the property for violations.

Use of a Due Process Procedure to Enforce Rules A due process procedure is a formal process designed to protect the rights of all parties involved. There are several benefits to using a due process procedure to enforce community association rules: • All alleged rule violations are handled in the same manner • Use of a due process procedure is recognized by the courts as an indication of legally valid rule enforcement • The vast majority of rule violations can be resolved with this procedure, thus avoiding going to court • The opportunity to be heard in a non-threatening fact-finding forum is often enough to result in a person’s voluntary decision to obey a rule • Such a procedure provides an opportunity to explore alternative means to resolve a violation



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Rule Enforcement, continued Carefully read the provisions for due process with the class. It is critical they understand these basic steps before leaving this section.

Say The steps in a due process procedure include: 1. Call the resident or send a courtesy letter to resolve the violation. 2. Issue a cease and desist letter. • Notice of alleged violation • Action to end alleged violation • Time frame to comply • Penalties for non-compliance 3. Issue a hearing notice. • Consideration of alleged violation and sanctions 4. Conduct a hearing. • This is a fact-finding session of allegations • A “default” hearing if alleged violator does not appear 5. Issue a decision. • After hearing all the facts 6. Allow for an appeal. • Review by a higher authority If the hearing panel is a committee, then the board of directors acts as the appeals body. If the board is the hearing panel, the appeal will have to be to an outside authority such as an arbitrator or other uninvolved third party.

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Rule Enforcement, continued Slide 40 Basic Steps in a Due Process Procedure for Handling Alleged Rule Violations 1. Call the resident or send a courtesy letter to resolve the violation. 2. Issue a formal “cease and desist” letter. 3. Issue a hearing notice if the alleged violation does not end within the stated time. 4. Hold the scheduled hearing if the alleged violation does not end within the stated time. 5. Issue a decision after a hearing is held. 6. Allow for an appeal of a decision. 40

Point out the sample resolution for a rules enforcement procedure on the following pages. It is an example of a due process procedure.



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The following are the basic steps in a community association due process procedure for handling alleged rule violations. If the violation is resolved after any of the steps, it is not necessary to continue the enforcement process. 1. Consider calling the resident or sending a courtesy letter to resolve the violation. Be sure to check your state statutes or governing documents for guidance with the formal enforcement process. While phoning a resident is the best customer service step to take, it may prolong the due process procedure if state statutes or governing documents require that the first formal step must be a cease and desist letter described below. 2. Issue a formal “cease and desist” letter by certified mail which contains: o Specific description of the alleged violation o The action required to resolve the alleged violation o A specific time within which the alleged violation must be corrected o The penalty (sanction) which may be imposed after a hearing if the alleged violation is not corrected within the stated time (specified by state statute, your governing documents or board resolution) 3. Issue a hearing notice if the alleged violation is not resolved within the stated time. This is a written notice to an alleged violator that a hearing will be held to consider his or her alleged violation. 4. Hold the scheduled hearing if the alleged violation is not resolved within the stated time. This is a fact-finding session. It is an inquiry into the allegations and an investigation of them. A hearing should be viewed as an opportunity for both the association and the alleged violator to hear the input of the other party, not to engage in additional conflict. Hold a default hearing in the absence of an alleged violator. A default hearing is one held when the alleged violator fails to appear. 5. Issue a decision after a hearing is held. The hearing panel determines the facts; whether or not a rule has been violated; the penalty to be imposed, if any; and the enforcement date of the penalty, if any. The hearing panel then issues this information in the form of a decision. A hearing panel may find an alleged violator to have committed a violation or not—or decide that not enough clear evidence was submitted to allow the panel to reach a clear decision. No decision is ever given during a hearing to avoid claims that the hearing panel was predisposed to a particular point of view. The hearing panel should issue its written decision within the time frame mandated by state statute, the governing documents, or an administrative resolution by the board. If the board of directors is the hearing panel, its decision should be adopted as a special resolution. 6. Allow for an appeal of a decision. An appeal is a request for a review of a case by a higher authority—if permitted by the governing documents, resolution or statute. For example—if the hearing panel is a committee, the board of directors acts as the higher authority. If the board of directors is the hearing panel, the alleged rule violator must appeal to an authority outside the community association—for example, alternative dispute resolution.

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If applicable legal sources allow, some community associations shorten the due process procedure by combining the “cease and desist” letter with imposition of a penalty and a statement of the alleged violator’s right to a hearing to waive (dismiss) the penalty. If the alleged violator does not request a hearing within the stated time, the party is understood to have accepted the penalty. If the party does not fulfill the penalty, then a hearing is scheduled. It is also important to check the governing documents carefully, as many recent documents specify a “due process” procedure, which would prevail. In addition, check your state statues to determine whether deliberations can be held in private or must remain open, and if there are regulations regarding the issuance of the findings of the panel. Below you will find a sample resolution for a rules enforcement procedure. It is an example of a due process procedure.

SAMPLE RESOLUTION: Rules Enforcement Procedure WHEREAS the board of directors of ___________ community association has determined the need to establish a policy detailing the manner in which to enforce the association’s governing documents; and WHEREAS Article _____ Section _____ of the bylaws of the condominium empower the board of directors to enforce the declaration, bylaws, and the rules and regulations; and, WHEREAS the _____ Condominium Act specifies (Section __ ) how to enforce the declaration, bylaws, and rules and regulations; and WHEREAS the board of directors imposes the following enforcement process on all owners, renters, guests and invitees entering onto the association’s premises; NOW, THEREFORE, BE IT RESOLVED THAT the condominium will enforce said declaration, bylaws, and rules and regulations with the following procedure: B. In order to begin the rules enforcement process, an owner must state in writing to the board of directors any rule violation he or she wishes to bring to the attention of the board. 1. The person making the complaint must be identified in the letter. 2. The person making the complaint may be called to testify at all hearings. 3. Committees, as well as groups of owners or residents, may also bring complaints. C. Upon receipt of an alleged rule violation letter stating the date and approximate time of the alleged violation, a letter will be sent to the alleged violator, stating the alleged violation and a time period during which the alleged violation may be abated without further sanction (not less than 10 days).


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1. A copy of this letter will be sent to the person originating the complaint. 2. If the alleged violation persists past the 10 day grace period, a second letter must be sent by a complaining owner (not necessarily the first owner who complained) alleging that the violation exists. D. After the receipt of two letters of complaint within the prescribed period, a hearing will be held. 1. A hearing notice will be sent to the alleged violator stating: the nature of the alleged violation; the action requested to cure the alleged violation; the time and place of a hearing; an invitation to attend the hearing and produce any statement, evidence or witnesses (the number of which not to exceed the total number of hearing board members) on his or her behalf; a statement that a sanction may be imposed; and the maximum amount of any sanction. 2. An invitation will also be sent to the person or persons originating the complaint, inviting them to the hearing in order to produce evidence to substantiate their complaint. E. The board will hear testimony from both sides at the hearing and then excuse both parties and render a decision. F. Should a fine be imposed on the alleged violator, standard collection action may be pursued which may take the form of court action for damages, collected as provided by law. It is also possible that standard collection action may include the recording of the lien on the unit for nonpayment of the fine. G. In the case of non-owner-occupied properties, all applicable renters and owners will be provided copies of all correspondence.

APPROVED: Date: ___________________________________________________________ President: _______________________________________________________ Secretary: _______________________________________________________

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Rule Enforcement, continued Alternative Dispute Resolution (ADR) Say ADR is an effective way to resolve alleged violations. It involves submitting the alleged violation to a disinterested third party who helps the parties reach an amicable solution. This person is not a judge or an expert in community association law, but can assist in the resolution of the alleged violation. Alternative dispute resolution is an effective way for both parties to avoid expensive litigation. Fees are nominal and usually decisions are reached quite quickly. Discuss the difference between mediation and arbitration. Refer to the next Participant Guide page for key differences.

Slide 41 Alternative Dispute Resolution • Effective with serious disputes • Used before lawsuit/court involvement • Trained 3rd party • Can include arbitration (binding or non-binding) or mediation (binding or non-binding)

41


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Alternative Dispute Resolution A number of community associations are turning to alternative dispute resolution as a means of encouraging people to comply with rules and guidelines. Alternative dispute resolution (ADR) refers to a process that has been around a long time. It involves submitting a dispute to a trained, uninvolved third party for assistance with solving a problem. The third party’s decision may be nonbinding or the third party may merely act as a facilitator. However, this approach can be a more efficient and effective way to resolve a dispute than a drawn-out lawsuit. An alleged rule violator might consider ADR if he or she is dissatisfied with the community association’s decision or appeal verdict. A community association might propose ADR when confronted with a difficult rule enforcement situation or the possibility of prolonged litigation. In many jurisdictions, ADR is either required or encouraged before filing suit or during the discovery process after the lawsuit was filed—but before trial. How Arbitration Differs from Mediation Arbitration is a process in which a third party—called the arbitrator—renders a decision as to the respective liabilities of all parties. The object is not to reach a settlement; instead the arbitrator ultimately makes a ruling. It is an adversarial process that results in the same “win-lose” or “lose-lose” that you would see in litigation. The arbitration can be binding or non-binding. A binding arbitration typically cannot be appealed. Once the decision is rendered, unless you can prove fraud, the decision will be forever binding. This is true even if the arbitrator has made a gross deviation from existing law. For that reason, it is advantageous to hire an intelligent and well-informed arbitrator. A non-binding arbitration is advisory in nature. The decision that the arbitrator makes does not have to be followed. In that respect, it is like getting an opinion of your case from a neutral party, which could result in a fair settlement figure. In contrast, mediation is a non-adversarial process that is intended to bring about a “win-win” resolution. In this process a neutral third party—called a mediator— attempts to guide the parties into reaching a resolution or settlement that is favorable to everyone. It gives both parties a chance to present their side in a forum where confidentiality is guaranteed; however, as will be explained, it can be compromised. Mediation is often the first meaningful discussion the parties have, in which each party has the opportunity to face the other and work through the issues with the help of the mediator. Like arbitration, mediation can be binding or nonbinding, depending on the terms agreed upon between the parties before the session begins. The mediator does not attempt to blame either party and should not take sides. However, the mediator will often give his/her opinion on the outcome of the case, should it go to trial, in order to facilitate settlement. A good mediator also will attempt to make the parties see the realities of their position. Traditionally, a mediator will not hear any testimony and while the mediator may review documents to get a better feel for the issues, the mediator does not admit evidence into any record. The mediator also meets with individual parties so that the mediator can discuss issues privately. Arbitrators, on the other hand, never meet with the parties individually because it would not give the opposing party the ability to respond to the allegations.

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Rule Enforcement, continued Internal Resources for Enforcing Rules Say Internal resources or “self help” methods of rules enforcement include each of the following: • Suspend voting rights. o Least effective o Easy to implement • Suspend use of amenities or recreation facilities. o May be effective o Hard to enforce • Fines. o Easy to implement o May be effective o May be hard to collect Caution with using fines: Fines must be reasonable and bear some relationship to the violation. For example, a fine of $100 per day for violating the parking rules would be unreasonable. The governing documents should empower the association to levy and collect fines. A board may not have authority to collect fines once they are imposed if the collection provision was not included in the documents. Also, fines should never be designed as a source of revenue for the association—only as a means of encouraging compliance. • •

Eviction of tenant of owner (eviction of owner is available only in Illinois) Self help corrections. o May be effective, such as towing o Could be illegal, such as trespassing to remove the violation from a lot/unit o Could end in physical harm to the person trying to correct the violation


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Rule Enforcement, continued Slide 42 Internal Resources for Enforcement • • • • •

Suspend voting rights Suspend use of amenities or recreation facilities Fines Eviction Self help corrections

42


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Module 1: Legal Basis Internal Resources for Enforcing Rules There are a number of internal resources a community can use to encourage an owner or tenant to conform to community association rules. Suspension of owner’s voting rights: While this may be the mildest action possible, a community association should still use it as a resource in encouraging rule violators to conform to association rules. The manager should make a recommendation of whether to suspend an owner’s voting rights, and the board should pass a formal resolution. Always consult with an attorney before suspending an owner’s voting rights. Suspension of the use of recreational facilities and common areas: If your community association uses this resource to encourage someone to conform to association rules, only privileges related to the violation should be suspended. (For example—suspend pool privileges—not parking privileges—for a pool violation.) Fines: Be sure your community has the authority to impose fines, as well as to collect them. If a “per day” fine is imposed, the violation must be personally witnessed each day the fine is imposed. Fines must bear a reasonable relation to the violation involved. Some states have legislated the maximum fines allowable. Most courts will not allow a community to continue to fine until the amount owed becomes unreasonable. A community association must pursue other means of resolving an issue. Eviction: Eviction is the process of physically removing a tenant (not an owner) from a property. This process involves the local court system and the use of an attorney. Do not consider this alternative without consulting your community’s attorney. Many jurisdictions do not permit eviction as a remedy for violations. Self help: Self help means the community association takes action to correct the violation itself. Again, do not consider this potentially dangerous alternative without consulting your community’s attorney. Before your community considers using any of the internal resources for enforcing rules, be sure to verify that either a statute or a governing document gives it the authority to take such an action.



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Rule Enforcement, continued External Resources for Enforcing Rules Say: External sources to help with rules enforcement include the following: 1. Health department o Unit/lot use or cleanliness 2. Zoning department or commission o Fence location o Setback restrictions o Commercial uses in residential area o Boats, trailers, abandoned vehicles on lots 3. Police department o Traffic regulations o Having vehicles towed o Noise 4. Fire department o Fire lane enforcement o Hazardous materials 5. Building/Housing/Property standards department o Issue building permits o Handle building, plumbing, fire, and electrical code violations 6. Animal control o Unleashed dogs o Dangerous animals Slide 43

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Module 1: Legal Basis External Resources for Enforcing Rules Community associations can also draw on resources within the broader community to help them enforce association rules. Local government agencies and municipal services can be great resources for enforcing rules. However, you must ask for help. Take the time to build working relationships with each of the following parties. Local Health Department: Your local health department can be asked to enforce the local health code. Possible areas of violation include: • Number of occupants in a unit • Internal use of a unit or storage on a lot • Pervasive stench or pet feces Local Zoning Department: This local agency can assist with enforcement of such rules as: • Fence or shed regulations • Setback restrictions • Restrictions on commercial use of dwellings • Removal of vehicles, boats, and trailers from lots or common areas • Other matters involving common areas and lots Local Police Department: In some jurisdictions, the police will enforce traffic regulations or tow violators of the community’s parking rules. In others, notice must be given to the police before the community has a vehicle towed. The police also can help with noise control and suspected illegal activity, and offer onsite presentations on crime prevention. As a general rule of thumb, it is a good idea to develop a good working relationship with your local police department before you need its help. Local Fire Department: Your local fire department will help with enforcement of fire lanes and the removal of hazardous materials. They also offer onsite presentations on fire safety. Local Building/Housing/Property Standards Department: These terms refer to the local government office that issues building permits. This department may be able to help you if a unit is in violation of an existing building, plumbing, fire, or electrical code. The office may require the approval of a community’s board of directors before it will issue a permit. You also should note that this office’s responsibilities can overlap with those of local zoning and health departments. Local Animal Shelter or Animal Control Officer: This agency is a good source of information on types of pets and weight classifications when your community association is defining rules for pets. You also can request that this agency patrol your community for animals in violation of its pet rules, or pick up animals that the association has caged. While local government agencies and municipal services can be great resources for enforcing rules, utilizing such entities can have repercussions for the community. Before you call or write, you should think through what enforcement of a code could involve. You should be prepared for all possibilities (e.g. shutting down a building, etc.). In addition, in certain situations, government agencies may be reluctant to enter private property—so their assistance can be limited. On the other hand, when help is available, it is much better to have someone else wear the black hat instead of the association and the manager.


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Rule Enforcement, continued Rule Variances Say: There are acceptable reasons for variances from or exceptions to the rules. In making exceptions, the following steps should be followed: 1. Determine the direct impact the violation has on the value or purpose of the association. Think about what the intent of the rule is and whether the particular scenario falls into the category. For example, the community has a rule against running a business from your home. If the business cannot be detected— say a computer programmer who works through the Internet— it makes no sense to attempt to enforce the rule. However, if the owner’s business is recycling paper products and his driveway and yard have used newspapers stacked high with trucks coming and going at all hours, then there is certainly a direct impact on the value and purpose of the community. 2. Make sound business decisions in keeping with the best interests of the community and its members. Always act in good faith and rely on opinions of experts such as attorneys, insurance agents, and engineers. 3. Document the decision for making the variance or exception. For example, the community has a rule prohibiting commercial vehicles from parking in the community. If an owner always parks her commercial vehicle in the garage and concealed from view, then the association could grant a variance or exception based upon the condition that the vehicle always remains out of sight. This goes back to the intent of the rule. The intent was to maintain the value and purpose of the association by prohibiting commercial vehicles from being seen in the community. This is accomplished with an appropriate exception.

Be sure to point out the sample architectural variance request form and the sample form for responding to variance requests on the following pages.

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Module 1: Legal Basis Enforcement of Architectural Guidelines A community’s enforcement of architectural guidelines can be upheld in a court of law. The keys to successful enforcement of architectural guidelines are the same as the keys to successful enforcement of other rules. (See the criteria for a valid and enforceable rule earlier in this lesson.) A manager should advise a board of any violations of architectural guidelines as soon as they are discovered—for example, during a site visit of the property. The board should refrain from turning a blind eye toward violations. They should report any known violations to the manager in a timely manner. If unapproved architectural changes are permitted to exist, the association may be hindered if it later tries to enforce the rule that was violated. One resource for successfully enforcing architectural guidelines is an established process for handling architectural variance or exception requests. On the following pages, you will find a sample architectural variance request form and a sample form for responding to variance requests. Although our sample does not, some architectural variance request forms include a “neighbor awareness” section. It requires the applicant for a variance to obtain the signatures of two neighbors—indicating that they have been informed of the pending changes. The signatures indicate only awareness of the request, not approval of the variance. Some states require obtaining signatures from “affected” owners. You, as the manager, or your community association’s architectural control committee/review board should always inspect any variance made to ensure that it conforms to what was approved.



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Page 75 SAMPLE: Architectural Variance Request Form Submission of Plans to Architectural Control Committee (ACC) Mail To: ACC Chairman (address) Name ___________________________________________________________ Address _________________________________________________________ City/State/Zip _____________________________________________________ Phone(s) H: ___________________ W: ________________________________ Date Submitted _________________ Date Received by ACC ______________ In accordance with the __________________ covenants, easements, charges, and liens (“declaration”) and the association’s rules and regulations, I request your consent to make the following changes, alterations, renovations, additions and/or removals to my unit: ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ [Please attach a detailed (to scale) drawing or blueprint of your plan(s) and a copy of your community plat in duplicate.] Is this an amendment to a previous request? ____________________________ If yes, approximate date of previous request: ____________________________ I understand that under the declaration and the rules and regulations, the committee will act on this request and provide me with a written response of their decision. I further understand and agree to the following provisions: 1. No work or commitment of work will be made by me until I have received written approval from the association. 2. All work will be done at my expense and all future upkeep will remain at my expense. 3. All work will be done expeditiously once commenced and will be done in a good workman-like manner by myself or a contractor. 4. All work will be performed at a time and in a manner to minimize interference and inconvenience to other unit owners. 5. I assume all liability and will be responsible for all damage and/or injury which may result from performance of this work. 6. I will be responsible for the conduct of all persons, agents, contractors, and employees who are connected with this work.

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Page 76 7. I will be responsible for complying with, and will comply with, all applicable federal, state, and local laws; codes; regulations; and requirements in connection with this work, and I will obtain any necessary governmental permits and approvals for the work. I understand and agree that the _______________, its board of directors, its agent and the committee have no responsibility with respect to such compliance and that the board of directors’ or its designated committee’s approval of this request shall not be understood as the making of any representation or warranty that the plans, specifications, or work comply with any law, code, regulation, or governmental requirement. 8. I understand that a decision by the committee is not final and that the board of directors may reverse or modify a decision by the committee upon the written application of any owner made to the board of directors within ten (10) days after the committee makes its decision. 9. The contractor is:______________________________________ 10. If approved within twenty-one (21) days, the work would start on or about _________________________ and would be completed by ______________________________. 11. Any work not started on or before __________________ is not approved and planned construction is be subject to re-submittal to the committee.

Signature: ____________________________________

SAMPLE: Form for Responding to Variance Requests Action Taken by Architectural Control Committee (ACC) Date of action:___________________________ ______ Approved as requested ______ Approved with the following exceptions: ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ ______ Disapproved based on the following: ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ _________________________________________ Chairman, ACC


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Work Group Exercises Allow 20 minutes for the Work Group Exercises.

Run the Work Group Exercise activity. Five work group exercises are described here. Divide the class into work groups of 3 to 6 persons depending upon the size of the class and assign an exercise to each group. Allow approximately 10 minutes for the work groups to complete their exercise. After the work groups have completed the exercises, have them share the problem and recommended solution with the remainder of the class (10 minutes). An alternative method for running this activity is to go through each exercises as a class—instead of breaking into smaller work groups.

Work Group Exercise #1 Prepare a resolution to allow residents to park recreational vehicles within the community. Use the general description of the community and the governing documents to structure your resolution. Answer: Purpose: There is a need to have a policy governing the parking of large vehicles. See Section 5.8(a)(7) of the declaration. Authority: Section 3.1(f) of the bylaws authorizes the board of directors to adopt rules. Scope: This should include all vehicles listed in the first sentence of Section 5.8(a)(7) of the declaration. Specifications: Should include vehicles parked in the lot at the rear of the property and not in the front or in the underground parking. Recall from the general description that there is substantial unused parking in this lot secluded in the rear of the community.

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Module 1: Legal Basis Work Group Exercise #1 Prepare a resolution to allow residents to park recreational vehicles within the community. Use the general description of the community and the governing documents to structure your resolution. Refer to the sample documents below and on subsequent pages. Answer: Purpose: ________________________________________________________________ ________________________________________________________________ Authority: ________________________________________________________________ ________________________________________________________________ Scope: ________________________________________________________________ ________________________________________________________________ Specifications: ________________________________________________________________ ________________________________________________________________

General Description Bayview Towers is a condominium located on a twenty-acre parcel containing 240 units. There are six five-story buildings with eight units on each floor. Assigned parking is provided underground in each building. The layout of each building is the same. Each floor contains the following units: # of Units

Style

Size

2 1 3 1 1

One Bedroom One Bedroom/Study Two Bedroom Two Bedroom/Den Three Bedroom

824 sq. ft. 950 sq. ft. 1,192 sq. ft 1,450 sq. ft. 1,597 sq. ft.

Parking Spaces 1 1 2 2 2

Each floor has 650 square feet of common area on each floor in the elevator lobby and hallways. The six buildings surround a small lake. There is a 2,600 square foot community center that includes the manager’s office, maintenance storage, an open area for parties and meetings, and a kitchen and rest rooms. There is one pool and two tennis courts. There are two “open” parking lots. One is near the clubhouse and office and accommodates 25 vehicles. The other lot is in a remote area at the rear of the property and accommodates 40 vehicles.


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Leader Guide Common Area Percentage Ownership Interests

Unit Type

Size

# of Units

Total Sq. Ft.

Unit %

Total

1 Bedroom 1 Bedroom/ Study 2 Bedroom 2 Bedroom/ Den 3 Bedroom

824 sq. ft.

60

49,440

0.2993%

17.9599%

950 sq. ft. 1,192 sq. ft

30 90

28,500 107,280

0.3451% 0.4330%

10.3531 38.9712%

1,450 sq. ft. 1,597 sq. ft.

30 30

42,150 47,910

0.5104% 0.5801%

15.3117% 17.4041

240

275,280

Totals

100.0000%

Bylaws ARTICLE 3 Board of Directors Section 3.1. Powers and Duties. The Board of Directors shall have all of the powers and duties necessary for the administration of the affairs of the Bayview Towers Condominium Association and may do all such acts and things as are not by the Condominium Act or the condominium instruments required to be exercised and done by the Association. The Board of Directors shall delegate to one of its members or to a person employed for such purpose the authority to serve as liaison to the managing agent and to act on behalf of the Board on such matters relating to the duties of the managing agent (as defined in Section 3.2) if any, which may arise between meetings of the Board as the Board deems appropriate. In addition to the duties imposed by these Bylaws or by any resolution of the Association that may hereafter be adopted, the Board shall on behalf of the Association: (a) Prepare and adopt an annual budget, in which there shall be expressed the assessments of each unit owner for the common expenses. (b) Make assessments against unit owners to defray the costs and expenses of the Condominium, establish the means and methods of collecting such assessments from the unit owners and establish the period of the installment payment of the annual assessment for common expenses. (c) Provide for the operation, care, upkeep and maintenance of all of the Property and services of the Condominium. (d) Designate, hire, and dismiss the personnel necessary for the maintenance, operation, repair and replacement of the common elements and provide services for the Property and, where appropriate, provide for the compensation of such personnel and for the purchase of equipment, supplies and material to be used by such personnel in the performance of their duties, which supplies and equipment shall be deemed part of the Property. (e) Collect the assessments against the unit owners, deposit the proceeds thereof in bank depositories designated by the Board of Directors, and use the proceeds to carry out the administration of the Property.

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Module 1: Legal Basis (f) Adopt and amend any rules and regulations in accordance with Section 5.8(b); provided, however, that such rules and regulations shall not be in conflict with the Condominium Act or the condominium instruments. (g) Open bank accounts on behalf of the Association and designate the signatories hereon. (h) Make, or contract for the making of, repairs, additions and improvements to or alterations and restoration of the Property, in accordance with these Bylaws, after damage or destruction by fire or other casualty, or as a result of condemnation or eminent domain proceedings. (i) Enforce by legal means the provisions of the Declaration, these Bylaws and the rules and regulations, act on behalf of the unit owners with respect to all matters arising out of any eminent domain proceeding, and notify the unit owners of any litigation against the Association involving a claim in excess of ten percent of the amount of the annual budget. (j) Obtain and carry insurance against casualties and liabilities, as provided in Article 6, pay the premiums therefore and adjust and settle any claims thereunder. (k) Pay the cost of all authorized services rendered to the Association and not billed to unit owners of individual units or otherwise provided for in Sections 5.1 and 5.2. (l) In accordance with section 55-79.74:1 of the Condominium Act, keep books with detailed accounts in chronological order of the receipts and expenditures affecting the Property, and the administration of the Condominium, specifying the expenses of maintenance and repair of the common elements and any other expenses incurred. Such books and vouchers accrediting the entries therein shall be available for examination by the unit owners, their attorneys, accountants, Mortgagees and authorized agents during general business hours on business days at the time and in the manner set and announced by the Board of Directors for the general knowledge of the unit owners. All books and records shall be kept in accordance with generally accepted accounting principles, and the same shall be audited at least once each year by an independent auditor retained by the Board of Directors who shall not be a resident of the Condominium. The cost of such audit shall be a common expense.

Declaration Excerpt Section 5.8 Restrictions on Use of Units and Common Elements: Rules and Regulations. (a) Restrictions. Each unit and the common elements shall be occupied and used as follows: (1) Except for the areas of the Condominium designed for a management office or commercial or recreational use and except as provided in the Declaration, no unit shall be used for other than housing and the related common purposes for which the Property was designed. The Board of Directors may permit reasonable, temporary non-residential uses from time to time. The Board may also permit the use of all or part of a residential unit for a professional office, provided that such use is consistent with all applicable laws, ordinances and regulations of any governmental authority. As a condition to consenting to such office use, the Board may require the unit owner to pay any increase in the rate of insurance for the Condominium that may result from such office use. Such permission may not be revoked later except for good cause shown. Nothing in these Bylaws shall be construed to prohibit the Declarant from using any unit owned by the Declarant for promotional, marketing, or display purposes or from using any appropriate portion of the common elements for settlement of sales of condominium units and for customer service purposes.


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(2) Nothing shall be done or kept in any unit or in the common elements that will increase the rate of insurance for the Property or any part thereof applicable for residential use without the prior written consent of the Board of Directors. No unit owner shall permit anything to be done or kept in the unit or in the common elements which will result in the cancellation of insurance on the Property or any part thereof or which would be in violation of any law, regulation or administrative ruling. (3) No improper, offensive or unlawful use shall be made of the Property or any part thereof, and all valid laws, zoning ordinances and regulations of all governmental agencies having jurisdiction thereof shall be observed. All laws, orders, rules, regulations or requirements of any governmental agency having jurisdiction thereof relating to any portion of the Property shall be complied with, by and at the sole expense of the unit owner or the Board of Directors, whichever shall have the obligation-to maintain or repair such portion of the Property, and if the latter, then the cost of such compliance shall be a common expense. (4) No unit owner shall obstruct any of the common elements nor shall any unit owner place or cause or permit anything to be placed on or in any of the common elements (except those areas designated for such storage by the condominium instruments or the Board of Directors) without the approval of the Board. Nothing shall be altered or constructed in or removed from the common element except with the prior written consent of the Board of Directors or the Covenants Committee, as appropriate (subject, however, to the applicable provisions of the Fair Housing Act regarding modifications by handicapped residents). (5) The common elements shall be used only for the furnishing of the services and facilities for which the same are reasonably suited and which are incident to the use and occupancy of the units. The lobbies, vestibules, hallways and stairways shall be used for no purpose other than for normal transit. (6) No unit shall be used or occupied for (i) transient or hotel purposes or (ii) in any event for an initial period of less than six months. No portion of any residential unit (other than the entire unit) shall be leased for any period; provided, however, that a reasonable number of roommates are permitted. No unit owner shall lease a unit other than on a written form of lease: (i) requiring the lessee to comply with the condominium instruments and rules and regulations; (ii) providing that failure to comply constitutes a default under the lease, and (iii) providing that the Board of Directors has the power to terminate the lease or to bring summary proceedings to evict the tenant in the name of the lessor after forty-five days prior written notice to the unit owner, in the event of a default by the tenant in the performance of the lease. The Board of Directors may suggest or require a standard lease form for use by unit owners. Each unit owner shall, promptly after entering into any lease of a condominium unit, forward a conformed copy of the lease to the Board of Directors. The foregoing provisions of this paragraph, except the restriction against use or occupancy for transient or hotel purposes, shall not apply to the Association, the Declarant, or a Mortgagee in possession of a unit as a result of foreclosure, judicial sale or a proceeding in lieu of foreclosure.



Module 1: Legal Basis (7) Trailers, campers, recreational vehicles, boats and other large vehicles may be parked on the Property only if expressly permitted by the rules and regulations and only in such parking areas, if any, as may be designated for such purpose by the Board of Directors. All vehicles shall be parked wholly within parking space lines. Other than as provided above, nothing may be stored, erected, attached to or otherwise placed on the common elements in the parking areas without the prior written consent of the Board of Directors or the Covenants Committee, as appropriate. No junk or derelict vehicle or other vehicle on which current registration plates and/or inspection stickers are not displayed shall be kept upon any of the common elements. Except in areas designated by the Board of Directors, vehicle repairs other than: (i) emergency maintenance, (ii) ordinary light maintenance (excluding fluid changes and other operations that might soil the common elements), and (iii) normal cleaning (in areas designated by the Board, if any) are not permitted on the common elements. (8) The maintenance, keeping, boarding and/or raising of animals, livestock, poultry or reptiles of any kind, regardless of number, is prohibited within any unit or upon the common elements, except that the keeping of orderly domestic pets (e.g., dogs, cats, or caged birds) not to exceed one per unit without the approval of the Board of Directors, and guide animals and aquarium fish (and other limited species of animals which do not normally leave the unit and which do not make noise) is permitted, subject to the rules and regulations adopted by the Board of Directors; provided, however, that such pets are not kept or maintained for commercial purposes or for breeding; and provided, further, that any such pet causing or creating a nuisance or unreasonable disturbance or noise may be permanently removed from the Property upon ten days' written notice from the Board of Directors. Pets shall not be permitted upon the common elements unless accompanied by someone who can control the pet and unless carried or leashed. Any unit owner who keeps or maintains any pet upon any portion of the Property shall be deemed to have indemnified and agreed to hold the Association, the manager and management company, each unit owner and the Declarant free and harmless from any loss, claim, or liability of any kind or character whatever arising by reason of keeping or maintaining such pet within the Condominium. All pets that leave the unit on a regular basis shall be registered with the Board of Directors and shall otherwise be registered and inoculated as required by law. The Board of Directors may establish reasonable fees for registration of pets not to exceed the additional costs incurred by the Association resulting from the presence of such pets. (9) Except for such signs as may be posted by the Association or by the Declarant for promotional or marketing purposes, no signs of any character shall be erected, posted or displayed upon, in, from or about any unit or common element without prior written approval of the Board of Directors. The foregoing provisions of this paragraph shall not apply to a Mortgagee in possession of a Unit as a result of foreclosure, judicial sale or a proceeding in lieu of foreclosure. (10) Sufficient carpeting or rugs shall be maintained on a minimum of eighty percent of the floor surfaces (except kitchens, closets and bathrooms) in units located over other units to adequately reduce transmission of sound between units. Additional washers, dryers and other major appliances may not be installed in a unit without the prior written approval of the Covenants Committee.


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(11) No unit shall be subjected to or used for any timesharing, cooperative licensing or other arrangement that would entail weekly, monthly or any other type of revolving or periodic occupancy by multiple unit owners, cooperators, licensees or timesharing participants. (b) Changes to Rules and Regulations. Each unit and the common elements shall be occupied and used in compliance with the rules and regulations that may be promulgated and changed by the Board of Directors. Copies of the rules and regulations shall be furnished by the Board of Directors to each unit owner. Changes to the rules and regulations shall be conspicuously posted prior to the time when the same shall become effective and copies thereof shall be furnished to each unit owner upon request. Section 5.9. Right of Access. By acceptance of the deed of conveyance, each unit owner thereby grants a right of access to the unit, as provided by Section 55-79.79(a) of the Condominium Act and Section 4.2(a) of the Declaration, to the Board of Directors or the managing agent, or any other person authorized by the Board or the managing agent, or any group of the foregoing, for the purpose of enabling the exercise and discharge of their respective powers and responsibilities, including without limitation making site visits, correcting any condition originating in the unit or in a common element to which access is obtained through the unit and threatening another unit or the common elements, performing installations, alterations or repairs to the mechanical or electric systems or the common elements in the unit or elsewhere in the Property or to correct any condition which violates any mortgage; provided, however, that requests for entry are made in advance and that any such entry is at a time reasonably convenient to the unit owner. In case of an emergency, such right of entry shall be immediate, whether or not the unit owner is present. Section 5.10. Utility Charges; User Fees. The cost of utilities serving the Condominium not individually metered or sub metered to specific units shall be common expenses allocated pursuant to Section 5.1. The cost of utilities serving one or more units and individually sub metered shall be a Limited Common Expense payable by the units served based on actual consumption of such services in accordance with Section 55-79.83C of the Condominium Act. Pursuant to Sections 55-79.83B and 5579.83C of the Condominium Act, the Board of Directors may impose reasonable user fees, whether or not designated as Limited Common Expenses, for the use of Reserved Common Elements or personal property of the Unit Owners Association or services provided by or arranged for through the Association. Section 5.11. Parking Spaces. All parking spaces shall be used by the unit owners for self-service parking purposes on a "first come; first served" basis, except as the Board of Directors may otherwise determine; provided, however, that no unit owner shall park on the common element parking spaces more than two vehicles (owned or leased by such unit owner, a member of such unit owner's household without the prior written consent of the Board of Directors. The cost of maintenance and repair of all parking areas shall be a common expense. During the time that units are being sold by the Declarant, no more than 24 parking spaces may be restricted to the Declarant’s use for sales purposes.

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Work Group Exercises, continued Work Group Exercise #2 According to the Bayview Towers Condominium Bylaws: (1) which group has the authority to assure that the community is well maintained and visually pleasing – and is responsible for protecting property values and promoting the welfare and safety of the residents; and (2) which governing body is authorized to modify or reverse the decisions of this group? Identify where in the bylaws both of these clauses are outlined. Answer: (1) The covenants committee is outlined in Section 3.12 of the bylaws. Their purpose is to “assure that the Condominium shall always be maintained in a manner: (1) providing for visual harmony and soundness of repair; (2) avoiding activities deleterious to the esthetic or property values of the Condominium; (3) furthering the comfort of the unit owners, their guests, and tenants; and (4) promoting the general welfare and safety of the Condominium community.” (2) Any appeal of the covenant committee’s decision should be to the board of directors. According to Section 3.12 (b), “Any action, ruling, or decision of the Covenants Committee may be appealed to the Board of Directors by any party deemed by the Board to have standing as an aggrieved party and the Board may modify or reverse any such action, ruling or decision.”



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Work Group Exercise #2 According to the Bayview Towers Condominium Bylaws: (1) which group has the authority to assure that the community is well maintained and visually pleasing – and is responsible for protecting property values and promoting the welfare and safety of the residents; and (2) which governing body is authorized to modify or reverse the decisions of this group? Identify where in the bylaws both of these clauses are outlined. Answer: (1) _____________________________________________________________ ________________________________________________________________ (2)______________________________________________________________ ________________________________________________________________

Bayview Towers Condominium Bylaws Section 3.7. Meetings of Directors. (a) Organization Meeting. The first meeting of the Board of Directors following the annual meeting of the Bayview Towers Condominium Association shall be held within thirty days thereafter at such time and place as shall be determined by a majority of the directors at the annual meeting. (b) Regular Meetings. Regular meetings of the Board of Directors may be held at such time and place as shall be determined from time to time by a majority of the directors, but such meetings shall be held at least quarterly during each fiscal year. (c) Special Meetings. Special meetings of the Board of Directors may be called by the President on three business days notice to each director, given personally or by mail, e-mail, or telephone, which notice shall state the time, place, and purpose of the meeting. Special meetings of the Board of Directors shall be called by the President or Secretary in like manner and on like notice on the written request of at least three directors. (d) Executive Session. All meetings of the Board of Directors shall be open to unit owners as observers, except that the President or presiding officer may recess the meeting and call the Board into executive session for discussion on sensitive matters such as personnel, litigation strategy, or hearings for violations of the condominium instruments, as provided section 55-79.75B of the Condominium Act. The Board shall reconvene the Board meeting to vote on any final action. (e) Notice. Notice of meetings of the Board of Directors shall be given to each director, personally or by mail, email, or telephone, at least three business days prior to the day named for such meeting. No notice of the organizational meeting shall be necessary if such meeting is held immediately following the annual meeting. (f) Waiver of Notice. Any director may at any time, in writing, waive notice of any meeting of the Board of Directors, and such waiver shall be deemed equivalent to the giving of such notice. Attendance by a director, in person or by telephone or electronic communication, at any meeting of the Board of Directors shall constitute a waiver of notice by such director of the time, place and purpose of such meeting. If all directors are present at any meeting of the Board of Directors, no notice shall be required and any business may be transacted at such meeting.

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Module 1: Legal Basis (g) Quorum of Board of Directors. At all meetings of the Board of Directors a majority of the directors shall constitute a quorum for the transaction of business, and the votes of a majority of the directors present at a meeting at which a quorum is present shall constitute the decision of the Board of Directors. If at any meeting of the Board of Directors there shall be less than a quorum present, a majority of those present may adjourn or recess the meeting from time to time. At any such adjourned meeting at which a quorum is present, any business that might have been transacted at the meeting originally called may be transacted without further notice. A director who participates in a meeting by means of telephone or electronic communication shall be deemed present at the meeting for all purposes. (h) Conduct of Meetings. The President shall preside over all meetings of the Board of Directors and the Secretary shall keep the minutes of the meeting and record in a minute book all resolutions adopted at the meetings. The then current edition of Robert’s Rules of Order, Newly Revised, shall govern the conduct of the meetings of the Board of Directors when not in conflict with the Condominium Act or the condominium instruments. Section 3.8. Action Without Meeting. Any action by the Board of Directors required or permitted to be taken at any meeting may be taken without a meeting if all of the directors shall individually or collectively consent in writing to such action. Any such written consent shall be filed with the minutes of the proceedings of the Board of Directors. Section 3.9. Compensation. No director shall receive any compensation from the Condominium for acting as such. Section 3.10. Board of Directors as Agent. The Board of Directors shall have the power to act as agent for the unit owners of all of the units and for each of the, to manage, control, and deal with the interests of such unit owners in the common elements of the Condominium to permit the Board of Directors to fulfill all of its powers, rights, functions, and duties. The Board of Directors shall have the power to act as agent for each unit owner, each Mortgagee, other named insureds and their beneficiaries and any other holder of a lien or other interest in the Condominium or the Property to: (i) adjust and settle all claims arising under insurance policies purchased by the Board of Directors, (ii) execute and deliver releases upon the payment of claims and (iii) act on their behalf in any condemnation proceeding or action of eminent domain pursuant to section 5579.44 of the Condominium Act; provided, however, that the consent of a Mortgagee shall be required if such Mortgagee notifies the Board of Directors pursuant to Section 11.1 within thirty days after receipt of notice of the damage pursuant to Section 6.2(c) or notice of the taking in condemnation or by eminent domain pursuant to Section 8.2. The powers set forth in this section are in addition to any rights granted by section 55-79.80B of the Condominium Act. The Board of Directors may grant and accept easements and licenses pursuant to section 55-79.80B of the Condominium Act. Section 3.11. Liability of the Board of Directors, Officers, Unit Owners, and Unit Owners Association. (a) The officers, directors, managing agent and members of the Covenants Committee shall not be liable to the Bayview Towers Condominium Association or any unit owner for any mistake of judgment, negligence or otherwise, except for their own individual willful misconduct or bad faith. The Association shall indemnify and hold harmless each of the officers and directors and the managing agent from and against all contractual liability to others arising out of contracts made by the officers or the Board of Directors on behalf of the Association unless any such contract shall have been made in bad faith or contrary to the provisions of the Condominium Act, except to the extent that such liability is satisfied by directors and officers liability insurance.


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Officers and directors shall have no personal liability with respect to any contract made by them on behalf of the Association. The liability of any unit owner arising out of any contract made by the officers or Board of Directors, or out of the indemnification of the officers or directors or managing agent, or for damages as a result of injuries arising in connection with the common elements solely by virtue of ownership of a Common Element Interest therein or for liabilities incurred by the Association, shall be limited to the total liability multiplied by such unit owner’s Common Element Interest. Every agreement made by the officers, the Board of Directors or the managing agent on behalf of the Association shall, if obtainable, provide that the officers, the directors or the managing agent, as the case may be, are acting only as agents for the Association and shall have no personal liability thereunder (except as unit owners), and that each unit owner’s liability thereunder shall be limited to the total liability thereunder multiplied by such unit owner’s Common Element Interest. The Association shall indemnify and hold harmless each of the members of the Covenant Committee from and against all liability to others arising out of the due exercise of such member’s responsibilities unless such member’s action shall have been taken in bad faith or contrary to the provisions of the Condominium Act or the condominium instruments. The Association shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding by reason of the fact that such person is or was an officer or director or managing agent of the Association or a member of the Covenants Committee against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement incurred any such person in connection with such action, suit or proceeding if such person acted in good faith and in a manner such person reasonably believed to be in, or not opposed to, the best interests of the Condominium. (b) Neither the Association nor the managing agent shall not be liable for any failure of water supply or other services to be obtained by the Association or paid for as a common expense, or for injury or damage to person or property caused by the elements or by any unit owner, or resulting from electricity, water, snow or ice which may leak or flow from or over any portion of the common elements or from any pipe, drain, conduit, appliance or equipment. Neither the Association nor the managing agent shall be liable to any unit owner for loss or damage, by theft or otherwise, of articles that may be stored upon any of the common elements. No diminution or abatement of any assessments, as herein elsewhere provided, shall be claimed or allowed for inconveniences or discomfort arising from the making of repairs or improvements to the common elements or from any action taken by the Association to comply with any law, ordinance or with the order or directive of any governmental authority. Section 3.12. Covenants Committee. (a) Purpose. The Board of Directors shall establish a Covenants Committee, consisting of three members appointed by the Board, each for a term of one year, in order to assure that the Condominium shall always be maintained in a manner: (1) providing for visual harmony and soundness of repair; (2) avoiding activities deleterious to the esthetic or property values of the Condominium; (3) furthering the comfort of the unit owners, their guests, and tenants; and (4) promoting the general welfare and safety of the Condominium community.

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Module 1: Legal Basis (b) Powers. The Covenants Committee shall regulate the external design, appearance, use, and maintenance of the units and the common elements. The Covenants Committee shall have the power to impose reasonable application fees as well as the costs of reports, analyses, or consultations required in connection with improvements or changes proposed by a unit owner. The Covenants Committee shall have the power to impose reasonable charges (pursuant to Section 9.1(g)) upon, and issue a cease and desist request to a unit owner, a member of such unit owner’s household or such unit owner’s guests, invitees, or tenants, agents or employees whose actions are inconsistent with the provisions of the Condominium Act, the condominium instruments, the rules and regulations or resolutions of the Board of Directors (upon petition of any unit owner or upon its own motion). The Covenants Committee shall from time to time, as required, provide interpretations of the condominium instruments, rules and regulations and resolutions pursuant to the intents, provisions and qualifications thereof when requested to do so by a unit owner or the Board of Directors. Any action, ruling, or decision of the Covenants Committee may be appealed to the Board of Directors by any party deemed by the Board to have standing as an aggrieved party and the Board may modify or reverse any such action, ruling or decision. (c) Authority. The Covenants Committee shall have such additional duties, powers and authority as the Board of Directors may from time to time provide by resolution. The Board of Directors may relieve the Covenants Committee of any of its duties, powers and authority either generally or on a case-by-case basis. The Covenants Committee shall carry out its duties and exercise its powers and authority in the manner provided for in the rules and regulations or by resolution of the Board of Directors. The Covenants Committee shall act on all matters properly before it within forty-five days; failure to do so within the stipulated time shall constitute an automatic referral of such matters to the Board of Directors for consideration. ARTICLE 4 Officers Section 4.1. Designation and Duties. The principal officers of the Bayview Towers Condominium Association shall be the President, the Vice President, the Secretary and the Treasurer, all of whom shall be elected by the Board of Directors. The Board of Directors may appoint an assistant treasurer, an assistant secretary, and such other officers as in its judgment may be necessary. The President and Vice President shall be residents of the Condominium (except for those directors appointed by the Declarant) and members of the Board of Directors. Any other officers may, but need not, be unit owners or directors. Each officer shall perform such duties as are normally associated with such office in parliamentary organizations, except to the extent (if any) inconsistent with the Condominium Act or the condominium instruments, and shall perform such other duties as may be assigned to such office by resolution of the Board of Directors. If any officer is unable for any reason to perform the duties of the office, the President (or the Board of Directors if the President fails to do so) may appoint another qualified person to act in such officer's stead on an interim basis. Section 4.2. Election of Officers. The officers of the Bayview Towers Condominium Association shall be elected annually by the Board of Directors at the organizational meeting of each new Board and shall hold office at the pleasure of the Board.


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Work Group Exercises, continued Work Group Exercise #3 You assume the management of a townhome style, condominium association that had been self-managed for a number of years. In reviewing the files, you note the following rules regarding parking which have been sent to all owners. Rewrite them using the concepts you have learned in this lesson. 1. No parking in front of dumpsters. 2. Storage of unused or disabled cars is not allowed on the premises or in the garage. 3. Boats & trailers may be parked only long enough to load them, 4 hours in any 24-hour period. They cannot be kept here. 4. Parking… You are allowed only two spots: one in your garage stall and one immediately behind your own car. If you own several vehicles, condo life is not for you. 5. Large trucks must be parked on the street. (Extra cars, too.) 6. The swimming pool parking lot is for swimmers and guests, only. Answer: All of the above statements are negative. Many of the statements are unclear. Rule #4 is confusing as well as unpleasant. Rule #5 regarding extra cars seems to conflict with Rule #4. These rules are not easy for the owners to comply with as they are subject to varying interpretations by the readers. While there is no one correct answer, here are a few you can share: 1. Please be aware that parking in front of dumpsters can result in damage to your vehicle by the trash contractor. Thank you for keeping this area clear for contractor ingress/egress. OR 1. Refrain from parking in front of dumpsters, which will obstruct the timely pickup of trash from our dumpsters. If trash removal is not completed as scheduled, dumpsters are likely to overflow. 2. Vehicles that are not in use or are disabled are permitted on association property for a period of time not to exceed fourteen days. After that time frame, vehicles not in use or disabled must be removed from the property unless written permission is obtained from the board of directors for unusual circumstances. Page 130


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Work Group Exercises, continued OR 2. Only operable vehicles are permitted on the premises. 3. Owners and residents are welcome to temporarily park boats and trailers for the purpose of loading or unloading. After the completion of loading or unloading and in any event, not to exceed four hours, boats and trailers must be parked off the property. 4. Thank you for limiting parking to two designated spots per home—the garage space and the space immediately in front of the garage. A limited number of designated guest parking spaces are also available. OR 4. Residents’ parking is permitted in their respective garage and immediately in front of the garage. Additional parking spaces are available by the clubhouse. 5. Please be aware that the public street adjacent to our entrance will accommodate large trucks which cannot maneuver our interior roads and driveways. This area may also be utilized for extra parking during times of heavy usage within the condominium. Please be aware that all vehicles parked on the street are parked at the owner’s risk. OR 5. Vehicles that do not fit within the outlined parking spaces may park only along the public streets where parking is permitted. 6. Thank you for limiting parking for the recreation area to those members and guests who are using the recreational facilities. All vehicles parking in this area most display a special parking tag which may be obtained from the community manager at (xxx) xxxxxxx. OR 6. Parking is permitted in the swimming pool parking lot only between the hours of 8 AM and 10 PM.


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Work Group Exercises, continued Page 87

Work Group Exercise #3 You assume the management of a townhome style, condominium association that had been self-managed for a number of years. In reviewing the files, you note the following rules regarding parking which have been sent to all owners. Rewrite them using the concepts you have learned in this lesson. 1. No parking in front of dumpsters. 2. Storage of unused or disabled cars is not allowed on the premises or in the garage. 3. Boats & trailers may be parked only long enough to load them, 4 hours in any 24-hour period. They cannot be kept here. 4. Parking… You are allowed only two spots: one in your garage stall and one immediately behind your own car. If you own several vehicles, condo life is not for you. 5. Large trucks must be parked on the street. (Extra cars, too.) 6. The swimming pool parking lot is for swimmers and guests, only. Answer: 1. ____________________________________________________________ 2. ____________________________________________________________ 3. ____________________________________________________________ 4. ____________________________________________________________ 5. ____________________________________________________________ 6. ____________________________________________________________


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Work Group Exercises, continued Work Group Exercise #4 You manage a community that prohibits sheds. An owner calls you to report that he saw a truck deliver a shed to his neighbor. He cannot see the shed in the yard, but he did see it delivered. During your next site visit, you look at the home in question and cannot see the shed until you peer over the fence and perimeter landscaping. Present a report to the board of directors explaining why you would recommend a variance in this case. How would you deal with the owner who has the shed? How would you deal with his neighbor who reported the violation? Answer: Encourage the “shed” owner to request a variance. Recommend that the board grant the variance based upon the fact that the shed cannot be seen. The variance would be revoked if for any reason the shed could be seen. For example, if the “shed” owner relocated the shed or cut back the perimeter landscaping. Advise the neighbor of the board’s decision for a variance and why. It’s also always a good idea to consult with your attorney and check your state statutes and governing documents to see if there are any relevant requirements.



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Work Group Exercise #4 You manage a community that prohibits sheds. An owner calls you to report that he saw a truck deliver a shed to his neighbor. He cannot see the shed in the yard, but he did see it delivered. During your next site visit, you look at the home in question and cannot see the shed until you peer over the fence and perimeter landscaping. Present a report to the board of directors explaining why you would recommend a variance in this case. How would you deal with the owner who has the shed? How would you deal with his neighbor who reported the violation?

Answer:

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Work Group Exercises, continued Work Group Exercise #5 While conducting a site visit, you notice painting contractors painting a home in a color that you know has not been approved by the association. What would you do? Answer: Ask the painters to immediately stop working until the owner can be contacted and a resolution can be reached. Try to call the owner immediately to discuss the problem. Type up a cease and desist letter and hang it on the owner’s front door as well as mail a copy of it to the owner. The worst thing would be to ignore the painters, let them complete the work, and then send a violation notice to the owner.



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Work Group Exercise #5 While conducting a site visit, you notice painting contractors painting a home in a color that you know has not been approved by the association. What would you do?

Answer:

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Summary Say You have learned: • • • • • •

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How to create rules that benefit the community and how to effectively enforce the rules in a less stressful environment while striving to protect the value of the community. How to use the resolution process to adopt rules. How to use due process in enforcing rules. How to use the alternative dispute resolution process in enforcing rules. How to use both internal and external resources in enforcing the rules. How to recognize and document acceptable resources for granting a variance to some rules.


Key Terms: • • • • • • •

Alternative dispute resolution Appeal Arbitration Architectural guidelines Cease and desist letter Default hearing Due process procedure

• • • • • • •

Eviction Hearing Hearing notice Mediation Resolution Rule Self help

Encourage the class to review the Discussion and Focus Questions to reinforce their learning. Ask the class to briefly complete the Lesson 2 Quiz and go over the answers with them as a class. (The answers are included in your Instructor Guide only.) Allow 10 minutes for this review.

Refer participants to the additional resources listed in their Participant Guides. Ask for any other questions or clarification of any item before leaving this session.


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Focus Questions Use the following questions to help you identify and review the core concepts in this lesson. (Hint: Once you look up the answer to a question, you may want to jot down the page number next to the question for future reference.) 1. What are some reasons for establishing community rules and architectural guidelines? 2. Give some reasons why careful rule making and enforcement are essential for community associations. 3. What are a manager’s responsibilities in the rule making and enforcement process? 4. Describe the scope of rules and guidelines for a community association. 5. List some areas commonly addressed by community association rules. 6. List some areas commonly addressed by community association architectural guidelines. 7. Explain the four types of resolutions for a community association and give an example of each. 8. What are the two most important sources of a community’s authority to make and enforce rules? 9. Name and explain the eight criteria for a valid and enforceable rule or architectural guideline. 10. Name and explain the eight steps in developing a rule or architectural guideline. 11. Name some of the benefits of using a resolution process to adopt rules for a community association. 12. Explain the four parts of a resolution. 13. Give some reasons for putting architectural guidelines in writing. 14. How does establishing an architectural guidelines committee benefit a board of directors? 15. What are the benefits of using a due process procedure to enforce rules? 16. Define the six steps in a due process procedure for handling alleged violations of community association rules or guidelines. 17. Name and define some internal resources a community association can use to enforce its rules and guidelines. 18. Name and define some external resources a community association can use to enforce its rules and guidelines. 19. What can a community association do to increase the likelihood of a court of law upholding its enforcement of its architectural guidelines?


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Thought/Discussion Questions Use the following questions to help you apply the information in this lesson to your own situation. 1. Review the legal documents in your community’s hierarchy of authority. What authority—general and specific—do they give your community association to make and enforce rules and guidelines? 2. Find out where your community association keeps its board resolutions. How are they organized? 3. Does your community association keep its rules in a Book of Resolutions or something similar? • If so, what areas of rule making has your community association addressed? • If so, what areas of architectural guidelines has it addressed? • If so, can you find examples of each of the four types of resolutions a community association can adopt? • If not, how can you arrange to consolidate all the community association’s rules and guidelines in a central place? 4. What process does your community association use to develop rules and guidelines? • Does it have a checklist or criteria for determining whether the rule or guideline it is developing is valid and enforceable? • Are there any changes you can propose for your community association? • If your community uses the resolution process to develop rules, is it following the standard resolution format? 5. Does your community association have written architectural guidelines? • Does it have an architectural guidelines committee? • If your community association lacks one or both, what reasons can you use to persuade your board that they are needed? 6. Is your community association’s rule enforcement process a due process procedure? What aspects of the procedure led to your answer? 7. Has your community association ever used alternative dispute resolution? What can you deduce about the experience? 8. Find out which internal resources for enforcing rules your community association has used. (Hint: Examine past resolutions and minutes of board meetings. Ask people who would know.) 9. Does your community association have an established relationship with any of the agencies described in this lesson as external resources for enforcing your association’s rules? • Has it used any of these resources to enforce its rules? • Which of these agencies have you established a relationship with? 10. Does your community association have a process and forms for handling architectural variance or change requests?


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Lesson 2 Quiz 1. Reasons for establishing community rules and architectural guidelines include each of the following EXCEPT: a. There is the need to create a sense of fairness and equity among residents. b. In contemporary society, people are more likely to question and challenge authority. c. In cases where rules have been poorly developed or enforced, the courts are ruling against community associations. d. Fines imposed on residents who break community rules are frequently the primary source of association income. RATIONALE: Careful rule making and enforcement are essential for community associations. Rules should never be passed simply to collect income for the association—they must be necessary and intended to contribute to the betterment of the community. 2. True or false. According to the general hierarchy of authority for operating community associations, rules and regulations take precedence over the articles of incorporation. (False) RATIONALE: The hierarchy of authority means that rules and architectural guidelines may not contradict or be in conflict with the legal sources that take precedence over them. Although rules and architectural guidelines are lower in the hierarchy of authority for community associations, they may clarify and expand a community’s governing documents—but may not conflict with the other governing documents, such as the articles of incorporation. 3. Which of the following is an example of an architectural guideline? a. pets b. noise c. fencing d. parking RATIONALE: An architectural guideline is a rule that applies to the appearance of an owner’s lot or the exterior of his or her unit or improvements, such as fencing. A rule is a specific statement of required behavior whose violation carries a penalty. Pets, noise, and parking are all examples of areas that often prompt community association rules. 4. Each of the following are benefits of using the resolution process to adopt rules EXCEPT: a. Provides an informal approach to making rules b. Protects owners from arbitrary board actions c. Protects the community from charges that could result in inoperable rules d. Provides for consistency in making and wording rules RATIONALE: There are several benefits to using the resolution process to adopt rules, as opposed to using the simpler process of making motions. Among these benefits is that it provides a formal, written record of all rules made.

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Lesson 2 Quiz, cont’d 5. Each of the following are sections of a resolution EXCEPT: a. Authority b. Purpose c. Scope and Intent d. Self help RATIONALE: The fourth component of a resolution is the specifications section (instead of self help). This section states clearly and completely what those bound by the rule will be expected to do. 6. True or false. Governing documents are one of the most important sources of a community’s authority to make and enforce rules. (True) RATIONALE: Governing documents provide general powers. General powers consist of the broad authority to adopt and enforce rules in order to carry out the purpose of the community association. Governing documents also provide specific powers—the authority to adopt and enforce rules in specific areas. 7. Which of the following is not one of the basic steps in a due process procedure? a. Issue a “cease and desist” letter b. Issue a hearing notice if the violation does not end within the stated time c. Hold the scheduled hearing if the violation does not end within the stated time d. Issue a decision before a hearing is held RATIONALE: The hearing panel should issue a decision only after a hearing is held. The hearing panel determines the facts, whether or not a rule has been violated, the penalty to be imposed, if any, and the enforcement date of the penalty, if any. The hearing panel then issues this information in the form of a decision. 8. True or false. Using alternative dispute resolution to encourage residents to comply with rules and guidelines is more costly and time consuming than going through the court system. (False) RATIONALE: Alternative dispute resolution (ADR) involves submitting a dispute to a trained, uninvolved third party for assistance with resolution. The third party’s decision may be nonbonding or the third party may merely act as a facilitator in the case of a mediator. However, this approach can be a more efficient and effective way to resolve a dispute than other means. A community association might propose ADR when confronted with a difficult rule enforcement situation or the possibility of prolonged litigation. In many jurisdictions ADR is either required or encouraged before filing suit or during suit, but before trial.


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Lesson 2 Quiz, cont’d 9. Which of the following is an internal resource a community can use to encourage an owner or tenant to conform to community association rules? a. Relying on the local health department to determine the appropriate number of occupants in a unit b. Asking for the local zoning department’s help in removing vehicles, boats, and trailers from lots and common areas c. Having the police enforce traffic regulations d. Suspending an owner’s voting rights RATIONALE: Suspending an owner’s voting rights is an example of an internal resource a community association can use to encourage residents to obey association rules. While this may be a rather mild action, it can be a very useful resource for encouraging rule violators to conform to community association rules. Each of the other examples listed are examples of external resources available to community associations. 10. True or false. To increase the likelihood that a court of law will uphold an association’s enforcement of architectural guidelines, the board of directors should turn a blind eye towards violations and permit unapproved architectural changes to exist. (False) RATIONALE: A manager should advise a board of any violations of architectural guidelines as soon as they are discovered—for example, during a site visit of the property. The board should also refrain from turning a blind eye towards violations. They should report any known violations to the manager in a timely manner. If unapproved architectural changes are permitted to exist, the association may be hindered if it later tries to enforce the rule that was violated.


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Additional Resources For further information on rule development and enforcement, we suggest the following: Conflict Resolution: How ADR Helps Community Associations, A Guide for Association Practitioners, by Mary Avgerinos. Alternative dispute resolution— negotiation, mediation, and arbitration—is far less costly than litigation and promotes harmony rather than discord. Learn how to avoid—and manage— disputes and build consensus among divergent groups. Contains numerous sample documents. (Community Associations Institute, 2004.) Design Review: How Community Associations Maintain Peace & Harmony, A Guide for Association Practitioners, by Byron R. Hanke and Richard Ekimoto, Esq. Enhance or maintain the aesthetics of your community and improve your architectural review criteria and compliance. Includes suggestions for designcommittee procedures and sample design guidelines to help you develop or update your own association manual. (Community Associations Institute, 2004.) Be Reasonable! by Kenneth M. Budd. A compendium of expert opinions from over 30 leading community association attorneys, managers, and directors. Provides effective strategies for drafting and enacting reasonable rules, identifying unreasonable rules and restrictions, working with owners, and reasonable enforcement procedures. (Community Associations Institute, 1998.) Conflicts of Interest: How Community Association Leaders Honor Their Duties, A Guide for Association Practitioners, by Tonia C. Sellers and Jay S. Lazega. Avoid conflicts of interest by reading about fiduciary obligations, conduct of directors, managerial conflicts, ethics policies and board conflicts. Contains sample policies, resolutions, code of ethics and cases. (Community Associations Institute, 2004.) Drafting Rules: How Community Associations Maintain Peace & Harmony, A Guide for Association Practitioners, by Gurdon H. Buck, Esq. Spells out the legalities of making rules and provides input for rules you may have overlooked. Contains sample community association rules (Community Associations Institute, 2004.) Pet Policies: How Community Associations Maintain Peace & Harmony, A Guide for Association Practitioners, by Debra H. Lewin. Find real solutions to old problems: how to have clean common areas—even when residents don’t pick up; nuisance barking; how to deal with unusual animal problems; and more. (Community Associations Institute, 2005.) Reinventing the Rules: A Step-By-Step Guide for Being Reasonable, by Lucia Anna Trigiani, ESQ. Describes in detail the challenge that must be met in order to put our communities first by looking at rules from a new perspective. (Community Associations Institute, 2002.)


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Take a Lunch Break for 1 hour

Transition to Module 2: Financial Management

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Module 2: Financial Management Focus How to understand the basic financial reports and activities of a community association and the community manager’s typical involvement in them.



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Lesson 2: 60 minutes

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Overview Module 2 will introduce you to: 

Budgets and Replacement Reserves—Lesson 1

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Collecting Assessments—Lesson 2

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Financial Statements, Audits, Income Taxes, and Investments—Lesson 3

Materials Needed

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PowerPoint slides

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LCD projector

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Remote advancer

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Flip chart



Module 2: Financial Management Module 2 Overview In Module 2, Financial Management, you will learn about the basic financial activities of a community association and a manager’s typical involvement with them. At a minimum, a manager has a professional duty to oversee a community’s financial operations. However, a typical manager’s financial duties and responsibilities often go well beyond this minimum. Without giving up their authority and responsibilities, the board of directors and officers often delegate their financial duties in full or in part to a manager or management company. The following excerpt from a set of bylaws illustrates the typical financial duties of a treasurer delegated to management: …The treasurer shall have the responsibility for the _______’s funds and securities and shall be responsible for keeping full and accurate financial records and books of account showing all receipts and disbursements, for preparing all required financial statements and tax returns, and for the deposit of all monies and other valuable effects in the name of the ________ in such depositories as may from time to time be designated by the board of directors. The treasurer shall be responsible for the preparation of the budget. The duties of the treasurer may be delegated to the management agent. In such case, the duties shall be performed by the management agent under the supervision of the treasurer… The financial duties delegated to a manager often are described in the management contract or employment agreement. However, a contract or agreement frequently will not include all the financial duties expected of or appropriate for a community association manager. As a new manager, request an initial discussion of what financial duties your board expects of you. It is recommended that the manager and the board periodically review expectations and performance to identify any needed changes. The financial duties and responsibilities expected of a professional manager, but not always spelled out, include: • Exercise of ordinary and reasonable care • Use of sound business judgment—involves a business decisions made with due care, good faith, and discretion • Maintenance of an adequate record-keeping system • Payment of bills in a timely, business-like manner • Collection of monies owed to the community association in a timely, businesslike manner Use the information in Module 2 to help you professionally fulfill the financial duties and responsibilities assigned to you and expected of you.


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Slide 44

Module 2: Financial Management Focus How to understand the basic financial reports and activities of a community association and the community manager’s typical involvement in them.

44

Overview the three lessons covered in Module 2.

Slide 45 Financial Management This section of the program will introduce you to: • Budgets and Replacement Reserves—Lesson 1 • Collecting Assessments—Lesson 2 • Financial Statements, Audits, Income Taxes, and Investments—Lesson 3

45

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Lesson 1: Budgets and Replacement Reserves


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Lesson 1: Budgets and Replacement Reserves Goal At the end of this lesson, students will understand the budgeting process, including development and presentation of a community association budget as well as understanding the importance of using the budget as a management tool.

Time 1 hour, 15 minutes Session Time Breakdown Budget  30 minutes—Faculty presentation Reserves 15 minutes—Faculty presentation

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Work Group Exercises—20 minutes Summary/quiz—10 minutes Overview This lesson may cause some apprehension for those students who are intimidated about accounting, finance, or just “math” in general. You should make sure everyone understands we will be discussing fundamental concepts of what a manager should know about the financial operations of a community association, not the mechanical creation of the financial reports. While there will be some “math” exercises in the session, they are designed to show the concepts being discussed—not the computations themselves. This lesson will cover all aspects of the financial operations of an association including budgets and replacement reserves. This session has both class and work group exercises. In some cases, there will be precise mathematical solutions. In others, there will be thoughts, ideas, and recommendations from the students. There are suggested answers to those exercises provided for you; however, you may find the class discussion and student recommendations to provide equally sound answers.

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Lesson 1: Budgets and Replacement Reserves Materials Needed 

LCD projector

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Remote advancer

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Flip chart



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Overview Introduce the lesson Say: The topic of this session is the community association budget. The manager: 

Must have a fundamental understanding of the budgeting process including the preparation of the budget for the board of directors’ consideration and the presentation of the adopted budget to the membership.



Must understand the concepts of replacement reserves and how the amounts for reserve contributions are calculated.

Overview the session Say: We will discuss:

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The aspects of preparing and presenting a budget, including the requirements for having a budget, identifying components of the budget, looking at various line items, calculating assessment rates, and conducting a role play on budget presentation.

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How to review the sample documents to determine how to comply with the requirements regarding budget preparation.

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Replacement reserves and replacement reserve calculations.


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Slide 46




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Key Terms: • • • • • • • • • • • • • •

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Assessment Baseline funding Budget Chart of accounts Discretionary budget line items Expenses FHA FHLMC FNMA Full funding Historical trend budgeting Mandatory budget line items Major improvement expenses Operating budget

• • • • • • • • • • • • •

Operating expenses Percent funded Reconciliation of expenses and revenue Reserve account Reserve cash flow statement Reserve formula Reserve Specialist Reserve study Revenue Special assessment Threshold funding VA Zero-base budgeting

This lesson provides an overview of the role of budgets and replacement reserves in community associations. The lesson explains: • Roles and responsibilities in the budget process • Budgets and replacement reserves and their use • The sources of budget and reserve requirements • Budget preparation • Budget presentation

What You Will Learn After reading and reviewing this lesson, you should be able to explain and understand: • Roles and responsibilities in the budget process for the board of directors, the treasurer, the owners, and the manager • The definition of a budget • The purpose of a budget in a community association and its uses • Sources of community association budget requirements • Sources of revenue for a community association • Types of expenses for a community association • Development of budget line items • Preparation of an operating budget • Reconciliation of expenses and revenue • Methods of budget presentation • Reasons for maintaining a reserve account • Preparation of a reserve account budget Your community governing documents will define formal roles and responsibilities in the budget process. However, it is important for you to find out as soon as possible what the board’s informal expectations are—for everyone involved.

