FOR HOA, CONDO, HIGH-RISE LEADERS
Content also provided by Robert Travis, retired from CAU.
Insurance is a complex subject in any context, and in the realm of community associations — condominiums and homeowners associations (HOAs) — there are many bases to cover when it comes to ensuring the association, its board, manager and residents are all appropriately protected. We spoke with Robert A. Travis, CIRMS, CPIA who is the Managing Partner of Risk Management Matters, LLC from Bartonsville, Pennsylvania. Risk Management Matters, LLC is a consulting company which specializes exclusively in Risk Management and Insurance for community associations and other common interest properties.
So how does a community determine how much and what types of insurance are needed? While an association’s governing documents offer meticulous details about the governance of a community, they don’t typically, and shouldn’t according to Travis, specify exact amounts of insurance needed. However, they usually lay the groundwork for building the proper mix of coverage. “They’re going to have an impact in setting minimal standards of insurance for every line of insurance the association needs to have,” he said. The types of insurance needed by associations are Property, Directors & Officers (D&O) Liability, Fidelity (otherwise known as Employee Dishonesty), Commercial General Liability, Workers’ Compensation and Commercial Umbrella. “The governing documents can have a lot to say and have a strong demand about what the minimal level of insurance will be,” he said.
The association also needs to be comfortable that they’re fulfilling all the insurance requirements of federal and state statutes, and any contractual or lenders’ requirements. Above that, boards need to fulfill their business judgment — that is, ensure they’re fulfilling their fiduciary duty and exercising due care in their decisions — to make sure they have adequate coverage. But Travis noted there is no definitive answer as to how much is too much when discussing insurance. “No one can know what the future could bring in terms of losses,” he said.
Homeowners should note that there is different insurance needed depending on whether their community is a condominium association or an HOA.
In covering the properties in condominium associations, there is a master insurance policy for the association, then individual unit owners have their own insurance — commonly called HO-6 policies — which cover their individual unit’s contents as well as any upgrades made to the unit by the owner or previous owner. These policies also cover things such as loss of use, special assessments caused by a loss to the association, as well as giving General Liability coverage to the owner.
What should an association know about how its master policy interacts with the coverage residents have on their individual units? The first thing people need to understand is that, when it comes to insuring the unit in a condominium, the association’s insurance is always primary. When a loss occurs, the unit owner’s insurer is always going to look and see how the master policy dispenses of the claim, and then their HO-6 policy — the unit’s policy — will step in and cover what it can pick up after the association’s master policy applies to the claim first.
Here is an example of how this works. Let’s say there is a storm and a medium-sized tree falls on the roof of a two-story condominium building. While no major damage is done to the structure, the roof is torn causing water to leak into the kitchen of the unit below. The unit’s ceiling collects water and the sheetrock eventually breaches, causing a hole in the unit’s ceiling and water damage to the custom wood cabinetry the owner had installed after the original purchase of the unit from the developer. The condominium’s master policy pays to repair the roof and the ceiling inside the condo unit. Then the unit owner’s HO-6 policy picks up the cost to replace the custom cabinetry that was not part of the original unit sold by the developer.
Another example of how the HO-6 policy kicks in is when there is minor damage that is under the amount of the deductible of the association’s master policy. Then the HO-6 policy picks up the repair cost, making the unit owner whole again subject to the HO-6 deductible.
Travis emphasized that having an overlap of coverage in these cases is better than having a gap in coverage. “Don’t think of this adding up to 100% of the value. Having a little bit of overlapping coverage is a far better scenario than putting yourself in a position where you may have a gap,” he said.
With HOAs, on the other hand, sometimes the association is covering the unit and sometimes it’s not. That would depend on the association’s governing documents. In townhome communities, even where there are common roofs, it is not always the case that the association’s master policy will cover the townhome building. Homeowners should have their insurance professionals make sure they have reviewed the Governing Documents and offer the proper coverage for their particular situation.
When insuring a property, it is best to be covered for the Replacement Cost Valuation (RCV) of what is insured. What is meant by Replacement Cost Valuation as opposed to an item’s Actual Cash Value (ACV)? When evaluating a loss, Actual Cash Value takes depreciation into consideration. Travis gave an example of someone who has a seventeen-year-old Plymouth Neon. Let’s say this person has Comprehensive and Collision Coverage on this car and has a total loss of the car in an accident. The insurance company will pay an amount to purchase another seventeen-year-old Plymouth Neon. That is Actual Cash Value. Inversely, Replacement Cost Valuation does not take depreciation into consideration. So a policy that is written to cover Replacement Cost Valuation will pay an amount for this person to buy a brand-new Neon. “So Actual Cash Value is a valuation where it is replacement cost, minus depreciation,” he said. “It does not give you enough money to rebuild a building, it gives you the depreciated value of that building.”
Associations need to make sure they regularly check their insurer’s estimate of the replacement value for their property to ensure they have enough coverage. How often should this be done? “In my opinion,” said Travis, “annually.” He recommended the association get a Replacement Cost Valuation from an actual replacement cost construction valuation company, and enter into a contract for the company to come back on a regular basis, such as every three years. Then on the in-between years, Travis said that you should get an automated increase based on construction cost increases at the time in that geographic area. He said that the valuation company can provide you with this as well.
Associations should also be knowledgeable of their property’s replacement value in connection with its property insurance policy’s co-insurance clause. Otherwise they could be subject to a co-insurance penalty should a loss occur. The co-insurance clause basically puts a condition upon the insured that they are properly insuring the premises to its true replacement value. The actual percentage of insurance required varies from company to company. “The co-insurance clause basically will state that if an insured does not properly insure the building or buildings to the proper percentage of the true replacement value, that they will then be penalized on any and all claims on the property,” he said.
For example, let’s say someone has a building worth $100,000 from a replacement cost standpoint, and their insurance policy has an eighty-percent co-insurance clause — it’s saying that this person or association should at least be insuring the building for $80,000 on a replacement cost basis. If they choose to insure it for an RCV of $70,000, the insurance company is then going to do an evaluation at the time of the loss and discover that the building is worth $100,000 and is only insured for $70,000. Therefore, the building is only insured for 7/8ths of what the co-insurance clause specifies. Consequently, the insurer can rightly say they’re only going to pay 7/8ths of any loss.
Travis explained if the person or association in the above example had a total loss, they would only be paid 7/8ths of the policy limit of $70,000. “That’s how the co-insurance penalty works,” he said.
Associations need to have special insurance to cover themselves and their board members in case they’re sued in relation to their actions in running the community. Board members can be sued for any wrongful acts or breach of their fiduciary duties to the association. A breach of fiduciary duty happens whenever a board member or any other person of authority in a community association does not properly exercise the proper controls or procedures in handling and utilizing the community association funds. “If I’m a board member and I am putting the association into contracts that they don’t really need to be in, I’m forcing money to be spent that doesn’t need to be spent, or I’m mishandling funds , that is a breach of my fiduciary duty. I have a fiduciary duty to protect the association’s funds,” said Travis.
A breach of fiduciary duty can also include when board members, or the manager, do not properly protect the assets of the association, including the resale value of the lots, units and homes in the association. “When you have a breach of fiduciary duty, you’re not fulfilling the fiduciary duty that you have to protect the money of the community association and its membership,” he said.
This is where Directors & Officers (D&O) liability insurance comes in. A D&O liability policy is designed to protect the association from various wrongful acts of its board members and association leadership. These wrongful acts can come in two categories. One is monetary losses — where someone sues an association for a wrongful act which has cost the claimant a dollar amount. Or, someone can sue a board of directors for a non-monetary claim. This is where they’re suing not for a dollar amount, but for injunctive relief. “It’s easy to say that most D&O claims are of the non-monetary variety,” said Travis. In cases seeking injunctive relief, it is when someone sues the board because they feel the board is enforcing a rule that is working unfairly against them. They want to go to court and have the court tell the board they must stop enforcing the rule in question. The opposite could also be the case. An individual can take the board to court saying that they’re not properly enforcing a rule. “They’re trying to get the court to make the board actually enforce the rule,” he said. So in these cases, the board is not being sued for a monetary amount, but in order to make them take some action, or to stop them from taking an action they are taking. In the non-monetary suits, the costs that need to be covered are all for legal defense.
Obviously, lawsuits can arise even when board members are fulfilling their fiduciary duties and following the rules of their associations to the letter. Travis explained that boards are faced with many difficult decisions, of which, whatever choice is made, could have some undesired effect for some residents. “Every day goes by where a situation is posed to a community association insurance professional, and we look at it and we know that the board was between a rock and a hard place. That either decision, you could back up as being a prudent decision, but either way you made a decision you’re setting yourself up for detractors and a possible lawsuit from those who think it’s the wrong decision,” said Travis. So even if every step of the way you’re trying to do the best you can do, many decisions that need to be made have no ideal choice that will satisfy everyone in the community. Even if there are two desirable choices in a decision, someone could say you chose the wrong one. “Even if you have the very best risk-management program on earth, you still do not eliminate all potential exposure to loss,” said Travis.
Are there things the D&O policy won’t cover? Travis said yes. One example is if someone is making a decision as a board member that helps them put money in their own pocket — such as if they sway jobs to a company the board member has a financial interest in, thereby profiting themself. Certain events are going to be excluded from D&O coverage. “If it’s criminal, if it is lining your own pockets, or something similar to these acts, there are just certain things that are not covered and certain types of wrongful acts that are not going to be covered,” he said.
Another item that possibly may not be covered by a D&O policy is when the board is accused of a wrongful act that is considered to be discriminatory toward someone in a protected class. According to Travis, there are some D&O policies that provide no protection for discrimination whatsoever. Alternatively, some D&O policies provide defense costs only, and then there are some that will not only provide defense costs but will also pay judgments made against the association for a discrimination claim. Travis said that there are different types of coverage available to boards and they should be sure they choose the D&O policy that protects their exposures to loss.
A somewhat gray area of coverage is the mismanagement or improper investment of funds. In terms of mismanagement or improper investment of the association’s funds, Travis noted this is a very broad topic. “For the most part, most D&O policies are not going to provide any coverage for mismanagement or improper investment of funds,” he said, “but some do.” He explained further that if you’re getting into areas where the FDIC is not providing insurance for your monies while they’re sitting in an investment fund, the D&O policy might not provide coverage either.
One thing board members should be aware of is that D&O is not there for Bodily Injury or Property Damage losses. That’s what General Liability insurance is for. “If I’m going to sue a board because I got hurt, or I’m going to sue them because my property or my car was damaged, and I blame the board for my injury or my damage, that is not a D&O lawsuit, that is going to be a General Liability lawsuit,” he said. D&O does not get into the Bodily Injury, Property Damage arena.
How do board members determine how much D&O insurance they require? First, most states have something about this in their statutes. After referring to state guidelines, the next place to look is their own governing documents — the declaration, CC&Rs, articles of incorporation and the bylaws. “Someplace within the declaration, the articles of incorporation or the bylaws, there may be some minimal standards set out as to what limits the board should have as far as directors and officers liability,” said Travis. He added that there also may be lenders, such as Fannie Mae, Freddie Mac, or the FHA and HUD that require certain limits in order to comply with those lending institutions. There could be another type of contract also demanding a certain amount of coverage, such as that with a local municipality or neighboring property whereby there may be a cooperative venture. “After that,” he said, “then it becomes a business judgment.” So an association may evaluate their assets and decide to have additional insurance based on that value, rather than going with the minimum required by other entities.
Board members should make sure they’re named as an additional insured on the association’s D&O liability policy. “The community association is going to be what’s called the first named insured. The first named insured is the party that’s on the policy’s declaration page,” he said. All the other insureds, such as the board members, committee members and managers, are named in the body of the policy. “Those are the folks who are additional insureds,” he said. This ensures that if there is a lawsuit, and these board members are named along with the association, that they will be covered by the policy.
Board members should verify that they are, in fact, insured under the association’s D&O policy by asking to see a copy of the policy. “If I’m a board member and I have someone whose opinion I value, such as my insurance agent or attorney, I’m getting a copy of the association’s D&O policy and asking what they think about it. Quite frankly, I’m also reading it myself,” he said. Other than doing that, a board member would be relying on certificates of insurance and proposals, and Travis said that not even the most comprehensive proposal explains every exclusion or definition on a policy. For example, every D&O policy covers for wrongful acts, however, every policy also has its own definition of what a wrongful act is. “That’s the definition that the entire policy is hitched up to,” he said, “so I would want to see that definition of wrongful acts.”
