Countryside Bank specializes in Property Management, Condominium, Townhome and Homeowners Association banking. We work with associations of all sizes and have the products to fit your different needs.  We understand the demanding day-to-day operations of your business. Our Business Bankers help associations like yours meet their treasury management and financial needs. Let our team of experts show you how we can be the key to your success! 

• Free Operating Account
• High Yielding Reserve Account
• HOA Financing 
• Lockbox 
• Remote Deposit/Mobile Banking
• Treasury Management
• Free Onsite Training for Staff 
• Educational Seminars offered throughout the year, go to ACTHA.org for more information
  

Call Kristin Walker today to discover how partnering with Countryside Bank is the smart choice for your association.

Kristin Walker

Countryside Bank

708-485-9371

Kristin.Walker@bankcountryside.com

www.bankcountryside.com

Patricia Bialek, Vice President of First Service Residential, was the speaker on November 27, 2018 at the Countyside Bank, 6734 Joliet Rd, Countryside, Illinois. Kristin Walker was the bank official that hosted the event. The topic was Building a Better Community, How to End Apathy? 

The interested crowd was given a myriad of ideas on how to “pep up” the community. A power point presentation accompanied her energetic presentation.

Her main points included:

• Community Apathy is a bad habit .
• Community members need a “push cultivated by the Association leaders.
• Survey the community
• Employ the community website
• Newsletters and establishment of website with unit owners contributions.
• Constant Communications with unit owners.
• Establish Committees and Volunteers after points of interest are known through the results of the survey.
• Tap into the community “beavers” :Those who wish to contribute time.
• Listen to the suggestions and value each contribution.
• Have picnics, pool get-togethers organized by the committees.
• Tap into the community interests. Organize clubs of interest. Start traditions.
• Use the Community Clubhouse for social purposes as well as Association Meetings.

She gave not only suggestions but concrete examples on how to implement the suggestions.

Another resource was community businesses, realtors and local, state and Federal Officials and involvement in the ACTHA and CAI organizations.

The attendees walked away energized and eager to implement the ideas Patricia Bialek offered.

In conclusion one would summarize the plan for community building . Actions bring results. Involvement of all members of the Community is the formula. Reaching out to the community is the starting point of success. Using the talents of the community and seeking to value the contributions of the volunteers causes a cycle of involvement. Who wouldn’t want to try out these ideas?

The ACTHA Board of Directors wants to publicly thank Patricia Bialek for her contributions to ACTHA . Also ACTHA Board of Directors would like to thank Kristin Walker, of Countryside Bank for providing our members the location, dinner and refreshments for the evening.

On November 15, 2018 the ACTHA membership had the privilege of hearing Kathryn Formeller speak on the topic of DOING WHAT'S RIGHT FOR YOUR ASSOCIATION: WHEN OWNERS DON’T PAY ASSESSMENTS, collection of Delinquent Assessments and Foreclosures at the Tahoe Village Condominium Association in Wheeling, Illinois. A gathering of Association members attended the seminar during an evening of inclement weather. Kathy Formeller is partner at Tressler LLP.

Kathryn regularly represents condominium associations as creditors in both Chapter 7 and Chapter 13 bankruptcy proceedings seeking to modify the automatic stay so that they can pursue their state court remedies. Kat is the lead attorney for the Condominium & Common Interest Community Association Law practice. Her practice includes representing condominium associations and common interest community associations in a variety of areas, including rule enforcement, interpretation of governing documents, review and negotiation of contracts, and collection of assessments. She also provides advice to clients on their rights and responsibilities under the Condominium Property Act, Forcible Entry and Detainer Act, General Not for Profit Corporation Act and the Common Interest Community Association Act. Furthermore, Kat practices in the area of commercial litigation nationwide and counsels clients with respect to a wide variety of business disputes.

In her presentation she explained the need for community association assessments, foreclosures and their threat to the collection of assessments. She focused on sections of the Condo Act 9 (g) 4 and 9 (g) 5 that provide condo associations with an avenue to collect delinquent assessments and attorney fees in foreclosure cases. She explained how to proceed in the collection of delinquent assessments using the Condo Act as your guide.