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Module 2: Financial Management Become familiar with the budgetary roles and responsibilities of: • The board of directors • The treasurer • The owners • Yourself, as manager

Board of Directors Most boards of directors are responsible for establishing, approving, and monitoring the community’s budget. Although they have the power to establish a budget, most will delegate preparation authority to their manager. When directors review a proposed budget, they should consider: • Legal requirements of state statutes and governing documents • Owners’ needs and desires (balancing mandatory and discretionary items) • Committee and owner feedback • The need to reconcile revenue and expenses (in a community association budget, revenue reconciles with expenses, meaning that they total each other. There should not be a “net profit” or “net loss” in a community association budget.) • Any financial forecasts and analyses of past financial activity prepared by the manager

Treasurer The community treasurer is responsible for ensuring that the draft budget is prepared and approved. He or she will usually delegate initial preparation of the budget to the manager. Then the treasurer will usually review the draft budget with a finance committee. It is important that the treasurer consult all committee chairpersons and invite owner input to ensure support of the planned revenue and expenses. Their participation and support would be especially important where a vote of owners is required or recommended for: • An increase in assessments • Special assessments • Major improvements • Funding replacement reserves Usually the treasurer presents the proposed budget to the owners at a formal, special meeting or at an informal, town hall-style community meeting. Frequently, community governing documents require that an open meeting be held before the board adopts a budget.

Owners Some states and some community governing documents require that the budget be passed by a vote of the owners. The preceding discussion explains when and why owners should be involved in reviewing the proposed budget—even when the board is responsible for its adoption.


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How a Budget is Used Say Budgets should be used as a management tool to facilitate the effective operation of the community association. They should be used: 1. To plan community activities. This includes special projects, improvements, community-wide activities, or maintenance issues. The point is that the financial implications of the planning process can be seen over a period of time. This helps preclude attempting to accomplish everything at one time in the early part of the fiscal year. 2. To determine assessments. The budget provides the information for the manager to compute each owner’s assessment rate for the year. 3. To measure and control the financial operations. By comparing budget to actual performance, the manager and board have an effective measurement or benchmark to evaluate the financial condition of the community. It allows them to make informed decisions about when to plan further expenditures. If a particular line item is running significantly over budget, it is a warning to the manager to investigate the cause of the overage. 4. To give continuity to services. Planning the budget prevents inconsistency in decision-making. Without the budget, services might be forgotten or not provided from year to year. 5. To maintain quality of life. The budget reflects the community operations, administration, and functions, and helps to ensure that the quality of life in the community is maintained to the level desired by the owners, if possible. 6. To limit surprises. By planning the year’s activities and maintenance operations, there is less of a chance for unexpected financial obligations to occur. 7. To look at the needs and desires of the community. In every budget there are both required and desired (optional) budget items. The budgeting process allows the board to ensure that all mandatory items are included and that all optional items have been fully considered.

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How a Budget is Used Slide 47 Using the Budget as a Management Tool • To plan community activities – not a prediction • To determine assessment rates • To measure and control financial operations

• To give continuity to services • To maintain quality of life • To limit surprises and minimize the unexpected • To balance the needs and desires of the community

47



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Manager As community manager, your formal budget responsibilities are more likely to appear in your contract than in the community’s bylaws. Even if neither the declaration nor your contract spell out your budget responsibilities, informally you will be expected to: • Prepare or be involved in the development of a draft budget • Review it with the treasurer, finance committee if one exists, and ultimately the board and membership • Revise it after any changes are made • Mail a summary of the budget to the owners after board approval unless your governing documents or state statute requires otherwise

Introduction to the Budget This section explains: • The definition of a budget • Its role in community management • How it is used

What is a Budget? A budget is an annual financial plan for an organization—in this case, a community association. A budget provides an estimate of a community’s revenue and expenses for a specified period of time. It is the first step in managing your community’s financial operations.

The Role of a Budget in Community Management A budget establishes: • What services and programs the community will provide • When they will be done • How they will be done In other words, a budget reflects the board’s policy decisions about what will be accomplished and what will not be accomplished during the budget period.

How a Budget Is Used A budget has many uses: • It is a way for the community to plan its activities • It is the basis for determining owner assessments • Together with financial reports, it is a means of controlling the community’s financial operations • It provides for continuity of community services • It helps the community maintain its desired quality of life • It helps to minimize the unexpected • It provides an opportunity for a community to balance its needs and desires (mandatory and discretionary items)

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How a Budget is Used, continued Community Association Budgets Say Every community association must have a budget. • It may be required by various laws or regulations. • It is usually required by the governing documents of the association.

Slide 48 Sources of Budget Requirements • • • •

Federal laws and regulations State statutes, regulations, and court decisions Local laws and regulations Governing documents

48



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Sources of Budget Requirements Budget items will vary from one community association to another. They also will vary from year to year for the same association. Many budget items develop in the normal course of doing business. However, a number of budget items appear because they are required by: • Federal laws and regulations • State statutes, regulations, and court decisions • Local laws and regulations • The community’s governing documents

Federal Laws and Regulations Federal laws and regulations can lead to community expense items. For example, all community associations must conform to Internal Revenue Service requirements in the area of income and payroll taxes. Federal agencies may also establish expense requirements that your community will have to meet. For example, in the environmental area, you may have to budget for oil tank testing, hazardous waste disposal, or chlorofluorocarbon (CFC) removal. Your community association may also be taking steps to conform to the requirements of the Fair Housing Act. Federally-established secondary mortgage institutions may set requirements that your community association will have to meet if owners are to participate in their financing or repurchase programs. These agencies include: • Federal National Mortgage Association (FNMA or Fannie Mae) • Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac) • Federal Housing Administration (FHA) • Veterans’ Administration (VA) These agencies regulate and influence such items as the amount of insurance a community association must carry, procedures for financial operations, the procedures an association must follow to dissolve, and requirements for the upkeep of property.

State Statutes, Regulations, and Court Decisions As we said in Module 1, all states have statutes that enable the establishment of condominiums and corporations. Some states have statutes that enable the establishment of planned communities. In several states, these statutes require or regulate such community association budget items as replacement reserves, audits, state taxes and fees, insurance, and the conduct of financial operations.

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Module 2: Financial Management States may have other laws and regulations that apply to community associations and have budgetary implications. To find out about any applicable laws and regulations, call your local CAI chapter, your association’s attorney or your local state legislator. What a specific state statute says very often will override what your community’s governing documents say. Check the state statute’s wording carefully to determine its applicability to your community association. And in so doing, keep in mind that your community association’s governing documents may not be current with the state statute that enables establishment of your type of association. If your community association employs at least one person (you, if you’re an onsite manager), it must follow all applicable state requirements for employers. This can result in expense items such as workers’ compensation insurance and unemployment taxes. State courts also have made decisions that affect the types of expenses community associations incur. For example, there have been safety cases involving the adequacy of lighting, patrols, and off-duty police. There have been other cases involving parking and sign requirements, and there have been “slipand-fall” cases involving the adequacy of snow removal. To find out more about the case law that applies to your community association, consult the CAI Law Reporter, an electronic newsletter from CAI reporting on current laws and legal decisions affecting community associations.

Local Laws and Regulations Your local government may have codes, laws, and, possibly, taxes with which your community association must comply. Any requirements in these areas will result in expense items for your community’s budget. For example, your local fire code may require such items as sprinkler systems, exit signs, fire extinguishers, or elevator inspections. Your local health and safety codes may require pool inspections, water quality tests, or mandatory procedures for sewage disposal or recycling. Property taxes may or may not be levied on land commonly owned by the community association, depending on your state or local jurisdiction.

Governing Documents The governing documents of your community: • Define the property to be maintained by the community association • Specify maintenance and service responsibilities and requirements Maintenance and service items will appear in the “expenses” section of your community’s budget


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Budget Components Say The budget is comprised of two components: 1. Revenue 1) Owner assessments: Most revenue will be derived from owner assessments. 2) Interest: Interest earned from invested replacement reserves and/or excess operating cash. 3) Other revenue: • Late payment fees • Fines • User fees 2. Expenses 1) Operating expenses: These are noted as “administrative” and “operating” expenses on the sample budget. They are items which occur on a routine basis for the operation of the association. 2) Major improvement expenses or capital improvements: These consist of items that are not required for daily operations, but may be added later to enhance value— such as adding a gazebo or awnings. 3) Replacement funding: Amounts set aside for future replacement of existing major components.

Slide 49 Budget Components Revenue • Owner assessments • Interest • Other revenue (includes late fees, fines, and user fees)

Expenses • Operating – routine administration and operations • Major improvements – new • Replacement fund – repair or replacement of major components 49

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Budget Components Point out the sample budget for Bayview Towers Condominium Association.



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Budget Components Before you begin reading this section, you may want to pull out a copy of your community budget to review as you read through the following pages. The two main components of a community budget are revenue and expenses. The revenue and expense categories used in your budget must be the same categories used in your financial records, reports, and statements.

Revenue Revenue consists of the collective items or amounts of income which, in the case of a community association, are appropriated for common expenses. The typical sources of revenue for a community association include: 1. Owner assessments: An assessment is the owner’s financial obligation to the community association during a given period of time— usually one year. It covers the owner’s share of the common expense. An annual assessment may be paid on a monthly, quarterly, or annual basis, or however the governing documents dictate. Most of a community’s revenue will come from owner assessments. Occasionally, special assessments may be levied. A special assessment is a onetime assessment often voted on by the owners to cover a major expense that was not included in the annual budget or replacement reserve. 2. Interest: A typical source of revenue for communities is interest or dividends earned on their cash savings and investments. 3. Other revenue: Other sources of revenue include rent from commercial tenants, rent from lease of units, charges for resale packages, collection on insurance claims, legal settlements, easements, and antenna rental. • Late payment fees • Fines • User fees: For example—parking space rentals, laundry machine use, guest privileges, swimming pool use, and move inmove out fees. Note that we do not recommend creating a separate line item in your budget for fines and late fees, as that would give the wrong impression to the owners. We don’t want them to think we hope they pay late and violate the governing documents because the association needs the revenue to balance the budget.

Expenses Expenses consist of the cost of goods and services used to operate and maintain the association’s common elements. Typically, there are three types of expenses for community associations: 1. Operating expenses: Operating expenses occur on a regular basis for the normal and usual services and repairs for the association For example— • Swimming pool management • Professional and administrative services (management, legal, accounting, insurance) • Utilities (electric, gas, water, oil) • Contract services (lawn maintenance, elevator, trash removal, janitorial services, painting)

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Module 2: Financial Management • Repairs (plumbing and pipe, electrical, door and lock) • Personnel costs (compensation and benefits for community employees) • Educational costs for employees, board members and volunteers (membership, courses and publications from Community Associations Institute) 2. Major improvement expenses: Major improvement expenses consist of items that are not necessarily required, but are added to improve the quality of life for the residents, appearance of the property—or to enhance the value of the community association as reflected in the resale value of units. A major improvement expense this year becomes a reserve item in the following and future years. Improvements are different from maintenance, repairs, or replacements. They increase the life, usefulness, or value of a property. They are called major improvements because they last more than one year and involve a large amount of funding. Examples of major improvement expenses are the addition of a new tennis court, more picnic areas, or additional street lights. 3. Reserve account: The establishment of a reserve account is a community association expense that requires detailed explanation.



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Page 111 Sample Community Association Budget

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Establishing Annual Assessments Say Assessments are usually calculated in one of two methods. 1. The percentage method uses the assigned percentage in the governing documents to determine each owner’s prorata share. Review the formula below. 2. The equal method computation assesses each owner equally for each lot or unit.

Slide 50



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Establishing Annual Assessments Annual assessments are based on the community’s budget for the fiscal year. The amount of the total annual assessment is the amount of income that the board decides to obtain from owner assessments—given the community association’s other revenue sources. Each owner is assigned a share of the community’s annual obligation. Frequently, an owner’s share is based on the number of owners in the community or on the square footage the owner’s unit occupies. In condominiums, an owner’s share is based on his or her percentage interest in the common elements. Here is the formula for calculating assessment fees for condominium owners: Total Assessments Required Percentage Interest as Found in Annual Budget X in the Declaration Number of Installment Payments in a Year For example— 1. Assume a total required assessment of $410,000 2. Assume a percentage interest in the common elements of .4682% for a two bedroom unit 3. Assume monthly payments $410,000 x .004682 = $160 monthly assessment fee 12 Always obtain percentage of interest as found in the declaration. Do not rely on prior year’s percentages as computational errors can occur and be perpetuated. Also, do not rely on the previous management company’s calculation when you take over management responsibilities. Note that the above calculations are among the most common methods for determining an owner’s share of the total annual assessment. But also be aware that there are other methods of calculating assessments. For example, high-rise condominiums might impose an additional fee on units in higher floors and/or with better view. Others may calculate assessments based on the local jurisdiction’s ad valorem property tax rate.


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Development of Budget Line Items Say Within each budgeted expense component are two types of line items. 1. Mandatory expenses are based on community and owner needs and requirements, such as insurance, utilities, management, or other items that must be included in the budget. 2. Discretionary expenses are based on owner, board, and committee desires. They do not have to be included in the budget, but certainly contribute to the quality of life within the community.

Slide 51



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Budget Preparation A budget usually applies to a 12-month period. For example— • January 1 to December 31 (calendar year) • July 1 to June 30 (fiscal year) Your community’s budget should be approved at least 45 days in advance of the start of the fiscal or budget year (check your state statute and governing documents). This will enable you to distribute copies of the approved budget to your owners before it goes into effect. Before you begin work on the budget, pull together all the related documents and reports you and your community association’s accountant have prepared over the past year. (For example—this year’s budget, any comparison of actual expenses to budgeted expenses, other financial reports or statements, and bills paid over the past year.) To meet approval and distribution deadlines, you should begin work on the next year’s budget several months in advance. Keep a file all year long with recommended budget items for the future, along with notices of rate increases from utilities and service providers. Ask residents for any “wish list” items for the coming year. Recommend that the board form a budget committee to assist with budget development. The budget packet should include the operating budget, a summary of the reserve budget, and a 3–5 year cash flow report combining the operating and reserve budgets. This budget packet, a statement as to whether special assessments are contemplated, and a description of the association’s collection policies, should be distributed to the members within the time frame stated above.

Development of Budget Line Items Each line in a budget represents a different account or category of revenue or expense. This is why accounts are commonly called line items in a budget. There are two types of expenditures in a community budget—mandatory line items and discretionary ones: • Mandatory line items—These are items based on community and owner needs. They are requirements that the community is obligated to meet, e.g. income taxes, management fees, repairs, utilities, and maintenance. • Discretionary line items—These are items based on owner, board, and committee desires. They are items people would like to have—given their values, lifestyle, and preferred level of service, e.g. social and recreational expenses, picnic areas, etc. There are standard ways to describe common line items for community associations, as the sample on the next page illustrates. It consists of an excerpt from a chart of accounts for a condominium association.

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Module 2: Financial Management A chart of accounts is an organized list of the titles, descriptions, and assigned numbers of all accounts in an organization’s general ledger. The assigned number helps you locate the account. The title describes the purpose of the account. CAI recommends that management companies retain a master list of general ledger account numbers to make it easy for managers and accounting staff to note the appropriate account number. For example, the general ledger account number for grounds maintenance should be the same for every community. There are three rules of thumb to keep in mind when selecting line items for your community’s budget: 1. Select line items that reflect your community’s activities 2. Select line items that will give your board the information it needs to plan and control your community’s operations 3. Keep line items as simple as possible Even though there are customary ways of listing common line items in a budget, your community association can decide how detailed a set of line items it wants to use. It is very important that the same account numbers and names be used in the budget, the general ledger, and all financial reports. Without this consistency, it is impossible to get a clear picture of the community’s financial operations over a period of time. When you are preparing a draft budget, list your line items in as much detail as possible to help you assign costs. For example, utility line items may include: water-domestic, water-irrigation, sewer, electricity, streetlights, fuel oil, natural gas, steam, garbage, telephone, and cable TV. This same level of detail should appear in your community’s financial records. (In order to prepare line items for specific types of goods and services, you may have to solicit bids and proposals, such as insurance, lawn maintenance, and pool management.) However, when you prepare published copies of the adopted budget and any monthly or annual financial reports, it is appropriate to combine detailed line items under a more general one. For example, you might combine Landscape – grounds maintenance, Landscape – seasonal planting and Landscape – irrigation repairs into one line item titled Landscape Maintenance.


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Preparation of an Operating Budget Say There are two methods of preparing a budget: 1. Zero-based. All amounts are set to zero and the budget amount must be justified, instead of assuming the line item is needed and adjusting the amount for the coming year. For example, employee education would be analyzed not only to justify each component within the line item, but also to identify the exact cost of anticipated classes, reference material, etc. 2. Historical trend. The line item is assumed to be needed without justification and the budgeted amount for the coming year will be based on past trends. For example, general repairs to common elements will continually need to be performed. Assuming previous trends will continue, the amount for the coming year should be increased by 8%. Emphasize that an extremely effective approach to developing the operating activities section of a budget is to combine the two methods. The zero-base approach keeps you from accepting this year’s figures at face value while the historical trend approach gives you information to start from when you develop your estimates for the coming year. Slide 52

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Module 2: Financial Management Preparation of an Operating Budget The section of a budget devoted to operating activities includes expenses an association incurs during its normal course of operations. It does not include planned expenses from the reserve fund. There are two basic methods of budget preparation: 1. Zero-base budgeting: With this method, all line items are set to zero and the amount of funds allotted to each must be justified. 2. Historical trend budgeting: This method begins with the assumption that existing line items are needed. The amount of funds allotted to each during the current year is adjusted for expected changes in the coming year. Sources of historical information include financial reports, existing contracts, and bills from the past year. A highly effective approach to developing the operating activities section of a budget is to combine elements of both zero-base budgeting and historical trend budgeting. The zero-base approach keeps you from accepting this year’s figures at face value. It requires you to analyze the reasons for the actual amounts spent. The actual dollar figure may be less or more than the budgeted figure because of circumstances you cannot assume will exist during the coming year. For example, lawn maintenance costs during a dry season will be low—but a community cannot assume that the coming year will be just as dry. The historical trend approach provides you with a starting point of existing data when you develop your estimates for the coming year.

Budgeting by Month In our next lesson, we will discuss the importance of thoughtfully and deliberately calculating each budget line item amount. One of the best financial management tools for both the manager and the board members is the Statement of Revenue and Expenses that, among other data, compares actual expenditures and revenue sources to budgeted amounts in each category. Logically, the report would be more informational if the budgeted amounts are shown in the months the revenue or expense is expected occur, rather than simply dividing the total expense by 12 months and showing 1/12 each month in the Statement of Revenue and Expense. For example, snow removal would show in winter months, pool lifeguard in summer months, etc. See the next page for a sample 12-month budget. When you compare actual figures with budgeted figures: • Identify all significant differences or variances between actual and planned figures • Determine the reasons for the differences and notify the board • Advise the board of any necessary corrective action it needs to take as soon as possible • On accrual basis reports, the budgeted assessment income should equal the actual assessment income


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Page 119 Bayview Towers: Sample Budget Worksheet

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Budget Presentation Say Budget presentation is critically important to help the directors and owners understand and accept the manager’s planned expenditures. Here are some tips: • Include a budget narrative that details your thought process in determining and substantiating the appropriate amount for each revenue and expense line item. • Anticipate the line items in which the owners and board members will be most interested, and formulate your response both verbally and in the budget narrative: o Salaries and benefit costs, especially those of the manager. o Management fees. o Quality of life items, such as newsletters, socials, and volunteer recognition. o Other discretionary line items. • Present information in an easy-to-read and easy-tounderstand format. o Do not provide too much information or complex explanations that will overwhelm the reader. For example, the manager may only want to focus on the budget line items with significant changes from the prior year and leave other budget line items with less significant changes out of discussion. If there are questions on these line items, the manager can always offer explanations. o Use charts, graphs, and other visual presentations o Use comparisons or trends to help explain line items, such as increases in utility costs. Obtain information on the past five years’ rate increases from utility and insurance companies.

Transition to Reserve Account


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Budget Presentation There are two questions to ask yourself when you are preparing to present a budget: • What information will help my audience understand and accept my estimates of revenue and expenses? • How can I present that information in an easy-to-understand format? There are two common mistakes to avoid when presenting a budget: • Neglecting to present any information on how estimates were developed. • Presenting so much information that people are overwhelmed and confused. When you are preparing to present your budget: 1. Identify the line items that your audience is likely to be interested in or question. 2. Identify any comparisons or trends that would help your audience understand why your estimate is what it is. 3. Decide whether a table or a visual presentation such as a pie chart or bar graph will most clearly demonstrate what is happening with the numbers. There are many ways to present historical information on line items to support budget estimates for the coming year. Here are three samples: 1. Line graph 2. Table 3. Bar graph—The bar graph below plots the utility expenses for a community association from 2007 through 2012. This graph allows the reader to see the changes in utility expenses over a six-year period. It also shows how these utility expenses compare to expenses for trash and landscaping and grounds during the same period. What conclusions about utility expenses can you draw from this bar graph?

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Reserve Account Say Reserves are funds set aside for the future replacement of major components. The reserve account should be included as part of the community association budget packet. Reserves may be required by statute, regulations, mortgages, or by the governing documents. Cite an example of replacement reserves being required by the governing documents and by federal law, such as the FHA requirement that 10% of the annual budget must be allocated by separate line item to replacement reserves. Slide 53



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Reserve Account The reserve account consists of funds put aside—in reserve—for the replacement of major components of a community’s common property. Typically, the reserve account might be used to replace asphalt paving, concrete sidewalks, roofs, central heating and cooling plants, swimming pool, tennis courts, elevators, and many other property components. Revenue raised for adding a major item will be a major improvement expense. Revenue raised for replacing that item when it deteriorates will come from the reserve account. Major items that either come with the initial construction or are added later are placed on a replacement reserves schedule. The schedule is a framework for accumulating and spending the funds for replacing major components of the property. The funds are put aside over a period of time to ensure that adequate amounts are available to replace components when they need to be replaced either for deterioration or technological improvements. The components, cost to replace the components, and the remaining useful lives of the components will determine how much should be in the replacement reserves. It is important to note that the Internal Revenue Service does not consider painting an eligible reserve component, believing that it is an operating expense. For those associations that want to set aside funds for a regular paint program, they should create a separate line on both the balance sheet and the statement of revenue and expenses (see Lesson 3), separate from the reserve budget allocation and/or fund, to track the monies set aside for this project. Otherwise, if it audits the association, the IRS may impose additional tax obligations and penalties.

Reasons for Maintaining a Reserve Account Because some items may not need to be replaced for several years, the board and owners may question the value of their contributions. Here are some reasons for maintaining a reserve account to convince the board and owners of the importance of budgeting replacement reserves: 1. Maintaining a reserve account meets legal, fiduciary, and professional requirements. A reserve account may be required by: • Any secondary mortgage market in which your community association participates, e.g. Fannie Mae, Freddie Mac, FHA, VA • Your state’s statutes, regulations, or court decisions • Your community’s governing documents • Industry standards 2. Maintaining a reserve account provides for the planned replacement of major items. Owners expect the community association to fulfill its obligations. At some point in time, the work will have to be done.

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Reserve Account, continued Say The benefits of adequate reserve funding include: 1. Meets legal and fiduciary professional requirements 2. Provides for planned replacement of major components. 3. Equalizes the contributions of old and new owners. 4. Minimizes the need for special assessments. 5. Enhances resale values.

Slide 54 Benefits of an Adequate Reserve Account • • • • •

Meets legal, fiduciary, and professional requirements Provides for planned replacement of major items Equalizes contribution of new and old owners Minimizes need for special assessment Enhances resale value

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3. Maintaining a reserve account equalizes the contributions of old and new owners. Major items deteriorate during use. Although a roof may be replaced when it is 25 years old, every owner who lived under that roof should pay a share of its replacement. Just as both old and new owners benefit from the presence of such an item, both contribute to deterioration. 4. Maintaining a reserve account minimizes the need for special assessments. Owners, especially those on fixed incomes, have limited resources. They may not be able to afford the large special assessments that would be required if replacement reserves are insufficient to cover a major replacement. Special assessments have the reputation of being indicative of poor management. 5. Maintaining a reserve account enhances resale values. Lenders and real estate agents are aware of what a reserve account is and the ramifications for a new buyer if reserves for replacement are inadequate. Many states have replacement reserves disclosure requirements for potential buyers in a community association. Most lenders require adequate replacement reserves before approving a loan application. Some states require replacement reserves for replacements and/or replacement reserve studies.

Funding Goals The answer to the critical question of how much replacement reserves are “enough” or “adequate” is not simple. Each association has different needs, so $100,000 may be excessive to one association but an extremely small amount to another. One standard method of measuring the size of an association’s reserve account, providing information about how the account measures up against the needs of the association, is the concept of percent funded. Percent funded allows an association to measure the relative size of their replacement reserves compared to a ‘fully funded’ reserve balance. Depending on the association’s funding objectives, the association’s funding plan can range from conservative to aggressive. Note that reliance on future special assessments is not considered part of a responsible funding plan. Funding plans are expected to project the revenue and expenses of the reserve account for 30 or more years. Many associations include the effects of interest earned from their reserve accounts ‘on deposit’ and the effect of inflation on projected future expenses. While interest earnings tend to reduce the effects of inflation, the two factors do not offset each other since interest is earned only on the reserve balance, while inflation affects the total replacement cost of all the reserve components.

Reserve Study Maintaining the association’s common property is among the manager’s and board’s most serious responsibilities, and it takes a long range plan to prepare successfully for repair or replacement of the association’s major common area assets. The reserve study is a budget planning tool with which the association expects to offset ongoing deterioration and prepare for inevitable future expenses. Reserve projects are typically the largest expenses that an association faces, and proper financial preparation is essential.

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Reserve Account, continued Reserve Study Discuss the benefits of commissioning a reserve study. Say Whenever possible, you should use an experienced person (Reserve Specialist) to prepare a reserve study or to assist you in determining the remaining useful life and replacement costs.

Slide 55 Benefits of a Reserve Study • Fulfills fiduciary duty • Meets state requirements • Meets AICPA requirements

• Reduces liability • Saves planning time • Effective communication tool • Reveals unbudgeted items

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The reserve study is used for developing a reserve account budget. The study addresses all major common physical components of the property that the association must repair, replace, restore, or maintain. The study should contain, at a minimum, a statement of the remaining useful life of each item; an estimate of the current cost of repair, replacement, or restoration, of those items; and an estimate of the total annual contribution necessary to defray the cost of repair, replacement, or restoration, of those items after deduction of existing reserve funds. In essence, the study must include all items for which the community has long-term replacement responsibility. Consequences of not having a reserve study— • Underfunding: Special assessments, bank loans, deferred maintenance, or a combination of these • Overfunding: Paying too much (more than owners “fair share”), for the benefit of future owners • Board member liability: Exposure to claims of fiscal irresponsibility and loss of D&O insurance coverage Reserve study benefits to community managers and board members— • Fulfilling fiduciary responsibility • Meet individual state requirements (for regulated states) • Compliance with the American Institute of Certified Public Accountants’ (AICPA) audit guide for community associations (An auditor must note in his or her report if the reserve funding amount is absent or inadequate.) • Reduce personal liability from claims of financial mismanagement • Save valuable time with prioritized business plan for capital repairs and replacements • Effective communication tool to keep owners informed • Reserve study can turn up maintenance issues that haven’t been budgeted in ongoing operations The physical components in community associations are constantly changing. As a reserve study is based upon facts at the time the study was conducted, managers and boards should plan for an update of their reserve study on a regular basis—typically from three to five years—to ensure accuracy. Annually, the manager and board should review its reserve study, particularly its funding plan because the association’s physical assets may deteriorate at different rates, interest and inflation rates change, and the association may change its reserve strategy from conservative to aggressive (or vice-versa). Associations should be encouraged to plan responsibly for the future, using the reserve study as a valuable tool. Interest earned on the investment of reserve funds can be added to the replacement reserves on hand. If you do not update your reserve budget each year, you should add its interest income directly to the reserve account. This will help your reserve account keep up with increases in prices due to inflation.

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Preparation of a Reserve Account Budget To maintain the association’s major common area assets, the board and manager must determine an appropriate level of revenue to segregate into a reserve account or replacement fund to pay for the eventual replacement of those assets as they wear out during the life of the development. Without a plan (called a reserve study, see below), it is strictly a “hit or miss” proposition. Usually, a separate section of the budget packet includes the replacement fund budget. Zero-base budgeting is the only practical method for preparing a reserve amounts because replacement costs for major cost items with a relatively long life span should be updated every 3 – 5 years.

Reserve Specialist Whenever possible, use an experienced, qualified person to prepare a reserve study because of the technical detail involved. If the board believes it cannot afford to use a specialist or one is not available in your market, the board should consider hiring a local engineer or qualified contractor and providing him or her with CAI’s A Complete Guide to Reserve Funding & Reserve Investment Strategies (Guide for Association Practitioners Series). Most managers are not qualified to prepare a reserve study or a reserve budget. Attempting to do so may increase your liability exposure and result in loss of the management contract if the reserve budget numbers are incorrect and the association either overfunded or underfunded the reserve account. CAI established the Reserve Specialist (RS) designation program to help community managers and board members identify qualified reserve study providers and to assist communities in developing their reserve study. Utilizing a Reserve Specialist means managers and boards can obtain proposals from competent reserve study providers and make informed business decisions to responsibly fund their association’s replacement reserves. What is the value of having the reserve study conducted by a Reserve Specialist? • Reduced liability exposure: Community managers and board members can limit liability by relying on expert advice. • Independence: No potential conflict of interest. • Focus: Allows managers and board members to concentrate on running the association. • Credibility: If the person or committee preparing the reserve study isn’t credible enough to effect a change in the association’s budget, there is no point expending time on the study. A Reserve Specialist, by virtue of his or her credential, has already established respect and credibility with the board. • Accuracy: The Reserve Specialist does this year-round, and is wellversed in the implications of all the decision points. A reserve cash flow statement shows the amount to be funded and the amount to be expended from the replacement fund over a given period of time.


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Run the Work Group Exercise activity. Three work group exercises are described here. Divide the class into work groups of 3 to 6 persons depending upon the size of the class and assign an exercise to each group. (Feel free to assign the same exercise to multiple groups.) Allow approximately 10 minutes for the work groups to complete their exercise. After the work groups have completed the exercises, have them share the problem and recommended solution with the remainder of the class (10 minutes). An alternative method for running this activity is to go through each exercises as a class—instead of breaking into smaller work groups.

Work Group Exercise #1 Using the budget sample, prepare for a role play in which the members of the work group will be answering audience questions. This budget reflects a 15% increase from last year. The areas that have increased the most from the previous budget are payroll, benefits, insurance, and repairs. Also note that an increase is projected in the management fee category. Anticipate questions the board and owners may pose to you. Questions to be posed from the “audience” during the role play are not to be provided to the work group, but either asked by the instructor or audience members selected during the role play. Q. The payroll costs go up every year. Why do we need all this staff? A. To attract quality staff. • Increases reflect satisfactory performance reviews. • It is better for associations to have long-term, qualified staff than high turn-over which results in employees who are in various stages of training.

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Work Group Exercises Q. Why do we pay so much in benefits to the staff members? A. Benefits are needed to attract high-quality staff. The association cannot control the costs of health benefits, workers’ compensation, etc. Showing comparative costs of the benefits package with other associations proves that we are paying the industry standard.

Q. Why are you increasing the management fee in January? What is the management fee for anyway? Why do we need a management company and a site-manager? I’m sure the manager could do the job by him- or herself. A. A loaded question. Companies have to cover ever increasing costs. This could be the first increase in several years. Many times, management companies are hesitant to raise fees on an annual basis because of potential concerns such as this. The increase could also be pre-set in the contract to reflect a multi-year agreement. To provide the highest level of service to the community, the site manager is needed along with support for knowledge, experience, administrative support, and financial record keeping from the management company.

Q. Why do we waste all this money on newsletters and socials? I just want my grass mowed and the parking garage kept clean. A. For the overall benefit of the entire community, these types of items enhance community value and the quality of life. There’s much more to an association than just maintenance. Since many different individuals live in our community association, you can be assured that there are individuals who fiercely support the newsletter and social activities as they believe that these association involvements provide community.

Q. Why are we paying taxes? I thought we were nonprofit? A. There is a big difference between being nonprofit and taxexempt. Community associations must pay taxes on revenue earned from sources other than member assessments.


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Work Group Exercises, continued Work Group Exercise #2 Using the budget sample, develop alternative revenue sources for Bayview Towers. Consider leveraging existing facilities and activities as you brainstorm ideas. Possible Answers: • • • • •

Newsletter advertising Getting area businesses to help sponsor social events Renting extra parking spaces, especially for RVs, boats, and campers Leasing high-rise roof to cellular phone company Clubhouse use fees


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Page 128 Work Group Exercise #1 Using the budget sample, prepare for a role play in which the members of the work group will be answering audience questions. This budget reflects a 15% increase from last year. The areas that have increased the most from the previous budget are payroll, benefits, insurance, and repairs. Also note that an increase is projected in the management fee category. Anticipate questions the board and owners may pose to you.

Answer:

Work Group Exercise #2 Using the budget sample, develop alternative revenue sources for Bayview Towers. Consider leveraging existing facilities and activities as you brainstorm ideas.

Answer:


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Bayview Towers: Budget Worksheet


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BAYVIEW TOWERS SAMPLE BUDGET NARRATIVE REVENUE Assessments Revenue received from owner assessments. Interest Interest earned on invested funds. Other Revenue earned for late fees, clubroom rental, and other miscellaneous fees. EXPENSE Administrative Expense Management Fee Provide for administrative, financial, and operational services of professional management firm. Increase in January as per contract. Legal and Audit Provide for assessment collections, advice and other legal services as needed. Provide for annual audit and tax return preparation. Insurance Provide for all insurance coverages as required including property, liability, fidelity, and directors/officers liability. After receiving three bids, the board determined that Allan Insurance offered the best coverage at the most competitive rate, reflecting a 6% increase over the previous year. Telephone Provide for telephone expense of site office. AT&T advised of a 3% increase effective March 1. Newsletter Provide for production and distribution of monthly newsletter. Meetings/Awards Provide for costs relating to board and committee meetings. Provide for annual meeting expense including costs of volunteer recognition and awards. Socials Provide for community socials in spring, early fall, and holiday season, 50% of which is underwritten by Golden Realtors and Good Food Groceries. Operating Expense Payroll Provide for wage costs for site manager, maintenance person, and housekeeper. Staff payroll is every two weeks. The months of October and May represent three-payroll period months. Funds are included to provide for a five percent increase in January.


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Payroll Taxes Provide for employer portion of payroll related taxes estimated at eight percent of gross payroll expense. Employee Benefits Provide for health and life insurance, workers compensation and other benefits estimated at 12 percent of gross payroll expense based on current bids for medical and life coverage and actual workers compensation rate. Employee Education Provide for training, seminars, and other educational courses. Two courses for onsite manager at $345, maintenance course for maintenance man at $500 and customer service class for all three employees provided by management company at no charge to the association. Utilities Provide common area electricity, water, and gas. Rate increases as follows: water 3%; sewage 7%; water meters $5 each; electricity 4%; gas 2% Elevator Provide for full service contract for six elevators. No rate increase. Includes 6 after-hour emergency calls @$150 per hour. Patrol Provide for daily drive-through patrol service, parking enforcement, and 10 non-contract visits for annual meeting, Neighbors Night Out, and emergency calls. Landscape Provide for complete landscape management program including routine maintenance, disease and pest control, fertilization, and seasonal color. 3% increase. Trash Removal Provide for contractor to service seven dumpsters three times each week. We eliminated a fourth weekly pick-up to reduce 8% increase to 2%. Pool Provide for complete pool management program including routine cleaning and maintenance. No rate increase. Repairs Provide for common area repairs as needed. Calculated at an increase of 5% over previous years’ actual expenses, less roof repair costs eliminated because roof was replaced last December. Painting Provide for interior common area lobby and hallways. 1% increase to reflect increased cost of paint. Taxes Provide for income taxes on all nonexempt revenue. Reflects 30% of estimated revenue other than assessments.

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Work Group Exercises, continued Work Group Exercise #3 Using the zero-based budgeting method of budget preparation, develop a budget line item for the creation, production, and delivery of the newsletter for Bayview Towers, the sample community. Answer: • Justify the newsletter for communications. • Justify monthly distribution. • Justify the size of the publication. For 240 units, 4-8 pages. • Justify the cost to create desktop publishing. $25-$40 per page. • Justify the cost to reproduce. $.40 to .65 per copy. • Justify the cost of delivery. Staff will need to deliver the newsletter door to door and mail it to offsite owners. • Justify the use of advertising and establish rates.



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Work Group Exercise #3 Using the zero-based budgeting method of budget preparation, develop a budget line item for the creation, production, and delivery of the newsletter for Bayview Towers, the sample community.

Answer:

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Summary Say You have learned: • • Page 133

How to prepare and present a budget. The importance of funding the reserve account.


Key Terms: • • • • • • • • • • • • • •

Assessment Baseline funding Budget Chart of accounts Discretionary budget line items Expenses FHA FHLMC FNMA Full funding Historical trend budgeting Mandatory budget line items Major improvement expenses Operating budget

• • • • • • • • • • • • •

Operating expenses Percent funded Reconciliation of expenses and revenue Reserve account Reserve cash flow statement Reserve formula Reserve Specialist Reserve study Revenue Special assessment Threshold funding VA Zero-base budgeting




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Focus Questions Use the following questions to help you identify and review the core concepts in this lesson. (Hint: Once you look up the answer to a question, you may want to jot down the page number next to the question for future reference.) 1. What are some sources that typically provide information on the financial duties and responsibilities delegated to a community association manager? 2. What are some examples of financial duties and responsibilities typically expected of a professional manager? 3. What is the role of a board of directors in the budget process? • What is a treasurer’s role? • What do committees do? • What is the role of the owners? • What does a manager do? 4. What is a budget? • What is the role of a budget in community management? • What are some of the uses of a budget? 5. What are the different sources of budget requirements? Give an example of each for your community association. 6. What is revenue? • Name the different types of revenue for a community association. • Give an example of each from your association. 7. What are expenses? • Name the three types of expenses. • Give an example of each from your community association. • How do the three types of expenses differ from one another? 8. What are the reasons for maintaining a reserve account? 9. What is the typical time period covered by a budget? 10. Why should a budget be approved at least 45 days before the budget year begins? 11. What are budget line items? • What’s the difference between mandatory and discretionary line items? • What are some characteristics of meaningful budget line items? 12. Name and define the two basic methods of budget preparation. Why should a combination of both methods be used to prepare an operating budget? 13. What is the purpose of a reserve study? • What do the line items in a reserve account budget consist of? • What four items of information do you need to calculate a reserve account budget line item? 14. What does it mean to reconcile a community association’s revenue and expenses for the coming year? 15. What are some “rules of thumb” to follow in order to make an effective budget presentation?

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Thought/Discussion Questions Use the following questions to help you apply the information in this lesson to your own situation. What are some financial duties and responsibilities your board expects of you? How do you know? 2. What are the formally required roles in your community association’s budget process for the board, the treasurer, committees, owners, and yourself? (Hint: See your community’s governing documents and your contract.) What are the informally expected roles for each? (Hint: What do people ask of one another or act as if they expect?) 3. When you look at this year’s budget for your community, what policy decisions do you think it reflects in terms of what your community association will do and will not do this year? 4. What budget requirements are set for your community association by: • Applicable federal laws and regulations • Applicable state statutes, regulations, and court decisions • Applicable local ordinances and regulations • Community association governing documents 5. When you look at the line item expenses in your community’s budget, can you tell which are mandatory and which are discretionary? 6. Check your community association’s software or records to find its chart of accounts. Are the same account titles and numbers used in the budget and in financial reports? 7. Can you find out what method or methods were used to prepare your community’s current budget? 8. What historical information is available to you for preparing the next budget? 9. Does your community association have a reserve account budget? If not, can you find out why not? • How can you help your board and owners see the need for one? • If so, how has the reserve account budget been prepared? • Given what you learned in this lesson, are there any changes in line items to propose? • Are there any changes in how the budget is prepared to propose? 10. Find out what documents were used to present the current budget to the board before it was adopted. (Hint: Check the files.) • Were any documents other than the draft budget prepared? • If so, what were they used for? • If not, what other documents do you think could have been prepared to help explain the proposed budget? 1.


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Lesson 1 Quiz 1. True or false. Community managers are ultimately responsible for establishing, approving, and monitoring the community’s budget. (False) RATIONALE: Most boards of directors are responsible for establishing, approving, and monitoring the community’s budget. Although they have the power to establish a budget, most will delegate preparation authority to their manager. 2. Which of the following officers is responsible for ensuring that the draft budget is prepared and reviewed? a. Treasurer b. President c. Secretary d. Vice President RATIONALE: The community treasurer is usually responsible for ensuring that the draft budget is prepared and reviewed. He or she will usually delegate initial preparation of the budget to the manager. Then the treasurer may review the draft budget with a finance committee. It is important that the treasurer consult all committee chairpersons and invite owner input to ensure support. 3. Each of the following agencies are federally established secondary mortgage institutions EXCEPT: a. Environmental Protection Agency b. Federal National Mortgage Association c. Veterans’ Administration d. Federal Home Loan Mortgage Corporation RATIONALE: Federally established secondary mortgage institutions may set requirements that community associations have to meet if owners are to participate in their financing programs. These agencies regulate and influence such items as the amount of insurance a community association must carry, procedures for financial operations, and requirements for the upkeep of property. The Environmental Protection Agency is not an example of a secondary mortgage institution. 4. True or false. The two main components of a community budget are revenue and expenses. (True) RATIONALE: The two main components of a community budget are revenue and expenses. The revenue and expense categories used in a budget must be the same categories used in financial records, reports, and statements.

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Lesson 1 Quiz, cont’d 5. Which of the following is not a typical source of revenue for a community association? a. Owner assessments b. Major improvement expenses c. Penalty fees d. Interest RATIONALE: As the name indicates, major improvement expenses are not a source of revenue for a community association—they are an association expense. Major improvement expenses consist of items that are not necessarily required, but are added to improve the residents’ lifestyle or to enhance the value of the community association as reflected in the resale value of units. Improvements are different from maintenance, repairs, or replacements which increase the life, usefulness, and/or value of a property. 6. Each of the following are reasons for maintaining a reserve account EXCEPT: a. Maintaining a reserve account meets legal, fiduciary, and professional requirements b. Maintaining a reserve account increases the likelihood that an association will require a special assessment c. Maintaining a reserve account equalizes the contributions of old and new owners d. Maintaining a reserve account enhances resale values RATIONALE: Owners, especially those on fixed incomes, frequently have limited resources. They may not be able to afford the large special assessments that would be required if replacement reserves are insufficient to cover a major replacement. Maintaining a reserve account minimizes the need for special assessments. 7. Which of the following is an example of a discretionary line item in a community budget? a. newsletter b. income taxes c. utilities d. maintenance RATIONALE: Discretionary line items are based on owner, board, and committee desires. They are items people would like to have—given their values, lifestyle, and preferred level of service, e.g. social and recreational expenses, picnic areas. Mandatory line items, on the other hand, are based on community and owner needs. They are requirements that the community is obligated to meet, such as income taxes, repairs, utilities, and maintenance.


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Lesson 1 Quiz, cont’d 8. True or false. With historical trend budgeting, all line items are set to zero and the amount of funds allotted to each must be justified. (False) RATIONALE: With zero-base budgeting, all line items are set to zero and the amount of funds allotted to each must be justified. Historical trend budgeting begins with the assumption that existing line items are needed. The amount of funds allotted to each one during the current year is adjusted for expected changes in the coming year. 9. True or false. Board member liability is a potential consequence of not having a reserve study. (True) RATIONALE: Not having a reserve study can expose board members to claims of fiscal irresponsibility and loss of D&O insurance coverage. Having a reserve study provides a comprehensive picture of the financial condition of the community. 10. Complete the following sentence: Utilizing a(n) ___________________ means managers and boards can obtain proposals from competent reserve providers and make informed business decisions to responsibly fund their association’s replacement reserves. a. Community Insurance and Risk Management Specialist b. Association Management Specialist c. Professional Community Association Manager d. Reserve Specialist RATIONALE: CAI established the Reserve Specialist (RS) designation program to help community managers and board members identify qualified reserve study providers and to assist communities in developing their reserve study.


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Additional Resources For further information on budges and replacement reserves, we suggest the following: Reserve Funds: How & Why Community Associations Invest Assets, 2nd Edition, A Guide for Association Practitioners, by Mitchell H. Frumkin, PE, PP, RS, MBA, and Nico F. March, CFM, Editors. Reserves are essential to the successful, long-term operation of a community association. Learn how to establish the right funds and invest them responsibly, and how to comply with federal and state regulations. Second edition has been updated relative to current economic conditions. Appendices include FAQs and summaries of state reserve-fund laws. (Community Associations Institute, 2009.) The Board Treasurer: Roles and Responsibilities in Community Associations, A Guide for Association Practitioners, by Howard A. Goldklang, CPA, MBA. Not just for treasurers. Contains information on all aspects of association finances—statements, balance sheets, assets and liabilities, members’ equity, reserves, investments, audits and more. Outlines the treasurer’s duties and how to prepare documents, work with boards and handle delinquencies. Contains sample documents. (Community Associations Institute, 2006.) Community Association Finances. A collection of 31 of the best articles from Common Ground magazine covering assessments, cutting costs, generating revenue, budgeting, protecting assets, reserves, investing and taxes. (Community Associations Institute, 2005.)



Transition to Lesson 2: Collecting Assessments


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Lesson 2: Collecting Assessments


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Lesson 2: Collecting Assessments Goal At the end of this lesson, students will understand the basic concepts of the assessment collection process.

Time 60 minutes Session Time Breakdown 30 minutes—Faculty presentation 20 minutes—Class Exercise 10 minutes—Summary/quiz

Overview This session focuses on basic information a manager can use to assist and support a board’s efforts to fulfill its duty to establish and collect assessments. Materials Needed

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LCD projector

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Overview Introduce the lesson Say This lesson provides an overview of assessments—the lifeblood of a community association as its major source of revenue. If adequate assessments are not collected in a timely manner, the community association will not be able to operate, preserve, maintain, and enhance its common property.

Overview the session Say We will discuss: •

The sources of authority to collect assessments.

•

The benefits of establishing a collections policy.

•

Legal remedies available to community associations for collecting delinquent assessments.

•

The impact of a bankruptcy filing on the association.



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Overview, continued Go through the Lesson 2 learning objectives with the class.

Slide 56


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Key Terms: • • • • • • •

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Acceleration Assessment Bad debt write-off Chapter 7 bankruptcy Chapter 11 bankruptcy Chapter 13 bankruptcy Fair Debt Collection Practices Act

• • • • • •

Foreclosure Lien Maintenance fee Personal money judgment Soldier and Sailors’ Act Special assessment

This lesson provides an overview of assessments—the lifeblood of a community association as its major source of revenue. If adequate assessments are not collected in a timely manner, the community association will not be able to operate, preserve, maintain, and enhance its common property. The lesson provides basic information a manager can use to assist and support a board’s efforts to fulfill its duty to establish and collect assessments. It explains: • Owner assessments and special assessments • Authority to collect assessments • Establishing annual assessments • Collection policies and procedures

What You Will Learn After reading and reviewing this lesson, you should be able to explain and understand: • Assessments • Special assessments • Community association authority to collect assessments • Process of establishing annual assessments • Consequences of delinquent payments • Benefits of an established collection policy • Characteristics of an effective collection policy • Collection procedures and remedies • Lien • Foreclosure • Lawsuit for a personal money judgment • Three types of bankruptcy • Bad debt write-off • Solutions for collection shortfalls


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Overview, continued Define Assessment and Special Assessment

Slide 57 Assessments Assessment – Owner’s financial obligation to a community association during a given period of time Special assessment – One time assessment, often voted on by owners to cover a major expense such as a major repair or replacement

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Say The authority to collect assessments comes from three sources: 1. Federal laws and regulations. Including Fair Debt Collection Practices Act and the Soldiers and Sailors’ Civil Relief Act. 2. State statutes. Typically regulate an association’s authority to collect assessments. 3. Governing documents. Routinely cover: • Mandatory nature of assessments • Authority to collect assessments • Purpose or use of assessments • Basis for calculating assessments • Reasons for levying fines, fees, etc. • Payment procedures • Collection procedures for delinquent payments

Point out the Sample Covenant Language on the following pages.

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Module 2: Financial Management Definitions of Assessments Assessment: As covered in Lesson 1, an assessment, sometimes called a maintenance fee, is the owner’s financial obligation to the community association during a given period of time—usually one year. It covers the owner’s share of the common expense (known as “common expense liabilities” in some states). An annual assessment may be paid on a monthly, quarterly, or annual basis. An assessment for an owner’s share of the common expenses is a binding legal obligation based on the community association’s governing documents. In condominiums and planned communities, assessments are binding obligations that the owner cannot avoid. Special assessment: A special assessment is— A one-time assessment, often voted on by owners, to cover a major expense, such as a major repair or replacement or improvement that was not included in the annual operating budget. To protect your community association’s interests, your governing documents should include a broad definition of assessments, if your state law does not. A broad definition includes: • Monthly (or quarterly or annual) and special charges against all units for common expenses • Special charges that may be levied against a particular unit, such as late fees and interest, collection costs (including attorney’s fees), fines, fees, payment for damages to the common property • Additional charge that may be levied against all owners to pay for a major expense not included in the operating budget

Authority to Collect Assessments Authority to collect assessments can come from three sources: 1. Federal laws and regulations: As described in Module 1, the federal Fair Debt Collection Practices Act and Soldiers and Sailors Civil Relief Act may apply to your community association’s collection efforts. For more information, contact your legal counsel. 2. State statutes: State statutes that enable the establishment of a community association typically state that the association board has the power to collect assessments. These statutes also state what procedures a community association must follow in order to collect delinquent assessments. 3. Governing documents: Governing documents typically cover the following items: • Mandatory nature of assessments • Authority to collect assessments • Purpose or use of assessments • Basis for calculating assessments • Reasons for levying fines, fees, etc. • Payment procedures • Collection procedures for delinquent payments On the next two pages is a sample of covenant language on the collection of assessments.


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SAMPLE: Covenant Language on the Collection of Assessments CREATION OF LIEN AND PERSONAL OBLIGATION The trustee, for each unit ownership hereby covenants, and each owner of a unit ownership by acceptance of a deed therefore, whether or not it shall be so expressed in any such deed or other conveyance, shall be and is deemed to covenant and hereby agrees to pay to the association such assessments or other charges or payments as are levied pursuant to the provisions of this declaration. Such assessments, or other charges or payments, together with interest thereon and costs of collection, if any, as herein provided, shall be a charge on the unit ownership and shall be a continuing lien upon the unit ownership against which such assessment is made. Each such assessment, or other charge or payment, together with such interest and costs, shall be the personal obligation of the owner of such unit ownership at the time when the assessment or other charge of payment is due. PURPOSE OF ASSESSMENTS The assessments levied by the association shall be exclusively for the purposes of administering the affairs of the association, and paying the common expenses. ANNUAL ASSESSMENT Each year at least sixty (60) days before the end of the association’s fiscal year, and at least thirty (30) days before final adoption thereof, the board shall furnish each owner with a proposed budget for the ensuing fiscal year which shall show the following, with reasonable explanations and itemizations: A. The estimated common expenses with an allocation of portions thereof for the payment of real estate taxes, if any; B. The estimated amount, if any, to maintain adequate replacement reserves for common expenses; C. The estimated net available cash receipts from sources other than assessments, including, without limitation, receipts from any leases, licenses or concessions; D. The amount of the “annual assessment,” which is hereby defined as the amount determined in “A” above, plus the amount determined in “B” above, minus the amount determined in “C” above, minus excess funds, if any, from the current year’s operation; and E. That portion of the annual assessment which shall be payable by the owner with respect to his dwelling unit each month until the next annual assessment or revised annual assessment becomes effective, which monthly portion shall be equal to one twelfth (1/12th) of the annual assessment multiplied by the dwelling unit’s undivided interest. PAYMENT OF ASSESSMENT On or before the first day of the fiscal year, and on or before the first day of each and every month thereafter until the effective date of the next annual assessment, each owner of a dwelling unit shall pay to the association, or as it may direct, that portion of the annual assessment, which is payable by such owner.

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Module 2: Financial Management SAMPLE: Covenant Language on the Collection of Assessments, continued NONPAYMENT OF ASSESSMENTS Any assessments or other charges or payments that an owner is required to make or is liable for hereunder which are not paid when due shall be deemed delinquent. If an assessment or other charge or payment is not paid within thirty (30) days after the due date, it shall bear interest from the due date at the contract rate permitted in _____, but not to exceed eighteen percent (18%) per annum, and the board (i) may bring an action against the owner personally obligated to pay the same, together with interest, costs, and reasonable attorneys’ fees of any such action, which shall be added to the amount of such assessment or other charge or payment and shall be included in any judgment rendered in such action and (ii) may enforce and foreclose any lien which it has or which may exist for its benefit, together with interest, costs, and reasonable attorneys’ fees of any such action, which shall be added to the amount of foreclosure judgment. In addition, the board may in its discretion charge reasonable late fees for the late payment of assessments or other charges. No owner may waive or otherwise escape liability for the assessments or other charges or payment provided for herein by nonuse, abandonment, or transfer of his dwelling unit.



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Benefits of Establishing a Collections Policy Say Every association should adopt a formal collection policy in which all actions are automatically and systematically executed. • Educate owners about consequences of failing to pay assessments and other charges on time • To ensure consistent handling of delinquent accounts • To avoid selective or discriminatory actions against delinquent accounts • To give equitable treatment and preserve harmony among owners

Slide 58 Benefits of an Established Collection Policy • Educates owners about their obligations to the association and the consequences of not meeting those obligations on time • Provides a checklist and a road map to guide a board and a manager • Avoids charges that the association is proceeding in a selective or discriminatory way • Helps preserve harmony among owners

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Module 2: Financial Management Introduction to Establishing a Collection Policy A formal collection policy is the foundation of a successful program for: • Maintaining necessary cash flows • Reducing financial loss from owner defaults on assessment payments It provides a systematic approach to delinquencies. It can be done without owner approval—unless it requires amendments to the governing documents. When a board formulates such a policy, it will become more familiar with collection tools it already has available. It may also find areas where its authority is lacking or where the governing documents could be amended to provide for additional collection remedies.

Consequences of Delinquent Payments Because a community association relies on the timely collection of assessments in order to meet operating expense requirements, delinquent payments may result in: • Increased assessments to cover the deficit • Essential maintenance deferred due to lack of funds • Property beginning to appear run-down—which in turn reduces property values • Shortfalls added to the next year’s operating budget if any monies are outstanding at the end of the year • Borrowing from otherwise restricted community association funds • Borrowing from a lender (which is highly unlikely if the association is having difficulty paying its regular operating expenses) • Disharmony between paying owners and delinquent ones • Inability to obtain mortgages on units in the community

Benefits of Having an Established Collection Policy The benefits of having an established collection policy include: • An established policy educates owners about their obligations to the community association and the consequences of not meeting those obligations on time. If owners are informed about their obligations and the consequences of not meeting them, they are more likely to ensure prompt payment. • An established policy provides a checklist and a road map to guide a board and a manager. It ensures consistent, predictable handling of collection activities. It enables the board and a manager to move quickly to protect the common interests. • Consistent enforcement of a clearly written policy avoids or answers charges that the community association is proceeding in a selective or discriminatory way. • An established policy helps preserve harmony among owners.


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Characteristics of an Effective Collection Policy Review the Characteristics of an Effective Collection Policy.

Slide 59 Characteristics of an Effective Collection Policy 1. Established by a formal resolution of the board 2. Specify only actions that are within the power of the association and its board 3. Set a firm due date for assessments

4. Outline the steps to be taken when a payment is late 5. Allow for discretion in special cases 6. Specify when a delinquent assessment should be referred to legal counsel 7. Provide for the collection of any costs associated with collecting delinquent assessments

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Every association should adopt a formal collection policy in which all actions are automatically and systematically executed. • Educate owners about consequences of failing to pay assessments and other charges on time • To ensure consistent handling of delinquent accounts • To avoid selective or discriminatory actions against delinquent accounts • To give equitable treatment and preserve harmony among owners

Characteristics of an Effective Collection Policy An effective collection policy should: 1. Be established by a proper formal resolution of the board that— • Specifies the problem to be solved • Delineates the authority for taking the approved action • Designates the procedures to be followed and the penalties for noncompliance • Designates the circumstances under which the procedures are required or permitted 2. Specify only actions that are within the power of the community association and its board. 3. Set a firm due date for assessments. All members of the community association must have proper advance notice of the due date for assessments. 4. Outline the steps to be taken by the person(s) responsible for collecting assessments when a payment is late. Be sure that whatever steps are taken to collect assessments are authorized by enabling statutes, governing documents, and the Fair Debt Collection Practices Act. Any steps taken should automatically and systematically increase in severity the longer the delinquency exists. 5. Allow for discretion in special cases. The burden of requesting special consideration should be placed on the owner. 6. Specify when a delinquent assessment should be referred to legal counsel. This step should be automatic once a delinquent assessment reaches a specified age or amount. Once an account is turned over to legal counsel, it is critical that all further communication be between the community association’s attorney and the delinquent owner or the owner’s attorney. The manager and/or board should not be involved in discussions with anyone other than the association’s legal counsel.

CAUTION: Because of recent legislative and media efforts to limit the right of community associations to foreclose on delinquent assessments and assessments, your board may want to consider requiring board member approval before referring an owner to the attorney and posting a home for foreclosure instead of establishing an automatic process as described above.

7. Provide for the collection of any costs associated with collecting delinquent assessments. The right to recover attorney fees, management company collection fees, and costs from a delinquent party should be guaranteed by state statute, the governing documents, or resolution.


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Collection Procedures and Remedies Say Most states have statutes governing the legal remedies available to community association in collecting delinquent assessments. While we will discuss remedies in general terms, we recommend obtaining the advice of competent legal counsel before pursuing any action against an owner for unpaid assessments or other charges. Collection procedures and remedies involve: • Levying late charges or other penalties. o Usually effective. o Easy to implement. o Generates funds for the association. • Suspending the voting rights of delinquent owners. o May not be effective. o May not be easy to implement • Suspending the delinquent owner’s, tenants’ and/or guests’ right to use the amenities. o Somewhat effective. o Difficult to enforce. • Perfecting assessment lien against the unit by recording it for public notice. o Somewhat effective. o Usually an expense to the association initially. • Foreclosing upon the lien. o Usually effective. o Expensive to the association. o Drastic action without any assurance of recovery. • Suing the owner for a personal money judgment. o Usually effective. o May be expensive to the association. o May be difficult to enforce.

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Collection Procedures and Remedies Slide 60

Slide 61


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Collection Procedures and Remedies Enforcement of collection procedures and remedies should be prompt, systematic, and aggressive. Do your best to be all three when collecting delinquent payments! When a payment is late, your community association’s collection policy should tell you: • When late notices are to be sent and how frequently • What late notices should say • What late or collection fee to assess the delinquent owner • When collection should be turned over to legal counsel • When to accelerate assessment payment Acceleration is the collection of all assessments due through the end of the fiscal year. For example, if an owner’s payments for the annual calendar-year assessment are due monthly and become delinquent at the end of March, all monthly payments through December of that year are due immediately. Usually, if acceleration is not authorized in state statutes or the association’s governing documents, it cannot be implemented by board resolution. Various state statutes generally govern the legal remedies available to a community association for collecting delinquent payments from owners. Because statutes and case law vary from state to state, your board and attorney should determine what is allowed by law before implementing any policy or procedure. Furthermore, always assess the cost effectiveness of taking various actions to recover delinquent assessments.

Basic Legal Procedures and Remedies Available to Community Associations In this section, we will discuss some of the procedures and remedies available to a community association for collecting delinquent payments from owners.

Extra-Judicial Remedies There are remedies outside the courts that a community association can use to encourage a delinquent owner to pay what is owed. If your board wants to use any of the following procedures, they must be provided for in a state statute, the governing documents, or a formal board resolution. Verify your community association’s authority to use any of these extra-judicial procedures before implementing them. Extra-judicial procedures to get an owner to pay a delinquent amount include: • Imposing a late charge or interest penalty on delinquent accounts • Requiring a security deposit of a certain number of months of estimated assessments from an owner with a history of delinquency • Acceleration • Suspending the owner’s use privileges, such as pool access • Suspending the owner’s voting and other participation rights Other, more drastic legal measures an association may employ to collect delinquent payments from owners include the following:

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Module 2: Financial Management Perfect a Lien on the Unit As discussed in Module 1, a lien is a legal claim by one party (community association) on the property of another (delinquent owner) to obtain the payment of a debt or the satisfaction of an obligation. The automatic lien in a community association protects the association’s interests. It encourages payment of the debt. Among other consequences of a lien, the owner cannot sell or transfer the unit without settling the debt. The lien against an owner’s unit must be authorized by your community association’s applicable statutes or governing documents. Most statutes enabling the establishment of a community association or governing documents require that assessment liens be subordinate to any mortgages or government claims—such as taxes or child support—against an owner’s property. Subordinate means that these other claims must be satisfied before that of the assessment lien. In most states, the recording of the declaration constitutes a prior recorded assessment lien against the unit owner’s interests. Some state statutes have authorized a “super lien” or “community asset protection lien”. It provides a limited six-month priority for the community association’s assessment lien over the lien of a first mortgage holder. Your attorney can handle the recording of any liens against the title to a unit in the land records. The form used varies by state. While the lien is automatic and exists without recording it in most states, perfecting the lien by recording it provides public notice of the debt.

Foreclose on the Unit Foreclosure is a legal proceeding filed in court whereby a party with a claim against an owner can claim ownership of the unit involved in order to recover the money it is owed. The unit is usually auctioned by the court’s representative or the association’s legal counsel and sold to the highest bidder. If a community association purchases a vacant unit that is foreclosed, it may rent it or use it to house an onsite employee. A community association may foreclose on an owner if it thinks it can recover what it is owed. Sometimes the act of posting a home for foreclosure will prompt an owner to pay what is owed—especially if the owner’s mortgage payments are current. If an owner has little equity in the unit—that is, still owes most of the mortgage—the association stands little chance of getting the money it is owed.

Sue the Owner for a Personal Money Judgment A personal money judgment or summary judgment is a decision by a judge to allow the community association to claim the owner’s personal property to settle a delinquent account. The association must file court papers, appear before a judge, and convince the judge that the owner owes the association money. If the judge recognizes the community association’s claim, he or she may authorize the association to attach the owner’s bank account, claim any rent being paid by a tenant in the unit, garnish the owner’s paycheck, or take possession of the owner’s car or other personal property. This is a viable alternative to consider when the amount of money owed is small. However, it can be difficult to gain satisfaction of the debt from the delinquent owner without incurring additional court costs and attorney fees.


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Bankruptcy Actions Say A bankruptcy filing imposes strict laws on the association. It is illegal for a creditor (the association) to violate the debtor’s (delinquent owner’s) protection under federal and state laws. As soon as you are aware that an owner has filed for bankruptcy: • Cease all collection efforts. • Contact your legal counsel. • Forward copies of all notices to your legal counsel. Explain to the class that the three types of bankruptcy involve Chapter 7, Chapter 11, and Chapter 13.

Slide 62 Bankruptcy Immediately take three actions: 1. Contact legal counsel (attorney) 2. Forward any bankruptcy notices to counsel 3. Stop all collection efforts

Types of bankruptcy: 1. Chapter 7 – liquidation 2. Chapter 11 – corporate reorganization 3. Chapter 13 – personal reorganization

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Module 2: Financial Management Be Prepared for Bankruptcy Petitions by Owners A community association should have procedures in place to protect its interests in case a delinquent owner declares bankruptcy. When an owner files a petition for relief from bankruptcy, this action affects: • The likelihood of the community association collecting any delinquent assessments it is owed • The steps it can take to collect those monies A bankruptcy filing imposes an automatic stay (hold or prohibition) against any debt collection efforts. It is illegal for a creditor (such as the association) to violate that stay—even if the creditor does not have notice of the bankruptcy. There are actions a creditor may and may not take under the law when a debtor declares bankruptcy. Immediately contact legal counsel when you become aware of a bankruptcy filing by an owner. Immediately forward any bankruptcy notices to your legal counsel. Immediately stop all collection efforts. There are legal means for a community association to collect what it is owed, even though an owner declares bankruptcy. The association still has the right to collect new charges from the debtor as they are incurred despite the bankruptcy filing, although only an attorney can continue the collection efforts. Don’t give up. Consult with your attorney and be aggressive. One of the factors that influence the order of creditors’ payment is the date a lien was filed. Since the association’s lien is continue, the attorney may need to quickly record it to make it public record. Make sure the association’s attorney files a proof of claim as soon as possible after you receive the notice of bankruptcy. There are three types of bankruptcy: 1. Chapter 7: Chapter 7 is called straight bankruptcy or liquidation. It involves the: • Prompt conversion of all the individual’s or corporation’s nonexempt property to cash • Payment of creditors to the extent possible The law establishes the order in which creditors are paid, and the percentage of debt that is paid. Where the community association is in the order of creditors will affect whether it is paid what is owed and, if so, how much. Typically, an association receives nothing or a very small percentage of the amount it is owed when an owner files Chapter 7. 2. Chapter 11: Chapter 11 bankruptcy is called a re-organization because it is designed to allow for an orderly payment to creditors while enabling a corporation to continue to operate. Chapter 11 involves the development of a plan to pay off debts in a timely manner. Once a judge approves a plan as “fair and equitable,” it is binding and discharges all debts not provided for under the plan. Creditors usually eventually receive more of what they are owed under a Chapter 11 than a Chapter 7. However, they don’t necessarily receive all they are owed.


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3. Chapter 13: Chapter 13 is used to reorganize personal or non-corporate debt. A plan is submitted to a judge for paying off all or some of the debt over a specified period of time while waiving other debt that may have been incurred prior to filing for bankruptcy. Chapter 13 establishes a payment plan detailing the amount that must be paid and the time period for repaying it. Creditors do not have to agree to the plan. As with Chapter 11, a creditor has more of a chance of eventually being repaid under Chapter 13 than Chapter 7.

Uncollectible Payments A payment that cannot be collected from an owner is called a bad debt. When a community association determines that a debt cannot be collected from an owner after a reasonable effort has been made, it should write off the debt. A bad debt write-off consists of recording an uncollectible debt as an expense that the association must absorb. This usually requires a resolution of the board.

Solutions for Collection Shortfalls How does a community association offset a collection shortfall? The alternatives available to an association include: • Levy a special assessment • Raise the regular assessments for the coming year • Create a reserve for bad debts in the budget • Cut this year’s expenses If your community association finds itself with a collection shortfall, your board will expect a prompt, effective recommendation from you, as the manager.


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Class Exercise Allow 20 minutes for the Class Exercise.

Run the Class Exercise. Run this activity as a class—instead of breaking into smaller work groups.

Class Exercise Based on the information about the sample community, prepare a collections policy for Bayview Towers. Identify the references in the governing documents that empower you to establish and enforce your policy. Answer: Section 5.3 of the Declaration gives the Board of Directors the authority to collect assessments and take action against any owners who are delinquent. Capture your notes here.


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Page 156 Class Exercise Based on the information about the sample community, prepare a collections policy for Bayview Towers. Identify the references in the governing documents that empower you to establish and enforce your policy.

Bayview Towers – Declaration ARTICLE 5 Operation of the Property Section 5.1. Determination of Common Expenses and Assessments Against Unit Owners. (a) Fiscal Year. The fiscal year of the Bayview Towers Condominium Association shall be July 1 through June 30 unless otherwise determine by the Board of Directors. (b) Preparation and Approval of Budget. (1) At least seventy-five days before the beginning of each fiscal year, the Board of Directors shall adopt a budget for the Association containing an estimate of the total amount considered necessary to pay the cost of maintenance, management, operation, repair and replacement of the common elements and those parts of the units as to which it is the responsibility of the Association to maintain, repair and replace, and the cost of wages, materials, insurance premiums, services, supplies and other expenses of the Association which will be required during the ensuing fiscal year for the administration, operation, maintenance and repair of the Property and the rendering to the unit owners of all related services. The budget shall also reflect the separate assessment of Limited Common Expenses. (2) Such budget shall also include such reasonable amounts as the Board of Directors considers necessary to provide a general operating reserve and replacement reserves for contingencies and replacements. At least sixty-five days before the beginning of each fiscal year, the Board of Directors shall send to each unit owner a copy of the budget in a reasonably itemized form which sets forth the amount of . the common expenses and any special assessment payable by each unit owner. Such budget shall constitute the basis for determining each unit owner’s assessment for the common expenses of the condominium. (c) Assessment and Payment of Common Expenses. (1) Subject to the provisions of section 9.1(a), the total amount of the estimated funds required from assessments for the operation of the Property set forth in the budget adopted by the Board of Directors shall be assessed against each unit owner in proportion to such unit owner’s respective Common Element Interest, except for. (i) Limited Common Expenses, which shall be assessed against each unit owner benefited in proportion to the relative Common Element Interest of such unit’s interest, or in accordance with use of the services, as appropriate.

