Date: February 20, 2011
By: Bruce Jenkins, Attorney
Preparing the annual budget and overseeing the association’s finances are perhaps the most important responsibilities of board members. The annual operating and reserve budgets reflect the planning and goals of the association and set the level and quality of service for all of the association’s activities.
1. PREPARING THE BUDGET
The association’s budget consists of two basic parts, income and expenses. When preparing the association’s budget it is wise to begin with expenses. This allows for an objective statement of needs before determining the sources of income. After the expenses are identified and quantified, ideal expectations may then be weighed against practical considerations and a balanced budget may be prepared.
2. DETERMINING EXPENSES
The budget process begins with an accurate inventory of all the major components for which the association is responsible. Determining what constitutes an operational versus a reserve expense may have a major impact on the financial plans of the association and subjective determinations should be minimized. The following should be considered when labeling an expense:
A. Operational Expenses. Operational expenses occur at least annually and can be effectively budgeted for each year. They are characterized as being reasonably predictable both in terms of frequency and cost.
B. Reserve Expenses. Reserve expenses are major expenses that occur other than annually and which must be budgeted for in advance in order to provide the necessary funds in time for their occurrence. Reserve expenses are reasonably predictable both in terms of frequency and cost. However, they may include significant assets which have an indeterminable but potential liability if they were not reserved for in advance. Examples of reserve expenses include paint, asphalt overlays and roof repair.
C. Budgeting. Budgeting is normally excluded for repairs or replacements of assets which are deemed to have an estimated useful life equal to or exceeding the estimated useful life of the facility or community itself, or exceeding the legal life of the community as defined in an association’s governing documents. Examples include the complete replacement of elevators, tile roofs, wiring and plumbing.
3. PREPARING THE RESERVE STUDY
Once the reserve assets have been identified and quantified, their respective replacement costs, useful lives and remaining lives must be assigned so that a funding schedule can be constructed. Replacement costs and useful lives can be found in published manuals such as construction estimators, appraisal handbooks, and valuation guides. Remaining lives are calculated from the useful lives and ages of assets and adjusted according to conditions such as design, manufacture quality, usage, exposure to the elements and maintenance history.
Certain calculations must be performed on the compiled data in order for the study to take on a practical meaning, ranging from simple to complex methods. The least complicated method is the straight-line approach in which the replacement cost in today’s dollars, less accumulated reserves, is divided by the estimated remaining life of the components.
The association should update the report on an annual basis to reflect such changes as shift in economic parameters, additions of phases or assets, or expenditures of reserve funds. The reserve analysis update process can be simplified by keeping accurate records of these changes throughout the year.
4. DISTRIBUTION OF ACCUMULATED RESERVES
To determine the ideal level of reserves and actual distributions for each asset an evaluation of the second step is to identify the ideal level of reserves for each asset. A calculation of the component’s age proportionate to its estimated useful life and current replacement cost must be made as follows.
IDEAL LEVEL OF RESERVES =
AGE
USEFUL LIFE X CURRENT REPLACEMENT COST
This method of calculating the ideal level of reserves does not consider future replacement cost, nor interest earned on the accumulated reserves. However, it is a general indicator of the adequacy of the Association’s current reserves, based on current conditions and replacement cost. If the reserves are underfunded, the monthly contribution requirements can be expected to be higher than normal.
5. LEGAL REQUIREMENTS
Most Association governing documents require the funding of a reserve. Further, several states now have laws requiring reserve studies.
Reserves are often under funded in the development stage of the project. Developers have competing objectives: first, to maintain low Association dues to entice buyers, but second, to collect sufficient dues to maintain an adequate reserve. Developers may have a fiduciary duty to provide for an adequate reserve.
Sunday, February 20, 2011
Tuesday, February 15, 2011
Association Liability
Date: February 15, 2011
By: Chris Tingey
Without a doubt, the most common question I am asked as an attorney by my homeowners’ association clients is “What can we do to protect ourselves from getting sued?” My answer is always the same: “Nothing!” In this era of quick-trigger and frequent litigation, there truly is nothing that an association can do to stop itself from being sued. However, it is important to understand that the clients are asking the wrong question. Instead, they should be asking what the association can do to protect itself from being held liable in a lawsuit.
There is, truly, a great deal that associations can do to protect themselves from being found liable in a lawsuit. It is important to determine the sources of potential liability in the association and take protective measures to limit or eliminate the potential liability. Such action may not stop you from getting sued, but it certainly will limit the effectiveness and pain of such a suit. To that end, I offer three basic tips to assist association boards in understanding their liability risks and taking steps to limit it.
1. Know the sources of potential liability.
2. Insurance, insurance, insurance.
3. Be proactive.
First, it is important for association boards of directors to understand the sources or bases of potential liability. For example, does the potential liability arise from a contract to which the association is a party, general principles of tort law, such as negligence, or a statute such as the Planned Community Act or Condominium Act? The source or basis of potential liability often affects many issues involved in a lawsuit, such as insurance coverage, indemnity obligations, and statutes of limitation. In assessing these issues, boards should visit with their legal counsel to discuss their rights, responsibilities, and ramifications of their actions.