Aside from the D&O policy, the board members should expect to have protection for their General Liability coverage. This would be for scenarios where they might get individually sued for a Bodily Injury or Property Damage to a third party that may find them individually responsible. “As an example, if I’m the head of the social committee and somebody gets hurt at one of the social events, they may sue the community association, but then sue me. As an individual I need to make sure that I have that kind of protection from my community association as a volunteer,” he said. Board members should expect to have coverage if they’re individually sued in this manner.
Property managers should follow a similar procedure in ensuring they’re insured in this manner. Travis recommended the manager make sure they are a named insured on all the General Liability and D&O liability policies that are written for all the community associations that they manage. Managers should also make sure that their management company, the site managers themselves and other management company employees are insureds on the policy as well.
This brings us to protecting associations, boards and managers in cases of theft of association funds. Fidelity insurance, which covers things such as employee theft, should be in place for this purpose. Travis explained that, for the most part, this is purchased to protect the association from something an employee could potentially steal. Travis explained that a contractor would buy this type of coverage because they’re worried about an employee stealing their tools and equipment. A retailer could be worried about employees stealing their goods. Community Associations, however, are primarily concerned with people stealing the association’s funds. “The average community association really doesn’t have what you and I would define as an employee. So in a community association environment we need to expand the definition of an employee so that it not only includes the kind of employee the IRS defines as an employee, but it also includes committee members and volunteers operating within the scope of the direction of the association,” he said. He added that if the association is professionally managed, they need to make sure the site manager, the management company and all its employees are included in the definition of employee on the Fidelity policy as well. The policy is intended to protect for potential internal theft of community association monies.
3/10/23 – Note from Jeffrey E. Kaman, Esq., Kaman & Cusimano, LLC:
Ohio law now requires that community associations have sufficient fidelity insurance on all individuals with access to association funds, in an amount not less than everything in the association’s accounts, plus three months worth of income.
As you can see the mix of policies procured by an association work together in a variety of ways. We’ve touched a bit on the General Liability insurance policy. So, what is General Liability insurance?
General Liability, like D&O, responds to what are called third party claims. These are when a third party, someone other than the community association or the Insurer, makes a claim or lawsuit against a community association claiming that the third party has somehow been injured or suffered damage because of the community association’s actions or lack thereof.
The first of these four is Bodily Injury. Bodily Injury is when someone has a physical injury to their person and claims the association is at fault.
The next item covered under General Liability is Property Damage. This is when someone has property that has been damaged, and they either have direct physical damage, or indirect damage, meaning loss of use of a property, and that direct or indirect damage or loss is claimed to be the community association’s fault.
Then there is Personal Injury. Not to be confused with Bodily Injury, this is when the community association is sued for something the association has said or done, which has hurt someone’s reputation or self-worth. Personal injury in this context is not when someone is physically injured.
Advertising Injury, said Travis, is the same as Personal Injury, except it’s in the written or published form. “So when we say things about people in board minutes or on the association’s website, we are talking about two classic examples of Advertising Injury exposure,” he said.
Under the General Liability policy, associations should include Host Liquor Liability insurance. This is for the Liquor Liability exposure an association has when hosting a party or event, since they are not in the business of selling alcohol. This is for those situations where a liquor license is not needed, because liquor won’t be sold, but it is being served at no charge or given away. These situations include wine and cheese parties, picnic type parties, cocktail parties — or any event where liquor will be provided in this manner. This type of insurance needs to be added to the General Liability policy.
Not every association has employees, however, every association should have Workers’ Compensation insurance coverage. Is this to cover volunteers? Travis said every community association should have Workers’ Compensation coverage, whether or not it has employees, to cover contractors who are sole proprietors or partnerships. Travis explained that in most states, sole proprietors and partnerships are unable to purchase Workers’ Compensation insurance to cover themselves. They are required to purchase it to cover their employees, and they will produce an insurance certificate to show the association they have the coverage for those employees. However the sole proprietor or partner in most states cannot cover himself under that policy. The reason being is that sole proprietors or partner are not considered employees of themselves. So if the sole proprietor or partner himself were to be injured on the job site, his Workers’ Compensation coverage would not cover him. What often will happen in the Workers’ Compensation courts is that since the sole proprietor or partner isn’t covered under his own policy, they will look at whom he was working for on the day he was injured. If they determine that the sole proprietor or partner was working for the community association that day as an employee, the association now owes Workers’ Compensation benefits for that sole proprietor or partner.
Another reason to have Workers’ Compensation coverage is to provide coverage in case one of their contractors provides a false certificate of insurance. If one of these contractor employees is injured on the job and the contractor has no Workers’ Compensation Insurance, the Workers’ Compensation courts would likely deem the association responsible for the Workers’ Compensation claim. Again, they would look at whom the individual was working for the day he was injured much like the scenario described in the previous paragraph.
Travis said that yet another reason why it is needed is to provide coverage for casual labor. The association could casually pay a teen to clean up a small area around the association’s pond on a Saturday, for example, and pay him or her $50 out of petty cash. The association’s Workers’ Compensation coverage would apply here if that teen were injured while performing this casual labor. “The Workers’ Compensation courts are going to look at this as an employee/employer relationship,” he said.
So for these reasons, even if a community association has no payroll, they should have Workers’ Compensation coverage.
As for associations that do have employees, they should carry a type of coverage to protect board members and association assets against employee claims.
There are three types of employee coverage and claims that would come up here.
There is Employment Practices Liability, which is when the association or the board can get sued for how they practice being an employer. This includes hiring and firing, as well as how employees are treated on the job, raises, promotions and more. “Generally we get that coverage from our D&O liability policy,” said Travis. He explained that the D&O policy’s Part B is usually Employment Practices Liability when the D&O policy does provide this coverage.
Next is Workers’ Compensation coverage, discussed previously, which covers the association should an employee get hurt during a work-related incident. These benefits are required and determined by the state.
Then there is a second part of the Workers’ Compensation policy, called Employer’s Liability, which is for when an injured employee waives their rights to be taken care of by the Workers’ Compensation system, and they want to sue their employer for some additional funds. “That would be Part B of the Workers’ Compensation policy,” said Travis. He further explained that when an employee sues in this manner, waiving Workers’ Compensation coverage, not only does the employee have to prove that they were injured on the job, but that their injury was the result of their employer’s negligence.
As I’m sure you all know, an Commercial Umbrella policy is not a special policy to cover the umbrellas around your community’s swimming pool. This is an important liability policy that covers above and beyond other liability policies. “If you had a General Liability policy that had $1 million per occurrence and $2 million in the aggregate, and you had a $10 million Commercial Umbrella and you were to suffer a $5 million loss, then the General Liability policy is going to basically take the first $1 million. Then the Commercial Umbrella policy is going to cover the next $4 million above that,” Travis explained.
The Commercial Umbrella policy sits on top of your General Liability policy. It will also go over your D&O policy and any other liability coverage the association purchases. The Commercial Umbrella would help in case a claim goes over the limits of any of these policies. “It basically provides excess coverage to the limits that are shown in all of the underlying liability policies that are listed on the Commercial Umbrella policy’s declaration page,” he said.
Self-insurance is any scenario where an entity or community association could buy insurance, but decides not to. In these cases, the entity or community retains the risk, and if anything comes up, they would be the ones to pay for the loss and/or legal defense. Travis explained that to be self-insured is a two-step process. First, there needs to be insurance that can be purchased for that exposure. Then if there’s insurance that can be purchased for that exposure, the association makes the choice not to buy that insurance. They choose instead to take financial responsibility if something happens.
“If it was an uninsurable event,” he said, “then you’re not self-insuring and it’s just a business expense.” Events that are not insurable would include things like repairing the roads after a bad winter. Since there is no insurance that covers this, an association cannot be self-insured for it, and must absorb the cost as a business expense. “Self-insurance is when you could have bought insurance, and made the decision not to buy insurance,” he said. That is the act of self-insurance
One special type of coverage that may be needed by some associations would be Garage Keepers insurance. Garage Keepers insurance covers when an association has someone else’s automobile in their care, custody and control. This could be if an association has unit-owners’ automobiles kept in an area under the care, custody and control of the association. For example, lots of community associations, especially in urban areas, have valet parking only. So residents and guests pull up to the building, give the valet their keys and they park the car in the garage for you. “That is the ultimate example of your car being in the care, custody and control of the community association, not you. That is a classic example of when you need what they call Garage Keepers insurance,” said Travis. This type of policy enables associations to insure vehicles they don’t own for when they are in their custody.
Associations can check an insurance company’s ratings in order to gauge the strength of the company and their ability to pay claims. Checking the AM Best Rating of the company is the best way to do this. It is an independent party’s evaluation of what position they are in financially to pay a claim. Travis said you can refer to other sources for the ratings as well, such as Moody’s or Standard & Poors. “There are several companies that evaluate an insurance company’s ability to pay future claims,” said Travis.
To learn more about cyber insurance, we spoke with Joel Davis, CPCU, CIC, CIRMS, Marketing Manager for the Hoffman Estates, Illinois office of Community Association Underwriters of America, Inc.
Cyber security is an often overlooked but increasingly essential part of community associations. Every association should develop their own strategy for minimizing the threat of a cyber attack, including keeping their security software up to date, keeping sensitive information secure and educating employees and board members on safe cyber practices.
Even if cyber security is being addressed by an association, Davis explained, “Most commercial insurance policies do not cover cyber, and if they do, it’s usually on a very limited basis.” If those preventative measures aren’t enough, and a cyber attack proves successful, that’s where cyber insurance comes in. “When a cyber attack occurs, community association operations may be interrupted. Cyber insurance helps to recover losses due to downtime,” Davis said. Cyber insurance also covers the association’s liability in the event of a data breach, such as theft of residents’ personal identifiable information. Thus, it is important for community associations to purchase a cyber liability policy, to ensure they are fully protected in that regard.
What is a waiver of subrogation? Most states have this written into their statutes or their condominium acts. In the world of community associations, the waiver of subrogation basically means that the association waives its right to subrogate — that is, specifically to go after a unit owner when the unit owner causes a loss or claim for the community association. Joel Davis, CPCU, CIC, CIRMS, Marketing Manager for the Hoffman Estates, Illinois office of Community Association Underwriters of America, Inc., gave the following example: “I live in an eight-unit condominium and I’m in my unit and I fall asleep while smoking a cigarette, and that cigarette then falls and sets my mattress on fire. I get out alive and I get everyone else out alive, but all eight units burn down to the ground. What the waiver of subrogation is going to stipulate is that the community association is not going to be able to come after me to rebuild all eight of those units.” This also means that the association’s insurer cannot go after the person in this example. The association and its property insurance need to pay this on their own, and they cannot subrogate against the unit owner.
Davis explained that the reason why the waiver of subrogation was written into the early condominium statues was to take certain decisions out of the board’s hands. Take an example of two unit owners having the same type of loss. Each of their water heaters bursts and the result is $10,000 worth of damage to each of their buildings. Let’s say one of the unit owners is well liked by the board. He volunteers on committees, he is a good neighbor and always participates positively in association meetings. The other unit owner, however, is the bane of the board’s existence. He causes disturbances at meetings and frequently calls the board president to harass him. In this example you can see where this law protects the board from inadvertently making an arbitrary decision to sue one of the owners and possibly not the other due to their personal feelings about either individual. Because of the waiver of subrogation, one does not need to decide if an owner should be sued in these cases, as the association’s master policy pays the claim. Davis explained that while insurance companies have lost large amounts of money due to paying claims, in cases where waiver of subrogation applies, it would have been much worse if they didn’t have the law because they would be paying even more in D&O liability claims.
Davis explained that the indemnification clause is typically found in the association’s bylaws, and it states that if a board member is sued through their actions functioning as such, the community association shall indemnify the board member and reimburse them for any financial loss. He said that the purpose of the indemnification clause is basically to address the fears many people have about stepping up to serve on the board of their association. Many individuals are afraid to volunteer as board members for fear of the potential liability. “The indemnification clause is going to try and encourage people to take association leadership positions by telling them, ‘hey, if you make a decision out here and you get personally named in a lawsuit, have expenses with the lawsuit and you lose the lawsuit, the association will indemnify you,’” he said.
When the association buys D&O liability insurance, it should be a policy that will be able to back up that promise. Davis warned if the proper policy isn’t written, then the association would need to write a check out of its own pocket to back this indemnification promise up.
Community associations can get themselves into trouble if they decide to charge for liquor at such an event. In that case, an association may need to obtain a liquor license and then can’t be covered by the Host Liquor Liability coverage. In that case, an association would need Dram Shop Liquor Liability — that is, true Liquor Liability insurance.