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Module 2: Financial Management The assessment for common expenses, including Limited Common Expenses, shall be alien against each unit owner’s unit as provided in Section 9.2. On or before the first day of each fiscal year, and the first day of each of the succeeding eleven months in such fiscal year, each unit owner shall be obligated to pay to the Association, one-twelfth of such assessment. Within ninety days after the end of each fiscal year, the Board of Directors shall supply to all unit owners, and to each Mortgagee requesting the same, an itemized accounting of the common expenses for such fiscal year actually incurred and paid, together with a tabulation of the amounts collected pursuant to the budget adopted by the Board of Directors for such fiscal year, and showing the net amount over or short of the actual expenditures plus replacement reserves. Any amount accumulated in excess of the amount required for actual expenses and replacement reserves shall, at the discretion of the Board of Directors, be placed in reserve accounts, be placed in a special account to be expended solely for the general welfare of the unit owners, be credited according to each unit owner’s Common Element Interest to the next periodic installments due from unit owners under the current fiscal year’s budget, until exhausted, or distributed to the unit owners. Unless the Board of Directors directs otherwise, any net shortage shall be assessed promptly against the unit owners in accordance with their Common Element Interests and shall be payable either: (1) in full with payment of that next periodic assessment which is due more than ten days after delivery of notice of such further assessment; or (2) in not more than six equal periodic installments, as the Board of Directors may determine. (2) Any common expenses paid or incurred in making available subscription television service to some or all of the unit owners shall be assessed equally against the condominium units involved. Any common expenses benefiting less than all of the condominium units, or caused by the conduct of less than all those entitled to occupy the same or by their licensees or invitees, shall be specially assessed against the condominium unit or units involved, in proportion to their respective Common Element Interests or actual cost, as determined by the Board. Any common expenses paid or incurred in providing metered utility services to some or all of the units shall be assessed against each condominium unit involved based on its actual consumption of such services. Further, the Board of Directors may assess other expenses on other bases to the extent permitted by section 55-79.83 of the Condominium Act. (d) Reserves. The Board of Directors shall build up and maintain reasonable replacement reserves for working capital, operations (including losses due to insurance deductibles), contingencies and replacements. Extraordinary expenditures not originally included in the annual budget that may become necessary during the year shall be charged first against such replacement reserves. Except for normal maintenance expenses shown in the annual operating budget, all expenses for repair and replacement of physical assets maintained by the Association shall be charged first against such replacement reserves. Unless otherwise determined by a vote of three-fourths of the directors, the amount held as replacement reserves shall not substantially exceed the amount reasonably required to assure the Association’s ability to replace components as they reach the end of their useful lives. If regular annual maintenance extends the useful life of components so that reserve account is excessive, the replacement reserves shall be adjusted by reallocation to other budget items or by distribution to the unit owners.


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If the replacement reserves are inadequate for any reason, including nonpayment of any unit owner’s assessment, the Board of Directors may at any time levy a further assessment, which shall be assessed against the unit owners according to their respective Common Element Interests, and which may be payable in a lump sum or in installments as the Board may determine. The Board of Directors shall serve notice of any such further assessment on unit owners by a statement in writing giving the amount and reasons therefore, and such further assessment shall, unless otherwise specified in the notice, become effective with the next periodic payment which is due more than ten days after the delivery of such notice of further assessment. All unit owners so notified shall be obligated to pay the adjusted periodic amount or, if such further assessment is not payable in installments, the amount of such assessment. Such assessment shall be a lien as of the effective date as set forth in subsection (c). (e) Initial Budget and Initial Capital Payment. (i) Upon taking office, the first Board of Directors elected or designated pursuant to these Bylaws shall determine the budget, as defined in this section, for the period commencing thirty days after such election and ending on the last day of the fiscal year in which such election occurs. Assessments shall be levied and become a lien against the unit owners during such period as provided in subsection (c). (ii) The Declarant, as the agent of the Board of Directors, will collect from each initial purchaser at the time of settlement an “initial capital payment” equivalent to twice the estimated periodic installment of the annual assessment for common expenses, if any, fur such purchaser’s unit. The Declarant will deliver the funds so collected to the Board of Directors to provide the necessary working capital for the Association. Such funds may be used for certain prepaid items, initial equipment, supplies, organizational costs and other start-up costs, and for such other purposes as the Board of Directors may determine. (f) Effect of Failure to Prepare or Adopt Budget. The failure or delay of the Board of Directors to prepare or adopt a budget for any fiscal year shall not constitute a waiver or release in any manner of a unit owner’s obligation to pay the allocable share of the common expenses as provided in this Declaration whenever the same shall be determined and, in the absence of any annual budget or adjusted budget, each unit owner shall continue to pay each periodic installment at the rate established for the previous fiscal year until notified of the periodic payment which is due more than ten days after such new annual or adjusted budget is adopted. (g) Accounts. All sums collected by the Board of Directors with respect to assessments against the unit owners or from any other source may be commingled into a single fund. Section 5.2. Payment of Common Expenses. Each unit owner shall pay the common expenses, including Limited Common Expenses, assessed by the Board of Directors pursuant to the provisions of Section 5.1. No unit owner may be exempted from liability for the assessment for common expenses by reason of waiver of the use or enjoyment of any of the common elements or by abandonment of the unit. No unit owner shall be liable for the payment of any part of the common expenses assessed against that unit subsequent to the date of recordation of a conveyance by such unit owner in fee of such unit.

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Module 2: Financial Management Prior to or at the time of any such conveyance, all liens, unpaid charges and assessments shall be paid in full and discharged. The purchaser of a unit shall be jointly and severally liable with the selling unit owner for all unpaid assessments against the latter for the proportionate share of the common expenses up to the time of such recordation, without prejudice to the purchaser’s right to recover from the selling unit owner amounts paid by the purchaser therefore; provided, however, that any such purchaser shall be entitled to a statement setting forth the amount of the unpaid assessments against the selling unit owner within ten days following a written request therefore to the Board of Directors or managing agent and such purchaser shall not be liable for, nor shall the unit conveyed by subject to a lien for, any unpaid assessments in excess of the amount therein set forth; and shall the unit conveyed be subject to a lien for, any unpaid assessments in excess of the amount therein set forth; and provided, further, that each Mortgagee who comes into possession of a condominium unit by virtue of foreclosure or by deed or assignment in lieu of foreclosure, or any purchaser at a mortgage foreclosure sale, shall take the condominium unit free of any claims for unpaid .assessments or charges against such unit which accrue prior to the time such Mortgagee or purchaser comes into possession thereof, except for claims for a pro rata share of such assessments or charges resulting from a pro rata reallocation of such assessments or charges to all condominium units including the mortgaged condominium unit. Section 5.3. Collection of Assessments. The Board of Directors, or the managing agent at the request of the Board, shall take prompt action to collect any assessments for common expenses due from any unit owner that remain unpaid for more than thirty days after the due date. If a unit owner is delinquent for more than sixty days, the Board of Directors shall file a memorandum of lien in compliance with section 55-79.84 of the Condominium Act prior to the ninetieth day, unless the Board decides by a two-thirds vote not to do so. Any assessment, or installment thereof, not paid within ten days after due shall accrue a late charge in the amount of twenty dollars per month for every month in which a delinquency exists, or such other amount as may be established from time to time by the Board of Directors. Section 5.4. Statement of Common Expenses. The Board of Directors shall promptly provide any unit owner, contract purchaser or Mortgagee so requesting the same in writing with a written statement of all unpaid assessments for common expenses due from such unit owner. The Board of Directors may impose a reasonable charge for the preparation of such statement to cover the cost of preparation.



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Summary Say You have learned:

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

The sources of authority to collect assessments.



The benefits of establishing a collections policy.

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Legal remedies available to community associations for collecting delinquent assessments.



The impact of a bankruptcy filing on the association.


Key Terms: • • • • • • •

Acceleration Assessment Bad debt write-off Chapter 7 bankruptcy Chapter 11 bankruptcy Chapter 13 bankruptcy Fair Debt Collection Practices Act

• • • • • •

Foreclosure Lien Maintenance fee Personal money judgment Soldier and Sailors’ Act Special assessment



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Focus Questions Use the following questions to help you identify and review the core concepts in this lesson. (Hint: Once you look up the answer to a question, you may want to jot down the page number next to the question for future reference.) 1. Explain the difference between assessments and special assessments. 2. Name the three sources of a community association’s authority to collect assessments. 3. How is the amount of a community association’s total annual assessment determined? 4. Describe the most common methods for determining an owner’s share of the total annual assessment. 5. List some possible consequences for a community association when owners are delinquent in paying their assessments. 6. List some benefits a community association receives from an established policy for collecting assessments. 7. What are the seven characteristics of an effective collection policy? 8. What are the basic collection procedures to use when an owner’s assessment payment is late? 9. What extra judicial remedies are available to a community association for collecting delinquent assessments? What legal remedies are available? 10. How does a foreclosure affect the collection process? 11. How does an owner’s bankruptcy affect the collection process? 12. What must a community association do when it cannot collect money due from a delinquent owner? 13. What are some ways a community association can make up any shortfall in collecting assessments?



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Thought/Discussion Questions Use the following questions to help you apply the information in this lesson to your own situation. 1. What authority to collect assessments can you find in your community association’s governing documents and the specific statute enabling its establishment, if any? 2. How does your community association assign each owner his or her share of the total annual assessment? 3. Does your community association have a formal collection policy for collecting delinquent assessments? • If so, which of the seven characteristics of an effective policy discussed in this lesson does it have? • If not, what reasons can you give your board for adopting one? 4. What are your community association’s procedures for collecting late payments from owners? 5. What extra-judicial remedies for collecting delinquent payments has your community association used in the past? (Hint: Check any formal collection policy, ask people who have been involved with the association for awhile, or look in its files.) 6. What legal remedies for collecting delinquent payments has your community association used—or can it use? (Hint: Look at your association’s governing documents, any state statute, any formal collection policy, or the community association’s legal files, or check with your association’s attorney.) 7. Does your community association have a standard bad debt write-off resolution it uses? 8. Has your community association ever had a collection shortfall? If so, how was it handled?


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Lesson 2 Quiz 1. Each of the following statements regarding community association assessments are true EXCEPT: a. Assessments penalize residents for violating association rules b. An assessment is the owner’s financial obligation to the community association during a given period of time c. An assessment for an owner’s share of the common expenses is a binding legal obligation based on the community association’s governing documents d. An annual assessment may be paid on a monthly, quarterly, or annual basis RATIONALE: Assessments are not a penalty or fine for residents who violate association rules. Instead, assessments cover an owner’s share of the common expenses, and are one of the three defining characteristics of all community associations. 2. Because a community association relies on the timely collection of assessments in order to meet operating expense requirements, delinquent payments may result in each of the following EXCEPT: a. Property beginning to appear run-down b. A budget surplus c. Disharmony between paying owners and delinquent ones d. Essential maintenance becoming unaffordable RATIONALE: Instead of creating a budget surplus, a large number of delinquent payments can actually lead a community association to increase annual assessments for all residents to cover the deficit. 3. True or false. An established collection policy educates owners about their obligations to the community association and the consequences of not meeting those obligations on time. (True) RATIONALE: If owners are informed about their obligations and the consequences of not meeting them, they are more likely to pay timely. 4. An effective collection policy should exhibit each of the following EXCEPT: a. Be established by a proper formal resolution of the board b. Prohibit the referral of delinquent assessments to legal counsel c. Set a firm due date for assessments d. Allow for discretion in special cases RATIONALE: An effective collection policy should specify when to refer a delinquent assessment to legal counsel. This step should be automatic once a delinquent assessment reaches a specified age or amount. Once an account is turned over to legal counsel, it is critical that all further communication be between the community association’s attorney and the delinquent owner or the owner’s attorney. The manager and/or board should not be involved in discussions with anyone other than the association’s legal counsel.


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Lesson 2 Quiz, cont’d 5. True or false. Acceleration is the collection of assessments due on a monthly basis. (False) RATIONALE: Acceleration is the collection of all assessments due through the end of the fiscal year. This is a common method for collecting assessments from owners who are frequently delinquent. 6. Which of the following is not an extra-judicial procedure for encouraging an owner to pay a delinquent account? a. Not distributing a ballot to the owner at an annual meeting. b. Prohibiting the owner from using the pool. c. Imposing a late charge on delinquent accounts d. Foreclosing on an owner RATIONALE: Initiating the foreclosure process is not an example of an extra-judicial remedy for encouraging an owner to pay off a delinquent account. Foreclosure is a legal proceeding filed in court whereby a party with a claim against an owner can claim ownership of the unit involved in order to recover the money it is owed. Extra-judicial remedies consist of options outside the courts that a community association can use to encourage a delinquent owner to pay what is owed. If a board wants to use extra-judicial procedures, they must be provided for in a state statute, the governing documents, or a formal resolution of the board. 7. True or false. When a community association determines that a debt cannot be collected from an owner after a reasonable effort has been made, it should write off the bad debt. (True) RATIONALE: A payment that cannot be collected from an owner is called a bad debt. When a community association determines that a debt cannot be collected from an owner after a reasonable effort has been made, it must take a bad debt write-off. A bad debt write-off consists of recording an uncollectible debt as an expense that the association must absorb. This usually requires a resolution of the board. 8. Complete the following sentence: A ____________ is a legal claim by one party (community association) on the property of another (delinquent owner) to obtain the payment of a debt or the satisfaction of an obligation. a. foreclosure b. personal money judgment c. lien d. bad debt write-off RATIONALE: The automatic lien on an owner’s property protects the community association’s interests. It encourages payment of the debt. Among other consequences of a lien, the owner cannot sell or transfer the unit without settling the debt. The lien against an owner’s unit must be authorized by a community association’s applicable statutes or governing documents.

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Lesson 2 Quiz, cont’d 9. True or false. When a community association forecloses on a unit and it is auctioned off, the association will always get the money it is owed. (False) RATIONALE: A community association may foreclose on an owner if it thinks it can recover what it is owed. Sometimes the act of foreclosing will prompt an owner to pay what is owed—especially if the owner’s mortgage payments are current. If an owner has little equity in the unit—that is, still owes most of the mortgage—the community association stands little chance of getting the money it is owed. When a mortgage company forecloses on a unit and it is auctioned off, the association may not get the money it is owed. The unit must sell for a price that is high enough to pay off the mortgage as well as any other debts that take precedence over the association’s claim. When the association forecloses, the foreclosure is subject to any other lien, which means the buyer must pay the association all amounts due by the delinquent owner plus attorney and collection fees, and then make arrangements with any other lien holders to take possession of the home. If there is no mortgage of other lien on the home except the association’s and the association forecloses because of delinquent assessments, the buyer can obtain clear title to the home. If the association forecloses on the home and there are no buyers, the association board may decide to take possession of it with the intent of selling or renting it. 10. Which of the following types of bankruptcy is called a corporation reorganization because it is designed to allow for an orderly payment to creditors while enabling a corporation to continue in business? a. Chapter 7 b. Chapter 11 c. Chapter 13 d. Chapter 21 RATIONALE: Chapter 11 involves the development of a plan to pay off debts in a timely manner. Once a judge approves a plan as “fair and equitable,” it is binding and discharges all debts not provided for under the plan. Creditors usually receive more of what usually do not necessarily receive all they are owed.



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Additional Resources For further information on collecting assessments, we suggest the following: Delinquencies: How Community Associations Collect Assessments, A Guide for Association Practitioners, by Loura K. Sanchez, Esq., and Thomas J. Hindman, Esq. An informative guide covering collections policies and procedures, legal remedies to collect delinquencies, the effect of bankruptcy on collections, the Fair Debt Collection Practices Act and more. Includes sample letters and a collections resolution. (Community Associations Institute, 2008.) Member Dues: How Community Associations Collect Assessments, A Guide for Association Practitioners. Learn how to create a payment system that works! This guide explains six kinds of remittance systems and helps you decide which is best for your association. Contains numerous sample documents. (Community Associations Institute, 2005.) Tips for Protecting Your Association Finances. A handy brochure for board members and key employees regarding finances. Offers tips on important aspects of association finances: audits, financial statements, signatory control, investment policies, and more. (Community Associations Institute.)



Transition to Lesson 3: Financial Statements, Audits, Income Taxes, & Investments

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Lesson 3: Financial Statements, Audits, Income Taxes, & Investments


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Lesson 3: Financial Statements, Audits, Income Taxes, & Investments Goal At the end of this session, students will be able to review financial statements and look for key elements that indicate the financial condition of the community.

Time 60 minutes Session Time Breakdown 20 minutes—Faculty presentation 20 minutes—Student exercises 10 minutes—Facilitated group discussion 10 minutes—Summary/quiz

Overview Because of the fundamental nature of this course, you should not attempt to explain in detail the most complex issues involving taxation or investments. You should make sure the students understand that each association must file a tax return, that there are annual options regarding the type of form to file, and that the membership should adopt the “rollover resolution” each year at their annual meeting. Likewise with investments, your role is to ensure that the students understand that the board should adopt a written investment policy that the manager can implement and oversee, and that the manager should not provide investment advice to the board of directors except, perhaps, to point them to www.bankrate.com. Materials Needed

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LCD projector

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Remote advancer

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Flip chart


Leader Guide


Overview Introduce the lesson Say This session about the financial aspects of the community association. The manager: 

Should be able to review the financial reports of a community association and evaluate its financial condition.



Must know that all community associations must file tax returns and are subject to taxation.



Must not give investment advice to the board of directors and must follow the adopted investment policy of the board.


The purpose and types of financial statements.



Three types of accounting methods.



The difference between an audit, review and compilation.



Federal income tax requirements and responsibilities for community associations.



Investment policies and objectives for community associations.


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Slide 63

Lesson 3: Financial Statements, Audits, Income Taxes, & Investments Session Overview Learning Objectives • • • • •

Identify the purpose and types of financial statements. Identify and explain the three types of accounting methods. Differentiate between an audit, review and compilation. Recognize federal income tax requirements and responsibilities for community associations. Explain investment policies and objectives for community associations. 63


Say Financial statements have two primary purposes: 1. To provide information for making appropriate decisions about the community association. 2. To enable the board and the manager to control the financial operations of the community association.

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Key Terms: • • • • • • • • • • • • • • • • • • • • • • •

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Accrual basis of accounting Assets Audit Balance sheet Bond Cash basis of accounting Certificate of deposit Commercial reporting method Comparison to budget Compilation CPA Deficit in members’ equity Engagement letter Excess of revenues over expense Expense FDIC Fund balance Fund reporting method GAAP GAAS Income Investment liquidity Investments

• • • • • • • • • • • • • • • • • • •

Investment safety Investment yield Liabilities Management letter Members’ equity Modified cash basis of accounting Net revenue Net loss Notes to financial statements Opinion letter Representation letter Revenue Review Statement of cash flows Statement of changes in members’ equity (or fund balances) Statement of revenue and expense Treasury bills Treasury bonds Treasury notes

This lesson provides an overview of additional financial operations for community associations. It explains: • Financial reports • Independent certified public accountant services • Federal income taxes • Investments

What You Will Learn After reading and reviewing this lesson, you should be able to explain and understand the: • Purpose of financial reports • Accounting methods used for reports • Statement of revenue and expense • Comparison to budget • Balance sheet • Warning signs to watch for when reviewing reports • Role of a CPA • Engagement and representation letters • Audits, reviews, and compilations • CPA’s opinion letter


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Federal income tax filing responsibilities for community associations Federal income tax filing options for community associations Investment options for community associations Investment checks and balances Manager’s typical investment-related duties Investment policies and procedures for community associations Essential investment objectives Asset protection

This section provides some background information on financial reports in general. Financial reports have two primary purposes: 1. To provide their internal and external users with the information needed to make appropriate decisions on behalf of or regarding the community association. 2. To enable the community association board and manager to control the community’s financial operations.


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Types of Accounting Say There are three types of accounting methods: 1. Cash basis records revenue when it is collected and expenses when they are paid. It is similar to a checkbook. It is a very simple method to use and is perceived as easy to understand. However, it often does not provide a true picture of the association’s financial condition. 2. Accrual basis records revenue when it is earned and expenses when they are incurred. It provides an accurate picture of the association’s financial condition. 3. Modified cash basis records revenue on the accrual basis and expenses on a cash basis with selected items on an accrual basis. For example, the association may accrue a large roof repair payment that will be due in a few months, but will not accrue any other expenses that were incurred but not yet paid. The best way to understand the differences between the three types of accounting methods is to review an example. Refer students to “Cash vs. Accrual Comparison” on the following pages. Note how given the same facts, two distinctively different financial pictures are portrayed. On the cash basis, the Members’ Equity shows $11,300 with a $6,300 profit for the month. However, this is misleading; look at the accrual basis. By including all amounts due to the association and all amounts due from the association, it is obvious that this is a much more accurate picture. In fact, the association actually lost $500 this month and the Members’ Equity is only $4,500. Emphasize to the class the substantial differences in financial reporting between these two methods.


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Types of Accounting Slide 64

Accounting Methods Cash Basis • Income – when received • Expense – when paid Accrual Basis • Income – when earned • Expense – when incurred

Modified Cash Basis • Records income and expenses on a cash basis with selected items recorded on an accrual basis • Most common = records income (assessments) on the accrual basis and expenses on the cash basis • Also known as Modified Accrual 64

Use your flip chart to recreate the table below. This exercise will help the class better understand the difference between the three types of accounting—by examining how revenue and expenses are recorded.

Revenue

Expense

Received

Paid

Accrual Basis

Earned

Incurred

Modified Cash Basis

Earned

Paid

Cash Basis

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Accounting Methods Used For Reports A community association’s financial reports will reflect one of three possible accounting methods: 1. Cash basis: This method records revenue when it is collected and expenses when they are paid. 2. Accrual basis: This method records revenue when it is earned (or assessed to owners) and expenses when they are incurred. 3. Modified cash basis: This method records revenue on the accrual basis and expenses on a cash basis with selected items recorded on an accrual basis. Modified cash varies in format depending on the number of items accrued.

FINANCIAL STATEMENT COMPARISON CASH VS. ACCRUAL FACTS TO BE CONSIDERED

Beginning Cash Balance:

5,000

Deposits were: Current month’s assessments Next month’s assessments Late fees Interest Other

11,000 1,000 200 500 300

Management fee Electricity Water Repairs Trash removal

1,000 800 1,500 2,600 800

Current month’s assessments Current month’s late fees

14,000 300

Insurance Patrol Legal Other repairs

1,800 1,000 600 1,500

Checks written:

Billings were:

Invoices received but not paid:

An invoice has not yet been received from the landscaper; however, the monthly contract amount for the work performed is $4,000.


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THE SAMPLE CONDOMINIUM FINANCIAL STATEMENTS FOR THE MONTH ENDED JULY 2012 CASH

ACCRUAL

ASSETS Cash Accounts Receivable Other Assets

11,300 0 0

11,300 3,100 0

Total Assets

11,300

14,400

LIABILITIES Accounts Payable Accrued Expenses Prepaid Assessments

0 0 0

4,900 4,000 1,000

Total Liabilities

0

9,900

MEMBERS’ EQUITY

11,300

4,500

TOTAL LIABILITIES/EQUITY

11,300

14,400

REVENUE Assessments Interest Late Fees Other

12,000 250 200 300

14,000 500 300 300

Total Revenue

13,000

15,100

EXPENSES Legal & Audit Management Fee Insurance Electricity Water Patrol Landscape Trash Removal Repairs

0 1,000 0 800 1,500 0 0 800 2,600

600 1,000 1,800 800 1,500 1,000 4,000 800 4,100

Total Expense

6,700

15,600

REVENUE/LOSS

6,300

(500)

BALANCE SHEET

STATEMENT OF REVENUE AND EXPENSE

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Financial Statements Say There are three components to financial statements: 1. The statement of revenue and expense 2. The balance sheet 3. Subsidiary reports – contain detailed information to support the financial reports, such as a check register, accounts receivable list, or accounts payable list. The statement of revenue and expense is a record of the association’s financial transactions and activities over a given period of time—usually a month, plus the fiscal year to date. Its purpose is to track the financial activity of the association. The statement of revenue and expense should be compared to the budget to provide a variance report. The statement of revenue and expense is the title of the report commonly used for not-for-profit entities, and is sometimes erroneously referred to as an income statement.

Slide 65

Be sure to point out the sample statements of revenue and expense on the following pages.


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Introduction to Interim Financial Reports Interim financial reports are prepared during the year to provide the board and management with accurate economic information that will allow them to make decisions and take action in a timely manner. Interim financial reports are often presented on a modified cash basis. For example, a modified cash basis report may include an accrual item such as assessments owed but not paid yet (accounts receivable). This gives a more complete financial picture. At a minimum, interim financial reports should include: • A statement of revenue and expense with a comparison to budget • A balance sheet Accompanying information to the financial reports should include: • Bank statements with reconciliations • Aged receivables report (amount owed by owners) • Open payables report (amount owed by the association)

Statement of Revenue and Expense The statement of revenue and expense records the community association’s financial transactions during a given period of time—generally for a given month plus the fiscal year to date. It is a way to keep track of the community’s financial activity. There are three major components of a statement of revenue and expense: 1. Revenue: Revenue represents the earnings of the community association. • Income on a cash basis statement consists of revenues received and deposited. • Income on an accrual basis statement consists of revenues earned, including amounts assessed to owners in accordance with the budget but not yet received. • Generally on a modified cash basis statement, revenue is recorded on the accrual basis. 2. Expense: Expenses are the cost of goods and services used to operate and maintain the community’s property. • Expense on a cash basis statement consists of any amounts paid. • Expense on an accrual basis statement consists of any amounts incurred, whether or not paid. • Expense on a modified cash basis statement is generally reported on a cash basis. 3. Excess Revenue Over Expenses Excess revenue is the amount left after deducting expenses from income. A loss occurs when expenses are greater than income. A loss is indicated on a statement of revenue and expense by putting the figure in parentheses. The net revenue or loss can be significantly different depending on whether a cash, accrual, or modified cash basis is used.

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Module 2: Financial Management ABC Condominium Association, Inc. Statement of Revenue and Expense for the Month Ending April 30th and 20XX to Date (Four Months Ended) With a Comparison to Budget REVENUE Assessments Interest Other Total Revenue

April 20XX $ 62,623 3,894 2,050 $ 68,567

Actual Year to Date $ 250,492 15,577 8,198 $ 274,267

Budget Year to Date $ 250,490 15,248 5,667 $ 271,405

EXPENSES Administrative: Management Fee Legal & Audit Insurance Telephone Other Total Administrative

$ 3,316 528 2,182 416 1,553 $ 7,995

$ 13,265 2,111 8,727 1,664 6,212 $ 31,979

$ 14,465 2,363 8,653 2,364 6,322 $ 34,167

Operating: Payroll & Related Taxes Professional Fees & Training Utilities Elevator Security Lawn Maintenance Trash Removal Pool Repairs & Maintenance Depreciation Income Taxes Total Operating

$ 12,263 287 23,964 1,029 328 531 1,610 1,332 6,220 250 1,838 $ 49,652

$ 49,052 1,149 95,857 4,116 1,313 2,127 6,438 5,328 24,879 1,000 3,677 $ 194,936

$ 46,726 2,000 103,979 4,637 570 3,406 7,003 6,229 17,811 — 2,821 $ 195,182

Total Expenses

$ 57,647

$ 226,915

$ 229,349

Net Income Before Contribution to Reserves Contribution to Reserves

$ 10,920

$ 47,352

$ 42,056

(10,514)

(42,056)

(42,056)

Net Revenue (Loss)

$ 406

$ 5,296

$—


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Sample Statement of Revenue and Expense



Module 2: Financial Management Sample Statement of Revenue and Expense, continued


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Financial Statements, continued Say The balance sheet is a summary (or snapshot) of the financial condition of the community association at a specific point in time. It provides information as to how things are on a certain date.

Slide 66 Financial Reports, continued Balance Sheet • Snapshot – financial condition at a specific point in time • What association owns and owes and its “net worth” ASSETS = LIABILITIES + MEMBERS’ EQUITY and ASSETS – LIABILITIES = MEMBERS’ EQUITY 66


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Module 2: Financial Management Balance Sheet A balance sheet is a summary of a community’s financial position at a specific point in time. A balance sheet summarizes: • What your community association owns • What your community association owes • The “net worth” of the association It is called a balance sheet because what the community association owns (assets) and what it owes to others (including the owners) (liabilities and members equity) must balance out. A balance sheet typically is prepared on a monthly basis to allow the board of directors and manager to carefully monitor the association’s finances. There are three major components of a balance sheet: 1. Assets: Assets include anything owned that has value. Unlike commercial businesses, however, the actual land and buildings of the community association are not generally shown as an asset, although the association may include assets that can be sold without an owner vote. For cash basis reports, cash usually is the only asset. 2. Liabilities: Liabilities consist of what is owed to others or collected in advance (e.g. owner assessments received prior to the billed month). 3. Members equity or fund balance: Members equity of fund balance equals the difference between the community association’s assets and liabilities. Industry standards suggest a minimum balance of 2-5% of gross assessments with 10-15% being very good. When a community association’s liabilities exceed its assets, this condition is known as a deficit in members’ equity. It occurs when a community association has incurred expenses that it cannot pay until it collects future assessments from owners or sells assets. If the association is dissolved on the day the financial statements/balance sheet was created, the equity would be distributed or charged to the owners. Occasional small decreases in members’ equity are common during a normal fiscal year due to such things as seasonal fluctuations in expenses. A continued or increasing decrease, however, is an indication of an inadequate level of assessments or overspending, and a signal for board action. Can you locate all three components of a balance sheet on the following pages? Notice how the three components balance out: ASSETS = LIABILITIES + MEMBERS’ EQUITY And ASSETS – LIABILITIES = MEMBERS’ EQUITY


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ABC CONDOMINIUM ASSOCIATION, INC. BALANCE SHEET DECEMBER 31, 20XX ASSETS Cash - Operating Cash - Operating Savings Cash - Reserves (NOTE 5) Assessments Receivable Prepaid Income Taxes Accrued Interest Prepaid Insurance Total Assets

$15,388 20,324 724,332 15,069 4,647 182 1,613 $781,555

LIABILITIES AND MEMBERS’ EQUITY Accounts Payable Prepaid Assessments Total Liabilities

$63,688 2,778 $66.466

Replacement Fund

$610,454

Unappropriated Members’ Equity Total Members’ Equity

104,635 $715,089

Total Liabilities and Members’ Equity

$781,555

See accompanying Notes to Financial Statements. NOTE 5—As of December 31, 20XX, the Association had invested its cashreplacement reserves as follows: $319,671 Money Market, $404,661 Treasury Bills.

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Warning Signs Briefly discuss the financial reporting warning signs.

Slide 67 Financial Reporting Warning Signs • •

• •

Steady decline in the amount of cash on hand Replacement reserves not set aside (no formal reserve study) Increase in assessments owed to the community Increase in what the association owes for bills

•

•

•

•

Failure to resolve any differences between bank statements and financial reports Significant and/or unexplained differences between actual and budgeted figures Members’ equity balance is less than one to three months of operating expenses Unpaid amounts showing as due between funds

67



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Sources of Variation in Reports Among Community Associations Do not be surprised if the form and content of your community association’s financial statements differ from those of other associations. Variation may be due to the: • Community association’s unique informational needs • Software package used • Expertise and experience of the internal users—the owners • Expertise and experience of the preparers • Reasons for preparing the report • Formatting

Warning Signs to Watch for When Reviewing Reports Here are some warning signs about the financial health of a community association to watch for when you review its financial reports: • A steady decline in the amount of cash on hand • The inability or failure to set aside budgeted additions to replacement reserves (or no formal reserve study has been conducted) • An increase in the amount of owners’ assessments owed to the community • An increase in the amount the community association owes for bills • The failure to reconcile bank statements monthly • Significant and/or unexplained differences between actual and budgeted figures for items • Unpaid amounts showing as due between funds (such as the operating fund owes money to the reserve fund because the association had to use reserve funds to pay operating bills) Statistical analysis is helpful in this area. A useful indicator is to evaluate assessment delinquencies as a percentage of annual assessments: Percent Delinquent 3% or less 4% to 5% 6% to 10% Greater than 10%

Rating Excellent Good Poor to Average Deteriorating financial position


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Run the Class Exercise. Divide the class into work groups of 3 to 6 persons depending upon the size of the class. Instructions are to review the “Sample Financial Statements” on the following pages. Have the work groups review the reports and provide both positive and negative trends they see, if any, and their recommended actions to overcome any negative trends. Allow approximately 15 minutes for the work groups to complete the exercise. After the work groups have completed the exercise, have each group share one or more of the issues identified and their recommended solution with the remainder of the class.

Problems/recommended solutions: Statement of Revenue and Expense items: 1. Interest income is below budget by 23% to date. Was the budget too optimistic? Are balances not being maintained? Possibly a CD has not matured and its interest is not included. 2. Other revenue is below budget by 73% to date. Are late fees not being correctly charged? Are all owners current in their assessments? What comprised this amount in the original budget? 3. Legal and audit expense is 55% over budget and as of the first three months of the year, the association has expended 96% of the annual budget amount. It may not be possible to cut back enough to cover the excess. This category will require close monitoring. However, it could reflect payment of the audit and a major collection effort. This line item reflects the need to insert the budget amounts in the month in which the expense is anticipated. 4. Payroll and payroll-related items are over budget. If this trend continues, the year will end with payroll being almost $5,000 over budget. Too much overtime? Poor scheduling? Emergencies? Can you reduce expenses for the next few months to recover? © 2011 Community Associations Institute

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Class Exercise, continued 5. Utilities are over budget by 10% to date. Time of the year? Will we reduce costs once the summer is over? Have weather patterns affected the costs? Is there a water leak? Here’s another example of the need to insert budget expenses in the month in which the cost is anticipated to occur. 6. Repairs are over budget by 64% to date. Time of the year? Doing repairs during good weather? Emergencies? Can future repair projects be postponed for a couple of months until the budget comes back into line? 7. Painting is over budget and 85% of the entire year’s budget has been spent. Time of the year? Doing painting in good weather? Can further painting projects be put on hold until financial conditions improve? 8. Is the association funding replacement reserves according to the budget? 9. How different would the report look if expenses and revenue were budgeted for the month in which the activity was expected to occur? Balance sheet items: 1. Low cash balances: There isn’t enough money to pay current accounts payable. Caution should be noted to make sure discounts are being taken and past due charges are not being incurred. The board and manager should refrain from incurring additional debt until current payment obligations are fulfilled. 2. Account receivables are low at 5% of monthly dues. This is an excellent delinquency rate. Keep up the good work. 3. Accounts payable are high, as they almost equal one month’s revenue. The association may be using next month’s revenue to pay this month’s bills. This is symptomatic of the over-budget issues and low cash balances discussed previously. As expenses are brought back to budget levels, the payables amount will decrease. 4. Prepaid assessments are good as almost 10% of next month’s dues have been collected before month end. A note of caution here: Do not depend on always having these advanced collections. Emphasize that the manager should make the board aware of any plans to postpone projects or work that has been approved and provide reasons why. Also make sure the owners understand the reason for any major time delays. Page 254


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Class Exercise Review the sample financial statements of Bayview Towers as of September 30, 2012. From your review, provide both positive and negative trends or aspects you note in the financial condition and operation of the association. For each negative item you identify, provide a recommended plan of action to correct or change.

BAYVIEW TOWERS BALANCE SHEET AS OF SEPTEMBER 30, 2012 ASSETS Cash – Operating Cash – Operating Savings Cash – Reserves Accounts Receivable Prepaid Insurance

28,695 184,088 2,320 35,865

TOTAL ASSETS

250,968

LIABILITIES Accounts Payable Accrued Expenses Prepaid Assessments TOTAL LIABILITIES

33,812 8,097 4,283 46,192

MEMBERS’ EQUITY

204,776

TOTAL LIABILITIES & EQUITY

250,968


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Class Exercise, continued Page 183 Sample Statement of Revenue and Expense

Bayview Towers – Statement of Revenue and Expense

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Audits, Reviews, and Compilations Say Year-end financial statement should be prepared by a CPA. There may be requirements for year-end reports in state statutes or in the governing documents. There are three types of reports that a CPA can provide based upon the community’s requirements: 1. An audit is the most thorough and contains the most assurances. It provides: • External verification of the accuracy and completeness of financial records. • Confirmation of selected transactions. • Physical inspection of records. • An opinion letter from the CPA, which should contain an unqualified opinion stating that everything is in order.

Slide 68 Role of the Certified Public Accountant (CPA) • Audit • Review • Compilation

68


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Introduction to Year-End Financial Reports Accounting standards are called GAAP, Generally Accepted Accounting Principles. Their purpose is to provide uniformity among reports from different preparers. GAAP requires the following set of year-end financial reports for a community association: • Balance sheet • Statement of Income and Expense (or Revenue and Expense) • Statement of Changes in Members’ Equity (or Fund Balances) • Statement of Cash Flow • Notes to Financial Statements • Unaudited supplementary information on future major repairs and replacements GAAP also requires the use of accrual accounting. Because many state statutes and community association governing documents specify the role of a CPA in preparing annual reports for associations, we will begin this section with a discussion of that role. Then we will move on to discuss the various types of reports prepared.

Role of a Certified Public Accountant (CPA) Community association governing documents and state statutes may require that an independent certified public accountant be involved in preparing a community’s annual reports (audit, review, or compilation). An independent certified public accountant (CPA) should not be a community association employee or owner. A CPA is certified by a state examining board as having fulfilled the requirements of state law. These requirements usually include a certain amount of experience, passing the CPA exam, and quality or peer review. Community association year-end reports prepared by CPAs must meet standards for both the community association profession and the accounting profession. CPAs must meet standards as set forth by the Financial Accounting Standards Board (FASB) and by the American Institute of CPAs. There is no industry requirement that they meet any other standards. For this reason, it is important to select a CPA who is familiar with community associations. When your community hires a CPA, s/he will send the association an engagement letter, which is a legally-binding contract. An engagement letter describes the: • Nature of the work to be done • Type of report to be prepared • Fee for services • Time frame for the assignment • Accountant’s disclaimers—statements about what the accountant’s services do not include

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Module 2: Financial Management A CPA also will give the community association a representation letter, which should be executed by the management company or board officer, or both, depending on the recommendation of the management company’s legal counsel and best practices in your area. A representation letter: • States that the information the community association provides is true to the best of its knowledge • Describes the steps the community association has taken to provide for the preparation of accurate and complete financial statements The accounting profession continues to debate how to present certain types of financial information for community associations. When your community selects a CPA, be sure he or she has experience with community associations and is familiar with the accounting issues they face.

Audits, Reviews, and Compilations AUDIT • •

•

•

Definition: An examination of the accounting records and procedures of an organization by a CPA for the purpose of verifying the accuracy and completeness of financial records. Purpose: An annual audit may be required by your community association’s governing documents and/or your state’s statutes. (Hint: Check yours.) External verification of the accuracy and completeness of your community’s financial records is a sound business practice. While the purpose of an audit is not to detect fraud or embezzlement, the CPA may discover improprieties during the course of his or her thorough examination of the records. Scope: May include— o Confirmation of selected transactions and balances with outside parties (such as banks and contractors) o Physical inspection of records o Tracing of transactions to supporting documentation and authorization by someone within the community association (such as treasurer, manager) o Review of community association’s legal documents and minutes o Any other procedures the auditor considers appropriate, given the community association’s situation o Preparation of annual tax return. Outcome: An opinion letter is issued. The format and wording of the opinion letter is established by GAAS, Generally Accepted Auditing Standards. There are five possible outcomes: 1. The auditor issues an unqualified or “clean” opinion that says the auditor finds everything in order and the financial statements fairly reflect the financial condition of the association. This is the desired outcome. For example: “In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of _______________as of December 31, 20XX and December 31, 20XY, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles.”


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Audits, Reviews, and Compilations, continued Say 2. A review is less thorough, but provides some assurances. It provides: • • • • • •

No external verification. No confirmations. No inspection of records. An analytical review for comparison and changes from the previous year. Some assurances that the financial statements make sense. No opinion letter, but a report that no material or significant changes are needed.

3. A compilation is a presentation without any review or assurances. Emphasize that the student should be aware of the statutory requirements as well as the requirements of the governing documents. Again emphasize that the purpose of an audit is for a qualified, independent CPA to express an opinion on the accuracy of the financial reports and not to discover fraud or embezzlement. Along with the audit, review or compilation, the CPA should prepare the annual tax return.


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2. The auditor issues a qualified opinion that says the statements taken as a whole are fairly presented with certain exceptions. 3. The auditor simply provides explanatory paragraphs that impart important information for the reader about the community association. 4. The auditor “disclaims” or refuses to issue an opinion. Usually this occurs when the client organization or the circumstances surrounding the audit restrict the accountant’s ability to collect sufficient evidence to form an opinion. 5. The auditor issues an adverse or negative opinion. In this case, evidence indicates that the financial statements do not fairly reflect the community association’s financial position or operating results. (This can occur if your community association’s financial statements differ materially [significantly] from GAAP for community associations.) A management letter is a separate report that often accompanies the audit or review. This is a separate narrative (descriptive) report discussing the community association’s accounting system and controls and any weaknesses found in them during the audit plus any other comments on the association’s finances. Follow up on any issues raised in a management letter as soon as possible.

REVIEW • •

•

•

Definition: A less thorough, and therefore less costly, review of a community association’s financial activities. Purpose: Provides some assurance to the board and other interested parties that the financial statements make sense—without going into the detailed examination of an audit. If included in the scope of work, a review typically includes the preparation of the association’s tax return. Scope: o Interviews of management personnel o Analytic review of financial procedures: - Make comparisons between budget and prior year - Look for unusual items or changes Outcome: Provides a significantly lower level of assurance than does an audit. Report states that the CPA is not aware of any material or significant changes that should be made to the financial statements in order for them to be in conformity with GAAP for community associations. As is also the case with audits, it is important to use a CPA who is familiar with community associations.

COMPILATION • • • •

Definition: A presentation of financial statements by a CPA without the assurance that the information conforms to GAAP. Purpose: The community association asks a CPA to prepare its yearend reports and tax return. Scope: The CPA prepares the community association’s financial statements based on information the association provides. Outcome: The CPA cannot make any claims about the accuracy and completeness of the financial statements.


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Income Taxes Say Community associations must file federal income tax returns. Federal tax returns, or extensions, are due 75 days after the end of the fiscal year. Community associations have options as to the kind of tax return they should file, which affects the amount of taxes due. State income tax filing requirements vary from state to state. Income tax returns should only be prepared by experienced CPAs or tax preparers. The manager should never prepare income tax returns for the association. The tax liability of the association may be reduced if the association adopts a “rollover resolution” at the annual membership meeting. The manager is urged to contact the association’s accountant for help with the wording of the resolution.

Why community associations pay taxes Explain to course participants that unless associations have tax exempt status Section 501 (c)(4) of the Internal Revenue Code, they are taxable entities. As taxable entities, they have the option to file under Section 277 (Form 1120) or Section 528 (Form 1120H) of the corporate code. The “H” in Form 1120H stands for Homeowner Association Note that there are a variety of elements and variations related to revenue that is or is not taxable under each method and what expenses are appropriate for deduction under each method. The bottom line is that if there is a net taxable revenue under either method, there will be a tax obligation and only a tax expert can determine the method most beneficial to the association.

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Module 2: Financial Management Introduction to Federal Income Taxes The purpose of this section is to provide basic information on federal income taxes and community associations—not to advise you on how your community association should handle its tax matters. Furthermore, the tax code and IRS rulings continually change. Consult your tax professional for the most up-to-date information on federal income taxes and advice on how to fulfill your community association’s income tax responsibilities. Community associations typically are organized as nonprofit corporations under state statutes. Nonprofit status is not the same as being tax exempt. Any community association interested in tax exempt status must apply for that status and qualify under Section 501(c)(4) of the Internal Revenue Code. Very few community associations qualify. Community association managers must be familiar with federal income tax requirements and options for two reasons: 1. Under the federal tax code, all organizations are taxed on their revenue unless specifically exempted. 2. If your community association has significant non-owner revenue, it is to the association’s advantage for you to consult with a tax professional to explore ways to reduce its potential income tax Note also that most tax-saving opportunities must be acted on during the tax year in question. Federal Income Tax Filing Responsibilities Here are some general federal income tax filing responsibilities for community associations: • All community associations must file a federal income tax return every year. The filing of a tax return does not necessarily mean that your community association owes any tax. Further, the lack of taxable revenue does not eliminate the need to file. • A community association’s federal tax return is due 75 days after the end of its tax year (the fifteenth day of the third month). It is possible to obtain up to a six-month extension of time in which to file a return. If a community association needs an extension, it must file an extension request form and pay any expected tax due by the original filing deadline. • If previous boards failed to submit tax returns, the current board is not absolved from filing a return for the current year and for any year in which one was not submitted. If you discover that your community association has not filed returns for previous years, immediately advise your board and contact your association’s CPA. • A community association may be required to make quarterly payments of its estimated annual tax, depending on the tax filing method it uses and the amount of the potential tax obligation. When a tax professional prepares your community association’s tax return, he or she will notify the association if it needs to make estimated tax payments for the coming year. Note: State income tax filing requirements vary from state to state. They differ from federal requirements.


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Federal Income Tax Filing Options How a community association files its federal tax return affects the amount of income taxes it has to pay. A community association can choose how it files, if it meets certain IRS qualifications, particularly as set forth in Section 277 of the Internal Revenue Code. A community association may file as a regular corporation (IRS Form 1120) or as a homeowners association (IRS Form 1120H). Regardless of which filing method is used (1120 or 1120H), interest income is taxable to the association. On Form 1120, certain expenses may be allocated against that income, and the association’s CPA will determine that allocation. Additionally, net revenue from non-members is also taxable. Other revenue may be taxable, depending on the filing method. In addition to Section 277 of the Code, you will hear people refer to Section 216, which refers to cooperatives, and Section 528, which refers to planned communities, condominiums, and timeshares. Check with your tax professional to see which method of filing is best for your community.

Why Do Community Associations Pay Taxes? Unless associations have tax exempt status Section 501(c)(4) of the Internal Revenue Code, they are taxable entities. As taxable entities, they have the option to file under Section 277 or Section 528 of the corporate code. There are a variety of elements and variations related to revenue that is or is not taxable under each method and what expenses are appropriate for deduction under each method. The bottom line is that if there is a net taxable revenue under either method, there will be a tax obligation.


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Investments Say Community associations should have written investment policies. The board of directors should seek investment advice from experienced financial or investment counselors. The manager should never give investment advice other than perhaps referring the board to www.bankrate.com, but should execute the written investment policy of the board of directors. Discuss the three essential investment objectives as outlined on the following pages: • • •

Safety. Safety for community association investments consists of protecting the principle (amount of original investment) from loss as much as possible. Liquidity. Liquidity refers to the ease with which an investment can be converted into cash or a cash equivalent. Yield. Yield is the amount of return on an investment.

Slide 69

Investments • Safety • Liquidity • Yield

69

Ask course participants if they have any questions or comments on association investments.


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Introduction to Investments The purpose of this section is to provide basic information on community associations and investments—not to advise you on how your community association should handle its investments. Investments involve the purchase of anything with money value for the purpose of generating additional money over time, such as savings accounts. This lesson presents the basic information you will need as a manager to oversee your community association’s investments.

Investment Checks and Balances Every community association needs a system of internal checks and balances to protect its investments: • A community association board should vote to invest funds based on an investment policy it has approved • Two signatures should be required to withdraw funds from investment accounts • Community association managers, employees, and volunteers should be covered by fidelity insurance to protect the association from losses due to employee theft

A Manager’s Typical Investment Duties Typically, a community association manager is expected to: • Maintain an accurate accounting system for the community association’s investments and generate timely reports. • Document all transfers of funds. • Develop methods for tracking investments so opportunities to earn money are not missed. For example. failure to track the date a certificate of deposit matures and funds can be transferred or reinvested may result in obtaining a lower rate of interest than was available had the investment timely renewed. Worse, the association may earn no interest at all on an investment whose maturity had expired and no action was taken to renew or move the funds. In such a situation, the board may look to the management company for reimbursement of the funds that should have been earned. • Provide prudent advice and referrals to the board and officers regarding financial institutions and investment advisors. A manager’s role is to encourage and enable the board to set investment policies and take action—not to be its investment counselor. A board should obtain investment advice from sources other than its management. As with all other aspects of community association operations, the manager may not be an expert but must be able to refer the board to professionals competent and knowledgeable in each area.

Investment Policies and Procedures A well-run community association should have a written investment policy and a set of procedures for ensuring that the policy is implemented. Some governing documents and some state statutes establish investment policies for community associations. For example, some states require that community association funds be invested only in federally insured lending institutions and government securities. Check your community association’s governing documents and state statutes for any investment mandates that your association must follow.

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Module 2: Financial Management Here are some examples of common investment policies to give you an idea of what to look for: • Not more than $250,000 will be invested in any one financial institution, which must provide federal insurance on the entire amount • Investment revenue must be optimized to get the best results under the given conditions without any risk of loss to the principle (amount of the original investment) Your community association’s CPA can recommend investment procedures to fit your community’s particular circumstances. Here are some examples of common investment procedures: • Management is to deposit all collected monies on a daily basis • Transfers of budgeted additions to replacement reserves are to be made on a monthly basis • Certificates of deposit, passbooks, bonds, etc., are to be under direct board control—not management control • A quarterly special report of earnings on investments is to be prepared by management or the treasurer and approved at a board meeting • Reserve funds may be loaned to the operating fund provided a repayment schedule with appropriate interest is maintained

Essential Investment Objectives The three essential investment objectives for community associations in the order of their importance to a community association are: • Safety • Liquidity • Yield

Safety Safety for community association investments consists of protecting the principle (amount of original investment) from loss. Here are some key questions to ask to determine the safety of an investment: 1. Is the principle insured? By whom? For how much? For example— Bank deposits of up to $250,000 per investor (not account) in a single FDIC institution are insured (FDIC stands for Federal Deposit Insurance Corporation, a government agency that guarantees investors’ deposits in member institutions). 2. How stable is the institution? The institution offering the highest rate of return may be taking risks which will influence its overall stability. 3. Is the investment speculative—that is, is there a chance of a financial loss, as well as a chance for a financial gain? Normally, anyone acting on behalf of a community association would not take this kind of risk in order to gain a higher return than usual. 4. Would a prudent investor choose this investment? Among the safest investments available to all community associations are certificates of deposit under $250,000, which are FDIC insured, and certain obligations of the U.S. government such as: • Treasury or T bills • Treasury notes and bonds


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These are the safest investments because payment is guaranteed by the government. Treasury bills are short-term instruments that mature in 13, 26, or 52 week periods. They are issued in minimum denominations of $10,000. Anything larger must be in $5,000 increments. As soon as one is purchased, the buyer receives the promised earnings. Then, when the bill matures, the buyer receives the face value (value indicated in the wording of the T bill). Treasury notes mature in one to 10 years. Treasury bonds mature in more than 10 years. Both notes and bonds are issued in denominations from $1,000 to $100,000. They are also interest-bearing with interest paid every six months. When the note or bond matures, the buyer receives the full face value. Your community association may pay more or less than the face value to purchase a Treasury bill, note, or bond—depending on the market demand for them.

Liquidity Liquidity refers to the ease with which an investment can be converted into cash or a cash equivalent. Due to unexpected events, a community association may need access to its invested funds at times other than planned. Here are some common ways to provide for that access: • A community association should avoid tying up all its invested funds for extended periods of time. On the other hand, a community association usually does not invest only in short-term options. This would limit the yield of its investments. • A community association can match investment maturity dates to the time the association expects to use the money (laddering), based on a reserve study that indicates when the funds will be needed. • A community association can always leave a portion of investments available on relatively short notice—such as 30 to 60 days. There is little reason to keep investments in non-interest-bearing accounts with immediate access. In an emergency, certificates of deposit could be used as collateral for a short-term loan. • Money market accounts may be appropriate under certain circumstances, since they typically offer private insurance rather than insurance provided by the federal government.

Yield Yield is the amount of return on an investment. The ultimate earnings from an investment are not necessarily the stated rate of interest. For example— • Certificate of deposit (CD)—When a CD is reinvested together with its accumulated interest, the ultimate yield will be higher than the stated rate of interest. • Bonds—Bonds can also yield more or less than their stated rate of interest. Because the prices at which bonds are bought and sold fluctuate in response to current interest rates, the community association may pay more than the face value of a bond if its stated rate of interest is attractive to buyers.

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Asset Protection Briefly discuss some of the ways a community manager can help the board of directors prevent fraud and embezzlement.

Slide 70 Safeguarding Association Funds • Work with your board of directors to implement a series of safeguards and internal controls to help prevent fraud and embezzlement.

70



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Safeguarding Association Funds To better protect association funds from theft and/or embezzlement, consider working with the board to implement the following practices and procedures. 1. Know the association's federal tax identification number (FTI). Use the FTI to obtain periodic listings of all bank accounts and account numbers, and make sure they are all under the association's name and FTI number. Needed to verify the existence of accounts and open new accounts, the FTI number should not be disseminated to the general membership, and only to board members on a need-to-know basis. All too often, the volunteer treasurer will provide his or her social security number instead of the association's FTI number, which makes it easier for the treasurer to transfer money to personal accounts. 2. Use a lock box system for deposits and require dual signatures for all withdrawals. While it may seem obvious, never sign blank checks. Require dual signatures on all checks or a monthly report showing check numbers, payees and amounts. As proof, require the bank to return canceled checks or provide electronic images of the canceled checks along with the monthly statements. A lock box system allows owners' payments to be mailed or transferred directly to the association's bank accounts. This reduces the chance that the association's money will be deposited into the wrong account. 3. Segregate and safeguard your association's replacement reserves. As the association builds its reserve funds, make sure you are segregating and safeguarding them. Similar to checking accounts, the reserve accounts should be under the control of at least two people. Any transfers or withdrawals should also require the name and signature of a board member. Do not give one board member or bookkeeper total control over reserve accounts. It is also important to lock long-term savings into non-liquid accounts such as certificates of deposit for better rates of return. 4. Require that copies of monthly statements of operating and reserve accounts be sent every month. One statement should be sent to the management company (or, if self-managed, to the treasurer or bookkeeper) and the duplicate to a board member, who does not have authority to sign the checks or make any type of transfer or withdrawal. Alternatively, many banks offer statements by e-mail, which could be sent to more, if not all, of the board members. Another option would be to give the board members read-only access to view the account(s) online. 5. Check invoices against checks paid and the original receipts for credit card accounts, if any. If the association has professional management or a bookkeeper, the board treasurer should conduct this review. If self-managed, a board member without access to the bank accounts or credit card privileges should check for any unauthorized use. 6. Shop around for bank services. Several of these steps require the cooperation of the bank to be effective. Unfortunately, some banks do not enforce dual-signature requirements or prohibit electronic transfers among accounts, despite their being under different FTI numbers. It is not enough to choose a bank that pays the highest interest rate. If the bank wants your business, demand that it demonstrate the safeguards it has in place to minimize the threat of theft, especially through electronic transfers.

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Module 2: Financial Management 7. Know the association's insurance company and consult with the agent. Keep copies of the association's insurance policies or, at a minimum, the declaration(s) page, accessible. At least once a year, the board should have the agent attend a board meeting to discuss the association's policies and whether additional or increased coverage is recommended. 8. Insure the association's money. Obtain fidelity coverage on the board members and the management company/bookkeeper, if any, in an amount that equals or exceeds the association's funds. It is just as important as carrying adequate property and liability insurance and should be part of every association's common expenses. When you purchase directors and officers insurance, a part of that provides fidelity insurance bonding on the board members, but it may not be sufficient. Similarly, extending fidelity coverage to the management company is not included in the base policy and requires the purchase of a managing agent rider. Even with coverage through the association's insurance carrier, the board should require evidence that the management company carries its own fidelity coverage that covers not only the company’s funds but the association’s as well and would provide the first line of recovery in the event of a theft by one of its employees. 9. Do not combine funds with other associations. Commingled funds make it very difficult to ascertain which funds belong to which association. 10. Regularly engage an independent CPA to conduct an audit. While it may be too costly to conduct an audit every year unless mandated by the governing documents or state statutes, the board should commit to having one performed at least every few years. In the interim, the association should have an annual review performed, with the stipulation that the bank balances be independently verified. While no single suggestion is fail-proof, these safeguards used in combination should help to create a system of checks and balances to help protect your association’s funds.

Internal Control Checklist You can help avoid opportunities for fraud or embezzlement by enacting good internal controls. Start with this checklist.    



Are your bank account statements reconciled monthly? Remember that your legal options may be limited by a window of time that has passed since the act was committed. Are your bank statements opened and reviewed by someone other than the person who issues checks? Are employees who are involved in positions of trust covered by a fidelity bond? Are all employees in the financial areas of your company required to take two consecutive weeks of vacation annually? Break the cover-up cycle. Having another person perform the duties of the vacationer may expose theft that was being hidden. Is there adequate supervision at all times? Is somebody reviewing the financial action taken by your employees--reviewing checks and periodically spot-checking reconciled statements?


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Is your mail opened by someone other than the bookkeeper? This prevents an embezzler from intercepting any correspondence that might bring the illegal activity to light. Is a daily listing of checks received by mail prepared by someone other than the bookkeeper? Many associations use a local bank's lockbox service to handle their monthly assessments. Are cash receipts deposited intact daily? Hold-over cash deposits can be stolen or pilfered. Is your bookkeeper prohibited from signing checks? Is your supply of unused checks controlled? Can just anyone gain access to them? Is the signing of blank checks prohibited? Never sign a blank check! Are signed checks mailed out without being returned to the person who prepared them? Prevent the preparer from changing or modifying the payee by making sure signed checks are never returned to the preparer's desk for mailing. Do you issue checks in numbered order? A check issued way out of sequence could have been stolen. You can catch attempts to steal funds by spotting checks that are significantly out of sequence. Are all invoices approved for payment? When paid, are they canceled or noted as having been paid? This prevents the same bill from being paid over and over. Are invoices checked to make sure there are no unexplained past-due notices? Do you maintain the integrity of your bank accounts and related service passwords or access codes? Keep them secret, and change them regularly. Store the master password record in a secure location, and don't distribute passwords to anyone not in the “need to know” small group.


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Summary Say The manager has a substantial part to play in the financial operations of an association. In most instances, it will be a role in which to advise and guide the board, implement their decisions, and oversee the financial operations. In this session, you have gained fundamental knowledge about the financial operations of a community association. You have learned: • • • •

How to understand association financial statements and how to review them to determine the financial condition of the association. How to point out key components of the financial statements to help the board members understand their association’s financial position. What your role is regarding income tax return preparation. What your role is regarding investment policies of the board.



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Key Terms: • • • • • • • • • • • • • • • • • • • • • • •

Accrual basis of accounting Assets Audit Balance sheet Bond Cash basis of accounting Certificate of deposit Commercial reporting method Comparison to budget Compilation CPA Deficit in members’ equity Engagement letter Excess of revenues over expense Expense FDIC Fund balance Fund reporting method GAAP GAAS Income Investment liquidity Investments

• • • • • • • • • • • • • • • • • • •

Investment safety Investment yield Liabilities Management letter Members’ equity Modified cash basis of accounting Net revenue Net loss Notes to financial statements Opinion letter Representation letter Revenue Review Statement of cash flows Statement of changes in members’ equity (or fund balances) Statement of revenue and expense Treasury bills Treasury bonds Treasury notes



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Focus Questions Use the following questions to help you identify and review the core concepts in this lesson. (Hint: Once you look up the answer to a question, you may want to jot down the page number next to the question for future reference.) 1. Explain two reasons for preparing financial reports. 2. What are some reasons why the form and content of one community association’s financial reports may be different from the form and content of another’s? 3. Explain the difference between the cash basis, accrual basis, and modified cash basis accounting methods used for reports. 4. List some warning signs about the financial health of a community association to watch for when you review its financial reports. 5. Name and define the two financial statements that are the minimum required for interim reporting purposes. 6. Define revenue and expenses. Give an example of each for your community association. 7. Explain what “comparison to budget” in a financial report involves. Why should a comparison to budget be prepared? 8. List and define the three major components of a balance sheet. Why is it called a balance sheet? 11. What is the role and purpose of a certified public accountant? 12. What is GAAP? What is it used for? 13. List and explain the various typical year-end reports for a community association. 14. Explain the difference between an audit, a review, and a compilation. Give at least one reason for using each. 15. Explain the five types of opinion letters that an auditor might prepare. 16. What is the purpose of the management letter that accompanies an audit? 17. Give some reasons why it is important for you to be familiar with federal income tax requirements and options for a community association. • List some federal income tax filing responsibilities for a community association. • Will state income tax filing requirements be the same as federal requirements? • Does a community association have a choice of forms for filing its federal income tax return? 18. Define investments. Give some examples. 19. List some checks and balances a community association should implement to protect its investments. 20. List some of a community association manager’s typical investment duties. 21. List at least two possible sources of investment policies for a community association. • Give an example of a possible investment policy for a community association. • Give at least two examples of investment procedures for a community association. 22. List and define the three essential investment objectives for a community association in their order of importance.


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Focus Questions, cont’d. 23. What are some questions to ask in order to determine the safety of an investment? 24. What’s the difference between U.S. Treasury bills and U.S. Treasury bonds and notes? Why are they considered among the safest investments available to community associations? 25. What are some common investment strategies with regard to liquidity? 26. Why is the stated rate of interest not necessarily the yield a buyer will receive from certain investments?


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Thought/Discussion Questions Use the following questions to help you apply the information in this lesson to your own situation. 1. What accounting method does your community association use—cash, accrual or modified accrual? 2. Do you use an independent CPA? 3. Locate copies of interim and year-end financial reports prepared for your community association, • Identify each report. • Identify the major elements in each report. • Can you tell which accounting method was used for the reports—cash, accrual or modified accrual? • When you review the reports, can you find any of the warning signs this lesson mentions? 4. Did your community association have any audit, review, or compilation prepared during the past year? If so, what general conclusions can you draw from the CPA’s letter or opinion and any management letter he or she prepared? 5. Find out the following information about your community’s tax status: • Is your community a nonprofit organization? • Is your community tax-exempt under the Internal Revenue Code? • What is the tax filing year for your community? • Was your community’s last federal tax return filed by its due date? • Does your community file as a regular corporation (IRS form 1120) or as a homeowners association (IRS form 1120 H)? • Is your community required to make quarterly payments of its estimated annual tax? 6. Find out the following information about your community’s investments: • Who makes the investments for your community association? • Does your community association have an investment advisor? • What types of investments does your community make? • What investment policies are your community association required to have? • What other investment policies does your community association have—written or informal? • What investment procedures does your community association have—written or informal? • Describe the safety of each of your community association’s investments. • Describe the liquidity of each of your community association’s investments. • Describe the yield for each of your community association’s investments.


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Lesson 3 Quiz 1. Which of the following accounting methods records revenue when it is collected and expenses when they are paid? a. cash basis b. accrual basis c. modified cash basis d. modified accrual basis RATIONALE: A community association’s financial reports will reflect one of three possible accounting methods. Cash basis records revenue when it is collected and expenses when they are paid. Accrual basis records revenue when it is earned (or assessed to owners) and expenses when they are incurred or acquired. Modified cash basis records revenue on the accrual basis along with selected expense items. 2. Complete the following sentence: A ___________ occurs when expenses are greater than revenue. a. net income b. net loss c. net gain d. net profit RATIONALE: A net loss occurs when expenses are greater than revenue. Net revenue is the amount left after deducting expenses from revenue. The net revenue or loss can be significantly different depending on whether a cash, accrual, or modified cash basis is used. 3. Which of the following is not one of the three major components of a balance sheet? a. Assets b. Liabilities c. Expenses d. Members’ Equity RATIONALE: Expenses are one if the major components of a statement of revenue and expense, while a balance sheet consists of assets, liabilities, and members’ equity. 4. True or false. A CPA’s representation letter describes the nature of the work to be done, the type of report to be prepared, the fee for services, the time frame for the assignment, and the accountant’s disclaimers. (False) RATIONALE: A representation letter states that the information the community association provides is true to the best of its knowledge and describes the steps the community association has taken to provide for the preparation of accurate and complete financial statements. An engagement letter describes the nature of the work to be done, the type of report to be prepared, the fee for services, the time frame for the assignment, and the accountant’s disclaimers. It is usually executed by the management company on behalf of the association.

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Lesson 3 Quiz, cont’d 5. Complete the following sentence: A(n) _______________ is a year-end financial report prepared by a CPA without the assurance that the information conforms to GAAP. a. compilation b. review c. audit d. opinion letter RATIONALE: With a compilation, the accountant prepares the community association’s financial statements based on information the association provides. The accountant cannot make any claims about the accuracy and completeness of the financial statements, as opposed to the audit and review, which provide some assurance to the board and other interested parties that the financial statements make sense. 6. True or false. Community associations must file a federal income tax return every year. (True) RATIONALE: All community associations must file a federal income tax return every year. The filing of a tax return does not necessarily mean that a community association owes any tax. Further, the lack of taxable revenue does not eliminate the need to file. 7. True or false. Requiring a single signature to withdraw funds from an investment account is a good example of a system of internal checks and balances to protect association investments. (False) RATIONALE: Every community association needs a system of internal checks and balances to protect its investments. An good example is requiring at least two signatures to withdraw funds from investment accounts. 8. Which of the following investment objectives for community associations refers to the ease with which an investment can be converted into cash or a cash equivalent? a. safety b. liquidity c. yield d. treasury bills RATIONALE: Liquidity refers to the ease with which an investment can be converted into cash or a cash equivalent. Due to unexpected events, a community association may need access to its invested funds at times other than planned.


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Additional Resources For further information on financial statements, audits, income taxes, and investments, we suggest the following: Accounting for Managers, by William H. Webster. Managers need a basic understanding of how money is accounted for in an association, since it plays a hand in every decision a manager makes. This down-to-earth book simplifies accounting concepts and their application in everyday business—enhancing your productivity and adding value to your communities, your employer and your career. (McGraw Hill 2004.) Property Taxes and Homeowner Associations, (Guide for Association Practitioners, Report #6), Fourth Edition, by George R. Grasser. If your association holds title to common areas and facilities, there’s a possibility they may be taxed twice. You may be surprised to learn that small mistakes in the original subdivision process can go unnoticed for years! Learn what you and your tax accountant can do about it. (Community Associations Press, 2002.) The Board Treasurer: Roles and Responsibilities in Community Associations, A Guide for Association Practitioners, by Howard A. Goldklang, CPA, MBA. Not just for treasurers. Contains information on all aspects of association finances—statements, balance sheets, assets and liabilities, members’ equity, replacement reserves, investments, audits and more. Outlines the treasurer’s duties and how to prepare documents, work with boards and handle delinquencies. Contains sample documents. (Community Associations Institute, 2006.) Reserve Funds: How & Why Community Associations Invest Assets, 2nd Edition, A Guide for Association Practitioners, by Mitchell H. Frumkin, PE, PP, RS, MBA, and Nico F. March, CFM, Editors. Reserves are essential to the successful, long-term operation of a community association. Learn how to establish the right funds and invest them responsibly, and how to comply with federal and state regulations. Second edition has been updated relative to current economic conditions. Appendices include FAQs and summaries of state reserve-fund laws. (Community Associations Institute, 2009.)


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Conduct the Review/Q&A session to wrap-up Day 1. Allow 30 minutes to respond to any questions participants may have about any of the material covered in Module 1 or 2.

Conclude Day 1

Transition to Module 3: Facilities Management


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Module 3: Facilities Management Focus How to understand the community manager’s role in operating, maintaining, repairing, and replacing the common elements and common areas—and planning, organizing, leading, and controlling your association’s resources in order to achieve its goals.









Overview Module 3 will introduce you to: 





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Materials Needed

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PowerPoint slides

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LCD projector

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Remote advancer

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Flip chart


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Slide 71

Module 3: Facilities Management Focus How to understand the community manager’s role in: • Operating, maintaining, repairing, and replacing the common elements and common areas. • Planning, organizing, leading, and controlling your association’s resources in order to achieve its goals.

71


Slide 72 Facilities Management This section of the program will introduce you to: • Maintenance—Lesson 1 • Contracting—Lesson 2 • Risk Management and Insurance—Lesson 3

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Module 3 Overview Management is the process of planning, organizing, leading, and controlling an organization’s use of its resources in order to achieve its goals. For a community association, facilities management is the process of operating, maintaining, repairing, and replacing common property—that is, the common elements or common areas. As such, it involves the management of both physical assets and human resources.

Contents of Module 3 Module 3 of this program is intended to introduce you to three key components of facilities management for a community association manager: • Maintenance—Lesson 1 • Contracting—Lesson 2 • Risk Management & Insurance—Lesson 3 These lessons will not tell you all that you need to know about facilities management or risk management and insurance. However, they will provide you with a good foundation for developing your management skills in these areas. The M-201 (Facilities Management) and M-205 (Risk Management) courses go into much more detail on these topics.


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Lesson 1: Maintenance Goal At the end of this lesson, students will understand the physical assets that must be maintained by the association and how to determine whether the association or the owner is responsible for such work. The students will also understand the different types of maintenance and the systems to use to ensure that maintenance is promptly and effectively completed.

Time 60 minutes Session Time Breakdown 30 minutes—Faculty presentation 20 minutes—Class exercises (2) 10 minutes—Summary/quiz

Overview This session covers the maintenance aspects of a community association. These responsibilities can vary greatly depending upon the type of association and the governing documents. There should be a focus on the systematic handling of a facilities maintenance program from its creation, through its supervision, and to its completion. Time should be spent focusing on preventive maintenance work to make the manager’s job easier. Time should also be spent helping managers understand how to determine who is responsible for maintaining the various components of the property, especially in those areas that are not clearly defined by the governing documents. There should be a discussion about how to sensibly resolve those ambiguities for the benefit of both the association and the owner. Depending upon where this course is presented, there will be different maintenance issues unique to that area. For example, ice damming in roof gutters will not be of concern to students in Arizona, nor will palm tree trimming be an issue to those from New England.