She explained the six month rule and the various case laws which shaped the collection and foreclosure process. Seminar attendees were given the opportunity to ask questions pertaining to their association’s challenges and problems.

The ACTHA board appreciates the expertise of Kathryn Formeller and is grateful for her participation as a presenter at the Seminar monthly series. Our members and guests gained much knowledge on the featured topic.

By: Brad Schneider of Condo CPA

INTRODUCTION

Most homeowners and managers understand that Certified Public Accountants (CPAs) can perform audit services and issue an audit report on a community association’s financial statements. However, some may not be familiar with the alternatives to an audit. CPAs can provide other levels of services such as a Review, Compilation or an Agreed upon procedures engagement. The purpose of these engagements is to add credibility to and enhance the reliability of the Association’s financial statements. All audit and review engagements must be performed by an independent CPA. A compilation can be performed by a CPA that is not independent from the association but must state that fact in the accountant’s report included with the financial statements.

COMPILATION ENGAGEMENT

The compilation, which is the lowest level of service that a CPA can provide for a client’s financial statements, requires substantially less time than a review or audit engagement because fewer procedures are required. Various states allow a CPA to perform a compilation without having a Peer Review for their firm. Unfortunately there is a wide variance in the quality of the financial statements and accountant’s work papers for compilation engagements since firms that have not followed the Peer Review quality standards generally have not developed a system of quality similar to those firms that follow the standards included in the Peer Review membership program of the American Institute of Certified Public Accountants (AICPA).

Compilation standards do not require the accountant to perform any procedures to verify or corroborate the financial statement information provided by the Association’s management. However, the accountant must address significant questions that arise in the course of the compilation engagement. If the accountant has reason to believe the information supplied by the Association’s management is inaccurate, incomplete or otherwise unsatisfactory, the accountant is required to obtain revised or corrected information before reporting on the financial statements. The AICPA compilation standards require the accountant to possess an adequate level of knowledge about the accounting principles and practices of the Community Association industry and have a general knowledge about the nature of the Association’s business. The accountant is required to read the compiled financial statements and consider whether they are in appropriate form and free from obvious material errors. Because of the limited scope of compilation procedures, the standard Compilation report disclaims any degree of assurance on the financial statements. The report also states that the accountant has “not audited or reviewed the financial statements and accordingly, does not express an opinion or provide any assurance about whether the financial statements are in accordance with the applicable reporting framework.”

At a minimum, a compilation engagement with the accompanying accountant’s report is required anytime an external CPA is associated with the financial statements of the Association.

REVIEW ENGAGEMENT

A review engagement requires the limited procedures included in a compilation engagement as well as other procedures that enable the accountant to provide limited assurance on the financial statements. These additional requirements are inquiries of the association’s management and analytical procedures. Inquiries are typically directed to knowledgeable persons having responsibility for financial and accounting matters. Please note the questions are being asked of the client’s management and accountants without outside verification. Accountants exercise their professional judgment to determine the extent of inquiries that are needed. Although specific inquiries are tailored for each Association, the inquiries should, at a minimum, relate to: the accounting practices and principles used by the organization; the procedures for recording and accumulating financial information; and the actions taken at meetings of the Board.

Analytical procedures include:

• Comparison of current year financial statements with the budget and prior year’s statements
  
• Study of the financial statements to identify items or relationships between items that do not conform to expectations based on earlier reports or budget or other information
  
• Review and consideration of adjustments made to the financial statements of prior years.
  

The purpose of analytical procedures is to identify account balances or relationships that appear unusual so that additional inquiries or review of financial data can be made to determine the cause of the unexpected results. Based on these inquiries adjustments to the financial statements may be necessary.

Because of the inquiry and analytical procedures included in a review engagement accountants are able to express limited assurance on the Association’s financial statements. Remember in the compilation report the accountant disclaims any assurance on the association’s financial statements. The standard Accountant’s Review Report states that a review is substantially less in scope than an audit, the objective of which is the expression of an opinion regarding the financial statements as a whole and that, accordingly, the accountant does not express such an opinion. However, a review report does state that “we are not aware of any materials modifications that should be made to the financial statements.”