What are the warning signs of masonry issues? What steps can be taken for preventative maintenance of association masonry? What goes into the repair process? What should an association look for from their masonry restoration contractor? We spoke with Chuck McCrimmon, President of Dakota Evans Restoration, Inc., in Palatine, IL, to answer these questions.
Masonry restoration encompasses much of the basis of a homeowners association and the buildings within its property, including individual units and structures in the common areas. It involves all aspects of the exterior building envelope, including general masonry, caulking, tuck-pointing (i.e. removing and replacing defective mortar joints between bricks), tearing down and rebuilding portions of brick, and exterior coatings and waterproofing. Masonry restoration contractors also perform concrete repair on balconies, parking structures, and other similar structures.
Buildings and structures within associations undergo general wear and tear from the environment, but there are certain things that associations can do as preventative maintenance to prolong the life of their structures. McCrimmon explained that one of the main issues with building deterioration begins with benign neglect, wherein a structure is not necessarily neglected; it just never comes up on the association’s radar to begin with. Limited common elements usually fall prey to benign neglect, especially balconies within fifteen to thirty years old on a building. The potential for failure of a neglected common element forces the association to repair it. Those costs can be astronomical. Working with a masonry contractor to determine which elements are neglected, and which have been over- looked, can help associations to avoid unnecessary costs.
Oftentimes, dissimilar materials are used or there are different building elements, including, for example, limestone meeting brick, or the concrete of a balcony slab abutting with the main unit. When dissimilar mate- rials meet, caulking can be put in that is factory-tested to last up to thirty years, but in an environment such as the Midwest, that lifetime could be reduced to eight to eleven years, a significant difference.
Another warning sign of a maintenance issue is efflorescence, which is a calcium chloride deposit that appears as a white substance on the face of brick. It occurs as a result of moisture seeping into the wall. “Basically, concrete and brick are a hard sponge. The Brick Institute of America has tolerances for how much water the brick and the concrete can take,” McCrimmon said. “It’s when you get beyond those tolerances that it starts to get inside the wall or inside the slab and starts to do some real damage.” Remaining proactive towards the various structures throughout an association can help prevent some of these issues.
How long do different materials generally last? The life of masonry materials depends on the environmental conditions and climate, as well as the quality of installation and the technology used, but they can last for extended periods of time. A concrete slab is best maintained if moisture and calcium chloride are kept out. McCrimmon explained that technological advances have changed the masonry industry and its materials in a big way. New mortar, for instance, is harder than the brick on many historical buildings. If the proper mortar is not used, it can damage the brick. “You have to match the materials to the building that you’re working on. Typically, if it’s maintained, the structure can last indefinitely,” McCrimmon said.
Preventative maintenance, ultimately, is critical to the survival of a building. If a structure is not constructed with skill, it may need work in a mere two to three years. McCrimmon recommended that the property manager or board members have a masonry contractor inspect the association on an annual basis. Some of the managers themselves come from the masonry industry and can even do this walkthrough on their own. They should examine the caulking areas, the flashings, and make sure that everything is still tight. Some companies charge for this, while others do not charge for the initial service. “You’re going to go a long way toward keeping your building in good shape,” McCrimmon said.
Once it is determined that a building needs repair, associations tend to go one of two ways. In the first route, the association hires an engineering firm to draft the specifications and procure the bids. McCrimmon recommended that, if an engineer is indeed hired, they be brought through to the end of the project. Another route is to have the association contact multiple masonry companies. These can be recommended by the board or the management firm. Before hiring a particular company, go through the specifications. McCrimmon also recommended that either the association board or the manager conduct an interview with each company. They should find out the company history, how long they have been in business, what their certifications are, and if they belong to any trade associations. The International Concrete Repair Institute (ICRI) is a good one to look for from a mason. An association should be comfortable with the company that it chooses.
McCrimmon underscored the importance of hiring a contractor with the proper certifications. In Chicago, they must be certified in order to use swing stages and scaffolding. Each worker must wear a badge and have gone through the required classes. “Safety is tantamount to anything,” McCrimmon said.
Safety red flags can include ladders used as working platforms, staff unfamiliar with the working equipment, and workers taking shortcuts rather than doing a thorough job. Associations should look at the condition of vehicles and equipment. Other small things can contribute to a good comfort level with a masonry company, including workers in uni- form or wearing shirts with the company name. These more general items show an attention to professionalism, something that extends to the way the company executes installations and repairs.
Insurance is also a big requirement for buildings in Illinois. For work that goes over three stories, the insurance costs jump astronomically and, therefore, many will not do work above that cut-off point. Associations should make sure that a masonry company doing work above the three- story mark has all of the required insurance.
When comparing bids, most contractors will not differ in a big way. Associations, however, should ask certain questions. What percentage of the wall are they going to work on? How many bricks are they replacing? “If they don’t have quantities in their bid, you should try to get it quantified ahead of time so you can get an idea of the work,” McCrimmon said. Look for quantities and unit costs in a contract. Determine how the con- tractor will handle a situation where something turns out to be more than allowed for in the contract.
Once a contractor has been selected, the association can expect certain things from their work, be it an installation or a repair. Buildings are typically rigged with scaffolding built up from the ground or down from the roof. Ladders should not be used as a work platform because of safety issues, McCrimmon said. In a public workspace, a pedestrian canopy will be constructed. This can be a temporary rolling canopy, about thirty feet long, or a canopy placed along the length of the sidewalk. A sidewalk canopy is considered a specialized trade now and is another cost to the association. Lights on the canopy must be plugged in throughout the night. When work is done in an alley or street, parking may have to be purchased.
McCrimmon stressed the necessity of permits for a range of work. This includes tuck-pointing, sidewalk canopies, environmental permits, and dust permits for the silica put in the air from grinding out mortar. “Along with your permit fees, some contractors, including myself, will use an expeditor so that we can get the permit quicker than in three weeks,” McCrimmon said. Work must be done correctly, safely, and properly, he said.
Project timeframes vary, mainly depending on the weather. Days can be lost to cold weather and precipitation. McCrimmon factored in about one day per week that will be lost due to poor weather.
“After you meet with the contractors and select who you’re going to go with, I think it’s important that, as a project goes on, you at least have a contact person,” McCrimmon said. The manager or board should stay informed of the project’s progress. That also allows them to keep association residents informed. The manager should walk the project with the foreman or contact person throughout the duration of the project.
Tuck-pointing is the removal and replacement of eroded and damaged mortar, which breaks down over time. The mortar is ground back between the bricks to a sound base. This can be done at the bed joint, which is the horizontal joint, or the head joint, which is the vertical joint between the bricks. According to McCrimmon, the rule of thumb to grind back to is 3/4 inch and as much more as is necessary to reach a sound base. “Like anything, you have to start from a sound basis,” McCrimmon said. “You then flush it with water and layer in a new tuck pointing mortar. Again, depending on the age of the structure and the type of structure, the actual type of mortar will be dictated by the structure you’re working on. Then you literally just take the pointing tools and lay in a new bed of mortar and strike it to match the adjacent surfaces.”
Generally, tuck-pointing will not be done on the entire wall, but rather on the defective mortar joints. Tuck-point mortar is not as strong as original mortar, so any remaining mortar without any issues should be left alone.
800 E. Northwest Highway
Palatine, IL 60074
Paved surfaces make up a large portion of homeowners associations’ assets, from sidewalks to parking lots to driveways and roadways. These paved surfaces are a large portion of the land real estate of an association and, therefore, they are crucial to maintain. Because of this, key questions arise. What are the signs of maintenance issues with asphalt pavement? What can be done as far as upkeep? What should an association look for in a contractor? What should they expect as part of the project? What are the environmental concerns of asphalt installation? To answer these, we spoke with Marketing Director and Sealcoating Sales Representative Michele DuBois, of DuBois Paving Company in East Dundee, Illinois about the issues associated with asphalt pavement and the importance of maintenance.
Maintaining an association’s paved surfaces can go a long way towards extending the life of asphalt. DuBois underscored the importance of sticking to a preventative maintenance plan. “Being proactive with preventative maintenance earlier in the year is a much better solution than reacting to problems,” said DuBois.
A maintenance plan should be put in place following the installation of new asphalt. From the moment of installation, hot asphalt begins to cool and the aging process begins, she said. From this point asphalt is broken down by oil, gas, sun oxidation, salt, water penetration, and cold weather. The most common causes of asphalt deterioration are water accumulation in areas of lower elevation, excessive loads on the pavement surfaces, and the destructive effects of vehicle fluids, gasoline and oil. Over time, water accumulation can cause asphalt to crack and split severely, or “alligator” as it is commonly called, explained DuBois. Also, she said excessive weight, such as garbage trucks on driveway areas, can cause asphalt to sink or displace, allowing gasoline and oil to seep into the pavement surface causing further deterioration.
DuBois explained that asphalt is a petroleum-based product. It is very flexible when it’s first laid, but as time passes, the petroleum-based products get oxidized and dried out by the sun. Associations should be on the lookout for certain indications of maintenance issues in their paved surfaces. Asphalt is very black when it’s first applied but turns grayish in color as a result of the oxidation process. “When the asphalt surface gets to this point, it is time for it to be sealcoated with a premium sealcoat product to protect the surface,” DuBois said.
When the surface color turns gray, the asphalt becomes brittle. This indicates that it has lost its flexibility and is going to crack. The cracks then lead to spider cracks, which in turn lead to holes and deteriorated areas, ultimately leading to asphalt replacement. “This is why it is important to seal asphalt,” said DuBois.
Whether the surface is brand new or an older surface, associations should look for any signs of cracking. As soon as any cracking is detected, the association contractor should be called in for a repair. According to DuBois, pore or crack sealing is one of the most important things that can be done for an asphalt’s surface.
Beyond the expected wear and tear, associations can also implement preventative measures to help stop any issues before they occur. Sealants are the most obvious tools, said DuBois. Sealants being oil-based, are able to seep into the pores of asphalt, DuBois stated. This adds flexibility and protects the asphalt against the natural elements – sun, rain, snow, ice, roots, etc. “This is called the asphalt rejuvenation process,” she explained.
Sealants aide to prevent water from penetrating small fissures and causing great damage. Sealants create a buffer against traffic and are resistant to oil, gasoline, salt and many other staining agents, explained DuBois. “The cost of sealcoating is insignificant when compared to the higher cost of resurfacing or replacement,” she said.
Another preventative measure is cleaning. Catch basins should be cleaned out at least once per year to avoid clogging. Parking lots should be swept once or twice a year to remove debris and salt settlements. This will also help prevent clogged catch basins. DuBois noted that contractors generally address the need for parking lot clean up before annual work on the surface is done.
As we change seasons from winter to spring, one of the most frequent issues we encounter is heaving of asphalt driveways, said DuBois. This occurs mostly at the top of driveways, at the garage, where the concrete apron meets the asphalt driveway. Water penetrates the stone base and subgrade, freezes and raises (or heaves) the asphalt surface. So how do we stop this from occurring? “The most logical place to start is not the driveway itself but to eliminate the source of problem – water. Moisture and poor pavement drainage are significant factors in pavement deterioration,” DuBois explained.
Preventative maintenance can extend the life of pavement an addition- al five years, from fifteen to twenty years. “Owners can be assured that paved areas will not deteriorate in the same way as unprotected surfaces. Lack of maintenance to the pavement will allow your driveway/parking areas to weaken and ultimately, fail,” she explained.
Can bulging or other deformities on a paved surface be indicative of faulty construction?
Yes, said DuBois. These issues can indeed happen with the initial pavement installation during the development of the community. Often, an inadequate thickness of pavement sections during construction to support the load that travels across the asphalt is one cause, said DuBois. Newly constructed homes have the very minimal base set on a foundation that has been unsettled during the construction. “Along with the settling, and the previously mentioned conditions of weather and vehicle fluids, asphalt deteriorates when the fine aggregates are worn away by weather and traffic. When the ‘fines’ are worn away, there is nothing to bind the larger aggregates together and the surface begins to ravel. This weakens the pavement section and eventually allows water to penetrate the sub- grade, which leads to pavement failure. Weak or unstable base materials cause driveways to fail,” DuBois explained.
“Water is an enemy to asphalt pavement,” said DuBois. As aforementioned, water can cause heaving. The problem of heaving occurs when water accumulates in the stone base and subgrade, under the asphalt pavement. Once water enters the subgrade, it is usually slow to evaporate or drain. In the winter it freezes and even in dry weather, the subgrade may remain wet or damp indefinitely.
“Repositioning and burying downspouts under concrete sidewalks, to direct water flow away from the stone base is vital to pavement structures,” said DuBois. “When downspouts cannot be buried, water should be directed to run on top of the driveway surface versus under the drive- way or into the stone base and subgrade. The pavements should be able to quickly shed water off the surface to areas that drain away from the stone base.”