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Lesson 1: Maintenance Therefore, students should not focus on the specific maintenance task being discussed—instead they should focus on the concept in which a problem or concern was handled. Materials Needed 

LCD projector

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Remote advancer

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Flip chart


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Overview Introduce the lesson Say The topic of this session is facilities maintenance for community associations. The manager: 

Must understand the responsibilities of the association to maintain its physical assets.



Must understand what components of the community are the responsibility of the association to maintain and which ones are the responsibility of the owner.



Must understand the different types of maintenance and how to effectively handle each one.



Must use appropriate systems to ensure the maintenance program is effective.

Overview the session Say We will discuss: The need for an association to maintain its facilities.  The different types of maintenance a community association must perform. 

How to effectively maintain the physical plant.

You will also:

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Review a set of governing documents to learn how to determine maintenance responsibilities.

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Participate in class exercises that will help you understand the items we discussed.


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Overview Go through the Lesson 1 learning objectives with the class.

Slide 73



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Key Terms: • • • • • • • •

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Analysis sheet Emergency services maintenance Facilities management Site visit checklist Site visit report Inventory Maintenance calendar or schedule Maintenance contact sheet

• • • • • • • •

Maintenance record Management tool Preventive maintenance Requested maintenance Reserve replacement Responsibility chart Routine maintenance Work order/response form

For a community association, facilities management is the process of operating, maintaining, repairing, and replacing common property—that is, the common elements or areas. A community association has four major maintenance goals: 1. To meet the needs of the individual residents as they relate to the community association’s responsibilities 2. To preserve and enhance the common property 3. To limit potential exposure to injury to residents, guests, and employees 4. To protect property values of the homes or units through successful maintenance of the common property An effective maintenance system depends on a manager’s leadership ability to get all the relevant participants involved as appropriate—residents, employees, consultants, contractors, and the developer. As a leader, the manager should work with the board, committees, and site staff to establish a maintenance system for the community. The purpose of this lesson is to help you to organize and manage the maintenance that your community association requires. Whenever the term “maintenance” is used in this lesson, it refers to “maintenance, repairs, and replacement” of physical assets or resources.

What You Will Learn After reading and reviewing this lesson, you should be able to explain and understand: • Maintenance management tools • Sources of information on a community’s physical assets and their maintenance needs • Necessary information on maintenance needs • Five basic maintenance programs • Methods for evaluating the effectiveness of a maintenance system and its implementation • Characteristics of an effective maintenance system • Characteristics of an ineffective maintenance system • Why sustainable lifestyles can reduce maintenance costs and increase homeowner participation

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Overview, continued Define maintenance management tool and provide some examples.

Slide 74 Management Tools for Maintenance A management tool is any means used to record, remind, or command attention. Examples: • Checklists • Charts of information • Calendars or schedules • Records of actions taken

• • • •

track,

Inventories Work orders Request forms Response forms

74

Point out that as a leader, the manager should work with the board, committees, and site staff to establish a maintenance system for the community.



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Develop Maintenance Management Tools The first step in establishing a maintenance system is to develop effective management tools for developing, implementing, and evaluating your community’s system. Maintenance Management Tools A management tool is any means used to track, record, remind, or command attention. Usually these means are forms or documents. Examples of maintenance management tools include: • Checklists • Charts of information • Calendars or schedules • Records of actions taken • Inventories • Computer generated work orders • Request forms • Response forms Effective maintenance cannot occur without management tools. If a manager relies too heavily on memory and verbal communication, it becomes impossible to accurately and completely track, record, prompt, or draw attention to maintenance needs and their resolution. This lesson provides sample forms that other managers have developed and found useful. It is up to you to create or modify forms to meet the maintenance needs of your community. Remember, any forms, checklists, or other samples included in this course are done so by way of example and are not intended to be utilized as a substitute for legal, accounting, or other professional advice where appropriate. If you use any form, checklist, or other sample, it may be necessary to tailor it to your particular community association’s needs and requirements.


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Maintenance Responsibilities Say The maintenance responsibilities in a community association are varied and require the manager to know all aspects of maintaining the community. To determine your association’s maintenance responsibilities—and who is responsible for the maintenance: • Review the governing documents of the association for specific maintenance responsibilities assigned to the association, the developer or the owner. • Review state statutes to determine if any laws require the association to maintain certain components or parts of the common areas. • Review board resolutions to determine if the directors have established specific maintenance responsibilities for the association or the owners that were not detailed in the governing documents or state statutes. • Identify any area in which the maintenance responsibilities are not clear and prepare necessary recommendations for clarification through the resolution process. Point out the sample language from the declaration and bylaws on the following pages as examples of how to research your maintenance responsibilities and identify who is responsible for the maintenance. Also be sure to point out the Sample Maintenance Responsibility Chart and Sample Contact Sheet.


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Maintenance Responsibilities To determine your association’s maintenance responsibilities—and who is responsible for the maintenance: Research legal documents to identify your community association’s physical assets and who is responsible for the maintenance: • State statutes • Board resolutions • Governing documents—frequently, the declaration or master deed will include a maintenance schedule for particular assets (See the typical language describing maintenance responsibilities in the excerpts from a condominium association’s declaration on the following pages. We included the excerpts to give you an idea of the kind of maintenancerelated information you are likely to find in your association’s governing documents.)


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Module 3: Facilities Management Typical Language on Physical Assets and their Maintenance from The Declaration of a Condominium Association Definition of Units Each unit consists of the space measured horizontally between the unit side or inside of the unfinished surface of the exterior walls enclosing such unit, and where walk and partitions separate such unit from other units, to the unfinished surface of the unit side of such walls and partitions, and measured vertically from the unfinished surface of the unit side of the floor to the underside of the unfinished surface of the ceiling of such unit. Included as part of a unit are a) the sliding glass door to the patio or balcony of a unit, b) the front entrance door and any other entrance door of a unit and their hardware and fixtures, c) all windows of a unit, and d) all floor covering of a unit. Common Elements The common elements consist of a) the land described in Schedule A, b) all foundations, columns, girders, beams, and supports of all buildings, c) all exterior walls and exterior surfaces of the buildings; all floors and ceilings structure and unfinished surfaces enclosing a unit; all walls and partitions separating units from hallways, corridors and stairways, and the terrace floor, d) roof, roof drainage pipes, gutters, headers, halls, corridors, stairs, stairways, crawl spaces, attic spaces, entrances and exits of all buildings, and e) all yards, gardens, play and grass areas, all parking and driveway areas, and streets. Limited Common Elements (a) The locations of the common elements to which each unit has direct access are shown on the Plats and Plans; pursuant to section 55-70.5(c) of the Condominium Act, a balcony, porch, patio, terrace or fence, if any, shown adjacent to a unit is a limited common element appurtenant to that unit. (b) A portion of the common elements is marked on the Plans as “Common Elements that may be assigned as limited Common Elements.” This portion of the common elements includes all of the covered or underground parking spaces located under or in the buildings from the top surface of the concrete floor slab to the underside of the concrete slab or dropped ceiling, as the case may be, and the storage areas in common element storage rooms. Pursuant to section 5579.54(a)(6) of the Condominium Act, the Declarant reserve the exclusive right to assign these parking spaces and storage areas as limited common elements forthe exclusive use of certain unit owners to whose units these parking spaces and storage areas shall become appurtenant. The Declarant may assign such a common element as a limited common element parking space or storage cubicle pursuant to the provisions of section 55-79.57 of the Condominium Act by causing an appropriate amendment to this Declaration or to the Plans to be executed and recorded. If, prior to settlement on a unit, a person acquires the right to the assignment of a limited common element, the Declarant shall evidence the right to such an assignment in the deed to the unit to which such limited common element parking space or storage cubicle shall appertain. If a unit owner acquires the right to the exclusive use of such a limited common element subsequent to settlement on the unit, the Declarant may but need not evidence the unit owner's right to such an assignment in a separate written agreement with the unit owner. The laundry room and hallway on each floor are limited common elements appurtenant to the units situated on that floor.


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Owner’s maintenance responsibility Each owner shall have the obligation to maintain and keep in good repair all portions of the unit and those other portions of the condominium hereinafter specified, including any interior walls; interior ceiling and floors; kitchen and bathroom fixtures and equipment, including refrigerator and range, dishwasher, clothes washer, clothes dryer, and disposal; lighting, heating, and air conditioning unit; those parts of the plumbing, mechanical, utility, and electrical systems which serve only his or her unit, whether located within or without the boundaries of his or her unit; and all carpeting, patio doors, screens, windows, drywall, doors, doorways, frames, and hardware that is a part of the entry system and window system of the unit. Each owner shall keep the interior of his or her unit and its equipment in good order, condition, and repair and in a clean and sanitary condition, and shall do all repair, maintenance, redecorating, painting, and varnishing which may at any time be necessary to maintain the good appearance and condition of his or her unit. In addition, each owner shall be responsible for all damages to any and all other units or to the common elements resulting from his or her failure to make any of the repairs required to be made by him or her by this Section, including, but not limited to, damages caused by water leaking from the plumbing fixtures of one unit into another unit. Condominium Association’s Maintenance Responsibility The condominium association shall maintain and keep in good repair as a common expense all of the condominium property not required to be maintained and kept in good order by an owner. Except to the extent that insurance required to be maintained or maintained by the board covers any damage or loss, the board shall not be responsible for any maintenance or repair to the interior of any unit nor for lack of waterproofing to any part of the unit or common elements. The board shall be responsible for all exterior surfaces, specifically including the painting of the exterior surface of the front door of each unit, whether or not included within the boundaries of a unit.

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Some community associations assume maintenance responsibilities for physical assets which they do not own—for example, assets that belong to owners, such as exterior painting of townhouses in a planned community. However, the governing documents and applicable state statutes must provide for a community association assuming maintenance responsibility for specific owners’ assets. An association must be very careful not to expend funds on maintenance items not clearly defined as the association’s responsibility in the governing documents, resolutions, or government mandates. One management tool you can use to keep track of who is responsible for the maintenance of various property elements or areas is the responsibility chart. It commonly is used as a handout for owners and tenants and maintained on the community’s website. Typical responsible parties include the owner, the association, the developer, a committee, or a manufacturer. (See the sample responsibility chart for a planned community on the following page.) If you prepare a responsibility chart for your community association, it must be based on your association’s legal documents and board policies. Some legal documents specify that the community association must perform a particular maintenance, repair replacement, or upgrade, but the individual owner must pay any financial costs involved. Preparing the chart is typically not a usual function included in the management contact. Be sure to obtain your supervisor’s approval to proceed, and advise the board that you can prepare the draft only if they agree to allow an attorney to approve it before distribution. On the other hand, an ad hoc committee would be an excellent alternative to develop the chart. To identify who should perform the maintenance for a particular physical asset, you will have to decide whether association employees can do the work—or whether it will be necessary to use a contractor. (See the discussion in the Contracting lesson to help you with this decision.) Here, a useful management control is the maintenance contact sheet. This is a form that records the contacts for various maintenance services and any pertinent information needed during an emergency. (See the sample maintenance contact sheet on the following pages.) Depending on your management company’s after-hours emergency procedures, every community manager should have an up-to-date maintenance contact sheet and carry it with him or her at all times. Emergencies do not keep normal business hours!



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Sample Responsibility Chart for Residents in a Planned Community

SAMPLE RESPONSIBILITY CHART FOR RESIDENTS IN A PLANNED COMMUNITY (whom to contact)

ITEM

Owner

Association

Other

1. Owners’ equipment / appliances 2. Interior unit construction

X

Equip. Mfg.

X

Developer*

3. Interior alterations to unit

X

Developer*

4. Exterior alterations to unit—approval 5. Trash collection

Architectural Committee X

6. Exterior pest control

X

7. Interior pest control

X

8. Plumbing

X

Developer*

9. Air conditioners

X

Developer*

10. Window Glass Replacement 11. Exterior painting

X

12. Roof repairs

X

13. Insurance—fire or damage to structure 14. Insurance—owners’ contents 15. Common Area Landscape Problems 16. Community pool/spa maintenance

X

X

X X X

X

17. Recreation facility maintenance *If a warranty matter

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Page 218

Sample Community Association Maintenance Contact Sheet Date __________________ Manager ________________________________ Association Name ________________________________________________ City _________________________________ # of Units __________________ Cross Streets and Address ________________________________________ Special board instructions: ________________________________________________________________

___________________________________________________________ ___________________________________________________________ CONTACT

Accountant: ___________________________ Phone: ___________________ Air Conditioning: _______________________ Phone: ___________________ Architect/Engineer: ______________________ Phone: ___________________ Attorney: _____________________________ Phone: ___________________ Cleaning Contractor: ____________________ Phone: ___________________ Electrician: ____________________________ Phone: ___________________ Exterminator: __________________________ Phone: ___________________ Schedule: ____________________________________________________ Fire: _________________________________ Phone: ___________________ Handyperson: _________________________ Phone: ___________________ Heating System: _______________________ Phone: ___________________ Insurance: ____________________________ Phone: ___________________ Landscaper: ___________________________ Phone: ___________________ Emergency/After hours: _________________________________________ Mail Boxes: ___________________________ Phone: ___________________ Patrol Service: _________________________ Phone: ___________________ Plumber: _____________________________ Phone: ___________________ Police: _______________________________ Phone: ___________________ Pool/Spa: _____________________________ Phone: ___________________ Pool Keys: ___________________________________________________ Pool Location: ________________________________________________ Roofer: ______________________________ Phone: ___________________ Warranty Info: ________________________________________________ Snow Plowing: ________________________ Phone: ___________________ Street Sweeper: _______________________ Phone: ___________________ Schedule: ____________________________________________________ Towing: _______________________________ Phone: ___________________ Towing Procedure: ____________________________________________ Trash Contractor: ______________________ Phone: ___________________ Schedule: ____________________________________________________ TV Cable/Master Antenna: _______________ Phone: ___________________ Utility Emergencies: ____________________ Phone: ___________________ Developer: ____________________________ Phone: ___________________ Other: ________________________________________________________________

___________________________________________________________

________________________________________________________________

___________________________________________________________


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Maintenance Responsibilities continued Say How do you assess the current condition and needs of the property? •

Conduct a detailed, thorough site visit of the property. Suggest taking photos for future comparison and historical record. Examine any available building plans or specifications. Review any reserve studies that have been prepared. Review all maintenance records. Interview board members, employees, or contractors providing maintenance services. Review product or equipment information from manufacturers.

• • • • •

Slide 75 Identifying Maintenance Needs • • • • • •

Conduct a site visit of the property Examine building plans or specifications Review any reserve studies Review all maintenance records Interview board members, employees, or contractors Review product or equipment information

75

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Class Exercise Allow 10 minutes for this activity.

Run the Class Exercise. Have students review the sample governing documents and the “Maintenance Responsibility Chart” on pages 220-222 to determine whether the association or the owner is responsible for the following maintenance requests. Allow 10 minutes for this exercise. Review responses. For those that are not clearly defined, discuss how the manager should address those items. Answers: 1. Repair roof leak: Association responsibility. 2. Repair broken pipe: Varies depending upon where the break in the pipe is located. Provide examples in which this request could be the responsibility of the association and examples of owner responsibility. 3. Repair damaged wooden slat on patio gate: Association responsibility. 4. Paint entry door: Exterior side is association responsibility. Interior side is owner responsibility. This is an area of possible class discussion. For example, how do you define the vertical edge of the door, exterior or interior? 5. Clean fireplace flue: Owner responsibility. 6. Repair ceiling damage from roof leak: Not described in governing documents. 7. Replace light bulb on balcony: Owner responsibility. 8. Paint balcony railing: Association responsibility. 9. Respond to sewer back up: Association responsibility. 10. Pay for sewer backup clearing and damage: Varies – could be either depending on interpretation. 11. Replace window screen: Owner responsibility. 12. Repair electrical transformer: Varies depending upon the location of the transformer. 13. Replace doorknocker on exterior of entry door: Owner responsibility. Emphasize using common sense and consistency in addressing undefined areas of responsibility. Ask students for their experiences in dealing with these issues. Has anyone been successful in addressing these areas? Do any students in the class have a problem with their own governing documents that could be discussed now? © 2011 Community Associations Institute

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Class Exercise Review the sample governing documents and the “Maintenance Responsibility Chart” to determine whether the association or the owner is responsible for the following maintenance requests. Write your response next to the requested maintenance item. 1.

Repair roof leak. ______________________________________________

2.

Repair broken pipe. ___________________________________________

3.

Repair damaged wooden slat patio gate. ___________________________

4.

Paint entry door. ______________________________________________

5.

Clean fireplace flue. ___________________________________________

6.

Repair ceiling damage from roof leak. _____________________________

7.

Replace light bulb on balcony. ___________________________________

8.

Paint balcony railing. __________________________________________

9.

Respond to sewer back up. _____________________________________

10. Pay for sewer back up clearing and damage. ________________________ 11. Replace window screen. ________________________________________ 12. Repair electrical transformer. ____________________________________ 13. Replace doorknocker on exterior of entry door. ______________________

Work Space

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Page 220


Bayview Towers Exhibit B to the Declaration NOTES TO MAINTENANCE RESPONSIBILITIES CHART This chart and the titles and heading used herein are not intended to describe or encompass all maintenance functions nor to delineate all respective responsibilities between the unit owners, severally and the association. The placement of responsibility under any specific column does not always accurately reflect the precise character and nature of ownership. The appropriate sections of the declaration determine ownership. In many cases, maintenance responsibility is allocated to the unit owners association to ensure central maintenance responsibility, uniformity, and quality of repair, and to protect community health and safety. Where such maintenance is required due to the negligent or wrongful act or omission of a unit owner (or such unit owner’s household, tenants, employees, agents, visitors, guests, or pets), the association will perform the necessary maintenance at the sole expense of the unit owner. Column I: Items. Items appearing in this column are illustrative and not exhaustive. Column II: Common Elements Under Association Responsibility. Responsibility for determining and providing for the maintenance, repair, and replacement of the common elements and determining the costs thereof shall be primarily the responsibility of the board of directors and such designees to which it may delegate certain such responsibilities. Column III: Limited Common Elements Under Association Responsibility. Responsibility for determining the maintenance, repair, and replacement requirements of the limited common elements shall be a shared responsibility between the board of directors and the unit owner of a unit to which a specific limited common element is exclusively appurtenant; provided, however, that the board shall have the final responsibility for determining the need for and accomplishing such maintenance, repair, and replacement activities. Column IV: Unit Components Under Association Responsibility. The items in this column are legally and by definition a part of a unit but are attached or directly connected or associated with the common elements and common expense items in such a way that a clear distinction between unit owner and association responsibility cannot be made except by board resolution. Moreover, such items frequently involve matters of concern relative to the general health and well being of a unit owner. Column V: Certain Other Components Under Unit Owner’s Responsibility Without Respect to Ownership of the Component. Responsibility for determining and providing for the maintenance, repair, and replacement requirements of any items within a unit shall be primarily the responsibility of the unit owner.


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Page 221 Maintenance Responsibility Chart

Bayview Towers Maintenance Responsibility Chart I

Items

Plumbing & related systems & components thereof.

Electrical & related systems & components thereof excluding appliances, fixtures, & lights serving only one unit. Heating, ventilating, & cooling systems & components thereof. Parking spaces. Refuse collection system.

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II

III

Common Elements Under Association Responsibility

Limited Common Elements Under Association Responsibility

IV

Unit Components Under Association Responsibility

V Certain Other Components Under Unit Owner’s Responsibility Without Respect to Ownership of the Component All portions within a unit including fixtures & appliances attached thereto. Water damage to a unit, when the primary source of such problem is through the negligence of the occupants of that unit.

All maintenance, repair, & replacement of portions of plumbing serving more than one unit. Water damage to common elements or units other than the one that is the primary source of the problem through negligence of the occupants of such units. All, in all regards.

If any, same as Column II.

Only to the extent that a malfunction originates outside the unit in which the malfunction occurs or may occur.

All, in all regards, from the common side of the unit panel.

—

All, in all regards, serving more than one unit, as a common expense. All parking space in all regards. All, in all regards.

—

—

—

—

—

—

—

—

All, in all regards, for items serving only one unit and located within the unit (on the unit side of the unit’s electrical panel, including the panel itself). All, in all regards serving only one unit.


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PAGE 222 Bayview Towers Maintenance Responsibility Chart, continued I

II

Limited Common Elements Under Association Responsibility

IV

V Certain Other Components Under Unit Owner’s Responsibility Without Respect to Ownership of the Component Maintenance of plantings and improvement approved by the association and installed by the unit owner.

Grounds, including all paved areas and other improvements thereon lying outside the main walls of the building and all underground utility systems. Building, exterior roof, exterior vertical breezeways, foundation. Windows.

All.

—

Unit Components Under Association Responsibility —

All, in all regards.

—

—

—

All which do not serve a unit, in all regards.

All, in all regards, except routine cleaning.

—

Doors, main entry to units.

All, in all regards.

All surfaces exposed to outside including door panel door edge, trim, & sill.

—

Balcony and patio doors.

—

—

Balconies, patios, & railings. Screens (balcony or patio doors and windows).

—

In all regards except routine cleaning, latch mechanism and weather-stripping. In all regards except routine cleaning. —

Routine interior and exterior cleaning, replacement – all, in all regards, serving only one unit Interior of door panel & interior trim. Hardware set including lock & doorknocker assembly & hinges/closure. Routine cleaning, latch mechanism and weatherstripping.

Fireplaces & fireplace flues.


—

—

Items

Common Elements Under Association Responsibility

III



—

Routine cleaning.

—

All which serve the unit in all respects. Replacements to be of same color, grade, & style. All, in all regards serving only one unit. Page 307


Leader Guide

Class Exercise #2 Allow 10 minutes for this exercise.

Lead the class through the following large-group activity. The sample governing documents for Bayview Towers do not address the issue of who is responsible for ceiling repairs resulting from roof leaks. Many owners have damaged ceilings and are calling board members and demanding that something be done. The board is sympathetic to the owners’ pleadings. Create a resolution that you would recommend to clarify this issue. Answer: Items to be considered: • •

• •

Purpose: There is a need to clarify an ambiguous or unclear provision of the maintenance responsibilities. Authority: Article 3 of the bylaws gives the board the powers and duties necessary for the administration of the affairs of the association and allows them to provide for the operation, care, upkeep, and maintenance of all property. Scope: Those owners who have suffered ceiling damage as a result of roof leaks. Specifications: The association will repair ceiling damage and repaint ceilings for those units that have been damaged as a result of roof failure—a common element for which the association is responsible. Owners are not allowed to make roof repairs and could not prevent their ceilings from being damaged. The association will paint only the damaged area. The owner must report the leak within 30 days of first occurrence to qualify for interior repair.

Ask the students to discuss these additional issues: • •

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What should be the policy on repairs other than ceilings, such as carpeting or personal property? Should there be a deadline by which all claims must be submitted?


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Class Exercise #2 The sample governing documents for Bayview Towers do not address the issue of who is responsible for ceiling repairs resulting from roof leaks. Many owners have damaged ceilings and are calling board members and demanding that something be done. The board is sympathetic to the owners’ pleadings. Create a resolution that you would recommend to clarify this issue. Answer: •

Purpose: _________________________________________________ _________________________________________________________ _________________________________________________________

•

Authority: ________________________________________________ _________________________________________________________ _________________________________________________________

•

Scope: ___________________________________________________ _________________________________________________________ _________________________________________________________

•

Specifications: ____________________________________________ _________________________________________________________ _________________________________________________________

Sample Bylaws Excerpt Bayview Towers ARTICLE 3 Board of Directors Section 3.1. Powers and Duties. The Board of Directors shall have all of the powers and duties necessary for the administration of the affairs of the Bayview Towers Condominium Association and may do all such acts and things as are not by the Condominium Act or the condominium instruments required to be exercised and done by the Association. The Board of Directors shall delegate to one of its members or to a person employed for such purpose the authority to serve as liaison to the managing agent and to act on behalf of the Board on such matters relating to the duties of the managing agent (as defined in Section 3.2) if any, which may arise between meetings of the Board as the Board deems appropriate. In addition to the duties imposed by these Bylaws or by any resolution of the Association that may hereafter be adopted, the Board shall on behalf of the Association:


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Types of Maintenance Say There are five basic maintenance programs for community associations: 1. Routine maintenance. • Regular, recurring upkeep. For example: o Cleaning the common areas. o Mowing the lawns. 2. Preventive maintenance. • To extend the useful life of the physical asset. For example: o Sealing cracks/seal coating asphalt paving. o Lubricating pump motors. o Changing oil in the association’s truck. 3. Emergency maintenance. Stress the importance of having written disaster plans in place. • Immediate response to a required service or to limit potential damage. • Danger to health. For example: o Sewer backups, out of service elevator, or burst pipes. 4. Requested maintenance. • Corrective action in response to a resident or board member request or contractor recommendation/observation, or observed during a regular site visit. For example: o Missing lawn sprinkler head. o Patio gate repairs. 5. Reserve replacement. • Replacing assets as needed from the inevitable deterioration process. For example: o Roof replacement. o Fence replacement.

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Types of Maintenance Slide 76

Types of Maintenance Work • • • • •

Routine Preventive Emergency Requested Reserve replacement

76



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Types of Maintenance To get the maintenance work done, a manager must: • Organize the maintenance work • Create controls for ensuring that the work is actually done

Five Types of Maintenance Use your analysis of the association’s maintenance needs and the board’s related policies to establish basic maintenance programs for your community: 1. Routine maintenance: This is the regular, recurring upkeep that must be done (for example—cleaning, cutting grass). Typically, the job description for a maintenance employee or a service contract is used to define the routine maintenance that is expected. 2. Preventive maintenance: This is periodic maintenance to avoid disruptive breakdowns and to prolong the useful life of the physical asset in question. (Examples include rebuilding pool pumps with a life expectancy of eight years every five years, and cleaning problem sewer lines every month to avoid backups.) Literature from the manufacturer is one of the best sources of information on preventive maintenance for equipment. 3. Emergency services maintenance: This is the ability to respond to unpredictable problems (for example—sewer backups, elevator failures, roof leaks, frozen pipes, etc.). The key to a successful response to an emergency is to anticipate the different possibilities—and to develop a plan for responding to each one. Especially important is the development of a disaster plan to address possible natural and terrorist catastrophes. For information on preparing for emergencies, see Natural Disasters, published by CAI. 4. Requested maintenance: This is maintenance requested by an owner, a tenant, or the board, or recommended by a contractor, or identified during a routine site visit of the property (for example—a pothole in the street). 5. Reserve replacement: This consists of replacing physical assets as they wear out or break. The basis for your reserve replacement is the reserve study and replacement fund budget. However, the maintenance needs of a replacement item may require adjustments in both your reserve study and replacement fund budget to allow you to replace the item sooner or later than originally planned.

Create Tools For Ensuring the Work is Actually Done In addition to planning, organizing, and leading, management also involves controlling the community’s use of its resources. The following are some common management tools for ensuring that maintenance work actually gets done in a timely manner: • Maintenance calendar: This is a calendar or schedule that identifies what needs to be done during the year, and how frequently. See the sample maintenance calendar on the following pages for a pool and spa. • Maintenance record: While the calendar tells you when maintenance ought to be done, the record tells you when it actually was done. Sometimes you can enter the date work was done right on the maintenance calendar—as we suggest for our pool and spa sample.

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Facilities Maintenance Systems Say The manager must have methods in place for controlling the facilities maintenance program to ensure that the work is completed properly and in a timely manner. Methods include site visits, site visit reports, and work order systems. Site visits and site visit reports: • Provide documentation of current conditions and outstanding items • Provide verification of completed work • Help to identify potential problems • Enable onsite meetings with staff or contractors • Provide a method for follow up on previous maintenance items Ask someone to volunteer their experiences in working with written site visit reports. Ask someone to tell the class how a written site visit report was of benefit to them, especially in dealing with a contractor or with the board of directors. Discuss why “site visit” is more appropriate than “site inspection.” Work order systems Say •

•

Purpose: o Provide written documentation of maintenance activities o Assign maintenance tasks to staff and contractors o Evaluate staff and contractor performance o Feedback process from residents o Basis for cost allocation Benefits: o Provides follow up o Helps to monitor costs o Provides historical data on repairs made o Documents contractor problems


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Facilities Maintenance Systems Slide 77 Work Order Systems: Purpose • • • • •

Document requests Assign tasks Obtain feedback Allocate costs Evaluate staff and contractor performance

77

Slide 78 Work Order Systems: Benefits • • • •

Ensure follow-up Monitor costs Provide historical records Document problems

78

In the same manner as you asked for class participation with written site visit reports, make the same inquiry about work order systems. Ask someone to volunteer their experiences in working with a work order system and to offer benefits in addition to those noted above. Specific examples of how these systems are effective will help other students realize their value. Be sure to point out each of the sample checklists and tools on the subsequent pages.

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Page 227

A separate maintenance record is useful when you contract for work. Use the records to verify that work was done before you pay any invoices. See the sample on the following pages for grounds maintenance. Note that by including the budget and contract columns in the maintenance record, the manager has added a financial control that will allow him or her to take quick action when necessary. •

Site visit checklist: A site visit checklist— o Documents your current maintenance standards o Helps you to identify potential problems See the sample checklist on the following pages for building site visits. You can use it to examine one or more buildings. Most commonly, manager combine the site visit checklist and report into one document.

•

Site visit report: A site visit report is a compilation of all the maintenance needs identified during a site visit. Use it to: o Assign maintenance tasks to your staff or contractors o Budget for maintenance needs o Identify any preventive maintenance that needs to be done o Determine when on-site staff or independent contractors are not properly performing work on time o Demonstrate to the board that you are visiting the property and complying with contractual obligations. For example, when you look at the sample site visit report on the following pages, you will notice that several rear doors are not closing properly. The manager should arrange for someone to make any necessary adjustments on all the rear doors as soon as possible.

•

Work order/response form: A work order is a form for assigning work to be done in any one of the types of maintenance programs described earlier. With some planning, it can be used— o To document owner and tenant requests o To assign maintenance tasks to both maintenance staff and contractors o As a response form to be returned to an owner or tenant, indicating that work was completed or confirming that it was assigned o As a basis for allocating charges, when appropriate A work order/response form has several benefits. It— o Identifies whether the need is an emergency or not o Requires attention o Allows follow-up to evaluate satisfaction o Provides a means of monitoring costs o Provides a history of the repairs that have been made o Documents any problems with contractors reported by owners or tenants o Indicates if the work is a recurring problem necessitating further evaluation Most software programs have work order/response forms as part of their system. On the following pages you will find a sample work order/response form.


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SAMPLE: Pool and Spa Maintenance Calendar


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SAMPLE: Grounds Maintenance Record 20XX


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SAMPLE: Checklist

Rate 1 – 5: 1 = Poor 2 = Fair 3 = Satisfactory 4 = Good 5 = Excellent Inspected by: ____________________________________ Date: _________________________

Address

Trash Room

Hall Floors

Stair Treads

Glass

Cleaning

Common Parking Area

10200 10202 10204 10206 10208 10210 10212 10214 10216 10218 10220 10222 10224 10226 10228 10230 10232 10234 10236 10238 10240 10242 10244 10246 10248 10250 10252 10254 10256 10258 10260

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Page 231


SAMPLE: Site Visit Report

Prepared: 1/11/XX

By: ___________________________________

10206 • • • • • • •

Adjust the rear door closer Replace the split stair treads; several split stair treads Repair the fresh air vent leak at top hallway rear Top floor, replace the door closer bolts with the proper type Cut off the hallway door; it drags on the carpet Install fire alarm glass at front fire pool Adjust the terrace room fire door so it doesn’t hit the frame

10220 • • • • • •

Replace the weather strip at the rear entry door Lubricate the rear entry door Install the proper bolts at the terrace level door closer Replace several split stair treads Re-secure the fire alarm at the front entrance Lock the attic access

10228 • • • • •

Adjust the rear door so it closes properly Replace the fire alarm glass at the rear entrance Adjust the terrace level door closer Replace the logo and the front entry glass Replace the fire alarm glass at front entry

10240 • • • • •

Adjust the rear door so it closes properly Exit face missing at the rear entry Adjust or replace the terrace level door Reposition the emergency light at front entrance Replace split stair tread as needed


1/16/XX 1/16/XX 1/16/XX 1/16/XX

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SAMPLE: Work Order/Response Form Work Order No. __________________

Association: ______________________ Date: ___________ Time: __________ Homeowner Name: ________________________________________________ Address: ________________________________________________________ ________________________________________________________________ Home Phone: _____________________Work Phone: _____________________ Email Address: ___________________________________________________ Service Requested: ________________________________________________ ________________________________________________________________ ________________________________________________________________ Comments: ____________________________________________________________ ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ Request Taken By: _____________________________ Keys Needed?_______

Address: ________________________________________________________ Assigned to: _____________________________________ Date: ___________ Date Job Completed: _______________________________________________ Completed By: ____________________________________________________ Contractor Comments: ____________________________________________________________ ________________________________________________________________ Resident Comments: ________________________________________________________________ ________________________________________________________________ Signed: ____________________________________ Date: ________________ Owner’s or Tenant’s Signature: ___________________________ Date: ________________

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Evaluating Maintenance Systems and Efforts Say The manager must have methods in place for evaluating the effectiveness of the facilities maintenance program. • Review financial reports to determine how funds have been allocated and expended. • Review all work orders to determine the type of work, time spent, and costs. • Establish a system to monitor “call-backs” or repeat work orders. • Establish a system to follow up with residents on requested maintenance to ensure that repairs were timely and were completed to their satisfaction. • Inspect the maintenance work performed in the community.

Emphasize the many differences noted on the comparison chart for maintenance systems.



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Evaluate Your Maintenance System and Efforts In order to evaluate your community’s maintenance system and implementation efforts, you will have to: • Develop appropriate evaluation methods for your community association • Recognize the characteristics of an effective maintenance system • Recognize the characteristics of an ineffective maintenance system

Develop Appropriate Evaluation Methods Here are some common methods community association managers use to evaluate their maintenance systems and implementation efforts: • Have your board of directors fill out a “report card” that addresses your basic maintenance programs in specific terms. • Survey residents, either periodically or at the time their maintenance request has been completed. • Review budget costs for the previous year to determine— o How monies have been allocated o What the results were o If the planned (budgeted) expenses were close to actual expenditures and, if not, why. • Review all maintenance work orders in terms of— o Type o Time spent o Money disbursed o Any other key factors • Physically inspect the property. • Drive through and/or visit other similar community associations to obtain a first-hand comparison or self-check.

IMPORTANT NOTE Lack of complaints does not necessarily mean that you have a good maintenance system that is well-implemented. Take steps to obtain feedback.

Recognize the Characteristics of Both Effective and Ineffective Maintenance Systems The chart on the next page compares and contrasts the characteristics of effective and ineffective maintenance systems for community associations. Use it to evaluate your community’s maintenance system and implementation efforts.

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Page 234 Characteristics of a Maintenance System

Effective

Ineffective

• Cost-effective; and within budget

• Budget overruns

• Smooth daily operation of the community

• Crisis-oriented maintenance

• Scheduled preventive maintenance programs

• Absence of established routines for performing maintenance

• Efficient and prompt response to requests • Ability to review work sorted by unit, building, contractor, type of work, and date

• Slow response time

• Preventive maintenance to reduce potential for damage to property and person

• Increased frequency of maintenance-related insurance claims

• Efficient use, maintenance and replacement of equipment

• Frequent equipment break-downs

• Buildings and grounds in good condition

• Buildings and grounds are “rundown”

• Health and aesthetic standards of the community are being met

• Local health or building department citations for corrective action

• Positive outlook and atmosphere among community members

• A board that gets involved in dayto-day maintenance issues (micromanages)

• Positive, supportive, respectful attitude among owners, board, staff and manager

• Residents and/or a board that show lack of respect toward management, employees, and all parties involved with maintenance

• Enthusiastic, loyal employees

• Defensive employees


• Poor record-keeping

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Sustainable Lifestyles Say The community association manager is in the perfect position to help associations to be more “green” and to be a steward of the environment.

Review the following pages with the class. Briefly go through many of the initiatives that a community association manager could recommend to the board to help their communities be more sustainable.

Say One great idea is to have your board establish a sustainable lifestyle mission statement or charter, and then share it with the membership. Here is an example:

Slide 79

Bayview Towers Condominium Association, Inc. GREEN ENERGY COMMITTEE (Advisory Committee) CHARTER OBJECTIVES: • To assist in the education of homeowners and staff regarding energy, water and other conservation related subjects. This shall be accomplished through research, analysis and testing of new technologies, in addition to well established procedures and recommendations. Additionally, the committee will investigate federal, state, and local government programs while also soliciting knowledge and ideas from public utilities and private industry. • Communication of technical findings, ideas and suggestions to homeowners will be through, but not limited to, a monthly column, special notices, lectures and demonstrations. Ideas suitable for the community will be presented to the board or appropriate committees. • The actions and benefits resulting from this committee will be dependent upon a high level of interest and the involvement of the entire community. Therefore, the committee shall encourage and solicit homeowner participation to the maximum extent practical. ORGANIZATION: • The committee will meet as needed, typically monthly. • The committee members will select its chair. • All committee meetings will be open to the public. • Minutes of the meetings will be taken and filed in the corporate files. • A report that will be issued to the board will be generated from each committee meeting. • The committee will consist of at least five (5) association members. • The committee will serve at the pleasure of the board.

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Module 3: Facilities Management Sustainable Lifestyles As community association managers, we have the opportunity to have a significant impact on the future of our world by educating our board members and residents on the need to focus on the impact they and their association have on the environment. Sustainable communities are developed to meet the “needs of the present without compromising the ability of future generations to meet their own needs.” They are regenerative, meaning they have “processes that restore, renew or revitalize their own sources of energy and materials, creating sustainable systems that integrate the needs of society with the integrity of nature.” The core purpose of community associations is to create sustainable practices and approaches, even in communities without sustainable language in their covenants. Community associations exist to improve members’ quality of life because they offer choices, lifestyles, amenities and, most importantly, efficiencies that people value. Architects, landscape architects and developers initially conceived community associations as places where residents could share resources, thereby saving each member the cost of building resources themselves such as pools, tennis courts, fitness facilities and recreational activities. Out of the community association concept came the sustainable idea of saving energy and resources. Developers have found that they enjoy a competitive advantage by constructing new communities with common recreational amenities and provision for some services. There is also a growing demand among potential buyers to find eco-friendly homes that offer high energy efficiencies in both design and resources. This final section will only briefly touch on the many opportunities the association and the residents have to both “save the planet” as well as benefit financially from their sustainable efforts. For a more in-depth discussion on how communities can conserve energy and reduce negative impacts on the environment through design, technology and social innovation, download the free “Best Practices: Green Communities” report from the Foundation for Community Association Research at www.cairf.org.

Opportunities for Sustainable Lifestyles Especially in communities where water and/or electricity are master metered, it’s incumbent on each resident to do everything possible to conserve energy. After all, their efforts have a direct impact on their maintenance fees. In communities where residents pay their own utility bills, they have a responsibility not to waste diminishing natural resources. Following are initiatives that a community association manager could recommend to the board. There’s one important caveat, however: each community’s resource savings, its “green-ness,” or its sustainability planning and acceptance should not come at the expense of the members living in those communities. So, what is the “right thing to do” or accepted as the right behavior in one community should not be dictated as required in another. What additional ideas can you offer?


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A. Individual Resident Programs 1. Install Energy Star™ rated windows and doors. Close window blinds and curtains on summer days. In winter close curtains at night to capture passive solar heat. These efforts could save 25-75% on heating and cooling bills and reduce CO2 emissions 2,700 lbs per year. 2. For large windows in direct sunlight, install UV protection window film. 3. Timely repair plumbing leaks 4. Install low-flow toilets, shower heads and faucets 5. Seal air flow leaks and ducts 6. Recycle household waste 7. Use energy-efficient Energy Star appliances (washer, dryer, dishwasher, refrigerator, water heater, air conditioner) 8. Use a digital, programmable thermostat 9. Use a power consumption monitor 10. Use tankless or point-of-use water heater 11. Sign up with green power provider 12. Use compact fluorescent lamps (CFL) or light emitting diodes (LED) lamps/bulbs 13. Use drinking water-filtration system instead of buying bottled water 14. Use low- or no-VOC paints and sealants. What does “VOC” mean? Volatile Organic Compounds are potentially toxic ground-water contaminants, some caused naturally in the environment, others by manmade activities, and some by both, which can ultimately impact drinking water supplies. 15. Buy smart – recycled/recyclable party goods and office supplies, recyclable grocery bags and containers, no- or minimum wrapping of products 16. Don’t litter; pick up other’s litter 17. Use glass, china or other materials for dishes and glasses instead of paper, plastic or Styrofoam ones 18. Donate old cell phones to www.collectivegood.com, www.recyclewirelessphones.com, www.donateaphone.com or to Good Will 19. Donate working appliances to www.goodwill.com 20. Donate cardboard boxes to a local shelter or www.usedcardboardboxes.com 21. Donate wearable women’s clothing at www.dressforsuccess.org 22. Donate gently used clothes and towels to a local animal shelter, faith-based organization or community center 23. Donate Styrofoam peanuts to a local pack-and-ship store or contact www.loosefillpackaging.com 24. Trade ink-toner cartridges at some office supply stores or www.recycleplace.com B. Individual and Association Maintenance, Repairs and Replacements 1. Improve attic insulation and install radiant barriers 2. Install energy-efficient doors 3. Use motion sensors instead of photocells or timers on exterior and interior 4. Use a heat recovery ventilating system

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Module 3: Facilities Management 5. 6. 7. 8. 9. 10. 11. 12. 13.

14. 15. 16. 17. 18. 19. 20. 21. 22. 23.

24. 25. 26. 27. 28.

Install solar fans in common attics Replace deteriorated weather stripping Replace windows Replace incandescent light bulbs with compact fluorescent lamps (CFL) or light emitting diodes (LED) lamps/bulbs Use solar lighting for common areas Replace low-efficiency boiler Improve chiller efficiency Replace lower-efficiency HVAC system Value engineering – replace building material with more sustainable components such as fiber-cement siding and roofing, vinyl fencing, etc. Use low- or no-VOC paints and sealants Use programmable thermostats in common areas Install solar panels to heat pool and power the clubhouse Maintain association’s fuel-efficient vehicles – tire pressure, oil change, filter change Replace old Exit signs with LED signs Install a green roof (lightweight, living system of soil, compost and plants) Install solar shingles Close clubhouse window blinds during the day Negotiate lower individual rates with green power provider Recycle gray water and direct rainwater to collection tanks for landscape irrigation. Gray water is wastewater generated from domestic activities - laundry, dishwashing, and bathing. Install rain sensors and smart controllers on irrigation system Water plants only in the early morning to prevent evaporation Plant deciduous shade trees that block sun in the summer on west and south sides of buildings Compost yard trimmings and food residuals Don’t perpetuate failure – redesign system failures such as poor drainage and short-lived building material such as wood siding; consider cost of material + cost of maintenance + longevity of product for capital replacement reserves

C. Common Area Conservation Programs 1. Recycle household and maintenance waste 2. WOWW! (Wipe Out Water Waste) program – analyze water consumption, organize residents to fix leaking faucets and toilets 3. Take the Challenge! (electricity and gas conservation program) – analyze gas and electricity consumption; send regular updates on progress; summarize water, gas and electricity bills 4. Install native shrubs and trees a. reduce ozone accumulation b. reduce irrigation requirements c. reduce air conditioning requirements by providing shade during peak energy demand


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5. To assist your community, plan and establish a means for the members to realize their greener future. a. The Sustainable Mission Statement – Start at the top. Unless the board of directors understands and strategizes about sustainable concepts—and sees the value of them—your initiatives as a manager could well be minimized or discounted. So, communicate your ecofriendly information to your board. b. The mission could state: “We support locally made, organic or earth and human friendly products and practices that reflect our goal as a conservation-friendly, education-oriented community that promotes sustainable initiatives such as 1) pick up litter, 2) recycle and reuses, 3) save or stores water, 4) maintain energy efficient buildings, 5) manage land and lakes for environmental preservation, conservation, and the benefit of wildlife, 6) make its membership aware of green products and services available to them, and 7) use energy efficient transportation.” c. This mission should not be developed unless there is an understanding that it is supported by the community’s membership. To that end, the board may want to add the following proviso: “We support these sustainable goals to the extent that they are embraced by the community’s members.” Such wording would allow future boards the ability to embrace the mission even as they modify it to suit the community for that year. It is to be anticipated that the sustainable community in your location would be very different over the next five years, since change is the nature of life. You will want to characterize that in the mission by its being able to change and grow. So maybe your community does not want to commit all of the initiatives described previously. Start with a very few things that you know you can tackle, then grow over time. Better for your community to grow from a solid foundation than be a quick-to-rise soufflé. 6. Green Team a. Once you have a board-approved policy in place, then it is up to you as the manager to implement the policy or to encourage the board to create a committee responsible for implementing the policy. b. Set up a representative from each community neighborhood, building or cluster of homes, plus staff department representatives, to serve as a Sustainable Initiative Leadership Council, or Green Team, an accountability group to move the mission. The Green Team becomes your closest confidante to help you put into action the board’s broad mission. c. Each representative must have excellent communication skills. He or she would monitor and advise on community interest in the Team’s green ideas, and consider tactics to fulfill the board’s mission.



Module 3: Facilities Management 7. Sustainable Library and Resources a. Provide videos, books, website for your community’s members. Provide a virtual tour of your recycling center on your website. b. Post information on progress in your community newsletter. c. Print sustainable -inspired materials including a business or home recycling guide, household hazardous materials guide, and variety of flyers about wildlife in your community, when and where they can be seen. d. Post sustainability tips and info in your community’s newsletter (e.g., article about how much money drip irrigation saves vs. standard irrigation or an article about how much money a non-leaking sink or toilet saves over a leaking one) e. Use CAI’s “Going Green” website resource. www.caigreen.com 8. Grass Roots Actions for Green Success. Be sure that: a. The board approves the strategy annually and has the opportunity to modify the strategy (Don’t let the mission stagnate.). Be sure to include related costs in the annual budget, and the projects in the annual management plan. b. Make one person responsible for driving the board- is that you? And, be responsible to report to the board at least twice a year on how it’s doing and what tactics you have initiated to dovetail into that year’s board’s policy. c. The person in charge and the Green Team will coordinate the strategy implementation and ensure effective communication throughout organization. d. The Green Team will develop indicators and baseline data to measure success. e. The Green Team will use a Hot Spot List to target sites and activities. f. The Green Team will develop positive relationships with community authorities to further the sustainability initiative (as a manager, you know who these movers and shakers are in your community). g. The Green Team will develop positive and productive partnerships with key community businesses (whether or not they are strictly within your community boundaries or not. Neighbors are neighbors.). h. The Green Team will use the expertise of the community’s current vendors including waste management contractors and recycling contractors who may have canned programs and assistance-in-place to offer. i. The Green Team will provide a consistent, creative and comprehensive community education program. j. The Green Team will help the community celebrate its successes. 9. Work with EPA on WasteWise program 10. Organize car pools to work and shopping 11. Create compost program to mulch flower beds 12. Relax architectural guidelines to allow green initiatives


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Sustainable Lifestyles, continued Say Another great idea is to ask your board to relax architectural guidelines to allow sustainable initiatives.

Slide 80 Relax Architectural Guidelines • • • • • • • • •

Use broad language Allow multi activities Allow diversity Include sustainable initiatives Assure proper restoration of sustainable systems Predetermine technologies you want Be up to date with terms Allow low tech options, too Allow resourceful and natural systems

Ask the class for any examples of methods or techniques they incorporate into their own maintenance programs to help the environment.


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Summary Say You have learned: • How to systematically design, implement, oversee, and evaluate an effective facilities maintenance program. • How to determine the maintenance responsibilities of the association and the owners and how to address areas that are not clearly defined in the governing documents. • The five types of maintenance work and the importance of each type. • Why associations should be interested in Going Green. Page 241


Key Terms: • • • • • • • •

Analysis sheet Emergency services maintenance Facilities management Site visit checklist Site visit report Inventory Maintenance calendar or schedule Maintenance contact sheet

• • • • • • • •

Maintenance record Management tool Preventive maintenance Requested maintenance Reserve replacement Responsibility chart Routine maintenance Work order/response form

Encourage the class to review the Discussion and Focus Questions to reinforce their learning. Ask the class to briefly complete the Lesson 1 Quiz and go over the answers with them as a class. (The answers are included in your Instructor Guide only.) Allow 10 minutes for this review. Refer participants to the additional resources listed in their Participant Guides. Ask for any other questions or clarification of any item before leaving this session.


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Focus Questions Use the following questions to help you identify and review the core concepts in this lesson. (Hint: Once you look up the answer to a question, you may want to jot down the page number next to the question for future reference.) 1. What are the maintenance goals for a community association? 2. What are the steps in establishing a maintenance system for a community association? 3. What are some sources that can provide information on a community association’s physical assets and their maintenance needs? 4. What kind of management control does an inventory provide? What kind of information does it typically record? 5. What kind of management control does an analysis sheet provide? What kind of information does it typically record? 6. What kind of management control does a responsibility chart provide? 7. Name some typical parties responsible for maintenance in a community association. 8. What kind of management control does a maintenance contact sheet provide? 9. Name five basic maintenance programs for a community association and give an example of each type of maintenance. 10. Compare and contrast a maintenance calendar or schedule and a maintenance record. Why do you need a form or forms for both? 11. What is the purpose of a site visit checklist? What can a site visit report be used for? 12. What can a work order form be used for? What are some benefits of using a work order/response form? 13. What are some common methods for evaluating maintenance efforts in a community association? 14. What are some characteristics of an effective maintenance system? 15. What are some characteristics of an ineffective maintenance system? 16. Why should associations be interested in “sustainable lifestyles”?


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Thought/Discussion Questions Use the following questions to help you apply the information in this lesson to your own situation. 1. Which of the five steps in establishing a maintenance system has your community association carried out? 2. What physical asset categories does your community’s maintenance system use? • Are there any ways you can improve on the categories you use? • If your community doesn’t have a set of categories, how would you modify the set suggested in the lesson for your community’s use? 3. Which sources of information have you used to identify your association’s physical assets and their maintenance needs? Try the information sources listed in the lesson that you haven’t used yet and familiarize yourself with them. 4. Which of the five types of maintenance programs described in the lesson does your community association have? Are there any you think your community association should add? Why? 5. What maintenance management controls does your community association have? • After reading this lesson, what maintenance management controls do you think your community association needs? • After reading this lesson, what improvements do you need to make in your maintenance management controls? 6. What methods has your community association used to evaluate its maintenance efforts? • Why have they been effective or not? • After reading this lesson, what evaluation methods do you think your community association could add? 7. Which characteristics of a good maintenance system apply to your community’s system? • Which characteristics of a poor maintenance system apply to your community’s system? • What steps can you take to eliminate any ineffective characteristics? 8. Name some ways your community can “go green.”


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Lesson 1 Quiz 1. Complete the following sentence: For a community association, _____________ is the process of operating, maintaining, repairing, and replacing common property. a. preventative maintenance b. facilities management c. maintenance record d. scheduled replacement RATIONALE: Facilities management is the process of operating, maintaining, repairing, and replacing common property, and for a community association, that includes the common elements or areas. 2. True or false. One of the goals of maintenance for a community association is to limit injury to residents, guests, and employees. (True) RATIONALE: Maintenance has three major goals in a community association. These include meeting the needs of the individual residents as they relate to common elements, to preserve and enhance the common property, and to limit potential for injury to residents, guests, and employees. 3. Each of the following include steps in establishing a maintenance system for a community association EXCEPT: a. assign blame to staff not adequately fulfilling maintenance responsibilities b. develop maintenance management controls c. analyze your assets’ maintenance needs d. evaluate your maintenance system and efforts RATIONALE: There are six steps in establishing a maintenance system for a community association. These involve developing maintenance management controls, identifying the physical assets to maintain, analyzing your assets’ maintenance needs, establishing five basic maintenance programs, and evaluating your maintenance system and efforts. Assigning blame to staff not adequately fulfilling maintenance responsibilities is not included among these steps. 4. Which of the following is not an example of a maintenance management control? a. work orders b. charts of information c. response forms d. public offering statements RATIONALE: A management control is any means used to track, record, remind, or command attention. Usually these “means” are forms or documents. Examples of maintenance management controls include checklists, charts of information, calendars or schedules, records of actions taken, inventories, work orders, request forms, and response forms. Effective maintenance cannot occur without management controls. The public offering statement is simply a disclosure statement that provides information on the community association to prospective buyers. It is also mandated by state statute.

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Lesson 1 Quiz, cont’d 5. True or false. The declaration or master deed often includes a description of maintenance responsibilities for both the owner and the association. (True) RATIONALE: Managers should research legal documents to identify the physical assets their community association is responsible for maintaining. State statutes, board resolutions, and governing documents all often discuss maintenance of physical assets. In particular, the declaration or master deed will frequently include maintenance responsibilities for particular assets. An operating manual will contain the actual schedules for maintenance of each component. 6. Complete the following sentence: The typical management control used to identify physical assets and their maintenance needs is a(n) ____________. a. site visit report b. site visit checklist c. maintenance record d. inventory RATIONALE: The typical management control used to identify physical assets and their maintenance needs is an inventory. This is a record of all real and personal physical property owned and maintained by the community association. Inventories usually record date of purchase, warranty, quantity, description, original installer/builder or service contractor, extended warranty and provider, cost, special maintenance needs, and estimated replacement data. 7. To identify what maintenance must be done, managers should record the following information for every physical asset EXCEPT: a. preventive and emergency plans needed b. contact information for each board member c. description of the asset from a maintenance point of view d. what maintenance needs to be done RATIONALE: To identify what maintenance must be done for every physical asset, managers should record description of the asset from a maintenance point of view, what maintenance needs to be done, how often, how long it will take, criteria for satisfactory maintenance, and preventive and emergency plans needed. Much of this information can be obtained by conducting an inventory of a community’s physical assets. Another source of this information is in the appropriate section of a community association’s service contract, which specifies the scope of work to be done. 8. True or false. A management control used to keep track of who is responsible for the maintenance of various property elements or areas is the analysis sheet. (False) RATIONALE: The responsibility chart is a management control used to keep track of who is responsible for the maintenance of various property elements or areas. It commonly is used as a handout for owners and tenants. Typical responsible parties include the owner, the association, the developer, a committee, or a manufacturer. A facilities / equipment analysis sheet is an appropriate management control to record what maintenance needs to be done.


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Lesson 1 Quiz, cont’d 9. Cleaning problem sewer lines every month to avoid backups is an example of which of the following types of maintenance? a. emergency services maintenance b. requested or corrective maintenance c. routine maintenance d. preventive maintenance RATIONALE: Preventive maintenance is periodic maintenance to avoid disruptive breakdowns and to prolong the useful life of the physical asset in question. Literature from the manufacturer is one of the best sources of information on preventive maintenance for equipment. Examples of preventive maintenance include rebuilding pool pumps with a life expectancy of eight years every five years and cleaning problem sewer lines every month to avoid backups. 10. True or false. Surveying residents is a common method community association managers use to evaluate their maintenance systems and implementation efforts. (True) RATIONALE: Surveying residents—either periodically or at the time their maintenance request has been handled—is a common method used by community association managers to evaluate their maintenance systems and implementation efforts. Other common methods include having the board of directors fill out a “report card” that addresses the basic maintenance programs in specific terms, reviewing budget costs for the previous year, reviewing all maintenance work orders, physically inspecting the property, and visiting other similar community associations to obtain a first-hand comparison or self-check.


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Additional Resources For further information on community association maintenance, we suggest the following: Enhancing Outdoor Spaces for Community Associations, Guide for Association Practitioners (GAP) No. 17, 2nd Edition, by Douglas M. Kleine, PCAM. Increase property values and resident satisfaction by improving the look of common areas. This useful guide can help. (Community Associations Institute, 1998.) Trees, Turf & Shrubs: How Community Associations Maintain Common Areas, A Guide for Association Practitioners, 2nd Edition, by Bette Weseman, PCAM and Debra Lewin. Improve property values with a good grounds maintenance system. Discusses pros and cons of do-it-yourself versus contracting, and provides information on maintenance practices for lawn care, trees and shrubs. Include a green approach to grounds maintenance. (Community Associations Institute, 2009.) Road Repair Handbook, by Roderick D. Johnston. Find out how to maintain roads and parking lots correctly and economically, spot the signs of pavement failure, when it’s okay to make quick fixes, how to deal with failing concrete, the advantages and disadvantages of concrete and asphalt, how to choose contractors, and much more! Includes numerous illustrations, photos and checklists. (Trans Mountain Publishing, 2009.) The Ultimate Guide to Pool Maintenance, by Terry Tamminen. Learn how to keep pools, spas, and other recreational water-containment units in tip-top shape. This comprehensive guide contains technical information and tricks of the trade suitable for the novice or pro. Covers chlorine alternatives, automation, noise control, pool-side safety, portable spas, environmentally friendly product resources and project checklists that make caring for a pool less costly. An absolute must for any community or homeowner with a pool or spa! (McGraw Hill 2007) The Complete Book of Home Inspection, by Norman Becker. Find out exactly what’s behind, beneath, above and around the homes in your community and how to evaluate their condition accurately. It’s basic enough for a layperson and detailed enough for professional home inspectors. Packed with photos, graphs, checklists, worksheets and more. (McGraw Hill 2002)


Transition to Lesson 2: Contracting


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Lesson 2: Contracting Goal At the end of this lesson, students will know the process to use for determining whether an association should use staff or contractors to complete various tasks in the community. The students will know what should be included in the specifications of work in a request for proposal (RFP) and what provisions should be included in all contracts, regardless of whether or not they are for maintenance services.

Time 50 minutes Session Time Breakdown 40 minutes—Faculty presentation 10 minutes—Summary/quiz

Overview While the majority of contracts that most community association managers deal with are related to the maintenance aspects of the community, there is also a need for managers to know how to deal with non-maintenance contracts such as engineers, reserve studies, garbage removal, or cable TV. You should make sure that these types of contracts are brought into the discussions. You should remind students that the decision of whether to use staff or contract for services in many cases will be made by the board of directors. Students must be prepared to present appropriate information to the directors to assist their decisionmaking process. In other cases, they will be able to make the decision. The students will need to understand that there may not be a choice in some areas. For example, a small community simply could not justify the cost of performing landscape maintenance with its own employees, so there is no need to go through the comparative analysis of such work.

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Lesson 2: Contracting You should make sure the students thoroughly understand both the need for the contract provisions as well as what the provisions mean. An uneducated manager can cause great harm to an association by omitting any of these key issues. This can be stressed during the exercise that identifies the strengths and weaknesses of the sample contract. Materials Needed 

LCD projector



Remote advancer



Flip chart


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Overview Introduce the lesson Say The topic of this session is the use of contracts to obtain products and services for the community association. The manager: 

Must be able to evaluate the needs of the association to determine whether or not to contract for a service. In some cases, such as professional services, there may not be a choice except to contract for these services, e.g. attorney, auditors, engineers, etc.



Must understand the bidding process including the preparation of the request for proposal (RFP) and evaluation of the bids.



Must know what provisions should be included in every contract.

Overview the session Say We will discuss:

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

The process the manager must use in determining whether or not to contract for services.



The bidding process including the preparation of an RFP and the evaluation process for bids submitted for consideration.



The provisions that should be included in every contract.



Using what we have discussed, you will complete an exercise that tests your knowledge of whether or not to contract for a service.



You will review a sample contract, determine its strengths and weaknesses, and evaluate the provisions it contains.


Leader Guide



Slide 81

Lesson 2: Contracting Session Overview Learning Objectives • Determine whether or not to contract for services. • Prepare a request for proposals and evaluate bids submitted for consideration. • Identify the provisions that should be included in every contract. 81



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Key Terms: • • • • • • • • • •

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Assignability provision Bid request Bid specifications Certificate of insurance Contract Default Entire obligation provision Governing law provision Modification provision Payment bond

• • • • • • • • •

Performance bond Progress payments Prospective bidder’s questionnaire Qualifications sheet Request for proposal Severability provision Waiver of lien Waiver provision Warranty

Management of a community association’s resources frequently involves the use of contracts to obtain the products and services required. A contract is— • An agreement between two or more parties • Enforceable by law • By which each party promises to do, or not to do, something Whenever a community association enters into a contract, it is binding itself both legally and financially. Therefore, as a community association manager, you must assist your community to enter contracts as carefully as possible—seeking legal or technical advice whenever necessary. The purpose of this lesson is to provide you with leadership tools to guide the board through the bidding and contracting process. It will introduce you to: • Deciding whether to contract for work • Preparing a request for proposal packet • Evaluating bids • Key contract provisions • Negotiating contracts

What You Will Learn After reading and reviewing this lesson, you should be able to explain and understand: • Criteria for deciding whether to contract for work or use association staff • Preliminary steps in preparing an RFP packet • Importance of thorough and accurate bid specifications • Contents of RFP packets • Ways to locate potential contractors • Steps in evaluating bids • Key contract provisions for community associations • Basic steps in negotiating contracts • Tips on successfully completing a contract

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Deciding Whether or Not to Contract Say There are several areas to be considered when deciding whether or not to contract for work. Personnel • • • • • •

The number of people required to perform the work must be determined. Existing staff members’ expertise must be considered. Current staff members’ schedules must be reviewed to determine if enough time is available. You or someone on your staff must be available to provide supervision. A contractor will have skilled workers on staff. A contractor can provide adequate supervision.

Slide 82 Issues that Affect the Decision to Contract Services • • • • • • •

Personnel Time constraints Cost Tools, equipment, and supplies Insurance coverage Licenses and permits Storage facilities 82


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Deciding Whether to Contract for Work Deciding whether to have a task performed by association staff members or by a contractor requires an analysis of several work requirements— • Personnel • Time • Cost • Tools, equipment, and supplies • Insurance coverage • Licenses and permits • Storage facilities

Personnel When deciding whether to have staff members or a contractor perform a task, consider the required: • Number of people • Expertise • Supervision • Availability When you look at the number of people a task requires, is it more than the community has available? Can the staff members available perform the task in addition to their routine assignments? If you try to stretch your people too thin, there is the danger of demoralizing the staff and delaying completion of all tasks. In comparison, contractors can add workers as necessary, even though they have established crew sizes. When you look at the expertise a task requires, do the available staff members have the training and skills needed? Will it be possible to make up a work crew of one or two experienced people who will be assisted by less-experienced ones? Will it be possible to bring your people up to speed with a short training period? Always consider the possible “costs” of using inadequately trained people to do a job. In comparison, if the skill involved is a specialized one, an experienced contractor will know where to find trained workers or already has them on staff. When you look at the supervision of onsite staff that a task requires, do you have someone available and qualified to supervise staff members if they do the work? Be realistic about the amount of supervision that will be necessary and whether you or someone on site can provide it. In comparison, a contractor can and should be contractually bound to provide adequate supervision for a work crew. Your contract must specify that a supervisor must be present during work hours and what will happen if a contractor’s work crew does not perform the task at all, performs it inadequately, or otherwise behaves inappropriately on the job.

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Deciding Whether or Not to Contract, continued Say Time • • • •

The urgency of the work must be known. A contractor may be able to complete the task quicker than staff. A contractor may be able to begin the work before you can hire or train staff. If there is no urgency, staff may be able to complete the work as time allows.

Cost • • • • •

Does the association have to purchase needed equipment or materials? There is the cost of training and start up. The total cost of staff includes taxes and benefits in addition to salaries. There are up-front costs that impact cash flow. A contractor provides a fixed cost or a cost-plus contract that you can control

Tools, equipment, and supplies • • • •

The association may already own tools and equipment or may have to purchase such items. Tools may be useful for only one time or one purpose. Tools or equipment may or may not be used in the future or for other work. A contractor will already have the necessary tools and equipment and the cost is included in the contract amount.


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Time When deciding whether to have staff members or a contractor perform a task consider: • The urgency of the work • How long it will take to complete the task If a task must be done immediately, staff members are already on site—all other factors being equal. If a task has low urgency, staff members might be able to work on it as their regular duties allow. When you estimate how long it will take to complete a task, include both start-up and clean-up time in your estimate.

Cost When deciding whether to have staff members or a contractor perform a task, look at both the cash outlay required and the real labor costs involved. If the association executed a turn-key contract, there will be no additional cost. On the other hand, employees can be a significant cost element in a special work project, even though they are already budgeted for in terms of training time, compensation, taxes, and benefits. All those cost components may increase if the staff is tasked with additional work. This cost element should not be overlooked. Depending on the project, it actually could cost more to use employees instead of contracting for the work.

Tools, Equipment, and Supplies When deciding whether to have staff members or a contractor perform a task, consider whether specialized tools, equipment, or supplies will be needed for timely, complete, and accurate work. Does your association already own what is needed—or a reasonable substitute? Is anything needed worth purchasing for continuing use? Can anything needed be rented or leased for a reasonable price? Are the employees properly trained on how to use the tools or equipment? Are there any Occupational Safety & Health Administration (OSHA) requirements about which the employees need to be aware? When analyzing work requirements, don’t forget to consider the possibility of borrowing or trading tools or equipment with other community associations. In comparison, a qualified contractor will provide any tools, equipment, and supplies a task requires.


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Deciding Whether or Not to Contract, continued Say Insurance coverage •

•

The association must carry appropriate coverage for any work done. As a general rule, workers compensation insurance increases the higher the worker is off the ground or the more dangerous the tasks being performed. Qualified contractors will have appropriate insurance.

Licenses and permits • • • •

The work may require a license. The staff may need to be certified. The work may require a permit. Qualified contractors will have all necessary licenses and permits.

Storage facilities • •

The association must provide a secure place to store tools and equipment. A contractor will already have facilities.

Point out that the manager must evaluate all aspects and requirements before deciding which method is best for the association and making a recommendation to the board. Refer students to the “Decision Chart for Choosing Between Association Staff and Contractor” on the following pages; this chart will help the manager in this decision-making process. Emphasize this process is to be used when the manager has the option of contracting or not. There may be situations such as needing legal or engineering services in which there is no option except to contract for the services.


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Insurance Coverage When deciding whether to have staff members or a contractor perform a task, consider which party or parties have—or can obtain—the necessary insurance coverage(s). Check with your association’s insurance agent to verify that its policy or policies cover the work to be done by staff members. If a task requires a specialized skill, your association’s liability insurance may not cover it. In comparison, qualified contractors should carry the necessary coverage, including— • Commercial general liability • Use of owned or non-owned vehicles • Workers compensation See Lesson 3 in this Module for an explanation of each type of insurance.

Licenses and Permits When deciding whether to have staff members or a contractor perform a task, consider whether any special licenses or permits are needed. Are the site employees properly licensed? Do you have the time and expertise to obtain required licenses and permits? Check with the proper authorities to confirm what licenses or permits are needed for a job. If the association is contracting for the work, request copies of all necessary licenses and permits from the contractor. An experienced contractor should be required to have the necessary licenses and can obtain the required permits on behalf of the association.

Storage Facilities When deciding whether to have staff members or a contractor perform a task, consider where tools, equipment, and supplies will be stored—and the liability involved. Make sure that all supplies are stored and labeled in accordance with OSHA standards. Both security and safety are the issues here. You want to avoid theft and accidents. Depending on the tools, equipment, and supplies involved in a task, your association may not be able to securely and safely store them for the duration of the project. Additionally, owners may not appreciate having to look at a pile of siding or roofing shingles for an extended period of time.


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Decision Chart for Choosing Between Association Staff & Contracting Out • • •

Place a check in a column if the party meets the work requirement. If the work requirement is not necessary, put an N/A for “Not Applicable” in a column. After you have reviewed all the work requirements, select the party that best meets the set of requirements as a whole.

WORK REQUIREMENTS

ASSOCIATION CONTRACTOR

An adequate number of people are available to do the job

____

____

The people available have the necessary skills

____

____

Adequate supervision is available

____

____

Available to do the work immediately

____

____

Available for a job of this length

____

____

Will not be pulled off assignment to do other work

____

____

Least expensive option

____

____

Has access to the necessary tools, equipment, and supplies

____

____

Has adequate insurance coverage for this job (liability, workers compensation, vehicle) ____

____

Has the necessary license(s) and permit(s)

____

____

Storage facilities are available for any tools, equipment, parts, or materials

____

____


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Using Requests for Proposals (RFPs) Emphasize the importance of using the RFP process and urge students to thoroughly review this entire section. Focus on the following areas of the RFP process:

Say Prepare thorough and accurate bid specifications – by hiring an expert to outline the scope of the project. • The root of the word “specifications” is “specific.” • Specifications must be complete, accurate, and specific.


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Module 3: Facilities Management Preparing An RFP Packet A request for proposal (RFP) is an announcement that an organization is interested in receiving proposals for a particular project. Preparing an RFP packet involves: 1. Gathering preliminary information 2. Hiring an expert to prepare specifications with accuracy and thoroughness 3. Compiling a complete RFP packet 4. Conducting a pre-bid walk through 5. Possible consulting with a professional engineer or architect Because of the amount of effort the bidding process requires of both the community association and the bidders, it should be used primarily for larger jobs or purchases or for on-going services, such as lawn maintenance. If the bidding process will be needed, confer with your board to determine the minimum size of a contract that requires competitive bidding. Alternatively, there may already be minimum amount established in the management contract. The RFP packet includes— • The bid specifications or detailed instructions about the products or services requested. All contract terms should be included in the bid request. This will help the association avoid a situation where the successful contract bidder receives a written contract in which terms may not be acceptable to the contractor. • Information about the association that the contractor will need in order to prepare a bid. • Information about work conditions, such as hours, uniforms, parking, storage areas, license requirements, daily clean-up requirements, and time requirements. • Requests for information about the contractor that will help the association evaluate the contractor’s ability to perform the work and meet the specifications.