Second, association boards should make certain that their association’s insurance coverage is current and adequate. Boards should review their coverage at least annually, and should meet with their broker to discuss their needs. A straight renewal of the existing policies may be sufficient on some occasions, but boards should not simply rely on last year’s insurance in determining this year’s insurance needs.
Finally, association boards need to be proactive in their efforts to limit or eliminate potential liability. Boards should meet with their experts—accountants, reserve study specialists, management team, insurance broker, maintenance team, attorneys, and others—at least annually to gather the information necessary to protect the association’s assets and members. Boards should keep their eyes open about the condition of the common property in the community. They should ensure that the governing documents are being enforced evenly and consistently.
In short, anyone can sue another at any time for anything. Now, whether the lawsuit has any merit is another question. But, association boards can limit or eliminate potential association liability by following the three guidelines discussed above.
By: Chris Tingey
Without a doubt, the most common question I am asked as an attorney by my homeowners’ association clients is “What can we do to protect ourselves from getting sued?” My answer is always the same: “Nothing!” In this era of quick-trigger and frequent litigation, there truly is nothing that an association can do to stop itself from being sued. However, it is important to understand that the clients are asking the wrong question. Instead, they should be asking what the association can do to protect itself from being held liable in a lawsuit.
There is, truly, a great deal that associations can do to protect themselves from being found liable in a lawsuit. It is important to determine the sources of potential liability in the association and take protective measures to limit or eliminate the potential liability. Such action may not stop you from getting sued, but it certainly will limit the effectiveness and pain of such a suit. To that end, I offer three basic tips to assist association boards in understanding their liability risks and taking steps to limit it.
1. Know the sources of potential liability.
2. Insurance, insurance, insurance.
3. Be proactive.
First, it is important for association boards of directors to understand the sources or bases of potential liability. For example, does the potential liability arise from a contract to which the association is a party, general principles of tort law, such as negligence, or a statute such as the Planned Community Act or Condominium Act? The source or basis of potential liability often affects many issues involved in a lawsuit, such as insurance coverage, indemnity obligations, and statutes of limitation. In assessing these issues, boards should visit with their legal counsel to discuss their rights, responsibilities, and ramifications of their actions.
Second, association boards should make certain that their association’s insurance coverage is current and adequate. Boards should review their coverage at least annually, and should meet with their broker to discuss their needs. A straight renewal of the existing policies may be sufficient on some occasions, but boards should not simply rely on last year’s insurance in determining this year’s insurance needs.
Finally, association boards need to be proactive in their efforts to limit or eliminate potential liability. Boards should meet with their experts—accountants, reserve study specialists, management team, insurance broker, maintenance team, attorneys, and others—at least annually to gather the information necessary to protect the association’s assets and members. Boards should keep their eyes open about the condition of the common property in the community. They should ensure that the governing documents are being enforced evenly and consistently.
In short, anyone can sue another at any time for anything. Now, whether the lawsuit has any merit is another question. But, association boards can limit or eliminate potential association liability by following the three guidelines discussed above.
Tuesday, February 1, 2011
JOIN US FOR OUR 2011 VANCOUVER HOA LAW FORUM
Vial Fotheringham Presents: HOAs, Navigating the Wilderness!
March 12th, 2011 9:00 AM - 03/12/11 1:00 PM
Join us for our educational Vancouver HOA Law Forum on March 12th at the Vancouver Hilton. It will be held from 9:00am-1:00pm (with sign-in beginning at 8:30am), and will include a continental breakfast, afternoon refreshments, chance to win prizes, option to look over or purchase our HOA handbooks, and a ton of great presentations and handouts from our attorneys!
TOPICS (Will include the following and a few additional topics/info):
*HOA Trends
*Board Resolutions and Other Governing Documents
*Finances & Reserves
*Fraud & Embezzlement Challenges
*Voting Nightmares
*Enforcement Scenarios
*Wild Card Topic: Attendees’ Choice!
*Q&A Panel
Aside from the presented topics and the wild card additions, we will also leave plenty of question and answer time! The cost is 30.00 to pre-register or 40.00 at the door; pre-registration may be completed with a check mailed to our Portland office, through paypal (see the link below), or over the phone to Amanda at 503-684-4111. We are looking forward to a very beneficial program this year! Do not hesitate to call to register or for more information!
*Note: This forum will focus on Washington law and statutes only; there will be an upcoming Portland forum in May focusing on Oregon law (as well as Bend and Wilsonville forums later in the year). Oregon Planned Communities: Please join us then!
Vancouver Hilton
301 W 6th Street
Vancouver, WA 98660
Contact Phone: 503.684.4111
Contact Email: ajb@vf-law.com
REGISTER AT WWW.VF-LAW.COM
Subscribe to:
Posts (Atom)