AUDIT ENGAGEMENT

An audit engagement provides the highest level of assurance on the Association’s financial statements, because many important audit procedures are performed. Some of the more important auditing procedures are:

• Consideration and evaluation of the internal control system of the Association, which may include testing the effectiveness of the system
  
• Tests of the underlying documentation to support the account balances
  
• Outside confirmation of bank and investment accounts, loans, insurance coverage and legal status.
  

In addition, the auditor is specifically  required to obtain reasonable assurance that the financial statements are not materially misstated due to fraud. In a compilation or review engagement the accountant is not required to document any assessment of fraud risk, nor are they required to consider fraud or search for fraud in the course of the engagement. However, in a compilation or review the accountant is required to report any significant deficiencies in internal control or fraud that comes to their attention. The possibility of this happening is less likely in a review and even less in a compilation since the procedures are less comprehensive in these levels of service. The audit report reflects a higher level of assurance based on the more extensive procedures performed. The standard audit report states, “In our opinion, the financial statements referred to above prevent fairly, in all materials respects, the financial position of your association as of December 31, 20xx and the results of its operations and cash flows for the year then ended in conformity with accounting principles generally accepted in the U.S.

AGREED UPON PROCEDURES

ENGAGEMENTS

When special circumstances are present it is often more beneficial to have an Agreed Upon Procedures engagement performed. This type of engagement is often performed when there is either a suspected fraud or a specific issues(s) that the association is trying to address. It is a way to efficiently assist in obtaining evidence and minimize cost by focusing only on those areas of concern to the board. For example, perhaps the association wants to address a garage employee that was suspected of theft, or reconcile special assessment billing. In these cases the procedures to be performed would be designed to test the areas of concern in order to gather any relevant evidence.

TAXES

For calendar year-end Associations, (December 31st), the corporate tax returns will be due on March 15th. The Illinois tax returns are due on the same day. The IRS allows you to extend the filing of the tax return to September 15th and Illinois allows the extension to October 15th of 2019. The extension does NOT grant you any additional time to pay the taxes. Fortunately with the low interest rates offered on investments it is more the rarity that an Association owes taxes. Most condominiums, townhomes and homeowner associations can decide which federal form to file each year, the regular corporate tax return, (1120) or the homeowners association tax return, (1120-H). If they are a cooperative they should be filing the 1120-C. The decision to file the 1120 versus the 1120-H is based on a number of factors. If they owe tax the 1120 begins at the 15% rate versus the 1120-H which has a flat rate of 30%. Since most Associations do not pay income taxes, we usually recommend the filing of the 1120- H. It is much safer to file this form with the IRS. Filing the 1120 has numerous issues to deal with that upon IRS audit can trigger the assessment of a large amount of tax. One Association in the Southwest was told that they had painting and other non-capital items going through the reserve fund and that the entire reserve was to be considered taxable. The IRS has attacked the Reserve accumulation in a variety of ways for various Associations across the US. The bottom line is that generally speaking the 1120-H is a better form to file if there is no tax due.

CONCLUSION

There are various levels of service that may fit the needs of the various associations. Each association is unique and may have substantially different expectations of what they are trying to accomplish with the CPA firm they select. There are even different levels of CPAs and CPA firms: those that are Peer Reviewed and those that choose not to be Peer Reviewed. Some CPA firms specialize in Community Associations because they love them while others see Community Associations only as a means to supplement their revenue. Whatever your Association’s circumstances, we hope you choose a CPA that is best suited for you based on your specific needs and level of service that you deem appropriate.

By Steve Silberman 

As a CPA, one of the most frequently asked questions I get from Board members is: Are we a not-for-profit corporation and if we are, do we have to file an income tax return?

First of all, most associations are usually incorporated as not-for-profit corporations by the developer. If this did not happen to your association, I recommend hiring an attorney to incorporate your association as a not-for-profit corporation, even though you could go to the Secretary of State's website yourself to incorporate. Once incorporated, you must remember that each year your association has to file an annual report with the Illinois Secretary of State and pay an annual fee in order to stay incorporated.