1. Gathering Information 1. When you are going to contract for services, there are a number of steps to take in developing your RFP packet. These steps should be performed in conjunction with a qualified expert or engineer: Survey the area(s) where the work is to be done. 2. Outline the work to be done in detail. This may include consulting with a professional engineer or architect. 3. Specify the materials to be used, and where the materials will be stored. 4. Set a realistic deadline for completion of the work. Your deadline should take into account enough time for— o You to develop your RFP packet o Adequate notice of pre-bid walk through o Contractors to prepare thorough bids o You to evaluate the bids received and make recommendations to your board o The board to review the bids and your recommendations and select the contractor o You to negotiate final details so the board can execute the contract o The selected contractor to do the work Be realistic! In many cases this can be a minimum of 60 days. 5. Make recommendations to the board and receive authorization to solicit bids from contractors.


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Using Requests for Proposals (RFPs), continued Briefly overview the key components of the RFP packet:

Slide 83 Preparing an RFP Packet • The full name, address, and telephone number of the association • Detailed description of the work to be done or the product to be purchased • Key dates

• Whom to call for information or inspection of site • Where to submit bid • Request for three to five references from previous jobs of similar size and scope • Warranties required 83


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Module 3: Facilities Management 2. Reviewing the RFP for Accuracy and Thoroughness It is crucial that your bid specifications be as thorough and accurate as possible before you send out your RFP packet. There are a number of reasons for this: • You want to ensure that all your bidders are bidding on the same job. If your specifications (called specs) are incomplete, bidders may ask different questions or make different assumptions—and end up offering you bids based on different interpretations of the specifications. This makes it difficult to evaluate the bids in comparison to one another. • If your specifications are incomplete or inaccurate, the work may end up costing far more or taking much longer than you planned. • If your specifications are incomplete or inaccurate, the chances of job disputes with the contractor are much greater.

3. Preparing a Complete RFP Packet If the task involved is a small one, your bid request or RFP may simply be a letter. If the request is more complicated or larger, you may want to use a short cover letter that tells the contractor that a bid request is enclosed. A complete RFP packet includes: • The full name, address, and telephone number of the community association that is the contracting party and its managing agent. • A detailed description of the work to be done (or the product to be purchased). These are your bid specifications; be as specific as possible in describing the scope of work or the product desired and the results expected. For example—For an asphalt resurfacing job, do you want one-and-a-half or two inches of asphalt overlay, or the entire area dug out, compacted and four inches of new asphalt installed? What specific areas require remedial work? Mark the areas to be repaired/replaced and provide the total square footage. Prepare specifications only for those services or products you adequately understand. For most specifications, however, you may need to draw on the technical skills and knowledge of such parties as an engineer, architect, contractor or supplier. •

• • • •

Key dates— o Deadline for submitting a bid o Date of a pre-bid walk through to review the specific areas where the work is to be performed o Date work expected to begin o Date work expected to be completed or products expected to be delivered Whom to call for information or inspection of site Where to submit bid Request for three to five references from previous jobs of similar size and scope. Warranties required: A warranty is a promise or guarantee that parts, materials, or labor will last for a designated period of time.


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Using Requests for Proposals (RFPs), continued Say For large or complex work, conduct a pre-bid conference with all bidders: • • •

Review specifications. Look at the job site. Answer bidders’ questions.

Do not abuse potential bidders, such as: • • •

Using the bid process just to get prices. Bidding, but never awarding, contracts due to the indecision of the board. Requiring detailed bids for small jobs.


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The RFP packet should state— • What parts, materials, or labor it wants guaranteed • For how long • What it expects the contractor to do if any parts, materials, or labor are defective

IMPORTANT NOTE For very large and complicated jobs, you will also want to enclose a prospective bidder’s questionnaire or qualifications sheet. This is a document that asks for certain types of information to determine if the bidder is technically and financially qualified to handle a job of this scope.

4. Conducting a Pre-bid Walk Through and Consulting with a Professional Engineer or Architect For large or complicated jobs, consider holding a pre-bid meeting with all the contractors at a designated time. This will allow the contractors to all see the work at the same time, and will provide you—or the consulting engineer or architect—the opportunity to answer questions. This will save you and the contractors a significant amount of time, and allows all of the contractors to get the same answer to each question.



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Using Requests for Proposals (RFPs), continued Say Take the following steps to help you evaluate bids: 1. Review each bid to verify that it conforms to your specifications. 2. Check each bidder’s references. 3. Check each bidder with your local Better Business Bureau and the local Office of Consumer Affairs to see what type of complaints it has received, if any. 4. Verify insurance compliance. 5. Verify licenses (if required). 6. Eliminate any bids that are unacceptable based on Steps #1-5. 7. Compare the remaining bids in terms of price. 8. Recommend a contractor to the board based on the following criteria— • Demonstrated understanding of what needs to be done • Possesses the necessary qualifications to do the job • Reasonable price (NOT the primary consideration!)

Point out the Sample Bid Comparison Spreadsheet for Lawn Work on the following pages.


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Module 3: Facilities Management Identifying Potential Contractors and Evaluating Bids Identifying Potential Contractors You can begin identifying potential contractors while you are developing your RFP packet. It usually takes five or six RFPs to obtain at least three bids. Some contractors will choose not to bid for one reason or another. You can obtain the names of potential contractors for a specific job from: • Past work done for your community association or management company • Referrals from other community associations in the area • Referrals from supply firms doing business with your community association • Referrals from the manufacturer or distributor of any equipment involved • Referrals from any architects or engineers who have worked with your community association • Referrals from other members of your nearest chapter of Community Associations Institute • Referrals from local trade associations that represent the type of contractor for whom you are looking Before you send a contractor an RFP packet, call first to see if the company is interested in bidding. You want to avoid sending out your packet and waiting for a response—only to find out that none of the receivers were interested or available.

Evaluating Bids Once you receive several legitimate bids from your contractors, take the following steps to evaluate the bids: 1. Review each bid to verify that it conforms to your specifications. Contact the bidder for clarification if you have any question about a term, a price, or a promised service. Don’t assume anything! 2. Check each bidder’s references. 3. Check each bidder with your local Better Business Bureau and the local Office of Consumer Affairs to see what type of complaints it has received—if any. 4. Verify insurance compliance. Obtain original certificates of insurance. 5. Verify licenses (if required). 6. Eliminate any bids that are unacceptable based on steps #1-5. 7. Compare the remaining bids in terms of price. (See the sample bid comparison spread sheet on the next page for a comparison of bids.) Be wary of extremely low or high-priced bids. A price that is noticeably lower than the rest may mean that the low bidder doesn’t understand what the job involves or is willing to cut corners. A price that is noticeably higher than the rest may mean that the high bidder doesn’t understand what the job involves or wants a high profit margin. 8. Recommend a contractor to the board based on the following criteria— • Demonstrated understanding of what needs to be done • Possesses the necessary qualifications to do the job • Reasonable price


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Page 258 Sample Bid Comparison Spreadsheet Lawn Bids: 20xx Season

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Contract Provisions The discussion of key contract provisions goes into a level of detail appropriate for new managers. Each provision can include more detail.

Say The manager should make sure that every association contract contains the following provisions. These items are applicable to all contracts—not just maintenance work. Parties to the contract The parties should be clearly defined and include corporate structure, such as ABC Landscaping Company, a Georgia corporation. The association, not the management company, must be clearly identified as the other contracting party. Scope of work The contract must specifically set forth the work to be performed. The specifications can be attached to the contract to establish the scope. This should include each of the following: • Requirement that the contractor conform to applicable codes, industry standards, or manufacturer’s specifications • Requirement that the contractor provide sufficient employees necessary to perform the scope of work as described in the contract • Requirement that the contractor clean up after the work is performed and restore the common elements or areas to their prior condition • Exact location where work is to be performed • Working hours • Provisions for tools and equipment • Materials • Storage • Job site safety requirements


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Contract Provisions Slide 84 Contract Provisions • • • • •

Parties Scope of work Compensation Time period Performance standards

• • • • •

Warranty Restoration Indemnification Insurance License & permits

84


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Key Contract Provisions Your community association should have a standard contract prepared or reviewed by its attorney. Provisions should be added or deleted based on the particular agreement involved. The following are key provisions that should be in every contract. As a manager with a professional duty to your community association, you must take steps to protect its interests when it enters into a relationship with a contractor—even if it seems unlikely that any problems will arise during the relationship. The discussion of key contract provisions goes into a level of detail appropriate for new managers. Each provision can include more detail.

Parties to the Contract A contract should state the complete names, addresses, and telephone numbers of the two parties to the contract. The community association, not the management company, should clearly be identified as one of the contracting parties.

Scope of Work A contract must spell out specifically what work is to be done by the contractor. The larger the dollar amount and size of the project, the more detail should be included. Both parties (and possibly a court) must understand precisely what the contractor is responsible to do. Instead of referring to prior correspondence that describes the work, provide completed, detailed specifications in the contract or provide them as an attachment. The scope of work should also include: • Requirement that contractor conform to applicable codes, industry standards, or manufacturer’s specifications • Requirement that contractor provide sufficient employees necessary to perform the scope of work as described in the contract • Requirement that contractor clean up after the work is performed and restore the common elements or areas to their prior condition • Exact location where work is to be performed • Working hours • Provisions for tools and equipment—include security, storage, insurance, rental, and repair terms • Materials o Quality, type, quantity, color o Who provides them o Delivery and storage o Who provides insurance coverage o Disposal of leftover materials • Storage o Where o Who is responsible for security and for any missing equipment • Job site safety requirements


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Contract Provisions, continued Say Compensation The contract should include: • The total amount • When payments will be made • The manner by which payments will be made • On what terms payments will be made • An allowance for progress payments, if any • The retainage amount to be held Time period The contract should provide for when the work will begin, when it will be completed, and if there are penalties for not meeting either date. Standard of performance The contract should provide a standard by which to measure work. Warranty The contract should include the agreed upon warranties.


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Module 3: Facilities Management Compensation A contract should state: • Total agreed-upon amount that will be paid for the product or service • When payment(s) will be made • In what manner payment(s) will be made • On what terms payment(s) will be made • Amount of retainage amount, if any For example, a contract may allow for progress payments. These are partial payments based on some demonstrable progress in completing the work involved. It is reasonable for a contractor to negotiate progress payments. Just be sure to tie them to observable progress and don’t let them get ahead in payments of the actual work completed. Your final payment should be based on the work being completed to the community association’s satisfaction (see discussion of standard of performance below). This means the final payment should be large enough to provide an incentive to the contractor to complete the work satisfactorily. As an alternative, some contracts call for the association to retain a certain percentage of the contract price until the terms of the contact are fulfilled.

Time Period A contract should state when the work is to begin and when it must be completed. It should also provide for liquidated damages payments by the contractor, or reduction in cost if the contractor is responsible for not meeting the deadline.

Standard of Performance A contract should provide a standard against which a contractor’s work can be judged. For example, the contract may require the contractor to create a specific result, such as an appearance “identical to that existing immediately prior to the commencement of the work” or a structure “substantially similar in design and appearance to existing structures of the same type in the community association.” Even without such a provision, contractors will generally be held to the standards established by prevailing custom and practice in their particular industries. But as with other terms of an agreement, it is always best to expressly state the expected standard of performance. Whenever possible, try to use an objective standard of performance, such as manufacturer specifications, American Standard Test Methods (ASTM), or American Institute of Architects (AIA) standards.

Warranty A contract should state the agreed upon warranties clearly and in detail. As we said earlier in this lesson, a warranty should state: • What is covered • For how long • What is not covered • What the contractor will do if the work or product proves defective


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Contract Provisions, continued Say Restoration The contract should require the contractor to restore any damaged property to its original condition. The contract should allow the association to withhold payment until restoration is completed. Indemnification The contract should expressly state that the contractor will indemnify the association against any claim resulting from the contractor’s work. Insurance The contract should require the contractor to have necessary insurance coverage in amounts acceptable to the association. There should be a requirement for the contractor to provide an original certificate of insurance to evidence its coverage and continue it in effect throughout the contract period. Licenses and permits The contract should require the contractor to demonstrate that it has the necessary permits and licenses before the work begins. The contract should specify that the contractor will comply with all laws and regulations.


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Module 3: Facilities Management Restoration A contract should contain a clause stating that if the contractor’s employees, agents, or subcontractors damage any common or individual property in the community while performing contracted work, the contractor agrees to fully restore the property to its condition prior to the damage. This clause may also provide for the community association to retain part of the contract price until restoration has been completed. Or it may provide for deducting from the contract price any costs that the community association is forced to spend to do the restoration itself if the contractor does not do it within a specified period after completion of the work.

Indemnification A contract should expressly state that the contractor will indemnify and hold harmless or reimburse the community association for any amount the association is required to pay because a claim was made against the association as a result of the contractor’s work—as well as for any legal costs associated with defending the association against any claims. For example, if an owner sues the community association because the owner tripped and injured himself on the stairs that a contractor was in the process of resurfacing, this provision would require the contractor to pay any amount for which the community association is found liable, as well as any legal costs involved. The provision should be broad—covering any claims of any type by any party arising from the contractor’s work.

Insurance A contract should expressly require the contractor to have all necessary insurance for the project—including liability, workers compensation, and vehicle insurance. The contract should also require the contractor to provide the community association with original certificates of insurance, which prove that it has coverage, before work begins. Have the community association insurance agent review the contractor’s insurance policies to assure that coverage is adequate. Depending on your region of the country and the contractor’s insurance carrier, it may be possible to get a contractor to name the association and its management company as additional insured parties on the contractor’s policies.

Licenses and Permits A contract should require the contractor to demonstrate to the community association that it has the necessary licenses and permits for the work before work begins. A contract should also specify that the contractor is required to comply with all federal, state, and local laws, regulations, or codes that are applicable.


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Contract Provisions, continued Say Notices. The contract should state the names and addresses of the persons who will receive notices from the other party. Termination. There should be a provision to terminate the agreement with or without cause after a specified notice period to the contractor. Default. The contract should specify what constitutes a default by either party and what the other party’s remedies will be. Financial protection. The contract should provide for the financial protection of the association should the contractor default. This may include performance bonds, payment bonds, and/or lien waivers. • Performance bond. This is a guarantee by a surety (a third party) to protect the community association if the contractor fails to perform or finish the work. • Payment bond. This bond usually comes in a package with the performance bond. The surety guarantees that the contractor’s suppliers and any subcontractors will be paid if the contractor does not pay them. • Waiver of lien. This is a document which gives up the right to make a claim against the community association for payments not received.

Slide 85 Contract Provisions, continued • • • •

Notices Termination Default Financial protection - Performance bond - Completion bond - Waiver of lien

• Legal provisions - Assignability - Modifications - Waiver - Severability - Entire obligation

85

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Notices A contract should clearly state the names and addresses of the individuals representing both parties for the purposes of that contract. These will be the official addresses to which correspondence related to the contract must be sent.

Termination A community association should always have a way extricate itself from a contract if it so desires. This is particularly true for long-term service contracts. A service contract should contain a provision that gives the community association the right to terminate the contract with or without cause after a specified period of prior notice to the contractor.

Default A contract should specify: • What constitutes a default or failure of either party to fulfill the terms of the contract • What each party’s rights are if the other defaults

Financial Protection A contract should provide for the community association’s financial protection if the contractor should default. This is important at all times, but especially during a weak economy, or for larger projects. Depending on the type of project, a contract may require: • Performance bond: This is a guarantee by a surety (a third party) to protect the community association if the contractor fails to perform or finish the work. Because there is a cost to the community association involved, a performance bond typically is used with certain large projects. • Payment bond: This bond usually comes in a package with the performance bond. The surety guarantees that the contractor’s suppliers and any subcontractors will be paid if the contractor does not pay them—to protect the association from having a mechanic’s lien placed against them. • Waiver of lien: This is a document which gives up the right to make a claim against the community association for payments not received. When a contractor does the work and receives payment, the contractor’s representative provides a waiver of lien signed by the contractor, as well as waivers signed by the contractor’s suppliers and any subcontractors. If the project involved is a large one with multiple payouts, it is possible to receive waivers of lien more than once during the project as each payment is made. Use a waiver of lien when a project involves the heavy use of materials or subcontractors—e.g., some type of construction project—and your community association wants to avoid the risk of having to pay for materials or subcontractors if the contractor fails to do so.


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Contract Provisions, continued Say Legally binding provisions— 1. Assignability: The contract should provide that the contractor cannot assign the contract or use sub-contractors without the association’s permission. 2. Modification: The contract should provide for modification by written mutual consent. 3. Waiver: The contract should provide that a waiver by one party does not constitute a general waiver of future events. 4. Governing law: The contract should state that the laws of a particular jurisdiction will be applied to all disputes. 5. Severability: The contract should provide that if any part of the contract is declared illegal or invalid, that part will be separated and the remainder of the contract will remain in force. 6. Entire obligation: The contract should state that the contract is the entire agreement between the parties.

Emphasize that managers should contact the association’s attorney regarding any question or concern they may have about a contract or one of its provisions before having the association enter into the contract.


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Be sure to obtain any waivers of lien before making final payment on a project—even a small one. If you do not, your community association could end up paying for supplies or subcontractor services twice! Although we discussed progress payments and retention of a portion of the contract price under the compensation provision, notice how they are also forms of financial protection for your community association.

Provisions That Address the Legal Binding of a Contract A contract should contain the following provisions which address the legal binding of the contract: • Assignability: This provision states that neither party may assign its obligations under the contract to any other person without the express written consent of the other party. The contract should specifically state that the contractor cannot use subcontractors without the express written consent of the association. • Modification: This provision states that the contract may not be modified in any way unless such modification is written and signed by both parties. • Waiver: This provision states that a waiver (permission) by one party of any breach of contract (failure to fulfill a provision) by the other party shall not act as a general waiver of future breaches. In other words, each party says to the other, “If we let you slide on any contract requirement at any time, it doesn’t mean we’re letting you slide on any other requirements, or even on that one a second time—unless we decide to let you do it again.” • Governing law: This provision states that the law of a particular state will be applied if there are any disputes about the contract after it is signed. This is particularly useful when the community association and the contractor are based in different states. • Severability: This provision states that if a court finds that any clause of the contract is illegal or unenforceable, that clause shall be severed (separated) from the rest of the contract, so that the whole contract need not be invalidated. • Entire obligation: This provision states that the written, signed contract constitutes the entire agreement between the parties. Except for any documents that are expressly referred to in the contract, neither party can claim that any other correspondence, communication, or documents contain obligations, promises, or requirements that are part of the binding contract between the parties. Make sure to consult legal counsel if you or the board have any questions or concerns. Also, for larger contracts, the association’s attorney should perform a thorough review of the contract.


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Negotiating Contracts Say The final section of this lesson discusses: 1. The basic steps in negotiating a contract, and 2. Some important tips for successfully completing a contract

Here are a few essential tips for completing a contract:

Slide 86 Tips for Successfully Completing a Contract • • • •

Hire a specialist to inspect ongoing work Monitor the job site while work is in progress Inspect the completed job before final payment Prepare a payment schedule if you are going to make progress payments

86

A final word of advice: While monitoring the job site, the manager should never try to climb a roof or attempt to ensure that cement mix is the right consistency, for example. A professional should inspect the work during the contract and again when it has been completed to certify that it was done correctly. This condition should be written into the contract and final payment should be contingent on successfully passing this professional inspection and receiving all written warranties.

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Module 3: Facilities Management Negotiating Contracts In this last section of the lesson, we would like to discuss: • The basic negotiating process • Tips on successfully completing a contract

The Basic Negotiating Process Here are the basic steps in negotiating a contract: 1. Have the association’s attorney review the proposed contract before it goes to the contractor. 2. Present your association’s contract to the contractor whom the board selected. 3. The contractor’s representative will either sign it “as is” or propose changes. 4. Negotiate any changes the contractor proposes, have the attorney review them, and have those changes initialed by the contractor. 5. Present the initialed version of the contract signed by the contractor’s representative to the authorized community association representative for his or her initials on any changes and signature on the contract. The president and/or secretary of the community association should sign contracts on its behalf. As a manager, you should not sign a contract as you are not the party entering into the agreement—the community association is. 6. Give the contractor and the board copies of the contract signed by both parties. One word of caution: Don’t try to operate outside the basic bidding and contracting process. You will only harm your community association and yourself. A typical example is the situation where a manager asks a contractor to come in at a lower price if he or she really wants the job.

Tips on Successfully Completing a Contract Although this lesson is just an introduction to bidding and contracting, we would like to end with a few important tips on successfully completing a contract: • Monitor the job site while work is in progress. You need to verify that work is proceeding as contracted. Take your contract with you when you visit the site. You also need to verify that your contractor is taking adequate steps to ensure job safety. Is the contractor protecting your residents and your employees—as well as its own employees and any subcontractors? • Inspect the completed job before final payment. Prepare a punch list when the work is completed. Take the contract with you and walk the job with the contractor when the work is done. Point out the items in writing that need attention before final payment is made. You cannot see a completed job from behind your desk! • Prepare a payment schedule if you are going to make progress payments—or ask your accounting department to help if you have one. Develop some kind of form you can use to keep track of progress payments for a project. There’s a real possibility of overpayments without one.


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A final word of advice: While monitoring the job site, the manager should never try to climb a roof or attempt to ensure that cement mix is the right consistency, for example. A professional should inspect the work during the contract and again when it has been completed to certify that it was done correctly. This condition should be written into the contract and final payment should be contingent on successfully passing this professional inspection and receiving all written warranties.


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Summary Say You have learned: • • • • •

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How to analyze a particular service or function the association needs and determine the best approach for accomplishing this work for the benefit of the association. What provisions should be included in all contracts to which the association is a party. To use RFP’s in requesting bids. To use specifications for all work in a RFP. An effective approach for deciding whether to use in-house staff or to contract out when the association has work that needs to be done.


Key Terms: • • • • • • • • • •

Assignability provision Bid request Bid specifications Certificate of insurance Contract Default Entire obligation provision Governing law provision Modification provision Payment bond

• • • • • • • • •

Performance bond Progress payments Prospective bidder’s questionnaire Qualifications sheet Request for proposal Severability provision Waiver of lien Waiver provision Warranty



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Focus Questions Use the following questions to help you identify and review the core concepts in this lesson. (Hint: Once you look up the answer to a question, you may want to jot down the page number next to the question for future reference.) 1. Why is it important to assist your community association with entering into contracts and to do so as carefully as possible? 2. What are some work requirements to consider when deciding whether to have a task performed by staff members or by a contractor? For each work requirement you name, explain the considerations involved. 3. What does an RFP packet include? 4. What are the five steps to take before developing an RFP packet? 5. Name some sources that can be used to obtain the names of potential contractors for a specific job. 6. Why is it important that bid specifications be as thorough and accurate as possible before the RFP packet is sent out? 7. List the basic items a complete RFP packet should include. 8. What are the eight steps to take in order to evaluate a set of bids for a project? 9. Why is it important to have a standard contract with certain key provisions in it? 10. Name some of the key provisions that should be included in every contract. Explain each provision. 11. What are the six basic steps in negotiating a contract? 12. What are some tips for successfully completing a contract?


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Thought/Discussion Questions Use the following questions to help you apply the information in this lesson to your own situation. 1. Identify a project or routine service your community association is considering or has decided to undertake. Use the decision chart from this lesson to decide whether staff members or a contractor would best meet the work requirements involved. 2. Identify a project or routine service for your community association whose bidding and contracting process you have either participated in or observed. (If you are relatively new to your community association, interview another employee or a board member about a recent process.) Based on what you have read in this lesson— a. Review the steps taken to gather preliminary information for the bid request. How could they have been improved? b. Review the process used to identify potential contractors for the project. How could it have been improved? c. Review the bid specifications. How could they have been improved? d. Review the complete RFP packet. How could it have been improved? e. Review the steps taken to evaluate the bids received. How could they have been improved? f. Review the steps in negotiating the contract for the project. How could they have been improved? g. Are there any ways execution of the contract could have been improved? 3. If your community association has a standard contract it uses, identify the clauses which represent the key contract provisions mentioned in this lesson. • If there are key provisions not represented in your community association’s standard contract, ask your immediate supervisor or community’s attorney about them. • If your standard contract has clauses which represent provisions his lesson hasn’t mentioned, ask about those, too. • If your community association does not use a standard contract, what are some reasons you could use to convince your board that it needs one?



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Lesson 2 Quiz 1. True or false. A contract is an agreement between two or more parties, enforceable by law, by which each party promises to do, or not to do, something. (True) RATIONALE: Management of a community association’s resources frequently involves the use of contracts to obtain the products and services required. A contract is an agreement between two or more parties, enforceable by law, by which each party promises to do, or not to do, something. Whenever a community association enters into a contract, it is binding itself both legally and financially. Therefore, as a community association manager, you must assist your community to enter contracts as carefully as possible—seeking legal or technical advice whenever necessary. 2. When deciding whether to have staff members or a contractor perform a task, a manager should consider each of the following EXCEPT: a. supervision b. expertise c. number of people d. retirement plan contributions RATIONALE: When deciding whether to have staff members or a contractor perform a task, a manager should consider the number of people, expertise, supervision, and availability. If a manager tries to stretch his or her people too thin, there is the danger of demoralizing the staff and delaying completion of all tasks. Always consider the possible “costs” of using inadequately trained people to do a job. Be realistic about the amount of supervision that will be necessary and whether you or anyone else on site can provide it. 3. True or false. When deciding whether to have staff members or a contractor perform a task, a manager should consider where tools, equipment, and supplies will be stored, and the liability involved. (True) RATIONALE: A manager is responsible for ensuring that all supplies are stored and labeled in accordance with O.S.H.A. standards. In this respect, the manager should be concerned with security and safety issues and seek to avoid theft and accidents. Depending on the tools, equipment, and supplies involved in a task, an association may not be able to securely and safely store them for the duration of the project, and may wish to instead use a contractor.

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Lesson 2 Quiz, cont’d 4. A bid request or request for proposal (RFP) should include each of the following EXCEPT: a. vague instructions about the products or services requested b. a request for information about the contractor that will help the association evaluate the contractor’s ability c. information about the association that the contractor will need in order to prepare a bid d. information about work conditions RATIONALE: A bid request or request for proposal (RFP) is an announcement that an organization is interested in receiving proposals for a particular project. Among other things, the bid request or RFP should include detailed instructions about the products or services requested (bid specifications). All contract terms should be included in the bid request. This will help the association avoid a situation where the successful contract bidder receives a written contract whose terms may not be acceptable to the contractor. 5. True or false. The bidding process and requests for proposals should be used primarily for smaller jobs or purchases of one-time services. (False) RATIONALE: Because of the amount of effort the bidding process requires of both the community association and the bidders, it should be used primarily for larger jobs or purchases or for on-going services, such as lawn maintenance. If the bidding process will be needed, a manager should confer with the board to determine the minimum size of a contract that requires competitive bidding. 6. True or false. A good resource for identifying potential contractors is referrals from supply firms doing business with the community association. (True) RATIONALE: A manager can obtain the names of potential contractors for a specific job from referrals from supply firms doing business with the community association. Before a manager sends a contractor a bid request, he or she should call first to see if the company is interested in bidding. He or she should avoid sending out bid requests and waiting for a response, only to find out that none of the receivers were interested or available. 7. Complete the following sentence: A ______________ is a promise or guarantee that parts, materials, or labor will last for a designated period of time. a. prospective bidder’s questionnaire b. warranty c. qualifications sheet d. waiver of lien RATIONALE: A warranty is a promise or guarantee that parts, materials, or labor will last for a designated period of time. A prospective bidder’s questionnaire or qualifications sheet is a document that asks for certain types of information to determine if the bidder is technically and financially qualified to handle a job of this scope. A waiver of lien is a document which gives up the right to make a claim against the community association for payments not received.


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Lesson 2 Quiz, cont’d 8. Which of the following contract provisions means that if the contractor’s employees, agents, or subcontractors damage any common or individual property in the community while performing contracted work, the contractor agrees to fully restore the property to its original condition? a. indemnification b. standard of performance c. restoration d. compensation RATIONALE: Restoration is an essential contract clause stating that if the contractor’s employees, agents, or subcontractors damage any common or individual property in the community while performing contracted work, the contractor agrees to fully restore the property to its condition prior to the damage. This clause may also provide for the community association to retain part of the contract price until restoration has been completed. Or it may provide for deducting from the contract price any costs that the community association is forced to spend to do the restoration itself if the contractor does not do it within a specified period after completion of the work. 9. Complete the following sentence: A ______________ is a guarantee by a surety (a third party) to protect the community association if the contractor fails to perform or finish the work. a. payment bond b. default c. performance bond d. waiver of lien RATIONALE: A contract should provide for the community association’s financial protection if the contractor should default. This is important at all times, but especially during a weak economy, or for larger projects. A performance bond is a guarantee by a surety to protect the community association if the contractor fails to perform or finish the work. Because there is a cost to the community association involved, a performance bond typically is used with certain large projects. 10. True or false. The manager should sign all contracts on behalf of the community association. (False) RATIONALE: The president and/or secretary of the community association should sign contracts on its behalf. The manager should not sign a contract on the community association’s behalf, as he or she is not the party entering the agreement—the community association is.

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Additional Resources For further information on bidding and contracting for community associations, we suggest the following— Bids & Contracts: How to Find the Right Community Association Professional, A Guide for Association Practitioners, by Stephen R. Bupp, CMCA, AMS, PCAM. Find out what to specify in your request for proposals and how to prepare your contracts correctly. Includes sample documents. (Community Associations Institute, 2004.) Landscape Contractors: How to Find the Right Community Association Professional, A Guide for Association Practitioners, by James B. Cranford, AMS, PCAM. This guide covers it all—drafting specs, performance criteria, warranties, maintenance schedules, insurance requirements, communicating with residents, advice on bidding the contract, selecting the best bid, legal review, environmental concerns and contractor evaluation. Includes sample documents. (Community Associations Institute, 2007.) Management Companies: How to Find the Right Community Association Professional, A Guide for Association Practitioners, by Michael E. Packard, PCAM, CPM. Here’s guidance for deciding on a company to manage your community—covers bid specifications, identifying candidates, requests for and analysis of proposals, onsite meetings, the interview process and working successfully with your management company. (Community Associations Institute, 2007.) On-Site Managers: How to Find the Right Community Association Professional, A Guide for Association Practitioners, by Thomas Burgess, PCAM, and Pam Washburn, CMCA, AMS, PCAM. Helps you determine whether your association needs an onsite manager; establish job criteria; find, screen and investigate leading candidates and make the partnership work. Includes sample documents. (Community Associations Institute, 2005.) Community Association Legal Counsel: How to Select & Use an Attorney, Guide for Association Practitioners No. 13, 2nd Edition, by Thomas J. Hindman, Esq., and Loura K. Sanchez, Esq. Find out how to get the best out of your association attorney, what to consider when searching for a new lawyer, working out fee structures and more. Includes a sample request for proposal, interview questions, evaluation criteria and sample billing statement. (Community Associations Institute, 2002.)


Transition to Lesson 3: Risk Management & Insurance


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Lesson 3: Risk Management & Insurance Goal At the end of this lesson, students should know how community associations are exposed to losses and what measures can be taken to manage that risk, including the purchase of insurance. Students must know the requirements for insurance coverage, the types of insurance protection available to community associations, and what their role is in the bidding and claims processes. Time 55 minutes Session Time Breakdown 45 minutes—Faculty presentation 10 minutes—Summary/quiz Overview This session may prove to be as equally intimidating to some students as the financial module. Certainly the various insurance coverages available to community associations, the different forms and endorsements, and the different types of policies for different types of community associations may make this subject seem incomprehensible and overwhelming. Because of the time limit of this session, you should not get into the details of insurance coverages and purchase. You should be providing an overview and discussing the basic concepts of effective risk management techniques and available insurance coverages for community associations. You should explain the manager’s function in the bidding process as well as what is expected in handling an insurance claim for the association. You should also encourage students to carefully read the text, answer the questions at the end of the lesson, and pose specific questions to their insurance agent. Materials Needed

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LCD projector

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Remote advancer

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Flip chart M-100: The Essentials of Community Association Management

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Overview Introduce the lesson Say The topics of this session are risk management and insurance for community associations. The manager: 

Must know the types of exposures that can cause a loss for a community association and how to manage the risks associated with that exposure.

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Must understand the requirements for insurance and the various types of insurance available to community associations.

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Must be involved in the insurance bidding process and be aware that there are limitations to the role.

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Must be involved in the insurance claims process when a loss occurs, and be aware that there are limitations to the role.

Overview the session Say 

We will discuss the areas in which community associations are exposed to loss and how to control and manage those risks.



In most cases, risk management will be through the purchase of insurance coverage. We will discuss the requirements for insurance as well as the various types of insurance coverage available to community associations.

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The board of directors will expect the manager to play a critical role in the bidding of insurance coverages. We will discuss what your role should be.

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The board of directors will expect the manager to play a critical role in the insurance claims process when a loss occurs. We will also discuss your role in this process.


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Slide 87

Lesson 3: Risk Management and Insurance Session Overview Learning Objectives • • • • • • •

Identify the four types of exposure to loss for an association. Define risk control. Identify four ways to control risk. Identify the requirements for community associations to have insurance coverages. Identify the four major insurance coverages available to community associations. Explain the manager’s role in the bidding process. Provide tips for filing insurance claims. 87


Define Risk Management: Risk management is the process of making and carrying out decisions that will minimize the adverse effects of accidental losses upon the community association.

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Key Terms: • • • • • • • • • • • • • • • • • • • • • • • • • •

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Actual cash value (ACV) Advertising injury Aggregate amount Agreed amount endorsement Assessments receivable insurance Bodily injury (BI) Building ordinance insurance Business income insurance Claims made coverage Coinsurance Commercial general liability insurance (CGL) Commercial umbrella insurance Common declarations Contingent liability Contractual transfers Covered cause of loss Deductible Demolition Directors & officers liability insurance Electronic data processing (EDP) Employers’ liability insurance Exposure avoidance Extra expense insurance Fidelity insurance Flood insurance Hired & non-owned automobile liability insurance

• • • • • • • • • • • • • • • • • • • • • • • • • •

HO-1,-2,-3,-4,-5,-6 policies Income exposure to loss Increased cost of construction Inflation guard endorsement Insurable replacement cost Insurance Liability exposure to loss Loss prevention Loss reduction Mechanical equipment breakdown insurance Medical payments Occurrence Ordinance law insurance Personal injury (PI) Personal property Personnel exposure to loss Property damage (PD) Property exposure to loss Real property Risk control Risk management Segregation of exposures Waiver of subrogation Waiver of the transfer of recovery rights Workers’ compensation & employers’ liability insurance Wrongful acts

This lesson provides an introduction to risk management and insurance for community associations. The lesson explains the: • Risk management process • Insurance coverages and related insurance issues for community associations Risk management is the process of making and carrying out decisions that will minimize the adverse effects of accidental losses upon the community association. Implementing these decisions requires the performance of four activities to all types of management: planning, organizing, leading, and controlling.


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The creation of a comprehensive community association insurance program lies at the heart of an effective risk management program. Although the duty to purchase insurance for a community association lies with its board of directors, a manager is expected to advise and lead the board in implementing this financial responsibility.

What You Will Learn After reading and reviewing this lesson, you should be able to explain and understand: • Risk management • Four types of exposure to loss for a community association • Risk control • Sources of community association insurance requirements • Primary types of insurance coverage required by most community associations • Basic components of a community association insurance program • Insurance claims • Relationship between community association insurance coverage and owner coverage


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Overview Say There are four types of exposure to loss for an association. 1. Property exposure to loss: Property losses can be tangible community association property (buildings, contents, etc.) or intangible association property (information, proprietary website, etc.). 2. Liability exposure to loss: Liability losses include damage to non-association property or to a person, and arise when a person or entity threatens or actually brings a legal claim against the community association, its members, or others whom it must indemnify by contract (such as a management company). 3. Income exposure to loss: Income losses involve a reduction in income or an increase in operating expenses, or both. 4. Personnel exposure to loss: Personnel exposures usually involve claims by employees regarding discrimination in hiring or firing, harassment, or other allegation.

Slide 88

Exposures to Loss 1. Property Exposure – tangible or intangible • Real property – buildings, land, information • Personal property – inventory, furniture, supplies 2. Liability Exposure – Third-party claim of personal or property damage 3. Income Exposure – net loss – reduction in income/increase in operating expenses 4. Personnel Exposure – claims of employees

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Overview Say There are four ways to attempt to control the risks: 1. Exposure avoidance, e.g. remove the diving board at the swimming pool. 2. Loss prevention and reduction, e.g. fire alarm monitoring systems or the installation of fire extinguishers. 3. Segregation of exposures, e.g. computer back up files stored off premises. 4. Contractual transfers, e.g. contracting for maintenance rather than employees doing the work.

Slide 89

Risk Control 1. 2. 3. 4.

Exposure avoidance Loss prevention and reduction Segregation of exposure Contractual transfers

89

Ask students for additional examples of ways to control risks and to define the category it represents.

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Module 3: Facilities Management Four Types of Exposure to Loss For a Community Association There are four types of sudden, accidental and unexpected loss to which a community association is exposed: 1. Property exposure to loss—Property losses can be to tangible community association property (buildings, contents, etc.) or to intangible association property (information, proprietary website, etc.). 2. Liability exposure to loss—Liability losses include damage to nonassociation property or to a person, and arise when a person or entity threatens or actually brings a legal claim against the community association, its members, or others whom it must indemnify by contract (such as a management company). 3. Income exposure to loss—Income losses involve a reduction in income or an increase in operating expenses, or both. 4. Personnel exposure to loss—Personnel exposures usually involve claims of employees regarding discrimination in hiring or firing, harassment, or other allegation. Ways to identify a community association’s exposures to possible loss include: • Conducting surveys • Examining financial statements including audits and reviews • Reading records and files, especially work orders • Constructing flow charts • Making personal inspections • Hiring experts such as Reserve Specialists, insurance risk managers and qualified general contractors

Examine Alternative Risk Management Techniques Risk control is a way to treat the primary exposures to loss. Risk control activities include: 1. Exposure avoidance: This involves avoiding the circumstances that would expose the community association to certain type of loss. For example, to avoid problems that may result from serving alcohol in the clubhouse, the community association has a rule prohibiting the use of alcohol in the facility. 2. Loss prevention and reduction: Loss prevention involves taking steps to reduce the frequency of a potential loss, such as conducting weekly fire safety inspections where flammables are stored. Loss reduction involves taking steps to reduce the severity of a potential loss, such as installing a sprinkler system where flammables are stored. 3. Segregation of exposures: This involves establishing some type of backup to prevent a loss, such as backing up all computer files and storing the backup files offsite in a separate place, or keeping a hard-toreplace mechanical part on hand. 4. Contractual transfers: This involves entering into a contract that will, among other things, transfer the community association’s legal responsibility for any loss. An example would be contracting for landscape services, instead of using community association employees, and incorporating clauses such as a hold harmless provision in the contract, or the association contracts with a community association management company.


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Insurance for Community Associations Say There are many requirements for community associations to have insurance coverages: 1. State statutes and regulations 2. Governing documents of the association—Emphasize that the manager must thoroughly review and fully understand what insurance coverages are required by the governing documents. Frequently, managers, the board, and the insurance agent do not review the governing documents to make sure all required coverages are being provided. 3. Local and federal law 4. Secondary mortgage market, agency, and lender requirements 5. Contractual obligations 6. Good business judgment

Slide 90

Sources of Insurance Requirements 1. 2. 3. 4.

State statutes and regulations Association governing documents Local and federal law Secondary mortgage market, agency, and lender requirements 5. Contractual obligations 6. Good business judgment

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Module 3: Facilities Management Characteristics of Insurance as a Contract Insurance transfers the financial burden of paying for certain losses to a third party—a commercial insurance company. Not all exposures to loss may be covered by insurance. Like other contracts, an insurance policy is— • An agreement between two or more parties • Enforceable by law • A contract in which each party promises to do, or not to do, something, and which terms are not negotiable. As a manager, it is important to always read an insurance policy in order to determine— • Who is insured? • What time period is involved? • What is insured? • What is a covered cause of loss, or “peril” insured against? • What is excluded? • What is limited? It is also important to read definitions of policy terms to find out if there are any restrictive definitions that exclude items your community association wants to insure. For example, is the definition of a “building” so narrow that it does not cover a certain type of structure your community association wants to insure such as a pool pavilion?

Sources of Community Association Insurance Requirements As in other areas of community association management, insurance requirements may be established by: 1. State statutes and regulations: Most states have statutes and regulations affecting community associations that include some type of insurance obligation. Have you checked your statutes and regulations for insurance requirements? 2. Association governing documents: Some type of insurance requirement will appear in: o The declaration and bylaws for a condominium o The CC&Rs (Covenants, Conditions, and Restrictions) for a planned community o The proprietary lease or occupancy agreement for a cooperative o Resolutions adopted by the board of directors (For example, the board may adopt resolutions dealing with the allocation of deductibles and the funding of catastrophic deductibles.) 3. Local, state, and federal law: A variety of local, state, and federal laws effect the purchase of insurance by a community association. o Local examples—building codes and health ordinances o State examples—workers’ compensation laws, automobile financial responsibility laws (required coverage of the driver based on the type of vehicle driven) o Federal example—flood insurance


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4. Secondary mortgage market, agency, and lender requirements: The four important entities that usually have an impact on community association insurance obligations include: 1) Fannie Mae (Federal National Mortgage Association) 2) Federal Home Loan Mortgage Corporation (FHLMC, or Freddie Mac) (The following are technically government sponsored enterprise or GSEs. Both of these GSEs buy mortgages from lenders and in doing so require certain types of insurance to be in place.) 3) Federal Housing Administration (FHA) 4) Veterans Administration (VA) (Fannie Mae and Freddie Mac are private agencies backed by the federal government and insure the mortgages, paying the lender if the borrower defaults. FHA and VA guarantee mortgages and require certain types of insurance coverage on the unit and the community before agreeing to buy the mortgage from the lender.) 5. Contractual obligations: Community associations may have entered into contractual obligations with a private trash company for trash removal or other activities, and requires that the trash company indemnify the association against any claims or damage. Management company contracts also contain an indemnification provisions that requires the association’s insurance to pay for defense, settlements and judgments in the event of a claim. 6. Good business judgment: The absence of explicit requirements from any of the sources listed above should not preclude the community association from obtaining coverage if the exposure is present and selffunding is not a viable option. The absence of an explicit requirement will not excuse a manager’s failure to fulfill his or her professional duty to recommend insurance coverage—or a board from fulfilling its fiduciary duty to obtain coverage.

Primary Types of Insurance Coverages Required by Most Community Associations There are four primary types of insurance coverages that address the four types of possible exposure to loss: 1. Property 2. Liability 3. Income 4. Personnel For each exposure to loss, the section discusses: • Insurance coverages and endorsements • Risk management issues • Insurance contract issues

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Insurance Coverages Due to limited time, the instructor cannot dwell on any particular area of coverage. Emphasize the need for the students to thoroughly read the workbook section on insurance and ask questions of the instructor. Emphasize that each state and each association will be unique in its insurance needs and that the manager must seek advice from competent insurance professionals. Say Property coverages that are available to community associations include: 1. Property coverage. • Commercial package policy o Real and personal property from all perils except exclusions o Obtain replacement cost coverage, not Actual Cash Value (ACV) o Obtain agreed amount endorsement o Choose affordable deductibles • Mechanical/Equipment Breakdown insurance (boiler and machinery) o Mechanical breakdown of elevators, HVAC, transformers, etc. • Ordinance/Law insurance o Contingent liability o Extra demolition o Increased cost of construction • Flood insurance o Provided only through National Flood Insurance Program if the building is in a flood plain • Electronic data processing o Needed for computer equipment, networks, websites, security systems, protection from hackers, and similar information technology exposures o Every community association should have internal procedures governing the proper use of information technology


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Insurance Coverages Slide 91 Property Coverage • Commercial package policy • Mechanical/equipment breakdown insurance • Ordinance/law insurance • Flood insurance • Electronic data processing

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Module 3: Facilities Management Property Exposures to Loss For insurance purposes, property consists of: 1. Real property—e.g. buildings, land, and the newest type of property exposure—information such as websites, logos and similar electronic information and data processing (EDP). Information loss is an exposure for some community associations that have websites and use e-mail to communicate electronically with members. 2. Personal property—e.g. inventory, furniture, fine arts, equipment, supplies, machinery and valuable papers and records.

Property Insurance Coverages and Endorsements The losses (perils) that are covered by an insurance policy are referred to as covered causes of loss. There are three insurance forms that identify exactly what is covered by the policy: 1. Special Form: This is the most comprehensive and insures against everything that is not excluded. It places the burden of denying a property claim on the insurance company. 2. Broad Form: This only insures specified perils. The places the burden of proving coverage on the association. 3. Basic Form: This provides the least property coverage. It also places the burden of proving coverage on the association. Common insurance coverages and endorsements for property exposures to loss include: 1. Commercial Package Policy (CPP) insurance: There are two parts to the CPP policy—property and liability. The property insurance part of the CPP can provide coverage for real and personal property. The most comprehensive property coverage is obtained through the “Special Form Covered Causes of Loss” insuring agreement. Policy limits should reflect the full insurable replacement cost of real and personal property. The interface between a unit and common areas in a condominium or cooperative requires both a CPP and a unit owners policy, typically an HO6 policy in a condominium, or a renters policy in a cooperative. 2. Mechanical/Equipment Breakdown insurance: If a community association has mechanical equipment of any kind (including elevators, pool equipment, and electrical transformers), it should consider this coverage because the CPP policy does not cover damage from mechanical breakdown, electric arcing, or power surges. Some policies also insure computer equipment, security systems, closed circuit TV, and similar information technology property. 3. Ordinance/Law insurance: This type of insurance is usually obtained by endorsement to the CPP. It is necessary because the CPP restores the covered loss to its original condition, which could mean 30 years ago. Ordinance/Law insurance brings the construction to current code so the building is eligible for an occupancy permit. This protection has three components: contingent liability, demolition, and increased cost of construction.


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Ordinance insurance covers three areas: • Contingent liability—covers the value of any undamaged portion of a building which may have to be replaced because it is impossible to tie in the remaining section to the rebuilt section because of changes in building codes over the years. • Demolition—covers the cost of demolishing any undamaged portion of the building. The basic property insurance pays for demolishing the damaged portion of the building. • Increased cost of construction—covers construction costs due to changes in the building code since original construction took place, e.g. wider door frames, installation of sprinkler systems, and code changes because of "green requirements" such as reflected roofs, complying with water saving specifications, etc. Policy limits should reflect the community association’s risk manager’s estimate of its actual exposure. As a manager, you should encourage the board to hire a professional to determine what changes in building code to which your community association would have to conform if it had to rebuild. 4. Flood insurance: This type of insurance is available only through the National Flood Insurance Program (NFIP), a federal insurance program, if a building is in a flood plain. It provides coverage for damage caused by flood (rising water) and mudslides to buildings and contents. Policy limits are driven by the internal requirements of the NFIP. The NFIP program is predicated on the association insuring to full insurable replacement cost or a maximum of $250,000 per unit. If a building is not in a flood plain, premiums are much more reasonable and can usually be obtained as an endorsement to the CPP. 5. Electronic data processing (EDP): This insurance may be needed for computer equipment, networks, websites, security systems, protection from hackers, and similar information technology exposures. Coverages vary so much that the community association needs to carefully evaluate its exposures and the ability of the EDP to meet those potential exposures to loss. Exposures to loss from information technology components may also need coverage by special liability insurance and special income insurance. Every community association should have internal procedures governing the proper use of information technology.

Property Risk Management Issues Here are some common risk management issues related to property exposures to loss: 1. Certain property exposures to loss are either uninsurable (such as land) or they may be too expensive to insure (such as coverage for physical replacement of a dam). The issue of being uninsurable or too expensive to insure can also arise with the three other types of exposure to loss (liability, income and personnel). In situations such as these, it is necessary to explore alternative means of risk control and risk financing. 2. Most sources of property insurance requirements for community associations are likely to require property insurance to be written at “insurable replacement cost” property limits for the association’s real property.

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Module 3: Facilities Management The replacement cost of property is the amount of money it would cost to replace the property at today’s prices and would include the land, foundations, underground piping, etc. Insurable replacement cost is the cost to replace property that can be insured and excludes the land, foundations, underground piping, and other components not typically insurable. The most reliable way to determine insurable replacement cost limits is to obtain an insurable replacement cost valuation from an insurance appraiser. These valuations should be updated every 3 – 6 years in conjunction with a reserve study update.

Property Insurance Contract Issues Here are some common insurance contract issues related to minimizing a community association’s property exposures to loss: 1. To have full insurable replacement cost protection in most property policies, it is necessary to: • Obtain a “replacement cost” endorsement that deletes depreciation. It is standard for most property policies to cover the depreciated value of an item—called “actual cash value” (ACV)—not its replacement cost. Be sure not to confuse insurable replacement cost or actual cash value with either the market value of a property or the assessed value for tax purposes. • Obtain an “agreed amount” endorsement that suspends the coinsurance clause. An agreed amount endorsement provides for an agreed upon limit of property insurance. Coinsurance is a standard element in most property policies that obligates the insured to maintain a certain amount of property insurance on the entire property or per structure, based on a stated percentage, usually 80% – 90%. If the insured does not maintain this percentage, the insured will not be reimbursed for the full loss of the property. •

Make sure the property limit shown on your property policy is for the full insurable replacement value. • Obtain an “inflation guard” endorsement, if the economic climate is an inflationary one. This type of endorsement will automatically raise the coverage to keep up with inflation. On the other hand, if there is little inflation, the inflation guard endorsement may artificially increase the cost of insurance premiums. 2. A property policy should be used for catastrophe protection, not as a source of funds for maintenance expenses. If a community association files too many claims for losses that could—and should—have been remedied with proper maintenance, its insurer may raise the cost of coverage or refuse to insure the item. 3. Premium expenses can be kept reasonable by raising the deductible level for specific items. The deductible is the amount that the association or homeowner must pay on each loss. Deductibles can be split between covered causes of loss so that water damage may carry a large deductible, but other perils may carry smaller deductibles. Note: Do not raise a deductible level without first going through the risk management decisionmaking process.


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4. It is to a community association’s benefit to have the property insurance deductible apply to all of its buildings on a blanket basis, rather than to each building separately. If a covered cause of loss (such as a fire) occurs for more than one building, it will be less expensive to pay one deductible as opposed to paying a deductible for each building. However, it may not always be possible to obtain this; many insurance companies insist that deductibles for water damage and other claims apply separately to each unit or each building in which damage occurs. 5. The standard property policy for a condominium contains several basic statements or endorsements (“condominium endorsement”). For example, the condominium association policy is primary with respect to an owner’s policy for the same loss, which means that the association’s policy will pay the loss. It also eliminates the association’s right to seek reimbursement for a covered loss from the owner who caused the damage. The endorsement that deletes this right is called a “waiver of the transfer of recovery rights” (formerly a “waiver of subrogation”). Property policies for cooperatives and planned communities often do not have the benefits of those features found in the standard “condominium endorsement.” They can usually be added for no extra premium. • Guaranteed Replacement Cost—Some insurance companies will offer “guaranteed replacement cost,” which means that the insurer will pay whatever it costs to rebuild the property (as defined in the insurance policy). A variation on this type of coverage is sometimes called "Extended Replacement Cost." This latter coverage will use a sub-limit extension, e.g. "we will pay up to 120% of replacement cost."


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Insurance Coverages, continued Say 2. Liability coverage. •

• • •

Commercial package policy o Property damage o Bodily injury o Personal injury o Advertising injury Hired and non-owned automobile liability o Autos of others (e.g., board members) used for association business Commercial umbrella liability o Excess coverage above commercial general liability and sometimes Directors and Officers liability Directors and Officers liability o Wrongful acts of volunteer leadership

Slide 92

Liability Coverage • Commercial general liability • Hired and non-owned automobile liability • Commercial umbrella liability • Directors and officers liability

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Liability Exposures to Loss For a community association to be held liable, a civil legal claim must be brought against it because of a legal wrong it is alleged to have directly committed or for which it is supposedly responsible. This alleged legal wrong must have led to property damage (PD), bodily injury (BI), personal injury (PI), or advertising injury (AI) to a third party if there is to be coverage in commercial general liability insurance (CGL). Wrongful acts that do not lead to property damage, bodily injury, personal injury, or advertising injury claims could be covered under Directors and Officers liability insurance. The association’s liability policy also includes Medical Payments insurance which is technically an accident policy that pays third parties for limited medical expenses without the injured party having to file a lawsuit against the association. For example, a visitor may trip over a sprinkler head and twist her ankle. The community association and manager should always ask to be an additional insured on the liability policy of every contractor or vendor doing work for the association. In the event of a claim involving both the association and the contractor, the claim can then be tendered to the contractor’s CGL insurer instead of the association’s paying the loss.

Liability Insurance Coverages and Endorsements Common insurance coverages and endorsements for liability exposures to loss include: 1. Commercial package policy (CPP) insurance: The Commercial General Liability (CGL) part of the CPP provides insurance coverage for legal claims arising from bodily injury (BI), property damage (PD), advertising injury (AI), and personal injury (PI). The most significant limits in most CGL policies include exclusions or caps on damages arising from (1) mold, (2) pollution, and (3) information technology. The community association needs to carefully review these exposures. 2. Hired and non-owned automobile liability insurance: This insurance covers legal claims arising out of the use of automobiles that are not owned by the community association, but that are used while acting on behalf of the association. Thus, injury to a third party and property damage caused by the use of automobiles belonging to board members, volunteers, employees, or management staff may be covered under certain circumstances. Damage to employee or volunteer vehicles or persons is not insured under this type of policy. The association would pay only that amount of a claim that is not covered by another policy, such as the other driver’s insurance policy.

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Module 3: Facilities Management 3. Commercial umbrella insurance: This insurance extends the amount of coverage beyond the limits of scheduled underlying liability policies such as commercial general liability, hired and non-owned auto, employers liability, and perhaps directors and officers. 4. Directors and officers (D&O) liability insurance: This insurance is designed to pay for damages arising from wrongful acts that do not lead to property damage, bodily injury, advertising injury, or personal injury. For instance, the board or the community association may be at fault for not fixing hand rails (someone falls and is hurt), but the result of that wrongful behavior led to bodily injury (BI), which is insured in the CGL and not in the D&O policy. On the other hand, D&O will defend the board and may pay for any settlements or judgment if an owner sued the association for not uniformly enforcing the governing documents. The definition of an insured should specifically include the community association, committee members and employees, as well as board directors and officers, whether they are elected or appointed and whether they are past or current. The managing agent should also be added as an additional insured; this is not automatic and must be requested from the insurance carrier. This helps the association fund the indemnity provisions often found in management contracts. Legal claims can be brought against a community association based on the manner in which it conducts its business. Examples of “wrongful acts” include the failure to file taxes, collect assessments, maintain replacement reserves, or deliver core services to its residents (member/owners and tenants). Directors and officers liability insurance involves “claims made” coverage, meaning that whatever company is insuring the association when the claim is made will cover the loss even though the wrongful act may have occurred when another carrier was insuring the association. This is just the opposite of a CGL policy which is based on “per occurrence” claims, meaning that whatever insurance company insured the association at the time the loss occurred will cover the loss. Another notable fact about this type of coverage is that the community’s defense costs may be included in the policy limits. However, higher D&O limits may be needed if the community association anticipates significant defense costs. The insurance company may or may not have the right to select the defense counsel for the association. Most of these policies have limitations and exclusions that a community association should consider. For example, strictly define who is covered in the association. And they may exclude claims for non-monetary damage, insurance decisions, and acts of discrimination. The community association should purchase coverage with as few of these exclusions as possible. The CAI endorsed D&O program provides some of the broadest protection available for community associations. Be wary of D&O coverage that is imbedded in the liability policy or that is not specifically for community associations as they may not cover unpaid volunteers.


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Risk Management Issues Liability claims can be brought against a community association because of: 1. Property damage: For example—an improperly maintained light pole falls on a car. 2. Bodily injury: For example—a slip-and-fall on a crumbling sidewalk. 3. Personal injury: Injury arising from libel, slander, false arrest, invasion of privacy, wrongful entry, or malicious prosecution. For example—a community newsletter inappropriately and incorrectly lists an owner as delinquent in assessments. 4. Advertising injury: Advertising injury provisions in CGL include language providing coverage to the community association with respect to damages resulting in “misappropriation of advertising ideas or style of doing business” or “infringement of copyright, slogan, or title.” Community associations with newsletters, directories, and websites that contain advertising and use online, magazine or newspaper articles without reprint permission have this exposure. Even the best managed community association can be the subject of liability claims in the areas of property damage, bodily injury, personal injury, and advertising injury. But these associations are likely to experience fewer of these claims than does a poorly managed one.

Liability Insurance Contract Issues Here are some common insurance contract issues related to minimizing a community association’s liability exposures to loss: 1. Liability insurance usually does not have a deductible. However, coverage may have aggregate limits. That is, there may be a limit to the total amount that the insurer will pay out under the policy. 2. For most liability policies, coverage is based on occurrence—that is, the event has to happen during the period of policy coverage. If the amount the insurer will pay for one incident (occurrence) is the same as the aggregate amount it will pay, try to obtain coverage that will either increase the aggregate or delete it altogether. If that fails, then the community association should consider purchasing a commercial liability insurance umbrella that will increase the CGL limits. Sometimes coverage has a “claims made” basis—that is, the current insurance company will cover the loss even though it occurred when another company was insuring the property. (Hint: This is almost always true of directors and officers liability insurance.) 3. The community association’s defense costs (attorney fees and related costs) are usually not included in the policy limits; the insurance pays these costs without their reducing the policy limits. For example, if defense costs total $50,000 and the association had a $1,000,000 general liability limit, there is still $1,000,000 to pay any judgment or settlement (unlike most directors and officers liability insurance). In addition, in liability situations the insurance company will usually retain all rights to select the attorney and settle claims. Be sure to request an endorsement if the board prefers to select its own counsel.

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Insurance Coverages, continued Say 3. Income coverage. • • • •

Fidelity insurance o Employee theft of money, securities, or property Business income insurance o Loss of income producing property, e.g. rental unit Assessments receivable insurance o Loss of assessments from owners due to loss (such as a fire) Extra expense insurance o Expenses incurred due to a loss, e.g. moving to another office after a fire

Slide 93

Income Coverage • Fidelity insurance • Business income insurance • Assessment fees receivable insurance • Extra expense insurance

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Income Exposures to Loss Be sure to apply the risk management decision-making process to all sources of income for your community association. Review the association’s revenue & expense statement and budget to determine its sources of revenue.

Income Insurance Coverages and Endorsements Common insurance coverages and endorsements for income exposures to loss include: 1. Fidelity insurance: This insurance protects against employee dishonesty which may lead to the theft of money, securities, or property. For the community association, this coverage must insure all persons (e.g. board members, committee members, volunteers, community manager) who handle funds whether they are salaried or not. Often fidelity insurance will be combined with the CPP. Fidelity insurance limits are often set by GSE standards. The GSEs, with appropriate controls, require three months of assessments, but best practices suggest three months of assessments plus the reserve funds. Caution: Be sure the association has its own fidelity coverage (independent of your management company’s policy). The management company should also be covered under the association’s policy, as well as any unpaid volunteers; these provisions should be written into the policy. 2. Business income insurance: This insurance covers the loss of certain types of business income. It can be used to cover rental income when the community association owns and rents out a unit. It can be used to cover the loss of income if an income-producing clubhouse or vending machines should they be destroyed by a covered loss in the CPP. 3. Assessments receivable insurance: This insurance actually has a certain limited value. It applies to situations in which a covered loss happens to the property (for example, a fire destroys a unit) and the community association is unable to collect assessments from the owner. Housing cooperatives can protect their assessments through “Loss of Rents” coverage, a type of business income. Assessments receivable insurance does not provide coverage for assessments lost because an angry owner withholds payment. Requirements for an insurance payment to be made first include that a covered loss occurred, and the unit owner still has a legal obligation to pay the assessment and unsuccessful collection efforts having been made by the association. The insurance company may attempt to collect from the owner the funds paid to the association under this claim. 4. Extra expense insurance: There is usually a certain amount of this coverage in the CPP. It is useful to consider the community association’s income exposure as a net exposure to loss because both lost revenue and increased operating expenses may be insurable. This insurance applies when a covered loss either increases operating expenses or diminishes the income produced by normal operations. An example would be the extra expense of a temporary office, temporary equipment, or temporary help, all of which may be needed if the community association’s onsite office was destroyed by fire.

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Module 3: Facilities Management Income Risk Management Issues Here are some common risk management issues related to income exposures to loss: • Dealing with income loss exposures primarily requires sound financial practices. Does your management company require and practice: o Separation of duties for recording income and paying expenses? o Multiple signatures on bank and investment accounts? o Monthly reconciliations of bank statements with financial reports? o Performance of an independent compilation, review, or audit of every managed association?

Income Insurance Contract Issues One of the primary forms of insurance coverage in this area is fidelity insurance. People often will use the words “fidelity bond” to refer to fidelity insurance. Here is a helpful chart for determining what sources of revenue can be insured: Source of Revenue 1. Assessments 2. Interest income on reserves 3. Fines and penalties 4. Club house or unit rentals 5. Vending machines 6. Washer/Dryers 7. Restaurant or golf pro shop

Insurance Availability Sometimes, in a policy called "Assessment Fees Receivable" Not insurable Not insurable Insurable as Business Income Insurable as Business Income Insurable as Business Income Insured as Business Income



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Insurance Coverages, continued Say 4. Personnel coverage. • •

Workers’ compensation Employers’ liability o All work-related injuries and death o Every community association should consider obtaining workers’ compensation and employers’ liability insurance o Associations should carry workers’ compensation and employers’ liability insurance even if they do not have employees—an independent contractor could be classified as an association employee or the contractor could allow his workers compensation insurance to lapse and one of his employees is injured on the association’s property.

Slide 94 Personnel Coverage • Workers’ Compensation insurance • Employers’ Liability insurance

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Module 3: Facilities Management Personnel Exposures to Loss In this section, personnel exposures to loss are limited to loss of services due to injuries received while working on behalf of the community association. This section will not address medical, dental, hospital, life, disability, pension, or retirement coverage. Traditional personnel exposures to loss involve death, disability, retirement, unemployment, and resignation.

Personnel Insurance Coverages and Endorsements Common insurance coverages and endorsements for personnel exposures to loss include: • Workers’ compensation insurance: State statutes determine the classes of employees to be insured and coverage for loss of services due to employment-related injuries. In most states, the actual insurance is obtained from commercial insurers. Coverage for associations with no employees is rated on an "if any employee" basis and usually is a minimum premium. • Employers’ liability insurance: Commercial insurers include employers’ liability insurance with workers’ compensation protection. Employers’ liability provides protection for claims made by injured employees (and their spouses) for certain types of liability that is excluded in the CGL. Every community association should consider obtaining workers’ compensation and employers’ liability insurance.

Personnel Risk Management Issues The key risk management issue for personnel exposures to loss is the question of whether a person is an employee or an independent contractor for the community association. The determination of whether someone is an employee or an independent contractor is often left to the state agency that administers the workers’ compensation program or to the courts. An independent contractor may inadvertently become the community association’s employee if the association controls some significant aspects of the work such as work hours, what to repair and when, and tools provided by the association. Community associations should always consider carrying workers’ compensation and employers’ liability insurance on an “if any” employee basis, even if it does not have employees on its books (see below).

Personnel Insurance Contract Issues Here are some common insurance contract issues related to minimizing a community association’s personnel exposures to loss: 1. Every commercial general liability (CGL) policy contains an exclusion for claims that should otherwise be covered under applicable state workers’ compensation statutes. 2. Volunteers, including directors and officers, can only be insured through workers compensation if the state statute permits such coverage. If coverage of volunteers under workers’ compensation is permitted and desired, a volunteer will be covered at a salary level the state agency applies to the person’s activities even though that employee receives no actual remuneration.


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The Bidding Process Say The manager’s role in the bidding process is one of coordination and should include each of the following: • • • •

Selecting agents to request to bid Distribution of the specifications and bid form Collection of the bid forms Preparation of a bid comparison form

The manager’s role in the bidding process should not include creation and approval of the bid request form or determining the types and limits of coverage. The board of directors should decide what coverages and amounts should be purchased. The manager can give recommendations but should not make the final decision. If needed, an independent insurance counselor should be hired to assist the board of directors in making their decision. CAI strongly recommends that associations retain a professional to conduct an insurance appraisal to ensure that the association is not over- or under-insured. Managers should evaluate agents/brokers in terms of their— • • • • • •

Experience Specialty in the field Knowledge of community associations Claims processing history Participation in professional and trade associations, such as Community Associations Institute Professional standing, types of insurance licenses, or bonding

Be sure to point out the sample Comparison of Bids form on the following pages.

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The Bidding Process Slide 95



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Community Association Insurance Programs This last section of the lesson discusses: • Basic components of a community association insurance program • Insurance claims • Relationship between community association insurance coverage and owner coverage

Basic Components of a Program The three components of a community association insurance program that require a manager’s attention are the bidding process, program maintenance, and program evaluation.

1) The Bidding Process When you solicit bids for insuring your community association in any area of coverage, be sure to do so in a way that will allow you to review and evaluate the bids in a systematic manner. Evaluate agents/brokers in terms of their— • Experience • Specialty in the field • Knowledge of community associations • Claims processing history • Participation in professional and trade associations, such as CAI • Professional standing, types of insurance licenses, bonding Four important designations in the insurance field are: 1. Chartered Property and Casualty Underwriter (CPCU) 2. Associate in Risk Management (ARM) 3. Certified Insurance Counselor (CIC) 4. Community Insurance & Risk Management Specialist (CIRMS), a designation conferred by CAI If more than one agent/broker wants to use the same insurer, the insurer will usually ask you to designate which agent to represent the insurance company by signing an agent-of-record letter or a broker-of-record letter.

2) Program Maintenance Insurance coverage is on an annual basis, typically called a policy period. Different policies will have different “annual renewal dates.” It is necessary for a manager to maintain a chronological schedule of the coverage inception dates for the association’s various policies. This will prevent policy lapses through oversight. Whenever possible, all policies should have the same expiration date.

3) Program Evaluation A community association should assign a specific person, committee, employee, manager or consultant the responsibility of handling the bidding process. The dynamic, technical nature of insurance issues requires conscientious attention to an association’s insurance program in order to protect its assets. Some CC&Rs and bylaws require that an insurance trustee be appointed for the community association in the event of a property loss in excess of some given amount.

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Page 298 Sample Comparison of Bids Form

Sample Comparison of Bids Form _________________________________ Association Insurance Proposals Effective Date: _____________, 12:01 a.m.

Description

A

B

C

Agent Insurer Rating

Property Coverages Bldg. Limit Bldg. Deductible

$ $

$ $

$ $

Replacement Cost

Yes

No

Yes

No

Yes

No

Guaranteed Replacement Cost

Yes

No

Yes

No

Yes

No

Special Form Agreed Amount

Yes Yes

No No

Yes Yes

No No

Yes Yes

No No

Yes Yes Yes

No No No

Yes Yes Yes

No No No

Yes Yes Yes

No No No

Yes Yes

No No

Yes Yes

No No

Yes Yes

No No

Yes

No

Yes

No

Yes

No

Broad Form Water: Sewer/Drain Backup Wind-Driven Rain Exterior Damage required Surface Water Leakage/Seepage Building Glass: Deductible Limit per Pane Limit per Loss

$ $

$ $

$ $

Hint: A complete comparison [or bid] would list all the property coverages sought, as well as coverages for all liability, income, and personnel exposures to loss the community association wants to insure.


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Insurance Claims Say Any possible claim that could have an adverse impact on the association should be reported to the insurance company. Neither the board nor the manager should decide whether there is coverage for a claim or not. It should be submitted to the insurance company for their determination, and rejection, if no coverage is available. The manager should coordinate all insurance claims. For complex claims such as a large fire loss, the board may need to hire a public adjuster. If the manager becomes involved in the oversight and supervision of property restoration due to an insurance claim, the manager or management company should receive additional compensation or assistance for the extra, unplanned work which is not covered in the management contract’s day-to-day operations of the association.

Review the following tips about filing insurance claims: • • •

• •

•

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Every insurance contract has its own requirements for filing claims. If these requirements are not met, the insurance company could void the coverage for the claim. Any possible claim that could have an adverse financial impact on the community association should be reported to the insurer. If the claim is not acted upon or reported immediately, it can be denied or refused at a later time. For example, if an owner threatens to sue over a perceived injustice, the manager should report the conversation to the association’s insurance agent. Claims may require the filing of formal proofs of loss, such as: challenges to elections, claims of misappropriation of funds, etc. The preservation of life and property are paramount concerns in any insurance contract. Do not hesitate to minimize further loss; it is incorrect to believe that “nothing can be touched until the adjuster arrives.” Claims involving liability issues should be sent to the insurance company without any admission of negligence on the insured’s part.



