M-100 Participant Regular

PARTI C I PANT W O R K B O O K
M-100
The Essentials of Community Association Management
PROFESSIONAL MANAGEMENT DEVELOPMENT PROGRAM
Community Associations Institute

225 Reinekers Lane, Suite 300 Alexandria, VA 22314 (703) 548-8600 www.caionline.org
Copyright 2003 by CAICommunity Associations Institute. All rights reserved. Reproduction in whole or in part is not permitted without the expressed, written consent of CAI. Community Associations Institute (CAI) is a national, nonprofit 501(c)(6) association created in 1973 to provide education and resources to Americas residential condominiums, cooperatives, and homeowner associations, and related professionals and service providers. The Institute is dedicated to fostering vibrant, responsive, competent community associations that promote harmony, community, and responsible leadership. CAI estimates that there are 250,000 community associations in the United States as of 2003, and the number will increase to 260,000 by the year 2004. The material presented in this publication has been prepared for the general information of the reader. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If expert assistance is required, the services of a competent professional should be sought. While the material presented is believed to be accurate, neither Community Associations Institute nor its chapters warrant the publications suitability for applications other than as an informational guideline. Any forms, checklists, or other samples contained in this course are included by way of example and are not intended to be utilized as a substitute for legal, accounting, or other professional advice where appropriate. If you use any form, checklist, or other sample in this manual, it may be necessary to tailor it to your particular community associations needs and requirements.
ACKNOWLEDGEMENTS
CAI is grateful to those volunteers who shared their expertise by designing, reviewing, editing, and writing portions of this course manual or for sharing sample materials. First Edition (1993) Joyce A. Kozuch, PH.D. H. Terrance Blaine, PCAM, CPM Michael Kurtzon Marge Blaine, PCAM, CPM Melinda Masson, PCAM Pauline Brickman Stephen Bupp, CMCA, AMS, PCAM Karen Merrill, AMS, PCAM Anne M. Calmes Carol Redenbaugh Roger Carney, CPA David Regenbaum, PCAM W. Stephen Castle, CMCA, AMS, PCAM Katharine Rosenberry, ESQ. Carole Sappington, PCAM Joseph D. Douglass, ESQ. Howard Goldklang, CPA Jordan I. Shifrin, ESQ. B. William Smink Edward Golob, CMCA, PCAM James L. Strichartz, ESQ. Don Haney, CPA Clifford J. Treese, CIC, CPCU, ARM, CIRMS Mary M. Howell, ESQ. Kathleen Kato, CPA Seth Weissman E. Richard Kennedy, ESQ. Second Edition (2003) Katie Allardyce, AMS, PCAM Marge Imfeld, PCAM Gayle L. Cagianut, CPA James Main, CMCA, PCAM B.G. Campbell, CMCA, AMS, PCAM Marc D. Markel, ESQ. Marjorie J. Meyer, CMCA, PCAM Ellen Hirsch de Haan, ESQ. Joseph D. Douglass, ESQ. Drew R. Mulhare, CMCA, AMS, LSM, PCAM Judy Farrah, CMCA, LSM, PCAM William E. Owens, CPA Thomas Gatlin Debbie Pasquariello, CIC, CIRMS Howard Goldklang, CPA, MBA Edward D. Thomas, CMCA, AMS, PCAM Jo-Ann M. Greenstein, CMCA, AMS, PCAM Clifford J. Treese, CIC, CPCU, ARM, CIRMS Jay Hansen, ESQ. Debra Warren, CMCA, PCAM Mary M. Howell, ESQ. CAI is especially indebted to Stephen Bupp, CMCA, AMS, PCAM, and Clifford J. Treese, CIC, CPCU, ARM, CIRMS, for their extraordinary efforts in designing and developing the original M-100: The Essentials of Community Association Management. Their hard work, enthusiasm, and dedication helped to make The Essentials of Community Association Management possible.
Special thanks is also extended to the CAI Presidents Club for their financial contribution, which helped to support the development of this course.
Presidents Club Members (as of 2003) Diana L. Barak, CMCA, PCAM William Blanton Mark E. Blasch Kevin Cavanaugh, CPA Kenneth E. Chadwick, ESQ. Mark A. Conner, CIC Robert M. Diamond, ESQ. Jeff Douglas, PCAM Ronald Duprey, CMCA, AMS, PCAM Seth Emmer, ESQ. Randy Fann, PCAM Ross W. Feinberg, ESQ. Michael Flores Linda P. Frey, CMCA, PCAM Marshall Frost, P.E., P.P., RS Mitchell H. Frumkin, P.E., P.P., RS Howard A. Goldklang, CPA, MBA W. Mickel Graham, PCAM Paul D. Grucza, CMCA, AMS, PCAM Vincent J. Hager Bob Hassol, CMCA, PCAM Steven Hein, CMCA, AMS Thomas J. Hindman, ESQ. Rick Hunter E. Richard Kennedy, ESQ. Karyn A. Kennedy, ESQ. John Lawton, CMCA, PCAM Dean Lerner, CMCA, AMS, PCAM Steven P. Levy, CMCA, AMS, PCAM Stephen M. Marcus, ESQ. Marc D. Markel, ESQ. Paul Mengert, CMCA, PCAM Marjorie Meyer, CMCA, PCAM James Miles, CMCA, AMS, PCAM Rachel Miller, ESQ. Thomas E. Miller, ESQ. Barry Minkoff Steven Morris Drew R. Mulhare, CMCA, AMS, LSM, PCAM P. Michael Nagle, ESQ. William P. Norman Jerry C.M. Orten, ESQ. Tricia Ostendorff, CMCA, AMS, PCAM Ronald L. Perl, ESQ. Judi Phares, CMCA, PCAM Gary A. Porter, CPA J. David Ramsey, ESQ. Jeffrey D. Roberts Dean A. Riddle, ESQ. Edward San George, PCAM Bruce Springthorpe John Springthorpe Tammy Springthorpe James L. Strichartz, ESQ. Wilbert Washington II, ESQ. Craig B. Zaller, ESQ.
ABOUT THIS COURSE

This course manual is the central component of CAIs M-100: The Essentials of Community Association Management. The course, designed for new community association managers or those with less than three years of experience, covers 11 basic functions of association management, from financial and facilities management to legal and management topics. A final exam, based on the information in this text, is administered to course students. A passing grade is required to receive credit for the course. The Essentials of Community Association Management is taught by CAI manager members who have successfully completed the course and who have a Professional Community Association Manager (PCAM) designation as well as qualified experts from other professions such as law and accounting. The course and exam, offered through CAIs 55 chapters, may be completed without attending classroom instruction. For more information on the Home-Study option or the Internet-based version, please contact CAI. Successful completion of the The Essentials of Community Association Management is required for the Certified Manager of Community Associations (CMCA), Association Management SpecialistTM (AMSTM ), Large-Scale Manager (LSM), and Professional Community Association Manager (PCAM) designations, and additionally, may satisfy state manager credentialing requirements. Criteria for community association manager licensing vary from state to state. For specific information, contact CAI at (703) 548-8600. Through its manager education program, CAI offers fourteen separate courses (see page 299), from basic to advanced levels, that cover all aspects of management and operation of community associations of all sizes and types. Completion of these courses leads to four professional designationsthe CMCA, AMS, LSM, and PCAM. For a course schedule in your area or for more information on the designation programs, contact the local chapter of Community Associations Institute, or call CAIs national office in Alexandria, Virginia at (703) 548-8600.
P R E FAC E
HOW TO USE THIS COURSE MANUAL

If you are using this course manual on your own, read the chapters and answer the questions at the end of each one at your own pace. Here are some additional ideas about using this manual:
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Try to read a section or sections of a chapter at one time, if you cant read the whole chapter all at once. Try to answer the questions as soon as possible after you have read the chapter. Answers to the focus questions can be found in the chapter. Take the time to use the thought/discussion questions to apply the ideas in a chapter to your situation. This will make them a part of your everyday management experience.
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If you are using this manual in a group, follow your leaders instructions. Whether you use this course manual alone or in a group, DO NOT USE ANY OF THE SAMPLE DOCUMENTS FOR YOUR COMMUNITY WITHOUT CHECKING FIRST WITH YOUR ATTORNEY OR ACCOUNTANT.
There are eleven chapters in the course manual. Each chapter contains:
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A basic explanation of a specific management area, including key definitions and concepts Focus questions to help you review what you have read Thought/discussion questions to help you apply the material to your own work situation Resources you can consult for more information
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M-100 EXAMINATION
To receive credit for completing The Essentials of Community Association Management, you must successfully complete an examination. If you participate in the classroom delivery of the course, you will take the examination at the end of the seminar. Those of you who wish to take the examination after completing the Home Study option or the Internet-based version may arrange to take the examination in several ways: 1. 2. Contact CAIs national office and ask for a certified test administrator to be assigned to you. Contact your local CAI chapter and ask for the schedule of course dates in your area.
CAI will make every effort to arrange a mutually convenient time and place for you to take the course examination, and will be as flexible as possible given our need to protect the integrity of the examination, uphold standards of examination administration, and meet state regulatory requirements.
CONTENTS
PART I: Community Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Chapter 1Legal Basis for Community Associations. . . . . . . . . . . . . . . . . . . . . 3 Chapter 2Community Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Chapter 3Rule Development and Enforcement. . . . . . . . . . . . . . . . . . . . . . . 45 Chapter 4Board Meetings and Decision Making . . . . . . . . . . . . . . . . . . . . . 69
PART II: Financial Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93

Chapter 5Budget and Reserves. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 Chapter 6Collecting Assessments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121 Chapter 7Financial Statements, Audits, Income Taxes, & Investments. . . . 143 Chapter 8Risk Management and Insurance . . . . . . . . . . . . . . . . . . . . . . . . . 175
PART III: Facilities Management. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209

Chapter 9Maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 211 Chapter 10Contracting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 235 Chapter 11Human Resources Management . . . . . . . . . . . . . . . . . . . . . . . . 259
Part IV: Additional Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .291 Professional Management Development Program (PMDP) Courses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .299
PART I
COMMUNITY MANAGEMENT
In Part I, Community Management, you will learn about governance and community living in an association. Part I is intended to help you inform and advise your communitys owners and volunteer leadersas well as to help you perform your managerial duties.
This section of the program will introduce you to:
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The legal nature of a community association, including the scope and limits of its authority (Legal Basis for Community Associations Chapter 1)
Your role and responsibilities as a manager in relation to the roles and responsibilities of your communitys owners and volunteer leaders (Community ManagementChapter 2) Proper rule development and enforcement (Rule Development and EnforcementChapter 3) The effective use of board meetings for decision making (Board Meetings and Decision MakingChapter 4)
2 Professional Management Development Program
CHAPTER 1
LEGAL BASIS FOR COMMUNITY ASSOCIATIONS

KEY TERMS
Articles of incorporation, p. 13 Book of resolutions, p. 15 Bylaws, p. 14 CC&Rs (Covenants, Conditions, and Restrictions), p. 11 Community association, p. 4 Condominium, p. 6 Cooperative, p. 6 Declaration, p. 11 Governing documents, p. 9 Indemnification, p. 14 Master association, p. 6 Master deed, p. 11 Mixed use development, p. 7 Occupancy agreement, p. 12 Planned community, p. 5 Proprietary lease, p. 12 Public offering statement, p. 15 Resolution, p. 14 Statute, p. 7 Umbrella association, p. 6
Community associations derive their basic legal authority for their existence, activities, and actions from state statutes (laws) and certain legal documents. In order to effectively manage a community association and inform and advise its owners, a manager must:
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Understand the legal nature of his or her community association, as well as the scope and limits of its authority. Recognize when to consult with the communitys attorney concerning the interpretation of statutes and documents.
This chapter explains: I What a community association is I The state statutes that enable a community association to operate I The legal documents that enable a community association to govern its member owners
M-100: The Essentials of Community Association Management
What You Will Learn

After completing this chapter, you should be able to explain and understand the: I Definition of a community association I Alternative names for a community association and differences among types of community associations I Purpose of a community association I Three types of residential community associations I Master or umbrella association and mixed use development I Sources of legal obligations for a community association I General, specific, and uniform state statutes for community associations I Purpose of governing documents I General hierarchy of authority for governing documents I Recorded map, plat, or plan I Declaration I Covenants, Conditions, and Restrictions (CC&Rs) I Master deed I Proprietary lease or occupancy agreement I Articles of incorporation I Bylaws I Resolutions In this first section of the chapter, we will discuss the: I Definition of a community association I Alternative names for a community association I Purpose of a community association I Types of residential community associations
Definition of a Community Association

A community association is a group of owners who wish to provide a communal basis for preserving, maintaining, and enhancing their homes and property. A community association has three defining characteristics: 1. Membership in the community association is mandatory and automatic for all owners. This is unlike other associations whose membership is voluntary. 2. Certain documents bind all owners to be governed by the community association. These documents require mutual obligations to be performed by the individual owner and the community. (See page 9 for a discussion of governing documents.)
3. Mandatory lien-based economic charges or assessments are levied on each owner in order to operate and maintain the community association. (See Chapter 6, Collecting Assessments.)
Alternative Names for a Community Association

You will see and hear community associations referred to by one of several names: 1. Community Association: This term is used by Community Associations Institute, publisher of this course manual and sponsor of this class, and by the Bureau of Condominiums of Florida. 2. Common-Interest Community (CIC): This term is used by the National Conference of Commissioners on Uniform State Laws. (See page 9 for a discussion of uniform laws or statutes) 3. Common Interest Realty Association (CIRA): This term is used by the American Institute of Certified Public Accountants (AICPA). 4. Common Interest Development (CID): This term is used by the California Department of Real Estate (DRE).
Purpose of a Community Association

The primary purpose of a community association is to provide for the governance, business, and communal aspects of the association. This is achieved by administering, maintaining, and enhancing a residential real estate development, and through the establishment of a system of property rights, binding covenants and restrictions, and rules and regulations. (See page 11 for an explanation of property rights, binding covenants, and restrictions.) As you will recognize as you work through this class, a community association combines the characteristics and activities of a local government, a business, and a community.
Types of Residential Community Associations

There are three basic types of residential community associations: 1. Planned CommunityThe National Conference of Commissioners on Uniform State Laws uses the term planned community to refer to the most common type of community association.
In a planned community: I An owner owns his or her lot and/or living unit I The community owns any common areas, such as tennis courts and roads for the use and benefit of the lot owners Other names for planned communities include I Homeowner Association (HOA) I Owner Association I Townhouse Association I Property Owners Association (POA) I Planned Unit Development (PUD) 2. CondominiumIn a condominium, an individual owns: I His or her living unit, and I An undivided interest in the common elements of the community Each owner owns a percentage of the common elementswhich consist of everything except the living units, for example, a pool or lobby. The community association itself owns no real estate as an association. 3. CooperativeIn a cooperative, an individual: I Owns stock or membership in the cooperative I Holds a proprietary lease or occupancy agreement for his or her living unit A proprietary or master lease or occupancy agreement defines the member or stockholders rights and obligations in relation to the living unit. For most cooperatives, the community association owns all of the real estate as a not-forprofit corporation. However, there are a few cooperatives set up as for-profit entities. Notice how an owner in a cooperative has two legal relationshipsone as someone who shares in ownership of the corporation and one as someone who holds a lease for a living unit. Another name for a cooperative is a stock cooperative. These three types of residential community associations can exist by themselves or they can be grouped in clusters called:
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Master or Umbrella AssociationsA master or umbrella association consists of more than one residential community association.
Mixed Use DevelopmentsA mixed use development usually consists of a mixture of residential and commercial and/or industrial uses grouped together.
The three basic definitions of residential community associations focus on ownership instead of architectural style. It is important not to define the types of community associations by appearance, as theres always an exception.
Sources of Legal Obligations for a Community Association

A community association derives its legal obligations from several sources:
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Federal, state, and local statutes, regulations, and case law (court decisions) Legal documents unique to the community association that bind the association and its owners Lender requirementsfor example, requirements set by secondary mortgage institutions (see page 99) Standards set by professional bodiesfor example, auditing standards set by the American Institute of Certified Public Accountants (AICPA) (see Chapter 7)
We will discuss these various sources of legal obligations throughout the class as we consider different areas of community association management. In the remainder of this chapter, we will focus on the two types of legal sources that define the basic legal authority for the existence, activities, and actions of a community associationstate statutes and governing documents.
INTRODUCTION TO STATE STATUTES

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

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

A specific state statute is one that applies only to one or more types of community associations. For example, most states have a condominium act which provides for the establishment and operation of condominiums as legal entities. These acts vary in terms of their complexity. The simplest ones just allow for the creation of condominiums. The more complex laws may: I Regulate the development and sale of condominiums I Provide protection for purchasers, owners, or tenants I Regulate the operation of condominiums (for exampleopen meeting requirements) Not all states have statutes that provide for the establishment of planned communities or cooperatives. If you are managing one of these communities, check to find out if your state has a specific statute that applies to it. A specific state statute for a certain type of community association takes precedence over any general statute that applies to the community association. Furthermore, a specific state statute takes precedence over a community associations governing documents unless it is written to allow for flexibility. For example, the statute might say, unless the documents provide otherwise. Specific state statutes can also be amended over time. In addition, their provisions can be retroactive (apply to past activities), as well as prospective (apply to the future). As community managers, you should stay informed about any specific state statutes that apply to your type of community associationeither on your own or through your communitys attorney. Any community association that is incorporated must be careful to follow the statutory requirements under which it is incorporated.
Uniform State Statutes

The National Conference of Commissioners on Uniform State Laws has attempted to standardize specific state statutes that apply to community associations. To date, the Conference has developed a: I Uniform Condominium Act I Uniform Planned Communities Act I Model Real Estate Cooperative Act I Uniform Common Interest Ownership Act Almost one third of the states in this country have adopted some form of these statutes.
INTRODUCTION TO GOVERNING DOCUMENTS

The purpose of a community associations governing documents is to provide for the legal structure and operation of the community. The documents:
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Define the rights and obligations of both the community association and its owners Create a binding relationship between each owner and the community association Establish the mechanisms for governing and funding the community associations operations Set forth rules and standards for the: I Protection of both owners and the community I Enhancement of property values I Promotion of harmonious living
In this section of the chapter, we will discuss the: I General hierarchy of authority for governing documents I Specific governing documents for community associations
General Hierarchy of Authority for Governing Documents

The general hierarchy of authority for governing documents is a loose one because not all documents address all issues involved in operating a community association. For operating a community association, the general hierarchy of authority among governing documents consists of:
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Recorded map, plat, or plan (to show the precise location of units, lots, and/or common area) Declaration, CC&Rs, master deed, proprietary lease, or occupancy agreement (Note that the master deed, proprietary lease, and occupancy agreement apply only to cooperatives.) Articles of incorporation (if incorporated)* Bylaws Board resolutions
* The bylaws and board resolutions must be consistent with the articles of incorporation. Generally, the declaration would control if there is a conflict with any of the other documents. Resolving such a conflict will depend on the specific facts and legal issues involved. Each of these documents is discussed in some detail in the pages that follow. The higher a documents place in the hierarchy, the greater its legal weight in a court of law. Documents lower in the hierarchy cannot conflict with or change the terms of those above them. Whenever there is a conflict, the higher document will prevail.
Recorded Map, Plat, or Plan

Some form of map is an essential document for a condominium or a planned community. A map or plat or plan is recorded in the County Recorders office before any lots or units shown on it are sold. The purpose is to show the precise location of each lot or unit, as well as the common areas. The format and content will differ according to local requirements. A map or plat or plan may help define an owners or a communitys title to property.
On an operational level, the map can help clarify: I Who is responsible for maintaining a particular piece of property I Whether a property improvement is properly located Some states require cooperatives to submit a legal description of the land involved and an architectural drawing.
Declaration, CC&Rs, or Master Deed