Residential condominiums, townhomes, and homeowners' associations are not-for-profit corporations that generally do not qualify for Federal income tax-exempt status. Residential associations may be taxed under Internal Revenue Code (IRC) Section 277 or may elect to be taxed under IRC Section 528. Under IRC Section 277, associations file Federal Form 1120 and under IRC Section 528, associations file Federal Form 1120-H. An association can decide annually which form it would like to file. So let's discuss which form is right for your association and the differences between each form.

FEDERAL FORM 1120-H

Federal Form 1120-H was developed so that associations would not be taxed for carrying out its main function of managing and maintaining the common elements. Commercial condominium associations cannot file Federal Form 1120-H. IRC Section 528 states that income and expenses must be allocated between exempt function activities and nonexempt function activities. Associations are only taxed on its net non-exempt function income at a Federal tax rate of 30%. (Timeshare Associations are taxed at a Federal tax rate of 32%). So what is exempt and non-exempt function income?

Exempt Function Income is:

Operating income received as assessments from owners of condominium, townhome or HOAs. They also can be assessments received from developers on unsold units or lots. These assessments must be assessed ratably to be exempt function income.

Non-exempt Function Income (or taxable income) is:

1) Income from non-association property - commercial operations and interest and dividends. 2) Income from non-members for use of association property. 3) User charges to association members for special services unless the user charge is assessed once in a twelve month period and the benefit lasts for the entire 12 month period. An example of a user charge is laundry income.

The advantages of Federal Form 1120-H are as follows:

1. Associations are not taxed on exempt function income.

2. The tax form is a one page form, with supplementary schedules, so it costs less to prepare.

3. The form has less risk than Federal Form 1120. There are four tests that have to be met to file Federal Form 1120-H, but most residential associations will qualify.

4. Fund accounting is not required since capital or reserve assessments are not taxed.

5. No election forms are required like on Federal Form 1120.

6. As long as you keep filing Federal Form 1120-H, no estimated taxes are required.

FEDERAL FORM 1120

The key advantage of Federal Form 1120 is that an association could pay tax at a lower rate than Federal Form 1120-H. Income tax rates start out at 15% on the first $50,000, however, the risk of compliance is far greater since an association must follow certain required procedures. Also, since the form is much longer and more complex it costs more to prepare than Federal Form 1120-H.

IRC Section 277 states that income for Federal Form 1120 should be allocated between membership and nonmembership income. An association can be taxed on both if there is net income, however, an association can make an annual election to defer net membership income.

Revenue Ruling 70-604 allows associations to defer net membership income for one year but if the association has net membership income in the next year then the association would have to pay tax in the next year on the deferred income. An association can also make an election under Revenue Ruling 70-604 to refund net membership income, but in my 30+ plus years of working with associations, I have never seen an association refund money. A question that I get asked about all the time is: Can our association transfer excess net membership income to reserves and then not have to pay taxes on this excess? The answer is NO if you are filing Federal Form 1120.

IRC Section 118 states that an association cannot transfer excess net membership income to reserves to avoid paying taxes since you cannot re-characterize what the assessments were for originally. In order for Revenue Ruling 70-604 to be valid, the election has to be made annually by all members (usually at the annual meeting) and it should preferably be made before the end of the year. The dollar amount does not have to be specified.

Capital contributions (reserve assessments) will be treated as non-taxable on Federal Form 1120 if certain guidelines are followed:

1. The purpose of the assessment must be capital in nature. The reserve study supports the purpose of the capital assessment. However, painting, even if it was included in your reserve study, is an operating assessment, not a capital assessment.

2. Members must have advance notice. Distributing copies of the budget to the members is considered advance notice.

3. The assessment must be accounted for as a capital contribution and held for that purpose. The books and records, along with the budget should segregate operating and reserve (capital) activities. Therefore, the association should use fund accounting.