According to DuBois, when inspecting driveways, it is vital to look at drainage at the same time as you evaluate the asphalt surface condition. The question to ask is, “What is the cause of the pavement failure?” Adequate drainage of the pavement structure is considered one of the most important factors in driveway performance. “Simply put, improper or no drainage can lead to failed pavement,” DuBois said.
“Contractors do a disservice to the industry when they use products of lower quality,” she added.
To avoid these situations, associations should look for a contractor who speaks openly, directly and with knowledge about the products to be used, noted DuBois. This indicates a contractor who is dedicated to installing products at the highest standard possible.
Selecting a quality contractor can go a long way towards extending the life of an association’s paved surfaces. The traits that associations should consider in a paving company include reputation, years in business, and financial stability. Word of mouth is another good indication of a reputable company. The most reliable companies are those that have worked with other associations in the area. Companies that have only been in business for a year or less may not have the proper equipment, personnel or experience to provide the necessary service, DuBois said.
Selecting a good contractor is a multi-stage process. The contractor should attend a board meeting to explain how the project will be executed, including scheduling, phasing, posting of notices, execution of the work, the post walk, and invoicing. “It is imperative to help the customer under- stand and so we as contractors must listen to concerns, formulate priori- ties and goals to work with budgets,” DuBois noted.
DuBois emphasized that associations should not only look at the cost as their deciding factor; the reputation of the company should carry more weight, as this is an investment. She recommended that associations re- quest certificates of insurance and obtain referrals from other similar communities, to see first-hand the quality of the work and speak about the details of projects. It is, of course, the responsibility of the association to budget on a yearly basis for this type of contracting work and to work with a contractor when they are given a plan, whether it is a one-year plan, three-year plan, or a five-year plan.
Prior to the beginning of work on a project, the contractor should review the project schedule to set dates with the property manager. That way, they can notify the association as to when the work will take place. A phasing map with details should be posted for the community. For large scale projects, the contractor should meet firsthand with the property manager as well as attend the community homeowner meeting to review the project and answer questions for all owners involved. It will not only help the direct relationship with the manager, but the added communications with owners will help the manager as well. “It should be a goal of the contractor to help the manager to alleviate questions and concerns and make their job easier,” said DuBois.
Because asphalt is an investment, an annual evaluation of all pavement should be done with the property manager. Typically, this is done in the early spring upon thawing after the winter frost line leaves the ground. Most often, it takes place prior to when asphalt plants open for the season, to conduct inspections to review any damages created by winter weather.
The contractor will consider the age of the investment and the condition to determine the type of repairs needed, explained DuBois. Pavement patching and removal and replacement are used for severe deterioration, especially when the underlying base has been affected. The damaged areas are squared off, saw cut, and excavated to a depth from two inches to two feet, depending on the subsurface conditions. New aggregate is added, as needed, and compacted in preparation for the new hot mix asphalt surface. When the extent of damage/age of the pavement surfaces is very severe, complete removal and replacement of the larger and/or entire surface, versus a limited area, is recommended.
Pavement resurfacing is when the asphalt pavement surface deteriorates to the point of needing repair; an asphalt overlay, also called grind- ing or milling, can be the solution, DuBois noted. It is primarily used in larger areas, such as in parking lots and roads versus driveways, where it is more economical to repair just the surface as the base is not failing. Driveways are a smaller surface area and it is more cost effective to patch or remove and replace, she said.
As for a project’s timeframe, sealcoating typically lasts one to five days, depending on the accessibility and traffic patterns for the community and total volume of work to be complete.
According to DuBois, there are various types of sealcoat materials; the industry standard being coal tar emulsion, a mainstay since the 1950’s. More recently, in 1980, asphalt-based emulsions were introduced as an alternative. Coal tar is known for its hard, durable file, deep dark color and increased fuel resistance, while asphalt-based sealant requires additives to match the durability and fuel resistance of coal tar, and are not as forgiving in cooler temperatures, such as the Midwest climates (versus in Southern or Western regions of the country.) In the end, both materials will perform only as well as how they are manufactured, mixed and applied. There are also other products designed for use on specific areas such as runways, large scale parking lots, etc. such as polymer modified sealers which are not commonly used in residential applications for parking lots and driveways. “It is important for the contractor to provide information to the customer so that they can make the best decision for their community,” DuBois s
DuBois Paving Co.
1061 E. Main Street, Suite 100
East Dundee, IL 60118
Illinois Accounting - Budgets
When it comes to the association’s finances, how can boards be assured they’re handling things properly? Where should the board begin when creating budgets? What are the reporting requirements and rules for handling association funds? What are the proper accounting methods? How can an association be assured they don’t be- come the victims of theft or fraud when it comes to their funds? We spoke with Brad L. Schneider, CPA, Certified Fraud Examiner, and President of Condo CPA, Inc., in Elmhurst, IL, to answer these questions and en- lighten readers on other important accounting topics.
Finances are, of course, crucial to the survival of an association, and boards therefore want assurance that everything is running properly. Associations with management companies generally have their account- ing functions taken care of by that management company. Self-managed associations may outsource their accounting functions to increase the amount of resources available to them. That way, they do not just rely on the abilities of their treasurer.
Schneider explained that each situation comes with its own issues and methods of setting up and verifying internal controls. In the case of a management company, the board will need to look into the reputation of that management company and its internal controls before turning over finances and future collections. The treasurer, or even another board member, in a self-managed association should have access to bank statements, whether online or in the form of hard copies. If accounting functions are outsourced, treasurers should see to it that they receive accurate and timely reports of income, expenses, cash and investments. A second signer can be utilized for all checks. It is imperative for the self-managed association where the treasurer is handling the finances, he said. “In any case, the association should make sure that they have a copy of the fidelity bond coverage of either the management company or the accounting firm, and they should make sure that anyone who has access to the funds is covered by the fidelity bond. And they should keep a copy in their file,” Schneider said.
The three different accounting methods are modified cash basis (the most prevalent, according to Schneider), cash basis, and accrual. Modified cash basis accounting records expenses on the cash basis and income on the accrual basis. Assessments and other charges are recorded when billed rather than when paid. If income is done on the accrual basis, as recommended by Schneider, the amounts receivable from the unit owners show up on the balance sheet. This allows associations to compare the receivable listing at the end of the month to the balance on the balance sheet. If those two numbers do not match up, certain items may be out of balance. The budget should also match what is being billed, Schneider said. Accounts written off during the year will appear as bad debts. “This method can work for most associations unless the association is getting behind in pay- ing bills. Then this method becomes dangerous. If an association is running into financial difficulties or is running low on cash, and invoices to be paid are not being paid when due, the accrual method must be used,” Schneider explained.
Accrual basis accounting records income when billed and records expenses when incurred, rather than received or paid. Schneider stated that accrual is usually the most accurate method when done properly, and it is also the most time-consuming for the management accounting staff. Management companies may need to hire additional staff, making accrual more of a rarity in Illinois. Accrual is best for associations experiencing difficulty with getting bills paid in a timely manner because the balance sheet lists the total amounts due to the vendors. Schneider recommended modified cash basis for associations that do not have this issue, as it creates unnecessary complexity.
The third method, cash accounting, records bills when they are paid and records amounts due from owners, along with other revenue items, when they are received. Schneider noted that this method is simplistic and can be good for small associations. “The problem with this method is that, sometimes, no one is reconciling the books to the receivables system. When we audit buildings on the cash basis, many times when we convert it to the accrual basis, the accounts receivable do not reconcile,”
Schneider said. This forces the accountants to inquire into any units writ- ten off during the year, as they will not show up on financial statements until converted to the accrual basis. Schneider explained that some association boards will want to see income on the cash basis so that they can use the statement of revenues and expenses as a cash flow statement. Income should be converted to the cash basis with a monthly entry, but the accounts receivable from the owners, along with the assessments and bad debts, must first be reconciled to ensure their accuracy. Since some avoid reconciling the books each month, Schneider discouraged cash basis accounting.
Schneider stated that the American Institute of Certified Public Accountants (AICPA) does not require monthly financial statements from the management company. However, he strongly recommended that the board receive monthly or at least quarterly financial statements for small associations. For associations that hire independent accounting firms for the year end, they must have a schedule included in the supple- mental information relating to the reserves, based on either a formal or informal reserve study. “If a basis of accounting is used that is not accrual based accounting, we are required to state the basis in ‘the auditor’s opinion or the independent accountant’s opinion (for compilations and reviews),’” Schneider said. He further explained that accountants, in this case, will say that they audited or reviewed the financial statements on the cash basis. The accountants state if the statements present fairly or that they were not aware of any material modifications based on the cash basis, Schneider said.
Associations often begin the budgeting process in July. Schneider stated that the process should begin no later than November in order for a budget to be passed in December.
When creating the association’s budget, it makes sense to categorize expenses. What is the best way to categorize these, and how detailed should the categories be?
Schneider explained that categorization depends on the type of association, be it a condo, co-op, or other. He noted that many management companies already have expense groupings set up, and budget worksheets can also suggest groupings. Associations should ultimately strive for categories that make the most sense to them. Schneider recommended that special facilities be grouped separately (i.e. garage, pool, clubhouse, or other major cost and income centers); items such as laundry, however, may be too small for their own category. Associations should always have a category for reserves.
With regard to detail, the categories should strike a balance between too detailed and not detailed enough. The categories should not be burdensome to the association. “A good indication that the budget is too detailed is when you have a lot of categories that are small amounts,” Schneider said. Sub-categories are an option as well, with their advantage being the ability to track items in greater detail when there are questions relating to management decisions.
How often should the budget be analyzed and by whom? Schneider said that the manager or treasurer of an association should first draw up a preliminary budget based on the input of the board and its plans for the upcoming year. Association managers should have a supervisor review the budget for any mistakes and provide information on how similar associations have handled their budgets. The budget then goes to the finance committee or board for their comments, according to Schneider, and then it returns to the board for review. Finally, the budget is presented to the owners prior to the board of directors passing the budget at an official meeting. Schneider further noted that accountants typically are not consulted on the budget prior to its approval by the board; however, an accountant can provide helpful suggestions to incorporate into an association’s budget.
Once passed, Schneider recommended that the budget be reviewed monthly. He explained, “For instance, if it is a prolonged winter, the amount budgeted for gas may not be enough. If it is bad enough to put the association in financial straits, the board will need to consider passing either a special assessment or amending the budget mid-year and increasing the assessments or passing an energy assessment.”
- Repairs and Maintenance
- Operating/Contractual Expenses
- Reserves (including, according to Schneider, Reserve Transfers/ Reserve Assessments)
* “By definition, these are un-budgeted assessments in the year they are created. However, if it is an on-going special assessment over a period of years, then it can be included in the reserve section of the budget,” Schneider said.
What are an association’s annual reporting requirements for financial statements? Schneider said, “According to the Illinois Condominium Property Act, the board must supply to all unit owners an itemized ac- counting of the common expenses for the preceding year actually incurred or paid, together with an indication of which portions were for reserves, capital expenditures or repairs or payment of real estate taxes, and with a tabulation of the amounts collected pursuant to the budget or assessment and showing the net excess or deficit of income over expenditures plus re- serves.” He noted that an association’s declaration may have a stricter pol- icy that requires an annual audit. It can also provide a date by which the annual accounting must be disseminated. Association funds must not be commingled with those of other associations, the management company, or even reserve funds, he said. Schneider recommended that associations review their financial statements on a monthly basis. Smaller associations might review on a quarterly basis, although their bank accounts should still be reconciled monthly.
The Prudent Man Rule typically dictates how reserves might be in- vested: reserve funds should be placed in safe, insured investments, including money market funds, money market accounts, certificates of de- posit, or treasury bills. Investing in mutual funds to take advantage of the stock market are frowned upon, Schneider said.
According to Schneider, the financial statement and the budget differ mainly on one thing: perspective. While the budget predicts for the com- ing year, the financial statements report what has happened in the past. Statements that are a “budget to actual comparison” are a hybrid of both, with both historical and prospective columns.
Variable expenses, such as electricity, are those expenses that change according to usage. Electricity use tends to change from month to month, so the expenses too will vary. Some expenses are part variable and part fixed. Elevator contracts are fixed, but certain parts or services related to the elevator may not be covered under contract and are, therefore, variable, Schneider explained.
“The operating fund is where the activity of the association occurs to maintain the daily operations. It will not include capital re- placement projects,” Schneider said.