Module 3: Facilities Management Insurance Claims A management company should specifically designate someone to be in charge of filing and monitoring claims, so that requirements are met and reports are made in a timely fashion. Here are some important tips about filing insurance claims: • Every insurance contract has its own requirements for filing claims. If these requirements are not met, the insurer could void the coverage for the claim. • Any possible claim that could have an adverse financial impact on the community association should be reported to the insurer. • Claims may require the filing of formal proofs of loss. • The preservation of life and property are paramount concerns in any insurance contract. Do not hesitate to minimize further loss; it is incorrect to believe that “nothing can be touched until the adjuster arrives.” • Claims involving liability issues should be sent to the insurance company without any admission of negligence on the insured’s part.

Relationship Between Community Association and Owner Insurance Coverages The community association’s insurance agent should provide an explanation of the interaction between the association’s insurance coverages and those of the individual owner. This explanation should be given directly to the owners by mail, newsletter, or meeting. No matter what type of association is involved, the governing documents and the applicable state statute must be reviewed when preparing an explanation. The nature of the explanation usually varies with the type of association involved. Condominiums and cooperatives usually have to explain where the building coverages interface with the unit’s coverages—the interface between the common elements and the units. For example, who insures the finished interior surfaces? Are improvements and betterments, such as floor and wall coverings, covered by the association or the owner? How is the owner protected under the association’s insurance? An even more precise question is: What is excluded from the policy? If it’s not excluded, it’s included. In a planned community, the focus is reversed. How is the community association protected from the owner? How can the association be sure that the owner is carrying insurance on his or her residence? Some planned communities, however, insure the buildings and units as though they are a condominium. Check your association’s governing documents to make sure such coverage is authorized! Terminology: Terminology varies with insurer, but homeowner (HO) policies are usually referred to by the following numbers: • HO-1, HO-2, HO-3, and HO-5 refer to policies for owner-occupied single-family homes • HO-4 is a tenant’s policy • HO-6 is a policy specifically for a condominium or cooperative unit owner


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Summary Say You have learned: • • •

• •

About controlling potential risks for loss in your community association by using risk management techniques, including the purchase of insurance coverage. About different types of community association insurance. That your role in the insurance bidding and purchasing process is to assist the board of directors. You should never decide on the amount, limits or type of coverages to be purchased. That you should coordinate all insurance claims on association policies and use experienced insurance professionals, if needed, for complex issues. To always seek the advice of a competent insurance agent regarding any risk management or insurance questions or concerns that you or the board of directors may have.


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Module 3: Facilities Management Once again, review the Key Terms with the participants.

Key Terms: • • • • • • • • • • • • • • • • • • • • • • • • • •

Actual cash value (ACV) Advertising injury Aggregate amount Agreed amount endorsement Assessments receivable insurance Bodily injury (BI) Building ordinance insurance Business income insurance Claims made coverage Coinsurance Commercial general liability insurance (CGL) Commercial umbrella insurance Common declarations Contingent liability Contractual transfers Covered cause of loss Deductible Demolition Directors & officers liability insurance Electronic data processing (EDP) Employers’ liability insurance Exposure avoidance Extra expense insurance Fidelity insurance Flood insurance Hired & non-owned automobile liability insurance

• • • • • • • • • • • • • • • • • • • • • • • • • •

HO-1,-2,-3,-4,-5,-6 policies Income exposure to loss Increased cost of construction Inflation guard endorsement Insurable replacement cost Insurance Liability exposure to loss Loss prevention Loss reduction Mechanical equipment breakdown insurance Medical payments Occurrence Ordinance law insurance Personal injury (PI) Personal property Personnel exposure to loss Property damage (PD) Property exposure to loss Real property Risk control Risk management Segregation of exposures Waiver of subrogation Waiver of the transfer of recovery rights Workers’ compensation & employers’ liability insurance Wrongful acts



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Focus Questions Use the following questions to help you identify and review the core concepts in this lesson. (Hint: Once you look up the answer to a question, you may want to jot down the page number next to the question for future reference.) 1. Explain risk management and risk control. 2. List the five steps in the risk management decision-making process. Illustrate each step with an example that could be applied to your community associations). 3. What are the four types of accidental loss to which a community association is exposed? 4. List some different ways to identify a community association’s exposure to possible loss. Give an example of each that could be applied to your community association(s). 5. Name and define four different risk control activities. Give an example of each that could apply to your community association(s). 6. List the different sources of community association insurance requirements. 7. What are some examples of real property that your community association owns? 8. What are some examples of personal property that your community association owns? 9. What endorsements are needed for full insurable replacement cost coverage for property? 10. List some types of insurance that commonly provide coverage for a community association’s property exposures to loss. Explain how they differ in their coverage. 11. What does liability consist of for a community association? 12. What are the four basic types of liability claims that can be made? Give an example of each. 13. List some types of insurance that commonly provide coverage for a community association’s liability exposures to loss. Explain how they differ in their coverage. 14. What types of claims does directors and officers liability insurance cover? What types of claims does it not insure against? 15. List some types of insurance that commonly provide coverage for a community association’s income exposures to loss. Explain how they differ in their coverage. 16. Explain the key risk management issue for a community association’s personnel exposures to loss. 17. List the two related types of insurance that commonly provide coverage for a community association’s personnel exposures to loss. Explain how they differ in their coverage. 18. What are some criteria that should be used to evaluate an insurance agent or broker? 19. Why is it necessary to maintain a chronological schedule of the coverage dates for a community association’s various policies? 20. Why is it necessary to explicitly assign someone responsibility for the bidding and review processes for an association’s insurance program? 21. List some important tips for filing insurance claims for a community association. Explain why each is important. 22. What is the difference in emphasis between condominiums or cooperatives and planned communities when explaining the relationship between community association and owner insurance coverages?

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Thought/Discussion Questions Use the following questions to help you apply the information in this lesson to a community association you manage. 1. How would you determine exposures to loss for each of the following: • Property • Liability • Income • Personnel 2. Keeping the four types of exposure to loss in mind: • What exposures to loss has the community association decided to self-fund—whether purposefully or through inaction? • What exposures to loss has the community association financed by means of insurance? 3. What insurance requirements are set for the community association by: • The governing documents • Applicable federal regulations • Any state statutes • Applicable local and federal laws 4. Does the community association have any exposures to loss that it has identified as uninsurable or too expensive to insure? If so, what alternative means of risk control and has it adopted? 5. Does the community association know the insurable replacement cost valuation for its property? What is it? How recent is it? 6. Which of the insurance contract issues for property exposures to loss are issues the community is addressing or needs to address? 7. What insurance coverages and endorsements does the community association have for property exposures to loss? 8. What insurance coverages and endorsements does the community association have for liability exposures to loss? 9. What risk management techniques does the community association apply to its internal financial practices? 10. What risk management techniques are used by any organizations (such as management company, bank, or investment firm) that handle their community association’s funds? 11. What insurance coverages and endorsements does the community association have for income exposures to loss? 12. What insurance coverages and endorsements does the community association have for personnel exposures to loss? 13. What bidding process does your management company use to obtain insurance? Can you think of any ways to improve the process? 14. Does the association have a chronological schedule of the coverage dates for its various insurance policies? If not, can you set one up? 15. What procedures has your management company set up for evaluating its associations’ ongoing insurance program? Can you think of any ways to strengthen its procedures? 16. Does your management company have any written or unwritten policies and procedures for filing and monitoring insurance claims? If so, what are they? If not, what are some basic policies and procedures to begin with? 17. What is the relationship between the community association’s insurance coverages and its owners’ coverages? (Hint: If you can’t find any written explanation, ask the association’s agent or broker.)


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Lesson 3 Quiz 1. Which of the following types of exposure to loss for a community association is characterized by net losses that may involve a reduction in income or an increase in operating expenses or both? a. property exposure to loss b. liability exposure to loss c. income exposure to loss d. personnel exposure to loss RATIONALE: There are four types of accidental loss to which a community association is exposed. Income exposures to loss are net losses that may involve a reduction in income or an increase in operating expenses or both. 2. Which of the following demonstrates the risk control technique of exposure avoidance? a. a community association rule prohibiting the use of alcohol in the clubhouse b. conducting weekly fire safety inspections where flammables are stored c. contracting for landscape services d. backing up all computer files and storing the backup files in a separate place RATIONALE: Exposure avoidance involves avoiding the circumstances that would expose the community association to certain type of loss. For example, to avoid problems with serving alcohol in the clubhouse, the community association has a rule prohibiting the use of alcohol in the facility. 3. True or false. The insurance industry is unregulated at the state level. (False) RATIONALE: The insurance industry is a highly regulated legal environment at the state level. Insurers are either admitted or non-admitted at the state level: both, if licensed, can write insurance, but only admitted insurers are eligible for state guarantee funds if the insurer becomes insolvent. Nonadmitted insurers are often called Excess & Surplus (E&S) Lines insurers. The insurance industry is highly regulated at the state level in terms of policy forms and rates, claims practices, financial operations, and other basic business practices. 4. Commercial package policies contain all of the following EXCEPT: a. common declarations b. a selection of forms c. claim form d. glossaries RATIONALE: Community associations purchase commercial package policies (CPP), sometimes called “package policies,” which combine property and liability insurance—and possibly other insurance coverages. All commercial package policies contain common declarations, common policy conditions, a selection of forms, optional endorsements, and glossaries. Claim forms are not included in the commercial package policies.

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Lesson 3 Quiz, cont’d 5. True or false. The Federal National Mortgage Association (FannieMae) has a direct impact on community association insurance obligations. (True) RATIONALE: The Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) are government sponsored enterprise, or GSEs. Both GSEs buy mortgages from lenders and in doing so require certain types of insurance to be in place, thus impacting community association insurance obligations. 6. Which of the following is not a common insurance coverage and endorsement for property exposures to loss? a. commercial package policy (CPP) insurance b. boiler and machinery insurance c. flood insurance d. hired and non-owned automobile liability insurance RATIONALE: Common insurance coverages and endorsements for property exposures to loss include commercial package policy insurance, boiler and machinery insurance, building ordinance insurance, flood insurance, and electronic data processing. Hired and non-owned automobile liability insurance, a common insurance coverage and endorsement for liability exposures to loss, covers legal claims arising out of the use of automobiles that are not owned by the community association, but that are used while acting on behalf of the association. 7. True or false. Employers’ liability insurance provides protection for claims made by employees regarding sexual harassment or discrimination. (True) RATIONALE: Employers’ liability provides protection for claims made by injured employees (and their spouses) for certain types of liability that is excluded in the CGL. Every community association should consider obtaining employers’ liability insurance. 8. Which terminology for the following homeowner policies is for a condominium or cooperative unit owner? a. HO-6 b. HO-4 c. HO-1 d. HO-2 RATIONALE: Terminology varies with insurer, but homeowner (HO) policies are usually referred to by the following numbers: HO-1, HO-2, HO-3, and HO-5 refer to policies for owner-occupied units, HO-4 is a tenant’s policy, and HO-6 is a policy for a condominium or cooperative unit owner. 9. True or false. The preservation of life and property are paramount concerns in any insurance contract. (True) RATIONALE: There are certain important things to consider when filing insurance claims. Included among these are that every insurance contract has its own requirements for filing claims, any possible claim that could have an adverse economic impact on the community association should be reported to the insurer, claims may require the filing of formal proofs of loss, and the preservation of life and property are paramount concerns in any insurance contract.


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Additional Resources For further information on risk management and insurance, we suggest the following: Insurance: How Community Associations Protect Themselves, A Guide for Association Practitioners, by Clifford J. Treese, CPCU, ARM and Katharine Rosenberry, Esq. What are your association’s insurance obligations? What’s available, and how much do you really need? A comprehensive overview of an important topic. (Community Associations Institute, 2006.) Risk Management: How Community Associations Protect Themselves, A Guide for Association Practitioners, by Clifford J. Treese, CPCU, ARM. This informative guide explains how to manage risk and implement a risk management program. Learn why insurance alone isn’t enough to control risk. Addresses the growing risks for community associations in the Internet age, and how to integrate replacement reserves and risk management programs. (Community Associations Institute, 2006.) Community Insurance and Risk Management Specialist™ (CIRMS™)— designation, offered by CAI, recognizes a demonstrated high level of competency within the risk management profession. This designation is useful for managers and community board members looking for qualified professionals to help them protect their most valuable investments. Before Disaster Strikes: Developing an Emergency Procedures Manual. How to minimize or prevent injury, loss of life and property damage; developing emergency plans, teams and manuals; evaluating security systems and evacuation plans; creating a public relations effort and much more. Includes a CD-ROM of resource materials. (IREM, 2004.) Natural Disasters: How Community Associations Protect Themselves, A Guide for Association Practitioners, Outlines how to prepare residents for natural disasters and catastrophes resulting from mechanical breakdown or equipment failure—how to begin, analyze needs, develop a workable plan and familiarize all residents with its execution. (Community Associations Institute, 2006.) Tips for Community Association Insurance. A handy brochure to help associations define insurance needs, outline steps for buying property and liability insurance, and ease the insurance buying process. (Community Associations Institute.)

Take a Lunch Break for 1 hour

Transition to Module 4: Community Management and Leadership

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Module 4: Community Management and Leadership Focus How to:  Inform and guide your community’s owners and volunteers. 

Successfully perform your role as community manager and leader.

Time 3 hours and 45 minutes (total) 








Overview This section of the program will cover:  Your role and responsibilities as a manager in relation to the roles and responsibilities of your community’s owners and volunteer leaders (Community Management—Lesson 1) 

The effective use of board meetings for decision-making (Board Meetings and Decision Making—Lesson 2)



Management ethics (Ethics—Lesson 3)

Materials Needed

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PowerPoint slides

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LCD projector

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Remote advancer

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Flip chart


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Slide 96

Module 4: Community Management and Leadership Focus How to: • Inform and guide your community’s owners and volunteers. • Successfully perform your role as community manager and leader.

96


Slide 97 Community Management and Leadership This section of the program will introduce you to: • Your role and responsibilities as a manager in relation to the roles and responsibilities of your community’s owners and volunteer leaders (Community Management—Lesson 1) • The effective use of board meetings for decision making (Board Meetings and Decision-Making— Lesson 2) • Management ethics (Ethics—Lesson 3) 97


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Lesson 1: Community Management


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Lesson 1: Community Management Goal At the end of this lesson, students will be able to understand their fundamental role as the manager of a community association, including their relationship with the volunteer leadership, the members, the staff, and various contractors and vendors. They will also understand the necessary components of a management contract and/or employment agreement, and the human resources issues that affect community associations. The students will value the usefulness of written personnel guidelines and job descriptions, as well as understand that there are numerous laws that affect employee recruitment, compensation, evaluation, and termination. Time 1 hour and 35 minutes Session Time Breakdown 55 minutes—Faculty presentation 15 minutes—Class exercise 15 minutes—Work group exercises 10 minutes—Summary/quiz

Overview This session should be of great interest to the novice manager. It may prove to be another of many “awakenings” the manager may encounter in this course. You may find students who currently perform tasks that they should not be. It is not uncommon for novice managers to be acting as a “surrogate” board by making decisions that should only be made by the directors. You may find managers performing extraordinary tasks outside their stated and expected scope of duties. It will be important to make sure every manager employed directly as a manager of an association understands the need to have an employment agreement with the association. This is to protect the manager from the “clean-sweep” mentality that unfortunately occurs too often in community associations. The manager’s employment—and compensation—should not be subject to the whims of volunteers without appropriate deliberation and notice.

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Lesson 1: Community Management You are encouraged to provide only a cursory review of human resources issues and current labor and wage laws at the end of this lesson. Chances are that most students do not supervise a large staff and will not need to know a great deal of exact detail about personnel management. You should emphasize throughout this session that personnel laws and regulations are constantly changing and that they may vary greatly from state to state. You should encourage the students to always seek help from an attorney or personnel specialist any time they have questions or concerns. They should be encouraged to seek help before they make decisions rather than trying to correct a problem once it has occurred. This session has both class and work group exercises to analyze documents, problems, and situations and arrive at a recommended solution or plan of action. While the exercise will provide a break to the session and probably some levity as well, it should be considered a serious learning experience. Suggested answers to the exercises are provided for you; however, you may find class discussion and work group recommendations to provide equally sound answers. Materials Needed 

LCD projector



Remote advancer

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Flip chart


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The topic of this session is the manager’s role in the community association and the principles by which the manager should perform the appropriate duties.



The manager’s role is of critical importance to the community, yet it requires the manager to work within limitations imposed by others, thereby potentially making it more difficult to succeed.

Overview the session Say We will discuss:

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

The role of the community association manager in dealing with volunteer leaders, members, staff, and contractors.



The duties a community association manager should be able to perform and, equally important, those tasks which a manager should not agree to perform—and how to explain to the board your role in the community.



How to review management contracts and employment agreements to make sure all necessary components are included for your success and protection.



The role of the community manager in overseeing an association’s human resources program.


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Slide 98



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Key Terms: • • • • • • • • • • • • •

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Ad hoc committee Association-employed manager Board liaison system Business judgment rule Employee handbook Employment agreement Employment at will Fiduciary duty Human resources management Job description Management Management audit Management contract

• • • • • • • • • • • •

Management plan Mandatory committee Performance evaluation Performance goals Performance planning Performance standards Personnel manual Progressive discipline system Standing committee Transition Turnover Volunteer or self-management

Leadership and Management A good leader is defined as someone people choose to follow. An effective leader will elicit more productivity from their followers than the followers intended to give. This can be accomplished by providing effective communication, creating a vision for success and building loyalty and trust. In general a leader creates a vision, sets a course, and makes sure everyone is on board. An association board of directors selects a management company because they want leadership and guidance in the operations of their community. A manager is defined as a person with the responsibility and authority to direct operational activities of the team by executing and implementing the leadership plan and scheduling resources. In general, a manager’s responsibility is to make sure that which has been promised is delivered. The purpose of this lesson is to give the relatively new community association manager a clear understanding of his or her leadership and managerial roles and responsibilities in relation to the roles and responsibilities of owners and volunteer leaders. To accomplish this purpose, the lesson explains the: • Legal basis for community association management • Role and responsibilities of the: o Owners o Board of directors o Committees o Manager

What You Will Learn After completing this lesson, you should be able to explain and understand the: • Legal basis for community management • Role and responsibilities of owners • Role and responsibilities of the board of directors • Board’s fiduciary duty • The “business judgment rule” • Role and responsibilities of committees • Role and responsibilities of a manager • Manager’s fiduciary duty • Three management options and their advantages and disadvantages

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Module 4: Community Management and Leadership • • • • •

Management contract and employment agreement Management plan Management evaluation Managing developing communities Human resources management

Legal Basis for Community Management The government, business, and community managed activities of a community association are defined by: 1. State statutes 2. Court decisions and appellate court cases 3. Community association governing documents, including: o Declaration, CC&Rs, master deed, proprietary lease, or occupancy agreement o Articles of incorporation (if incorporated) o Bylaws o Rules and regulations All three types of legal sources specify the: • Authority or power of different parties in a community association • Responsibilities or duties of the different parties In this section of the lesson, we will examine some of the basic authority and responsibilities given to the community association itself by various legal sources. In turn, the authority and responsibilities are delegated to specific parties within the community association to carry out on its behalf. The legal or governing documents typically empower and charge community associations to: • Levy and collect assessments to fund operations • Enter into contracts • Maintain the common areas • Enforce the restrictions in the governing documents • Provide services to the members • Employ a manager or contract for services with a management firm • Create rules and regulations • Enter into litigation • Fund various replacement reserves • Invest funds • Consult with professional advisors • Comply with federal, state, and local government requirements • Obtain insurance coverage • Adopt and approve operating budgets • Contract with independent professionals to conduct periodic review or audit of community association financial records Because the community operates as an incorporated or unincorporated legal entity, its legal sources also specify procedures in such areas as: • Elections • Meetings • Basic operations (for example—budget preparation, hiring of employees) • Record maintenance • Composition of the board and officers


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Everyone Has a Role in the Operation of the Community Association The owners Say The basic authority in a community association lies with the owners. •

The owners’ role is to participate in the association and to vote to elect representatives or amend the governing documents.

•

The owners delegate the decision-making responsibilities of the association to their chosen or selected representatives—the board of directors.

Review with the class the various methods for obtaining owner input. •

Resident/owner forum at board meetings

•

Participation of owners on committees

•

Annual membership meeting

•

Newsletters and surveys

•

Internet access/online surveys

Review some of the rights and responsibilities of owners in a community association as outlined in Rights and Responsibilities for Better Communities.

Ask participants if they have any questions or comments about the role of the owners in a community association.

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Everyone Has a Role in the Operation of the Community Association Slide 99 Role of the Owner • Elect and remove directors • Amend any of the governing documents, except board resolutions • Approve special assessments or capital improvements • Not veto board decisions

99



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Introduction to Roles and Responsibilities In this section of the lesson, we will discuss the roles and responsibilities of a community association’s: • Owners • Board of directors • Committees

Role and Responsibilities of Owners The basic authority in a community association lies with the owners. In order for the association to govern effectively, the owners elect a board of directors to act on their behalf. The governing documents delegate most of the association’s decision-making powers to a board. This leaves the owners with very few direct powers. Typically, they have only the voting power to: • Elect and remove directors • Amend any of the governing documents, except board resolutions • Approve special assessments or capital improvements Occasionally, owners vote to approve the association’s annual budget. Generally, other daily operating and policy decisions are left to the board. As a result of the authority placed with the board, it may be necessary for you, as the manager, to educate and remind your owners of their role in the association. If they do not like a board decision, they should attend a board meeting or otherwise communicate their position to the board, although they usually do not have any authority to “veto” or “undo” the board’s action. Under such conditions, their only remedy is to elect a new board or replace specific board members. At the same time, the board has an obligation to establish communication, to listen to the owners’ concerns and to take those concerns into consideration in making its decisions. Formal means for obtaining owner input include the: • Resident/owner forum at board meetings • Participation of owners on committees • Annual membership meeting • Newsletters and surveys • Internet access/online surveys Just as a board has the responsibility to encourage owner input via these means, owners have the responsibility to use these means to make their views known.

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Module 4: Community Management and Leadership Owners have the responsibility to: 1. Read and comply with the governing documents of the community. 2. Maintain their property according to established standards. 3. Treat association leaders honestly and with respect. 4. Vote in community elections and on other issues. 5. Pay association assessments and charges on time. 6. Contact association leaders or manager, if necessary, to discuss financial obligations and alternate payment arrangements. 7. Request reconsideration of material decisions that personally affect them. 8. Provide current contact information to association leaders or manager to help ensure they receive information from the community. 9. Ensure that those who reside on their property (e.g., tenants, relatives, and friends) adhere to all rules and regulations. Owners have the right to: 1. A responsive and competent community association. 2. Honest, fair, and respectful treatment by community leaders and managers. 3. Participate in governing the community association by attending meetings, serving on committees, and volunteering to serve on the board. 4. Access appropriate association books and records. 5. Prudent expenditure of revenue. 6. Live in a community where the property is maintained according to established standards. 7. Fair treatment regarding financial and other association obligations, including the opportunity to discuss payment plans and options with the association before foreclosure is initiated. 8. Receive all documents that address rules and regulations governing the community association before closing on the home. 9. Appeal to appropriate community leaders those decisions affecting nonroutine financial responsibilities or property rights.



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Everyone Has a Role in the Operation of the Community Association, continued The board of directors Say The board is ultimately responsible for operating the community association on behalf of the owners. •

As the representatives of the owners, the board of directors has the obligation to solicit and listen to owner input.

•

Their role is to establish policy and to delegate the implementation of their adopted policy to their manager.

•

The board of directors cannot delegate its responsibility for everything that occurs in their community. They are ultimately responsible for all actions and activities.

Association boards of directors play various roles in the community and have numerous responsibilities. The role of the board of directors is to:

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•

Act in the best interests of the association

•

Be responsive to the needs and desires of the owners

•

Be familiar with the governing documents, state statutes and federal laws that impact the association

•

Enforce the governing documents fairly and uniformly.

•

Set the policies, standards, procedures, programs, and budgets for the community association.

•

Not micromanage the manager, volunteers, contractors, and other service providers.


Leader Guide


Everyone Has a Role in the Operation of the Community Association, continued Slide 100

Role of the Board • Act in the best interests of the association • Be responsive to the needs and desires of the owners • Be familiar with the governing documents, state statutes and federal laws that impact the association • Enforce the governing documents fairly and uniformly • Set the policies, standards, procedures, programs, and budgets for the community association • Not micromanage the manager, volunteers, contractors, and other service providers 100



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Role and Responsibilities of Board of Directors The board of directors is charged with the ultimate responsibility and authority for operating the community association on behalf of its owners. The board’s legal authority to act on the owners’ behalf typically is found in: • Specific state statutes establishing condominiums, cooperatives, or planned communities. These specific statutes may set broad guidelines within which a board may act or may list specific responsibilities that it must meet. • General state statutes that provide for the general authority and responsibilities of all corporate boards of directors such as the nonprofit or not-for-profit corporation act. • Uniform state statutes that, similar to specific state statutes, set broad guidelines for the management and operations of community associations. • Community association governing documents which give the board authority to act on the owners’ behalf. Typically, this authority is found in the declaration, articles of incorporation, and/or bylaws. A board of directors cannot delegate its responsibility for everything that happens in their community. While the board can delegate authority, it can never delegate its responsibility.

Role It is the role of a board to: 1. Always act in the best interests of the association. 2. Be responsive to the needs and desires of the owners. 3. Be familiar with the governing documents, state statutes and federal laws that impact the association. 4. Establish and enforce the governing documents fairly and uniformly. 5. Set the policies, standards, procedures, programs, and budgets for the community association. 6. Not micromanage the manager, volunteers, contractors or other professional service providers. A board may implement its own decisions—or delegate implementation to a manager, committees, or an independent contractor.


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Everyone Has a Role in the Operation of the Community Association, continued Say The board of directors is responsible for: •

The care and enhancement of the common property and protection of property values

•

Management of the financial operations

•

Risk management, including purchasing insurance

•

Establishing and enforcing community rules

•

Human resources management

•

Preservation and promotion of community harmony

Slide 101


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Everyone Has a Role in the Operation of the Community Association, continued Slide 102

Ask students to briefly review the complete list of rights and responsibilities of a board member as outlined in their Participant Guides.


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Module 4: Community Management and Leadership Responsibilities Legal sources typically assign a board of directors the responsibility to maintain, protect, preserve, and enhance the common areas home values. Areas of responsibility include: • Care, maintenance, and enhancement of the physical property, common areas, and facilities • Management of community finances and developing reserve funds • Risk management, including obtaining insurance • Establishment, enforcement, and interpretation of rules and regulations • Human resources management of employees and volunteers • Preservation and promotion of community harmony The board of directors is also responsible for establishing and revising, whenever necessary, the community association’s mission statement, shortrange plans, and long-range plans to reflect changing conditions and demographics of the residents. This helps to bond the community in a common goal. Additionally, board members have the responsibility to: 1. Fulfill their fiduciary duties to the community and exercise discretion in a manner they reasonably believe to be in the best interests of the community. 2. Exercise sound business judgment and follow established management practices. 3. Balance the needs and obligations of the community as a whole with those of individual owners and non-owner residents. 4. Understand the association’s governing documents and become educated with respect to applicable state and local laws, and to manage the community association accordingly. 5. Establish committees or use other methods to obtain input from owners and non-owner residents. 6. Conduct open, fair, and well-publicized elections. 7. Welcome and educate new members of the community—owners and nonowner residents alike. 8. Encourage input from residents on issues affecting them personally and the community as a whole. 9. Encourage events that foster neighborliness and a sense of community. 10. Conduct business in a transparent manner when feasible and appropriate. 11. Allow owners access to appropriate community records, when requested. 12. Collect all monies due from owners and non-owner residents. 13. Devise appropriate and reasonable arrangements, when needed and feasible, to facilitate the ability of individual residents to meet their financial obligations to the community. 14. Provide a process that residents can use to appeal decisions affecting their non-routine financial responsibilities or property rights—where permitted by law and the association’s governing documents. 15. Initiate foreclosure proceedings only as a measure of last resort. 16. Make covenants, conditions, and restrictions as understandable as possible, adding clarifying “lay” language or supplementary materials when drafting or revising the documents. 17. Provide complete and timely disclosure of personal and financial conflicts of interest related to actions of community leaders, e.g., officers, the board, and committees.


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Rights Board members have the right to: 1. Expect owners and non-owner residents to meet their financial obligations to the community. 2. Expect residents to know and comply with the rules and regulations of the community and to stay informed by reading materials provided by the association. 3. Respectful and honest treatment from residents. 4. Conduct meetings in a positive and constructive atmosphere. 5. Receive support and constructive input from owners and non-owner residents. 6. Personal privacy at home and during leisure time in the community. 7. Take advantage of educational opportunities (e.g. publications, training workshops) that are directly related to their responsibilities, and as approved by the association.


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Everyone Has a Role in the Operation of the Community Association, continued Discuss a board’s fiduciary relationship to the community association. Explain the concept of the business judgment rule and how this applies to a community association board member.

Slide 103



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Fiduciary duty A board has a fiduciary relationship to the community association. Fiduciary duty requires directors to act in the best interests of the community as a whole, and for the benefit of the corporation. This fiduciary duty has two components: 1. Board members are required to avoid conflicts of interest and acting out of self-interest. 2. They are also required to act as reasonable people in managing the association’s affairs. Although they may delegate some of their authority to others, they cannot delegate their legal obligation to protect the asset that is the total community. It is the board that is ultimately responsible for the management of the association. The board can direct or empower the manager to take certain actions on behalf of the community association. However, the board is still responsible to the owners. Through court decisions, a substantial body of law has developed concerning the standards to which directors must conform while conducting a community association’s affairs. Courts apply the business judgment rule to a board’s actions. That is, if a board has exercised reasonable due diligence in making a decision, the court will generally not consider the board negligent in its fiduciary duty. Nor will the court substitute its judgment for that of the board. However, the board must demonstrate how it reached a decision with good faith, loyalty and due care. It is up to the court to decide if the board has exercised reasonable business judgment.


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Everyone Has a Role in the Operation of the Community Association, continued Committees Say The role of committees is to assist the board of directors by providing a broader base of owner involvement and input. •

Some committees may be required (mandatory committees).

•

The manager should carefully review the governing documents to determine if any requirements exist.

Slide 104 Types of Committees • Mandatory o Required by the governing documents o Typical mandatory committees: - Elections - Nominations - Architectural standards 104



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Everyone Has a Role in the Operation of the Community Association, continued Say 

Other committees may be created at the discretion of the board of directors.

– There may be “standing” committees that meet some ongoing need of the community—such as the newsletter committee. – There may also be “ad-hoc” committees or tasks forces that meet some specific need and are then dissolved—such as a lobby refurbishing committee.

Slide 105 Types of Committees, continued •

Standing o Ongoing to meet a basic community need o For example: - Budget/finance - Social - Newsletter o Established by board resolution

•

Ad Hoc o One-time issue o Established by board resolution 105


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Role and Responsibilities of Committees Usually a community association’s bylaws—and sometimes its declaration—will: • Name certain committees that are required • Allow for the appointment of other committees that may be required from time to time

Role Community association committees typically consist of owners appointed by the board of directors. The role of these committees is to: • Assist the board in meeting its responsibilities • Broaden the community’s input on decisions by serving as a: o Means of gathering owners’ opinions and attitudes o Training ground for future leaders o Means of explaining board actions to the community • Perform research and prepare recommendations for the board, not act on recommendations instead of the board The number and type of committees will depend on the size of the community, willingness of the volunteers and the complexity of its activities. The more activities a community is involved in, the more a board may need additional groups to collect information, develop recommendations, and carry out activities.

Responsibilities A mandatory committee is one that is required by the governing documents. Mandatory committees typically are assigned responsibilities related to: • Elections • Nominations • Architectural Standards If the bylaws do not name certain committees that the board has determined it needs on an ongoing basis, an administrative resolution should be used to create a standing committee. These committees meet a basic community association continuing need. Examples of typical standing committees that are not mandated include: • Budget/finance • Grounds • Social/welcome • Newsletter • Recreation, pool, or swim team • Public relations • Rules/dispute resolution


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Everyone Has a Role in the Operation of the Community Association, continued Say Frequently, committees do not function properly, do not complete their assignments, or worse—assume too much power, acting like shadow boards of directors. For committees to be successful, they must operate within the following parameters: • Committee members must understand that they serve at the direction of the board in only an advisory capacity. All decisionmaking remains with the board of directors. •

A committee with independent authority, such as a mandatory Architectural Control Committee, must have an established appeals process to permit access to the board of directors.

•

Committees must have specific, written job descriptions, called committee charters, which outline their roles and responsibilities.

•

Committees should have meeting minutes that include recommendations to the board of directors.

•

Committee members must be given meaningful tasks, adequate guidance to complete their tasks, consideration of their recommendations, and recognition of their performance.

Slide 106 Guidelines for Successful Committees • Serve in an advisory capacity • Have an appeals process, if needed • Have specific job descriptions • Keep minutes and make recommendations

• Have meaningful tasks • Have guidance to complete tasks • Consideration of their recommendations • Recognition of their work

106

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Module 4: Community Management and Leadership In addition, a board has the authority to appoint ad hoc committees to explore single issues. (For example parking regulations, development of investment guidelines, or renovation of a lobby.) The purpose of an ad hoc committee is to deal with a one-time issue and make recommendations to the board within a specific time frame. The board should use a resolution to establish an ad hoc committee and clearly state the charge and expected outcome to the committee. A board and its committees must communicate effectively with one another. For example, a committee representative should prepare written reports with any recommendations in time be included in a board packet prior to the board’s meeting. Some boards use a board liaison system. Directors are assigned to certain committees to observe and report back to the board on activities and committee dynamics. Associations that use the board liaison system occasionally have directors that need help distinguishing their observation role from their role as a committee chairperson. The committee chairperson runs the committee while the director acts as a non-voting advisor and observer. Having a volunteer other than a board member chair a committee provides that volunteer with an opportunity to learn or improve on leadership skills that will enable him or her to later serve well on the board of directors.

Guidelines for Successful Committees Successful committees tend to operate within the following guidelines: 1. Ad hoc and standing committees serve at the pleasure and direction of the board in an advisory capacity, and can be disbanded at a board directive. 2. Any committee with independent authority—such as an architectural control committee—has an established appeals process to permit access to the board as the ultimate authority and decision body for the community. 3. Committees have specific job descriptions which outline their roles and responsibilities. 4. Committees keep minutes of their meetings and submit their recommendations to the board in written form to ensure that the recommendations are included in any report to the board. 5. Committees are given: o Meaningful tasks o Adequate authority to complete the tasks o Serious consideration of their recommendations o Public recognition for their performance 6. Committee meetings should be open to all members with date, time, and location published in accordance with notice provisions of the governing documents.


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Role and Responsibilities of the Manager Say The role of the manager is to: • Provide information, training, and leadership on community association operations to the board, committees, and the community at large •

Foster a sense of community awareness and spirit within the residents

•

Develop a body of leadership through the committee structure

•

Provide the necessary administrative tools to the board to enable it to make wise, informed decisions on both short-term and long-term actions and goals

•

Facilitate board meetings

•

Provide practical, technical and administrative advice

Slide 107 Role of the Manager • Provide information, training, and leadership on community association operations to the board, committees, and the community at large • Foster a sense of community awareness and spirit within the residents • Develop a body of leadership through the committee structure • Provide the necessary administrative tools to the board to enable it to make wise, informed decisions on both shortterm and long-term actions and goals • Facilitate board meetings • Provide practical, technical and administrative advice 107

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Role and Responsibilities of the Manager Emphasize that: •

The manager is charged with assisting the board of directors’ decision-making process by means of providing informationgathering and fact-finding support, implementing the decisions of the board, and administering the services, programs, and operations of the community association within the policies and guidelines set by the board.

•

The manager must work within the policies established by the board, the management contract, state statutes and court decisions. The board may delegate its authority to the manager to act on its behalf in certain instances; however, the board can never delegate its responsibility for making decisions to the manager.

Say There are limitations to the manager’s authority and responsibilities that are defined in several different sources. •

The governing documents of the association will define the duties of the board of directors and which of those duties may or may not be delegated to the manager.

•

The management contract or employment agreement should establish the scope and duties of the manager, including limitations of the manager’s authority.

•

The board of directors may place additional limitations on the manager.

The manager must be aware at all times of the limitations imposed by these documents and the board of directors.


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Introduction to Manager’s Role and Responsibilities This section of the lesson discusses: • Role and responsibilities of the manager • Three management style options and their comparative advantages and disadvantages • Management contract and employment agreement • Management plan • Management evaluation

Role and Responsibilities of the Manager The role of a professional community association manager is to: • Provide information, training, and leadership on community association operations to the board, committees, and the community at large • Foster a sense of community awareness and spirit within the residents • Develop a body of leadership through the committee structure • Provide the necessary administrative tools to the board to enable it to make wise, informed decisions on both short-term and long-term actions and goals In fulfilling the terms of his or her management contract and employment agreement, the professional community association manager is charged with assisting the board of directors’ decision-making process by means of providing information-gathering and fact-finding support; implementing the decisions of the board; and administering the services, programs, and operations of the community association within the policies and guidelines set by the board. A manager’s authority and responsibility are defined and limited by: • Governing documents which define the authority of the board to enter into a contract. Some governing documents also require the board to retain a professional manager. • The manager’s management contract or employment agreement with the board • Actions of the board which delegate specific authority and duties to the manager. (The board is ultimately the decision maker for the community association.) • Court cases • State statutes

IMPORTANT NOTE Agency Relationship Between the Board and the Manager The manager is considered an agent and is required to represent the best interest of the community association (client). This is different from an independent contractor who is responsible for providing the services, but is generally not working as an extension of the community association, as is the case with a manager.

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Class Exercise Allow 15 minutes for this Class Exercise.

Run the Class Exercise. Review the sample bylaws from Bayview Towers to find the duties and limitations of the manager. List at least five (5) limitations or prohibitions placed on the manager by these documents. Allow 10 minutes for students to complete their review and compile a list. Then, discuss the exercise (5 minutes). Note that the manager’s duties and limitations were easily located and identifiable in Article 3.2 of the bylaws. Ask a student to give the class one of the limitations found during the review. Continue with other students with each providing a limitation until all the following answers are covered. Answers: The manager is prohibited from the following tasks as noted in Article 3.2(b) of the sample documents. • Make assessments against the owners. •

Establish the collections policy.

•

Establish installment payments of the annual assessment.

•

Adopt and amend rules and regulations.

•

Open bank accounts.

•

Designate the bank signatories. Note this does not say that the manager cannot be a signatory on the account; it states the manager cannot designate who is a signer.

•

Borrow money on behalf of the association.

•

Acquire, hold, mortgage, and dispose of units.

•

Designate common elements as limited common elements.

•

Grant and accept easements.


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Class Exercise The manager is prohibited from the following tasks, unless instructed otherwise by the board of directors, as noted in Article 3.2(c) of the sample documents: • Commingling the association’s bank accounts with any other entity’s accounts. •

Accepting commissions or fees from vendors or contractors.

Note that Article 3.2, in describing the manager’s duties and limitations, refers to the powers and duties of the board of directors in Article 3.1—which provides a list of those board duties that may and may not be delegated to the manager. The manager may not engage in the actions noted above in the class exercise. However, note that subsections of Article 3.1 have not been identified in Article 3.2 as either an allowed or prohibited duty of the manager. Pose this scenario to the class and ask how they would handle the omission. Answer: Have the board of directors adopt an administrative resolution authorizing the manager to deal with the master association. Since this provision is not included in Article 3.2’s itemized list of prohibitions, it falls under subsection (t) which provides for such other things as authorized by resolution.


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Module 4: Community Management and Leadership Class Exercise Review the sample bylaws from Bayview Towers to find the duties and limitations of the manager. List at least five (5) limitations or prohibitions placed on the manager by these documents. 1. 2. 3. 4. 5.

_______________________________________________ _______________________________________________ _______________________________________________ _______________________________________________ _______________________________________________

Sample Bylaws Bayview Towers ARTICLE 3 Board of Directors Section 3.1. Powers and Duties. The Board of Directors shall have all of the powers and duties necessary for the administration of the affairs of the Bayview Towers Condominium Association and may do all such acts and things as are not by the Condominium Act or the condominium instruments required to be exercised and done by the Association. The Board of Directors shall delegate to one of its members or to a person employed for such purpose the authority to serve as liaison to the managing agent and to act on behalf of the Board on such matters relating to the duties of the managing agent (as defined in Section 3.2) if any, which may arise between meetings of the Board as the Board deems appropriate. In addition to the duties imposed by these Bylaws or by any resolution of the Association that may hereafter be adopted, the Board shall on behalf of the Association: (a) Prepare and adopt an annual budget, in which there shall be expressed the assessments of each unit owner for the common expenses. (b) Make assessments against unit owners to defray the costs and expenses of the Condominium, establish the means and methods of collecting such assessments from the unit owners and establish the period of the installment payment of the annual assessment for common expenses. (c) Provide for the operation, care, upkeep and maintenance of all of the Property and services of the Condominium. (d) Designate, hire, and dismiss the personnel necessary for the maintenance, operation, repair and replacement of the common elements and provide services for the Property and, where appropriate, provide for the compensation of such personnel and for the purchase of equipment, supplies and material to be used by such personnel in the performance of their duties, which supplies and equipment shall be deemed part of the Property. (e) Collect the assessments against the unit owners, deposit the proceeds thereof in bank depositories designated by the Board of Directors, and use the proceeds to carry out the administration of the Property.


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(f) Adopt and amend any rules and regulations in accordance with Section 5.8(b); provided, however, that such rules and regulations shall not be in conflict with the Condominium Act or the condominium instruments. (g) Open bank accounts on behalf of the Association and designate the signatories hereon. (h) Make, or contract for the making of, repairs, additions and improvements to or alterations and restoration of the Property, in accordance with these Bylaws, after damage or destruction by fire or other casualty, or as a result of condemnation or eminent domain proceedings. (i) Enforce by legal means the provisions of the Declaration, these Bylaws and the rules and regulations, act on behalf of the unit owners with respect to all matters arising out of any eminent domain proceeding, and notify the unit owners of any litigation against the Association involving a claim in excess of ten percent of the amount of the annual budget. (j) Obtain and carry insurance against casualties and liabilities, as provided in Article 6, pay the premiums therefore and adjust and settle any claims thereunder. (k) Pay the cost of all authorized services rendered to the Association and not billed to unit owners of individual units or otherwise provided for in Sections 5.1 and 5.2. (l) In accordance with section 55-79.74:1 of the Condominium Act, keep books with detailed accounts in chronological order of the receipts and expenditures affecting the Property, and the administration of the Condominium, specifying the expenses of maintenance and repair of the common elements and any other expenses incurred. Such books and vouchers accrediting the entries therein shall be available for examination by the unit owners, their attorneys, accountants, Mortgagees and authorized agents during general business hours on business days at the time and in the manner set and announced by the Board of Directors for the general knowledge of the unit owners. All books and records shall be kept I accordance with generally accepted accounting principles, and the same shall be audited at least once each year by an independent auditor retained by the Board of Directors who shall not be a resident of the Condominium. The cost of such audit shall be a common expense. (m) Notify a Mortgagee of any default hereunder by the unit owner of the unit subject to such Mortgage, if such default continues for more than sixty days. (n) Borrow money on behalf of the Condominium when required in connection with any instance relating to the operation, care, upkeep and maintenance of the common elements; provided, however, that (except during the Declarant Control Period) either a Majority Vote obtained at a meeting duly called and held for such purpose in accordance with the provisions of these Bylaws or the written approval of unit owners of units to which more than fifty percent of the votes in the Association appertain, shall be required to borrow any sum in excess of twenty percent of the total annual assessment for common expenses for that fiscal year. If any sum borrowed by the Board of Directors on behalf of the Condominium pursuant to the authority contained in this subsection (a) is not repaid by the Association, a unit owner who pays to the creditor a percentage of the total amount due equal to such unit owner's Common Element Interest in the Condominium shall be entitled to obtain from the creditor a release of any judgment or other lien which such creditor shall have filed or shall have the right to file against such unit owner’s condominium unit, and the Association shall not be entitled to assess the unit for payment of the remaining amount due such creditor. (o) Acquire, hold and dispose of condominium units and mortgage the same without the prior approval of the Association if such expenditures and hypothecation are included in the budget adopted by the Association.



Module 4: Community Management and Leadership (p) In its sole discretion, from time to time, designate certain common elements as Reserved Common Elements and impose such restrictions and conditions on the use thereof as the Board of Directors deems appropriate. (q) Grant and accept easements through or over the common elements in accordance with section 55-79.80B of the Condominium Act. (r) Upon receipt of such payment as may be established by the Board of Directors in compliance with section 55-79.97 of the Condominium Act, furnish the, statement required by section 55-79.97 of the Condominium Act within ten days after the receipt of a written request therefore from any unit owner, substantially in the form set forth on Exhibit A to these Bylaws and designated “'Certificate of Resale.” (s) Act on behalf of the Association with respect to rights and obligations arising out of the Declaration for The Virginia Master Association. (t) Do such other things and acts not inconsistent with the Condominium Act or the condominium instruments that the Board of Directors may be authorized to do by a resolution of the Association. Section 3.2. Managing Agent. The Board of Directors shall employ for the Condominium a “managing agent” at a compensation to be established by the Board. (a) Requirements. The managing agent shall be a bona fide business enterprise, unaffiliated with the Declarant, which manages common interest residential communities. Such firm or its principles shall have a minimum of two years experience in real estate community management and shall employ persons possessing a high level of competence in the technical skills necessary for proper management of the Condominium. The managing agent must be able to advise the Board of Directors regarding the administrative operation of the Condominium and shall employ personnel knowledgeable in the areas of condominium insurance, accounting, contract negotiation, labor relations and condominium regulation. (b) Duties. The managing agent shall perform such duties and services as the Board of Directors shall direct. Such duties and services may include, without limitation, the duties listed in subsections (a), (c), (d), (e), (h), (i), (j), (k), (l), (m), (r) and (t) of Section 3.1. The Board of Directors may delegate to the managing agent all of the powers granted to the Board of Directors by these Bylaws other than the powers set forth in Subsections (b), (f), (g), (n) (o), (p), and (q) of Section 3.1. The managing agent shall perform the obligations, duties, and services relating to the management of the property, the rights of Mortgagees and the maintenance of reserve funds in compliance with the provisions of these Bylaws. (c) Standards. The Board of Directors shall impose appropriate standards of performance upon the managing agent. Unless the managing agent is instructed otherwise by the Board of Directors: (1) The accrual method of accounting shall be employed and expenses required by these Bylaws to be charged to more than one but less than all unit owners shall be account for and reported separately; (2) Two or more persons shall be responsible for handling cash to maintain adequate financial control procedures; (3) Cash accounts of the Bayview Towers Condominium Association shall not be commingled with any other entity’s accounts. (4) No remuneration shall be accepted by the managing agent from vendors, independent contractors or others providing goods or services to the Association whether in the form of commissions, finder’s fees, service fees or otherwise; any discounts received shall benefit the Association;


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5) Any financial or other interest which the managing agent may have in any firm providing goods or services to the Association shall be disclosed promptly to the Board of Directors; and (6) A monthly financial report shall be prepared for the Association containing: (A) A “revenue statement” reflecting all income and expense activity for the preceding period on an accrual basis; (B) An “account activity statement” reflecting all receipt and disbursement activity for the preceding period on a cash basis; (C) An “account status report” reflecting the status of all revenue and expense accounts in an “actual” versus “projected” (budget) format; (D) A “balance sheet” reflecting the financial condition of the Association on an unaudited basis; (E) A “budget report” reflecting any actual or pending obligations which are in excess of budgeted amounts by an amount exceeding the operating reserves or ten percent of a major budget category (as distinct from a specific line item in an expanded chart of accounts); and (F) A “delinquency report” listing all unit owners who are delinquent in paying condominium assessments and describing the status of any actions to collect such assessments. (d) Limitations. During the Declarant Control Period, the Board of Directors shall employ a managing agent for an initial term not to exceed one year. The Association and the Board of Directors shall not undertake “selfmanagement” or fail to employ a managing agent without the consent of at least sixty-seven percent of the unit owners and at least fifty-one percent of the Mortgagees. Any contract with the managing agent must provide that it may be terminated, without payment of a termination fee, without cause on no more than ninety days written notice and with cause on no more than thirty days written notice. Section 3.3. Number and Term of Office. (a) Designated Members. During the Declarant Control Period, the Declarant shall be entitled to designate directors not elected pursuant to Section 2.4. The initial Board of Directors shall consist of no less than three and no more than five persons, all of whom shall be designated by the Declarant. The term of office of at least two directors shall expire at the third annual meeting after the special meeting held pursuant to Section 2.4(b); the term of office of up to two additional directors shall expire at the second annual meeting after the special meeting held pursuant to Section 2.4(b); and the term of office of any other directors shall expire at the first annual meeting after the special meeting held pursuant to Section 2.4(b). The term of each designee shall be fixed by the Declarant. The persons elected shall serve for the remainder of the terms of office of the resigning directors who such persons replace, or if no resignation was required, for the terms of office necessary so that the term of office of onethird of the directors shall expire at each of the first three annual meetings after their election. The directors receiving the greatest vote shall be elected for the longest available terms. At the expiration of the term of office of all directors designed by the Declarant or elected at the special meeting held pursuant to subsection (b) of Section 2.4, all successor directors shall be elected to serve for a term of three years. For a period of one year following the termination of service by the directors designed by the Declarant, the Declarant may appoint and replace from time to time a representative who shall be entitled to notice of all meetings of the Board of Directors and to attend and speak (but not vote) at all Board meetings, in all respects as if such delegate were a member of the Board.

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Module 4: Community Management and Leadership (b) Elected Members. No later than the first annual meeting of the Bayview Towers Condominium Association after the special meeting held pursuant to Section 2.4(l), the Board of Directors shall be composed of five persons, all of whom shall be unit owners, Mortgagees (or designees of Mortgagees) or designees of the Declarant. An elected director shall serve for a term of three years unless elected to fill a vacancy, in which case such director shall serve as provided in Section 3.6. Except for resignation or removal, the directors shall hold office until their respective successors shall have been elected by the Association. Section 3.4. Election of Directors. (a) Elections Committee. At least sixty-five days prior to the special meeting required by subsection (b) of Section 2.4 and each annual meeting of the Bayview Towers Condominium Association thereafter, the Board of Directors shall appoint an Elections Committee consisting of a member of the Board whose terms is not then expiring and at least two other unit owners. The Elections Committee shall develop election procedures and administer such procedures as are approved by the Board providing for election of directors by ballot of the unit owners at annual meetings and, where appropriate, special meetings. (b) Nominations. Persons qualified to the directors may be nominated for election only by a nominating petition submitted to the chairman of the Elections Committee at least thirty-five days before the meeting at which the election is to be , signed by persons owning fee simple interest in and representing in the aggregate at least ten units and either signed by the nominee or accompanied by a document signed by the nominee indicating the willingness to serve as a director; provided, however, that additional nominations may be made from the floor at the meeting at which the election is held for each vacancy on the Board of Directors for which no more than one person has been nominated by petition. The nominee must either be present and consent to the nomination or have indicated in writing the willingness to serve. This subsection (b) does not apply to persons appointed to the Board by the Declarant. (c) Qualifications. No person shall be eligible for election as a member of the Board of Directors unless such person is (alone or together with one or more other persons) a unit owner, a Mortgagee (or a designee of a Mortgagee) or a designee of the Declarant. No person affiliated with a unit owner nor any unit owner shall be elected as a director or continue to serve as a director if such person is more than sixty days delinquent in meeting financial obligations to the Association and a lien has been filed against such person’s unit. Section 3.5. Removal or Resignation of Directors. Except with respect to directors designated by the Declarant, at any regular or special meeting of the Bayview Towers Condominium Association duly called, any one or more of the directors may be removed with or without cause by a Majority Vote of the unit owners (as defined in Section 1.3(e)) and a successor may then and there be elected to fill the vacancy thus created. Any director whose removal has been requested by the unit owners shall be given at least seven days notice of the time, place and purpose of the meeting and shall be given an opportunity to be heard at the meeting. A director may resign at any time (i) in person at a meeting of the Board or the Association or (ii) by giving written notice to an Officer. Resignation of a director is effective when delivered unless the notice specifies an effective date that is not more than thirty days after the date of the notice. Except for directors who are designees of the Declarant, a director shall be deemed to have resigned automatically and without notice upon disposition of the unit which made such person eligible to be a director as provided for officers in section 55-79.78A of the Condominium Act, or if not in attendance at three consecutive regular meetings of the Board, if the minutes reflect the Board’s removal of such director for such absence.


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Different Forms of Management Say There are three types of community management. 1. Volunteer management. The community association is managed by volunteer members of the board and association. 2. Association-employed manager. An individual is directly employed by the association. 3. Management company. The manager is a representative of a firm contracted by the association.

Emphasize that:

Slide 108

•

Each community association must decide which form of management—or possible combination of methods—best meets its need.

•

Review the advantages and disadvantages of each method.

Forms of Management

• Volunteer • Association-Employed Manager • Management Company

108

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Different Forms of Management Briefly describe the different types of community association managers: •

Portfolio managers

•

Onsite managers

•

Large-scale managers

•

High-rise managers

•

Managers of mixed-use developments

•

Managers of developing communities



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Three Forms of Management There are three forms of community association management: 1. Volunteer or self-management—The community association is managed by the board itself or by committees under the direction of the board. 2. Association-employed manager—The manager is directly employed by the community. 3. Management company—The community association engages a management company to provide specific management services. The community manager and staff are employees of the management firm. Each community association must decide for itself which form of management best meets its current needs. Occasionally, a community association may decide to combine more than one form of management. Following you will find a comparison of the advantages and disadvantages of each of the three forms—in terms of cost, continuity, and professionalism. As a manager, use this information to advise your board. There are also various types of community association managers, including: • Portfolio managers • Onsite managers • Large-scale managers • High-rise managers • Managers of mixed-use developments • Managers of developing communities


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The Management Contract Say The management contract should be used to formalize the agreement between the community association and a management company. There are various provisions that should be included in all management contracts: 1. Contracting parties. The parties should be clearly defined and include corporate structure, such as ABC Management Company, a Texas corporation. There should be a clause stating that both parties intend to enter into the contract. 2. Chain of command or lines of authority. The contract should provide for management to communicate with and take direction from only one designated representative of the community association—typically the president. 3. Responsibilities of management. The contract should clearly describe management’s authority, responsibilities, functions, and duties (including property maintenance, administrative services, and fiscal services). 4. Insurance. The contract should specify the minimum limits of insurance to be provided by both the association and management. 5. Term of agreement. The contract should specify the length of its term, which is typically one to five years. 6. Termination. The contract should have some type termination provision to allow either party to terminate the contract after adequate notice provisions. 7. Indemnification and hold harmless provision. The contract should require the community association to indemnify, defend, and hold harmless the management firm for any claims against it as a result of the actions of the association or the board of directors. 8. Compensation. The compensation for management services must be included in the contract, as well as any additional charges for reimbursements or additional fees for specific services, such as transfer fees.


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The Management Contract Slide 109

Provisions of a Management Contract • Contracting parties • Chain of command • Responsibilities of management • Insurance

• Terms of agreement • Termination • Indemnification and hold harmless • Compensation

109

Discuss the importance of reading and knowing the management contract.

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•

The management contract outlines your job responsibilities, i.e., what you are supposed to do.

•

Extra pay for services: Your community may be required to pay extra fees for any services you perform over and above what is delineated in the management contract.



Module 4: Community Management and Leadership Management Contract and Employment Agreement If a community association hires a manager or a management firm, there should be an agreement or contract to formalize the relationship. An employment agreement is used for an association-employed manager and a management contract is used for a management firm. The agreement or contract should contain all of the basic components of a legal contract and: • Specify the manager’s authority and duties • Establish a clear chain of command (For example—after a board makes a decision, the president must direct the manager to implement the decision before he or she can do so.) • Provide for the manager’s compensation and termination • Be signed by authorized representatives of both parties—the community association and the “manager” Managers employed by a management company with questions about their responsibilities to their associations under their individual management contracts should seek advice from their respective management company. The following discussion describes the management contract and employment agreement in more detail.

Typical Management Contract Provisions Here are some typical provisions to look for in a management contract: 1. Contracting parties—The contracting parties should be clearly defined. There should be a clause stating that both parties intend to enter into the contract. 2. Chain of command or lines of authority—The contract should provide for management to communicate with the community association primarily through one designated liaison appointed by the board—for example, the board president. 3. Responsibilities of management—The contract should describe management’s authority, responsibilities, functions, and duties. It usually divides them into the following categories: o Property maintenance—This involves responsibility for the common elements or areas and for any other property that the community association has an obligation to maintain in terms of:  Site visits to the property  Arranging for maintenance, repairs, and replacement  Responding to emergencies  Bidding and contracting for services (see Module 3, Lesson 2) o Administrative services—This involves responsibility for such services as:  Maintaining the community association’s records  Preparing materials for and organizing and participating in meetings of the community association, the board, and any committees  Managing the community association’s employees and contractors  Providing guidance and advice to the board and to the community association on policy issues


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Fiscal services—This involves responsibility for such services as:  Preparation of the annual budget  Depositing association funds and developing effective assessment collection and accounts payable procedures  Maintenance of the community association’s fiscal records in accordance with recognized and acceptable procedures  Preparation of regularly scheduled financial statements and reports  Risk management and insurance o General support—This involves responsibility for such services as:  Preparation of a periodic newsletter  Dealing with and assisting sellers and prospective buyers  Dispute resolution/rules enforcement 4. Insurance—The contract should specify the minimum limits of various types of insurance to be carried by both the association and the management firm. 5. Term of agreement—The contract should specify the length of its initial term—generally one to five years. (Some governing documents limit the length of management company contracts.) 6. Termination—Most contracts also have some type of termination provision. It allows either or both parties the right to terminate the contract at anytime, with or without cause, with a certain number of days’ notice—typically 60 days. o

The management firm needs to provide the association with enough time for a new management company to perform the financial management functions—if the agreement were to be terminated. 7. Indemnification and hold harmless provision—Most contracts include a provision indemnifying and holding harmless the management firm, with certain limitations. According to the definition in Module 1, Lesson 1, to indemnify and hold harmless a management firm is to exempt it from responsibility for claims made against the association (with certain exceptions) and to agree to reimburse the management firm for damages or expenses it incurs as a result of such claims or thirdparty actions. 8. Compensation—The management compensation, or the method of calculating it, must be specified in the contract or in a fee schedule attached to the contract. The fee schedule should also include any additional charges, such as: • Reimbursement for specific out-of-pocket expenses on behalf of the community association • Charges for specific additional services provided to the community association

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The Employment Agreement Similar to the management contract for management companies, the employment agreement is used to formalize the relationship between the association-employed manager and the community association. Emphasize that every manager employed directly by a community association should have an employment agreement with the association to protect the manager from dramatic changes or whims by a newly-elected board of directors.

Say There are various provisions in an employment agreement similar to those of the management contract; however, there are other provisions as well. The provisions in an employment agreement include: 1. Terms of employment. The agreement should specify the length of its term, which is usually one to three years. 2. Duties and services to be performed. The agreement should clearly describe the manager’s authority, responsibilities, and duties. 3. Compensation. The manager’s compensation, including salary and benefits, should be included as well as provisions for performance reviews and compensation adjustments. 4. Termination procedures. The agreement should include provisions for termination—especially termination without cause. Many times a newly elected board of directors may wish to terminate a manager for personal reasons or personality conflicts. The manager should include adequate protection from this kind of action. 5. Association’s obligation to provide facilities, equipment, and personnel. The association must agree to provide this support for the manager to fulfill the duties and responsibilities of the agreement. 6. Exclusiveness of agreement provisions. The agreement should clearly state that this is the entire agreement between the parties. 7. Waivers or modifications must be in writing. The agreement should not be subject to verbal or oral modifications.


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The Employment Agreement 8. Applicable legal sources. The agreement should set forth any references to applicable laws of the state in which the association is located. 9. Nondisclosure of confidential information. It is appropriate that the agreement contain a provision that the manager will not disclose confidential or proprietary information about the association. 10. Notice provisions. The agreement should include what type of notice must be given to each party and the delivery address for such notice. Slide 110 Provisions of an Employee Agreement • Terms of employment • Duties and services to be performed • Compensation • Termination • Association’s obligations

• Exclusiveness of agreement • Modifications only in writing • Applicable legal sources • Nondisclosure of confidential information • Notice provisions 110


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Module 4: Community Management and Leadership Employment Agreement An employment agreement between an association-employed manager and the association typically includes: • Terms of employment, including beginning and ending date • Duties and services to be performed • Compensation • Notice and termination procedures • Statement of association’s obligation to provide appropriate facilities, equipment, and personnel to permit the efficient and orderly conduct of the association’s business, management, operation, and administration • Statement of exclusiveness of agreement provisions: This is a statement that the written agreement is the sole and entire agreement between the two parties with respect to its subject matter • Statement that any waivers or modifications of the agreement must be in writing between each of the parties • Applicable legal sources • Confidentiality or nondisclosure of information: This is a statement to the effect that the employee will not disclose confidential or proprietary information belonging to the association • Provision for notices to one another

Management Plan A management plan is a statement of goals and objectives approved by the board. It includes the yearly cycle of tasks that management should perform on the community association’s behalf. Whether you are a manager who is employed by your community or by a management company, you should have a management plan so you and your board are clear on what is expected of you. In most instances, it will be up to you to propose a plan to your board for approval. Set your goals for the year in relation to your community association’s budget. Typically, a management plan includes tasks that address the community association’s governance, business, and community operations: • Rules enforcement (for example—violations of the association documents or rules) • Property maintenance (for example—site visits, repairs, preventive maintenance, bidding, scheduling replacements) • Services (for example—grounds, trash or snow removal, security systems, opening the pool) • Communications (for example—flyers, newsletters, websites) • Finances (for example—budgets, collections, payables, financial reports) • Administration (for example—prepare correspondence and meeting notices, conduct annual meetings and elections, maintain records and personnel files) • Asset protection (for example—insurance, audits, security) • Policy development (for example—assist board to award contracts, select professional assistance [such as attorney and accountant], and develop standard operating procedures) The regular board meeting should periodically be used to monitor, adjust, and review the annual management plan.


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Management Evaluation It is necessary for a board to evaluate management performance, as well as to monitor it. Because interpersonal relationships are involved, it is important that objective criteria be used. The management plan and specific information from the management contract or employment agreement should establish this basic criteria. Typical means are the: • Owner/resident survey • Management audit A management audit, similar to the Case Study which is the last CAI course before achieving the PCAM designation, consists of a review of: • Governing documents and existing policies and procedures • Current condition of the property • Owner/resident satisfaction • Fiscal operations This review can be done by the board and manager together, or a third-party management consultant can be hired. Here are some warning signs of a weak management situation that a management audit may bring to light or that is apparent even without an audit: • An increase in assessment delinquencies that is not due to a poor economy • An increase, instead of a decrease, in the list of action items for management carried over from one board meeting to another • An increase in owner attendance at board meetings and in complaints about poor service • An increase in the response time for maintenance of common elements or areas • Contractor or employee performance becomes “sloppy” and employees become “defensive” when questioned • Board members start resigning for “personal reasons” • An unusually large number of owners volunteer to run for the board because they “have an ax to grind” • An unusually high turnout at a general or annual meeting—which is not related to some other issue Any one of these items by itself may or may not indicate a management failure. But don’t let matters slide! When one of these situations develops, investigate it as soon as possible and as objectively as you can. In addition, if the demands of the community association and the board of directors are unreasonable or exceed the manager’s ability to perform the required services, it is the manager’s responsibility to communicate this to the board before it creates a weak management situation.

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Run the Work Group Exercise activity. Three work group exercises are described here. Divide the class into work groups of 3 to 6 persons depending upon the size of the class and assign an exercise to each group. (Feel free to assign the same exercise to multiple groups.) Allow approximately 10 minutes for the work groups to complete their exercise. After the work groups have completed the exercises, have them share the problem and recommended solution with the remainder of the class (5 minutes).

Work Group Exercise #1 Review the employment agreement. Describe any weaknesses or strengths you note in the agreement. Answer: Weaknesses: 1. The duties and services to be performed are too general in nature. 2. There is no obligation for the association to provide facilities, equipment, or personnel that will be needed to perform duties. 3. There is no requirement to keep information confidential. Strengths: 1. There is a good compensation and benefits section with performance review and salary adjustments. 2. There are appropriate termination provisions to protect the manager. 3. The agreement includes term of employment, written amendments, and notice provisions.


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Work Group Exercise #1 Review the sample employment agreement. Describe any weaknesses or strengths you note in the agreement. Weaknesses: 1. _________________________________________________________ _________________________________________________________ 2. _________________________________________________________ _________________________________________________________ 3. _________________________________________________________ _________________________________________________________ Strengths: 1. _________________________________________________________ _________________________________________________________ 2. _________________________________________________________ _________________________________________________________ 3. _________________________________________________________ _________________________________________________________

SAMPLE EMPLOYMENT AGREEMENT This agreement is made and entered into as of January 1, 2012, by and between Bayview Towers, a Virginia condominium association (Association) and John Doe (Manager). In consideration of and subject to the mutual terms and conditions of this agreement, both parties agree to the following:

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1.

Employment. Association shall employ Manager as the General Manager of the Association. Subject to the instructions received from the Board of Directors of Association, Manager shall have general operating and management authority with regards to the operation of Association. Manager shall carry out instructions from the Board of Directors relating to hiring, firing and compensation of other employees and shall have all other authority reasonably implied in or incidental to such primary duties and the duties customarily associated with the position of General Manager of Association, including but limited to those duties set forth in the Declaration and Bylaws of Association. In the exercise of authority, Manager shall devote time during regular business hours to the management of the business and operation of Association, shall furnish the Board of Directors with pertinent written reports and information, and shall perform other services as reasonably are prescribed by the Board of Directors.

2.

Salary. Subject to the provisions of this agreement, Manager’s salary from Association shall be _______ per month.

3.

Salary Review. On or before July 1 of each year, Association shall review Manager’s salary to determine whether a salary increase shall be given to him based upon a written performance review and the financial condition of Association.



Module 4: Community Management and Leadership 4.

Benefits. Manager shall receive those benefits listed as “Employee Benefits” in Association’s employee handbook in effect as of the date of this agreement. Manager shall receive one week paid vacation in addition to that authorized by the Association’s employee handbook to compensate for requirements that may occur from time to time to discharge normal duties during evenings, weekends and holidays: Manager shall participate in all other benefits that may be provided by Association to other employees as long as this agreement remains in effect.

5.

Termination for Cause. At any time during the term of Manager’s employment, Association may terminate such employment for cause; provided that Association shall provide Manager a reasonable accounting of the specifics of the cause at least thirty (30) days prior to a special meeting of the Board of Directors called for the exclusive purpose of affording Manager a hearing on alleged cause for termination. Upon a resolution adopted by a majority of the entire membership of the Board of Directors and written notification of the resolution to Manager, the employment, compensation, and benefits provided under this agreement shall terminate. Cause for termination of Manager shall be defined as: • • • •

Manager willfully or negligently refused to perform the duties and responsibilities under this agreement; Manager has committed a crime or other act that resulted in or was intended to result in personal gain of the Manager at the expense of Association; Manager has been convicted of a felony; or Manager has engaged in conduct in conflict with the established policies of the Board of Directors.

6.

Termination Without Cause. At any time during the term of this agreement, Association may terminate Manager for any reason without cause. In such event, Manager shall be provided three (3) months’ notice prior to the termination date. Should Association fail to provide such notice, Manager shall receive compensation for three (3) months including salary and benefits.

7.

Self-Initiated Termination. Manager may voluntarily elect to terminate employment with Association by providing written notice no less than thirty (30) days prior to the date of termination.

8.

Governing Law. The parties agree that the interpretation, construction, enforcement, and validity of this agreement shall be governed by the laws of the state of Virginia and each paragraph hereof is divisible and separable to the extent necessary to preserve the validity and legality of the remainder.


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Page 340 9.

Entire Agreement. This is the entire agreement between the parties. No oral or verbal agreement exists. Any modification must be in writing and agreed to by both parties.

10.

Attorney’s Fees. In the event of any litigation between the parties as a result of the execution of this agreement or any alleged breach thereof, the prevailing party in such litigation shall be entitled to recover reasonable attorney’s fees and reasonable costs of litigation in addition to any other award or decree granted or given by the court.

11.

Notices. Written notice, as required in this agreement, shall be given to each party as follows: To Association: _________________________ _________________________ _________________________ _________________________ _________________________ Or such other address as Association hereafter may direct in writing. To Manager: _________________________ _________________________ _________________________ _________________________ _________________________ Or such address as Manager hereafter may direct in writing.