An understanding of the declaration, Covenants, Conditions, & Restrictions (CC&Rs), or master deed requires an understanding of the rights of ownership. The terms CC&Rs and declaration are sometimes used interchangeably. Under Anglo-American common law, the ownership of land has been characterized as a bundle of rights. In the absence of any restrictions, the landowner traditionally has the full bundle of rights regarding the use of the property. (For exampleright to lease the property, build on it, mortgage it, and occupy it.) When people buy a parcel of real estate, the bundle of rights is defined in the deed to the property, as it is in the previous deeds for the same parcel. All deeds should be recorded in the land records. These documents are sometimes called the chain of title. The provisions in deeds which define or limit the rights of ownership are often called deed covenants or deed restrictions. The legal community speaks of these covenants or restrictions as running with the land. That is, they attach and apply to the land, no matter who owns it in the future. Instead of inserting all of the same covenants and restrictions into each individual deed in a community development, the developer draws up a Declaration of Covenants, Conditions, and Restrictionsor something with a similar name. The developer records this declaration in the County Recorders office before any of the real estate is transferred to any other owner. This means that the declaration is in the chain of title for each piece of real estate. Its terms are binding on the real estate itself, as well as on its original and succeeding purchasers. As a result, the declaration defines the bundle of rights of each owner in the community association. More than any other single document, the declaration brings the condominium or the planned community into existence because it spells out the essential elements of ownership. The condominium or planned community comes into existence when the declaration is filed in the office of the local recorder of deeds or registrar of titles. For condominiums, it is called the declaration (of condominium) or the master deed. For planned communities, it is called the declaration ofcovenants, conditions, and restrictions, or CC&Rs.
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The declaration, CC&Rs, or master deed generally:

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Defines the portions of the development owned by the individual owners and those owned by the community associationif any Creates interlocking relationships binding all the owners to one another and to the community association for the purposes of maintaining, governing, and funding the development Establishes protective standards, restrictions, and obligations in areas ranging from architectural control to prohibitions on various activities in order to promote harmonious living Creates the administrative framework for the operation and management of the community associationalthough many of the specific administrative details are spelled out in the bylaws Provides the mechanism for financial support of the community association through assessments Provides for a transition of control of the community association from the developer to the owners
Proprietary Lease or Occupancy Agreement

As we said earlier, a proprietary lease or occupancy agreement in a cooperative defines the member or stockholders rights and obligations in relation to the living unit. (In a cooperative, this document serves generally the same purpose as the declaration, CC&Rs, or master deed in other community associations.) The proprietary lease or occupancy agreement:
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Identifies the premises that the stockholder is permitted to occupy exclusively Defines the term of the lease and the rent (sometimes called maintenance) that is payable by the stockholder Establishes the powers and obligations of the cooperatives board of directors, including assessment rights Defines the events which would result in the termination of the proprietary lease
Articles of Incorporation
Incorporation may or may not be a legal requirement for a community association. It is essential for cooperatives because they are based on the corporation concept. The articles of incorporation usually spell out the essential elements of ownership for a cooperative because it is a corporation. The cooperative comes into existence when its articles of incorporation are recorded or filed. The governing bodies of planned communities are almost always set up as not-for-profit non-stock corporations. Condominium associations often are incorporated, depending upon the requirements of the applicable state law. In some cases, condominium associations do not have to be incorporated, because they exist under the authority of a state condominium statute. A community associations corporate structure is established when a developer sets up the association. The developer files articles of incorporationsometimes called a corporate charterwith the appropriate state corporation agency. Different states have different names for this agency. The articles of incorporation: I Bring the corporation into existence I Define its basic purposes and powers I Indicate whether stock will be issued I Indicate whether there will be a board of directorsand if so, identify the initial board There are a number of benefits to incorporating a community association. Incorporation:
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May help to limit the liability of individual owners for acts of the community association Entitles the community association to the rights granted to all corporations under state lawthis could be useful in areas such as obtaining financing, obtaining insurance, or bringing suit against another party May make it easier to deal with other parties, such as utility companies or vendors
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Bylaws
Bylaws are formally adopted governing regulations for the administration and management of a community association. Planned communities, condominiums, and cooperatives all have bylaws. Sometimes bylaws are developed as part of the declaration. At other times, they are adopted as soon as a corporation is established. Bylaws address such topics as: I Requirements for membership in the community association I Requirements for membership meetings I Voting rights of member owners I Procedures for electing the board of directors; qualification of directors I Procedures for the board of directors to elect officers (In some associations, the association members elect the officers.) I General powers and duties of the board I Provision for indemnification of officers and directorsexcept in cases of gross negligence or willful misconduct To indemnify and hold harmless means:
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To exempt an individual or entity from responsibility for claims made against the organization and To reimburse the individual or entity for damages or expenses incurred as a result of such claims
Resolutions
Rules and regulations for all three types of community associations are also established by means of board resolutions. A resolution is a motion that follows a set format and is formally adopted by the board of directors. Resolutions may enact rules and regulations or formalize other types of board decisions. (See pages 5153 for an explanation of the resolution format and the benefits of using the resolution process to adopt rules for a community association.) There are four types of resolutions for a common interest community: 1. Policy Resolutions: These are resolutions that affect owners rights and obligations. (For examplerules for the use of common areas and recreational facilities, architectural guidelines, and enforcement procedures.) 2. Administrative Resolutions: These are resolutions that address the internal operations of the community association. (For exampleoperating procedures, collection procedures, and where board meetings will be held.)
3. Special Resolutions: These are resolutions stating board decisions that apply a policy or rule to an individual situation. (For examplea decision about an alleged rule violation or authorization of a lawsuit.) 4. General Resolutions: These are resolutions which involve routine events. (For exampleadoption of the annual budget or approval of a contract.) The power of the board to enact rules and regulations is generally defined in the declaration and/or the bylaws. Sometimes, the boards right to enact rules is limited by the requirement that the members approve the rules. Resolutions should be kept in a Book of Resolutions. This is an orderly, indexed record of the resolutions adopted by the board. In some communities, it includes the resolutions adopted by the architectural guidelines committee as approved by the board. If your community association doesnt already do so, consider creating a Book of Resolutions by dividing a three-ring binder into sections by type of resolution. Enter resolutions under their designated category in the order of their adoption. This system makes the use and updating of a Book of Resolutions as simple as possible. If someone in your office is handy with computer software, you could create a chronological list of numbered resolutions with a topical index. Note: A resolution cannot conflict with or override requirements in a statute or document higher in the hierarchy of governing documents.
Public Offering Statement

Because it is often accompanied by copies of the governing documents, some people think of the public offering statement itself as a governing document. However, this is a misconception; the public offering statement is not a governing document. Instead, it is simply a disclosure statement that provides information on the community association to prospective buyers. It is also mandated by state statute.
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FOCUS QUESTIONS
Use the following questions to help you identify and review the core concepts in this chapter. (Hint: Once you look up the answer to a question, you may want to jot down the page number next to the question for future reference.) 1. Define a community association and its three key characteristics. 2. What is the purpose of a community association? 3. Define the three basic types of residential community associations in terms of ownership rights. 4. What sources create legal obligations for community associations? 5. Explain the difference between general, specific, and uniform state statutes and give an example of each. 6. What is the purpose of governing documents for a community association? 7. List the basic governing documents for a community association. 8a. What is the purpose of a recorded map, plat, or plan in terms of the legal rights and obligations of owners and the community? b. How does this document affect a community associations activities? 9a. What purpose does a declaration, CC&Rs, or a master deed serve for a condominium or planned community? b. How does this document affect a community associations activities? 10a. What is the purpose of a proprietary lease or occupancy agreement in a cooperative? b. How does this document affect a cooperatives activities? 11a. What is the purpose of articles of incorporation? b. What are the benefits to incorporating a community association? 12. What areas of community association activity do bylaws typically address? 13. Explain the four types of resolutions for a community association and give an example of each.
THOUGHT/DISCUSSION QUESTIONS
Use the following questions to help you apply the information in this chapter to your own situation. 1. Is your community association part of a master or umbrella associationor a mixed use development? 2. Find out which general state statutes apply to your community association. (Hint: Ask your communitys attorney.) 3. Find out which specific state statutes apply to your community association, if any. 4. Find out whether your state uses any uniform statutes for community associations. 5. Look at a copy of any recorded map, plat, or plan for your community association. What can you learn from it? 6. Review your communitys declaration, CC&Rs, or master deed, if it has one. What does it tell you about: I Ownership of different portions of the community association? I Owner-to-owner relationships and community-to-owner relationships? I Administration of the community? I The transition of control of your community association from the developer to the owners? 7. Review your community associations proprietary lease or occupancy agreement, if it is a cooperative. What does it tell you about member/stockholder and corporate rights and obligations? 8. Review your community associations articles of incorporation, if it is incorporated. What general topics do the articles address? 9. Review your community associations bylaws. What general topics do the bylaws address? 10a. Find out where your community association keeps its board resolutions. b. How are they organized? c. Can you find examples of each of the four types of resolutions a community association can adopt?
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RESOURCES
For further information on the legal basis for community associations, we suggest the following:
Community Association Law: Cases and Materials on Common Interest Communities, by Wayne S. Hyatt, ESQ. and Susan F. French. Contains more than 300 legal cases illustrating concepts. Topics include types of common interest communities; creating common interest communities; association functions and powers; constitutional issues; association governance, financing, design standards and control; rule enforcement; amending governing documents; liability; and declarant control of board and transition. Fully indexed and copiously noted. (Carolina Academic Press, 1998.) Community Association Law Reporter, Wayne S. Hyatt, ESQ., Editor. A monthly newsletter that reports on current laws and legal decisions affecting community associations. (Community Associations Institute.) Community Association Legal Counsel: How to Select & Use Association Legal Counsel, (Guide for Association Practitioners Series, Report #13), Second Edition, by Thomas J. Hindman, ESQ. and Loura K. Sanchez, ESQ. Contains information on how to get the best out of your association attorney as well as what to consider when searching for a new one. Offers guidance for working out various fee structures and includes a five-part appendix consisting of a sample request for proposal, interview questions, evaluation criteria, billing statement, and more. (Community Associations Press, 2002.) Condominium and Homeowner Association Practice: Community Association Law, Third Edition, by Wayne S. Hyatt, ESQ. Contains a comprehensive overview of the basics of community association ownership, including creating associations, governance, financing, design standards, enforcement, liability, and amending documents. Appendices contain a document drafting checklist, a sample table of contents for the declaration of a condominium association, and a sample table of contents for the bylaws of a condominium association. (American Law Institute-American Bar Association, 2000.) The Homeowners Association Manual, Fourth Edition, by Peter M. Dunbar, ESQ. and Marc W. Dunbar, ESQ. A practical guide for the operation of homeowner associations. Useful for leaders and board members of single-family, townhome, condominium, mobile, and masterplanned community associations. (Aras Publishing, 1999.) Transition from Developer Control, (Guide for Association Practitioners Series, Report #3), Third Edition, by Amanda G. Hyatt. The transition from developer control is a critical phase in a community associations evolution. This report presents information on the various methods of transfer and the legal framework within which the transition takes placeincluding how to draft important legal documents. Contains an association transition checklist in the appendix. (Community Associations Institute, 1998.)
CHAPTER 2
COMMUNITY MANAGEMENT
KEY TERMS
Ad hoc committee, p. 28 Association-employed manager, p. 30 Board liaison system, p. 28 Business judgment rule, p. 24 Conflict of interest, p. 38 Employment agreement, p. 31 Fiduciary duty, p. 24 Management, p. 19 Management audit, p. 36 Management contract, p. 31 Management plan, p. 35 Mandatory committee, p. 27 Professional ethics, p. 37 Standing committee, p. 27 Volunteer or self-management, p. 30
Management is the process of planning, organizing, leading, and controlling an organizations use of its resources in order to achieve its goals. (See George L. Morriseys Management by Objectives and Results for Business and Industry.) The purpose of this chapter is to give the relatively new community association manager a clear understanding of his or her managerial role and responsibilities in relation to the roles and responsibilities of owners and volunteer leaders. To accomplish this purpose, the chapter explains the: I Legal basis for community association management I Role and responsibilities of the: I Owners I Board of directors I Committees I Manager
What You Will Learn

After completing this chapter, you should be able to explain and understand the: I Legal basis for community management I Role and responsibilities of owners I Role and responsibilities of the board of directors I Boards fiduciary duty I Courts business judgment rule
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I I I I I I I I
Role and responsibilities of committees Role and responsibilities of a manager Managers fiduciary duty Three management options and their comparative advantages and disadvantages Management contract and employment agreement Management plan Management evaluation Management ethics
LEGAL BASIS FOR COMMUNITY MANAGEMENT

The governance, business, and community activities of a community association that should be managed are defined by: 1. State statutes 2. Court decisions 3. Community association governing documents, including: I Declaration, CC&Rs, master deed, proprietary lease, or occupancy agreement I Articles of incorporation (if incorporated) I Bylaws I Rules and regulations All three types of legal sources specify the: I Authority or power of different parties in a community association I Responsibilities or duties of the different parties In this section of the chapter, we will examine some of the basic authority and responsibilities given to the community association itself by various legal sources. In turn, the authority and responsibilities are delegated to specific parties within the community association to carry out on its behalf. The legal or governing documents typically empower and charge community associations to: I Levy and collect assessments to fund operations I Enter into contracts I Maintain the common areas I Enforce the restrictions in the governing documents I Provide services to the members I Employ a manager or contract for services with a management firm
I I I I I I
I I I
Create rules and regulations Enter into litigation Fund various replacement reserves Invest funds Employ professional advisors Comply with federal, state, and local government requirements, including filing tax returns Obtain insurance coverage Adopt and approve operating budgets Conduct periodic review or audit of community association financial records by independent professionals
Because the community operates as an association and/or corporation, its legal sources also specify procedures in such areas as: I Elections I Meetings I Basic operations (for examplebudget preparation, hiring of employees) I Record maintenance I Composition of the board and officers
INTRODUCTION TO ROLES AND RESPONSIBILITIES

In this section of the chapter, we will discuss the roles and responsibilities of a community associations: I Owners I Board of directors I Committees
Role and Responsibilities of Owners

The basic authority in a community association lies with the owners. In order for the association to govern effectively, the owners elect a board of directors to act on their behalf. The governing documents delegate most of the associations decision-making powers to a board. This leaves the owners with very few direct powers. Typically, they have only the voting power to: I Elect and remove directors I Amend any of the governing documents, except board resolutions I Approve special assessments or capital improvements
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Occasionally, owners will vote to approve the associations annual budget. Generally, other daily operating and policy decisions are left to the board. As a result of the authority placed with the board, it may be necessary for you, as the manager, to educate and remind your owners of their role in the association. If they do not like a board decision, they should attend a board meeting or otherwise communicate their position to the board, although they usually do not have any authority to veto or undo the boards action. Under such conditions, their only remedy is to elect a new board to represent them at their annual meeting. At the same time, the board has an obligation to establish communication and to listen to the owners concerns as well as take those concerns into consideration in making its decisions. Formal means for obtaining owner input include the: I Resident/owner forum at board meetings I Participation of owners on committees I Annual membership meeting I Newsletters and surveys I Internet access/online surveys Just as a board has the responsibility to encourage owner input via these means, owners have the responsibility to use these means to make their views known. Owners have the responsibility to: 1. Read and comply with the governing documents of the community. 2. Maintain their property according to established standards. 3. Treat association leaders honestly and with respect. 4. Vote in community elections and on other issues. 5. Pay association assessments and charges on time. 6. Contact association leaders or managers, if necessary, to discuss financial obligations and alternate payment arrangements. 7. Request reconsideration of material decisions that personally affect them.
8. Provide current contact information to association leaders or managers to help ensure they receive information from the community. 9. Ensure that those who reside on their property (e.g., tenants, relatives, friends) adhere to all rules and regulations. Owners have the right to: 1. A responsive and competent community association. 2. Honest, fair, and respectful treatment by community leaders and managers. 3. Participate in governing the community association by attending meetings, serving on committees, and standing for election. 4. Access appropriate association books and records. 5. Prudent expenditure of fees and other assessments. 6. Live in a community where the property is maintained according to established standards. 7. Fair treatment regarding financial and other association obligations, including the opportunity to discuss payment plans and options with the association before foreclosure is initiated. 8. Receive all documents that address rules and regulations governing the community associationif not prior to purchase and settlement by a real estate agent or attorney, then upon moving into the community. 9. Appeal to appropriate community leaders those decisions affecting non-routine financial responsibilities or property rights.
Role and Responsibilities of Board of Directors

As we said above, the board of directors is charged with the ultimate responsibility and authority for operating the community association on behalf of its owners. The boards legal authority to act on the owners behalf typically is found in:
I
Specific state statutes establishing condominiums, cooperatives, or planned communities. These specific statutes may set broad guidelines within which a board may act or may list specific responsibilities that it must meet.
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General state statutes that provide for the general authority and responsibilities of all corporate boards of directors. Community association governing documents which give the board authority to act on the owners behalf. Typically, this authority is found in the declaration, articles of incorporation, or bylaws.
A board of directors cannot delegate its responsibility to supervise implementation of its decisions. While the board can delegate authority, it can never delegate its responsibility.
Role
It is the role of a board to set the policies, standards, procedures, programs, and budgets for the community association. A board may implement its own decisionsor delegate implementation to a manager, committees, or an independent contractor. A board has a fiduciary relationship to the community association. Its fiduciary duty requires directors to act in the best interests and for the benefit of the corporation, thus the community as a whole. This fiduciary duty has two components. The members are required to avoid conflicts of interest and acting out of self-interest. They are also required to act as reasonable people in managing the associations affairs. Although they may delegate some of their responsibilities to others, they cannot delegate their legal obligation to protect the asset that is the total community. It is the board that is ultimately responsible for the management of the association. The board can direct or empower the manager to take certain actions on behalf of the community association. However, the board is still responsible to the owners. Through judicial decision, a substantial body of law has developed concerning the standards to which directors must conform while conducting a community associations affairs. Many courts apply the business judgment rule to a boards actions. That is, if a board has exercised reasonable business judgment in making a decision, the court will generally not consider the board negligent in its fiduciary duty. Nor will the court substitute its judgment for that of the board. However, the board must demonstrate how it has taken care in reaching a decision. It is up to the court to decide if the board has exercised reasonable business judgment.
Responsibilities
Legal sources typically assign a board of directors the responsibility to maintain, protect, preserve, and enhance the common areas and the unit values of the total community.
Areas of responsibility include: I Care, maintenance, and enhancement of the physical property, common areas, and facilities I Management of community finances and developing reserve funds I Risk management, including obtaining insurance I Establishment, enforcement, and interpretation of rules and regulations I Human resources management of employees and volunteers I Preservation and promotion of community harmony The board of directors is also responsible for establishing and revising, whenever necessary, the community associations mission statement, short-range plans, and long-range plans. This helps to provide consistency between the passage of boards and bonds the community in a common goal. Additionally, board members have the responsibility to: 1. Fulfill their fiduciary duties to the community and exercise discretion in a manner they reasonably believe to be in the best interests of the community. 2. Exercise sound business judgment and follow established management practices. 3. Balance the needs and obligations of the community as a whole with those of individual owners and non-owner residents. 4. Understand the associations governing documents and become educated with respect to applicable state and local laws, and to manage the community association accordingly. 5. Establish committees or use other methods to obtain input from owners and non-owner residents. 6. Conduct open, fair, and well-publicized elections. 7. Welcome and educate new members of the communityowners and nonowner residents alike. 8. Encourage input from residents on issues affecting them personally and the community as a whole. 9. Encourage events that foster neighborliness and a sense of community.
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10. Conduct business in a transparent manner when feasible and appropriate. 11. Allow owners access to appropriate community records, when requested. 12. Collect all monies due from owners and non-owner residents. 13. Devise appropriate and reasonable arrangements, when needed and feasible, to facilitate the ability of individual residents to meet their financial obligations to the community. 14. Provide a process residents can use to appeal decisions affecting their nonroutine financial responsibilities or property rightswhere permitted by law and the associations governing documents. 15. Initiate foreclosure proceedings only as a measure of last resort. 16. Make covenants, conditions, and restrictions as understandable as possible, adding clarifying lay language or supplementary materials when drafting or revising the documents. 17. Provide complete and timely disclosure of personal and financial conflicts of interest related to actions of community leaders, e.g., officers, the board, and committees.
Rights
Board members have the right to: 1. Expect owners and non-owner residents to meet their financial obligations to the community. 2. Expect residents to know and comply with the rules and regulations of the community and to stay informed by reading materials provided by the association. 3. Respectful and honest treatment from residents. 4. Conduct meetings in a positive and constructive atmosphere. 5. Receive support and constructive input from owners and non-owner residents. 6. Personal privacy at home and during leisure time in the community.
7. Take advantage of educational opportunities (e.g. publications, training workshops) that are directly related to their responsibilities, and as approved by the association.
Role and Responsibilities of Committees