What types of tax returns does an association file? Tax returns differ based on the type of entity, and associations rarely qualify as true tax exempt organizations under the Internal Revenue Code section 501C. “There are the rare occasions where an association may qualify as a 501C4 Social Welfare organization or as a Social Club, 501C7. Cooperatives will need to file the 1120-C as well as the IL-1120. Condominiums, HOAs, and town home associations will generally be able to file as either a regular corporation (1120) or a homeowners association (1120-H),” Schneider said. Deciding which form to file happens annually.
The 1120-H form taxes net income of non-assessment or membership fees from owners. Under this form, many associations have no net taxable income due to extremely low interest rates at the present moment. Provided that there is any tax due, the tax rate is a flat 30% in addition to the Illinois taxes of approximately 9.5%. Schneider explained that the 1120-H requires that an association be residential, obtain at least 60% of its revenue from membership dues or assessments, and have 90% of its expenses going to manage, maintain, care for, acquire, or build the association property. “Non-exempt income, such as user fees for the laundry facility, or income other than assessments, such as interest income, is taxed net of directly related expenses,” Schneider said.
The 1120 form, Schneider said, is much more complex. This form is for a normal corporation and is modified by Section 277 of the Internal Revenue Code, stating that member losses cannot offset non-member in- come gains. This particular form taxes net non-member income and member income. Member income can be carried over to the next year, provided that elections are successfully completed. The IRS requires that this is a one year election passed by the unit owners. “If the 1120 is filed and there is tax, the first $50,000 of taxable income is taxed at 15% along with the approximately 9.5% Illinois tax. At the present time, we recommend the filing of the 1120-H form since there are less issues upon IRS audit and, since the interest rates are presently very low, most associations end up with no net taxable income,” Schneider said.
“A compilation is a financial statement where the outside accountant prepares financial statements based on the management company’s records or the treasurers’ records for self-managed associations,” Schneider explained. The format and level of disclosure of compilations can vary greatly in Illinois because CPA firms are not required to adhere to Peer Review quality standards. Compilations do not require that the underlying numbers be looked into. If the CPA firm is licensed in Illinois, it is required to adhere to quality re- view standards mandated by the American Institute of CPAs. If the firm or partners are “registered” in Illinois, Schneider said, they are not required to follow Peer Review standards. Schneider said that, because of the lack of requirements in Illinois for compilations, the quality of the financial statements and the work product of the accountant varies greatly. He said it is essential that the firm selected is a member of the AICPA Peer Review Program. Compilations can, however, serve as viable alternatives to audits when an association feels comfortable with its level of financial control. Compilations are often the only level of service affordable for a smaller association.
The Illinois Condominium Property Act does not require audits, although some Illinois declarations do call for annual audits. Schneider noted that this is rare and that an association, by law, may opt out of an audit at any point in time, assuming it is not required by their declaration. The cost per unit of an audit is negligible in a larger association, and it can be a good way to increase oversight of the financial operations of the association. “According to the Association of Certified Fraud Examiners, oversight can greatly reduce the opportunity, and thus the incidents, of fraud,” Schneider said. An audit can also be provided to prospective unit owners to give them an idea of the association’s financial condition.
How can associations protect themselves from fraud? The best way to avoid fraud, according to Schneider, is to examine the internal controls set up by the management company (or the board if the association is self- managed). Solid internal controls and segregation of duties can do much to prevent fraud. The treasurer, or even another board member, should have access to original bank statements or online check copies. Cash disbursements should be compared to check copies on a spot basis. Schneider reiterated that annual audits can also discourage fraud.
Warning signs for theft or fraud can include a bank balance on the books that does not reconcile with the bank records. Unit owner receivables increasing at the same time as unit owners stating that their accounts are incorrect and that payments are missing can be another sign. Keep on the look out for expenses that were not authorized or approved yet that still show up on financial statements, for dropping bank account balances while costs increase at an abnormal rate, or for vendors who refuse to bid on jobs or complain that they had to pay extra to bid. Schneider further recommended to look for income that had been on previous financial statements and is now missing.
Associations should periodically check for items of income that are not part of the typical monthly assessment bill to determine if they are reason- able (i.e. laundry income, health club memberships, antenna income, etc.). Checks made out to cash, credit card companies, or hardware/other house accounts without back-up attached to the paid bill copy can also serve as red flags for fraud. Accounts where the management company is not a signer and no records have been turned over to the management company are also suspect. Associations should keep in mind that QuickBooks al- lows changes to payment dates and the payees and therefore is susceptible to fraud. Schneider said, “In order for a fraud to happen, the three legs of the fraud triangle must be in place: opportunity, need, and rationalization.”
When selecting an accounting firm, Schneider recommended, first of all, that a firm has consistently received reviews of good quality from the AICPA and has a solid reputation in the industry. Associations should look to the experience of a firm’s staff, the number of associations with which they work, and the availability of the firm’s partners to answer questions in a timely manner. Firms should expose themselves to continuing education relating to the community association industry and stay in- formed of current topics and issues. As Schneider said, some questions an association should ask of accounting firms include, “Do they participate in Community Associations Institute (CAI) locally and at the national level for educational updates? Do they participate in CPA society educational opportunities relating to your association? Are they well known by newspaper, magazine, and public speaking engagements to give advice to associations?”
Billings are based on the time spent by staff members at a CPA firm; a multiple of the staff members’ hourly rate will be calculated to produce an hourly billing rate for whatever service is provided to an association. Schneider stated that many firms charge a flat fee for auditing, accounting, or tax work for community associations since those associations work on a fixed budget or assessment. Note that unforeseen circumstances can increase the cost of a firm’s services. “Although the fee is important, so is the quality of the service,” Schneider said.
Brad Schneider, CPA
Brad L. Schneider CPA
John has retired from Reserve Advisors.
In order to answer these questions, and provide other important details on this topic, we spoke with John P. Poehlmann, RS, a principal from the Milwaukee, Wisconsin office of Reserve Advisors, Inc., a company specializing in reserve studies, serving clients in all 50 states and in 35 countries worldwide.
“Reserves are funds that are collected by the association from the homeowners on a monthly, quarterly, or annual basis, and set aside into a reserve account for the purpose of replacing the common elements of the association as they wear out,” said Poehlmann. The reserve amounts are most commonly included as part the co-owner’s regular association fee. The elements the funds are set aside for include those undertaken as large capital projects, such as roof and siding replacements or pavement replacements. Although it is ideal for associations to have sufficient reserves for items such as these as they are needed, that is not always possible. In instances where reserves fall short, associations are faced with three undesirable options: 1) impose a special assessment on the co-owners; 2) borrow funds for the capital project from a bank, or 3) postpone projects.
Of course, it would be impossible for anyone to randomly decide the proper amount to hold aside in reserves. Many factors must be examined, including the age and condition assessment of all the common elements the community association is responsible for, maintenance practices, interest earned on the reserve funds, as well as adjusting for inflation to the time each of those would need to be repaired or replaced. This is where a professional reserve study comes in. Often conducted by engineers, reserve studies offer a detailed analysis of all of these factors, and provide amounts the association can depend on for ensuring adequate reserves will be there when the association needs them.
Reserve studies have evolved over the years to where they are avail- able in various forms of sophistication, ranging from simplistic forecasts with limited support to comprehensive studies that provide advice that can save associations money. Today one can obtain a professional reserve study that contains cloud-based software that enables boards and managers to have a dynamic, “living” reserve study, that they can easily update as each actual capital project is completed and conduct unlimited “what if” scenarios.
Prior to starting the reserve study, the association should provide the reserve professional with copies of the community’s governing documents — the declaration, bylaws, CC&Rs, and any other legal instruments that identify what the association is responsible for. “These documents will identify the property components for which the association is responsible for maintaining,” said Poehlmann.
In addition to examining the documents, Poehlmann recommended convening with association leadership to ensure the actual needs of the community are addressed by the reserve study. “Equally, or even more important, our engineers have a thorough discussion with management and/or board members or committee members about each of the common elements and whether they want it included in the reserve study that we’re going to prepare for them,” he said.
There are several good reasons why the reserve professional doesn’t rely exclusively upon what’s in the governing documents. “First and foremost,” said Poehlmann, “we’re not lawyers and governing documents are legal documents. We use them as a starting point to get a general idea of the size and complexity of the common elements.” Also, he said that association documents are often not specific enough to properly determine which common elements are maintained through the association’s reserve account. The association board or trustees might treat the maintenance and replacement of certain common elements through the association’s operating budget and not the reserve budget. “I’ll give you a simple example — mailbox stations. While a mailbox station might be considered a significant item worthy of inclusion in the reserve budget for a small association of ten units, the replacement of mailbox stations might fall under the operating budget as maintenance in an association comprised of hundreds of homes as it’s, relatively speaking, a very small item to them,” he said.
While the association is responsible for maintaining the common elements, there is latitude for the board to choose how they maintain the elements, and from which budget, reserve or operating, they take funds to repair or replace. So for these reasons, a discussion with association leadership is key.
Poehlmann explained that a reserve study is made up of two parts, as defined by Community Associations Institute (CAI) and the Association of Professional Reserve Analysts (APRA) — the physical analysis and the financial analysis of the common elements.
The physical analysis is comprised of three things. First is the component inventory, which is an identification of the common elements and their quantities, such as square feet, square yards, number of street lights, etc. Second, a condition assessment is performed, which is an evaluation of the current condition of each component based on the observation of the engineer performing the reserve study. Last is the life and valuation estimate. This is where the reserve professional’s engineering team deter- mines the useful life, the remaining useful life — or better stated, how much longer the component will last before it has to be replaced — and what is the repair or replacement cost of each component.
The financial analysis has two components. First is an analysis of the fund status. This looks at the current amount of money in the association’s reserve fund at the time the engineer conducts the reserve study. It will be noted on the study as of a specific date, often the beginning of the fiscal year for the association. “This is a starting point for the engineer as he or she conducts the financial analysis portion of the reserve study,” said Poehlmann.
Second is the funding plan. “This is the plan that identifies the unit or homeowners’ reserve contributions that go into the reserve account to offset the anticipated future capital expenses and pays for those capital projects as they become necessary,” he said. The funding plan extends a minimum of 20 years into the future, and, more commonly, is developed as a 30-year forecast.
Aside from having the information in the reserve study itself, there are other benefits associated with having a professional reserve study performed.
One benefit is that the reserve study can point out potential problems the association doesn’t know about. “You’d be surprised how often maintenance issues are overlooked,” said Poehlmann. The reserve professional could also find possible unbudgeted or over budgeted items. “We like to look at the entire operating budget, which includes the reserve budget,” he said. There are two reasons for doing this. One is to make sure that all property is accounted for and nothing was omitted from both budgets. The second reason is to ensure that no items were double counted and in both budgets. “When that happens, the association is obviously over- assessing,” he said.
Another major benefit of a reserve study, when followed by the association, is that it will eliminate, or certainly greatly reduce, the possibility of special assessments. “Picture yourself as part of a young couple who recently bought a condominium trying to make ends meet and getting a surprise special assessment bill in the mail from the association saying that you have to come up with $4,000 in the next six months for a re-roofing project that wasn’t planned for,” said Poehlmann. Reserve studies make it easier for homeowners to manage their personal long-term financial planning by ensuring stable association fees, with only minimal and predict- able increases.
Preservation of the market value of units or homes in the community is another benefit of having and following a proper reserve study. “This is a big one because peoples’ single largest investment is usually their home. A reserve study will help maintain the property in good condition, which helps strengthen the market values of the homes,” said Poehlmann.
The reserve study provides benefits to the board as well as home- owners. Since one of the board’s primary responsibilities is to maintain and protect the common property of the association, a reserve study helps them fulfill that fiduciary duty. The reserve study can also help the board members reduce claims of fiscal mismanagement by homeowners. “And having that long-term plan saves boards countless hours and meetings. The reserve study gives the board that long-term financial master plan that they need to prepare for the short-term and long-term,” said Poehlmann.
For the property manager, the reserve study helps prepare the community for capital projects. “They need to know when capital projects are coming down the pike so they can go out to bid and help the board in understanding the bids,” said Poehlmann. It’s also a great tool when planning the next year’s budget. The information in the reserve study will help free up the manager to focus on the many other property management functions.
While some states have legal requirements regarding reserve studies, many still don’t. “For instance, the State of California requires that associations hire a professional reserve firm to provide a full reserve study with site inspection every three years, and an annual update in the years that a full reserve study was not provided,” said Poehlmann. Nevada and Virginia require a professional reserve study every five years. According to Poehlmann, other states that have statutes that involve either funding reserves, establishing reserve accounts, or rules relating specifically to reserve studies include: Minnesota, Michigan, Ohio, Hawaii, Washington, and others. “The key thing that we’ve found over the years is that the number of states that are enacting legislation is growing. There is clearly a trend toward more legislation, not less,” he said.