IN WITNESS WHEREOF, the parties have executed this agreement as of the _____ day of _____ (month and year) _____. ASSOCIATION:

By:

_________________________________________________________

Its:

_________________________________________________________

MANAGER:______________________________________________________

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Work Group Exercises, continued Work Group Exercise #2 After the recent annual meeting and election of two new directors, the board has selected one of the new members as the treasurer. She has many concerns about the financial condition of the association and is concerned that you, the manager, are spending too much money without previous approval. She tells you that she wants you to get her approval on all expenditures in excess of $100.00. What do you tell her? Note: Use the sample management contract as your technical and contractual basis for this answer. However, there are other issues here more than just what you are contractually obligated to do. Answer: Your management contract has three provisions for your assistance. 1. First, your contract calls for all direction to come from the president of the board. 2. Second, the contract has a written spending limit of $1,000.00 per item. 3. And finally, the contract provides for changes only by written consent of both parties. That is the contractual agreement. Further, you need to explain that such a low limit would substantially overburden you in the execution of your duties and would delay prompt response to owner requests and necessary repairs that may result in damage to common elements and unit interiors in the case of roof leaks. You should advise the president of the treasurer’s directions to you and your response. However, there is much more to this situation and its answer. As the manager, you do not want to be technically or contractually correct and still get fired. While it is important to have the protection of a detailed contract, you must address the issue of apparent mistrust of your capabilities. In addition to providing the treasurer with the contract information, time should be spent finding out her specific concerns or fears and how you could alleviate them. Consider an invitation to your office to see how it operates. Find out specific concerns and provide answers to her questions. The point of this exercise is to learn that issues other than the written contract will affect the manager’s role in the association. © 2011 Community Associations Institute

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Work Group Exercises, continued Work Group Exercise #3 Review the management contract. Describe any weaknesses or strengths you note in the agreement. Answer: The contract is very good. All the provisions described during this session are included. The compensation section is particularly good as it clearly defines what is included in the management fee and what extra fees may be charged. There is no concern about potential conflicts here. Also of interest is that all fees for nonrecurring services (the “extras”) can be changed with 30 days notice while the management fee is fixed for the entire term. This allows for a great deal of flexibility; when management company costs increase for charge backs such as postage, copies, or salaries, those increases can be passed on to the association within 30 days, keeping the management company from having to absorb the increased costs. Capture your notes here.

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Module 4: Community Management and Leadership Work Group Exercise #2 After the recent annual meeting and election of two new directors, the board has selected one of the new members as the treasurer. She has many concerns about the financial condition of the association and is concerned that you, the manager, are spending too much money without previous approval. She tells you that she wants you to get her approval on all expenditures in excess of $100.00. What do you tell her? Note: Use the sample management contract as your technical and contractual basis for this answer. However, there are other issues here more than just what you are contractually obligated to do.

Answer:

Work Group Exercise #3 Review the management contract. Describe any weaknesses or strengths you note in the agreement.

Answer:


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SAMPLE MANAGEMENT CONTRACT THIS MANAGEMENT AGREEMENT (“Agreement”) made as of this first day of January 2012 by and between Bayview Towers, a condominium association organized under the laws of the Commonwealth of Virginia (“Association”), and Excellent Management Company (“Agent”), a Virginia Corporation, having its principal office at 123 Main Street, Alexandria, Virginia 22300. WITNESSETH THAT: 1.

Appointment:

In consideration of the mutual terms, covenants and conditions set forth herein below, the Association hereby appoints Agent for certain and specific duties included herein, and Agent hereby accepts that appointment in mutual agreement as to all items listed as part of this Agreement. 2.

Terms:

The commencement date of this Agreement shall be the first day of January 2012 which date shall constitute the time Agent will be required to begin performance of its duties hereunder. This Agreement shall have an initial term of twenty-four (24) months and shall automatically be renewed at the end of the original term for successive terms of one (1) year each unless sooner terminated in accordance with Section 7 of the Agreement. Said renewal is to be upon the same terms and conditions stated herein, unless otherwise amended in writing and approved by both parties. 3.

Liaison with the Board:

Agent shall principally communicate to the Board of Directors (“Board”) and to the Association membership, to the extent practical, through the Board’s appointed liaison. In the absence of an appointed liaison, the President of the Board will be the liaison with the Agent. The Board liaison shall be authorized to act on behalf of the Board with Agent on any matters related to those specific duties of Agent. 4.

Compensation:

The total compensation to which Agent shall be entitled during the terms of this Agreement shall consist of fees for recurring routine services, nonrecurring services and for non-routine services, as stated in the attachments hereto and incorporated herein by this reference. 4.1 (a) Recurring Routine Services: Agent shall be compensated according to the listed schedule(s) listed herein. The current fee will be due and payable on the first of the month. Such compensation includes the overhead expenses of Agent including salaries of employees, general and administrative expenses, and travel expenses of officers and employees incurred under this Agreement, and covers fees for basic services as outlined in this Agreement and attachments hereto.

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Module 4: Community Management and Leadership 4.1 (b) Compensation for Recurring Routine Services: As compensation for its recurring routine service 3 (Attachments A and B), Agent shall receive a Management Fee in the Sum of $3,000 per month. Payment shall be made in advance each month. Said Management Fee shall be included in the operating budget of the Association as a common expense and Agent is hereby authorized to deduct and disburse to itself said Management Fee each month from Association funds collected, received, or held by Agent in its capacity hereunder. If services to be performed hereunder begin or are terminated on a day other than the first day of the calendar month, the Management Fee for such month shall be prorated to the date of such commencement of services or termination on the basis of a thirty (30) day month. 4.2

Non-Recurring Services.

Agent shall perform certain non-recurring services as necessary and in accordance with the fees set forth in Attachment C to this Agreement. Said fees shall be subject to adjustment by Agent from time to time-upon thirty (30) days’ notice to Association. 4.3

Non-Routine Services:

Agent shall maintain an availability for services related to certain nonroutine activities for which the need may or may not arise and which are not specified in this Agreement under any other section. Non-routine service shall be performed with the authorization of the Board or as directed by the Board liaison. Charges for services performed under this section shall be negotiated at the time the work is authorized and Agent is hereby authorized to deduct and disburse to itself; from common funds collected, received, or held by Agent in its authorized capacity hereunder the sums necessary as compensation for said charges. 5.

Agency Relationship:

Everything done by Agent under the provisions of this Agreement shall be done as Agent for the Association and all obligations or expenses incurred thereunder shall be for the account, on behalf of, and at the expense of the Association, except that the Association shall not be obligated to pay overhead expenses of Agent's offsite office including the salaries, office expense and transportation and other expenses of officers and employees of the Agent. Any payments to be made by the Association shall be made out of the funds of the Association, or as may be provided by the Association. Agent shall not be obligated to make any advance to or from the account of the Association or to pay any sum, except out of funds held or provided as aforesaid, nor shall Agent be obligated to incur any liabilities or obligation for the funds for the account of the Association without assurances that the necessary funds for the discharge will be provided. 6.

Documents and Plans:


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Delivery to Agent:

The Association shall deliver to Agent true, complete, and correct copies of all governing documents, financial reports, rules and regulations, minutes and other documents of the Association as the Agent may require. The Association will furnish to the Agent all the available architectural, electrical, mechanical, and other plans of the Association as Agent may request. All such documents shall remain at all times the sole property of the Association and, upon expiration or termination of this Agreement, shall be delivered by Agent to the Association. Records older than two (2) years will be returned to Association for retention or disposal. 6.2

Time of Delivering:

Association shall deliver to Agent, at least twenty (20) days prior to the commencement date stated in Section 2 herein, all current owner records, including ownership, financial and delinquency reports for all units governed by Association. 7.

Termination:

This Agreement may be terminated with no termination or cancellation charge, with or without cause, upon sixty (60) days’ written notice. Said termination may be by either party before the time of expiration specified in Section 2 of this Agreement by written notice to the other party, sent via certified mail or hand-delivered with a signature receipt. 8.

Indemnification:

The Association agrees to indemnify, defend, and save Agent harmless from all suits in connection with the Association and the property and from liability for damages to the property and injuries or death of any employees or other persons whomsoever, other than caused by the willful or grossly negligent conduct of Agent or its employees. The Association further agrees to pay all expenses, including attorney’s fees incurred by Agent in any proceeding or suit involving an alleged violation by Agent, the Board, or the Association, of any constitutional provisions, statute, ordinance, law, or regulation of any governmental body. 9.

Notices:

All Notices and demands of any kind which either party hereto may require or desire to serve upon the other party, under the terms of this Agreement, shall be in writing and shall be served upon such other party by personal service, or by having a copy of such notice or demand served at the address hereinafter set forth, whereupon such service shall be deemed complete, or by mailing a copy thereof by certified or registered mail, postage prepaid, with receipt requested addressed as follows: If to Agent: If to Association:

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Module 4: Community Management and Leadership In case of service by mail, it shall be deemed complete on the day of actual delivery as shown by the addressee’s registry or certification receipt or at the expiration of the third day after the date of mailing, whichever first occurs. The addresses to which notices and demands shall be delivered or sent may be changed from time to time by notice served as hereinabove provided by either party upon the other party. 10.

Miscellaneous Provisions:

10.1

Offices and Facilities:

Agent and its staff are hereby authorized to occupy without charge or expense to Agent, such portions of the Association as Agent and the Board may from time to time determine to be reasonably required to provide office, storage, parking, and related facilities for the exclusive use of Agent and its staff in conducting and performing the services contemplated hereunder. 10.2

Not Responsible for Units:

Except for such repairs to individual units as may be authorized as being necessary to avoid significant risks of loss or injury to other portions of the Project or the occupants thereof, Agent shall have no responsibility for and shall not be required to maintain or repair individual units or any other portion of the project, the maintenance and repair of which are the responsibility of individual unit owners. 10.3

No Partnership:

Nothing contained in this Agreement nor the relationship of Agent and the Association shall be deemed to constitute a partnership, joint venture, or other relationship between the parties hereto except that of principal and agent. 10.4

Attorney’s Fees:

In the event of any litigation between the parties in connection with this Agreement, the prevailing party to such litigation shall be entitled to all costs and expenses, including reasonable attorney’s fees, incurred in connection with such litigation. 10.5

Waiver:

No waiver or breach of any provision contained in this Agreement shall be construed to be a waiver of any subsequent breach of the same provision or waiver of any other provision herein. 10.6

Interpretation:

This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof, supersedes all prior and contemporaneous agreements between the parties hereto with respect to the subject matter hereof and may not be modified, amended, or otherwise changed in any manner, except by a writing executed by the parties so to be charged.


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Termination Procedures: Upon Termination of this Agreement, Agent will: a. Surrender and/or deliver to the Board all papers, books, and records of the Association therefore maintained by agent, including, but not limited to, financial records, insurance policies, and existing contracts relating to the operation and/or maintenance of the Association, together with all keys, materials, supplies, and all funds collected, received or held by Agent, after deducting therefrom any Management Fee or prorated portion thereof, or any other amounts due Agent hereunder; b. Prepare and render to the Association within thirty (30) days after such termination, a written statement accounting for the common funds from the last such written accounting to the date of termination; and c. Use its best efforts to cooperate with the Association to accomplish an orderly transfer of the management and operation of the Association to the party designated by the Board.

10.8

Provisions:

Each of the articles, sections, paragraph, and provisions of this Agreement shall be deemed independent and severable and the invalidity or unenforceability of any article, section, paragraph, or provision hereof shall not affect the validity or enforceability of any other article, section paragraph or provision hereof. The headings of the several articles and sections of this Agreement are inserted solely for the convenience of reference and are not a part of and are not intended to govern, limit, or aid in the construction of any article, section, paragraph, or provision of this Agreement. Wherever the context so requires, the singular number includes the plural, the plural number includes the singular, the masculine gender includes the feminine and/or neuter and the neuter includes the masculine and/or feminine. This Agreement may be executed in three (3) counterparts, each of which shall be deemed an original and constitute one and the same instrument and shall be governed by and construed in accordance with the laws of the Commonwealth of Virginia.

IN WITNESS WHEREOF, the parties have affixed or caused to be affixed their respective signatures on the first day of January, 2012.

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EXCELLENT MANAGEMENT COMPANY

BAYVIEW TOWERS CONDOMINIUM ASSOCIATION, INC.

By: ________________________

By: ______________________

Principal

President


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ATTACHMENT “A” FINANCIAL AND BOOKKEEPING SERVICES 1.

Collection of Fees:

Agent will supervise the invoicing of all assessments due and processing of all assessments received from Association owners, contractors, and other sources (common funds). Payments will be mailed to the depository or office of Agent designated by Agent. Agent will mail reminder notices to all delinquent owners on the tenth th (10 ) day of each month, or as otherwise directed by the Association, the postage or distribution cost thereof to be an expense of the Association. At the direction of the Board and at the expense of the Association, in accordance with Attachment “C”, Agent will charge and collect special and/or additional assessments, late charges, and return check charges. 2.

Payment of Association Obligations:

Agent will, from the common funds collected, pay all obligations of the Association. The Association shall provide sufficient funds to Agent to comply with this provision if for any reason funds in the possession of Agent are insufficient. 3.

Financial Reports: th

On or about the fifteenth (15 ) day of the month following the end of the accounting period, Agent will provide the following reports to the Association: • • • • 4.

Balance Sheet Operating Statement of Revenue and Expense Monthly Disbursement Summary Accounts Receivable Status

Deposits and Accounts:

Agent will deposit all receipts from all sources in a financial institution insured by an agency of the federal government. Agent will provide individual checking and savings account for Association. 5.

Budget Preparation:

Agent will prepare, ninety (90) days prior to the start of each fiscal year, a proposed operating budget projection draft by line item categories setting forth the anticipated expenses and receipts for the fiscal year. The budget will be prepared based on expense history, the approved service level of the Association and the condition of the property. Agent recommends that a reserve study be contracted for with an outside independent agency specializing in that field.


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Payroll:

Agent will cause disbursement, in accordance with federal, state, and local wage and hour withholding tax and minimum wage regulations, bi-monthly, all wages and salaries, commissions and bonuses for all employees. Agent will abide by all local, state and federal laws, regulations and guidelines in administering the payroll for the Association. Agent will cause preparation and filing of all forms, reports, and returns as required by law in connection with unemployment insurance, workers’ compensation insurance, withholding tax, social security, and other similar taxes now in effect.

ATTACHMENT “B” GENERAL MANAGEMENT SERVICES 1.

Facilities Management:

1.1

General:

Agent shall oversee the operation, care, upkeep and maintenance of the common elements and other services of the Association as authorized by the Association and provided and funded for in the budget; and assist and/or advise the Association, and/or employees and contractors of the Association;. Agent maintains a twenty-four (24) hour answering service and on-call personnel to handle any emergency. 1.2

Contact:

Agent shall recommend to the Association for approval, contractors for work to be performed based on written specification approved by the Board of Directors. Whenever the size and nature of the contract dictate and the scope of the work can easily be defined and the estimated costs exceed One Thousand Dollars ($1,000.00), competitive bidding procedures may be used. Agent will bid and administer contracts for the following: pest control, trash pick-up, pool operation and maintenance, grounds care and maintenance landscaping, laundry equipment, and security, as applicable. 1.3

Site visits:

Agent will visit the property on a weekly basis in order to be knowledgeable and informed of the conditions of the property. Agent will conduct a complete site visit no less than monthly and prepare a site visit report with recommendations and a detail of the plan of action taken or to be taken. 2.

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Personnel Management:



Module 4: Community Management and Leadership 2.1

Onsite Manager and Staff:

Agent shall, based on an operating schedule, jobs standards, and wage rates previously approved by the Association, interview, hire, pay, train, oversee and discharge the personnel necessary to be employed in order to properly maintain and operate the Association. Such personnel shall be in the employ of Agent, and compensation for the services of such employees, as evidenced by payroll documents including workers compensation and all other benefits as well as direct overhead, shall be considered an expense of the Agent, such cost to be reimbursed in total by the Association on a monthly basis. Association shall reimburse Agent actual costs involved plus three (3%) percent of gross payroll. 2.2

Onsite Manager and Staff:

If an onsite manager is employed as described in section 2.1 above, this person in most instances will be the person directly responsible for all onsite employees. All employees will be answerable to this person through an established and approved organizational chain. All staff will be given job descriptions that will outline specific responsibilities of all employees. Agent will prepare job descriptions and organizational chain as required, in accordance with Schedule “C:” Other Management Services, unless otherwise instructed in writing by the Board of Directors. This will ensure a clear understanding of Agent’s exclusive responsibilities and tasks that are joint between Agent and staff and those that are exclusive tasks of the staff. 3.

Insurance:

Agent, in conjunction with and reliance upon a qualified insurance broker or brokers, will solicit insurance for the Association as required by the Association’s governing documents and all other insurance reasonably necessary to cover the risks to which the Association and Agent are subject. Agent shall be named as an additional insured. Agent, in conjunction with and reliance upon qualified insurance broker or brokers, will also recommend modifications and additional coverage. Agent will file for insurance claims, followup for payment and act as the Association representative in negotiating settlement up to a maximum of five (5) hours per claim, and thereafter in accordance with Attachment “C:” Other Management Services or ten (10%) percent of total claim, whichever is greater. 4.

Ordering:

Agent shall oversee placing orders for such equipment, tools, appliances, parts, materials, and supplies as are necessary to properly maintain the Association. All contracts and orders for such items shall be in the name of the Association. Agent shall use best efforts in taking bids and issuing purchase orders to ensure that the interest of the Association is served and that the best value and price available for the quality and quantity of services and materials ordered be obtained. Agent will credit any discount, commission, rebate, or concession obtained as a result of such purchases to the Association. 5.

Administration:


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5.1

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Records:

Agent will maintain and keep accurate and up-to-date all of the books and records of the Association, including: • • • •

Minutes (to be taken by Association Secretary or volunteer); Association Contracts; Accounting and financial records; Correspondence, notices, and memoranda in connection with activities of the Association, its various Boards, and Committees.

5.2 All records older than two (2) years will be returned to the Association for retention or stored at the Associations expense. 5.3

Resale Certification:

Agent shall supply, in accordance with Virginia law, in proper form, a written statement regarding the sale of a unit containing such information that is required by law. The Resale Disclosure Statement shall be executed by an officer of the Association. Agent is authorized to charge a fee for each statement furnished as outlined in Attachment “C”. 5.4

Membership Notices and Communications:

At the direction of the Board and at the expense of the Association, Agent shall send all notices of meetings of Association owners or Board meetings to its members and all parties entitled to copies. 6.

Association Support:

A representative of Agent shall attend the meetings of the Board including annual meeting, not to exceed six (6) meetings in a one (1) year period based upon a mutually agreed upon schedule established annually. Any meeting exceeding two (2) hours shall be separately billed by Agent at a rate of seventyfive ($75.00) dollars per hour, in accordance with Attachment “C”. Any meeting scheduled to begin after 5:30 PM or on weekends also shall be separately billed by Agent at the flat rate of $150.00. 6.1

Management Report:

Agent will prepare and deliver a report at a time preceding the regularly scheduled meeting of the board that will normally contain: (a) (b) (c) (d) (e) 6.2

Status of contracts Status of finances Status of administration Personnel activity Recommendations

Rules:

Agent will assist the Association in the administration and enforcement of the governing documents by notifying and informing owners and other residents, in writing, who may be in violation of Association policies.

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Module 4: Community Management and Leadership ATTACHMENT “C” NON-RECURRING CHARGE ADDENDUM 1. Resale Information (to include documents, budget, financial disclosure, etc. Said listed items are to be charged to the owner.) Resale Packet HOA Management Letter Resale Certificate Condominium Insurance Policy 2. Community Mailings Fax Photocopying (Duplicating) Postage Envelopes: Letter Size Manila Envelopes Labels 3. Photocopying (except as provided as part of this Agreement) 4. Accounting time (This item is for special projects only and items not outlined in the original Agreement) 5. Special assessment set-up charge 6. Initial data process set-up fee 7. Certified Letters: (Other than late letters) 8. Late Letters 9. Delinquency Turnover Fee: (Charged to owner) 10. Return Check Charges: (Charged to owner account) 11. Other Management Services (Outside general management services outlined in Agreement) Manager Secretary Accounting


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Managing a Developing Community Say We will now take a few moments to examine an important type of community association management: developing communities. •

Transition from developer control is not a definitive point in time. Rather, it is a process that begins when the community is a glimmer in the developer’s eye and ends after control of the association has been transferred from the developer to the owners and the developer no longer has a final responsibility to the association.

•

Transition from developer to owner control is one of the most critical phases in a community’s growth. If conducted properly, it will give the association the independence it needs to mature into a capable governing body.

Slide 111 Transition

111

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Say A smooth transition benefits both the developer and the owner. Cooperative efforts between both parties can result in a well-run association. Overview the objectives of a smooth transition:

Slide 112 Objectives of a Smooth Transition • • • • • • • •

Enhance community relations Minimize controversy Build trust Resolve issues before they escalate Minimize potential claims Retain management contract Ensure future developer work Less stressful life 112



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Managing a Developing Community, continued Define Transition and Turnover Transition: •

• •

The general process by which the control and responsibilities of the governing board of an association are transferred from the developer to the persons who bought unit/lots in the association. Transition is not a single event. It is a multi-stage process of many events taking place over a period of time—ranging from when the declarant decides to build until the declarant no longer has any financial obligations to the association.

Turnover: •

That date upon which homeowners gain control of their association. Typically, turnover occurs at an annual or special meeting of the homeowners.

Slide 113

Definition Transition - (tran-sis'-shun) n. the gradual process by which the control and responsibilities of the governing board of an association are transferred from the declarant to the persons who bought units/lots in the common interest community.

113

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Managing a Developing Community, continued Slide 114

Definition Turnover - (turn'-oh-ver) n. the date on which the declarant no longer has the right to appoint a majority of the members of the board.

114



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Managing a Developing Community Transition from developer control is not a definitive point in time. Rather, it is a process that begins when the community is a glimmer in the developer’s eye and ends after control of the association has been transferred from the developer to the owners. Transition from developer to owner control is one of the most critical phases in a community’s growth. If conducted properly, it will give the association the independence it needs to mature into a capable governing body. By helping your communities to transition the right way you’ll avoid dissent in the community— and more importantly, those expensive legal problems. A smooth transition benefits both the developer and the owner. Cooperative efforts between both parties can result in a well-run association. A poorly planned transition with unproductive developer-owner relations can result in angry unit/lot owners, lawsuits, a bad reputation for the manager, management company and developer, and an ineffective association. The developer should strive for early and continuing owner involvement and education in association operations. The developer and the owners must recognize their mutual interests and cooperate and communicate with each other during the transition period. An interim set of committees—staffed primarily by owners—facilitates transition work and provides training for future leaders and ongoing committees.

What Is Transition? Transition is a term that has evolved in recent years to describe the general process by which the control and responsibilities of the governing board of an association are transferred from the developer to the persons who bought unit/lots in the association. It includes the creation of the association, transfer of governance, the acceptance of ownership of the common property, and the accounting for funds. Transition is not a single event, such as the election of an owner-controlled governing board or the execution of a settlement agreement regarding construction defects in the common property. It is a multi-stage process of many events taking place over a period of time—ranging from when the declarant decides to build until the declarant no longer has any financial obligations to the association.

What Is Turnover? We use the term “turnover” to describe that date upon which homeowners gain control of their association. Typically, turnover occurs at an annual or special meeting of the homeowners.

Role of the Manager The professional manager plays a very important role in the transition process, ranging from working with the developer to create a viable, operationally-sound association and carefully ensuring a clear delineation between developer and association financial responsibilities, to assisting in the education of new board members with regard to the association’s governing process and coordinating the work of the professional team retained by the board.

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Managing a Developing Community, continued Say The key players in a developing community include each of the following:

Slide 115 The Players • Manager • Attorneys o Developer o Association • Engineer/Reserve Specialist • Accountant • Insurance Agent 115



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Role of the Manager Say: The professional manager plays a very important role in the transition process, ranging from: • Working with the developer to create a viable, operationallysound association • Ensuring a clear delineation between developer and association financial responsibilities • Assisting in the education of new board members with regard to the association’s governing process • Coordinating the work of the professional team retained by the board

Slide 116

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Overview the role of the manager in the various stages of the transition process, including: • • • •

Initial Services Pre-Turnover Services Turnover Services Post-Turnover Services

Slide 117

Slide 118


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Slide 119 Turnover Services • Prepare for Turnover Meeting o Documents & statutes o Positive environment o Ducks in a row • Coach board • Prepare homeowner advisory/board members • Coordinate transition team • Turnover checklist 119

Slide 120 Post-Turnover Services • • • • • •

Community association management New board orientation Coordinate transition team Coach new leaders Follow up turnover meeting issues Leadership development

120


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Module 4: Community Management and Leadership The manager can have the most impact on the ongoing success of a community when contracted by the developer before the first shovel of dirt is turned. There are three primary advantages to the developer when hiring a professional manager at the beginning of the development process: 1) The manager can offer recommendations on the governance structure of the association – should it be a condo or cooperative or planned community? Should there be independent sub-associations under an umbrella association, or one association with different “neighborhoods”? 2) The manager can review the draft governing documents for operational consistency and reasonableness. For example, the documents may contain a rule that prohibits parking in certain areas for more than 24 hours. However, unless there is a means provided to monitor how long each and every vehicle parks, the rule is unenforceable. The manager’s expertise can also encourage flexible, user-friendly documents that ensure relevance both today and in the future. 3) The manager can relieve the developer of association-related concerns by acting as the team leader for the service providers that should be involved in the planning for the community. Another critical job of the manager is to provide a realistic context for both the developer and the homeowner board members that ensures any expectations concerning transition are reasonable. The transition process includes not only investigating construction issues but also the evolution of the governing process, fine-tuning of rules, regulations, and restrictions, development of architectural control standards, and establishment of administrative policies that will serve the community into the future. A professional manager will be able to analyze the administrative and operating systems of the association and point to what is missing or what can be further fine-tuned. In terms of developer-related issues, the manager should play a key role in providing focus for the association, so a realistic list of concerns can be identified and managed. One of the first responsibilities of the manager following the turnover election is to make sure that the new board has its professional advisers in place to prepare reports regarding the financial and physical health of the association. The manager will be familiar with the extent of any potential issues in the community and know other professionals in the area who have experience with transition matters. The manager consequently will be in a position to recommend several professionals for the board to interview. The manager will be able to coordinate this process, so the board can make its choice in an organized and informed atmosphere. Once the professional team is established, the manager should work with the board and each professional to develop timelines for the production of transition reports. Once established, the manager will monitor progress so the timelines are maintained, and receive the draft reports for distribution to the board, its subcommittee, and the association’s legal counsel. After the draft engineering report and auditor’s report are received, the board or its subcommittee should review it and refine any issues that have been identified. The manager can provide a valuable service to the association by maintaining realistic expectations and keeping the board or subcommittee focused on the important issues at hand.


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Managing a Developing Community, continued Say The manager of a developing community will face many different, sometimes competing loyalties. Some of these include:

Slide 121 The Manager’s Loyalty Conundrum Developer: • Consulting fees • Sense of satisfaction • More business • Easier work • No night meetings • Manager runs the show

121

Slide 122 The Manager’s Loyalty Conundrum, cont. Association: • Continue after turnover • Use skills • Challenges • Word of mouth

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Managing a Developing Community, continued Say • • •

Managers are expected to educate and guide the developer and owners through the maze of governmental, regulatory, and internal laws and rules. The manager must educate the developer to help minimize the developer's future liabilities and conflicts with the owners. The manager’s ultimate allegiance is to the association and to the establishment of a well-run community with a capable governing body.

Slide 123 The Conundrum Winner

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When final reports are produced and furnished to the developer, the manager will assist in scheduling meetings and discussions, so the process of resolving any identified issues does not become overly protracted. All in all, the manager is much like an orchestra conductor, bringing together skilled musicians of varying types to produce a symphony that is pleasing to those he represents. This is done by establishing the context, creating the team, coordinating the efforts, refining the result, and resolving the issues. Managers, as the professional community association experts, are expected to educate and guide the developer and owners through the maze of governmental, regulatory, and internal laws and rules. It’s not a one-time effort, but rather a continuing program to remind existing owners of, and introduce new owners to, their community’s culture. First-time deed-restriction violation? A phone call goes a long way to establishing a warm, personal relationship with the residents, much more so than a form letter that, no matter how much thought went into its language, will offend the recipient. The manager’s allegiance is to the association, and one of the indications of a truly talented manager is the ability to speak frankly to both parties about their obligations to each other.

Budgets The preparation of an initial budget is a developer’s first look into the potential revenues and expenses of the association. In managing owners’ expectations, the developer and the management company preparing the budget should emphasize that the budget is based on proposed plans and developer estimates, and is always subject to change. Moreover, while developers typically have done an analysis of comparable projects and have a desired assessment figure in mind, the budget preparer should not be constrained by that figure. If the budget is prepared early in the development process, then there should be ample time to reconsider and possibly eliminate certain amenities or obligations of the association in the event that the developer perceives the budgeted assessment amount to be too high. Budgets which are manipulated to meet desired assessment levels, threaten the successful transition of the association. More than any other disclosure of the developer, the assessment amount is frequently the most remembered. Owners may not remember when a transition election is scheduled to occur, but they will invariably remember the exact amount of the assessment obligation as quoted by the developer’s salesperson. Certainly the amount of assessment creates an expectation as to the quality of service to be provided by the association. When this expectation is not met due to changes in the plans or market conditions, the association transition is usually more adversarial. Throughout the developer-control period, the developer should manage expectations. Budgets should be revisited and updated annually. With each new budget, an explanation as to why it may differ from the original should be provided, and input should be solicited from owners as to the level of services desired. Moreover, in communities where the developer initially subsidized the project, the amount of the subsidy should be accounted for and should also be explained to the owners with clear detail as to when that subsidy will end. Similarly, in certain circumstances, the developer should periodically update reserve studies during the developer-control period, in order to minimize any gap in replacement reserves once transition occurs.

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Human Resources for Managers Say Before we conclude this lesson on community management, we will discuss the role of the community manager in human resources issues. The manager: • May be responsible for overseeing the human resource program in a community association. • If so, he or she must establish a system to administer human resource issues. • Must ensure the association complies with all applicable laws and regulations. • Is responsible for training and development programs for the staff members. • Is responsible for performance planning and ensuring evaluations are regularly performed for staff members. • Is responsible for disciplinary action including termination when necessary. In this final section of this lesson, we will discuss: • Creating personnel guidelines and job descriptions. • The various laws that may affect the personnel policies of a community association. • Employee evaluations and performance reviews. • Various disciplinary actions including suspension and termination. Slide 124 Human Resource Management • • • •

Personnel guidelines Job descriptions Personnel laws Performance planning and evaluation • Disciplinary actions

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Human Resources for Managers A community association relies on human resources to operate, maintain, repair, and replace its facilities. These resources may be paid employees, volunteers, or contractors. This final section of this lesson will introduce you to the human resources management of employees. Human resources management (HRM) is the process of planning, organizing, leading, and controlling an association’s human resources—in this case, its employees—in order to achieve the association’s goals. In community associations managed by a management company, the management contract will specify who has the authority to hire, fire, supervise, and compensate any onsite employees. Some boards retain authority in some of these areas when they engage a management company. Alternatively, management companies often directly employ the onsite staff. In either scenario, the manager is responsible for implementing the human resources management system. Human resources management involves: • Establishing and administering HRM systems • Complying with applicable federal, state, and local laws and regulations • Recruiting, screening, and selecting people • Training and developing people • Establishing performance objectives and evaluating work performance • Supervising people • Dismissing people, when necessary An effective human resources management process helps both management and employees fulfill their basic obligations to one another.


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Creating a Human Resources Management System Say As with other areas in community association management, human resources should also be approached in a systematic fashion. To provide the optimum protection to the association, the employees and the manager, a written system should be adopted by the board of directors. Personnel manual or handbook: A written set of personnel policies and procedures should be created to define the relationship between the association and its employees and to explain the responsibilities of both parties. Depending upon the state in which you work, the content of an employee handbook can have legal implications. It is recommended that every employee handbook contain a statement that employment with the association is “at will,” meaning that the association can dismiss an employee without cause at any time. It is also recommended that the handbook contain a disclaimer to the effect that it is not an implied contract or promise of employment. •

• •

You should establish a procedure to make sure every employee has received and read the handbook. Consider having the staff sign a written acknowledgment of receipt. This information should be provided to each new employee. You should always provide to all employees written notice of any changes to the manual. As with all aspects of personnel issues, you should have a competent attorney or personnel specialist review the handbook and subsequent changes before distribution.

Job descriptions: Job descriptions should be created for each staff position and should include the required duties of the job, knowledge required to perform the duties, skills, and the reporting relationship of the position.


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Human Resources Management Systems Human resources management systems typically include: • A personnel manual or employee handbook • A set of job descriptions • A compensation and benefits program • Employee records and files Personnel Manual or Employee Handbook Even if your community association has just one part-time employee, it should have a written set of policies and procedures that: • Define the relationship between the community association and the employee • Explain the rights and responsibilities of both the employer and the employee The content and wording of any manual or handbook have legal ramifications. As a result, any personnel specialist or attorney whom you consult may make one or both of the following recommendations—depending on the state you are in. 1. One possible recommendation is that your manual or handbook contains an employment at will statement. This is a statement to the effect that the community association retains the right to dismiss an employee without cause at any time. 2. Your personnel advisor may also recommend that your manual or handbook contain a disclaimer to the effect that it is not an implied contract or promise of employment. Job Descriptions A job description is a specific description of the— • Required duties of a position • Skills and knowledge necessary to perform required duties • Reporting relationships of the position A written job description should exist before you hire an individual for a position: • It tells you and the potential employee what is expected of the person in the position • It is an aid for planning and budgeting for the use of personnel • It is an aid for evaluating job performance For the above reasons, it is important to take the time to periodically review and update job descriptions. An outdated job description leads to misunderstanding at best and legal problems at worst.

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Compliance with Applicable Laws and Regulations Emphasize that the laws and regulations affecting personnel issues are constantly changing and vary from state to state. This section will be provided solely as an overview to the students (some of these laws were reviewed in Module 1, Lesson 1). Urge students to always seek the help of competent legal counsel or a qualified personnel specialist about any questions on the legal aspects of any personnel matter or related laws and regulations. Say Note that applicable statutes, regulations, and case law at all three governmental levels address: • Discriminatory treatment of employees based on non-work related characteristics • Hiring • Promoting • Dismissal • Compensation • Working conditions Community associations are subject to all laws that prohibit discrimination in hiring, promotion, dismissal, compensation, and working conditions based upon the following specific personal characteristics: • Race and ethnicity • Color • National origin • Age • Gender – Note that sexual harassment is considered a form of gender discrimination. • Religion • Pregnancy • Disability To avoid claims of discrimination: • Avoid any kind of preferential treatment of employees • Make all employment decisions based on bona fide job requirements • Document the basis for each employment decision


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Compliance with Applicable Laws and Regulations Applicable statutes, regulations, and case law at all three governmental levels address: • Discriminatory treatment of employees based on non-work related characteristics • Compensation • Working conditions • Hiring • Promoting • Dismissal Always consult an attorney if you have any questions about the legal aspects of a specific situation for your community association. Anti-Discrimination Statutes, regulations, and case law at all three governmental levels prohibit discrimination in hiring, promotion, dismissal, compensation, and working conditions based on specific personal characteristics. The federal government prohibits discrimination against otherwise qualified people based on— • Race and ethnicity • Color • National origin • Age • Gender • Religion • Pregnancy • Disability State and local governments vary in terms of the characteristics which they recognize in their anti-discrimination statutes and regulations. For example, many states and localities also prohibit discrimination based on sexual orientation. The best way to avoid employee claims of alleged discrimination is to: • Avoid any kind of preferential treatment of employees. • Make all employment decisions based on bona fide job requirements. • Document the basis for each employment decision. Compensation Statutes, regulations, and case law at all three governmental levels also regulate employee compensation or payment. Examples at the federal level include: • Fair Labor Standards Act (FLSA): This act addresses minimum wage requirements, maximum hours of work, and overtime pay. • Federal Insurance Contributions Act (FICA): This act requires employers and employees to make matching contributions to Social Security. The employer must withhold the employee’s share of the tax from his or her wages or salary.

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Compliance with Applicable Laws and Regulations, continued Say Compensation: Community associations are subject to all laws that regulate employee compensation. The Fair Labor Standards Act (FLSA) establishes minimum wage, overtime pay, recordkeeping, and child labor standards affecting full-time and part-time workers in the private sector and in federal, state, and local governments. Covered nonexempt workers are entitled to a minimum wage of not less than $7.25 per hour effective July 24, 2009. Overtime pay at a rate of not less than one and one-half times their regular rates of pay is required after 40 hours of work in a workweek. Caution: Many community associations improperly classify some personnel as salaried workers and exempt from overtime pay. The community association manager is typically the only person who can legally be considered salaried and exempt from overtime pay. Emphasize that the manager should seek advice from legal counsel or a personnel specialist regarding the salaried versus hourly status of employees. Review www.dol.gov for the most current information. Occupational Safety and Health: Community associations are subject to all regulations established by OSHA related to workplace safety and health. Federal, state, and local governments regulate and monitor workplace safety and health. Various regulations require— • Specific working conditions • Specialized training • Safety equipment • Posting of warnings related to products and work site conditions • Reporting of accidents and/or deaths


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Examples at the state level include: • Workers’ compensation laws: This legislation requires employers to obtain insurance that will provide most employees with medical benefits and compensation for loss of income due to injury or illness related to employment. • Unemployment insurance laws: States administer unemployment insurance programs and jointly contribute to them with the federal government. • Child labor laws: States also establish requirements for the employment of minors. One major source of confusion for community association managers is whether employees who supervise other employees should be salaried (exempt from overtime) or hourly (non-exempt) workers. A typical example is the maintenance supervisor who picks up the work orders, supervises a few maintenance workers, does the maintenance work with them, and reports to the community association manager. Many associations erroneously consider this position a salaried one because the person is supervising other employees. Under Department of Labor regulations, to be salaried, a person must: • Spend 80 percent or more of the time in supervising • Supervise two or more people • Have control over hiring and dismissing people in the supervised positions Anyone who does not meet these requirements must be paid on an hourly basis—even if the person’s title is “supervisor.” However, certain “professional” or executive positions may be salaried, even though they do not meet these federal criteria. In addition, both federal and some state laws require that “nonexempt,” hourly workers are paid time-and-a-half or double time pay under certain circumstances. When in doubt about salaried versus hourly status, consult your attorney or personnel specialist. If you classify someone as a salaried worker who should be classified as an hourly worker, you are violating federal labor laws and your community association is subject to penalties and back taxes. In addition, your worker may file a claim with the labor board for overtime pay for all hours worked over 40 hours in a given pay week or exceeding 8 hours in a given work day, depending on the state. Occupational Safety and Health Statutes, regulations, and case law at all three levels of government also regulate occupational safety and health on the job. The most common example is regulations established by the federal Occupational Safety and Health Administration under the Occupational Safety and Health Act (both called OSHA), as previously discussed in Module 1. However, state and local governments also regulate and monitor workplace safety and health. Various regulations require— • Specific working conditions • Specialized training • Safety equipment • Posting of warnings related to products and work site conditions • Reporting of accidents and/or deaths

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Performance Planning and Evaluation Say Positive reinforcement and constant communication are key in developing and retaining staff. Performance planning is the process of establishing performance goals and standards: • • • • •

To link an employee’s performance goals with the association’s goals. To plan and assign work. To motivate an employee. To provide feedback to the employee. To hold the employee accountable for meeting performance standards.

Performance evaluation is the process of reviewing an employee’s performance to determine if the established goals and standards have been met. Performance evaluations should be performed regularly—usually after the first 90 days of employment and annually thereafter. Conducting a performance review takes time and effort, but has many benefits. It is the basis for: • • • • • •

Letting an employee know where he or she stands. A salary review. Consideration for promotion. Identifying training and development needs. Documenting unsatisfactory performance. Checking on the effectiveness of your efforts.


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Performance Planning and Evaluation Positive reinforcement and constant communication are key in developing and retaining staff. If a person is properly oriented, receives adequate initial and ongoing training, and receives regular feedback on work performance, then he or she will work more productively, there will be less job dissatisfaction, and costly turnover will be avoided. An organized approach to performance planning and evaluation will help you to provide regular feedback and motivation to your staff. Performance Planning Performance planning is the process of establishing performance goals and standards for an employee. Performance planning has several benefits. It is a means of: • Linking the employee’s performance goals with the association’s goals • Planning and assigning work • Motivating an employee • Providing feedback to an employee on his/her performance • Holding an employee accountable for meeting performance standards Performance goals are those regular and special tasks management expects an employee to perform during a certain time period. The job description can be the basis for setting goals. But goals are more specific than a restatement of duties listed in the job description. This is because they relate to the community association’s current needs. Performance standards are a description of the results management expects an employee to accomplish during a certain time period. They are reflected in the criteria used for performance evaluation. Always involve an employee in his or her performance planning in some way to get the person to “buy into” the goals and standards. For example, you could: • Offer the employee a set of goals and standards and ask for feedback • Develop goals and standards together • Ask the employee to propose some goals and standards and finalize them together • Discuss the performance standards or evaluation criteria at the beginning of the time period involved Performance Evaluation Performance evaluation is the process of reviewing a person’s work performance to determine the extent to which his/her established goals and standards have been met. When Review a new employee’s performance with him or her after hiring—usually sometime within the first 90 days. Conduct a formal performance evaluation on an annual basis. Conduct an interim review at least once during the year—and whenever either party considers a discussion necessary.

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Module 4: Community Management and Leadership How Always schedule a performance review or formal evaluation—in fairness to the employee and to you. Be prepared or reschedule. Arrange for your meeting to be private and uninterrupted. Even informal reviews can make people anxious. Talk strengths and areas for improvement. Give the person an opportunity to say what’s on his or her mind. What ideas, concerns, goals, or training and development needs does the person want to talk about? Document your conversations with your employees about their performance. Use a standard evaluation form for performance evaluations—to document commendations as well as corrective actions to improve performance deficiencies. Benefits Admittedly, conducting performance evaluations takes effort. But there are several benefits to conducting a formal performance evaluation at least once a year. It provides a basis for: • Letting an employee know where he/she stands • A salary review • Consideration for promotion • Identifying training and development needs • Documenting unsatisfactory performance—you must document corrective or disciplinary actions in case an employee or former employee makes a claim against you or the community association— including any inappropriate application for unemployment payments • Checking on the effectiveness of your recruiting, selecting, and training efforts



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Supervision and Discipline Say The ability to supervise people, including employees, is a developed skill that comes with learning and experience. Occasionally supervisors must deal with disciple problems. The manager must use a discipline system to set forth performance problems of an employee and to establish appropriate actions to correct them. The discipline system may include each of the following: • • • •

Verbal warnings should be given as the first step. A written warning should be used if the problems are not corrected with a verbal warning. Give the employee a specific probationary period should the problem continue. This action should be in writing and the form used in the step above can be used here as well. Dismiss the employee.


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Module 4: Community Management and Leadership Supervision and Discipline The ability to supervise people, including employees, is a developed skill that comes with learning and experience. The ability to “get along with people” is not enough. We will restrict ourselves in this section to a few key tips from experienced community association managers because there are so many resources available on supervising employees. An effective supervisor is consistent, fair, honest, understanding, and supportive. An effective supervisor: • Honors the employee’s right to rely on one individual for supervision and direction—and encourages everyone else to do so. Committee members, board directors, owners, and other staff should provide input to an employee through his or her immediate supervisor. • Involves employees in the decision-making process where appropriate. When staff members help to develop policies and procedures, they are more committed to implementing them. They also have unique insights based on their positions in the association that can benefit the community association. In addition, people who are involved in an organization tend to have higher morale on the job. • Encourages a businesslike atmosphere. Businesslike means always being aware that you are in a business setting. It does not mean that you have to be cold and impersonal. However, overly-casual behavior can hinder work performance. And if problems arise, it is easier to resolve them if work relationships have been businesslike all along. • Is fair and honest. Employees are tempted to leave if they perceive a supervisor as unfair. Employees who stay under such conditions tend to experience low morale—which affects their work performance. In addition, a supervisor’s unfair, selective or dishonest behavior with employees leaves the community association open to legal claims. Discipline There are three ways an employee can be separated from an employer— retirement, voluntary departure, and dismissal. Dismissing an employee is always difficult. But it will go as smoothly as possible if your community association has: • A progressive discipline system • Established dismissal policies and procedures Progressive Discipline System A progressive discipline system is a procedure whereby performance problems are brought to the employee’s attention and the employee and employer take appropriate actions to correct them. An effective—and legally defensible—system requires that the employee has received: • Written job description • Orientation to the job and initial job training • Performance evaluation at the end of an initial probationary period


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Supervision and Discipline, continued Say Termination for cause without notice or other disciplinary action is legal for the following reasons: • • • • •

Stealing Fighting Substance abuse on the job Illegal actions Sabotage

Unacceptable or illegal reasons to terminate someone include: •

• •

Because the employee has one of the characteristics protected by anti-discrimination laws. For example, terminating a female employee because she is pregnant is illegal. Because the employee is exercising a legal right such as trying to organize employees into a union. Because the employee refuses to perform an illegal or dishonest act.

Dismissal procedures: Discuss the following tips regarding dismissal procedures with the class. • The process should be short and specific. • Outline the facts. • Speak about the issue causing the dismissal action—never about the employee. • If possible, have and distribute the final paycheck. • Obtain all association property, keys, pagers, etc. in the employee’s possession. • Advise the employee of the extension or termination of his or her benefits. • Tell the employee what information you will provide when potential employers call for references. • Attempt to resolve any other issues to avoid the need for further contact. • Advise other parties affected by the dismissal such as other staff, the board of directors, contractors, or residents, if necessary.

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Module 4: Community Management and Leadership When an employee performance or discipline problem arises, there are four steps to the progressive discipline procedure: 1. Give a verbal warning. If the situation persists... 2. Give a written warning. Your statement of the problem and the agreedupon solution should be specific. Document dates and times of the problem. Ideally, the agreed-upon solution should be one proposed by the employee. If the situation persists... 3. Give the employee a specific probationary period. Use a written notice. Both you and the employee should sign the notice to acknowledge that you both have read it. Note that the employee’s signature on a written notice of probation does not mean that he or she agrees with the need for a probationary period. If the situation persists... 4. Dismiss the employee. Your board’s policy may require that you confer with the board in executive session before dismissing anyone. However, if the person is employed by the management company, the management company has full authority to terminate its employee. Dismissal Policies and Procedures Your community association should have established dismissal policies and procedures that appear in its personnel manual or employee handbook. They should address: Grounds for dismissal: Unless you are in a jurisdiction where employment at will is restricted, your community association is within its legal rights to dismiss an employee with or without cause. If you are going to dismiss an employee with cause, that cause or reason should be a legally acceptable one. If you are concerned about a dismissal, consult your community’s attorney or personnel specialist. Typical examples of reasons for dismissal following progressive discipline include— • Willful violation of rules • Incomplete or inadequate work performance • Repeated disregard of reasonable instructions • Neglect of duties • Insubordination • Sexual harassment • Unauthorized absence from work • Sleeping on the job Typical grounds for immediate dismissal without progressive discipline include— • Stealing • Fighting • Substance abuse on the job • Illegal actions • Sabotage Unacceptable or illegal reasons for dismissal include— • The employee has one of the personal characteristics listed in the antidiscrimination section • The employee is exercising one of his or her legal rights (for example— trying to organize employees) • The employee refuses to perform dishonest or illegal acts Whatever the reason for dismissing an employee, it should be well-documented.


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Dismissal procedures: The act of dismissing an employee should be short and specific. Just outline the facts and prior discussions. If you are dismissing for cause, anything you say or put in writing should focus on deficiencies in work performance, not on the person. Many employers provide only basic employment information regardless of the reason for a former employee’s departure to avoid possible claims against them by a former employee based on what was allegedly said. Try to resolve all issues at the time of dismissal in order to avoid the need for further contact between the former employee and the community association: • Make arrangements for the employee’s final paycheck. There are two current legal requirements regarding final paychecks that employers tend to overlook. Most states specify how soon a dismissed employee should receive a final paycheck—usually within 24 to 48 hours. And the employer cannot deduct from the paycheck any monies the employee owes to it, unless the employee agrees. • Arrange for the employee to return any community association property in his or her possession. This includes such items as keys, credit card, tools, and uniforms. • Discuss the extension or termination of the employee’s benefits. • Tell the employee the information that you will provide when potential employers call asking for a reference— o The person has been employed at your association o The dates of employment o The person’s last job title and salary • Notify other parties affected by the dismissal. Notify your other employees and your board immediately. Notify residents and contractors as necessary. After dismissing an employee make notes on your reasons for dismissal and what you said to the employee to help you when you complete unemployment forms.


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• • •

• •

The role of the owners, committees, and board of directors in the operation of the association. How effective committees are created and how they can operate successfully. About the limitations imposed on you in your role as a community association manager by the governing documents, the management contract, and the board of directors. What provisions should be included in your management contract or employment agreement. That human resources management requires a systematic approach to be successful. That the community association must follow the same regulations and laws as other businesses. You have learned that laws are always changing and to seek the help of a competent attorney or personnel specialist. How to use performance planning and evaluation to motivate and recognize employees. How to use a discipline system to document performance problems and how to dismiss an employee should the problems not be corrected.



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Summary Page 369


Key Terms: • • • • • • • • • • • • •

Ad hoc committee Association-employed manager Board liaison system Business judgment rule Employee handbook Employment agreement Employment at will Fiduciary duty Human resources management Job description Management Management audit Management contract

• • • • • • • • • • • •

Management plan Mandatory committee Performance evaluation Performance goals Performance planning Performance standards Personnel manual Progressive discipline system Standing committee Transition Turnover Volunteer or self-management



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Page 370

Focus Questions Use the following questions to help you identify and review the core concepts in this lesson. (Hint: Once you look up the answer to a question, you may want to jot down the page number next to the question for future reference.) 1. What three types of legal sources specify management authority and responsibilities for community associations? 2. List some specific types of management activities that community associations are empowered to engage in. 3. Explain the relationship between the owners’ authority and the board of directors’ authority in a community association. 4. List some means of obtaining owner input on community management. 5. What legal sources typically define a community association board of directors’ authority and responsibilities? 6. What is the role of a community association board of directors? 7. Who is responsible for supervising implementation of the board’s decisions? 8. List some areas of responsibility for a community association board of directors. 9. What legal sources typically authorize the establishment of committees in a community association? 10. What is the general role of a community association committee? 11. List some guidelines for a successful community association committee. 12. Describe the role of a community association manager. 13. What sources typically define a manager’s authority and duties? 14. What are the three forms of community association management? 15. Compare their advantages and disadvantages in terms of cost, continuity, and professionalism. 16. What are some basic elements in a management contract or employment agreement? 17. List some of the different types of management tasks included in a management plan. 18. What resource can be used to develop the plan’s goals for the year? 19. List two means of evaluating management performance in a community association. 20. List some potential warning signs of a weak management situation. 21. What are the typical components of a human resources management system? 22. What are some typical topics addressed in the policies and procedures found in a personnel manual or employee handbook? 23. What are the benefits of having written job descriptions? 24. What are some things a manager can do to avoid employee claims of alleged discrimination? 25. What are the benefits of doing performance planning with employees? 26. What are some of the things a supervisor can do to effectively supervise the employees who report to him or her? 27. What are some typical grounds for dismissal following progressive discipline?


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Thought/Discussion Questions Use the following questions to help you apply the information in this lesson to your own situation. 1. Locate any sections of state statutes that apply to the management of your community association. (Hint: Ask your community’s attorney or your nearest Community Associations Institute chapter.) What management-related authority and responsibilities, if any, do they assign to: • Your community? • Its board of directors? • Its committees? • You as a manager? 2. Review your community association’s governing documents, including its resolutions. What management-related authority and responsibilities, if any, do they assign to: • Your community? • Its board of directors? • Its committees? • You as a manager? 3. What steps does your community association take to encourage owner input into board decision-making? 4. What mandatory committees must your community association have? 5. What other standing committees does it have—or should it have? 6. Can you identify any examples of ad hoc committees your community association has used recently? 7. What steps does your community association take to ensure effective communication between the board and committees? 8. How do your community’s committees measure up to the guidelines for successful committees? 9. What recommendations can you make to your volunteer leaders to improve your community’s committees? 10. What authority and duties, if any, are assigned to you as manager of your community association by: • Your community’s governing documents, including its resolutions? • Your management contract or employment agreement? • Any other actions of the board of directors? 11. How do the provisions in your management contract or employment agreement compare to the lists of typical provisions in this lesson? 12. Do you have a management plan? • If not, what steps can you take to develop one? • If so, how is it developed? What does it include? • After reading this lesson, are there ways you can improve your plan’s development or content? What are they? 13. What process does your community association use to evaluate your management performance? • Are there any ways the process can be improved? • Do you see any warning signs that suggest you need to improve your management efforts? • If so, what steps can you take to address any warning signs?

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Thought/Discussion Questions, cont’d 14. Does your community association have a written personnel manual or employee handbook? If so, can you identify any areas for improvement? If not, what reasons can you give your board for developing one? 15. Does your community association have written job descriptions? If so, can you identify any areas for improvement? If not, what reasons can you give your board for developing written ones? 16. Does your community association maintain employment records and files? If so, can you identify any areas for improvement? If not, what records do you think your association should be keeping? If not, what files do you think it should set up? 17. What steps does your community association take to ensure that it is in compliance with applicable employment statutes, regulations, and case law at all three governmental levels? How can it improve its compliance efforts? 18. Describe your community association’s performance planning process. How can it be improved? 19. Describe your community association’s performance evaluation process. How can it be improved? 20. Does your community association have a progressive discipline system? If so, how does it work? If so, why has it been effective or not? If not, what are some reasons why it might be beneficial to have one? 21. What grounds for dismissal appear in your community association’s personnel or employment policies? 22. What established dismissal policies and procedures does your community association have? 23. Are there any ways your community association’s dismissal policies or procedures can be improved?



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Lesson 1 Quiz 1. Each of the following legal sources specify management authority and responsibilities for community associations EXCEPT: a. survey data b. state statutes c. community association governing documents d. court decisions RATIONALE: All three types of legal sources—state statutes, governing documents, and court decisions—specify the authority or power of different parties in a community association and the responsibilities or duties of the different parties.

2. True or false. The basic authority in a community association lies with the developer. (False) RATIONALE: The basic authority in a community association lies with the owners. In order for the association to govern effectively the owners elect a board of directors to act on their behalf. The governing documents delegate most of the association’s decision-making powers to a board.

3. Complete the following sentence: The board of directors in a community association has a _____________ to act in the best interests and for the benefit of the community as a whole. a. bond b. fiduciary duty c. ballot d. quorum RATIONALE: The board’s fiduciary duty has two components: (1) Board members are required to avoid conflicts of interest and acting out of selfinterest. (2) They are also required to act as reasonable people in managing the association’s affairs.

4. True or false. The “business judgment rule” means that if a board has exercised reasonable business judgment in making a decision, the court will generally not consider the board negligent in its fiduciary duty. (True) RATIONALE: Through judicial decision, a substantial body of law has developed concerning the standards to which directors must conform while conducting a community association’s affairs. Many courts apply the “business judgment rule” to a board’s actions.

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Module 4: Community Management and Leadership Lesson 1 Quiz, cont’d 5. Which of the following community association committees typically are assigned responsibilities related to elections, nominations, and architectural standards? a. standing committees b. professional committees c. ad hoc committees d. mandatory committees RATIONALE: A mandatory committee is one that is required by the governing documents. Mandatory committees typically are assigned responsibilities related to elections, nominations, and architectural standards.

6. True or false. The role of the professional community association manager is to make all decisions for the association and to delegate informationgathering and fact-finding support to the board of directors. (False) RATIONALE: The professional community association manager is charged with assisting the board of directors’ decision-making process by means of providing information-gathering and fact-finding support, implementing the decisions of the board; and administering the services, programs, and operations of the community association within the policies and guidelines set by the board.

7. In which of the following forms of community association management is the association managed by the board itself or by committees under the direction of the board? a. management company b. volunteer or self-management c. association-employed manager d. municipal management RATIONALE: Self-managed community associations make up a majority of all associations in the United States; in 2010, approximately 150,000 selfmanaged community associations currently exist in the U.S. In self-managed associations, the board itself is responsible for all community association functions, including maintaining accounting records, preparing budgets, collecting dues, enforcing the governing documents, and staying informed about association resources and best practices.

8. True or false. An increase in assessment delinquencies that is not due to a poor economy may be an example of a warning sign of a weak management situation. (True) RATIONALE: When assessment delinquencies increase, the manager should investigate the reasons for the increase as soon as possible and as objectively as he or she can.


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Lesson 1 Quiz, cont’d 9. Complete the following sentence: A ________________ is a statement of goals and objectives approved by the board that includes the yearly cycle of tasks that management should perform on the community association’s behalf. a. management audit b. management contract c. management plan d. employment agreement RATIONALE: Typically, a management plan includes tasks that address the community association’s governance, business, and community purposes. Managers should have a management plan so both they and their boards are clear on what is expected. In most instances, it will be up to the manager to propose a plan to the board for approval. Managers should set goals for the year in relation to the community association’s budget.


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Additional Resources For further information on community association management, we suggest the following: Management Companies: How to Find the Right Community Association Professional, A Guide for Association Practitioners, by Michael E. Packard, PCAM, CPM. Here’s guidance for deciding on a company to manage your community—covers bid specifications, identifying candidates, requests for and analysis of proposals, onsite meetings, the interview process and working successfully with your management company. (Community Associations Institute, 2007.) Conflicts of Interest: How Community Association Leaders Honor Their Duties, A Guide for Association Practitioners, by Tonia C. Sellers and Jay S. Lazega. Avoid conflicts of interest by reading about fiduciary obligations, conduct of directors, managerial conflicts, ethics policies and board conflicts. Contains sample policies, resolutions, code of ethics and cases. (Community Associations Institute, 2004.) Managing & Governing: How Community Associations Function, A Guide for Association Practitioners, by Clifford J. Treese, CPCU, ARM. An excellent overview of the various aspects of managing a community association and providing business and governance services. Contains a fascinating chapter on why community associations are successful forms of housing. (Community Associations Institute, 2007.) Rights and Responsibilities for Better Communities: Principles for Homeowners and Community Leaders. This brochure establishes an ideal standard to which communities can aspire, a goal-based statement of principles designed to foster harmonious, vibrant, responsive, and competent community associations. For a free, easily photocopied, single-page version, visit www.caionline.org/rightsandresponsibilities. On-Site Managers: How to Find the Right Community Association Professional, A Guide for Association Practitioners, by Thomas Burgess, PCAM, and Pam Washburn, CMCA, AMS, PCAM. Helps you determine whether your association needs an onsite manager; establish job criteria; find, screen and investigate leading candidates and make the partnership work. Includes sample documents. (Community Associations Institute, 2005.) Self-Management: A Guide for the Small Community Association, 3rd Edition, Ellen Hirsch de Haan, Esq., Editor. For volunteers who are managing their communities. Covers finances, insurance, budgets, developer transition, meetings, rules, role of the board, working with professionals, maintenance, legal considerations, information technology and more. Includes sample documents. (Community Associations Institute, 2010.)


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Transition to Lesson 2: Board Meetings and Decision-Making

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Lesson 2: Board Meetings and Decision-Making


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Lesson 2: Board Meetings and DecisionMaking Goal At the end of this lesson, students will understand the roles and responsibilities of the manager in relation to boards of directors meetings and any related decision-making. Community association managers attend numerous meetings with both the board of directors and with the owners. Students will learn how to prepare for and help facilitate a successful and effective meeting.

Time 1 hour and 20 minutes Session Time Breakdown 45 minutes—Faculty presentation 25 minutes—Work group exercises 10 minutes—Summary/quiz

Overview Meetings: The continuing challenge for managers. Probably the leading factor in manager stress, frustration, and burn out. It is especially true of long, unproductive meetings that last late into the night. This session touches on many of the key aspects covered during the course. In addition to your facilitation of this session, students will use exercises to help them learn how to prepare for meetings and work with volunteers. Materials Needed

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LCD projector

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Overview Introduce the lesson Say The topic of this session is conducting effective meetings. 

Community association managers must regularly attend numerous meetings with association leaders and owners.



The involvement of owners, board members, and committees in the operation of the community association has an impact on the job duties and responsibilities of the manager and require additional meeting time.

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The manager must be able to prepare for and facilitate an effective meeting.


The roles of managers in the operation of the community association.

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How to prepare for an effective and successful meeting.

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How to facilitate an effective and successful meeting.

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You will complete work group exercises that will help you prepare for meetings.


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Slide 125

Lesson 2: Board Meetings and Decision-Making Session Overview Learning Objectives • Explain the board of directors’ decision-making authority. • Explain the manager’s role in preparing for the board meeting. • Provide tools for conducting a board meeting. • Understand the types of owner meetings. • Use techniques to facilitate a successful meeting. 125


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Key Terms: • • • • • • • • •

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Abstention Action item list Agenda Ballot Committee report Debate Executive session Financial report Management report

• • • • • • • • •

Minutes Motion Notice of meeting Parliamentary procedure Proxy Quorum Residents forum Robert’s Rules of Order Timed agenda

At the center of the management of any community association are boards of directors meetings. These meetings are the source of policy decisions that: • Impact the quality of life in the community • Enhance the overall value of the assets commonly held and individually owned • Set the boundaries within which management will function • Define how the association will operate. The emphasis of board meetings should be on timely attention to policy matters—leaving the day-to-day administration of the community association to the manager. Authorization of specific actions and approval of contracts and committee recommendations allow the governance, business, and community life of the community association to function smoothly. For this to happen, the manager must play an integral role in guiding the board president and secretary to prepare, organize, and properly conduct association meetings. This lesson explains four aspects of board meetings that contribute to effective decision-making: 1. Focus 2. Preparation 3. Conduct 4. Manager’s role

What You Will Learn After reading and reviewing this lesson, you should be able to explain and understand: • Three areas of board decision-making • Importance of focusing meetings • Legal requirements for board meetings • How to prepare for decision-making at meetings • Notice of meeting, agenda, and supporting materials • Management report • Site selection and preparation • Basic principles of parliamentary procedure


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Decision Making for Community Associations Say Recall that in our first Module (Legal Basis For Community Associations) we discussed the purposes of a community association. The board of directors must make the decisions about how the association fulfills those purposes. • Acting as a community, the board must: o Promote harmony throughout the community o Attempt to resolve conflicts o Hear appeals of the decisions of others o Support the greater, surrounding community • Acting as a government, the board must: o Enforce the provisions of the governing documents o Adopt and enforce rules for governing the association o Decide issues of policy for the owners • Acting as a business, the board must oversee maintenance, financial, and administrative matters to preserve and enhance the value of the community. Most decisions for the association are made during the board of directors meetings. Discuss the role of the board and the manager when it comes to board meetings and decision-making.

Slide 126 Board Meeting - Policy Matters • The emphasis of board meetings should be on timely attention to policy matters. • And, the day-to-day administration of the community association should be left to the manager.

126

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Module 4: Community Management and Leadership • • • • • • • • • • •

Establishing a quorum Use of motions Role of the presiding officer Proper behavior during debate Executive sessions Recording minutes for meetings Action item list Owner meetings Dual role of a manager How to facilitate a meeting Role of personalities in meetings

Board meetings are a means of effective decision-making when they focus on: • The areas in which a board is authorized to make decisions • The decision-making process itself

Areas of Board Decision Making There are three areas of board decision-making. They are related to the three functions of a community association board of directors: 1. Community—As volunteer leaders of a community, a board must: o Promote harmony through service and social programs and regular communication with owners o Attempt to settle conflicts o Hear appeals of committee and management decisions that are protested by individuals or groups of owners 2. Governance—As volunteer leaders responsible for governing an organization, a board must: o Enforce the community’s governing documents o Adopt and enforce rules for governing the community o Decide issues of policy for the owners in the community 3. Business—As volunteer leaders responsible for a community association’s business affairs, a board must monitor administrative, financial, and property maintenance matters for the purpose of preserving and enhancing the community.

The Importance of Focusing Meetings A manager must consider the board of directors meeting as a critical date for decision-making and implementation. Board meetings should always focus on: • The decisions to be made during the meeting • The presentation of possible solutions • The setting of new priorities that become the next meeting’s agenda items When you and the board approach meetings in this manner, the community association will move forward in an orderly and progressive manner that will achieve the community’s goals. When meetings are neglected, irregular, or poorly planned, the results will be confusion and paralysis, and, very possibly, litigation.


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Preparing for the Board Meeting Say The manager’s role in preparing for the board meeting is critical to the success of the meeting. All meetings must conform to various legal requirements: •

State statues or regulations regarding meetings frequently address: o Frequency o Open or closed o Owner notice o Voting issues o Executive Session o Violation Hearings

•

The governing documents will also contain requirements for meetings including: o Frequency o Notice provisions o Quorum requirements o Conduct of meetings o Executive session

Slide 127

Legal Requirements State statutes and governing documents establish requirements for board of directors meetings. Legal requirements commonly address such issues as: • Frequency of meetings • When meetings should be open or closed • Notice of meetings • Voting • Executive session • Violation hearings 127

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Preparing for the Board Meeting Be sure to address the following key points: •

•

•

• • •

• •

Establish a regular meeting date such as the third Tuesday afternoon of every odd-numbered month (January, March, May, July, September, November). Emphasize that few boards are required to meet monthly, and that “regularly” does not mean monthly. Encourage the use of bi-monthly or quarterly meetings. Use monthly meetings only as a last resort. If monthly meetings are used, consider skipping August (vacation month) and December (holiday season) and get the number of meetings down to 10 per year. Night meetings: Emphasize that meetings are not required to be held at night. Encourage meetings during the day or to at least start no later than 5:00 p.m. and adjourn no later than 7:00 p.m. Schedule meetings often enough to conduct business in a timely manner and to suit the community’s needs. Involve key leaders in the preparation process. The meeting notice, agenda, and meeting materials should be distributed to all participants at least one week prior to the meeting. This may be done electronically. Be sure to review your state statute and consult with your attorney for your specific requirements. Meetings should last 90 minutes or less. Be sure to review the management contract for any references to the length of association meetings. There may be extra charges for meetings that last longer than the specified length.



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Preparation Adequate preparation for a board of directors meeting includes: • Conforming to legal requirements for board meetings • Preparing for decision-making • Distributing a notice of meeting, agenda, and supporting materials • Selecting and preparing a meeting site

Conforming to Legal Requirements for Board Meetings State statutes and governing documents establish requirements for board of directors meetings. Be sure to check your community’s legal documents. Legal requirements most commonly address such issues as: • Frequency of meetings • When meetings should be open or closed • Notice of meetings • Voting

Preparing for Decision-Making at Meetings Think of a board meeting as the end of a decision-making process, not the beginning. • Set up an annual calendar of board meetings at a fixed time and place. Consult with your board of directors when you set up the calendar. • Schedule meetings often enough to allow for timely attention to matters requiring action or decision by the board. Meetings can be monthly, bimonthly, or quarterly—depending on the community’s needs as well as legal requirements, such as governing documents and state law. Board meetings should only be held when there is business to conduct which requires a board vote, or if required at certain times by the bylaws. • Involve key players in the meeting preparations. Before you finalize an agenda for a meeting, consult with the presiding officer—usually your board president—and relevant committee chairpersons. Once an agenda is established, check to: o Be sure everyone responsible for an agenda item understands what is to be accomplished o Verify that people are prepared for the agenda items for which they are responsible o Offer assistance, as needed •

Prepare your board members to make decisions. A board of directors has the responsibility to come to a meeting prepared to make decisions. A manager has the responsibility to see that information necessary for decisions is gathered, disseminated, and adequately presented. Therefore, be sure to provide information to the board early enough so directors can read and absorb it before the meeting. The manager should provide a management report to the board of directors at least a full week prior to the meeting.

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Preparing for the Board Meeting, continued Say The agenda can be used as an effective management tool. • • • •

Have time limits for each item or for the duration of the meeting. Place items in an order that will allow easily accomplishable items first. Refocus wandering conversations. Keep extraneous items out of the discussion.

Meeting materials to be distributed with the notice and agenda should include: • • • • •

Minutes of the last meeting. Financial report. Committee reports, if any. Management report. Other information applicable to issues being discussed.

Be sure to point out the sample timed agenda. Note that timed agendas can be set up for 90-minute meetings if needed.



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There are four things a manager should provide to board members before each meeting—a notice of meeting, an agenda, management report and other supporting materials.

Notice of Board Meeting A notice of meeting should be sent in writing to board members at least a week before a meeting. Exactly how far in advance you send a notice of meeting may be set by your community association’s governing documents or state statutes. • A meeting agenda and any supporting materials should accompany the notice. • All owners should receive a board meeting schedule at least once a year.

Agenda Meeting agendas follow a standard format, based on parliamentary procedure. (See sample pictured here.) The various agenda items are discussed in the pages that follow. An agenda is more than an announcement of the order of business for a meeting. It is a meeting management tool. For example, by specifying the duration of a meeting in the agenda or allotting agenda items specific amounts of time, you are helping the board to proceed with its business in a timely manner. Note that meetings that run more than two hours often degenerate into an unproductive effort. Where the agenda allows discretion in the order in which items are considered, give some thought to the order in which you list them. Should some decisions precede others? Will the board feel a sense of accomplishment if it makes a number of small decisions before tackling a complicated one? When an item requires discussion, but a decision is inappropriate or premature, label the item “for discussion only” on the agenda. This allows for the free flow of ideas. But the discussion must be restricted to the specific topic listed. During a meeting, a presiding officer can appeal to the agenda as a way to keep a group moving and focused on decision-making. If possible, post a meeting agenda in a central common area before each meeting. Any owner who attends a board meeting should be given an agenda. The residents’ forum, typically held at the beginning of a board meeting, is an open forum for owners and residents to speak. This gives them the opportunity to raise items for future board consideration. Some boards prefer to hold the open forum at the end of the meeting because many issues the owners want to raise may be addressed during board discussion.