Usually a community associations bylawsand sometimes its declarationwill: I Name certain committees that are required I Allow for the appointment of other committees that may be required from time to time
Role
Community association committees typically consist of owners appointed by the board of directors. The role of these committees is to:
I I
Assist the board in meeting its responsibilities Broaden the communitys input on decisions by serving as a: I Means of gathering owners opinions and attitudes I Training ground for future leaders I Means of explaining board actions to the community Perform research and prepare recommendations for the board
The number and type of committees will depend on the size of the community and the complexity of its activities. The more activities a community is involved in, the more a board may need additional groups to collect information, develop recommendations, and carry out activities.
Responsibilities
A mandatory committee is one that is required by the governing documents. Mandatory committees typically are assigned responsibilities related to: I Elections I Nominations I Architectural standards If the bylaws do not name certain committees that the board has determined it needs, an administrative resolution should be used to create standing committees. These are ongoing committees that meet a basic community association need.
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Examples of typical standing committees that are not mandated include: I Budget/finance I Grounds I Social/welcome I Newsletter I Recreation, pool, or swim team I Public relations I Rules/dispute resolution In addition, a board has the authority to appoint ad hoc committees to explore single issues. (For exampleparking regulations, development of investment guidelines, or renovation of a common room.) The purpose of an ad hoc committee is to take a charge from the board to deal with a one-time issue and make recommendations to the board within a specific time frame. The board should use a resolution to establish an ad hoc committee to clearly state the charge and expected outcome to the committee. A board and its committees must communicate effectively with one another. For example, committees should prepare written reports with any recommendations in time for their reports to go out with a board packet (see page 74) prior to the boards meeting. Some boards use a board liaison system. Directors are assigned to certain committees to oversee and report back to the board on activities. Associations that use the board liaison system occasionally have directors that need help distinguishing their oversight role from their role as a committee chairperson. The committee chairperson generally runs the committee while the director acts as a non-voting advisor and observer.
Guidelines for Successful Committees

Successful committees tend to operate within the following guidelines: 1. The committees serve at the pleasure and direction of the board in an advisory capacity. 2. Any committee with independent authoritysuch as an architectural guidelines committeehas an established appeals process to permit access to the board as the ultimate authority and decision body for the community. 3. The committees have specific job descriptions which outline their roles and responsibilities.
4. The committees keep minutes of their meetings and submit their recommendations to the board in written form to ensure that the recommendations are included in any report to the board. 5. The committees are given: I Meaningful tasks I Adequate authority to complete the tasks I Serious consideration of their recommendations I Public recognition for their performance 6. The committee meetings should be open to all members with date, time, and location published in accordance with notice provisions of the governing documents.
INTRODUCTION TO MANAGERS ROLE AND RESPONSIBILITIES

This final section of the chapter discusses: I Role and responsibilities of the manager I Three management options and their comparative advantages and disadvantages I Management contract and employment agreement I Management plan I Management evaluation I Management ethics
Role and Responsibilities of the Manager

The role of a professional community association manager is to: Provide information, training, and leadership on community association living to the board, committees, and the community at large; foster a sense of community awareness within the residents; develop a body of leadership through the committee structure; and provide the necessary administrative tools to the board to enable it to create lasting policies and make decisions in accordance with the communities short-range plans, longrange plans, and mission statements. In fulfilling the terms of his or her management contract and employment agreement, the professional community association manager is charged with assisting the board of directors decision making process by means of providing information-gathering and fact-finding support; implementing the decisions of the board; and administering the services, programs, and operations of the community association within the policies and guidelines set by the board.
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A managers authority and responsibility are defined and limited by:

I
Governing documents which define the authority of the board to enter into a contract. Some governing documents also require the board to retain a professional manager. The managers management contract or employment agreement with the board. (See pages 31-32 for typical management contract and employment agreement provisions.) Actions of the board which delegate specific authority and duties to the manager (The board is ultimately the decision maker for the community association.)
Agency Relationship Between the Board and the Manager The manager, as an agent, is required to represent the best interest of the community association (client). This is different from an independent contractor who is responsible for providing the services, but is generally not working as an extension of the community association, as is the case with a manager.
Three Forms of Management

There are three forms of community association management: 1. Volunteer or self-managementThe community association is managed by the board itself or by committees under the direction of the board. 2. Association-employed managerThe manager is directly employed by the community. 3. Management companyThe community association engages a management company to provide specific management services. The community manager and staff are employees of the management firm. Each community association must decide for itself which form of management best meets its current needs. Occasionally, a community association may decide to combine more than one form of management. Following you will find a comparison of the advantages and disadvantages of each of the three formsin terms of cost, continuity, and professionalism. As a manager, use this information to advise your board.
COMPARISON OF THE FORMS OF COMMUNITY MANAGEMENT

Volunteer/ Self Management
Cost No out-of-pocket management fees Requires investment of time and effort Unnecessary costs may be incurred through inexperience Continuity Difficult because of volunteer turnover and the fact that activity is discretionary for the volunteer Depends on the skills and experience of those who volunteer
Association-Employed Management Manager Company

Cost must be justified Additional costs may be incurred for temporary replacements due to absence, termination, or resignation Cost must be justified Routine Management provided for what is typically a fixed price
Continuity depends on individual hired
Can provide continuity because of the number of people at its disposal
Professionalism
Depends on the individual hired (may possess CMCA, AMS, LSM, or PCAM designation )
Can provide personnel, systems, and procedures (may possess CMCA, AMS, LSM, PCAM, or AAMC)
Management Contract and Employment Agreement

If a community association hires a manager or a management firm, there should be an agreement or contract to formalize the relationship. An employment agreement is used for an association-employed manager and a management contract is used for a management firm. The agreement or contract should contain all of the basic components of a legal contract and:
I
Specify the managers authority and duties Establish a clear chain of command (For exampleafter a board makes a decision, the president must direct the manager to implement the decision before he or she can do so.) Provide for the managers compensation and termination Be signed by authorized representatives of both partiesthe community association and the manager
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Managers employed by a management company with questions about their responsibilities to their associations under their individual management contracts should seek advice from their respective management company. The following discussion describes the management contract and employment agreement in more detail.
Typical Management Contract Provisions

Here are some typical provisions to look for in a management contract: 1. Contracting partiesThe contracting parties should be clearly defined. There should be a clause stating that both parties intend to enter into the contract. 2. Chain of command or lines of authorityThe contract should provide for management to communicate with the community association primarily through one or more designated liaisons appointed by the boardfor example, the board president. 3. Responsibilities of managementThe contract should describe managements authority, responsibilities, functions, and duties. It usually divides them into the following categories:
I
Property maintenance (see Chapter 9)This involves responsibility for the common elements or areas and for any other property that the community association has an obligation to maintain in terms of: I Inspecting the property I Arranging for maintenance, repairs, and replacement I Responding to emergencies I Bidding and contracting for services (see Chapter 10) Administrative servicesThis involves responsibility for such services as: I Maintaining the community associations records I Preparing materials for and organizing and participating in meetings of the community association, the board, and any committees I Managing the community associations employees and contractors (see Chapter 11) I Providing guidance and advice to the board and to the community association on policy issues Fiscal servicesThis involves responsibility for such services as: I Preparation of the annual budget (see Chapter 5)
Depositing association funds and developing effective assessment collection and accounts payable procedures (see Chapter 6) Maintenance of the community associations fiscal records in accordance with recognized and acceptable procedures Preparation of regularly scheduled financial statements and reports (see Chapter 7) Risk management and insurance (see Chapter 8)
General supportThis involves responsibility for such services as: I Preparation of a periodic newsletter I Dealing with and assisting sellers and prospective buyers I Dispute resolution/rules enforcement (see Chapter 4)
4. InsuranceThe contract should specify the minimum limits of various types of insurance to be carried by both the association and the management firm. (see Chapter 8) 5. Term of agreementThe contract should specify the length of its initial termgenerally one to five years. (Some governing documents limit the length of management company contracts.) 6. TerminationMost contracts also have some type of termination provision. It allows either or both parties the right to terminate the contract at anytime, with or without cause, with a certain number of days noticetypically 60 days. The management firm needs to provide the association with enough time for a new management company to come in and perform the financial management functionsif the agreement were to be terminated. 7. Indemnification and hold harmless provisionMost contracts include a provision indemnifying and holding harmless the management firm, with certain limitations. According to the definition in Chapter 1, to indemnify and hold harmless a management firm is to exempt it from responsibility for claims made against the association (with certain exceptions) and to agree to reimburse the management firm for damages or expenses it incurs as a result of such claims or third-party actions. 8. CompensationThe management compensation, or the method of calculating it, must be specified in the contract or in a fee schedule attached to the contract.
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The fee schedule should also include any additional charges, such as:
I
Reimbursement for specific out-of-pocket expenses on behalf of the community association Charges for specific additional services provided to the community association
Employment Agreement
An employment agreement between an association-employed manager and the association typically includes:
I
Terms of employment, including beginning and ending date Duties and services to be performed Compensation Notice and termination procedures Statement of associations obligation to provide appropriate facilities, equipment, and personnel to permit the efficient and orderly conduct of the associations business, management, operation, and administration Statement of exclusiveness of agreement provisions: This is a statement that the written agreement is the sole and entire agreement between the two parties with respect to its subject matter Statement that any waivers or modifications of the agreement must be in writing between each of the parties Applicable legal sources Confidentiality or nondisclosure of information: This is a statement to the effect that the employee will not disclose confidential or proprietary information belonging to the association Provision for notices to one another
Management Plan
A management plan is a statement of goals and objectives approved by the board. It includes the yearly cycle of tasks that management should perform on the community associations behalf. Whether you are a manager who is employed by your community or by a management company, you should have a management plan so you and your board are clear on what is expected of you. In most instances, it will be up to you to propose a plan to your board for approval. Set your goals for the year in relation to your community associations budget. Typically, a management plan includes tasks that address the community associations governance, business, and community aspects:
I
Rules enforcement (for exampleviolations of the association documents or rules) Property maintenance (for exampleinspections, repairs, preventive maintenance, bidding, scheduling replacements) Services (for examplegrounds, trash or snow removal, security systems, opening the pool) Communications (for exampleflyers, newsletters, Web sites) Finances (for examplebudgets, collections, payables, financial reports) Administration (for exampleprepare correspondence and meeting notices, conduct annual meetings and elections, maintain records and personnel files) Asset protection (for exampleinsurance, audits, security) Policy development (for exampleassist board to award contracts, select professional assistance [such as attorney and accountant], and develop standard operating procedures)
The regular board meeting should periodically be used to monitor, adjust, and review the annual management plan.
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Management Evaluation
It is necessary for a board to evaluate management performance, as well as to monitor it. Because interpersonal relationships are involved, it is important that objective criteria be used. The management plan and specific information from the management contract or employment agreement should establish this basic criteria. Typical means are the:
I I
Owner/resident survey Management audit A management audit consists of a review of: I Governing documents and existing policies and procedures I Current condition of the property I Owner/resident satisfaction I Fiscal operations This review can be done by the board and manager together, or a third-party management consultant can be hired.
Here are some warning signs of a weak management situation:

I
An increase in assessment delinquencies that is not due to a poor economy An increase, instead of a decrease, in the list of action items for management carried over from one board meeting to another (see pages 83-84) An increase in owner attendance at board meetings and in complaints about poor service An increase in the response time for maintenance of common elements or areas Contractor or employee performance becomes sloppy and employees become defensive when questioned Board members start resigning for personal reasons An unusually large number of owners volunteer to run for the board because they have an ax to grind An unusually high turnout at a general or annual meetingwhich is not related to some other issue
Any one of these items by itself may or may not indicate a management failure. But dont let matters slide! When one of these situations develops, investigate it as soon as possible and as objectively as you can. In addition, if the demands of the community association and the board of directors are unreasonable or exceed the managers ability to perform the required services, it is the managers responsibility to communicate this to the board before it creates a weak management situation.
Management Ethics
The term ethics refers to the specific choices to be made by an individual in his or her relationships with others. Professional ethics are the rules or standards that govern the conduct of members of a profession. The assumption is that the special expertise held by members of the profession holds them to a high standard of trust by others. The manager of a community association has a professional duty to:
I
Provide diligent and faithful service Make full written disclosure of any matter that presents a potential conflict of interest for him or her Use reasonable care, diligence, and skill Avoid acting in conflict with the interests of the community association Avoid attempting to make any secret profits when acting on the communitys behalf (for examplearranging for a kickback for giving a contractor a community association contract) Disclose and account for anything of value he or she receives as a result of managing the community association (for examplea valuable gift from a contractor) Avoid delegating more authority than he or she has received from the board Avoid acting on behalf of the community association after being terminated by the board (for examplegiving a contractor instructions on behalf of the community association after being terminated)
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Be mindful that the duty of loyalty and duty of confidentiality of client relationships continue to exist following termination by the association (for examplegiving another company information or documents that are proprietary to the former association client after being terminated) Decline to perform services that you are not qualified to perform
The most common ethical problem faced by community association managers is a conflict of interest or the appearance of one. A conflict of interest is a situation where an individuals duty to one leads to the disregard of a duty to another. For example, a manager or management firm acquires an interest in a company that is eligible to do business with the community associationsuch as a landscape company. For a real conflict of interest to exist, two questions must be answered with a yes: 1. Is the transaction which results in compensation to the management company or agent directly or indirectly related to managements relationship with the community association? Continuing with the landscape company example, management happens to be tasked with or is responsible for maintaining landscaping in the community associations common areas. 2. Will management directly or indirectly receive some compensation from the community association, or a third party, other than the compensation described in the management contract? An example of extra direct compensation would occur if the manager receives a share of the profit earned by the landscape company that does business with the community association. An example of extra indirect compensation would occur if the manager receives a share of profit from a nursery which sells supplies to the landscape company that does business with the community association.
Be sure to take the following steps to avoid a conflict of interest or, most importantly, the appearance of one: 1. Make full and complete written disclosure of all relevant facts to your board prior to any dealings which may be in conflict for you. 2. Obtain specific authorization from the board in writing before proceeding with any action which may present a conflict of interest. This authorization should also be recorded in the minutes of a board meeting. 3. Even after full disclosure, avoid any actions which areor may be perceived asa conflict of interest. Individual owners may not be aware of all the facts and may view your actions as improper. It is strongly recommended you review and consult the codes of ethics adhered to by manager members and member companies who have achieved specific designations (CMCA, AMS, LSM, PCAM, AAMC) offered by Community Associations Institute. The Professional Community Association Manager (PCAM) code of ethics sets forth the general and technical standards for integrity and objectivity, professional courtesy, conflict of interest, use of client funds, and limitations of practice. All managers should follow this policy to ensure their duties to the client are met.
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FOCUS QUESTIONS
Use the following questions to help you identify and review the core concepts in this chapter. (Hint: Once you look up the answer to a question, you may want to jot down the page number next to the question for future reference.) 1a. What three types of legal sources specify management authority and responsibilities for community associations? b. List some specific types of management activities that community associations are empowered to engage in. 2a. Explain the relationship between the owners authority and the board of directors authority in a community association. b. List some means of obtaining owner input on community management. 3a. What legal sources typically define a community association board of directors authority and responsibilities? b. What is the role of a community association board of directors? c. Who is responsible for supervising implementation of the boards decisions? d. List some areas of responsibility for a community association board of directors. 4a. What legal sources typically authorize the establishment of committees in a community association? b. What is the general role of a community association committee? c. List some guidelines for a successful community association committee. 5a. Describe the role of a community association manager. b. What sources typically define a managers authority and duties? 6a. What are the three forms of community association management? b. Compare their advantages and disadvantages in terms of cost, continuity, and professionalism. 7. What are some basic elements in a management contract or employment agreement? 8a. List some of the different types of management tasks included in a management plan. b. What resource can be used to develop the plans goals for the year? 9. List two means of evaluating management performance in a community association.
10. List some potential warning signs of a weak management situation. 11. Give some examples of the ethical behavior expected of a professional community association manager. 12a. What is necessary for a true conflict of interest to exist for the manager of a community association? b. What are three steps to take to avoid either a conflict of interest or the appearance of one?
Use the following questions to help you apply the information in this chapter to your own situation. 1a. Locate any sections of state statutes that apply to the management of your community association. (Hint: Ask your communitys attorney or your nearest Community Associations Institute chapter.) b. What management-related authority and responsibilities, if any, do they assign to: I Your community? I Its board of directors? I Its committees? I You as a manager? 2a. Review your community associations governing documents, including its resolutions. b. What management-related authority and responsibilities, if any, do they assign to: I Your community? I Its board of directors? I Its committees? I You as a manager? 3. What steps does your community association take to encourage owner input into board decision-making? 4a. What mandatory committees must your community association have? b. What other standing committees does it haveor should it have? c. Can you identify any examples of ad hoc committees your community association has used recently?
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d. What steps does your community association take to insure effective communication between the board and committees? 5a. How do your communitys committees measure up to the guidelines for successful committees on pages 28-29? b. What recommendations can you make to your volunteer leaders to improve your communitys committees? 6. What authority and duties, if any, are assigned to you as manager of your community association by: I Your communitys governing documents, including its resolutions? I Your management contract or employment agreement? I Any other actions of the board of directors? 7. How do the provisions in your management contract or employment agreement compare to the lists of typical provisions in this chapter? 8a. b. c. d. Do you have a management plan? If not, what steps can you take to develop one? If so, how is it developed? What does it include? After reading this chapter, are there ways you can improve your plans development or content? What are they?
9a. What process does your community association use to evaluate your management performance? b. Are there any ways the process can be improved? c. Do you see any warning signs that suggest you need to improve your management efforts? d. If so, what steps can you take to address any warning signs? 10a. Have you faced any conflict of interest with your role as a community association manageror the appearance of conflict? b. If so, how have you handled the situation? c. After reading this chapter, would you handle the situation any differently? d. Do you know anyone who has faced such a situation? How did he or she handle it?
RESOURCES
For further information on community association management, we suggest the following: Choosing a Management Company (Guide for Association Practitioners Series, Report #8), Fifth Edition, by
Michael E. Packard, PCAM. This report examines what to look for in a manager, including an eight-step selection process with supporting information and sample forms, and guidance on how to work with the manager. (Community Associations Press, 2002.)
Conflicts of Interest, (Guide for Association Practitioners Series, Report #20), Third Edition, edited by
Tonia C. Sellers and Jay S. Lazega. This report provides standards for both boards and managers. It highlights areas of activity in which actual or potential conflict may arise and suggests actions to take when a conflict does arise. (Community Associations Press, 2003.)
Introduction to Community Association Management, Governance, & Services, (Guide for Association Practitioners Series, Report #1), by Clifford J. Treese, CIC, CPCU, ARM, CIRMS. Written for
board members, this report provides an excellent overview of the various aspects of managing a community association. (Community Associations Press, 2002.)
Rights and Responsibilities for Better Communities: Principles for Homeowners and Community Leaders.
This brochure establishes an ideal standard to which communities can aspire, a goalbased statement of principles designed to foster harmonious, vibrant, responsive, and competent community associations. For a free, easily photocopied, single-page version, visit www.caionline.org/rightsandresponsibilities.
Selecting an On-Site Manager, (Guide for Association Practitioners Series, Report #19), Second Edition,
by Thomas Burgess, PCAM. Reviews how to recruit a new on-site manager and how to work successfully with the manager. Also guides the reader through the transition period. (Community Associations Institute, 1996.)
Self-Management: A Guide for the Small Community Association, Second Edition, Ellen Hirsch de
Haan, ESQ., Editor. Addresses the unique role of the self-managing board, and presents significant information on financial management, insurance, meetings, communications, and taking over from the developer. Also includes an appendix containing model documents, sample forms, and helpful checklists. Provides information on governing documents, compliance with rules, working with professionals, maintenance, public policy, and important legal considerations like fair housing and fair debt collection. (Community Associations Press, 2001.)
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Note taking
CHAPTER 3
RULE DEVELOPMENT AND ENFORCEMENT