Poehlmann recommended that a full reserve study, which includes a site inspection and condition assessment, should be conducted as soon as possible after transition from the developer. “Then it should be updated with a site inspection at least every three years and certainly no later than every five years,” he said. Another good time to have an update is after major changes to the property, such as following a large capital project. “However, it is very important for the board and management to review the reserve study every year. Many boards use the study throughout each year,” he said.
The initial reserve studies themselves can take anywhere from two weeks to three months upon authorization from the association, depending on several factors. “Weather conditions can slow down the development of a reserve study. We sometimes experience delayed inspections in the Midwest and Northeast due to extended bad weather,” said Poehlmann. The engineer needs to be able to see the roofs and pavement in order to assess their conditions, so if there is snow and ice on their surfaces that isn’t melting, that would cause a delay. Also, the scheduling time varies for different companies, so associations should ask potential reserve professionals about their time-frames and schedules.
Poehlmann said that the reserve study should be used as a guide for future planning. “No one can predict with complete accuracy when capital replacements will be necessary. Weather conditions, for example, can alter what the reserve study provider projected several years earlier,” said Poehlmann. Even so, the reserve study is going to give the association the best chance of properly planning and funding their reserves.
To further insulate the community from the possibility of special assessments or needing a bank loan, Poehlmann recommended the reserve professional consider a cushion when developing the funding plan so there is money available in the event that a capital repair or replacement takes place sooner than initially projected in the reserve study. Another safeguard against the unexpected is to have frequent updates conducted on the reserve study. “The initial study is a snapshot in time, and common elements don’t wear out overnight. Things change over time, like the inflation rate, interest earned on funds, etc. Every few years the study needs a fresh update to prevent the need for special assessments,” he said.
There are four general funding strategies for association re- serve accounts: baseline funding, threshold funding, full funding and statutory funding. Aside from statutory funding, the remaining three strategies are all about how much risk the association will be taking in funding their reserve account. Statutory funding is what associations need to have in reserves in order to comply with their state statutes. The other strategies would be at the association’s discretion. Baseline funding looks at the future expenditures and their timing, and calculates future reserve contributions such that the reserve account balance will reach $0 as the lowest point over the life of the analysis, anywhere from 20 to 30 years out into the future. “This approach is the highest risk for the association to assume because it will get down to a $0 balance at some point,” said Poehlmann. The threshold funding strategy is calculated like the baseline approach, with one very big difference — this plan never takes the reserve account balance down to $0. The reserve professional builds a cushion into the reserve account so that in the event that some capital expenditures are necessary sooner than project- ed in the association’s reserve study, the association will have the available funds to cover those costs without having to conduct a special assessment or take out a bank loan. The last strategy, full funding, also known as the component method, is the least risky of the strategies, but there’s a big tradeoff. “It’s also the most costly,” said Poehlmann. “What happens here is that each common element is looked at and funded individually. In other words, the association will begin fully funding for items that won’t be replaced for up to 20 years.” Poehlmann gave the example of the association’s roofs. “Let’s say they’ll need to be replaced in 20 years at a cost of $200,000. In this example the association collects $10,000 per year and sets it aside. The money builds up over time and isn’t used for 20 years. Now repeat this process with each of the association’s common elements and before long, you’re collecting a lot of money that won’t be used for long periods of time,” he said. This is the safest for the association, but is also significantly more costly than other strategies.
Poehlmann said that a good reserve study provider should ask questions about the objectives of the board and association in the reserve study. “We like to learn about what I call the ‘culture’ of the association. Some like to just maintain their properties while others take an active interest and want to maintain the association in ways that one might consider over-the-top, but others don’t,” he said. He gave an example of redecorating the clubhouse. “One association may want to do this every five years, because the members prefer to see it being kept as fresh as possible, while another association might redecorate only every 20 years. Neither is right or wrong, it’s what I call the ‘culture’ of the association,” he said.
Association board members have several roles in the reserve study process, and one of those roles is to communicate to the provider not only the list of common elements that should be included in the reserve study, but these types of desires for the association to maintain its individual personality.
Asphalt seal coating is an example of one type of item that is frequently overlooked by associations. “Sometimes it’s in the reserve account because of asphalt replacement, other times it’s in the association’s operating budget, and some of the time it’s not anywhere to be found,” said Poehlmann. When it’s time to do it, the association will struggle to find the funds to do it, or take the money from the reserve account even though it wasn’t part of the reserve budget. “Here’s an- other one,” he said. “This one’s newer and particular to the northern part of the United States. In associations that have large numbers of ash trees on the property, we’re looking at the invasion of the emerald ash borer that is attacking and killing significant numbers of ash trees. We’ll incorporate the cost of ash tree removal and replacement with other species of trees if it’s a large number and the board wants to re- serve for it. Why not budget for it?”
For the most part, the reserve funds should be kept in their own separate account. Statutes regarding this are different in each state, and the laws are frequently changing, so associations should ask their accounting and legal professionals about this. “It’s really a legal question, and I’ll defer to the attorneys,” said Poehlmann. However, he pointed out an example of how Florida specifies the funds be kept. “In Florida, state law historically required that reserves for roofing be kept in a separate reserve account and could not be used for any other purpose than replacement of roofs,” he said. More recently, this requirement has been relaxed. Other states allow using reserve money for other expenses, but specify the funds must be paid back to the reserve account within a strict time frame. Another factor in deciding how to keep and use reserves is the strategy the reserve study provider used to fund the reserve account. “One method, known as the cash flow method or pooling method, pools all of the future replacement costs into a pool. That pool of funds is used to conduct the replacements in the order that they come due,” said Poehlmann.
Poehlmann explained cash flow analysis as a method of calculating the appropriate level of reserve funding. It’s also known as the pooling method. In short, using one of the cash flow methods, the reserve professional aggregates all of the future capital expenditures or project costs and “pools” them into one group. He then looks at those future capital expenditures as they come due and funds the reserves with consistent annual contributions into the re- serve account with the objective that the reserve account will never fall into a deficit position or below a set minimum amount
Poehlmann said there really is no such thing as leftover reserves. A reserve account is a dynamic thing. It’s constantly changing, money goes into it (reserve contributions) and money is drawn from it (paying for capital projects) on a regular basis. “And remember, the association never completely wears out, so the purpose of and need for the reserve account never comes to an end,” he explained.
At some point, if a reserve account has been overfunded over a period of time, the board could then reduce the regular common fees assessed to the owners. However, associations should beware of and avoid overfund- ing the account. “The negative aspect of overfunding is that the current owners are paying more than their fair share into the reserve account. This means that, as the current owners are paying too much, the future boards will reduce the amount of reserve assessments and the future owners will pay less into the reserve account because today’s owners are pay- ing for part of the future necessary contribution,” said Poehlmann. So, in essence, when you overfund, the current owners are paying toward a future fee reduction that, if they move, they will never be able to enjoy. And additionally, owners who purchase later in this timeline will not be contributing the same level of funding toward the reserve account as cur- rent owners.
“Regular reserve study updates will help keep the association on track,” said Poehlmann. These should be conducted every three years to avoid overfunding, or possibly worse, underfunding. Reserve study updates account for changes in the inflation rate of materials and labor, interest rate changes on the reserve funds and accelerating or delaying capital projects as compared to the original reserve plan estimates. “All of these events contribute to the calculation of an appropriate level of reserve funding,” he said.
According to Poehlmann, the prices vary on reserve studies, and there is even software that associations can purchase to do simplified, but not very reliable, reserve studies. However, cost should not be the main factor in choosing a reserve study provider. He also does not recommend relying on do-it-yourself software for this important service. Poehlmann said to look at the choice of which provider to use from a board member’s perspective. “What do I, as a board member, want out of that study? I want the kind of reserve study that will help me fulfill my fiduciary responsibility, protect the investment of the association members in their homes, provide our board with advice and recommendations that would save the homeowners money over the long run and educate us so that we can be more effective board members while maintaining a community where the members look forward to coming home every night,” he said. For the most part, board members are neighbors in the communities they serve, and they should treat the decision about how to pursue maintaining proper reserves in terms of how it would affect their neighbors and themselves.
What is typically included in the cost of a reserve study? CAI and the APRA have strict guidelines as to the minimum components of what should be included the reserve study. “National standards were developed in the mid 1990s by a small committee of national reserve study providers, of which I was fortunate enough to be one,” said Poehlmann. One can expect, at a minimum, a component inventory of each common element, a physical inspection and measurement of each common element, a determination of the normal useful life of each, the remaining life (how long before replacement is necessary), a status of the reserve fund at the time of the reserve study, and a funding plan that determines the amount of annual reserve contributions necessary to offset the anticipated expenditures for replacement over at least the next 20 years. “That’s the mini- mum,” he said.
Poehlmann said that reserve studies have changed in many ways over the past few decades. “My partner, Ted Salgado, and I started conducting reserve studies in the 1980s, which was only about 15 to 20 years from the birth of the community association industry,” he said. “We’ve seen a lot of changes over the years. In the early days, we found that most people who were doing reserve studies were property managers or board members because there wasn’t a reserve study industry yet. Property components were just beginning to wear out and associations clearly weren’t prepared for that. They’d take projections from contractors and guesstimate the future replacement costs in very unscientific ways. We’d see accountants trying to get their arms around the question of how to fund for replacements. People were using different terminology in different parts of the country. Some were providing engineering inspection reports that were invasive in nature, providing more information than a board would ever need to plan for the future. Others were providing common element re- placement forecasts without any kind of funding plan, which didn’t really help when it came time to budget. They still called these reserve studies, even though half of what we expect from reserve studies today wasn’t even included.”
Poehlmann said in the mid-1990s, CAI invited Salgado and him, along with a handful of other reserve study providers, to meet and develop national reserve study standards and consistent terminology so boards and managers would have a basis from which to compare providers and have reasonable expectations of what they were buying. “Along with that came the Reserve Specialist designation program that required providers to provide their reserve studies in accordance with these standards. The purpose of the national standards was to provide boards with a standard reserve study that served as a budgeting tool,” he said.
Going forward, Poehlmann sees the industry expanding. “More states will enact legislation to ensure that associations are protecting their members’ investments in their homes. Other factors, such as green technologies and new materials will also have an impact on reserve studies. Additionally, new technologies and methods are continually being developed to make the reserve studies even more accurate and informative. We think the reserve study industry is about to take the next exciting step in its evolution,” said Poehlmann.
Reserve Advisors, Inc.
4256 N Ravenswood Ave Unit 201
Chicago, IL 60613
Under what conditions may an association need to apply for a bank loan? Who is responsible for paying the loan? Can board members or homeowners be held responsible in the case of default? What are the benefits, if any, of taking out a loan as opposed to using reserves to fund projects? What are the terms generally for association loans?
There are infinite questions involving association borrowing, but your first one may be “When on earth would an association need to apply for a bank loan?” Management and the board are supposed to be ensuring there are adequate reserves, right? If my HOA is applying for a loan, does that mean we’re in dire trouble and the association is mismanaged? The answer to that question could be yes or no, depending on a few different factors. However, associations do not only seek loans because they’re mismanaged or low on reserves. Fortunately, Thomas Engblom, CMCA, AMS, PCAM, ARM, CPM, PhD, VP/Regional Account Executive at CIT, whose doctorate is in business administration, availed himself to answer these questions for our readers.
The best place to start talking about association loans is to describe what an association may need a loan for. According to Engblom, the reason for and types of loans are geographically driven and depend on what type of physical property the association is comprised of. The loan could be for roof replacements, paving, siding, carpeting for the halls of a building with interior residence entrances, decorating of a clubhouse or lobby, adding a pool, adding a clubhouse — the list goes on. An association could obtain a loan for any number of capital repairs or improvements to buildings and common areas.
Financing litigation against the developer and manufacturers of building materials to remedy construction defects is another reason an association may need to obtain a loan. An HOA loan can be the best way to fund a construction defect litigation suit, as the loan can help the association through the process by funding both legal fees and building costs until the suit is settled — which can take several years.
Additionally, an association’s bylaws or declaration may have imposed requirements that prevented the association from securing and maintaining adequate reserves for their actual needs. Or, these documents may impose a minimum amount that needs to be maintained in reserves. Therefore, those funds cannot be used at the time the funds are needed.
So who is responsible for paying this loan, and are unit owners on the line for the money if the association doesn’t pay on time? Can the bank place liens on the individual units for the loan? Unit-owners are only indirectly responsible for the loan. Unlike a mortgage or home equity loan, the association loan is not secured by any physical elements of the community, including the individual units and common elements. Instead, an association loan is secured by the future assessments to be collected by the association. Additionally, there are no personal guarantors on the association loan, so board members are also not personally responsible for paying the loan.