4. Reserve (capital) assessments should be deposited into a separate account and reserve expenditures should be paid out of this separate account. An association can pay for capital expenditures out of the operating fund account as long as the reserve account reimburses the operating account in a relatively short period of time.

Now that you have a brief understanding of the two forms, you might be wondering which form should your association be using? This is a hard question to answer unless your CPA knows the facts and issues associated with your association.

Usually if your association has little interest income and no (or minimal) user fees you will file Federal Form 1120-H. As interest income grows, your association should look at filing Federal Form 1120 as an alternative. If your association has minimal interest income, but you have a net loss from your net membership (for example due to a painting project) you may want to file Federal Form 1120 since that loss gets carried forward. If your association files Federal Form 1120 because of the large amount of non-membership income, you want to make sure that you do tax planning ahead of time to minimize your net membership income.

You now should have a better understanding about the different types of Federal income tax returns and which Federal income tax return is right for your association.

On Wednesday, October 3, 2018, Mark Rosenbaum of Fischel and Kahn Law Firm gave a presentation on the topic of Getting Along on a Board (Without Necessarily Going Along) at The Book Market at Hangar One at the Glen, Glenview, Illinois. The host, Barbara’s Book, provided a splendid venue for the presentation.

The seminar was well attended with a topic that has perplexed many Board member volunteers as well as unit owners attending Board meetings.

Mark Rosenbaum, in a comfortable arm chair manner, discussed the mechanics of a Board Meeting and the requirements of a Board Meeting in regards to Illinois Condo Law. He introduced the “gadfly” personality. Who is that? A gadfly is a unit owner who is not on the Board and who insists on complaining about what the Board does or does not do. The personality of the gadfly was explored; the complainer in the audience; one who complains and follows up and the gadfly who complains and never follows up. The Board has to deal with all unit owner personalities and tips were given how to deal with this “gadfly”. The speaker continued with the makeup of the Board. The harmonious Board and the fractured Board and how they affect the functioning or non-functioning of the Board progress and success.

Various stereotypes of Board members were analyzed. They are the project manager, the gadfly, the controller, the reluctant warrior and the regular. All aspects of these types were explored.

The final segment was why some boards cannot make any progress. What impedes them? Disputes about money, esthetics, big picture impasse, small picture impasse and a bad blend of temperaments all contribute to a non-performing Board. Mark Rosenbaum was open to questions from the audience and graciously gave real life situations and solutions to common Board interpersonal relationship struggles and road blocks that happen during the Board interactions. This includes Board meetings, neighborhood interaction and time on task. The attendees appreciated Mark’s calm manner and his professional expertise in the Condo world. 

The ACTHA Board of Directors thanks Mark Rosenbaum and looks forward to inviting him to speak at future seminars.

By: Kristofer Kasten

MICHAEL C. KIM & ASSOCIATES

ATTORNEYS AT LAW

19 South LaSalle Street, Suite 303, Chicago, IL 60603

T: 312.419.4000 - F: 312.419.4008 - www.mkimlaw.com

By now, most, if not all, community association managers and board members, as well as attentive owners, of condominium and common interest community associations are aware that there is a January 1, 2019 deadline to adopt a complaint resolution policy under the Illinois Condominium and Common Interest Community Ombudsperson Act (the “Ombudsperson Act”). Although that deadline is quickly approaching, it does not mean that “the sky is falling” or that associations must hastily adopt a one-size-fits all form policy. Let’s all just take a deep breath and give some thought to the matter to understand what is required and what best suits each individual association.

Many associations may already have procedures under their declaration, bylaws, or rules and regulations pursuant to which owners may file complaints about other owners. Those procedures are typically part of the association’s enforcement policy because they relate to the association addressing an owner’s alleged violation of the declaration, bylaws, or rules and regulations. The complaint resolution policy under the Ombudsperson Act is different than those procedures because it deals with an owner’s complaint about the association, not other owners.

To assist associations in understanding what is required of them, we provide the following questions and answers:

Q: Is my association required to comply?

A: If your association is a condominium or a non-exempt common interest community, then your association must adopt a complaint resolution policy.