KEY TERMS
Alternative dispute resolution, p. 56 Appeal, p. 55 Architectural guidelines, p. 46 Cease and desist letter, p. 55 Decision, p. 55 Default hearing, p. 55 Due process procedure, p. 54 Eviction, p. 59 Hearing, p. 55 Hearing notice, p. 55 Hierarchy of authority, p. 48 Resolution, p. 51 Rule, p. 46 Self help, p. 59
Community associations use rules and architectural guidelines to: I Promote harmonious community living I Maintain, preserve, enhance, and protect the property values and assets of the community Careful rule making and enforcement are essential for community associations for several reasons: 1. There is the need to create a sense of fairness and equity among residents (owners and tenants). 2. In contemporary society, people are more likely to question and challenge authority. 3. In cases where rules have been poorly developed or enforced, the courts are ruling against community associations. Authority to make and enforce rules rests with the board of directors in a community. But the manager is expected to:
I
Give the board practical, technical, and administrative assistance in developing and enforcing rules Maintain records which can furnish legal support if board actions in adopting or enforcing rules are challenged
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This chapter explains: I Authority to make and enforce rules for a community association I Development of rules I Enforcement of rules Whenever the term rules is used in this chapter, it refers to rules and architectural guidelines.
What You Will Learn

After reading and reviewing this chapter, you should be able to explain and understand: I What rules and architectural guidelines are I Scope of rules and guidelines I Relation of rules to the hierarchy of authority in community associations I Sources of community association authority to make and enforce rules I Criteria for a valid and enforceable rule I Steps in developing a rule I Benefits of using a resolution process to adopt rules I Resolution format I Development of architectural guidelines I Use of a due process procedure to enforce rules I Alternative dispute resolution I Internal resources for enforcing rules I External resources for enforcing rules I Enforcement of architectural guidelines I Architectural variance or change requests In this section of the chapter, we will discuss the: I Definition of a rule and guideline I Scope of rules and guidelines I Typical areas of rule making I Relation of rules to the hierarchy of authority in community associations I Sources of authority to make and enforce rules
Definitions
Lets begin with some basic concepts: A rule is a specific statement of required behavior whose violation carries a penalty (sometimes called a sanction). An architectural guideline is a rule that applies to the appearance of an owners lot or the exterior of his or her unit or improvements.
Scope of Rules and Guidelines

In a community association, rules and guidelines outline expected behavior, identify limitations, and govern the community in three areas. These areas include: 1. The use of both common property and individual lots or units. Rules and guidelines are developed in this area to promote conformity and harmonious living. 2. Changes in the architecture, the construction, or the appearance of lots or units. Rules and guidelines are developed in this area in order to: I Establish and preserve a harmonious design for a community I Protect the value of the property 3. The behavior of residents (owners and tenants), guests, and other visitors. Rules are developed in this area because of the possible impact one persons behavior may have on another person.
Typical Areas of Rule Making

To give you an idea of the scope of rules and guidelines, here are some typical areas of rule making. Community associations frequently develop rules that address: Pets Noise Children Garbage and trash Parking Use of common areas and facilities Solicitation Renting and leasing of units Maintenance of units Community associations frequently develop architectural guidelines that address: Fencing Location of improvements upon lots Decks and patios Exterior materials Exterior lighting Color of exterior surfaces Landscaping Outdoor equipment, such as play sets Doors Roof protrusions, such as skylights Window treatments
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Relation of Rules to Hierarchy of Authority

In a community association, rules are established by means of resolutions or other motions. Here is where rules fit into the general hierarchy of authority for operating community associations (see page 10): I Federal statutes, regulations, and court decisions I State statutes, regulations, and court decisions I Local county and city statutes, regulations, and court decisions I Plats (and the restrictions and easements contained) I Declaration, CC&Rs, master deed, proprietary lease, or occupancy agreement I Articles of incorporation (if incorporated) I Bylaws I Board resolutions I Rules and regulations* *The rules and regulations must be consistent with the board resolutions, bylaws, articles of incorporation, and declaration. This hierarchy of authority means that rules and architectural guidelines may not contradict or be in conflict with the legal sources that take precedence over them. Although rules and architectural guidelines are lower in the hierarchy of authority for community associations, they may clarify and expand a communitys governing documentsbut may not conflict with the other governing documents.
Sources of Authority to Make and Enforce Rules

Check all the legal documents in your communitys hierarchy of authority to verify its authority to make and enforce rules. The most important sources of a communitys authority to make and enforce rules are: 1. State statutes and court decisionsOften statutes or case law empower the community association to make and enforce rules. Consult with legal counsel periodically to ensure rules are proper under current law. 2. Governing documentsGoverning documents provide general powers, which consist of the broad authority to adopt and enforce rules in order to carry out the purpose of the community association. That purpose is to preserve, maintain, and enhance the communitys property.
Governing documents also provide specific powersthe authority to adopt and enforce rules in specific areas. Governing documents may be silent as to the ability to adopt rules, however, general corporate power should provide this right. Please check your state statute for this authority. Final authority to adopt and enforce rules rests with a board of directorsunless the governing documents specify otherwise. A board may delegate the task of drafting or enforcing rules to standing or ad hoc committees or to other sourceswhen the governing documents allow. The board should include the owners in the formation of rules. The use of town meetings or focus groups to review proposed rules may be helpful. Normally, a board will receive limited input from owners for a proposed rule. But what it does not receive may be very important. Owners may offer a view of the proposed rule that the rule-makers did not consider. And owners are assured that the board is open to their input.
INTRODUCTION TO DEVELOPMENT OF RULES

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

In general, the courts recognize the following list as characteristics of a valid rule. Furthermore, people are more likely to accept and cooperate with rules with these characteristics. Encourage your community association to use the following criteria when developing or reviewing its rules:
I
The rule must not violate a fundamental constitutional right. The rule must be consistent with applicable federal, state, and local statutes and the communitys governing documents. The rule must reasonably relate to the operation and purpose of the community.
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The rule must be reasonablea reasonable rule is one that is just, sensible, and not excessive. The rule must be fair. It must not create a separate class or group of people. (For examplea rule that treats resident owners and nonresident owners differently.) The rule must be capable of uniform enforcement. The rule must be uniformly enforcedthis means there must be no selective enforcement or exceptions. The rule must be necessary. Do not make rules which are not necessary.
When in doubt about the legality of a rule, consult an attorney. It is always a good idea to have your communitys attorney review the wording of all rules and regulationsas proposed and as adoptedto ensure that they are legally sound and to ensure conflict avoidance with other governing documents and the law.
Steps in Developing Rules

Use the following steps to develop rules for your common interest community: 1. Determine the need for a rule in the specific area. Answer the question, Why? Then check to be sure that your community associations existing rules and governing documents are inadequate to address the issue. 2. Consider both the immediate impact of such a rule and its long-term implications. How is the rule likely to be received? Will a solution to a current problem create future ones for the community? 3. Identify the source(s) of your communitys authority to make a rule in the specific area involved. 4. Define the scope of the rule. Specify who and what will be covered by the rule. The what of a rule includes: I Required steps, procedures, acts, or prohibitions a person is expected to follow I Enforcement procedures I Penalties for violations I Due process procedures (see page 54) It is a general rule of law that if something is omitted from a list of items, it was intentionally omitted. An acceptable solution is to use language such as, to
include, but not to be limited to It is important to keep the language of a rule simple and the rule itself flexible. 5. Apply an enforceability test. Check to be sure the proposed rule has the eight characteristics of a valid and enforceable rule listed on pages 4950. 6. Give notice of any proposed rule. Build consensus and support for the rule before it is adopted in order to gain acceptance and compliance. For example, make owners aware that the board is considering a particular rule. Invite written comments. Schedule a hearing on a proposed rule if it is a major matter. 7. Act promptly on a proposed rule. Once a proposed rule has been published and input received, the board should act on it at its next regularly scheduled meeting. The boards options are to either approve or reject the proposed ruleas it is, or as amended. Failure to act will cause the board and the rule to lose credibility. 8. Give notice of an adopted rule. Actual notice of an adopted rule is necessary if people are to voluntarily obey it. Send a notice to the owners last known address in the communitys records. Send a notice to the unit or lot address, too, in case the occupant is a non-owner. Use a first-class mailing, either with a billing notice or separately, to maximize the likelihood of people receiving the notice and reading it. Publish the rule in the community newsletter, and/or post it in the common area, if any. Provide copies of the revised rules to local real estate professionals and to all new owners and residents. Whatever notice you give, use a positive tone of voice. Avoid sounding demanding or condescending.
Benefits of Using a Resolution Process to Adopt Rules

As we said in Chapter 1, a resolution is a motion that follows a set format and is formally adopted. (See pages 14-15 for an explanation of the different types of resolutions and the use of a Book of Resolutions.) There are several benefits to using the resolution process to adopt rules as opposed to using the simpler process of making motions. The resolution process: I Provides a thorough, deliberate approach to making rules I Provides for consistency in making and wording rules I Provides a formal record of all rules made
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As a result, the process: I Protects owners from arbitrary board actions I Protects the community from charges that could result in inoperable rules
Resolution Format
A resolution contains four sections: 1. AuthorityThis section cites the primary source(s) of a boards authority to make a rule on the topic. Possible sources include statutes, declaration, articles of incorporation, and bylaws. For example: WHEREAS, the board of directors of _____ Homeowners Association, Inc. is empowered to govern the affairs of the homeowners association pursuant to Article IX of the bylaws... 2. PurposeThis section states why a rule is being adopted. For example: WHEREAS, there is a need to adopt specific rules on parking... 3. Scope and IntentThis section states: I Who will be affected I For what period of time I The reach or range and extent of the rule For example: WHEREAS, it is the intent that this rule shall be applicable to all owners, tenants, guests, invitees, or any others who have vehicles entering upon the common areas and this resolution shall remain in effect until otherwise rescinded, modified, or amended by a majority of the board of directors
4. SpecificationsThis section states clearly and completely what those bound by the rule will be expected to do. For example: NOW, THEREFORE, BE IT RESOLVED THAT the following rules on parking are hereby adopted by the board of directors: Revised Article IV, Section D of the parking rules will read: Parking spaces which are not marked reserved shall be available on a firstcome-first-served basis for visitors, guests, second cars, etc. Continuous parking of an undriven vehicle in one or more unreserved spaces for more than fourteen (14) consecutive days is prohibited unless prior arrangements have been made with the community manager. Vehicles in violation of this rule will be considered stored vehicles and the owner of the unit responsible for this vehicle will be subject to sanctions as imposed by the board of directors.
Development of Architectural Guidelines

Development of architectural guidelines should begin with a review of the governing documents to determine in what areas the board can allow a change. Usually a community associations declaration, CC&Rs, or master deed provides for architectural changes. It is in the communitys best interests for a board to establish written architectural guidelines for two reasons: 1. Written guidelines indicate to owners what types of changes will be allowed under normal circumstances. 2. Written guidelines are a way to avoid claims of arbitrary or selective treatment of owners. Follow the steps for developing rules on pages 5051 when developing architectural guidelines. It is in the boards best interests to establish an architectural guidelines committee. A committee can concentrate its effort and attention on this major task alone. It can also act as a buffer between the requesting owner and the board.
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INTRODUCTION TO ENFORCEMENT OF RULES

In this section of the chapter, we will discuss: I Use of a due process procedure to enforce rules I Alternative dispute resolution I Internal resources for enforcing rules I External resources for enforcing rules I Enforcement of architectural guidelines I Architectural variance or change requests As a new manager, remember that your board has the authority to enforce rules. It may delegate to a committee the responsibility to review situations and make recommendations. Your responsibility as a manager is to provide administrative support to the rule enforcement process. From time to time, managers may have a board that expects them to do all rule enforcement. As a community manager, you must help your leaders to understand and accept your respective role as administrative support to the enforcement process.
Use of a Due Process Procedure to Enforce Rules

A due process procedure is a formal process designed to protect the rights of all parties involved. There are several benefits to using a due process procedure to enforce community association rules:
I
All alleged rule violations are handled in the same manner Use of a due process procedure is recognized by the courts as an indication of legally valid rule enforcement The vast majority of rule violations can be resolved with this procedurethus avoiding going to court The opportunity to be heard in a non-threatening fact-finding forum is often enough to result in a person voluntarily obeying a rule Such a procedure provides an opportunity to explore alternative means to resolve a violation
The basic steps in a community association due process procedure for handling alleged rule violations are: 1. Issue a cease and desist letter which contains: I Notice of the alleged violation I The action required to end the alleged violation I A specific time within which the alleged violation must be corrected I The penalty (sanction) which may be imposed after a hearing if the alleged violation does not end within the stated time 2. Issue a hearing notice if the alleged violation does not end within the stated time. This is a written notice to an alleged violator that a hearing will be held to consider his or her alleged violation. 3. Hold the scheduled hearing if the alleged violation does not end within the stated time. This is a fact-finding session. It is an inquiry into the allegations and an investigation of them. It is also just that, a hearing; it is not a time to engage in additional conflict but to hear the view of the person accused of a violation. 4. Hold a default hearing in the absence of an alleged violator. A default hearing is one held when the alleged violator fails to appear. 5. Issue a decision after a hearing is held. The hearing panel determines the facts; whether or not a rule has been violated; the penalty to be imposed, if any; and the enforcement date of the penalty, if any. The hearing panel then issues this information in the form of a decision. A hearing panel may find an alleged violator to have committed a violation or notor decide that not enough clear evidence was submitted to allow the panel to reach a clear decision. No decision is ever given during a hearing. This is to avoid the claim that the hearing panel was predisposed to a particular point of view. The hearing panel should issue its written decision within thirty (30) days. If the board of directors is the hearing panel, its decision should be adopted as a special resolution. 6. Allow for an appeal of a decision. An appeal is a request for a review of a case by a higher authorityif permitted by the governing documents or statute. (For exampleif the hearing panel is a committee, the board of directors acts as the higher authority. If the board of directors is the hearing panel, the
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alleged rule violator must appeal to an authority outside the community associationfor example, alternative dispute resolution. [See below.]) If applicable legal sources allow, some community associations shorten the due process procedure by combining the cease and desist letter with imposition of a penalty and a statement of the alleged violators right to a hearing to waive (dismiss) the penalty. If the alleged violator does not request a hearing within the stated time, the party is expected to accept the penalty. If the party does not fulfill the penalty, then a hearing is scheduled. It is also important to check the governing documents carefully, as many recent documents specify a due process procedure, which would be controlling. In addition, check your state statues to determine whether deliberations can be held in private or must remain open, and if there are regulations regarding the issuance of the findings of the panel. On the next two pages you will find a sample resolution for a rules enforcement procedure. It is an example of a due process procedure.
Alternative Dispute Resolution

A number of community associations are turning to alternative dispute resolution as a means of encouraging people to comply with rules and guidelines. Alternative dispute resolution (ADR) is a relatively new term for a process that has been around a long time. It involves submitting a dispute to a trained, uninvolved third party for assistance with resolution. The third partys decision may be nonbonding or the third party may merely act as a facilitator in the case of a mediator. However, this approach can be a more efficient and effective way to resolve a dispute than other means. An alleged rule violator might consider ADR if the party is dissatisfied with the community associations decision or appeal verdict. A community association might propose ADR when confronted with a difficult rule enforcement situation or the possibility of prolonged litigation. In many jurisdictions, ADR is either required or encouraged before filing suit or during suitbut before trial.
Internal Resources for Enforcing Rules

There are a number of internal resources a community can use to encourage an owner or tenant to conform to community association rules. Suspension of owners voting rights: While this may be the mildest action possible, a community association should still use it as a resource in encouraging rule violators to conform to association rules.
SAMPLE RESOLUTION: Rules Enforcement Procedure
WHEREAS the condominium has a declaration, bylaws, and rules and regulations, and, WHEREAS Articles _____ and _____ of the bylaws of the condominium empower the board of directors to enforce the declaration, bylaws, and the rules and regulations, and, WHEREAS the _____ Condominium Act specifies (Section __) how to enforce the declaration, bylaws, and rules and regulations, NOW, THEREFORE, BE IT RESOLVED THAT the condominium will enforce said declaration, bylaws, and rules and regulations with the following procedure: A. In order to begin the rules enforcement process, an owner must state in writing to the board of directors any rule violation he or she wishes to complain about. 1. The person making the complaint must be identified in the letter. 2. The person making the complaint will be called to testify at all hearings. 3. Committees, as well as groups of owners or residents, may also bring complaints. B. Upon receipt of an alleged rule violation letter stating the date and approximate time of the alleged violation, a letter will be sent to the alleged violator, stating the alleged violation and a time period during which the alleged violation may be abated without further sanction (not less than 10 days). 1. A copy of this letter will be sent to the person originating the complaint. 2. If the alleged violation persists past the 10 day grace period, a second letter must be sent by a complaining owner (not necessarily the first owner who complained) alleging that the violation exists.
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SAMPLE RESOLUTION: Rules Enforcement Procedure, continued
C. After the receipt of two letters of complaint within the prescribed period, a hearing will be held. 1. A hearing notice will be sent to the alleged violator stating: the nature of the alleged violation; the action requested to cure the alleged violation; the time and place of a hearing; an invitation to attend the hearing and produce any statement, evidence or witnesses on his or her behalf; a statement that a sanction may be imposed; and the maximum amount of any sanction. 2. An invitation will also be sent to the person or persons originating the complaint, inviting them to the hearing in order to produce evidence to substantiate their complaint. D. The board will hear testimony from both sides at the hearing and then excuse both parties and render a decision. E. Should a fine be imposed on the alleged violator, standard collection action may be pursued which may take the form of court action for damages, collected as provided by law. It is also possible that standard collection action may include the filing of a lien on the unit for nonpayment of the fine and, ultimately, foreclosure, if necessary. F. In the case of non-owner-occupied properties, all residents and owners will be provided copies of all correspondence.
APPROVED: Date: ________________________________________ President: ____________________________________ Secretary: ____________________________________
Suspension of the use of recreational facilities and common areas: If your community association uses this resource to encourage someone to conform to association rules, only privileges related to the violation should be suspended. (For examplesuspend pool privilegesnot parking privilegesfor a pool violation.) Fines: Be sure your community has the authority to impose fines, as well as to collect them. If a per day fine is imposed, the violation must be personally witnessed each day the fine is imposed. Fines must bear a reasonable relation to the violation involved. Some states have legislated the maximum fines allowable. The courts will not allow a community to continue to fine until the amount owed becomes unreasonable. A community association must pursue other means of resolving an issue. Eviction: Eviction is the process of physically removing someone from a property. This process involves the local court system and the use of an attorney. Do not even consider this alternative without consulting your communitys attorney. Many jurisdictions do not permit eviction as a remedy for violations. Self help: Self help means the community association takes action to correct the violation itself. Again, do not even consider this potentially dangerous alternative without consulting your communitys attorney. Before your community considers using any of the internal resources for enforcing rules, be sure to verify that either a statute or a governing document gives it the authority to take such an action.
External Resources for Enforcing Rules

Community associations can also draw on resources within the broader community to help them enforce association rules. Local government agencies and municipal services can be great resources for enforcing rules. However, you must ask for help and take the time to build working relationships with each of the following parties. Local Health Department: Your local health department can be asked to enforce the local health code. For example, possible areas of violation include: I Number of occupants in a unit I Internal use of a unit or storage on a lot
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Local Zoning Department: This local agency can assist with enforcement of such rules as: I Fence or shed regulations I Setback restrictions I Restrictions on commercial use of dwellings I Removal of vehicles, boats, and trailers from lots or common areas I Other matters involving common areas and lots Local Police Department: In some jurisdictions, the police will enforce traffic regulations or tow violators of the communitys parking rules. In others, notice must be given to the police before the community has a vehicle towed. As a general rule of thumb, it is a good idea to develop a good working relationship with your local police department before you need its help. Local Fire Department: Your local fire department will help with enforcement of fire lanes and the removal of hazardous materials. Local Building/Housing/Property Standards Department: These terms refer to the local government office that issues building permits. This department may be able to help you if a unit is in violation of an existing building, plumbing, fire, or electrical code. However, the office may require the approval of a communitys board of directors before it will issue a permit. You also should note that this offices responsibilities can overlap with those of local zoning and health departments. Local Animal Shelter or Animal Control Officer: This agency is a good source of information on types of pets and weight classifications when your community association is defining rules for pets. You also can request that this agency patrol your community for animals in violation of its pet rules. While local government agencies and municipal services can be great resources for enforcing rules, utilizing such entities can have repercussions for the community. Before you call or write, you should think through what enforcement of a code could involve. You should be prepared for all possibilities (e.g. shutting down a building, etc.). In addition, in certain situations, government agencies may be reluctant to enter private propertyso their assistance can be limited.
Enforcement of Architectural Guidelines