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Preparing for the Board Meeting, continued Say One of the ways the manager should prepare for the board meeting is by assembling the management report. The management report is the manager’s report on the association’s current management and administrative activities. It is the manager’s opportunity to update the board on action items of interest or concern.

Point out the sample management report on the following pages.



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Supporting Materials In addition to a meeting agenda, board members should receive such supporting materials as: • Management report—This is the manager’s report on the association’s current management and administrative activities. It is the manager’s opportunity to both update the board on action items of interest or concern (see the sample below) and to demonstrate all the accomplishments the manager performed on the association’s behalf. • Minutes from the last meeting • Financial report—This is a report on the community’s financial condition and activities. • Committee reports—These written reports should highlight recommendations for board decision. Supporting research should be included in the reports. Committees need to clearly state the actions they are asking the board to take. Provide your committees with a suggested format for their reports and a sample. Committee reports submitted with the board packet will preclude the necessity for oral reports at the meeting. • Special reports, memos, or correspondence on issues to be discussed In a properly prepared board meeting, all members should have had the information needed for discussion before the meeting.

SAMPLE MANAGEMENT REPORT January 15, 2012 Board of Directors ABC Association, Inc. Dear Directors: The following is a recap of the events which occurred at your community since our last meeting: 1. The financials as of December 31, 2011, are attached for your review. Your attorney’s delinquency report is also attached. 2. The onsite staff will be scheduling replacing balconies on 8433 #1, 21 and 31. This will leave one more set of balconies for this building to be completed. Total Balconies 92 sets stucco 34 non-stucco Masonite

Completed 77 Sets 17 Sets

3. AAA Pipe has flushed out the main sewer lines; this is done on a quarterly basis. 4. The City of Houston advised that the annual safety inspections for the elevators were due and we initiated the work, now completed. We have received our Annual Operating Certificates.

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Module 4: Community Management and Leadership Sample Management Report, continued Board of Directors ABC Association Page Two

5. Texas Lawns is doing an excellent job; unfortunately many shrubs were lost during the freeze. 6. Deed restriction letters have been mailed on a regular basis; most residents comply upon receipt of our phone call or the letter. The photographs I include in the letter make it very clear what the violation is. 7. Best A/C Repair has inspected all lobby air conditioners. Fire extinguishers will be inspected in January. 8. We had a gas leak on the property; therefore, the gas to the entire complex was turned off. It was necessary to get re-permitted and inspected by the City Inspectors. Total cost for the repair and inspections came to $19,262.50. 9. Our property Insurance came due in November. With board approval, we changed to Associations Insurance Agency’s property coverage because it had a better rate at $169,521 and lower deductible. AIAI’s policy runs from November to November. ABK Insurance Agency’s proposal was $185,386.27. Our liability insurance came due on October 15, 2011, and at the board’s instructions was renewed with Town & Country in the amount of $24,942.24. This includes D & O Insurance. 10. Unfortunately, we are still dealing with the elevator problems in buildings 8421 and 8423. The problems actually started with the original construction from the developer in the mid-1990s. It was discovered that there was no foundation in the elevator pit. It was necessary to hire an engineer to give instructions to the elevator company in order to perform the repair work. There was also water in the pit, which made it necessary to check for leaks in the water lines. 11. Besides routine maintenance, the onsite staff has checked all the emergency lights, replaced batteries where needed, cleaned the PVC drains along the sidewalks, cleaned the gutters and roofs, repaired the ladders in the roof stairwells, and cleaned the carports and light globes. 12. The board approved a budget for 2012 with a 2% increase. Coupons and letters have been mailed to all homeowners. 13. Pool pass bracelets are being given out again this summer. We locked the pool gates on several occasions last year because of non-compliance with the rules and regulations. 14. Trees are being trimmed in anticipation of the hurricane season. Texas Lawns gave us a very good price for the work. 15. Andre Jones, CPA has begun your 2011 audit as approved at the last meeting. Respectfully submitted, Meticulous Manager


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Preparing for the Board Meeting, continued Say The meeting location is also an important consideration when preparing for the board meeting. Consider the following: • • • • •

Business-like setting. Meeting room on site. Conference room at the management company. Nearby facility such as a library, church, fire station, or recreation center. Avoid board members’ homes when possible because they typically lack space, comfort and neutrality.

The meeting room set up is important. • • • • •

Comfortable size, climate, and lighting. Serve refreshments after the meeting. No alcoholic beverages. This is a business meeting. Adequate guest seating. Provide for a meeting table, with the chairman to sit at the head of the table.


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Module 4: Community Management and Leadership Site Selection for Meetings If your community association does not have a meeting room, schedule board meetings in public meeting rooms that usually do not require a rental fee. Possibilities include a local church, school, community room, law enforcement center or library. Even more convenient for the manager, consider using your management company’s conference room. Be sure to give board members and owners plenty of advance notice if a meeting is offsite. Avoid meetings in homes of board members. The space will not always be adequate. Additionally, a board member’s home is not a public and neutral site that will encourage owners’ attendance.

Site Preparation Here are some tips on site preparation from experienced managers. • Make arrangements in advance for a well-lighted, comfortably warm or cool environment. • Serve any refreshments after the meeting (unless the management company has made arrangements to feed the board as an incentive for attending). • Avoid alcoholic beverages. This is an official meeting. • Provide adequate seating for all the owners who attend. Inadequate seating may make people feel like unwanted or unexpected intruders. • If possible, avoid having the board members sit with their backs to the owners in attendance. • The presiding officer should sit at the head of the table with the manager beside him or her. This will make it possible for the manager to give the presiding officer immediate assistance if needed.



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Conducting the Board Meeting Say Employ the following items to help a board meeting run smoothly: • Use parliamentary procedure. • A quorum must be present (define “quorum”). • The chairman—not the manager—presides over the meeting. • Follow the agenda. Executive sessions, or closed sessions, may be held to discuss sensitive items such as litigation, contract negotiation, issues of a sensitive nature or personnel matters. Typically, there are no minutes for an Executive Session as the proceedings are confidential and intended for discussion only. Once the board has decided on its course of action, it should reconvene to the regular board meeting to vote so that the decision is recorded in the minutes. The discussion leading to the decision remains confidential. Caution: Some state statutes limit how executive sessions can be used and how decisions made in executive sessions should be recorded. The manager helps facilitate a successful meeting by assisting and guiding the chairman to keep discussions on target and preventing the meeting from becoming too long. Meetings should ideally last no more than 60 minutes, but definitely no longer than two hours. Meetings that last longer usually become unproductive. Use timed agendas or an agreed upon adjournment time to prevent lengthy meetings. Minutes of meetings must be kept to document the actions and decisions of the board of directors. Minutes are the permanent record of the board. The minutes should reflect what actions were taken in the meeting, not what was said. The minutes are not meant to provide a narrative or transcription of the meeting. The secretary, not the manager, is responsible for maintaining all records including the minutes. Emphasize that the manager should not take the minutes of the meeting. The responsibility of the manager is to focus on the dynamics of the meeting and assist as needed. You cannot do this and take minutes. If a volunteer is unwilling to take the minutes, the association should make appropriate arrangements such as paying a minute-taking service or asking volunteers from among the membership. Action items lists should be created at the end of the meeting to record the items to be accomplished— and by whom—prior to the next meeting. This action list, as well as information contained in the minutes, becomes the basis for preparing for the next meeting. Page 546


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Conduct of Board Meetings Adequate preparation is necessary, but not sufficient, for effective decisionmaking at board meetings. Unless a meeting is conducted in a manner that supports decision-making, your preparations will be wasted. This section of the lesson discusses the elements of a meeting that contribute to effective decision-making: • Basic principles of parliamentary procedure • Establishing a quorum • The use of motions • The role of the presiding officer • Proper behavior during debate • Executive sessions • Recording minutes for meetings • Action item lists

Basic Principles of Parliamentary Procedure Parliamentary procedure is a set of rules for conduct at meetings. Experience demonstrates that this can be a very effective decision-making method in a group setting. Be sure to introduce new board members to parliamentary procedure as they take their places on the board. The most popular version of parliamentary procedure is Robert’s Rules of Order. There are many sources available that present these rules in a simple, straightforward way (see the list of resources at the end of this lesson). Make the effort to train your board to use them effectively.

Establishing a Quorum The basic requirement for effective decision-making that parliamentary procedure establishes is the need for a quorum. A quorum is the number of members required to be present for the board to legally conduct the business of the association. In the absence of a quorum, the only formal actions a board may take are to recess, adjourn, or take measures to obtain a quorum. Your community’s bylaws set the quorum for a board meeting.

The Use of Motions A motion is a proposal that the board takes a stand or takes action on a specific matter. A board of directors can consider ideas from committees, board members, or owners. However, only board members can actually make a motion. Motions should be made only for items listed on the agenda.


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Abstentions To abstain is to not cast a vote. Board members should abstain from voting only for clearly stated reasons such as a conflict of interest or ignorance of the matter at hand. In small groups like boards of directors, abstentions should be discouraged. A board has the fiduciary duty to act on matters brought before the community association. The abstentions should be recorded in the minutes. A majority of the votes cast decides the issue. Abstentions do not count as negative or positive votes unless the abstention keeps the board from a majority vote. In that case, it might be wise for the board to table the decision until the abstaining member can be brought up to speed with the facts and feel comfortable to complete the vote.

Role of the Presiding Officer The presiding officer or person who runs a board meeting is the president or chairman of the board—and in that person’s absence, usually the vice president or vice chairman. The presiding officer contributes to effective decision-making by fulfilling the following duties: • • •

Opens the meeting on time, announces the presence of a quorum, and establishes the agenda of the meeting Ensures that the meeting follows the agenda Keeps discussions focused on the matter at hand The presiding officer sees to it that all major issues are brought to the floor in the form of a motion. This focuses the discussion. He or she allows discussion to begin only after a motion is seconded. If no one seconds a motion made during a meeting, it dies for lack of support. If discussion wanders or becomes confused, the presiding officer calls people’s attention to the motion on the floor as a way of refocusing discussion. If it is clear from the discussion that a decision will not be made within a reasonable period of time during the meeting, the presiding officer asks for a motion to postpone the motion to a later meeting.

•

Keeps meetings from becoming unreasonably long If meetings always run longer than one-and-a-half to two hours, consider recommending the use of a timed agenda to your presiding officer. A timed agenda is a list of meeting items with a period of time assigned to each. Once the time limit is reached, the group either votes on the motion or moves on to the next agenda item, postponing the vote to the next meeting. Timed agendas should be approved at the beginning of the meeting. For a timed agenda to be effective, the presiding officer must politely insist that time limits be obeyed and incomplete items postponed to another meeting. An appointed board member should keep time for the presiding officer, so he or she can concentrate on running the meeting.

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Module 4: Community Management and Leadership Behavior During Debate Debate is the term used in parliamentary procedure for discussing a motion or issue. Parliamentary procedure calls for the following rules to keep the discussion focused and to avoid disagreements turning personal: • Direct all remarks to the presiding officer • Stop speaking when the presiding officer finds it necessary to speak • Confine remarks to the issue being discussed • Avoid using members’ names when you refer to their positions • Avoid attacking members’ motives • The presiding officer should warn a member about a serious offense the first time it happens (For example—personal attacks, use of obscene language, etc.)

Executive Sessions There are times when a board must hold a discussion or make decisions of a sensitive nature. Many states have so-called “sunshine laws” which limit the reasons why a governing board may go into a closed or executive session. The topics that commonly require an executive session and are allowable by law usually include: • Personnel issues • Contract negotiations and discussions • Lawsuits and other legal matters • Issues of a sensitive nature While discussions in executive sessions are secret, any decisions made must be brought to an open session and voted on there. However, requirements vary by state and governing documents. Consult with your attorney for your state’s requirements.

Recording Minutes for Meetings The minutes of a meeting document the decisions made during the meeting. This provides a permanent public record of positions and actions taken by a board. The secretary of the board is responsible for maintaining all official records, including the minute book of all board meetings. Minutes should reflect what was done at a meeting, not what was said. The minutes may list the name and topic for any speaker, but not a summary of the person’s remarks. Minutes should state: • The type of meeting—such as regular or special • Name of the group • Date, place and time of the meeting • Presence of the president and secretary or their substitutes • Presence of a quorum and the names of the board members present and absent • Action taken on the minutes of the previous meeting and corrections, if any • Exact wording of a motion as it is adopted, including the name of the persons making and seconding the motion (depending on state requirements, governing documents, and legal counsel preference) • Hour of adjournment


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Owner Meetings Say There are two types of owner meetings: 1. Annual meetings • •

•

Requirements for conducting the annual meeting may be detailed in state statutes. The governing documents will set forth requirements for the annual meeting. These include: o Time o Place o Notice o Quorum o Order of business o Conduct of meetings o Voting Annual meetings should be used not only as an official business meeting of the association but also to recognize and reward volunteers and leaders for their efforts and contributions to the community.

2. Special meetings • • •

Requirements for conducting special owner meetings may be detailed in state statute. The governing documents will set forth requirements for a special meeting. In most cases, the notice of a special owners meeting must state the purpose of the meeting and no business, other than what is included in the notice, can be transacted.

Define ballot and proxy.

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•

Owners’ meetings often require the use of ballots. A ballot is a written means of voting when secrecy is desired.

•

A proxy is a written statement authorizing another person to cast a vote on the signer’s behalf. The association’s governing documents may dictate when and if proxies are permissible.



Module 4: Community Management and Leadership All motions passed during a community association board meeting are recorded in the minutes with the: 1. Exact wording of the motion 2. Name of the persons making and seconding the motion 3. Result of the vote (According to Robert’s Rules of Order, when a motion is defeated, it does not have to be recorded.) 4. Dissenting minority vote—if those dissenting ask that it be recorded In addition, any recommendations from committees should be in writing and given to the secretary to place in the minutes of the meeting. As a community manager, you should not take the minutes at a board meeting. Your responsibility is to concentrate on the dynamics of the meeting in order to assist when needed. It is difficult do that and take minutes at the same time. However, the manager needs to be cognizant of the presence of the recording secretary and, in the event no provisions are made for minutes, the manager must prompt the chairman to make those arrangements. To free the manager to concentrate on the board’s discussion, many community associations use a recorder to back up note-taking. If a meeting is recorded to assist in preparation of the minutes, the recording should be erased when the minutes are approved.

Action Item Lists An action item list is a list of actions to be taken before the next meeting as a result of decisions made at the current one or between meetings. An action item list contains the decisions to be implemented together with the names of those assigned implementation responsibility. Excel, Google Docs and Microsoft Outlook Tasks may be useful programs for helping you compile your action item list.

Owner Meetings Although the focus of this lesson is on board of directors meetings, we would like to end this section with some basic information on owners’ meetings. Owners’ meetings can be annual or special. Special meetings are devoted to a specific issue. Usually a special meeting is called when the bylaws require the vote of owners on some action the board would like to take. Your bylaws will state the quorum needed for an owners’ meeting. Whether a motion requires a plurality, a majority, or two-thirds approval will depend on your governing documents and the issue. Owners’ meetings often require the use of ballots. A ballot is a written means of voting when secrecy is desired. Your governing documents will also tell you when and if proxies are permissible. A proxy is a written statement authorizing another person to cast a vote on the signer’s behalf.


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The Manager's Role Say A manager plays two roles at a board of directors meeting—support staff and professional advisor. Offer examples of each: The manager as support staff • Stay informed about committee activity and provide assistance when needed. • Handle all matters relating to a board meeting well in advance. • Try to create the most pleasant working atmosphere for meetings as possible. • Develop a clear understanding as to exactly what type of support volunteer leaders expect and how much. • Work closely enough with your presiding officer to enable the two of you to evaluate and adjust the support provided. The manager as professional advisor • Alert your board to community issues that need to be resolved. • Demonstrate professional competence in answering questions. • Make recommendations on appropriate courses of action. • Be careful to state your opinions only within your field of management expertise. (NEVER give a legal opinion. Rely on professionals when it is deemed necessary.) • If you don’t have an answer, promise to get back with one within a specific time. Don’t fake it! • Keep your board informed on matters of interest in the field of common interest real estate as they develop particularly in relation to changes in federal, state and local law and best practices. • Provide training sessions as part of board meetings and encourage board members to take advantage of outside educational opportunities. For example—local or national training sessions for volunteer community leaders offered by Community Associations Institute. • Be prepared to make adjustments for the fact that board members’ participation is a voluntary activity that must compete with their other obligations and interests. • Be a source of history and continuity for your board during its deliberations. • Be alert to potential board and committee members and convey your suggestions to the board and/or nominating committee.

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The Manager's Role Slide 128 Dual Role of a Manager 1. Support Staff

2. Professional Advisor • Provide the board with guidance and perspective on the matters at hand

• Meetings are wellprepared • Board members have the necessary information ahead of time

128



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The Manager’s Role As a manager, you are also a key element in effective board meetings. This final section of the lesson will discuss: • The dual role of a manager • How to facilitate a meeting • The role of personalities in meetings

The Dual Role of a Manager A manager plays two roles at a board of directors meeting—support staff and professional advisor: • The manager as support staff—As staff, a manager has the responsibility to see to it that meetings are well-prepared and board members have the necessary information ahead of time. Here are some suggestions from successful community managers: o Stay informed about committee activity and provide assistance when needed. o Handle all matters relating to a board meeting well in advance. o Try to create the most pleasant working atmosphere for meetings as possible. o Develop a clear understanding as to exactly what type of support volunteer leaders expect and how much. (For example—number of meetings, reports typed, phone calls.) o Work closely enough with your presiding officer to enable the two of you to evaluate and adjust the support provided—as necessary. • The manager as professional advisor—As a professional advisor, a manager must provide a board with guidance and perspective on the matters at hand. Suggestions from successful community managers: o Alert your board to community issues that need to be resolved. o Demonstrate professional competence in answering questions. o Make recommendations on appropriate courses of action. o Be careful to state your opinions only within your field of management expertise. (NEVER give a legal opinion. Rely on professionals when it is deemed necessary.) o If you don’t have an answer, promise to get back with one within a specific time. Don’t fake it! o Keep your board informed on matters of interest in the field of common interest real estate as they develop. o Provide training sessions as part of board meetings and encourage board members to take advantage of outside educational opportunities. For example—local or national training sessions for volunteer community leaders offered by Community Associations Institute. o Be prepared to make adjustments for the fact that board members’ participation is a voluntary activity that must compete with their other obligations and interests. o Be a source of history and continuity for your board during its deliberations. o Be aware of potential board and committee members and make those suggestions to the board and/or nominating committee.

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The Manager's Role, continued Facilitating the Successful Meeting Say Frequently board meetings get bogged down or off track from the agenda. Many times board members simply do not know how to reach consensus or resolve an issue. The manager needs to use various techniques to facilitate the meeting in a low-key manner without seeming impatient or appearing to take over the meeting. • • • • • • • •

Help keep discussions on target. Offer alternatives when discussion stalls. Call attention to previous board actions or resolutions if they are relevant. Be a timekeeper. Be aware of possible conflicts with the governing documents. Urge consistency in actions of the board. Support fairness. Elaborate on the management report with additional explanations.

Slide 129 Helping to Facilitate a Board Meeting • Help keep discussions on target • Offer alternatives when discussion stalls

• Call attention to previous board actions • Be a timekeeper • Be aware of governing documents • Urge consistency in action • Support fairness • Elaborate on the management report

129


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How to Facilitate a Meeting As a professional advisor, a community manager is expected to facilitate board meetings in a low-key manner. To facilitate is to help a process or action move forward. The challenge for a manager is to do this without taking charge of a meeting. Here are some things to do to keep a meeting moving. The challenge is to do them with a simple question or appeal to parliamentary procedure so you won’t appear impatient or condescending. • Help keep discussions on target. For example—“Could the secretary repeat the motion that’s on the floor?” • Offer alternatives when discussions stall. For example—“Would it help if we tabled that motion until the next meeting to enable the Recreation Committee to get some answers to those questions from the bidders?” • Call attention to past board actions when they are relevant to the current matter and overlooked. For example—“Some of you will recall that the board considered that issue last spring and decided to wait until after the parking lots were repaved.” • Be a timekeeper. For example—Unobtrusively, keep an eye on your watch. If time starts to slip away during a discussion, quietly let your presiding officer know with a prearranged signal or note. • Be alert to proposed actions that might be in conflict with your community’s governing documents. For example—Always bring a set of the governing documents to board and owner meetings. • Urge consistency in actions of the board. For example—If a board imposes a late fee in one case, it should impose a late fee in all similar cases. • Support the principle of fairness. For example—If a board replaces a dead tree on a common area in front of one owner’s home, it should be prepared to replace other dead trees as the issue arises. • Elaborate on your management report. For example—Highlight the key points in your report at the meeting. Respond to questions and offer additional explanations as needed.

The Role of Personalities in Meetings Part of being a good meeting facilitator is to recognize the role personalities play in meetings. Personalities are the element that makes meetings interesting—and unpredictable! Learn to recognize different personality types. Think about how to use people’s strengths to get things done. At the same time, anticipate how to compensate for their limitations.

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Here are some final tips from experienced community managers: • Do not make personal judgments about people. This type of judgment about others will hamper your effectiveness. • Identify the decision makers in a group early and work through them. • Don’t immediately dismiss a complainer. The complaint may be legitimate! On the other hand, don’t change your efforts in response to every complaint you receive. Recognize that chronic complainers are bothered by something other than the issue they are complaining about. • When people are angry, try to understand why. Ask for an explanation. Sometimes the opportunity to be heard calms people down. • When someone gets too hot under the collar to calm down, call for a break. In severe situations, reschedule your meeting. • Finally, remember that you are but one element in an effective meeting. When a meeting goes well, take pride in your contribution to its effectiveness. But when things beyond your control go wrong, don’t blame yourself. You’re going to participate in a lot of meetings over the course of your career in community management. Some will go smoother than others.



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Run the Work Group Exercise activity. Three work group exercises are described here. Divide the class into work groups of 3 to 6 persons depending upon the size of the class and assign an exercise to each group. (Feel free to assign the same exercise to multiple groups.) Allow approximately 15 minutes for the work groups to complete their exercise. After the work groups have completed the exercises, have them share the problem and recommended solution with the remainder of the class (10 minutes).

Work Group Exercise #1 Review the sample meeting minutes for Bayview Towers. Comment on any strengths or positive attributes you note. Comment on any negative attributes or weaknesses and make recommended changes. Answer: • There are no particular strengths or positive aspects of these minutes. • The minutes are too wordy. They include a narrative description of what was said rather than what actions were taken. • Actions are not clear. The action to approve the previous minutes as corrected does not state what the correction was. • Motions are not properly recorded with the maker, second, and vote, as with the motion to purchase a certificate of deposit (CD). • Details of motions are not properly included. For example, the motion to purchase a CD does not include maturity, rate, or applicable information. • The minutes include action items for the manager— which should not be included. • The minutes should be signed and dated by the secretary.

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Module 4: Community Management and Leadership Work Group Exercises Work Group Exercise #1 Review the sample meeting minutes below for Bayview Towers. Comment on any strengths or positive attributes you note. Comment on any negative attributes or weaknesses and make recommended changes.

BAYVIEW TOWERS SAMPLE BOARD OF DIRECTORS MEETING MINUTES SEPTEMBER 19, 2012 This meeting of the board of directors of Bayview Towers was held on September 19, 2012. Present were directors Jim Jones, Sue Smith, Dan Doe, Pat Parks, and Beth Bell. Also present were Gene Green, manager, and Keith Kent, representing the covenants committee. President Jones called the meeting to order at 7:26 p.m. Sue Smith moved and Beth Bell seconded that the minutes from the previous meeting be approved as corrected. Pat Parks and Gene Green presented the financial report for August. It was agreed that we could buy a $50,000 CD at First Amalgamated Bank. No written committee reports were received. The management report was presented by Gene Green. Old Business: Keith Kent, chairman of the covenants committee reports that the committee did not receive any comments from owners regarding the proposed rule on parking RVs on the property. He recommends the board adopt the rule now. Sue Smith said she was still afraid the rule would make the property look run down by allowing these kinds of vehicles on the premises. Beth Bell said she and her husband just bought a new one and they love it and they would not have bought it if they knew they could not keep it here. Dan Doe said it did not make any difference because the rule had everybody’s agreement except for Sue. Sue responded that she was not opposed, just concerned, and would like to think about it some more. It was agreed to put this on next month’s agenda. New Business: After much discussion, it was decided to continue to contract for landscape services and not hire staff to do the work. The manager will get bids for the next board meeting. Jim Jones noted the light fixture outside his front door is still broken. Beth Bell asked if we have insurance if someone falls and get hurts. Beth also reminded Gene to make sure the landscapers who bid have insurance. The meeting was adjourned at 10:03 p.m.


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Answer: Strengths/positive attributes:

Negative attributes/weaknesses:

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Work Group Exercises, continued Work Group Exercise #2 Using the provisions set forth in Section 3.4 of the Bylaws, prepare a time-line and schedule for the preparation of the annual membership meeting, including facilities, reports, nominations, and/or other issues. Answer: Be sure to note the required actions in the governing documents as well as good ideas for the manager’s success: • At least 65 days prior to the meeting, the board must appoint the elections committee. See Section 3.4(a) of the bylaws. The manager should send a notice to all owners advising them of this appointment and the method by which to submit nominations in accordance with the bylaws. • At least 35 days prior to the meeting, the elections committee must close nominations. See Section 3.4(b) of the bylaws. • At least 30 days prior to the meeting, the meeting site should be determined and confirmed. • At least 21 days prior to the meeting, but not more than 30 days before the meeting, the notice of the meeting must be sent to all owners. • At least 10 days prior to the meeting, all reports to be presented at the meeting should be completed. This includes reports of the president, treasurer, and any committees. Ballots should be prepared. Meeting registrars, if needed, should be selected. All recognitions and awards should be decided upon and purchased. The agenda should be prepared. • At least 3 days prior to the meeting, conduct a review and rehearsal of the meeting with board members and other speakers or presenters.


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Work Group Exercise #2 Using the provisions set forth in Section 3.4 of the Bylaws, prepare a time-line and schedule for the preparation of the annual membership meeting, including facilities, reports, nominations, and/or other issues.

Answer:

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Page 397 Sample Bylaws Bayview Towers ARTICLE 3 Board of Directors Section 3.4. Election of Directors. (a) Elections Committee. At least sixty-five days prior to the special meeting required by subsection (b) of Section 2.4 and each annual meeting of the Unit Owners Association thereafter, the Board of Directors shall appoint an Elections Committee consisting of a member of the Board whose terms is not then expiring and at least two other unit owners. The Elections Committee shall develop election procedures and administer such procedures as are approved by the Board providing for election of directors by ballot of the unit owners at annual meetings and, where appropriate, special meetings. (b) Nominations. Persons qualified to the directors may be nominated for election only by a nominating petition submitted to the chairman of the Elections Committee at least thirty-five days before the meeting at which the election is to be held signed by persons owning fee simple interest in and representing in the aggregate at least ten units and either signed by the nominee or accompanied by a document signed by the nominee indicating the willingness to serve as a director; provided, however, that additional nominations may be made from the floor at the meeting at which the election is held for each vacancy on the Board of Directors for which no more than one person has been nominated by petition. The nominee must either be present and consent to the nomination or have indicated in writing the willingness to serve. This subsection (b) does not apply to persons appointed to the Board by the Declarant. (c) Qualifications. No person shall be eligible for election as a member of the Board of Directors unless such person is (alone or together with one or more other persons) a unit owner, a Mortgagee (or a designee of a Mortgagee) or a designee of the Declarant. No person affiliated with a unit owner nor any unit owner shall be elected as a director or continue to serve as a director if such person is more than sixty days delinquent in meeting financial obligations to the Association and a lien of record has been filed against such person’s unit.


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Work Group Exercises, continued Work Group Exercise #3 Based upon the sample documents, financial reports, minutes, and other information provided for Bayview Towers throughout this course, prepare a timed agenda for an upcoming board meeting. Answer: The following sample agenda could contain even more information, such as recommended actions and additional support. However, this should be considered a minimally acceptable agenda. Sample Agenda

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Agenda Item

Time

Call to order

5:30 p.m.

Secretary’s Report: • Approval of previous minutes

5:30 p.m.

Treasurer’s Report • Review financial statements • CD purchase

5:32 p.m.

Management Report

5:35 p.m.

Committee Reports

5:45 p.m.

Old business • Adopt RV parking rules

5:55 p.m.

New business • Landscape bids • Review action items

6:05 p.m.

Open Forum

6:15 p.m.

Evaluation/Celebration

6:25 p.m.

Adjournment

6:30 p.m.


Leader Guide

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Work Group Exercise #3 Based upon the sample documents, financial reports, minutes, and other information provided for Bayview Towers throughout this course, prepare a timed agenda for an upcoming board meeting.

Answer: SAMPLE AGENDA Agenda Item

Time

1. 2. 3. 4. 5. 6. 7. 8. 9. 10.


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Page 399

How to assist the board of directors in making decisions. How to properly prepare for a board of directors meeting. How to help facilitate a successful board of directors meeting.


Key Terms: • • • • • • • • •

Abstention Action item list Agenda Ballot Committee report Debate Executive session Financial report Management report

• • • • • • • • •

Minutes Motion Notice of meeting Parliamentary procedure Proxy Quorum Residents forum Robert’s Rules of Order Timed agenda



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Page 399

Focus Questions Use the following questions to help you identify and review the core concepts in this lesson. (Hint: Once you look up the answer to a question, you may want to jot down the page number next to the question for future reference.) 1. What should the focus of board of directors meetings be? 2. What are the three functions of a board of directors? For each function, list at least one corresponding board responsibility. 3. What does adequate preparation for a board of directors meeting include? 4. What are some things a manager can do to prepare for decision-making at meetings? 5. Who should receive a notice of a board meeting? 6. What items should be included with the notice? 7. What is the standard order of items on a meeting agenda? 8. What are the various uses of an agenda? 9. What are some considerations when selecting and preparing a site for a board of directors meeting? 10. Why is a quorum for a meeting important? 11. Describe some things a presiding officer can do during a meeting to facilitate decision-making. 12. What are some rules that apply to debate at meetings that help to keep discussion focused and disagreements impersonal? 13. What is the purpose of an executive session? 14. What are some topics for an executive session that the law usually allows? 15. Who is responsible for taking minutes at a board meeting? 16. What items of information should be included in the minutes of a meeting? 17. Explain the dual role of a community manager. 18. List some of the things a manager can do to facilitate an effective board meeting. 19. Explain the role of personalities in meetings and how a good facilitator should take them into account.



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Thought/Discussion Questions Use the following questions to help you apply the information in this lesson to your own situation. 1. Are there any improvements that can be made in the focus of your board meetings that would lead to more effective decision-making? 2. How can you work with others to make those improvements? 3. Are there any improvements that can be made in the preparations for your board meetings that would lead to more effective decision-making? 4. How can you work with others to make those improvements? 5. Are there any improvements that can be made in the conduct of your board meetings that would lead to more effective decision-making? 6. How can you work with others to make those improvements? 7. Are there any improvements that can be made in your role at board meetings that would lead to more effective decision-making? 8. How can you work with others to make those improvements?


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Page 401

Lesson 2 Quiz 1. Which of the following responsibilities relate to the governance function of a community association board of directors? a. Decide issues of policy for the owners in the community b. Promote harmony through service programs and regular communication with owners c. Monitor financial matters for the purpose of preserving and enhancing the community d. Hear appeals of committee and management decisions that are protested by groups of owners RATIONALE: There are three areas of board decision-making which relate to the three functions of a community association board of directors: business, governance, and community. As volunteer leaders responsible for governing an organization, a board must decide issues of policy for the owners in the community. 2. Complete the following sentence: A notice of meeting should be sent in writing to board members at least _________ before a meeting. a. a year b. 1 day c. 3 months d. a week RATIONALE: Community managers should send a notice of meeting in writing to board members at least a week before a meeting. Exactly how far in advance a notice of meeting can be sent may be set by a community association’s governing documents. 3. True or false. An agenda is more than an announcement of the order of business for a meeting; it is a meeting management tool. (True) RATIONALE: By specifying the duration of a meeting in the agenda or allotting agenda items specific amounts of time, managers are helping the board to proceed with its business in a timely manner. Note that meetings that run more than two hours often degenerate into an unproductive effort. 4. In addition to a meeting agenda, board members should receive each of the following supporting materials prior to a meeting EXCEPT: a. Minutes from the last meeting b. Financial reports c. Community newsletter d. Committee reports RATIONALE: In a properly prepared board meeting, all members should have had all the information needed for discussion before the meeting. The community newsletter is not typically an item required to conduct a board meeting.


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Lesson 2 Quiz, cont’d 5. True or false. The home of the association president is neutral site for board meetings that will encourage owners’ attendance. (False) RATIONALE: If a community association does not have a meeting room, board meetings should be scheduled in public places. Avoid meetings in homes of board members, as the space will not always be adequate. Nor is a board member’s home a public and neutral site that will encourage owners’ attendance. 6. True or false. A board of directors can legally conduct the business of the association without a quorum. (False) RATIONALE: A quorum is the number of members required to be present for the board to legally conduct the business of the association. In the absence of a quorum, the only formal actions a board may take are to recess, adjourn, or take measures to obtain a quorum. A community’s bylaws set the quorum for a board meeting. 7. True or false. Personnel issues are an example of a topic that often require an executive session that is allowable by law. (True) RATIONALE: There are times when a board must hold a discussion or make decisions of a sensitive nature. Many states have so-called “sunshine laws” which limit the reasons why a governing board may go into a closed or executive session. The topics that commonly require an executive session and are allowable by law usually include personnel issues, contract negotiations and discussions, lawsuits and other legal matters, and governing document violations. 8. Complete the following sentence: A _______________ is a written means of voting when secrecy is desired. a. proxy b. residents forum c. action item list d. ballot RATIONALE: Unit owners’ meetings often require the use of ballots. A ballot is a written means of voting when secrecy is desired.

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Additional Resources For further information on board meetings and decision-making, we suggest the following: The A-B-Cs of Parliamentary Procedure. A brief, illustrated booklet that outlines the basic process involved in running a meeting according to Robert’s Rules of Order. Robert’s Rules of Order: IN BRIEF. This pocket-guide version of Robert’s Rules of Order distills and summarizes all the complexities of parliamentary procedure in a handy guide that’s suitable for board members, managers and even homeowners attending their association’s meetings and elections. 2004 Robert’s Rules of Order. A number of inexpensive paperback versions are available. The League of Women Voters publishes an excellent flyer that summarizes the basic points. Conducting Meetings: A Guide to Running Productive Community Association Board Meetings, 2nd Edition. Find out how to prepare for a meeting, stay on the agenda, take good minutes, use resolutions, tape record meetings and conduct executive sessions. (Community Associations Institute, 2005.) Decision Making in Communities: Why Groups of Smart People Sometimes Make Bad Decisions, by Jasmine Martirossian. Presents a fascinating look at the unseen forces that affect groups of people in community associations— including boards, management teams, and committees—and the decisions they make. (Community Associations Institute, 2001.) Meetings & Elections: How Community Associations Exercise Democracy, A Guide for Association Practitioners, by P. Michael Nagle, Esq. An excellent reference for all aspects of conducting meetings and elections—quorums, parliamentary procedures and organizing and implementing elections. Addresses electronic notice, e-ballots and e-proxies. Includes a checklist of election procedures. (Community Associations Institute, 2005.) The Board Secretary: Roles and Responsibilities in Community Associations, A Guide for Association Practitioners, by Anita Hagerty Schenk, PCAM and P. Michael Nagle, Esq. A must-have for all community association secretaries. Full of advice on meeting preparation, record keeping, effective filing and more. Includes samples of agendas, minutes, and forms. (Community Associations Institute, 2003)


Transition to Lesson 3: Ethics


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Lesson 3: Ethics


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Lesson 3: Ethics Goal At the end of this lesson, students will be able to understand what constitutes a conflict of interest and how to avoid it as well as understanding how not to engage in unethical or improper behavior.

Time 50 minutes Session Time Breakdown 25 minutes—Faculty presentation 15 minutes—Student exercise 10 minutes—Summary/quiz

Overview Many managers do not always see the potential conflicts of interests that occur almost daily in the role of managing a community association. In fact, many managers act as if they believe gifts, lunches, golfing, and other entertainment from owners and vendors is simply “part of the package.” They believe this practice does not affect their decision-making process. This session has class exercises to analyze problems and situations and arrive at a recommended solution or plan of action. While the exercise will provide a break to the session and probably some levity as well, it should be considered a serious learning experience. Suggested answers to the exercises are provided for you; however, you may find class discussion and work group recommendations to provide equally sound answers. Materials Needed

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LCD Projector

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Remote advancer

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Flip chart


Leader Guide



The topic of this session is ethics and the principles by which the manager should perform the appropriate duties.



Managers of community associations should avoid conflicts of interest, both real and perceived, at all times.


The various definitions of ethics and how it relates to the community association industry.



What factors constitute a conflict of interest and how to avoid it.



CAI’s Code of Ethics for Managers



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Slide 130


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Key Terms: • • • • •

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Business ethics Code of ethics Conflict of interest Duty of care Duty of loyalty

• • • •

Ethics Moral principles Moral values Professional ethics

What You Will Learn After completing this lesson, you should be able to explain and understand: • What is ethics • What is business ethics • Ethics for community associations • Conflict of interest • CAI's designation code of ethics for management

What is Ethics? Simply put, ethics involves learning what is right and wrong, and then doing the right thing—but “the right thing" is not nearly as straightforward as conveyed in a great deal of business ethics literature. As we have seen in many segments of our society, what is an ethical guideline today is often translated to a law, regulation or rule tomorrow. Values which guide how we ought to behave are considered moral values. These include values such as respect, honesty, fairness, and responsibility. Statements defining how these values are applied are sometimes called moral or ethical principles. As a community association manager of primary importance is your integrity. You represent you and your company. You will enjoy a positive reputation if you act ethically and honor the trust you are given. A mistake or an error in judgment can be very harmful to your reputation and take years to repair.

What is "Business Ethics"? The concept of business ethics has come to mean various things to various people, but generally it is knowing what is right or wrong in the workplace and doing what's right. Business ethics expands on the definition of ethics and applies it to the delivery of products or services, and in our relationships with customers, employers, vendors, and colleagues. Companies may lose sight of the need to ensure the integrity and ethical behavior of its employees because of what is perceived as a more pressing need for revenue. Attention and awareness to ethics in the workplace sensitizes leaders and staff to appropriate behavior. Perhaps most important, attention to ethics in the workplace helps ensure that when leaders and employees are struggling in times of crises and confusion, they retain a strong moral compass. Consequently, consistent communication about business ethics can be strong preventive medicine especially during times of increased stress.


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Definitions Say •

Ethics involve learning what is right and wrong, and then doing the right thing.

•

Business ethics is knowing what is right or wrong in the workplace and doing what's right. Business ethics applies to the delivery of products or services, and to our relationships with customers, employers, vendors, and colleagues.

•

Professional ethics are the rules or standards that govern the conduct of members of a profession.

Community association managers have a professional duty to their associations to:

Slide 131 Ethics for Community Managers • • • •

Diligent service Full disclosure Reasonable care Avoid competition/conflict

• No undisclosed monies • Accountability • Prudent use of authority

131

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Module 4: Community Management and Leadership Ethics for Community Associations In the management of a community association, both the board of directors and the community association manager have a duty to the membership. This is referred to as the Duty of Care and Duty of Loyalty. We therefore use the term “ethics” to refer to the specific choices to be made by an individual in his or her relationships with others. Professional ethics are the rules or standards that govern the conduct of members of a profession. The assumption is that the special expertise demonstrated by members of the profession holds them accountable to a higher standard of trust by others. The manager of a community association has a professional duty to: • • • • • • • •

• •

Provide diligent and faithful service Make full written disclosure of any matter that presents a potential conflict of interest for him or her Use reasonable care, diligence, and skill Avoid attempting to make any secret profits when acting on the community’s behalf (for example—arranging for a “commission” for giving a contractor a community association contract) Disclose and account for anything of value he or she receives as a result of managing the community association (for example—a valuable gift from a contractor) Avoid delegating more authority than he or she has received from the board Avoid acting on behalf of the community association after being terminated by the board (for example—giving a contractor instructions on behalf of the community association after being terminated) Be mindful that the duty of loyalty and the duty of confidentiality in the client relationship continues to exist following termination by the association (for example—providing information or documents to a third party that are proprietary to the former association client after being terminated) Decline to perform services that you are not qualified to perform Understand the circumstances that create a conflict with the interests of the community association and disclose these conflicts carefully to all parties



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Conflict of Interest Say A conflict of interest is a situation in which an individual’s duty to one leads to the disregard of a duty to another. Offer an example from your experience.

Review the two questions that must be answered “yes” for a conflict of interest to exist.

Slide 132 Conflict of Interest 1. Is the transaction which results in compensation to the management company or agent directly or indirectly related to management’s relationship with the community association? 2. Will management directly or indirectly receive some compensation from the community association, or a third party, other than the compensation described in the management contract?

132


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Describe the three steps for disclosing a conflict of interest.

Slide 133 Full Disclosure 1. Make full and complete written disclosure of all relevant facts to your board prior to any dealings which may be, or appear to be, a conflict of interest for you. 2. Obtain specific authorization from the board in writing before proceeding with any action which may present a conflict of interest. 3. Even after full disclosure, avoid any actions which are—or may be perceived as—a conflict of interest. 133



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Conflict of Interest Recognizing and addressing a conflict of interest or the appearance of one is a common ethical problem faced by community association managers. A conflict of interest is a situation in which an individual’s duty to one leads to the disregard of a duty to another. For example, a manager or management firm acquires an interest in a company that is eligible to do business with the community association—such as a landscape company. For a real conflict of interest to exist, two questions must be answered with a “yes:” 1. Is the transaction which results in compensation to the management company or agent directly or indirectly related to management’s relationship with the community association? Continuing with the landscape company example, management is tasked with or is responsible for maintaining landscaping in the community association’s common areas. 2. Will management directly or indirectly receive some compensation from the community association, or a third party, other than the compensation described in the management contract? • An example of extra direct compensation would occur if the manager receives a share of the profit earned by the landscape company that does business with the community association. • An example of extra indirect compensation would occur if the landscaper provides free lawn maintenance of the manager’s yard. Be sure to take the following steps to disclose a conflict of interest. 1. Make full and complete written disclosure of all relevant facts to your board prior to any dealings which may be, or appear to be, a conflict of interest for you. 2. Obtain specific authorization from the board in writing before proceeding with any action which may present a conflict of interest. This authorization should also be recorded in the minutes of a board meeting. Best Practice— Annual Authorization for Continuing Agreements: Present the authorization to the board annually to assure all board members, including those recently elected, have participated in the authorization. 3. Even after full disclosure, avoid any actions which are—or may be perceived as—a conflict of interest. Individual owners may not be aware of all the facts and may view your actions as improper.

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Code of Ethics Say CAI has a professional code of ethics for managers. Anyone who obtains the following credentials from CAI must sign off on this code and agree to abide by the stated principles. •

CMCA

•

AMS

•

LSM

•

PCAM

•

AAMC (for management companies)

Note that the 15 separate tenants of the code are reproduced in the Participant Guide. Point out the various best practices for helping managers live by the code and fulfill their duties in an ethical manner. •

Carefully choose your words and your assignments

•

Develop an annual calendar

•

Use a trusted method for sending and tracking homeowner communication

•

Management transition

•

Support the profession

•

Management firm support


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CAI's Designation Code of Ethics for Management Community Associations Institute has developed a Code of Ethics for Management that applies to manager members and member companies who have achieved specific credentials (CMCA, AMS, LSM, PCAM, AAMC). The code of ethics sets forth the general and technical standards for integrity and objectivity, professional courtesy, conflict of interest, use of client funds, and limitations of practice. All managers should follow this policy to ensure their duties to the client are met. (Note: CAI has also adopted Code of Ethics for the Reserve Specialist (RS) and Community Insurance and Risk Management Specialist (CIRMS) designations and for board members.) The Manager Shall: 1. Comply with current bylaws, standards and practices as may be established from time to time by CAI subject to all federal, state and local laws, ordinances, and regulations in effect where the manager practices. 2. Participate in continuing professional education through CAI and other industry related organizations. 3. Act in the best interests of the client; refrain from making inaccurate or misleading representations or statements; not knowingly misrepresent facts to benefit the manager. 4. Undertake only those engagements that they can reasonably expect to perform with professional competence. Best Practice— Carefully choose your words and your assignments: In the process of working with the board of directors it is important for them to have confidence in our abilities and provide us with exciting challenges. Be careful not to answer questions too quickly without the appropriate research. Always use care in accepting additional assignments and obtain guidance from a supervisor if you do not have the technical expertise. 5. Exercise due care and perform planning and supervision as specified in the written management agreement, job description or duly adopted board policies. Best Practice— Develop an Annual Calendar: To assure that all association obligations are performed in a timely manner, develop an Annual Calendar to track routine tasks and special projects. 6. Disclose all relationships in writing to the client regarding any actual, potential or perceived conflict of interest between the manager and other vendors. The manager shall take all necessary steps to avoid any perception of favoritism or impropriety during the vendor selection process and negotiation of any contracts.

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Module 4: Community Management and Leadership 7. Provide written disclosure of any compensation, gratuity or other form of remuneration from individuals or companies who act or may act on behalf of the client. 8. Ensure that homeowners receive timely notice as required by state statutes or legal documents and protect their right of appeal. Best Practice— Use a trusted method for sending and tracking homeowner communication: Members place their trust in the board of directors, and management, that they will receive information about association meetings in a timely manner. They also trust they will receive notifications about enforcement and payment procedures timely as required. Develop a system to monitor and track homeowner communication. 9. Disclose to the client the extent of fidelity or other contractually required insurance carried on behalf of the manager and/or client and any subsequent changes in coverage, which occur during the manager’s engagement if the amount is lower than the contract amount requires. 10. See that the funds held for the client by the manager are in separate accounts, are not misappropriated, and are returned to the client at the end of the manager’s engagement; Prepare and furnish to the client accurate and timely financial reports in accordance with the terms of the management agreement, job description or duly adopted Board policies. 11. Recognize the original records, files and books held by the manager are the property of the client to be returned to the client at the end of the manager’s engagement; maintain the duty of confidentiality to all current and former clients. Best Practice— Management Transition: As in all businesses, client transition is a routine part of the profession. It reflects positively on all of us in community association management when we handle the transition in a professional manner. Timely transition of records and sharing information on current business is the example of an ethical transfer of responsibilities. Withholding information, failure to forward mail, speaking negatively about the new management company and providing misinformation to homeowners are all examples of unethical conduct. When a community association board decides to change management companies, the transition can often be a source of emotions and anger. However, professional managers and management companies understand that they still must maintain their business-like and professional image by assisting the transition in every way possible by: * Continuing to comply with every contract provision until the termination date * Maintaining a customer service attitude


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Page 412 • • • •

Promptly responding to board, owner and new management company requests Transferring hard-copy and software data as quickly as possible Not acting on behalf of the association after the contract ends, including writing checks for company reimbursement Not burning bridges; perhaps the board will realize what it is missing and ask to return to your company

12. Refrain from criticizing competitors or their business practices; act in the best interests of their employers; maintain a professional relationship with our peers and industry related professionals. Best Practice— Support the Profession: Involvement in CAI provides the opportunity for mentoring and supporting each other as we enhance our professional development. It is unethical to speak negatively about another manager or harm someone for your own personal gain. 13. Conduct themselves in a professional manner at all times when acting in the scope of their employment. 14. Not engage in any form of price fixing, anti-trust, or anti-competition. 15. Not use the work products of colleagues or competing management firms that are considered proprietary without the expressed written permission of the author or the management firm. Best Practice— Management Firm Support: In addition to the Duty of Care and Loyalty we extend to our clients we also owe this duty to our employer. As you proceed through your career and have opportunities with new firms and communities, honor the work products, client list, and technology used by your former employers. It is unethical to use a former employer’s proprietary reports, forms or information in your new management position.

Summary As community association managers we have an impact on the most expensive asset most people will own: their homes. We are extended a large degree of trust when given the opportunity to participate in the management of a community association. We honor that trust and present a positive image for the industry when we conduct ourselves ethically and apply strong ethical principles to our work.

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Run the Class Exercise. Give the participants 15 minutes to read the following statements and answer the question “What would you do?” Facilitate a class discussion by asking for volunteers to share their answers. It is appropriate for there to be differing points of view expressed during the discussion. Use the guide below to emphasis the key points and ethical principles for each of the following situations. 1. John Smith works for a large community association management firm. Over the years he has worked with ABC Construction Company when his communities need major repairs. The President of ABC Construction recently called John to ask him for the name and phone number for the Board President of an association John’s firm previously managed. What would you do? John continues to have a Duty of Loyalty and Duty of Care to the former client. This duty exists even if John was not the manager assigned to the association. The duty of confidentiality exists and John should not provide the information to ABC Construction. 2. Betty Jones is an onsite manager of a large high-rise condominium. At Christmas time some of the owners give Betty gifts to show their appreciation. Recently some of them have started to give her gift cards and cash.


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What would you do? These gifts represent a conflict of interest. Betty should make a written disclosure of the gifs to the Board of Directors and obtain written authorization to keep the gifts. Even after proper disclosure this may be perceived as an undesirable conflict of interest. It would be advisable for the board to adopt a policy about gifts from association members and provide this information to the owners on a routine basis. 3. To show her thanks for the policy renewal, the insurance agent of the association invites you to a round of golf on the new PGA course that recently opened. It is the one which you have been waiting to play, but could never find anyone with a membership to get you on the course. She only has one slot in the foursome. What would you do? Accepting this gift would create a conflict of interest and require disclosure and authorization from the Board of Directors. Even if approval is given you may see an owner at the course, thus creating a negative perception. 4. Bob Benson is a portfolio manager and shares an office with Marcia Johnson, who is also a portfolio manager. Yesterday they were both eating lunch at their desks and Bob overheard Marcia talking with the landscape contractors that works with Marcia’s largest client. The contractor was currently putting in a new patio for Marcia and he offered to forgive the bill for his services. Marcia thankfully accepted. What would you do? The focus of this question is on Bob’s actions, not Marcia’s. Bob has a Duty of Loyalty and Duty of Care to his employer. It is important for him to honor these duties by telling them of Marcia’s actions. He may find it easier if he confronts Marcia with this information first and gives her the opportunity to make it right with the landscape contractor, or go to her supervisor directly with the information.

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Module 4: Community Management and Leadership Class Exercise Review the following statements and answer the question: “What would you do?” 1. John Smith works for a large community association management firm. Over the years he has worked with ABC Construction Company when his communities need major repairs. The President of ABC Construction recently called John to ask him for the name and phone number for the Board President of an association John’s firm previously managed. What would you do?

2. Betty Jones is an onsite manager of a large high-rise condominium. At Christmas time some of the owners give Betty gifts to show their appreciation. Recently some of them have started to give her gift cards and cash. What would you do?


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Class Exercise, continued 3. To show her thanks for the policy renewal, the insurance agent of the association invites you to a round of golf on the new PGA course that recently opened. It is the one which you have been waiting to play, but could never find anyone with a membership to get you on the course. She only has one slot in the foursome. What would you do?

4. Bob Benson is a portfolio manager and shares an office with Marcia Johnson, who is also a portfolio manager. Yesterday they were both eating lunch at their desks and Bob overheard Marcia talking with the landscape contractors that works with Marcia’s largest client. The contractor was currently putting in a new patio for Marcia and he offered to forgive the bill for his services. Marcia thankfully accepted. What would you do?

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• Page 415

Various definitions of ethics How ethics relates to community association management To be aware of both potential and real conflicts of interest and to avoid them at all times. If you do have a potential conflict of interest, you know to fully disclose it to the board and to ask for written approval. The importance of following CAI’s Code of Ethics for managers


Key Terms: • • • • •

Business ethics Code of ethics Conflict of interest Duty of care Duty of loyalty

• • • •

Ethics Moral principles Moral values Professional ethics




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Leader Guide

Focus Questions Use the following questions to help you identify and review the core concepts in this lesson. (Hint: Once you look up the answer to a question, you may want to jot down the page number next to the question for future reference.) 1. Give some examples of the ethical behavior expected of a professional community association manager. 2. What is necessary for a true conflict of interest to exist for the manager of a community association? 3. What are three steps to take to avoid either a conflict of interest or the appearance of one? 4. What are some of the tenants from CAI’s Code of Ethics for managers?

Thought/Discussion Questions Use the following questions to help you apply the information in this lesson to your own situation. 1. Have you faced any conflict of interest with your role as a community association manager—or the appearance of conflict? If so, how have you handled the situation? 2. After reading this lesson, would you handle the situation any differently? 3. Do you know anyone who has faced such a situation? How did he or she handle it?


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Page 416

Lesson 3 Quiz 1. The manager of a community association has a professional duty to do all of the following EXCEPT: a. Disclose and account for anything of value he or she receives as a result of managing the community association (for example—a valuable gift from a contractor) b. Delegate more authority than he or she has received from the board only under extreme situations. c. Decline to perform services that you are not qualified to perform d. Make full written disclosure of any matter that presents a potential conflict of interest RATIONALE: A manager must be able to recognize what is and is not an example of ethical behavior. B is wrong because the manager has a duty to avoid delegating more authority than he or she has received from the board. 2. Scenario: A manager or management firm acquires an interest in a landscape company that is eligible to do business with the community association. Based on this scenario, which of the below DOESN’T qualify as a conflict of interest? a. Management happens to be tasked with or is responsible for maintaining landscaping in the community association’s common areas. b. The manager obtains specific authorization from the board in writing before purchasing the landscaping company. c. The manager receives a share of the profit earned by the landscape company that does business with the community association. d. The manager receives a share of profit from a nursery which sells supplies to the landscape company that does business with the community association. RATIONALE: A manager must be able to recognize what does and does not qualify as an example of conflict of interest. B doesn’t qualify as a conflict of interest because this is one of the three steps in disclosing a conflict of interest. 3. All of the following are steps that should be taken to disclose a conflict of interest, EXCEPT? a. Even after full disclosure, avoid any actions which are—or may be perceived as—a conflict of interest. Individual owners may not be aware of all the facts and may view your actions as improper. b. Obtain specific authorization from the board in writing before proceeding with any action which may present a conflict of interest. This authorization should also be recorded in the minutes of a board meeting. c. Make full and complete written disclosure of all relevant facts to your board prior to any dealings which may be, or appear to be, a conflict of interest for you. d. Acting on behalf of the community association after being terminated by the board (for example—giving a contractor instructions on behalf of the community association after being terminated) RATIONALE: A manager must know what steps to take when a situation is or could potentially be a conflict of interest. Choice D represents unethical behavior by a manager.


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Lesson 3 Quiz, cont’d Best Practice: Use a trusted method for sending and tracking homeowner communication. Members place their trust in the board of directors, and management, that they will receive information about association meetings in a timely manner. They also trust they will receive notifications about enforcement and payment procedures timely as required. 4. The above Best Practice illustrates which of the Code of Ethics guidelines? a. Comply with current bylaws, standards and practices as may be established from time to time by CAI subject to all federal, state and local laws and regulations in effect where the manager practices. b. Exercise due care and perform planning and supervision as specified in the written management agreement, job description or duly adopted board policies. c. Ensure that homeowners receive timely notice as required by state statutes or legal documents and protect their right of appeal. d. See that the funds held for the client by the manager are in separate accounts, are not misappropriated, and are returned to the client at the end of the manager’s engagement. RATIONALE: Managers must understand what CAI’s Code of Ethics means within their professional work life. C is the correct choice in that the Best Practice will hopefully ensure that homeowners receive timely notices as required by federal, state, local, and association statutes. Best Practice: Management Firm Support: In addition to the Duty of Care and Loyalty we extend to our clients we also owe this duty to our employers. As you proceed through your career and have opportunities with new firms and communities, honor the work products, client list, and technology used by your former employers. It is unethical to use a former employer’s proprietary reports, forms or information in your new management position. 5. The above Best Practice illustrates which of the Code of Ethics guidelines? a. Not use the work products of colleagues or competing management firms that are considered proprietary without the expressed written permission of the author or the management firm. b. Refrain from criticizing competitors or their business practices; act in the best interests of their employers; maintain a professional relationship with our peers and industry related professionals. c. Recognize the original records, files and books held by the manager are the property of the client to be returned to the client at the end of the manager’s engagement; maintain the duty of confidentiality to all current and former clients. d. Undertake only those engagements that they can reasonably expect to perform with professional competence. RATIONALE: Managers must understand what CAI’s Code of Ethics means within their professional work life. A is the correct choice in that the Best Practice will hopefully ensure that employees respect the proprietary rights of past employers. It is also intended to protect the employee and new employer from the legal liability of using proprietary material.

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Lesson 3 Quiz, cont’d Scenario: John Smith works for a large community association management firm. Over the years he has worked with ABC Construction Company when his communities need major repairs. The President of ABC Construction recently called John to ask him for the name and phone number for the Board President of an association John’s firm previously managed. 6. Based on this scenario, what would you do? a. Presenting this information represent a conflict of interest. John should make a written disclosure to the Board of Directors and obtain written authorization to provide the information. Even after proper disclosure, this may be perceived as an undesirable conflict of interest. It would be advisable for the board to adopt a policy about disclosure of information from association members and emphasize this policy to employees on a routine basis. b. John continues to have a Duty of Loyalty and Duty of Care to the former client. This duty exists even if John was not the manager assigned to the association. The duty of confidentiality exists and John should not provide the information to ABC Construction. c. The focus of this question is on John’s actions. Not the President of ABC Construction. John has a Duty of Loyalty and Duty of Care to his employer. It is important for him to honor these duties by telling them about the President of ABC Construction’s request for information. He may find it easier if he confronts the President of ABC Construction with this information first and gives him/her the opportunity to make it right with a retraction of the request, or go to his/her supervisor directly with the information. d. Accepting this request for information would create a conflict of interest and require disclosure and authorization from the Board of Directors. Even if approval is given, it may create a negative perception in the eyes of employees, affiliates, and peers in the industry. RATIONALE: Managers need to recognize how to respond to specific situations based on their commitment to CAI’s Code of Ethics. B is the best choice in that it represents the most clear cut, comprehensive, and defendable response to the situation.



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Lesson 3 Quiz, cont’d Scenario: Bob Benson is a portfolio manager and shares an office with Marcia Johnson, who is also a portfolio manager. Yesterday they were both eating lunch at their desks and Bob overheard Marcia talking with the landscape contractors that works with Marcia’s largest client. The contractor was currently putting in a new patio for Marcia and he offered to forgive the bill for his services. Marcia thankfully accepted. 7. Based on this scenario, what would you do? a. Bob continues to have a Duty of Loyalty and Duty of Care to his current employer. This duty exists even if Bob was not directly the manager being offered the bribe by the landscape contractor. At the same time, the duty of confidentiality exists and Bob should not provide the information to his current employer. b. This gift represents a conflict of interest. Bob should make a written disclosure of the gift to the association and obtain written authorization that it is ok for Marcia to keep the gift. Even after proper disclosure this may be perceived as an undesirable conflict of interest. It would be advisable for the association to create a policy about gifts from portfolio managers and provide this information to Bob and the rest of Bob’s coworkers on a routine basis. c. The focus of this question is on Bob’s actions. Not Marcia’s. Bob has a Duty of Loyalty and Duty of Care to his employer. It is important for him to honor these duties by telling them of Marcia’s actions. He may find it easier if he confronts Marcia with this information first and gives her the opportunity to make it right with the landscape contractor, or go to her supervisor directly with the information. d. Inform Marcia that accepting this gift would create a conflict of interest and require disclosure and authorization from the Board of Directors. Even if approval is given, it may be negatively perceived by various other association employees, affiliates, and peers in the industry. RATIONALE: Managers need to recognize how to respond to specific situations based on their commitment to CAI’s Code of Ethics. C is the best choice in that it represents the most clear cut, comprehensive, and defendable response to the situation. 8. True or false. It is ethically acceptable for a professional community association manager to arrange for a commission for giving a contractor an association contract. (False) RATIONALE: The manager of a community association has a professional duty not to make any secret profits when acting on the community’s behalf. Arranging for a commission for giving a contractor an association contract— without disclosing the relationship and the remuneration to the board— constitutes making secret profits and is ethically unacceptable. Managers should review and consult the CAI codes of ethics. The Professional Community Association Manager (PCAM) code of ethics sets forth the general and technical standards for integrity and objectivity, professional courtesy, conflict of interest, use of client funds, and limitations of practice.

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Additional Resources For further information on ethics, we suggest the following— From Good to Great Brochure. All homeowner and condominium associations share common characteristics and core principles. That’s why CAI developed, and included in one convenient brochure, the Community Association Governance Guidelines, Rights and Responsibilities for Better Communities and the Model Code of Ethics for Community Association Board Members. With practical, time-tested principles and guidance, all three can inspire effective, enlightened leadership and responsible, engaged citizenship. (Community Associations Institute.) Conflicts of Interest: How Community Association Leaders Honor Their Duties, A Guide for Association Practitioners, by Tonia C. Sellers and Jay S. Lazega. Avoid conflicts of interest by reading about fiduciary obligations, conduct of directors, managerial conflicts, ethics policies and board conflicts. Contains sample policies, resolutions, code of ethics and cases. (Community Associations Institute, 2004.) Policies & Procedures to Prevent Fraud & Embezzlement, by Edward J. McMillan, CPA, CAE. Is your association or management company vulnerable to fraud? It's no secret that corporate fraud is a real threat to business today. Fraud losses are devastating—but they are also avoidable. Find out how to safeguard your associations' assets or your company's reputation from plots, schemes, and identity theft. 2006.



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Conduct the Review/Q&A session to wrap-up Day 2. Allow 25 minutes to respond to any questions participants may have about any of the material covered in Module 3 or 4.

Conclude Day 2

Transition to Course Conclusion

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Course Conclusion

Course Conclusion


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Leader Guide

Course Conclusion Goal The course conclusion should include a wrap up/review of the entire course to prepare the class for the final exam. At the end of the course conclusions, students should be confident enough to complete and pass the course exam.

Time 3 hours and 15 minutes Session Time Breakdown 5 minutes—Day 3 Introduction 55 minutes—Course Review/Question and Answer Session 15 minutes—Course Evaluations 120 minutes—Course Exam

Overview This session concludes each of the key aspects covered during the course. Briefly review each of the modules and lessons discussed during the past two days. Ask students for any final questions they may have. The course conclusion also includes the answers to each of the end of lesson quizzes for the students so they can check their work. Materials Needed

Page 600



LCD projector



Remote advancer



Evaluation sheets



Course exam booklets



Pencils



Exam answer sheets


Leader Guide

Course Conclusion

Summary Announce that the class has reached the end of the course.

Slide 134 Course Conclusion

134

Answers to End of Lesson Quizzes Module 1 Lesson 1 Quiz: 1.C 2.T 3.B 4.D 5.T 6.F 7.C 8.T 9.D 10.F Lesson 2 Quiz: 1.D 2.F 3.C 4.A 5.D 6.T 7.D 8.F 9.D 10.F Module 2 Lesson 1 Quiz: 1.F 2.A 3.A 4.T 5.B 6.B 7.A 8.F 9.T 10.D Lesson 2 Quiz: 1.A 2.B 3.T 4.B 5.F 6.D 7.T 8.C 9.F 10.B Lesson 3 Quiz: 1.A 2.B 3.C 4.F 5.A 6.T 7.F 8.B Module 3 Lesson 1 Quiz: 1.B 2.T 3.A 4.D 5.T 6.D 7.B 8.F 9.D 10.T Lesson 2 Quiz: 1.T 2.D 3.T 4.A 5.F 6.T 7.B 8.C 9.C 10.F Lesson 3 Quiz: 1.C 2.A 3.F 4.C 5.T 6.D 7.T 8.A 9.T Module 4 Lesson 1 Quiz: 1.A 2.F 3.B 4.T 5.D 6.F 7.B 8.T 9.C Lesson 2 Quiz: 1.A 2.D 3.T 4.C 5.F 6.F 7.T 8.D Lesson 3 Quiz: 1.B 2.B 3.D 4.C 5.A 6.B 7.C 8.F


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Leader Guide

Summary, continued Overview the various Modules and Lessons discussed in the course.

Slide 135 Module 1: Legal Basis This section of the program introduced you to: • The legal nature of a community association, including the scope and limits of its authority (Legal Basis for Community Associations—Lesson 1) • Proper rule development and enforcement (Rule Development and Enforcement—Lesson 2) 135

Slide 136 Module 2: Financial Management This section of the program introduced you to: • Budgets and Replacement Reserves—Lesson 1 • Collecting Assessments—Lesson 2 • Financial Statements, Audits, Income Taxes, and Investments—Lesson 3

136

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Course Conclusion

Summary, continued Slide 137 Module 3: Facilities Management This section of the program introduced you to: • Maintenance—Lesson 1 • Contracting—Lesson 2 • Risk Management and Insurance—Lesson 3

137

Slide 138 Module 4: Community Management and Leadership This section of the program introduced you to: • Your role and responsibilities as a manager in relation to the roles and responsibilities of your community’s owners and volunteer leaders (Community Management—Lesson 1) • The effective use of board meetings for decision making (Board Meetings and Decision-Making— Lesson 2) • Management ethics (Ethics—Lesson 3) 138


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Leader Guide

Summary, continued Say For more information on any of the topics discussed in this course, CAI offers a wealth of resources, including: •

Publications

•

Articles

•

Web resources

•

Chapter network

Slide 139 Additional Resources from CAI CAI offers many excellent resources for those interested in obtaining additional information about community association management. For information on these products, call CAI for a bookstore catalog at (888) 224-4321 or visit the bookstore online at www.caionline.org/shop

139

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Course Conclusion

Say Please feel free to contact CAI anytime via phone, fax, or e-mail, or visit CAI on the web.

Slide 140 Contact CAI

6402 Arlington Blvd., Suite 500 Falls Church, VA 22042 (888) 224-4321 (M-F, 9-6:30 ET) (703) 970-9558 (Fax) [email protected] www.caionline.org 140



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Leader Guide

Summary, continued Say Thank you for attending this CAI course and for investing in your career and professional development.

Slide 141

Thank you! • For participating in this course • For your support of CAI and the Professional Management Development Program

141

Say CAI also offers many other courses to help you stand out from the crowd and enhance your career. By continuing your education and pursuing professional credentials, you will gain a competitive advantage, potentially earn more money, and obtain valuable experience.

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Course Conclusion

Thank you for participating in The Essentials of Community Association Management (M-100). We hope that you have enjoyed the learning experience. CAI also offers the following Professional Management Development Program (PMDP) courses that provide community association managers the necessary information about insurance, law, leadership, governance, and finance to help create and maintain strong and vibrant communities. M-100: The Essentials of Community Association Management M-201: Facilities Management M-202: Association Communications M-203: Community Leadership M-204: Community Governance M-205: Risk Management M-206: Financial Management PCAM Case Study M-310: Management Company Administration M-320: High-Rise Maintenance and Management M-330: Advanced Insurance and Risk Management M-340: Managing the Large-Scale Association M-350: Manager and the Law M-360: Leadership Practices in Building Community M-370: Managing Developing Communities M-400: Contemporary Issues in Community Association Management For more information about any of these classes, or to obtain more information about the CMCA® (Certified Manager of Community Associations®) certification, or the AMS® (Association Management Specialist®), LSM® (Large-Scale Manager®), RS™ (Reserve Specialist™), CIRMS™ (Community Insurance and Risk Management Specialist™), AAMC™ (Accredited Association Management Company™), or PCAM® (Professional Community Association Manager®) designations, please call 888-224-4321 or visit www.caionline.org.


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Course Conclusion

Leader Guide

Summary, continued Conduct the Review/Q&A session to wrap-up the course. Allow 55 minutes to respond to any questions participants may have about any of the material covered in the course. Ask participants for any remaining questions or concerns.

Slide 142 Final Questions?

142


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Course Conclusion

Course Evaluation Say Before we begin the exam, we are going to now distribute the course evaluations.

Ask for a volunteer from the class to: •

Distribute the evaluations

•

Collect the evaluations

•

Place the evaluations in the envelope provided by CAI

•

Seal the envelope and return it to you for inclusion in the red bag.

Slide 143 Evaluations Please be sure to fill out your course evaluations. Your feedback is important to us.

143


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Leader Guide

Course Exam Say Now it is time for the course exam. •

100 multiple-choice questions

•

Fill in the bubbles completely

•

70% is passing score

•

2 hours to complete

Slide 144 Course Exam • 100 questions • Multiple choice • Results will be available within four weeks, if not sooner • Good luck!

144


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Course Conclusion

Course Exam, continued Slide 145



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Leader Guide

6402 Arlington Blvd., Suite 500 Falls Church, VA 22042 (888) 224-4321 www.caionline.org Copyright © 2011, by CAI—Community Associations Institute. All rights reserved. Reproduction in whole or in part is not permitted without the expressed, written consent of CAI.

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M-100 - The Essentials of Community Association Management - Leader Guide

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