An exempt common interest community association is one that is exempt from the provisions of the Illinois Common Interest Community Association Act (the “CICAA”); specifically, such association has either (a) 10 units or less or (b) annual budgeted assessments of $100,000 or less, unless that association voluntarily elects to be covered by the CICAA.

Q: What must the policy include?

A: Section 35 of the Ombudsperson Act provides that the “policy must include: (1) a sample form on which a unit owner may make a complaint to the association; (2) a description ofthe process by which complaints shall be delivered to the association; (3) the association’s timeline and manner of making final determinations in response to a unit owner’s complaint; and (4) a requirement that the final determination made by the association in response to a unit owner’s complaint be: (i) made in writing; (ii) made within 180 days after the association received the unit owner’s original complaint; and(iii) marked clearly and conspicuously as “final”.”

Note that the Ombudsperson has published a sample policy and complaint form on itswebsite, which can be found under the “Publications” tab. The website URL is: https://www.idfpr.com/ccico/.

Q: Is the policy published on the Ombudsperson’s website mandatory?

A: No. The Ombudsperson has published a sample policy that includes the basic requirements under the Ombudsperson Act, as well as additional provisions for consideration. An association may (1) use the sample policy as published or (2) may modify it for their particular association or (3) use their own existing policy (typically a rules enforcement policy) as long as it generally complies with the Ombudsperson Act and provides for a final determination within 180 days that is marked “final”.

Q: Is the complaint form published on the Ombudsperson’s website mandatory?

A: No. Similar to the policy, the complaint form is a sample that the association may use, (either as published or modified for their particular association) or the association can modify/adapt its existing enforcement policy to include the required elements.

Q: Can the board adopt the policy without a unit owner vote?

A: If the policy only establishes a procedure pursuant to which owners can submit complaints about the association to the association, without the imposition of any type of sanction or adverse consequence (such as monetary fines or denial of privileges) to any party, then the board can adopt the policy via a board resolution. In such a situation, no meeting of the unit owners would be required to discuss the policy before the board can adopt it by resolution. However, the board must still adopt the resolution at a duly noticed open board meeting at which a quorum is present. Also, the board must still provide notice of the policy to all owners. 

If the policy goes further than simply establishing a procedure for making complaints to the association and also provides for the imposition of some type of sanction or adverse consequence against any party, then the policy is more akin to a rule and the procedure for adopting rules should be followed. In either case, the board can adopt the policy without a unit owner vote.

Q: What happens if the association does not adopt the policy by January 1, 2019?

A: The Ombudsperson Act does not provide for any specific consequence or penalty if the policy is not adopted by the prescribed deadline.

That said, boards should be mindful that they are required under Illinois law to strictly comply with their respective governing statutes. Section 35 of the Illinois Condominium Property Act incorporates the Ombudsperson Act by reference. Section 1-90 of CICAA does the same. Accordingly, the association should adopt the policy regardless of whether or not there are consequences for not doing so.

If your association has not already done so, it must adopt a complaint resolution policy by January 1, 2019 because that what the law requires. However, there is no need to freak out about it. Should you have any questions about what your association should do to comply, please contact us and we will assist you in meeting the January 1, 2019 deadline.

This document has been prepared by Michael C. Kim & Associates for informational purposes only. Michael C. Kim & Associates is a law firm representing community associations. Download a PDF of the article here. Visit us at www.mkimlaw.com.

By: Sal Sciacca of Chicago Property Services

Now more than ever, associations must spend money wisely and plan ahead to ensure that their reserves are properly funded. Proper reserve funding will allow the board of directors to properly maintain the association and maximize the real estate values of the owners.

Duties and Obligations of Board Members

One of the fundamental obligations of board members is to maintain the common elements. In fact it is their fiduciary duty to maintain the common elements as stated in the law. The common elements consist of physical characteristics that involve regular maintenance as well as capital replacement. The focus of this article is on capital items. Which capital items should be replaced and when should they be replaced are the most important questions to ask. It is not a question of whether the items should be replaced. All capital items have a finite life expectancy. 