A communitys enforcement of architectural guidelines can be upheld in a court of law. The keys to successful enforcement of architectural guidelines are the same as the keys to successful enforcement of other rules. (See the criteria for a valid and enforceable rule on pages 49-50.) A manager should advise a board of any violations of architectural guidelines as soon as they are discoveredfor example, during inspection of the property. The board should also refrain from turning a blind eye towards violations. They should report any known violations to the manager in a timely manner. If unapproved architectural changes are permitted to exist, the association may be hindered if it later tries to enforce the rule that was violated. One resource for successfully enforcing architectural guidelines is an established process for handling architectural variance or change requests. On the following pages, you will find a sample architectural variance request form and a sample form for responding to variance requests. Although our sample does not, some architectural variance request forms include a neighbor awareness section. It requires the applicant for a variance to obtain the signatures of two neighborsindicating that they have been informed of the pending changes. The signatures indicate only awareness of the request, not approval of the variance. You, as the manager, or your community associations architectural guidelines committee should always inspect any variance made to ensure that it conforms to what was approved.
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SAMPLE: Architectural Variance Request Form Submission of Plans to Architectural Guidelines Committee (AGC)
Mail To: AGC Chairman (address) Name __________________________________________________ Address ________________________________________________ City/State/Zip ____________________________________________ Phone(s) H: ___________________ W: ______________________ Date Submitted ____________ Date Received by AGC __________ In accordance with the __________________ covenants, easements, charges, and liens (declaration) and the associations rules and regulations, I request your consent to make the following changes, alterations, renovations, additions and/or removals to my unit: ________________________________________________________ ________________________________________________________ ________________________________________________________ ________________________________________________________ [Please attach a detailed (to scale) drawing or blueprint of your plan(s) and a copy of your community plat in duplicate.] Is this an amendment to a previous request? ____________________ If yes, approximate date of previous request: ____________________ I understand that under the declaration and the rules and regulations, the committee will act on this request and provide me with a written response of their decision. I further understand and agree to the following provisions: 1. No work or commitment of work will be made by me until I have received written approval from the association. All work will be done at my expense and all future upkeep will remain at my expense. All work will be done expeditiously once commenced and will be done in a good workman-like manner by myself or a contractor.
2.
3.
SAMPLE: Architectural Variance Request Form, continued
4.
All work will be performed at a time and in a manner to minimize interference and inconvenience to other unit owners. I assume all liability and will be responsible for all damage and/or injury which may result from performance of this work. I will be responsible for the conduct of all persons, agents, contractors, and employees who are connected with this work. I will be responsible for complying with, and will comply with, all applicable federal, state, and local laws; codes; regulations; and requirements in connection with this work, and I will obtain any necessary governmental permits and approvals for the work. I understand and agree that the _______________, its board of directors, its agent and the committee have no responsibility with respect to such compliance and that the board of directors or its designated committees approval of this request shall not be understood as the making of any representation or warranty that the plans, specifications, or work comply with any law, code, regulation, or governmental requirement. I understand that a decision by the committee is not final and that the board of directors may reverse or modify a decision by the committee upon the written application of any owner made to the board of directors within ten (10) days after the committee makes its decision. The contractor is:______________________________________
5.
6.
7.
8.
9.
10. If approved within twenty-one (21) days, the work would start on or about _________________________ and would be completed by ______________________________. 11. Any work not started on or before __________________ is not approved and later construction must be subject to resubmital to the committee. Signature: ____________________________________
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SAMPLE: Form for Responding to Variance Requests Action Taken by Architectural Guidelines Committee (AGC)
Date of action:___________________________
______ Approved as requested
______ Approved with the following exceptions: ________________________________________________________ ________________________________________________________ ________________________________________________________ ________________________________________________________ ________________________________________________________
______ Disapproved based on the following: ________________________________________________________ ________________________________________________________ ________________________________________________________ ________________________________________________________ ________________________________________________________
_________________________________________ Chairman, AGC
FOCUS QUESTIONS
Use the following questions to help you identify and review the core concepts in this chapter. (Hint: Once you look up the answer to a question, you may want to jot down the page number next to the question for future reference.) 1. What are some reasons for establishing community rules and architectural guidelines? 2. Give some reasons why careful rule making and enforcement are essential for community associations. 3. What are a managers responsibilities in the rule making and enforcement process? 4. Describe the scope of rules and guidelines for a community association. 5. List some areas commonly addressed by community association rules. 6. List some areas commonly addressed by community association architectural guidelines. 7a. Where do rules fit in the hierarchy of authority in community association law? b. What is their relationship to the governing documents? 8. What are the two most important sources of a communitys authority to make and enforce rules? 9. Name and explain the eight criteria for a valid and enforceable rule or architectural guideline. 10. Name and explain the eight steps in developing a rule or architectural guideline. 11. Name some of the benefits of using a resolution process to adopt rules for a community association. 12. Explain the four parts of a resolution. 13. Give some reasons for putting architectural guidelines in writing.
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14. How does establishing an architectural guidelines committee benefit a board of directors? 15. What are the benefits of using a due process procedure to enforce rules? 16. Define the six steps in a due process procedure for handling alleged violations of community association rules or guidelines. 17. Name and define some internal resources a community association can use to enforce its rules and guidelines. 18. Name and define some external resources a community association can use to enforce its rules and guidelines. 19. What can a community association do to increase the likelihood of a court of law upholding its enforcement of its architectural guidelines?
Use the following questions to help you apply the information in this chapter to your own situation. 1. Review the legal documents in your communitys hierarchy of authority. What authoritygeneral and specificdo they give your community association to make and enforce rules and guidelines? 2a. Does your community association keep its rules in a Book of Resolutions or something similar? b. If so, what areas of rule making has your community association addressed? c. If so, what areas of architectural guidelines has it addressed? d. If not, how can you arrange to consolidate all the community associations rules and guidelines in a central place? 3a. What process does your community association use to develop rules and guidelines? b. Does it have any checklist or criteria for determining whether the rule or guideline it is developing is valid and enforceable? c. Are there any changes you can propose in either a or b for your community association? d. If your community uses the resolution process to develop rules, is it following the standard resolution format?
4a. Does your community association have written architectural guidelines? b. Does it have an architectural guidelines committee? c. If your community association lacks one or both, what reasons can you use to persuade your board that they are needed? 5a. Is your community associations rule enforcement process a due process procedure? b. What aspects of the procedure led to your answer? 6a. Has your community association ever used alternative dispute resolution? b. What can you find out about the experience? 7. Find out which internal resources for enforcing rules your community association has used. (Hint: Examine past resolutions and minutes of board meetings. Ask people who would know.) 8a. Does your community association have an established relationship with any of the agencies described in this chapter as external resources for enforcing your associations rules? b. Has it used any of these resources to enforce its rules? c. Which of these agencies have you established a relationship with? 9. Does your community association have a process and forms for handling architectural variance or change requests?
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RESOURCES
For further information on rule development and enforcement, we suggest the following: Alternative Dispute Resolution & Consensus Building for Community Associations, (Guide for Association Practitioners Series, Report #26), Second Edition, by Mary Avgerinos. Provides associations
with an alternative to the traditional justice system and has been embraced by attorneys and judges alike. Covers the key ADR techniques such as negotiation, mediation, and arbitration. Provides samples of many useful letters, documents, and agreements. (Community Associations Institute, 1997.)
Architectural ControlDesign Review, (Guide for Association Practitioners Series, Report #2), Fourth
Edition, by Byron R. Hanke and Richard S. Ekimoto. Explains how to organize a system that works, including developing a manual on design objectives, standards and practices, and review procedures. (Community Associations Institute, 1998.)
Be Reasonable! by Kenneth M. Budd. A compendium of expert opinions from over 30 leading

community association attorneys, managers, and directors. Provides effective strategies for drafting and enacting reasonable rules, identifying unreasonable rules and restrictions, working with owners, and reasonable enforcement procedures. (Community Associations Institute, 1998.)
Condominium and Homeowner Association Practice: Community Association Law, Third Edition, by
Wayne S. Hyatt, ESQ. Contains a comprehensive overview of the basics of community association ownership, including creating associations, governance, financing, design standards, enforcement, liability, and amending documents. Appendices contain a document drafting checklist, a sample table of contents for the declaration of a condominium association, and a sample table of contents for the bylaws of a condominium association. (American Law Institute-American Bar Association, 2000.)
Drafting Association Rules, (Guide for Association Practitioners Series, Report #7), Fourth Edition, by
Gurdon H. Buck. Presents a step-by-step process for drafting rules to which community association residents will adhere. (Community Associations Press, 2002.)
Pet Policies: How to Draft and Enforce Rules That Sit, Stay, and Heel (Guide for Association Practitioners Series, Report #28), by Debra H. Lewin. Offers practical suggestions, helpful alternatives, and lots of new information on societal changes that impact your associations approach to pets. (Community Associations Press, 2001.)
Reinventing the Rules: A Step-By-Step Guide for Being Reasonable, by Lucia Anna Trigiani, ESQ.
Describes in detail the challenge that must be met in order to put our communities first by looking at rules from a new perspective. (Community Associations Press, 2002.)
CHAPTER 4
BOARD MEETINGS AND DECISION MAKING

KEY TERMS
Abstention, p. 79 Action item list, p. 83 Agenda, p. 73 Amend a motion, p. 79 Ballot, p. 83 Committee report, p. 74 Debate, p. 82 Executive session, p. 82 Financial report, p. 74 Majority, p. 79 Management report, p. 74 Minutes, p. 82 Motion, p. 78 Notice of meeting, p. 72 Parliamentary procedure, p. 77 Plurality, p. 79 Proxy, p. 83 Quorum, p. 78 Residents forum, p. 73 Roberts Rules of Order, p. 77 Second a motion, p. 79 Table a motion, p. 79 Take a motion from the table, p. 79 Timed agenda, p. 81
At the center of the management of any community association are board of directors meetings. These meetings are the source of policy decisions that: I Impact the quality of life in the community I Enhance the overall value of the assets commonly held and individually owned I Set the boundaries within which management will function The emphasis of board meetings should be on timely attention to policy matters leaving the day-to-day administration of the community association to the manager. Authorizations of specific actions and approval of contracts and committee recommendations allow the governance, business, and community life of the community association to function smoothly. For this to happen, the manager must play an integral role in the preparation, organization, and proper conduct of meetings. This chapter explains four aspects of board meetings that contribute to effective decision making: I Focus I Preparation I Conduct I Managers role
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What You Will Learn

After reading and reviewing this chapter, you should be able to explain and understand: I Three areas of board decision making I Importance of focusing meetings I Legal requirements for board meetings I How to prepare for decision making at meetings I Notice of meeting, agenda, and supporting materials I Management report I Site selection and preparation I Basic principles of parliamentary procedure I Establishing a quorum I Use of motions I Role of the presiding officer I Proper behavior during debate I Executive sessions I Recording minutes for meetings I Action item list I Owner meetings I Dual role of a manager I How to facilitate a meeting I Role of personalities in meetings Board meetings are a means of effective decision making when they focus on: I The areas in which a board is authorized to make decisions I The decision-making process itself
Areas of Board Decision Making

There are three areas of board decision making. They are related to the three functions of a community association board of directors:
I
BusinessAs volunteer leaders responsible for a community associations business affairs, a board must monitor administrative, financial, and property maintenance matters for the purpose of preserving and enhancing the community. GovernanceAs volunteer leaders responsible for governing an organization, a board must: I Enforce the communitys governing documents I Adopt and enforce rules for governing the community I Decide issues of policy for the owners in the community
CommunityAs volunteer leaders of a community, a board must: I Promote harmony through service programs and regular communication with owners I Attempt to settle conflicts I Hear appeals of committee and management decisions that are protested by individuals or groups of owners
The Importance of Focusing Meetings

A manager must use the board of directors meeting as a critical date for decision making and implementation. Board meetings should always focus on: I The decisions to be made during the meeting I The presentation of possible solutions I The setting of new priorities that become the next meetings agenda items When you and your leaders approach meetings in this manner, the community association will progress from decision to decision in an orderly and progressive manner that will achieve the communitys goals. When meetings are neglected, irregular, or poorly planned, the results will be confusion and paralysis.
PREPARATION
Adequate preparation for a board of directors meeting includes: I Conforming to legal requirements for board meetings I Preparing for decision making I Distributing a notice of meeting, agenda, and supporting materials I Selecting and preparing a meeting site
Conforming to Legal Requirements for Board Meetings

State statutes and governing documents establish requirements for board of directors meetings. Be sure to check your communitys legal documents. Legal requirements most commonly address such issues as: I Frequency of meetings I When meetings should be open or closed I Notice of meetings I Voting
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Preparing for Decision Making at Meetings

Think of a board meeting as the end of a decision making process, not the beginning.
I
Set up an annual calendar of board meetings at a fixed time and place. Consult with your board of directors when you set up the calendar. Schedule meetings often enough to allow for timely attention to matters requiring action or decision by the board. Meetings can be monthly, bimonthly, or quarterlydepending on the communitys needs as well as legal requirements, such as governing documents and state law. Involve key players in the meeting preparations. Before you finalize an agenda for a meeting, consult with the presiding officerusually your board presidentand relevant committee chairpersons. Once an agenda is established, check to: I Be sure everyone responsible for an agenda item understands what is to be accomplished I Verify that people are prepared for the agenda items for which they are responsible I Offer assistance, as needed
Prepare your board members to make decisions. A board of directors has the responsibility to come to a meeting prepared to make decisions. A manager has the responsibility to see that information necessary for decisions is gathered, disseminated, and adequately presented. Therefore, be sure to provide information to the board early enough so directors can read and absorb it before the meeting.
There are three things a manager should provide to board members before each meetinga notice of meeting, an agenda, and supporting materials.
Notice of Board Meeting

A notice of meeting should be sent in writing to board members at least a week before a meeting. Exactly how far in advance you send a notice of meeting may be set by your community associations governing documents or state statutes. I A meeting agenda and any supporting materials should accompany the notice. I All owners should receive a board meeting schedule at least once a year.
Agenda
Meeting agendas follow a standard format, based on parliamentary procedure. (See below.) The various agenda items are discussed in the pages that follow. An agenda is more than an announcement of the order of business for a meeting. It is a meeting management tool. For example, by specifying the duration of a meeting in the agenda or allotting agenda items specific amounts of time, you are helping the board to proceed with its business in a timely manner. Note that meetings that run more than two hours often degenerate into an unproductive effort. Where the agenda allows discretion in the order in which items are considered, give some thought to the order in which you list them. Should some decisions precede others? Will the board feel a sense of accomplishment if it makes a number of small decisions before tackling a complicated one? When an item requires discussion, but a decision is inappropriate or premature, label the item for discussion only on the agenda. This allows for the free flow of ideas. But the discussion must be restricted to the specific topic listed. During a meeting, a presiding officer can appeal to the agenda as a way to keep a group moving and focused on decision making. If possible, post a meeting agenda in a central common area before each meeting. Any owner who attends a board meeting should be given an agenda. The residents forum, typically held at the beginning of a board meeting, is an open forum for owners and residents to speak. This gives them the opportunity to raise items for future board consideration.
SAMPLE AGENDA FORMAT

Call to order 7 P.M. Establishment of quorum Residents forum Review/acceptance of minutes Treasurers report Management report Committee reports Unfinished business [List items which were previously discussed or reviewed, but did not receive final action.] New business [List new items not previously discussed, including committee or management requests.] Review of action items Set the date of next meeting Adjournment 9 P.M.
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Supporting Materials
In addition to a meeting agenda, board members should receive such supporting materials as:
I
Minutes from the last meeting(See page 82 for a discussion of minute taking.) Financial reportThis is a report on the communitys financial condition and activities. Committee reportsThese reports should be in writing and highlight matters to be decided and recommendations by the committee. Supporting research should be included in the reports. Committees need to clearly state the actions they are asking the board to take. Provide your committees with a suggested format for their reports and a sample. Management reportThis is the managers report on the associations current management and administrative activities. It is the managers opportunity to update the board on action items of interest or concern. (See the sample on the next two pages.) Special reports, memos, or correspondence on issues to be discussed
In a properly prepared board meeting, all members should have had the information needed for discussion before the meeting.
Site Selection for Meetings

If your community association does not have a meeting room, schedule board meetings in public meeting rooms that usually do not require a rental fee. Possibilities include a local church, school, or library. Be sure to give board members and owners plenty of advance notice if a meeting is off-site. Avoid meetings in homes of board members. The space will not always be adequate. Nor is a board members home a public and neutral site that will encourage owners attendance.
Site Preparation
Here are some tips on site preparation from experienced managers.
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Make arrangements in advance for a well-lighted, comfortably warm or cool environment. Serve any refreshments after the meeting.
SAMPLE: Management Report
October 1, 20XX
7:00 PM Executive Session

ACTION
1: Decision on employee year-end bonuses. The budget allowed $2,000.00 for bonuses to staff members. If a bonus is to be given, the amount is the boards decision. The vote needs to be for each employee who is to receive a bonus.
7:15 PM Regular session

Old Business ACTION 1: Discussion and decision on fence between XYZ and ABC Condominium. ABC will pay for half of the cost (approximately $1,000.00) to raise the fence height by two (2) feet. Board needs to vote if you want to pursue. ACTION 2: Update on community center renovations. ACTION 3: Update on hallway renovations at 3648. Carpet, paint, and tile work were authorized at the September meeting. New Business ACTION 1: Discussion and decision on the purchase of new radios for the maintenance staff. Prices quoted from Radio USA ranged from $1,300 - $2,800. Refer to our memorandum of September 17, 20XX for the details. No money has been budgeted for these radios. Current radios are over 12 years old and require an annual maintenance service. ACTION 2: Letter received from Joyce Brannon of 3648 regarding the $50.00 furnace rebate. Refer to her letter of September 4, 20XX. We need to provide a written response to Ms. Brannon about why she is not entitled to the rebate. ACTION 3: Decision needed on the renewal of the trash removal agreement. No change in the price until July 1, 20XX, at which time the trash contractor would like to present a fee increase based on the dump fee. We budgeted $5,150.00 per month. His current price remains at $5,000.00. Recommend approval. continued on next page
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SAMPLE: Management Report, continued

Information items for board review. These items will not be discussed unless specifically requested by a director. 1. Extra decals stating Aluminum Cans Only were received and installed on the recycling containers. Jones Carpentry installed the larger mailboxes at 3952. The agreement with Jones Carpentry for the construction of the disabled access ramp and miscellaneous repairs has been fully signed. Work in the community center commenced on September 15, 20XX. Smith Architects prepared all the drawings for the ramp and submitted all papers to Humboldt County for the permit. Correspondence summary: A. Board, RE: Patrol activity report, September 20XX. B. Board, RE: In-house maintenance, September 20XX. C. Board, RE: Maintenance log, September 20XX D. Residents, September/October 20XX newsletter. E. Residents, building 3950, RE: Items in hallways, under steps, 8/26/XX. Removed, 9/04/XX. Violations: A. Powell, 3854, RE: Dog not on leash. Hearing scheduled for Tuesday, October 15, 20XX: A. Pirson, 3880, RE: Leak damages. Fine Updates: A. Savage, 3884, fine due to leak damages, balance due of $85.00. Has not been making any fine payments. Charge remains on account. Lien filed for nonpayment of fine. New sales:
DATE ADDRESS FEE AMOUNT
2. 3.
4.
5.
6.
7.
8.
08/17/XX
3886
$276.00
$66,000
Avoid alcoholic beverages. This is an official meeting. Provide adequate seating for all the owners who attend. Inadequate seating may make people feel like unwanted or unexpected intruders. Arrange for a table for the board that allows board members to sit facing each other close enough to conduct the business of the meeting. This type of seating arrangement encourages board members to interact and emphasizes that they are working together to make decisions. If possible, avoid having the board members sit with their backs to the owners in attendance. The presiding officer should sit at the head of the table with the manager beside him or her. This will make it possible for the manager to give your presiding officer immediate assistanceif needed.
CONDUCT OF BOARD MEETINGS

Adequate preparation is necessary, but not sufficient, for effective decision making at board meetings. Unless a meeting is conducted in a manner that supports decision making, your preparations will be wasted. This section of the chapter discusses the elements of a meeting that contribute to effective decision making: I Basic principles of parliamentary procedure I Establishing a quorum I The use of motions I The role of the presiding officer I Proper behavior during debate I Executive sessions I Recording minutes for meetings I Action item lists
Basic Principles of Parliamentary Procedure