What are the terms commonly assigned to association loans? Engblom said that the amount of an association loan can be anywhere from $50,000 to $50 million, and several factors will determine the length of the time for which the loan should be cast. This depends on the life expectancy of what is being financed. However, it also depends on the board, and the individual association, and includes factors such as how the association plans to fund those payments. For example, the board can actually special assess the unit-owners in order to repay the loan. In this case, the board can give unit-owners a choice of paying this special assessment as one large amount upfront, or they can pay over a specified period of time with an additional amount to be paid for interest. The board could also raise their monthly or annual assessments to pay the loan.
Either way, terms for an association loan are typically 5, 7, 10 or 15 years. Again, these terms would depend on the project being financed. According to Engblom, most association loans are actually paid before their term period expires. For example, he said, a 5-year loan is typically paid in 3 years, and a 10-year loan is paid in 7. Defaults are very rare in association loans. Engblom noted that association loans are a fairly new phenomenon — having only been around for about 18 years. And, he said that they are among the safest types of loans for banks to issue to customers.
The last component of the loan would be determining the interest rate. This is typically determined by the United States Treasury rate.
So what is required by the bank from the association when applying for a loan? According to Engblom, banks typically look at a number of items which help them determine if they can provide the loan to the association. One important factor is the association fee delinquency rate. The bank will examine this over a period, typically, of 4 months, and usually require there to be fewer than 10% delinquencies in the community. This would include units with accounts over 60 days past due. Additionally, it is common for the loan documents to have language that states that, during the repayment of the loan, the association maintain this desired, low fee delinquency rate. Since these common fees are the only collateral for an association loan, the security of these is very important to the lender.
Another important factor is the size of the association. This will affect its ability to obtain a loan. In referring to association size, typically banks will say “the bigger the better,” when an association is applying for a loan. Look at it this way, the more units in an association, the more the payments will be spread out over a larger number of owners who indirectly affect the repayment of the loan. According to Engblom, communities with less than 25 units will face some challenges in applying for funding from a bank.
The bank also looks at the number of investor-owned units in the community. According to Engblom, if a community has greater than 40% of its units owned by investors who rent those units, that community will have greater challenges with an association loan. Also, if one person owns a large portion of the units or has a large proportion of the voting control of the community, the association will not be approved for a loan.
Lastly, does having a loan on the books of the association affect the owners’ property values or cause the association to be viewed in a negative manner? This question can be viewed in a number of ways and depends on many factors. However, if the loan prevents the property and/or its common elements from deteriorating, such as if the loan prevents putting off necessary projects, which could lead to structural problems or worse, the loan can help maintain or even bolster property values. Additionally, in cases where a loan prevents special assessments or fee increases, residents maintain their personal cash to preserve quality of life, and even have more available funds to put into their own individual units. Having well-maintained and updated units helps bolster property values as well.
Do banks require any documentation from the residents in the approval process of the association loan?
Engblom said no, residents and board members are not asked to provide personal information, such as personal tax returns, when the association is applying for a loan. Nor are the credit ratings of residents viewed. However, residents do indirectly affect the association’s ability to obtain a loan if they develop a history of paying their assessments late or allowing their units to go into foreclosure.
Financial management is perhaps one of the most critical facets of a homeowners association. Financial transactions factor into day-to-day interactions in an HOA, with residents paying dues and vendors providing goods and services. The complexities of an HOA, however, demand a business-like approach to financial matters in order to provide a well-functioning environment for all involved. Budgets, therefore, become essential to success.
How does an association diagram a budget? What can the association do to limit surprises in a budget? How do reserve studies factor in? What are the different types of budgets? Creating a sound budget and adhering to it for the fiscal year for the association is very important. Thomas Engblom, CMCA, AMS, CPM, PCAM, PhD, provided us with an explanation of the budget process.
According to Engblom, “A budget is a roadmap that provides an estimate of a community’s revenue, expenses and reserves. It provides an avenue for a community to plan activities, goals, maintenance, repairs, reserves, determine assessments, and minimize the unexpected.” While the necessity of an association budget may seem clear, the process itself can be quite complex. Engblom stated that an association should first consider the legal requirements for a budget in their state. Refer to state statutes as well as the governing documents of your association as your guidelines. “Every community association must have a budget. It is required at various levels of the law and in the governing documents,” Engblom said. He added that local laws may require a budget, whether for insurance, emergency, life safety, etc. All associations must conform to IRS rules, and mortgage institutions may set requirements that a community will need to meet as well. Additionally, budgets mandate the procedures to determine the applicable requirement for reserves.
Once the legal necessity of a budget has been established, how must your association proceed? From there, your association may take into account the needs and desires of homeowners. What services do they require on a daily, weekly, monthly and yearly basis? Which do they expect? Engblom also noted that associations should not simply aim for a net profit or loss. Don’t simply set a budget including all known expenses (i.e. routine maintenance, electricity, water, etc.). The budget will also need to account for and include unexpected expenses. If, for example, a natural disaster occurs, your association will need to be prepared. Ideally, a budget will limit the impact of financial surprises. Within a budget there is a chart of accounts, which is an organized list of the numbers of the association, categorized showing each item being budgeted for. This is detailed in the previous chapter on association accounting under the heading “Preparing and Organizing Budgets.”
When is the budget due? This depends on the association and is generally contained within the bylaws. Typically, budgets are done either by calendar year or fiscal year. Most do them by calendar year, Engblom noted. The association’s manager typically puts the budget together. A budget committee, headed by the board treasurer, can be formed by board resolution to come up with the nuances in the budget. This is an ongoing, standing committee. Engblom again underscored that an association should not just budget for money it expects or does not have. As an example, Engblom said, “You shouldn’t necessarily be budgeting for fines and late fees.” If income is not expected, don’t budget as if it is.
There are two components of a budget: revenue and expenses.
• Revenue: assessments (which Engblom noted is the only component of value that an association has), excluding miscellaneous income of late fees, fines, move ins and move outs, etc.
• Expenses: operating expenses (i.e.: maintenance, utilities, administrative, management, insurance, copying, printing, Internet, etc.)
Furthermore, two components are affiliated with each budget line as to whether it is mandatory or discretionary. Mandatory expenses are things such as insurance and utilities. These are expenses the association is obligated to cover, as opposed to discretionary items such as pool furniture, a community newsletter or the expectation of an individual unit owner.
There are also two types of budgets:
• Zero base: In this type of budget all line items are set to zero. Therefore, all line items must be justified, rather than assuming a base line from the prior year. This assures that every line item is necessary and reduces the fluff within the budget. This zero base approach requires every line item to be calculated accordingly (i.e. utilities) based on usage.
• Historical trend: In this type of budget an association uses the historical data from budgets past, then reviews its past history to determine what the increase or decrease in expenses will be for the next year. As an example, Engblom said, “To increase the percentage, you can look at two years ago. You spent 17%, and then this year you spent 19%. So you know to increase 2% again for the next year.” Typically the budget has numerous line items that have inaccurate numbers in those accounts.
There are three (3) types of accounting methods to be used within a budget as follows:
1. Cash method. Using this method, the association will collect money and pay it out as invoices are received. A great comparison would be one’s personal checkbook.
2. Accrual is based on when income is earned (or billed), and when expense are incurred. Income and expenses are accounted for outside of when the actual cash comes in or goes out.
3. Modified cash, also know as modified accrual, is the most complicated method for accounting, but also the best. It records income and expense on a cash basis with some on an accrual basis.
As mentioned earlier, the association can take into account the needs of the homeowners. Budget line items are determined to be either mandatory or discretionary. Mandatory line items are a need or an obligation, such as water, insurance, or taxes. Discretionary line items are a desire or expectation, such as a pool, playground, or golf course. The discretionary items can be ranked based on the desires of the homeowners, but mandatory items must always be budgeted for.
Reserve studies themselves are detailed in another chapter, but here is an overview of the studies and how they are utilized within the framework of budget creation. Once revenue and expenses are established, the association has the so-called bottom line of the budget. Engblom advised that reserves are taken out at this point. Reserve studies serve as a resource for capital expenditures that would be in the the future of the association. The reserve study consists of two components including a physical inspection and a financial inspection. “Reserve funds are set aside for the future, for replacement of major components of an association,” Engblom said, “and reserve studies should be updated every three to five years.” They may be required by a state statute, regulations, mortgagees, or the association’s own governing documents. The Federal Housing Administration suggests setting aside 10% of the total budget for reserves.
Funding for reserves consist of four aspect as follows:
1. Statutory — Required by state or federal agencies.
2. Fund Safety — Maintain in FDIC insured accounts.
3. Liquidity — Don’t have all funds in certificate. Have some cash on hand for emergencies.
4. Yield — The return on investments.
Reserve studies generally include capital improvements and major improvements. Capital improvements include existing entities that must be replaced, such as a roofs, siding or playground equipment. Reserve studies set money aside for the future, anticipating that something will need to be replaced or repaired. Engblom noted that the amount of money set aside can be judged from the useful life of the structure in question. As an example, “A roof has a 30 year useful life, but because of weather or the like, it may need to be replaced sooner or later. Reserve studies plan for putting aside money for these sort of things,” Engblom said.
Major improvements, on the other hand, include the addition of something new to the association, such as a clubhouse, pool, or golf course. These improvements are not being maintained, as with a capital improvement, but rather they are being constructed for the first time.
Engblom pointed out some of the benefits of using a reserve study: meets legal and fiduciary professional requirements, provides for planned replacement of major components, minimizes the need for special assessments, enhances the resale value of units, equalizes new and old, reduces personal liability from financial mismanagement, prioritizes a business plan for repairs, acts as a communication tool for the owners, can reveal maintenance issues that you haven’t seen, saves planning time, reveals unbudgeted items.
He also mentioned some of the drawbacks of a reserve study: underfunding resulting in the need for a bank loan, deferred maintenance, overfunding, board member liability and possible loss of directors & officers liability insurance.
In relation to a budget, a reserve study can most importantly determine what has not yet been budgeted for. It can provide an association with a more thorough road map for the what-if scenarios and help secure an association’s future.
In addition, having control of your financial reports will provide a means of best practices for procedures relating to accounts receivable or accounts payable. In the global aspect for the association it can help discourage dishonest behavior within the association that may result in embezzlement, fraud or theft.
Extra money goes into reserves.
Assessments are a common conduit of condominium and homeowners associations, as an intricate component in providing income for the operating budget and funding reserves for future community expenditures. Thomas Engblom, CMCA, AMS, CPM, PCAM, PhD, detailed for us what assessments are, how they are calculated, and how special assessments factor in. Of course, in order to keep your association running well, you must understand assessments and their purpose in aiding financial stability.
“Assessments are the proportionate shares of the expenses to maintain the property of the association,” Engblom said. Assessments are sometimes called maintenance fees or dues. How are assessments calculated? “They’re typically calculated on a percentage of ownership — which never changes for each co-owner. However, there can be a change in the monetary amount of the fees, but it will always be based on that owner’s same percentage of ownership.” Assessments are usually calculated in the initial phase of the association by the developer. “The developer creates a mathematical formula based on the cost of maintaining the new association,” he said. Engblom noted that as the association ages, logically, additional maintence is required thus increasing the association’s fees. In Chapter 6, changes in fees after the developer leaves the community are discussed.
Each owner’s percentage of ownership can always be found in the association’s governing documents.
What could cause assessments to be higher in one association as opposed to another, even though all variables and amenities are equal? Assessments are quite dependent on the actions and professionalism of the board and management. If those running the community are educated in association managment, they will have the knowledge to provide a budgetary structure that will maintain the association in its daily operations, as well as building proper reserves for the future. However, it is also important that those running the community adhere to their fiduciary duties, and always act in the best interest of the association. Problems can occur when an association’s governing body is only concerned with the political advantages of maintaining low fees. In the most drastic situations, some board members, knowing they want to sell their units in a few years, can make the community seem attractive to potential buyers by keeping fees artificially low while not putting any funds in reserves. Such a community would eventually come in for a crash landing — specifically, needing to special assess the unit owners and/or obtain a bank loan for capital improvements as they became necessary, or otherwise causing the physical association to deteriorate.
Engblom pointed out other factors which affect fees among different communities. “If you’re going to buy in an association with a pool, it will cost you considerably more to live there compared to a association without a pool. A pool will require maintenance, repairs, chemicals, furniture, attendants and more. Communities with pools also have an increased insurance cost over those without. Assessments are the sheer cost of living for the association — what it costs to maintain the common areas of that community. Comparatively, owners of single homes outside of a community incur costs to run and maintain their homes and properties. In a community, these similar costs are multiplied by the number of units for those similar needs.”
