​By Michael Madson, MGM Management

Your association may contract with an association manager, but are they qualified?  We’d like the residents and an HOA’s membership to know what a manager has – and has not – been hired to do.
​An association manager has two primary responsibilities: 
1. Carry out the policies set by the HOA’s Board.
2. Manage the association’s daily operations.

Quite often, members assume the manager performs certain tasks that just aren’t in the contract. And, when the manager doesn’t meet their expectations, residents are unhappy. Here are a few clarifications to help you understand the role of an association manager.

·        The manager works closely with the Board – as an advisor – not as a Board member. The manager is not your advocate with, or conduit to, the Board. If you have a concern about your HOA, your first action is to contact your Board or send them a letter or an email.

·        The manager should be available to the membership. However, that doesn’t mean the manager will drop everything to take your call. If you need to see the manager, it’s best to call to arrange a meeting or email them.

Living in a planned community comes with a set of benefits, including access to community amenities, shared spaces, and often a sense of community belonging. However, it also comes with a set of rules and regulations that every owner and resident must adhere to. These rules are typically outlined in the community's governing documents, including the Declaration of Covenants, Conditions, and Restrictions (CC&Rs), Bylaws, and Rules and Regulations.

Unfortunately, not all residents follow these rules, which can lead to frustration and tension within the community. The community association’s Board of Directors is often granted the responsibility and authority to do all things necessary to carry out and enforce the terms and provisions of the governing documents.  When an owner or resident is in violation of the community association’s rules, the Board of Directors may rely on a combination of enforcement tools in order to persuade the offending owner to abate the violation and deter future rule violations.
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     I. Demand Letters
The least severe enforcement tool available to an association is to send warning notices and demand letters to owners who are in violation. These letters can be sent directly from the Board of Directors, or by the Association’s manager or attorney. 

​If your Association is professionally managed, it’s critical that your Directors & Officers Liability (D&O) insurance extend coverage to your management company.

Pause – which one is D&O again?

D&O protects the Association, the Board of Directors collectively, and individual board members against “wrongful acts” allegations, much like an errors & omissions policy. Essentially, if someone objects to how the Association is being operated, administered, or governed, this is the policy most likely to respond. Common claims include failure to enforce the governing documents, improper handling of an election, challenges to assessments, breach of fiduciary duty, objections to architectural review decisions, and so forth. Like other liability policies, D&O insurance contains coverage for both defense costs (legal expenses to defend the claim) and indemnity payments (money damages, such as a settlement or a judgment, IF awarded to the claimant).
Whether you are a board member or a community manager, it is important to determine the quality of the Association's D&O insurance because the scope of coverage can vary significantly from one provider to the next.

OK, so why should our management company be covered under our policy?  Shouldn’t they have their own insurance?
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Yes, management companies need their own errors & omissions insurance for their business dealings. However, when acting under the Board's direction as the Association's designated agent, it is reasonable and appropriate for them to be covered by the Association's insurance.

A homeowners association is the cornerstone of a planned community. When run properly, it brings continuity, preserves architectural integrity, maintains common areas, protects property values, and promotes the concept of “community.” Every association should be responsible for its assets and operation in accordance with state laws and the community’s governing documents.
To be effective, an association should have a strong board of directors whose members know the responsibilities that come with their volunteer positions, including the need to govern uniformly and fairly, and have a clear understanding of the association’s strengths and weaknesses, its history, and what needs to be accomplished. The board’s authority includes all of the powers and duties contained in state statutes, as long as these are consistent with the provisions of the governing documents.

Among the many considerations for an association, when adding amenities to their community, is the Liability exposure and making sure that the association is properly covered should there be an injury or lawsuit.
Amenities will require both property and liability insurance coverage. Property insurance protects the equipment owned by the association and covers replacement cost of those items due to a covered peril. Liability insurance will cover bodily injury and property damage claims that are brought by a third party due to use of the amenities. A slip and fall on the pickleball and Tennis courts, an injury while using gym equipment or even a dog bite at the dog park may have legal ramifications.
When seeking property insurance for an amenity, you must provide your agent with accurate replacement values of each added piece of equipment. Determining these values can be achieved in a number of ways.  A receipt if the equipment has been recently purchased, an appraisal done on existing equipment or this information can sometimes be found on a reserve study. Many carriers are requesting the Associations Reserve Study In order to ensure they are adequately covering their insured. ​

Receivables

Receivables are an asset which is generally presented just below cash on the balance sheet. It represents amounts the association has the right to receive.

Receivables are amounts due from other people or entities.  For associations, the largest and most common receivable is for unpaid assessments.  Most associations bill owners for assessments each month.  If an owner has not paid their monthly assessment by the due date, the assessment is considered a receivable from the owner.

Recording assessments revenues on the accrual basis without considering the effect of delinquent accounts receivable can mislead readers of an association’s statement of revenues and expenses.  Assessments are recorded when billed under the accrual method.  Should there be an accumulation of delinquent accounts, the statement of revenues and expenses will continue to present results assuming 100% collection of outstanding assessments.  Readers should always refer to an aging report to assess the status of assessments receivable. 

​By:  Jeremy Newman CPA, Newman Certified Public Accountant PC

​We introduced you to balance sheets in our last blog, which was the first in our Reading Financial Statements Series © 
In this and following blogs we will explore some typical association balance sheet accounts in more detail.
CASH!
Everyone likes cash!   Associations are no different.  Without enough cash, association management and community property can become neglected, often leading to future major repairs requiring loans and special assessments. Understanding what activities have the most impact on cash balances is vital to the future success of an association’s operations.  As managers and board leaders, it is so important to review cash activity and balances continuously.  Be proactive in a timely manner.  Not reactive two years down the road.

This blog is to introduce you to balance sheets. This is the first in our Reading Financial Statements Series ©
 
What is a balance sheet?
Balance sheets present the financial position of your association as of a certain date, usually the month or year end.
 
What are the classifications of accounts on my association’s balance sheet?

• Assets
• Liabilities
• Equity or Funds

 
Assets
What the association owns or owns the rights to, including:

• Cash
• Assessments and other receivables
• Prepaid expenses
• Deposits

 
Liabilities
What the association owes or is obligated to pay, including:

• Accounts payable (unpaid vendor invoices)
• Accrued expenses
• Prepaid assessments
• Deferred revenues

 
Equity or fund balances
The association’s net worth.
Generally, represents the cumulative revenues minus expenses over the life of the association since its inception.
 
Basis of Accounting
One of my favorite topics is “What basis of accounting is used to present your association’s financial statements?”
Some balance sheet accounts will not be presented on financial statements if your association presents its financial statements using the cash basis of accounting. Being aware of what you are reading, as well as what may be missing from the balance sheet you are reviewing is important to your understanding of the association’s financial position each month.
 
We will dive deeper into the individual accounts like cash and receivables in future blogs.  A short example of what to look forward to:
Cash – Do you know what your bank accounts are used for? Do you verify balances? Are you pursuing returns over security?
Receivables – Are you expecting to collect everything that is owed to the association? Did you bill for all services?
Payables -How much does the association owe to vendors?
 
 Prepaid assessments – Are you shoring up today’s cash balances with money collected for future expenses?
 
Operating Fund (Equity) – Does the association have excess funds, has it been over-spending?