Parliamentary procedure is a set of rules for conduct at meetings. Experience demonstrates that this can be a very effective decision making method in a group setting. Be sure to introduce new board members to parliamentary procedure as they take their places on the board. The most popular version of parliamentary procedure is Roberts Rules of Order. There are many sources available that present these rules in a simple, straightforward way (see the
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list of resources at the end of this chapter). Make the effort to train your board to use them effectively. Parliamentary procedure recognizes a few basic principles of conduct for every meeting:
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Order: A board should consider one item of business at a time. Courtesy: The rights of the individual should be respected and protected. Majority rule: The will of the majority should decide issues. (Technically, it may be a plurality that decides an issue, not a majority. See page 79 for the difference.) Protection of rights: The rights of the minority should be protected. Justice: Everyone is entitled to a fair hearing of his or her position. A board should not act on an issue during the same meeting in which it was raised unless it is an emergency or a very minor matter. The principle of justice requires that all sides be heard before a decision is made.
Establishing a Quorum
The basic requirement for effective decision making that parliamentary procedure establishes is the need for a quorum. A quorum is the number of members required to be present for the board to legally conduct the business of the association. In the absence of a quorum, the only formal actions a board may take are to recess, adjourn, or take measures to obtain a quorum. Your communitys bylaws set the quorum for a board meeting.
The Use of Motions

A motion is a proposal that the board take a stand or take action on a specific matter. A board of directors can consider ideas from committees, board members, or owners. However, only board members can actually make a motion. Motions should be made only for items listed on the agenda.
Making a Motion
Here are some basic terms you will need to know in order to understand the process of making a motion. Majoritymore than half of the votes cast Pluralitymore votes than any other option receives Second a motionrequired support from one other member before a motion can be considered by the group Amend a motionto change a motion by inserting, adding, striking out, striking out and inserting, or substituting words; only the maker of the motion can amend it Table a motionto put aside a motion for future consideration at a specific time Take a motion from the tableto reconsider a motion previously put aside The sample on the next page provides a brief summary of the basic steps in making motions. All motions passed during a community association board meeting are recorded in the minutes with the: 1. Exact wording of the motion 2. Name of the person making the motion 3. Result of the vote (According to Roberts Rules of Order, when a motion is defeated, it doesnt have to be recorded.) 4. Dissenting minority voteif those dissenting ask that it be recorded In addition, any recommendations from committees should be in writing and given to the secretary to place in the minutes of the meeting.
Abstentions
To abstain is to not cast a vote. Board members should abstain from voting only for clearly stated reasons such as conflict of interest or ignorance of the matter at hand. In small groups like boards of directors, abstentions should be discouraged. A board has the fiduciary duty to act on matters brought before the community association. The abstentions should be recorded in the minutes. A majority of the votes cast decides the issue.
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SAMPLE: Parliamentary Procedure To Make a Motion:

I I I I I I
Maker must be recognized by chairperson Maker then states, I move A second to the motion is required The maker of the motion has the right to speak first The maker also has the privilege of speaking last before the vote The chairperson recognizes each person before he or she speaks
To Amend a Motion:
I I I I
Requires a second Amendment can be debated and can be amended Majority vote is needed to approve the amendment Vote on the amendment before voting on the original motion
To Table a Motion:
I I I I I
Requires a second No debate is allowed No amendments to the tabling motion can be made Majority vote is required to pass the tabling motion Can set a definite date for reconsideration
To Adjourn a Meeting:
I I I I
Requires a second Not debatable Cannot be amended Majority vote is needed pass
To Take a Motion from the Table:

I I I I
Requires a second Not debatable Cannot be amended Majority vote is needed to pass
Role of the Presiding Officer

The presiding officer or person who runs a board meeting is the president of the board and in that persons absence, usually the vice president. The presiding officer contributes to effective decision making by fulfilling the following duties:
I
Opens the meeting on time, announces the presence of a quorum, and establishes the agenda of the meeting Sees to it that the meeting follows the agenda Keeps discussions focused on the matter at hand The presiding officer sees to it that all major issues are brought to the floor in the form of a motion. This focuses the discussion. He or she allows discussion to begin only after a motion is seconded. If no one seconds a motion made during a meeting, it dies for lack of support. If discussion wanders or becomes confused, the presiding officer calls peoples attention to the motion on the floor as a way of refocusing discussion. If it is clear from the discussion that a decision will not be made within a reasonable period of time during the meeting, the presiding officer asks for a motion to table the issue to a later meeting.
Keeps meetings from becoming unreasonably long If meetings always run longer than one-and-a-half to two hours, consider recommending the use of a timed agenda to your presiding officer. A timed agenda is a list of meeting items with a period of time assigned to each. Once the time limit is reached, the group moves on to the next agenda itemeven if the item under discussion is not completed. Timed agendas must be approved at the beginning of the meeting once time limits for each item on the agenda are announced. For a timed agenda to be effective, the presiding officer must politely insist that time limits be obeyed and incomplete items tabled for another meeting. Regardless of whether or not a timed agenda is used, someone should keep time for the presiding officer, so he or she can concentrate on running the meeting.
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Behavior During Debate

Debate is the term used in parliamentary procedure for discussing a motion or issue. Parliamentary procedure calls for the following rules to keep the discussion focused and to avoid disagreements turning personal: I Direct all remarks to the presiding officer I Stop speaking when the presiding officer finds it necessary to speak I Confine remarks to the issue being discussed I Avoid using members names when you refer to their positions I Avoid attacking members motives I The presiding officer should warn a member about a serious offense the first time it happens (For examplepersonal attacks, use of obscene language, etc.)
Executive Sessions
There are times when a board must hold a discussion or make decisions of a sensitive nature. Many states have so-called sunshine laws which limit the reasons why a governing board may go into a closed or executive session. The topics that commonly require an executive session and are allowable by law usually include: I Personnel issues I Contract negotiations and discussions I Lawsuits and other legal matters I Governing document violations While discussions in executive sessions are secret and separate privileged minutes are kept, any decisions made must be brought to an open session and voted on there. Privileged means that access to and use of the minutes by others is restricted.
Recording Minutes for Meetings

The minutes of a meeting document the decisions made during the meeting. This provides a permanent public record of positions and actions taken by a board. The secretary of the board is responsible for maintaining all official records, including the minute book of all board meetings. Minutes should reflect what was done at a meeting, not what was said. The minutes may list the name and topic for any speaker, but not a summary of the persons remarks. Minutes should state: I The type of meetingsuch as, regular or special I Name of the group I Date and time of the meetingand the place, if it is not always the same
I I I I
Presence of the president and secretary or their substitutes Presence of a quorum and the names of the people present Action taken on the minutes of the previous meeting and corrections, if any Exact wording of a motion as it is adopted, including the name of the person making the motion Hour of adjournment
As a community manager, you should NOT take the minutes at a board meeting. Your responsibility is to concentrate on the dynamics of the meeting in order to assist when needed. You cannot do that and take minutes at the same time. To free the secretary and the manager to concentrate on the boards discussion, many community associations use a tape recorder to back up note-taking or hire a stenographer to come in and take notes. If a meeting is taped to assist in preparation of the minutes, the tape should be erased when the minutes are approved.
Action Item Lists

An action item list is a list of actions to be taken before the next meeting as a result of decisions made at the current one. An action item list contains the decisions to be implemented together with the names of those assigned implementing responsibility. A sample action item list appears on the next page. Notice how the decision-making cycle is completed and begins again as you review a set of minutes and an action item list to prepare for the next board meeting.
Owner Meetings
Although the focus of this chapter is on board of directors meetings, we would like to end this section with some basic information on owners meetings for your use. Owners meetings can be annual or special. Special meetings are devoted to a specific issue. Usually a special meeting is called when the bylaws require the vote of all owners on some action the board would like to take. Your bylaws will state the quorum needed for an owners meeting. Whether a motion requires a plurality, a majority, or two-thirds approval will depend on your governing documents and the issue. Owners meetings often require the use of ballots. A ballot is a written means of voting when secrecy is desired. Your governing documents will also tell you when proxies are permissible. A proxy is a written statement authorizing another person to cast a vote on the signers behalf.
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SAMPLE: Action Item List From Meeting of 6/01/20XX
MANAGEMENT
1. 2. Main entrance light is still out and needs to be replaced. Need signs to slow down traffic. Possibly Dead End/No Through Street. Towing signs needed. Need lawn watered during summer months. One owner has volunteered to assist. Contact Ms. Hunt at 336-8212. New dumpster needed for the area near buildings 6 and 7.
3. 4.
5.
DEVELOPER
1. It was requested that the developer look into the parking problem and evaluate it. It was also requested that they look into cutting into the green space for more parking. Crepe myrtles are to be placed outside unit 3850. Are they in the plan or does the association have to pay for them?
2.
BOARD OF DIRECTORS
1. Roof bids: Commercial Roof Services Roof Services Corp. Verbal bid (individual) $_______ $_______ $_______
All prices are for twice-per-year inspection. Bids to be given to property committee for review and selection.
THE MANAGERS ROLE

As a manager, you are also a key element in effective board meetings. This final section of the chapter will discuss: I The dual role of a manager I How to facilitate a meeting I The role of personalities in meetings
The Dual Role of a Manager

A manager plays two roles at a board of directors meetingsupport staff and professional advisor:
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The manager as support staffAs staff, a manager has the responsibility to see to it that meetings are well-prepared and board members have the necessary information ahead of time. Here are some suggestions from successful community managers:
I
Stay informed about committee activity and provide assistance when needed. Handle all matters relating to a board meeting well in advance. Try to create the most pleasant working atmosphere for meetings as possible. Develop a clear understanding as to exactly what type of support volunteer leaders expect and how much. (For examplenumber of meetings, reports typed, phone calls.) Work closely enough with your presiding officer to enable the two of you to evaluate and adjust the support providedas necessary.
The manager as professional advisorAs a professional advisor, a manager must provide a board with guidance and perspective on the matters at hand. Suggestions from successful community managers:
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Alert your board to community issues that need to be resolved. Demonstrate professional competence in answering questions. Be careful to state your opinions only within your field of management expertise. (NEVER give a legal opinion. Rely on professionals when it is deemed necessary.)
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If you dont have an answer, promise to get back with one within a specific time. Dont fake it! Keep your board informed on matters of interest in the field of common interest real estate as they develop. Provide training sessions as part of board meetings and encourage board members to take advantage of outside educational opportunities. For examplelocal or national training sessions for volunteer community leaders offered by Community Associations Institute. Be prepared to make adjustments for the fact that board members participation is a voluntary activity that must compete with their other obligations and interests. Be a source of history and continuity for your board during its deliberations.
How to Facilitate a Meeting

As a professional advisor, a community manager is expected to facilitate board meetings in a low-key manner. To facilitate is to help a process or action move forward. The challenge for a manager is to do this without taking charge of a meeting. Here are some things to do to keep a meeting moving. The challenge is to do them with a simple question or appeal to parliamentary procedure so you wont appear heavy-handed.
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Help keep discussions on target. For exampleCould the secretary repeat the motion thats on the floor? Offer alternatives when discussions stall. For exampleWould it help if we tabled that motion until the next meeting to enable the Recreation Committee to get some answers to those questions from the bidders? Call attention to past board actions when they are relevant to the current matter and overlooked. For exampleSome of you will recall that the board considered that issue last spring and decided to wait until after the parking lots were repaved.
Be a timekeeper. For exampleUnobtrusively keep an eye on your watch. If time starts to slip away during a discussion, quietly let your presiding officer know with a prearranged signal. Be alert to proposed actions that might be in conflict with your communitys bylaws. For exampleAlways bring a set of your communitys governing documents to board meetings. Urge consistency in actions of the board. For exampleIf a board imposes a late fee in one case, it should impose a late fee in all similar cases. Support the principle of fairness. For exampleIf a board replaces a dead tree on a common area in front of one owners home, it should be prepared to replace other dead trees as the issue arises. Elaborate on your management report. For exampleHighlight the key points in your report at the meeting. Respond to questions and offer additional explanations as needed.
The Role of Personalities in Meetings

Part of being a good meeting facilitator is to recognize the role personalities play in meetings. Personalities are the element that make meetings interestingand unpredictable! Learn to recognize different personality types. Think about how to use peoples strengths to get things done. At the same time, anticipate how to compensate for their limitations. Here are some final tips from experienced community managers:
I
Do not make personal judgments about people. This type of judgment about others will hamper your effectiveness. Identify the decision makers in a group early and work through them. Dont immediately dismiss a complainer. Consider a complaint. It may be legitimate! On the other hand, dont change your efforts in response to every complaint you receive. Recognize that chronic complainers are bothered by something other than the issue they are complaining about.
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When people are angry, try to understand why. Ask for an explanation. Sometimes the opportunity to be heard calms people down. When someone gets too hot under the collar to calm down, call for a break. In severe situations, reschedule your meeting. Finally, remember that you are but one element in an effective meeting. When a meeting goes well, take pride in your contribution to its effectiveness. But when things beyond your control go wrong, dont blame yourself. Youre going to participate in a lot of meetings over the course of your career in community management. Some will go smoother than others.
FOCUS QUESTIONS
Use the following questions to help you identify and review the core concepts in this chapter. (Hint: Once you look up the answer to a question, you may want to jot down the page number next to the question for future reference.) 1. What should the focus of board of directors meetings be? 2a. What are the three functions of a board of directors? b. For each function, list at least one corresponding board responsibility. 3. What does adequate preparation for a board of directors meeting include? 4. What are some things a manager can do to prepare for decision making at meetings? 5a. Who should receive a notice of a board meeting? b. What items should be included with the notice? 6a. What is the standard order of items on a meeting agenda? b. What are the various uses of an agenda? 7. What are some considerations when selecting and preparing a site for a board of directors meeting? 8. What are the five basic principles of parliamentary procedure that apply to every meeting? 9. Why is a quorum for a meeting important? 10. Describe some things a presiding officer can do during a meeting to facilitate decision making. 11. What are some rules that apply to debate at meetings that help to keep discussion focused and disagreements impersonal? 12a. What is the purpose of an executive session? b. What are some topics for an executive session that the law usually allows? 13a. Who is responsible for taking minutes at a board meeting? b. What items of information should be included in the minutes of a meeting? 14. Explain the dual role of a community manager.
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15. List some of the things a manager can do to facilitate an effective board meeting. 16. Explain the role of personalities in meetings and how a good facilitator should take them into account.
Use the following questions to help you apply the information in this chapter to your own situation. 1a. Are there any improvements that can be made in the focus of your board meetings that would lead to more effective decision making? b. How can you work with others to make those improvements? 2a. Are there any improvements that can be made in the preparations for your board meetings that would lead to more effective decision making? b. How can you work with others to make those improvements? 3a. Are there any improvements that can be made in the conduct of your board meetings that would lead to more effective decision making? b. How can you work with others to make those improvements? 4a. Are there any improvements that can be made in your role at board meetings that would lead to more effective decision making? b. How can you work with others to make those improvements?
RESOURCES
For further information on board meetings and decision making, we suggest the following: The A-B-Cs of Parliamentary Procedure. A brief, illustrated booklet that outlines the basic process involved in running a meeting according to Roberts Rules of Order. (Channing L. Bete, 2003.) The Art of Successful Meetings, by William Dixon Southworth. Comprehensive treatment in one
useful resource. Covers basics like chairing a meeting, motions, committees, voting and membership, what to do about conflicting motions, and how to handle unusual procedures like correcting minutes or rescinding. Contains valuable tips for ensuring that your meetings are positive and productive. (McGraw-Hill, 2000.)
Basic Parliamentary Procedure Workbook, Sixth Edition, by Joyce L. Stephens. How-to manual on
conforming to basic parliamentary procedure. Covers decorum, how to write a resolution, meeting minutes, proper language for presiding officers, completing action on motions, and common errors to avoid. (Frederick Publishers, 2001.)
Community Association Leadership: A Guide for Volunteers, Anne M. Calmes, Editor. Covers how to
attract more residents to association volunteer work and how to enable them to perform better by gaining a thorough understanding of committee work and the volunteers role. (Community Associations Institute, 1997.)
Conducting Meetings: A Guide to Running Productive Community Association Board Meetings, M.J.
Keatts, Editor. Helps community association directors and managers run effective, efficient board meetings. Discusses how to prepare for a meeting, how to take proper meeting minutes, the potential benefits and drawbacks of recording meetings, and appropriate agenda items for executive sessions. Includes an outline of Roberts Rules of Order thats perfectly tailored for association meetings. (Community Associations Institute, 1998.)
Decision Making in Communities: Why Groups of Smart People Sometimes Make Bad Decisions, by Jasmine Martirossian. Presents a fascinating look at the unseen forces that affect groups of people in community associationsincluding boards, management teams, and committeesand the decisions they make. (Community Associations Press, 2001.)
Guide to Annual Meetings, Special Meetings, and Elections (Guide for Association Practitioners Series, Report #21), by P. Michael Nagle, ESQ. Addresses all aspects of meeting procedures from
giving notice of a meeting to conducting and controlling the meeting. Topics include quorums, ballots, voting, elections, nominations, and proxies. (Community Associations Institute, 1998.)
Guide for the Presiding Officer: A Functional Guide for Presidents and Chairmen, Third Edition, by
Joyce L. Stephens. Will help readers chair meetings with confidence in spite of disagreements, diverse opinions, and even outright conflict. Contains detailed descriptions of key rules, tips on communicating more effectively, and advice on body language. (Frederick Publishers, 1997.)
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Roberts Rules of OrderA number of inexpensive paperback versions are available. The League
of Women Voters publishes an excellent flyer that summarizes the basic points.
The Role of the Association President (Guide for Association Practitioners Series, Report #23), Second
Edition, by Robert T. Dennistoun. Offers tips and advice on how presidents can improve the overall quality of life in their communities. (Community Associations Institute, 1996.)
The Role of the Association Secretary (Guide for Association Practitioners Series, Report #18), Second
Edition, by Anita Hagerty Schenk, PCAM and P. Michael Nagel, ESQ. Explains the secretarys duty to record the history of the association, handle correspondence, and maintain the filing system. Includes examples of agendas, minutes, and other forms needed. (Community Associations Institute, 1999.)
PART I I
FINANCIAL MANAGEMENT
In Part II, Financial Management, you will learn about the basic financial activities of a community association and a managers typical involvement in them. At a minimum, a manager has a professional duty to oversee a communitys financial operations. However, a typical managers financial duties and responsibilities often go well beyond this minimum. In Chapter 2, we described the authority and responsibilities typically held by the board of directors in a community association. Without giving up their authority and responsibilities, the board of directors and officers often delegate their financial duties in full or in part to a manager or management company.
The following excerpt from a set of bylaws illustrates the typical financial duties of a treasurer delegated to management: The treasurer shall have the responsibility for the _______s funds and securities and shall be responsible for keeping full and accurate financial records and books of account showing all receipts and disbursements, for preparing all required financial statements and tax returns, and for the deposit of all monies and other valuable effects in the name of the ________ or the management agent in such depositories as may from time to time be designated by the board of directors. The treasurer shall be responsible for the preparation of the budget. The duties of the treasurer may be delegated to the management agent. In such case, the duties shall be performed by the management agent under the supervision of the treasurer The financial duties delegated to a manager often are described in the management contract or employment agreement (see page 31). However, a contract or agreement frequently will not include all the financial duties expected of or appropriate for a community association manager. As a new manager, request an initial discussion of what financial duties your board expects of you. Together, periodically review expectations and performance to identify any needed changes. The financial duties and responsibilities expected of a professional manager, but not always spelled out, include:
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Exercise of ordinary and reasonable care Use of sound business judgmenta sound business judgment involves a business decision, due care, good faith, and discretion Maintenance of an adequate record-keeping system Payment of bills in a timely, business-like manner Collection of monies owed to the community association in a timely, businesslike manner
Use the information in Part II to help you professionally fulfill the financial duties and responsibilities assigned to you and expected of you. Part II of this program will introduce you to: I Budgets and ReservesChapter 5 I Collecting AssessmentsChapter 6 I Financial Statements, Audits, Income Taxes, and InvestmentsChapter 7 I Risk Management and InsuranceChapter 8
CHAPTER 5
BUDGETS AND R E S E RVE S