When special assessments or fee increases are necessary, associations cannot randomly calculate assessments based on the whim of the board. The assessment or increase must be made within the parameters of the governing documents and specific state statutory requirements.
Collection procedures for delinquent unit owners are detailed in other chapters, however here, Engblom outlined the methods and importance of collecting regular dues, and how to evaluate the health of an association based on its delinquency rate.
Assessments are a financial obligation to the community association during a given period of time, which is usually broken down into payments, such as monthly, quarterly, etc., unless a long-term special assessment is manadated. “Assessments are paid pursuant to the governing documents of the association. They’re mandatory, so residents are obligated to pay them,” Engblom explained. Presently, numerous methods for payment are available — check, ACH (automatic debit), online payements through an association or bank website and credit card.
Every association should have a formal collection policy and take the time to educate owners about the consequences of delinquency. Associations should avoid discriminatory actions against delinquent account holders. “You should have a procedure and protocol — rule or regulation,” Engblom said. Board members can establish these procedures utilizing the business judgement rule, he added. Not only can this improve relationships and communication between the board and the residents, but it can also help ensure that assessments and monthly fees are paid on time. Furthermore, collections are crucial to maintaining necessary cash-flow and to reducing loss of payments from owners. “The bottom line,” Engblom said, “is that a collection policy keeps owners informed, provides a guide for the manager, and enforces a written policy.”
Since assessments make up the major portion of an association’s income, it is crucial that they are paid by the unit owners. However, most associations have at least some delinquent owner accounts. Engblom delineated the delinquency rates and how they should be evaluated:
0-3% good delinquency rate
4-5% reasonable delinquency rate
6-10% declining delinquency rate
10% horrendous delinquency rate
Over 10% very bad delinquency rate
Engblom also noted that for association loans, delinquency rates must be less than 10%.
Special assessments, in addition to regular dues, sometimes constitute part of an HOA’s income. Special assessments generally make up for expenses that cannot be covered by the budget, either because operating expenses exceeded the budget, a natural disaster or similar situation occurred, a special project began, or too many residents were delinquent in their dues. Reserve funds, as noted in Chapters 8 and 12, alleviate some of the pressure of unexpected expenses. Special assessments pick up any monetary gaps not covered by reserves or the budget. Engblom said, “They are a one-time fee or charge.” They are not charged regularly as plain assessments are, although they can be collected on a similar schedule (i.e. monthly, quarterly, or annually). The dollar amount of the special assessment each unit owner pays similarly depends on their percentage of ownership.
A special assessment is typically voted on by an association’s board for an item or project that was not voted on previously during the annual budget planning. “It’s all driven by what the state requirements are, but in theory, the board approves the budget or special assessment. The board communicates the information, allowing the unit owners to review or discuss it at a subsequent special meeting for the purpose of the special assessment. The board always has the power to initiate the budget or the special assessment, however, depending on the governing documents or state statute, final approval may be contingent upon a vote of the unit owners. Furthermore, some states allow unit owners to petition the board of director’s decisions thereby repealing an action of the board while other states don’t allow that option.
Percentage of ownership always equals 100% when all units are combined. Engblom’s example: “If all the units were the same size, and you only have 10 of them, each unit would have 10% of ownership. If you have 1,000 units, the percentage decreases as the percentage sum must always equal 100%. The equation to calculate the percentage is based on square footage and/or location of the unit. Henceforth, square footage of units will change the percentage of assessments depending on their percentage of ownership.”
“Let me give you a situation,” said Engblom. “One of the properties that I own as an investment property had a swimming pool. The swimming pool was used by hardly anyone, and it was costing the association approximately $35,000 each year. There were numerous problems with the pool. Suddenly, the association was going to need to spend $60,000 obtaining proper licensing from the state. The board said, ‘Well, we’re not going to waste that kind of money. For $70,000, we’re going to fill that pool in.’ The community decided to put a park in place of the pool area, thereby deleting the pool expense from the budget forever! This resulted in a three year pack back for the association. The association manadated a special assessment — a one-time charge paid either in a lump sum within two months, or monthly for five years at $50 per month, including interest as a result of the funding by the association.”
While every homeowner association hopes for a community that runs smoothly and safely, HOAs must remain aware of the possibility of disasters and dangerous situations in order to provide their residents with the greatest amount of safety and security. Thomas Engblom, CMCA, AMS, PCAM, ARM, CPM, PhD, outlined a plan of action for homeowner associations, detailing what to do prior to a disaster, and how to manage if disaster does indeed strike. Disasters can include anything from weather-related incidents, including hurricanes and tornadoes, to man-made disasters and emergencies, including bomb threats. While each scenario differs in how an HOA must react, there is a certain amount of preparation that an HOA may do to help ensure the well-being of its residents, first and foremost, and to help reduce damage to property.
Before enacting disaster preparation within an association, what exactly qualifies as a disaster? “A disaster is anything that would be unplanned,” Engblom said. Some common disasters include fire, flood, tornado, electrical malfunction, etc., which of course vary in scale. “You should always plan for something that would be abnormal to your area as well. Planning for a disaster, geographically you may have fire, flood, or tornado, but you should prepare for the unknown.” Consider any weather events that typically occur in your area, but also consider aspects of your surrounding area, including, for example, train tracks or chemical plants. Simply because a certain disaster or event has not occurred near an association or is quite rare, the association should still consider it a possibility and plan for it. Being over-prepared for a variety of disasters is a better plan of action than being completely unprepared. Bigger properties, with more units and residents, will need to prepare differently than smaller properties.
Placing the burden of preparation entirely on the residents themselves is not an option. The association has a responsibility to its residents in the event of a disaster. The responsibility of the board is covered in the association’s governing documents. “This goes back to the board, and the board is the governing agency. The board has a fiduciary responsibility to maintain the common elements. How do you maintain those common elements? They essentially need to restore the common elements to the condition that they were in before [the disaster],” Engblom said. “You want to protect the association, and the bigger concern is that you don’t want any loss of life.” To illustrate this, Engblom gave the example of an association where the power went out. The association did not want residents to walk up to their units in the dark through the stairwells because residents could injure themselves. In addition to jeopardizing the safety of residents, such a hazard could become a liability to the association.
When actually planning for hypothetical disasters, Engblom suggested that associations prepare for different components of any problems that may arise. Additionally, disaster plans should be updated on a regular basis by trained professionals. Parties involved in the review process of a disaster plan include maintenance, management, the board of directors, or residents with a relevant skill set (fire personnel, tradespeople, medical personnel, etc.) to provide input. “You as a board member might not have the expertise, but if you call the fire department or the police department, they can give insight to some of the basic information that would be a part of this.” Engblom further noted that, if you have people involved in any of these fields within your own association, you can tap into their knowledge.
Insurance companies should be involved in the process as well. “You want to know how much they will cover and what authority you will have,” Engblom said. The insurance company can provide the funds necessary, depending on the situation, to prevent any additional damage after the disaster. He advised that the association should first call 911 in the event of an emergency before contacting any other involved parties (including restoration or insurance companies).
Engblom also noted that FEMA (Federal Emergency Management Agency) provides information regarding disaster plans, including how to make a disaster preparedness kit and how to act both before and after a disaster occurs. They also provide booklets that can be kept by associations and their residents. The booklets cover a range of topics related to disaster preparedness, including what should be kept in preparedness kits — including water, flashlights, rope, plywood for boarding up windows, etc. Detailed information can be found on FEMA’s website at www.fema.gov.
Associations should establish command centers to prepare prior to, and to coordinate following, the disaster. “A command center can be in the office or it can be in a different location so that everyone who is filtering through — such as contractors and emergency response personnel — can be briefed,” Engblom said. In the emergency disaster plan you should also have a meeting place. “It can be down the street. Maybe it’s at a church, maybe it’s at a school. You want it conducive to your situation. You want people to go there and meet so that you can have a head count,” Engblom said. Meeting locations may change depending on the season or the type of disaster. The main component is that the meeting place will serve as an information and treatment point as well as a refuge for residents.
Engblom noted the importance of establishing if any residents have special needs or circumstances that would be affected by certain situations. For example, if the power goes out and a resident needs an oxygen tank, having that knowledge on file allows the association to better ensure that resident’s safety. Associations should provide evacuation plans for residents and stipulate specific plans for non-ambulatory residents. If your association allows pets, provide a plan for them. Local pet hotels serve as a good option for boarding. Planning for every type of disaster requires that the association plan for the aftermath of every scenario as well.
Associations must also consider how to communicate information and updates to residents in the event of a disaster. Engblom said, “You may have a dedicated cable channel that you can utilize. You can call people at home, by cell phone, or email them.” Automated technology that utilizes email or phone to send out blasts of information to certain groups of people is a good choice. This can be customized to fit the needs of your association as well. If a task force exists, they can be sent information specific to them while residents can be sent their own relevant information. Note that some lines of communication will cease functioning during certain scenarios (i.e. if there is a fire, updates by home phone is not the most efficient choice).
In order to best prepare residents, the association should have meetings to go over the disaster preparedness plan. They may also want to hold a mock-drill. Inform residents of the potential of upcoming events, such as fire drills and town hall meetings. Forms can be provided for residents to complete. “Consider having owners acknowledge receipt of the plan with a signature page,” Engblom said. The plan can be included in association documents, such as the rules and regulations, and can be mailed out on an annual basis with a summer communications or annual meeting packet. Ensure that the plan is included in your resale disclosures.
In the event of a disaster, an association should hold meetings on a regular basis to keep residents informed and to discuss what damage has been addressed and how the situation should be dealt with. This harkens back to maintaining open lines of communication. “If you’re with a management company, they will be the conduit for the communication that you have.”
Following a disaster, the association demonstrates their responsibility by liaising with a restoration company to repair any damage that occurred. The restoration process is discussed in detail in the next chapter, but here is a briefing of what typically should occur. If the disaster covered a wide area, a restoration company will need to prioritize a list of their own, which may delay repairs within your association. “The question becomes, do you have multiple restoration companies as a backup?” Engblom said. As will be detailed in the next chapter, associations should be prepared with information about restoration company contacts to help speed up the process of fixing any damaged common elements and returning the community to a place of normalcy.
Associations also should be aware of security issues and put measures in place to prevent burglaries if units will be unoccupied. “Call your vendors to make sure they are ready, willing, and able to perform board-up services and begin interior dry out,” Engblom said. While security of your residents remains the priority, securing a building against theft helps to mitigate the stress following a disaster. Associations should further secure their important documents, including insurance policy documents, checks, owner lists, banking information, and a complete set of the governing documents.
As far as documentation of the disaster itself, associations need to report any damage to their insurance company. This process is detailed in Chapter 10 — Insurance. Briefly, the extent of documentation is done on a case by case basis and depends on the type of disaster, Engblom said. Insurance companies typically ask the date and time that the event occurred and what steps you are taking. Engblom recommended that you schedule an adjuster to call as soon as possible. If possible, require your restoration contractor or other vendor to meet with the adjuster on site to verify damage; try not to allow the adjuster to visit the site unaccompanied. Get the claim number as well as your insurance company contact’s email address so that you can immediately follow-up with them, noting all of the information previously exchanged over the phone.
As part of preparing in advance, associations should catalog specific building information. Keep a file of the brand, model, and serial numbers of pumps, motors, appliances, swimming pools, and any other major equipment. Conduct a physical inventory of items such as furniture and equipment. Engblom added, “Videos of these items [before a disaster] will be invaluable.”
he media may show up at an association in the event of a disaster. Engblom suggested letting a representative from the management company deal with the media, as they are more likely to have the expertise and the knowledge necessary to adequately address any questions. Engblom also suggested keeping the media off of the property, as they may only exacerbate ongoing problems.
While disasters can occur on a vast scale and vary greatly in type, associations do have the power to mitigate damage and panic to a certain extent. Preparing for a wide range of scenarios can help provide residents with a greater sense of security and can help the association fulfill its responsibility to the residents.
- First aid supplies
- Emergency cordoning tape
- Sheets and blankets
- Battery-operated megaphone and whistles
- Portable AM/FM radios
- Spare batteries and manual battery
- Poster board and markers
- Blockades and flashing lights
- Bottled drinking water
- Water purification tablets
- Non-perishable food
- Plywood Sheets
- Portable generators
- Hygiene products
- Filtering face masks
- Tool kit
- Plastic sheeting and duct tape
Thomas Engblom, Ph.D, CMCA, AMS, PCAM, ARM, CPM
Vice President Regional Account Executive Midwest
CIT Group Inc.
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