Reserve Studies are Recommended

One of the questions that board members should ask is who determines what are the capital items, how long will they last and how much will it cost to replace the times. To answer those questions, associations should ideally hire a company that specializes in reserve studies. The reserve study is a document generated by experts that incorporates the life expectancy of all capital items over the span of 30 years into a detailed report. The report will indicate what items need to be replaced, when they need to be replaced, and how much it will cost to replace them. It will also detail how much the association will need to save to fund the capital item replacements on an annual basis. In principle, this sounds like a very sound idea. A reserve study is generally at least $3,000 for a 30 unit community association to over $10,000 for a larger community. replacement.

Reserve studies are recommended

Practically speaking, many associations cannot afford to pay for a reserve study.  In Illinois, there are over 40,000 communities and about 30,000 are under 25 units. Most of the associations under 25 units probably don’t have the funding to afford a reserve study. In addition, there are associations that have paid for reserve studies and have not followed the recommended plans. Certainly, this is not recommended but it is the reality for many associations based on their financial constraints.

5 Year Capital Plans are Essential

Regardless of whether an association has a current reserve study or not, it makes the most financial sense that ALL associations large or small, well funded or underfunded, have a 5 year capital plan. The capital plan needs to incorporate the reserve study data if available and create a road map of exactly what capital items will be addressed during which calendar year.

Capital Planning Saves Money

Planning ahead and proactively addressing capital projects actually saves money. This is especially applicable to exterior facade, masonry and tuck pointing issues. Simple masonry issues can easily escalate into major expenditures. Costs associated with exterior masonry issues typically raise exponentially and not linearly. This means that the longer associations hold off with repairs, the more costly the repairs become. It is cheaper to make the capital improvements sooner than later. Given this fact, the best approach for a board is to have a capital plan and to plan ahead. It is always best to plan long term and to keep the homeowners informed of expenditures especially larger ones. As a result, it is quite important for the board of directors to create and maintain a 5 year capital plan.

Capital Planning Cycle

The capital plan is a guide and a road map detailing exactly what capital items will be addressed over the next 5 years. The capital planning process should start in the spring and finish up with the plan that the board will present to the homeowners at the budget approval meeting which is typically held in October or November of each year. Ideally there is a capital committee that reviews the capital plan every year and submits the recommendation to the board each year in September. This allows the board to incorporate the capital planning process into the operational budget planning process that typically starts in September. Once the operating budget and capital plan is approved, the cycle starts all over again in the spring. It is an ongoing process that continues on through the life of the association.

Proactive Planning or Deferred Planning

It is best when associations plan ahead and pre-fund the reserves for capital projects. But what happens when associations don’t plan ahead? The answer is simple. It costs MORE money. The project costs are higher and the board is often forced to pass special assessments and raise more through bank loans. In addition, there is typically more frustration among the homeowners as the amount the homeowners are asked to pay is often larger than the regular monthly assessment amount. It is much cheaper to raise regular assessments and save over time and have the funds necessary for capital projects versus raising funds for capital projects as necessary. The following sections discuss the most common capital funding scenarios. 

Funding Options – Reserves Only

In this best case scenario, the association has planned ahead and has built up the reserves sufficiently over the years and has enough to pay for the capital projects as necessary per the capital plan. This is the ideal situation. This means that the assessment levels are sufficient to build long term reserves. The association can move forward with the capital project at any time in this scenario and does not have to wait to collect additional funds. This scenario is the least stressful to the association and to the homeowners.

Funding Options – Reserves and Special Assessments

In this scenario, the association can only partially fund the capital project from reserves and it is necessary to raise additional funds through a special assessment to fully fund the capital project. In this scenario, the association will need to wait until the special assessment funds are collected before proceeding with the project. This scenario would only apply in cases where there is low urgency in the project completion timeline.

Funding Options - Special Assessments Only

In this scenario, the association is severely underfunded and must raise funds completely through a special assessment. This is a viable option only if the project is not urgent in nature and can wait until the special assessment funds are collected. This scenario is the least common and would only apply in cases where there is low urgency in the project completion timeline.