KEY TERMS
Assessment, p. 101 Baseline funding, p. 104 Budget, p. 98 Chart of accounts, p. 106 Discretionary budget line items, p. 106 Expenses, p. 102 FHA, p. 99 FHLMC, p. 99 FNMA, p. 99 Full funding, p. 105 Historical trend budgeting, p. 107 Mandatory budget line items, p. 106 Major improvement expenses, p. 102 Operating budget, p. 107 Operating expenses, p. 102 Percent funded, p. 104 Reconciliation of expenses and revenue, p. 111 Replacement fund, p. 103 Reserve cash flow statement, p. 111 Reserve formula, p. 111 Reserve Specialist, p. 110 Reserve study, p. 108 Revenue, p. 101 Special assessment, p. 101 Threshold funding, p. 105 VA, p. 99 Zero-base budgeting, p. 107
This chapter provides an overview of the role of budgets and reserves in community associations. The chapter explains: I Roles and responsibilities in the budget process I Budgets and reserves and their use I The sources of budget and reserve requirements I Budget preparation I Budget presentation
What You Will Learn

After reading and reviewing this chapter, you should be able to explain and understand: I Roles and responsibilities in the budget process for the board of directors, the treasurer, the owners, and the manager I The definition of a budget I The role of a budget in a community association and its uses I Sources of community association budget requirements I Sources of revenue for a community association I Types of expenses for a community association
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I I I I I I
Reasons for maintaining a replacement fund Development of budget line items Preparation of an operating budget Preparation of a replacement fund budget Reconciliation of expenses and revenue Methods of budget presentation
Your community governing documents will define formal roles and responsibilities in the budget process. However, it is important for you to find out as soon as possible what peoples informal expectations arefor everyone involved. Become familiar with the budgetary roles and responsibilities of: I The board of directors I The treasurer I The owners I Yourself, as manager
Board of Directors
Most boards of directors are responsible for establishing, approving, and monitoring the communitys budget. Although they have the power to establish a budget, most will delegate preparation authority to their manager. When directors review a proposed budget, they should take into consideration:
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Legal requirements of state statutes and governing documents Owners needs and desires (balancing mandatory and discretionary itemssee page 106) Committee and owner feedback The need to reconcile revenue and expenses Any financial forecasts and analyses of past financial activity prepared by the manager
As the board has the power to approve the budget, you, as the manager, are responsible for providing all owners with a summary copy of the proposed budget before it is officially adopted by the board.
Treasurer
The community treasurer is usually responsible for seeing to it that the draft budget is prepared and reviewed. He or she will usually delegate initial preparation of the budget to the manager. Then the treasurer will usually review the draft budget with a finance committee. It is important that the treasurer consult all committee chairpersons and invite owner input to ensure support. Their participation and support would be especially important where a vote of owners is required or recommended for: I A required increase in assessments (see page 101) I Special assessments (see page 101) I Major improvements (see page 102) I Funding reserves (see pages 102-105) Usually the treasurer presents the proposed budget to the owners at an open community meeting. Frequently, community governing documents require that an open meeting be held before the board adopts a budget.
Owners
Some states and some community governing documents require that the budget be passed by a vote of the owners. The preceding discussion explains when and why owners should be involved in reviewing the proposed budgeteven when the board is responsible for its adoption.
Manager
As community manager, your formal budget responsibilities are more likely to appear in your contract than in the communitys bylaws. Even if neither the bylaws nor your contract spell out your budget responsibilities, informally you will be expected to:
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Prepare or be involved in the development of a draft budget Review it with the treasurer, finance committee if one exists, and ultimately the board and membership Revise it after any changes are made Mail a summary of the proposed budget to the owners before it is approved
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INTRODUCTION TO THE BUDGET

This section explains: I The definition of a budget I Its role in community management I How it is used
What is a Budget?
A budget is a financial plan for an organizationin this case, a community association. A budget provides an estimate of a communitys revenue and expenses for a specified period of time. It is the first step in your communitys financial operations.
The Role of a Budget in Community Management

A budget establishes: I What services and programs the community will provide I When they will be done I How they will be done In other words, a budget reflects a communitys policy decisions about what will be accomplished and what will not be accomplished during the budget period.
How a Budget Is Used

A budget has many uses:
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It is a way for the community to plan its activities It is the basis for determining owner assessments (see Chapter 6) Together with financial reports (see Chapter 7), it is a means of controlling the communitys financial operations It provides for continuity of community services It helps the community maintain its desired quality of life It helps to minimize the unexpected It provides an opportunity for a community to balance its needs and desires (mandatory and discretionary items, see page 106)
SOURCES OF BUDGET REQUIREMENTS

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

Federal laws and regulations can lead to community expense items. For example, all community associations must conform to Internal Revenue Service requirements in the area of income and payroll taxes. Federal agencies may also establish expense requirements that your community will have to meet. For example, in the environmental area, you may have to budget for oil tank testing, hazardous waste disposal, or chlorofluorocarbon (CFC) removal. Your community association may also be taking steps to conform to the requirements of the Americans With Disabilities Act (ADA). Federally established secondary mortgage institutions may set requirements that your community association will have to meet if owners are to participate in their financing programs. These agencies include: I Federal National Mortgage Association (FNMA or Fannie Mae) I Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac) I Federal Housing Administration (FHA) I Veterans Administration (VA) These agencies regulate and influence such items as the amount of insurance a community association must carry, procedures for financial operations, and requirements for the upkeep of property. If you know you are regulated by a particular agency, contact that agencys local representative for more information on requirements that affect your community associations budget process. Or you can call your congress person's local office.
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State Statutes, Regulations, and Court Decisions

As we said in Chapter 1, most states have statutes that enable the establishment of condominiums and corporations. Some states have statutes that enable the establishment of cooperatives or planned communities. In several states, these statutes require or regulate such community association budget items as reserves for replacement, audits, insurance, and the conduct of financial operations. States may have other laws and regulations that apply to community associations and have budgetary implications. To find out about any applicable laws and regulations, call your attorney or local state legislator. What a specific state statute says very often will override what your communitys governing documents say. Check the state statutes wording carefully to determine its applicability to your community association. And in so doing, keep in mind that your community associations governing documents may not be current with the state statute that enables establishment of your type of association. If your community association employs at least one person (you), it must follow all applicable state requirements for employers. This can result in such expense items as workers compensation insurance and unemployment taxes. State courts have also made decisions that affect the types of expenses community associations incur. For example, there have been security cases involving the adequacy of lighting, patrols, and off-duty police. There have been other cases involving parking and sign requirements, and there have been slip-and-fall cases involving the adequacy of snow removal. To find out more about the case law that applies to your community association, consult the Community Association Law Reporter, a monthly publication from Community Associations Institute reporting on current laws and legal decisions affecting community associations.
Local Laws and Regulations

Your local government may have codes, laws, and, possibly, taxes that your community association must meet. Any requirements in these areas will result in expense items for your communitys budget. For example, your local fire code may require such items as sprinkler systems, exit signs, fire extinguishers, or elevator inspections. Your local health and safety codes may require pool inspections, water quality tests, or mandatory procedures for sewage disposal or recycling.
Property taxes may or may not be levied on land commonly owned by the community association, depending on your state or local jurisdiction.
Governing Documents
The governing documents of your community: I Define the property to be maintained by the community association I Specify maintenance and service responsibilities and requirements Maintenance and service items will appear in the expenses section of your communitys budget (see next page).
BUDGET COMPONENTS
Before you begin reading this section, you may want to pull out a copy of your community budget to look at as you read through the following pages. The two main components of a community budget are revenue and expenses. The revenue and expense categories used in your budget must be the same categories used in your financial records, reports, and statements.
Revenue
Revenue consists of the collective items or amounts of income which, in the case of a community association, are appropriated for public expenses. The typical sources of revenue for a community association include: 1. Owner assessments: An assessment is the owners financial obligation to the community association during a given period of timeusually one year. It covers the owners share of the common expense. An annual assessment may be paid on a monthly, quarterly, or annual basis. Most of a communitys revenue will come from owner assessments. (See Chapter 6 for more information on owner assessments.) Occasionally, special assessments may be levied. A special assessment is a onetime assessment often voted on by the owners to cover a major expense that was not included in the annual budget or replacement reserve. 2. Interest: A typical source of revenue for communities is interest or dividend earned on their cash savings and investments. 3. Penalty fees: Exampes includefines for violating community rules and regulations, reimbursements for legal fees and lien filings, and late payment fees.
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4. User fees: For exampleparking space rentals, laundry machine use, guest privileges, swimming pool use, and move in-move out fees. 5. Other revenue: Other sources of revenue includerent from commercial tenants, rent from lease of units, charges for resale packages, collection on insurance claims, legal settlements, easements, and antenna rental.
Expenses
Expenses consist of the cost of goods and services used to operate and maintain property. Typically, there are three types of expenses for community associations: 1. Operating expenses: Operating expenses are those items that occur on a regular basisday to day, week to week, month to month, and year to year. For example I Swimming pool management costs I Professional and administrative services (management, legal, accounting, insurance) I Utilities (electric, gas, water, oil) I Contract services (lawn maintenance, elevator, trash removal, janitorial services, painting) I Repairs (plumbing and pipe, electrical, door and lock) I Personnel costs (compensation and benefits for community employees) I Educational costs for employees and volunteers (courses, publications, membership in Community Associations Institute) 2. Major improvement expenses: Major improvement expenses consist of items that are not necessarily required, but are added to improve the overall welfare, safety, or life of the residentsor to enhance the value of the community association as reflected in the resale value of units. Improvements are different from maintenance, repairs, or replacements. They increase the life, usefulness, or value of a property. They are called major improvements because they typically last more than one year and involve a large amount of funding for the community association. Examples of major improvement expenses are the addition of a new tennis court, more picnic areas, or additional street lights. 3. Replacement fund: The establishment of a replacement fund is a community association expense that requires detailed explanation. Please see the next page.
REPLACEMENT FUND
The replacement fund consists of funds put asidein reservefor the replacement of major components of a communitys common property. Typically, the replacement fund might be used to replace asphalt paving, concrete sidewalks, roofs, central heating and cooling plants, swimming pool, tennis courts, elevators, and many other varied property components. Revenue raised for adding a major item will be a major improvement expense. Revenue raised for replacing that item when it deteriorates will come from the replacement fund. Major items that either come with the initial construction or are added later are placed on a replacement reserves schedule. The schedule is a framework for accumulating and spending the funds for replacing major components of the property. (See the sample replacement reserves calculation on page 112 for a sample schedule.) The funds are put aside over a period of time to ensure that adequate amounts are available to replace components when they need to be replaced either for deterioration or technological improvements. The components, cost to replace the components, and the remaining useful lives of the components will determine your reserves for replacement. It is important to note that the Internal Revenue Service considers the expenditure of certain replacement funds for regular maintenance and repairssuch as paintingas an action that may expose the community association to possible taxation. Until recently, community associations referred to the replacement fund as replacement reserves, reserves for replacement, or just reserves. However, the Common Interest Reality Associations Audit and Accounting Guide prepared by the American Institute of Certified Public Accountants for community associations refers to these funds as a replacement fund.
Reasons for Maintaining a Replacement Fund

Because some items may not need to be replaced for several years, youand the ownersmay question the value of their contributions. Here are some reasons for maintaining a replacement fund to convince youand the ownersof the importance of budgeting reserves for replacement: 1. Maintaining a replacement fund meets legal, fiduciary, and professional requirements. A replacement fund may be required by: I Any secondary mortgage market in which your community association participates, e.g. Fannie Mae, Freddie Mac, FHA, VA I Your states statutes, regulations, or court decisions I Your communitys governing documents I Industry standards
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2. Maintaining a replacement fund provides for the planned replacement of major items. Owners expect the community association to fulfill its obligations. At some point in time, the work will have to be done. 3. Maintaining a replacement fund equalizes the contributions of old and new owners. Major items deteriorate during use. Although a roof will be replaced when it is 25 years old, every owner who lived under that roof should pay a share of its replacement. Just as both old and new owners benefit from the presence of such an item, both contribute to it. 4. Maintaining a replacement fund minimizes the need for special assessments. Owners, especially those on fixed incomes, have limited resources. They may not be able to afford the large special assessments that would be required if reserves are insufficient to cover a major replacement. Special assessments have the reputation of being indicative of poor management. 5. Maintaining a replacement fund enhances resale values. Lenders and real estate agents are aware of what a replacement fund is and the ramifications for a new buyer if reserves for replacement are inadequate. Many states have reserves disclosure requirements for buyers into a community association. Some states require reserves for replacements and/or replacement reserve studies.
Funding Goals
The answer to the critical question of how much reserves is enough or adequate is not simple. Each association has different needs, so $100,000 may be excessive to one association but an extremely small amount to another. One standard method of measuring the size of an associations replacement fund, providing information about how the fund measures up against the needs of the association, is the concept of percent funded. Percent funded allows an association to measure the relative size of their reserves as compared to a fully funded reserve balance. Depending on the association s funding objectives, the associations funding plan can range from conservative to aggressive. Note that reliance on future special assessments is not considered part of a responsible funding plan. There are three distinct funding goals:
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Baseline funding: Establishing a reserve funding goal of keeping the reserve cash balance above zero (never purposefully running out of money or having special assessments). This is the most aggressive methodology, characterized by lower (typically) reserve contributions and reserve balances. This funding plan is also the riskiest of the three, with a greater potential for special assessments and/or bank loans when things do not go according to plan.
Full funding: Setting a reserve funding goal of attaining and maintaining reserves at or near 100% funded. This is a conservative methodology, characterized by higher (typically) reserve contributions and higher reserve balances. This funding plan results in the least likelihood of special assessments and/or bank loans. Threshold funding: Establishing a reserve funding goal of keeping the reserve balance above a specified dollar or percent funded amount. Here a specific minimum figure is chosen (either a cash value or percent funded value) below which the reserve fund never drops. The threshold funding approach is often used to define an objective that results in more safety net funds available than under baseline funding, while not as conservative as fully funding. This funding plan typically falls between baseline funding and full funding in terms of the possibility of requiring special assessments and/or bank loans.
Funding plans are expected to project the revenue and expenses of the replacement fund for 20 or more years. Many associations include the effects of interest earned from their replacement funds on deposit and the effect of inflation on projected future expenses. While interest earnings tend to reduce the effects of inflation, the two factors do not offset each other since interest is earned only on the reserve balance, while inflation affects the total replacement cost of all the reserve components.
BUDGET PREPARATION
A budget usually applies to a 12-month period. For example I January 1 to December 31 I July 1 to June 30 Your communitys budget should be approved at least 45 days in advance of the start of the fiscal or budget year. This will enable you to distribute copies of the approved budget to your owners before it goes into effect. To meet approval and distribution deadlines, you will have to begin work on the next years budget several months in advance. Before you begin work, pull together all the related documents and reports you and your community associations accountant have prepared over the past year. (For examplethis years budget, any comparison of actual expenses to budgeted expenses, any other financial reports or statements, bills paid over the past year.) The budget should include estimated revenue and expenses, and a summary of the most recent reserve study. (For more information on reserve studies, see page 108.) This budgM-100: The Essentials of Community Association Management
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et, a statement as to whether special assessments are contemplated, and a description of the associations collection policies, should be distributed to the members within the time frame stated above.
Development of Budget Line Items

Each line in a budget represents a different account or category of revenue or expense. This is why accounts are commonly called line items in a budget. There are two types of expenditures in a community budgetmandatory line items and discretionary ones:
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Mandatory line itemsThese are items based on community and owner needs. They are requirements that the community is obligated to meet, e.g. income taxes, repairs, utilities, and maintenance. Discretionary line itemsThese are items based on owner, board, and committee desires. They are items people would like to havegiven their values, lifestyle, and preferred level of service, e.g. social and recreational expenses, picnic areas, etc.
There are standard ways to describe common line items for community associations, as the sample on the next page illustrates. It consists of an excerpt from a chart of accounts for a condominium association. A chart of accounts is an organized list of the titles, descriptions, and assigned numbers of all accounts in an organizations general ledger. The assigned number helps you locate the account. The title describes the purpose of the account. There are three rules of thumb to keep in mind when selecting line items for your communitys budget: 1. Select line items that reflect your communitys activities 2. Select line items that will give your board the information it needs to plan and control your communitys operations 3. Keep line items as simple as possible Even though there are customary ways of listing common line items in a budget, your community association can decide how detailed a set of line items it wants to use. It is very important that the same account numbers and names be used in the budget, the general ledger, and all financial reports. Without this consistency, it is impossible to get a clear picture of the communitys financial operations over a period of time.
When you are preparing a draft budget, list your line items in as much detail as possible to help you assign costs. For example, utility line items may include: water-domestic, water-irrigation, sewer, electricity, streetlights, fuel oil, natural gas, steam, garbage, telephone, and cable TV. This same level of detail should appear in your communitys financial records. (In order to prepare line items for specific types of goods and services, you may have to solicit bids and proposals, e.g. insurance, lawn maintenance, and pool management.)
EXCERPT FROM A CHART OF ACCOUNTS FOR A CONDOMINIUM ASSOCIATION

EXPENSES
Administrative 52310 Office Supplies and Expense 52490 Management Fee 52491 Audit Expense 52492 Legal Expense 52500 Staff Training and Development 52750 Insurance Maintenance of Buildings and Grounds 62250 Plumbing Repairs 62420 Lawn Maintenance Service 62425 Snow Plowing Service 62510 Building Repair and Maintenance 62520 Janitorial Service Personnel 63330 Maintenance Staff 63350 Swimming Pool Staff 63410 Service Coordinator 63520 Secretary 63750 Central Plant Engineer 63810 Payroll Taxes Utilities 72250 Electricity 72430 Natural Gas 72460 Water and Sewer 72750 Fuel Oil Reserves 81940 Asphalt 81950 Concrete 81960 Roofing 81970 Swimming Pool
However, when you prepare published copies of the adopted budget and any monthly or annual financial reports, it is appropriate to combine detailed line items under a more general one. For example, utilities might be the only line item that appears in place of the previous list.
Preparation of an Operating Budget

The section of a budget devoted to operating activities includes operating expenses and major improvement expensesbut not the replacement fund. There are two basic methods of budget preparation: 1. Zero-base budgeting: With this method, all line items are set to zero and the amount of funds allotted to each must be justified. 2. Historical trend budgeting: This method begins with the assumption that existing line items are needed. The amount of funds allotted to each during the current year is adjusted for expected changes in the coming year. Sources of historical information include financial reports, existing contracts, and bills from the past year.
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A highly effective approach to developing the operating activities section of a budget is to combine elements of both zero-base budgeting and historical trend budgeting. The zero-base approach keeps you from accepting this years figures at face value. It requires you to analyze the reasons for the actual amounts spent. The actual dollar figure may be less or more than the budgeted figure because of circumstances you cannot assume will exist during the coming year. For example, lawn maintenance costs during a dry season will be lowbut a community cannot assume that the coming year will be just as dry. The historical trend approach gives you information to start from when you develop your estimates for the coming year.
Preparation of a Replacement Fund Budget

To maintain the associations major common area assets, the board and manager must determine an appropriate level of income to segregate into a reserve account or replacement fund to offset the repair or replacement of those assets as they wear out during the life of the development. Without a plan (called a reserve study, see below), it is strictly a hit or miss proposition. Usually, a separate section of the budget is prepared for a replacement fund. Zero-base budgeting is the only practical method for preparing a replacement fund budget. The reason is the lack of frequent cost comparisons for large, long-term items. The Common Interest Reality Associations Audit and Accounting Guide prepared by the American Institute of Certified Public Accountants for community associations has separate reporting requirements for replacement funds.
Reserve Study
Maintaining the associations common property is among the manager and boards highest responsibilities, and it takes a long range plan to prepare successfully for repair or replacement of the associations major common area assets. The reserve study is the plan by which the association expects to offset ongoing deterioration and prepare for inevitable future expenses. Reserve projects are typically the largest expenses that an association faces, and proper financial preparation takes many years. A reserve study is a budget planning tool that considers the current status of the replacement fund and determines a stable and equitable funding plan to offset the anticipated future major common area expenditures. The reserve study can also be very useful for developing a replacement fund budget. The study addresses all items that the association must repair, replace, restore, or maintain. The study should contain at a minimum a statement of the remaining useful life of each item, an estimate of the current cost of repair,
replacement, restoration, or maintenance of those items, and an estimate of the total annual contribution necessary to defray the cost of repair, replacement, restoration, or maintenance of those items after deduction of existing reserve funds. In essence, the study must include all items for which the community has long-term replacement responsibility. Consequences of not having a reserve study
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Underfunding: Special assessments, bank loans, deferred maintenance, or a combination of these Overfunding: Paying too much (more than owners fair share), for the benefit of future owners Board member liability: Exposure to claims of fiscal irresponsibility and loss of D&O insurance coverage
Reserve study benefits to community managers and board members