Funding Options – Special Assessments & Bank Loans

In this scenario, which is the least desirable scenario, the association is seriously underfunded and urgently needs funds to complete a capital project. This can be attributed to an unexpected event that has created the need to complete a capital project. Other scenarios include poor planning, deferment of capital projects, and/or under funding of the reserves. There are banks that do lend to community associations which allow associations to access the capital necessary to complete the capital projects in this scenario. In this case, the association applies for a bank loan and at the same time will need to pass a special assessment to cover the cost of the project. The bank loan will allow the association to take on the project fairly quickly as a loan approval usually takes about 6 weeks to complete. Once the loan is approved, the association has the funding available to take on the project. The payback period of the loan is usually over 3 to 5 years. The special assessment is also usually drawn out over the same period of time. This is the most expensive scenario due to borrowing money and it creates the most stress on the association and homeowners.

Communication is Key

In the end, the best approach is to communicate information to owners on a regular basis. By communicating the information, they will know the issues and not be surprised to hear about upcoming capital improvement projects. In addition, if additional funds are needed, the owners will not be surprised by the need to pass a special assessment or obtain a bank loan. The way to do this is by holding regular quarterly board meetings that are officially noticed and distributing meeting minutes to all the homeowners so that information is shared to those who were not able to attend the board meetings.

Summary

In summary, associations are encouraged to plan ahead especially regarding capital expenditures. These are the greatest expenditures that associations will undertake. As a result, it is advised that an association obtain a reserve study if financially affordable and to incorporate this information into a 5 year capital plan. Each year, the association should revise the 5 year plan and every 3-5 years the association should get an update to their reserve study. This proactive approach will result in the lowest amount of operating costs for the association Conversely, associations that wait until the last minute to make capital repairs will often times need to pass special assessments, obtain bank loans, spend greater amounts of money to complete the projects and create the greatest stress and strain on the association and homeowners.

Chicago Property Services

3634 W. Wrightwood, Chicago 60647 - 773-455-0107

ssciacca@chicagopropertyservices.com

www.chicagopropertyservices.com

There were over 30 attendees at the Thursday, September 13, 2018 Deerfield Library Seminar, "How to Deal with Difficult People". 

Presenting the topic, “How to Deal With Difficult People” was Jim Stoller,  President of the Building Group, Jim presented strategies on how to manage conflict between the Board members and the unit owners. He presented a packet of resource materials that provided “take home strategies” that will be useful long after this seminar ended.

Some techniques to encourage a positive and productive environment included: 1) Having specific goals timetables and priorities 2) Preventing discussions from becoming personal; 3) Distributing accurate information to all board members and unit owners, 4) Setting up fact finding committees to obtain information 5) Using independent experts to provide technical information.

He gave tips on how to reduce conflict at the Board Meetings with communication with unit owners being the key component. If Boards create and consistently enforce rules and regulations, a board meeting atmosphere of fairness and predictability occurs. If Boards respect their managers, the unit owners see a team effort at Board meetings and harmony at the meetings exist. Involving the unit owners and providing an inviting atmosphere, the unit owners are prone to attend where they feel welcome. A win win situation is inevitable.

When conflict does arise, Jim Stoller provided ways to approach a conflict situation. He stated that knowing the ways people approach a disagreement will assist you to choose the best tactics for resolving conflict. These ways were: 1) Direct aggression 2) Collaborative 3) Compromising 4) Accommodating 5) Avoiding .

The tips that he stated for resolving the Conflict and Handling Difficult People were:

• Be Proactive
• Listen and Stay Calm
• Encourage the people involved to share their perspective
• Discuss possible solutions
• Be empathetic

The attendees had a chance to share their Board experiences and get tailor made answers to their questions. Boards and unit owners have to take an objective look at all parties’ behavior and seek common ground for a harmonious outcome which will be beneficial for all parties involved.

This task involves time and effort to analyze, diffuse heated discussions, using techniques as Jim Stoller advocated.

The ACHA Board of Directors are grateful for the expertise in the subject matter Jim Stoller provided.