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Fulfilling fiduciary responsibility Meet individual state requirements (for regulated states) Compliance with the American Institute of Certified Public Accountants (AICPA) audit guide for community associations (An auditor must modify his or her report if the disclosure about funding is absent or inadequate.) Reduce personal liability from claims of financial mismanagement Save valuable time with prioritized business plan for capital repairs and replacements Effective communication tool to keep owners informed Reserve study can turn up items that havent been budgeted in ongoing operations
Associations are constantly changing. As a reserve study is based upon facts at the time when the study was conducted, managers and boards should plan for an update of their reserve study on a regular basisfrom one to three yearsto ensure accuracy.
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The manager and board should review its reserve study, particularly its funding plan, annually because the associations physical assets may deteriorate at different rates, interest and inflation rates change, and the association may change its reserve strategy from conservative to aggressive (or vice-versa). Associations should be encouraged to plan responsibly for the future with the valuable reserve study as a tool. In addition, each replacement fund budget line item should be updated each year using new current cost, new estimated remaining life, and new funds on hand. If you update these line items each year, the interest earned on these reserve funds can be used to offset operating expenses. Interest earned on the investment of reserve funds can be added to the reserves on hand. If you do not update your replacement fund budget each year, you should add its interest income directly into the reserves. This will help your replacement fund keep up with increases in prices due to inflation.
Reserve Specialist
Whenever possible, use an experienced, qualified person to prepare a reserve study because of the technical detail involved. If you feel you cannot afford to use a specialist or one is not available to you, you will have to pull together all the relevant information yourself. CAIs A Complete Guide to Reserve Funding & Reserve Investment Strategies (Guide for Association Practitioners Series, Report #24) can assist you. CAI established the Reserve Specialist (RS) designation program to help community managers and board members identify qualified reserve study providers and to assist communities in developing their reserve study. Utilizing a Reserve Specialist means managers and boards can obtain proposals from competent reserve providers and make informed business decisions to responsibly fund their associations reserves. What is the value of having the reserve study conducted by a Reserve Specialist?
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Reduced liability exposure: Community managers and board members can limit liability by relying on expert advice. Independence: No potential conflict of interest. Focus: Allows managers and board members to concentrate on running the association.
Credibility: If the person or committee preparing the reserve study isnt credible enough to effect a change in the associations budget, it is a waste of time from the start. Accuracy: The Reserve Specialist does this year-round, and is well-versed in the implications of all the decision points.
Calculating Replacement Fund Budget Line Items

To calculate replacement fund budget line items, you will need the information from a reserve study and the amount of your current reserves for replacement. Use the following reserve formula to calculate each line item: Current Replacement Cost Funds on Hand = This Years Budget Line Item Remaining Useful Life in Years On the next page you will find a sample replacement reserve calculation for a communitys asphalt paving. Page 113 features an excerpt for asphalt paving from a 20-year reserve cash flow statement. A reserve cash flow statement shows the amount to be funded and the amount to be expended from the replacement fund over a given period of time. The charts illustrate the gradual replacement of an item (asphalt). Note also that an item can be replaced all at once.
Reconciliation of Expenses and Revenue

After you draft both your operating and replacement fund budgets for the coming year, you must reconcile your estimated expenses with your communitys anticipated revenue. To reconcile means to bring together after a difference. If estimated expenses exceed estimated revenue, you will have to weigh discretionary expense items against the probable impact of any increase in assessmentsor a special assessment. On this basis, decide whether a reduction in expenses is appropriateor an increase in revenue from assessments. When reconciling expenses and revenue, be certain about the exact powers your board has to establish assessments. In some cases, it may be necessary to have a vote of your owners to approve an increase in assessments or to impose a special assessment.
BUDGET PRESENTATION
There are two questions to ask yourself when you are preparing to present a budget: I What information will help my audience understand and accept my estimates of revenue and expenses? I How can I present that information in an easy-to-understand format?
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SAMPLE REPLACEMENT RESERVE CALCULATION

NOTE: Current reserves for replacement of asphalt are $75,328. #81940 Asphalt Paving 30,000 square yards $16,359.00
PRICE/ SQ. YD. UNIT PRICE
YEAR
ITEM
SQ. YDS.
LOCATION
2002 2003 2004 2005 2007 2008 2009 2011 2012 2013 2015 2016 2017 2019 2020 2021
1 12" Top. Seal Coat Seal Coat Seal Coat Seal Coat Seal Coat Seal Coat Seal Coat Seal Coat Seal Coat 1 12" Top. 1 12" Top. 1 12" Top. Seal Coat Seal Coat Seal Coat
7,500 15,000 7,500 7,500 15,000 7,500 7,500 15,000 7,500 7,500 15,000 7,500 7,500 15,000 7,500 7,500
11300-15 11316-85 11386-400; Rec Area 11300-15 11316-85 11386-400; Rec Area 11300-15 11316-85 11386-400; Rec Area 11300-15 11316-85 11386-400; Rec Area 11300-15 11316-85 11386-400; Rec Area 11300-15
$5.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 5.00 5.00 5.00 1.00 1.00 1.00
$37,500.00 15,000.00 7,500.00 7,500.00 15,000.00 7,500.00 7,500.00 15,000.00 7,500.00 7,500.00 75,000.00 37,500.00 37,500.00 15,000.00 7,500.00 7,500.00 $307,500.00 15,000.00 80,000.00 $402,500.00
For basketball court For major patching before paving or sealing
Current Replacement Cost Funds on Hand = This Years Budget Line Item Remaining Useful Life in Years $402,500 $75,328 = $16,359.00 20 years
There are two common mistakes to avoid when presenting a budget: I Neglecting to present any information on how estimates were developed. I Presenting so much explanatory information that people are overwhelmed and confused. When you are preparing to present your budget: 1. Identify the line items that your audience is likely to be interested in or question. 2. Identify any comparisons or trends that would help your audience understand why your estimate is what it is. 3. Decide whether a table or a visual presentation such as a pie chart or bar graph will most clearly demonstrate what is happening with the numbers.
EXCERPT FROM A SAMPLE 20-YEAR RESERVE CASH FLOW STATEMENT

#81940 ASPHALT BALANCE 12/31/01 FUNDING 2002 EXPENSES 2002 BALANCE 12/31/02 FUNDING 2003 EXPENSES 2003 BALANCE 12/31/03 FUNDING 2004 EXPENSES 2004 BALANCE 12/31/04 FUNDING 2005 EXPENSES 2005 BALANCE 12/31/05 $75,389 16,359 37,500 ______ 54,248 16,359 15,000 ______ 55,607 16,359 7,500 ______ 64,466 16,359 7,500 ______ 73,325
On the following pages, weve included samples of three different ways to present historical information on line items to support budget estimates for the coming year. We use utilities as the sample because they are major expenses for community associations.
1. Line graphThe line graph on the next page plots the actual utility expenses for a community association from 2003 through 2011. More importantly, it compares utility expenses to the community associations total cash and reserves for the same period. What conclusions can you draw from this line graph? 2. Bar graphThe bar graph on page 115 plots the utility expenses for another community association from 2007 through 2012. This graph allows the reader to see the changes in utility expenses over a six-year period. It also shows how these utility expenses compare to expenses for trash and landscaping and grounds during the same period. What conclusions about utility expenses can you draw from this bar graph?
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3. TableThe table on the following page provides a utility analysis for a third community associations electricity use. The table includes historical data on kilowatt-hours used. It also presents a comparison of budgeted and actual use and costs for 2011. Notice how the past four years of use were averaged to create an estimate of the number of kilowatt-hours to budget for in 2011. An average of past use is a more reliable estimate than one based on a percent increase in the past years use. You can never be sure how typical a single year is. Reliable estimates are important for utility use and costs because even a small difference in estimates can make a large difference in terms of the amount of money involved. What conclusions can you draw about the estimates for budgeted use and cost for 2011 when you compare them to the actual use and cost?
SAMPLE COMPARISON OF TOTAL CASH, RESERVES FOR REPLACEMENT, AND UTILITY EXPENSES 20032011
1600 1400
DOLLARS IN THOUSANDS
1200 1000 800 600 400 200 2003 2004 2005 2006 2007 2008 2009 2010 2011
TOTAL CASH RESERVES UTILITIES
SAMPLE COMPARISON OF EXPENSES FOR UTILITIES, TRASH, AND LANDSCAPING/GROUNDS 20072012

350 300
DOLLARS IN THOUSANDS
250 200 150 100 50 0

UTILITIES TRASH LANDSCAPING/GROUNDS
2007
2008
2009
20 0 8 $275,000 22,000 18,000
2010
20 0 9 $310,000 23,000 15,500 2010 $305,000 32,500 17,500
2011
2011 $315,566 30,500 23,001
2012
2012 $325,000 34,000 23,000
20 07 Utilities $295,000 Trash 21,000 Landscaping/Grounds 15,500
SAMPLE UTILITY ANALYSIS #72250 Electricity

MONTH KWH USED 2007 KWH USED 2008 KWH USED 2009 KWH USED 2010 KWH KWH BUDGETEDACTUAL COST COST BUDGETED ACTUAL # OF DAYS 2011 2011 2011 2011 (IN DOLLARS) (IN DOLLARS) (IN DOLLARS) (IN DOLLARS) 2011 20111
JAN FEB MAR APR MAY JUNE
261426 283522 467364 244890 538216
279536 274674 221998 277996 213992 464618 1732814 726024 929850 801662 424656 273508 261132
292426 278574 268174 266010 272592 417936
313186 261763 261301 289545 345063 397412
286700 274700 246300 266900 269200 454600
279862 263577 258402 265871 316489 667041
32 29 30 31 29 31 182 32 28 30 32 32 31 367
$0.062 0.062 0.062 0.062 0.062 0.087 $0.066 0.087 0.087 0.087 0.062 0.062 0.062 $0.070
$0.049 0.049 0.051 0.055 0.056 0.082
$17,776 17,032 15,270 16,548 16,690 39,550
$13,581 12,911 13,267 14,533 17,690 54,431 $126,413 60,396 62,418 59,205 50,559 14,992 15,057 $389,040
6 MONTH TOTALS 1795418
1795712 1868270 1798400 2051242 698236 821316 569364 586806 303876 287278 678616 747898 633895 523726 400265 266826 704900 934600 715000 520700 272300 275900 824233 769092 727011 548650 268742 278169
$0.062 $122,866 0.073 0.081 0.081 0.092 0.056 0.054 61,327 81,311 62,205 32,284 16,883 17,106
JULY AUG SEPT OCT NOV DEC

TOTALS
690192 1052506 773844 550608 239370 279250 5381188
5149646 5062588 5119496 5221800 5467139
$0.071 $393,982
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FOCUS QUESTIONS
Use the following questions to help you identify and review the core concepts in this chapter. (Hint: Once you look up the answer to a question, you may want to jot down the page number next to the question for future reference.) 1a. What are some sources that typically provide information on the financial duties and responsibilities delegated to a community association manager? b. What are some examples of financial duties and responsibilities typically expected of a professional manager? 2a. b. c. d. e. What is the role of a board of directors in the budget process? What is a treasurers role? What do committees do? What is the role of the owners? What does a manager do?
3a. What is a budget? b. What is the role of a budget in community management? c. What are some of the uses of a budget? 4. What are the different sources of budget requirements? Give an example of each for your community association. 5a. What is revenue? b. Name the different types of revenue for a community association. Give an example of each from your association. 6a. What are expenses? b. Name the three types of expenses. Give an example of each from your community association. c. How do the three types of expenses differ from one another? 7. What are the reasons for maintaining a reserve or replacement fund? 8a. What is the typical time period covered by a budget? b. Why should a budget be passed at least 45 days before the budget year begins? 9a. What are budget line items? b. Whats the difference between mandatory and discretionary line items? c. What are some characteristics of meaningful budget line items?
10a. Name and define the two basic methods of budget preparation. b. Why should a combination of both methods be used to prepare an operating budget? 11a. What is the purpose of a reserve study? b. What do the line items in a replacement fund budget consist of? c. What three items of information do you need to calculate a replacement fund budget line item? 12. What does it mean to reconcile a community associations revenue and expenses for the coming year? 13. What are some rules of thumb to follow in order to make an effective budget presentation?
Use the following questions to help you apply the information in this chapter to your own situation. 1. What are some financial duties and responsibilities your board expects of you? How do you know? 2. What are the formally required roles in your community associations budget process for the board, the treasurer, committees, owners, and yourself? (Hint: See your communitys governing documents and your contract.) What are the informally expected roles for each? (Hint: What do people ask of one another or act as if they expect?) 3. When you look at this years budget for your community, what policy decisions do you think it reflects in terms of what your community association will do and will not do this year? 4. What budget requirements are set for your community association by: I Applicable federal laws and regulations I Applicable state statutes, regulations, and court decisions I Applicable local laws and regulations I Community association governing documents 5. When you look at the line item expenses in your communitys budget, can you tell which are mandatory and which are discretionary?
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6. Check your community associations software or records to find its chart of accounts. Are the same account titles and numbers used in the budget and in financial reports? 7. Can you find out what method or methods were used to prepare your communitys current budget? 8. What historical information is available to you for preparing the next budget? 9. Does your community association have a replacement fund budget? If not, can you find out why not? How can you help your board and owners see the need for one? If so, how has the replacement fund budget been prepared? Given what you learned in this chapter, are there any changes in line items to propose? Are there any changes in how the budget is prepared to propose? 10. Find out what documents were used to present the current budget to the board before it was adopted. (Hint: Check the files.) Were any documents other than the draft budget prepared? If so, what were they used for? If not, what other documents do you think could have been prepared to help explain the proposed budget?
RESOURCES
For further information on budges and reserves, we suggest the following: A Complete Guide to Reserve Funding & Reserve Investment Strategies (Guide for Association Practitioners Series, Report #24), Fifth Edition, Mitchell H. Frumkin, P.E., P.P., RS, MBA, and Christopher
J. Juall, Editors. How to set up and implement reserve funds. Chapters cover investing reserve funds, investment policies and options, and lists the pros and cons of each. Contains a summary of state reserve fund requirements, the complete reserve standards, and the reserve specialist code of ethics. (Community Associations Press, 2001.)
Common Interest Reality Associations Audit and Accounting Guide, by the AICPA. Provides the
AICPA recommendations on the application of generally accepted auditing standards plus audits of financial statements of community associations. Also describes and recommends reporting principles and practices. (American Institute of Certified Public Accountants, 2003.)
The Role of the Association Treasurer, (Guide for Association Practitioners Series, Report #22), Second
Edition, by Howard A. Goldklang, CPA, MBA. Although written for community association treasurers, this guide provides useful information for everyone on all aspects of association financesbasic financial statements, balance sheets, assets and liabilities, members equity, cash versus accrual accounting, interpreting accounting information, reserves, investments, audits, and tax filing options. (Community Associations Institute, 1998.)
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Note taking
CHAPTER 6
COLLECTING ASSESSMENTS
KEY TERMS
Acceleration, p. 134 Assessment, p. 122 Bad debt write-off, p. 138 Chapter 7 bankruptcy, p. 137 Chapter 11 bankruptcy, p. 138 Chapter 13 bankruptcy, p. 138 Fair Debt Collection Practices Act, p. 122 Foreclosure, p. 135 Lien, p. 135 Personal money judgment, p. 136 Special assessment, p. 122
This chapter provides an overview of assessmentsthe lifeblood of a community association as its major source of income. If adequate assessments are not collected in a timely manner, the community association will not be able to operate, preserve, maintain, and enhance its common property. The chapter provides basic information a manager can use to assist and support a boards efforts to fulfill its duty to establish and collect assessments. It explains: I Owner assessments and special assessments I Authority to collect assessments I Establishing annual assessments I Collection policies and procedures
What You Will Learn

After reading and reviewing this chapter, you should be able to explain and understand: I Assessments I Special assessments I Community association authority to collect assessments I Process of establishing annual assessments I Consequences of delinquent payments I Benefits of an established collection policy I Characteristics of an effective collection policy I Collection procedures and remedies I Lien I Foreclosure I Lawsuit for a personal money judgment
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I I I
Three types of bankruptcy Bad debt write-off Solutions for collection shortfalls
Definitions of Assessments
Assessment: As covered in Chapter 5, an assessment is the owners financial obligation to the community association during a given period of timeusually one year. It covers the owners share of the common expense (known as common expense liabilities in some states). An annual assessment may be paid on a monthly, quarterly, or annual basis. An assessment for an owners share of the common expenses is a binding legal obligation based on the community associations governing documents. In condominiums and planned communities, assessments are binding obligations that the owner cannot avoid without board consent. In a cooperative, however, the governing documents may allow suspension or reduction of the assessment if a unit is unoccupiable. Special assessment: A special assessment is A one-time assessment, often voted on by owners, to cover a major expense (e.g. a major repair or replacement or improvement, see page 102) that was not included in the annual budget. To protect your community associations interests, your governing documents should include a broad definition of assessments, if your state law does not. A broad definition includes: I Monthly (or quarterly or annual) and special charges against all units for common expenses, and I Special charges that may be levied against a particular unit, e.g. late fees and interest, collection costs (including attorneys fees), fines, fees, payment for damages to the common property
Authority to Collect Assessments

Authority to collect assessments can come from three sources: 1. Federal laws and regulations: The federal Fair Debt Collection Practices Act may apply to your community associations collections. The Act requires that the person who owes a debt receive written notice containing:
I
The amount of the debt;
The name of the creditor to whom the debt is owed (in this case the community association); A statement that the debt will be assumed to be valid by the debt collector (in this case the community association), unless the debtor disputes the validity of the debt, or any portion of it, within 30 days after receiving the written notice; A statement that the debt collector will mail a copy of verification of the debt or a copy of a judgment against the debtor if he or she notifies the debt collector in writing within the 30-day period that he or she disputes the debt, or any portion of it; and If appropriate, a statement that the debt collector will provide the debtor with the name and address of the original creditor, if it is different from the current debt collector, upon the debtors written request within the 30-day period. Notice that the sample collection policy on pages 129-133 fulfills the first four requirements for a debt notice under the Fair Debt Collection Practices Act.
2. State statutes: State statutes that enable the establishment of a community association typically state that the association board has the power to collect assessments. These statutes also state what procedures a community association must follow in order to collect delinquent assessments. 3. Governing documents: Governing documents typically cover the following items: I Mandatory nature of assessments I Authority to collect assessments I Purpose or use of assessments I Basis for calculating assessments I Reasons for levying fines, fees, etc. I Payment procedures I Collection procedures for delinquent payments On the next two pages is a sample of covenant language on the collection of assessments.
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SAMPLE: Covenant Language on the Collection of Assessments CREATION OF LIEN AND PERSONAL OBLIGATION
The trustee, for each unit ownership hereby covenants, and each owner of a unit ownership by acceptance of a deed therefore, whether or not it shall be so expressed in any such deed or other conveyance, shall be and is deemed to covenant and hereby agrees to pay to the association such assessments or other charges or payments as are levied pursuant to the provisions of this declaration. Such assessments, or other charges or payments, together with interest thereon and costs of collection, if any, as herein provided, shall be a charge on the unit ownership and shall be a continuing lien upon the unit ownership against which such assessment is made. Each such assessment, or other charge or payment, together with such interest and costs, shall be the personal obligation of the owner of such unit ownership at the time when the assessment or other charge of payment is due.
PURPOSE OF ASSESSMENTS
The assessments levied by the association shall be exclusively for the purposes of promoting the recreation, health, safety and welfare of members of the association, to administer the affairs of the association, and to pay the common expenses.
ANNUAL ASSESSMENT
Each year at least sixty (60) days before the end of the associations fiscal year, and at least thirty (30) days before final adoption thereof, the board shall furnish each owner with a proposed budget for the ensuing fiscal year which shall show the following, with reasonable explanations and itemizations: A. The estimated common expenses with an allocation of portions thereof for the payment of real estate taxes, if any; B. The estimate amount, if any, to maintain adequate reserves for common expenses;
C. The estimated net available cash receipts from sources other than assessments, including, without limitation, receipts from any leases, licenses or concessions;
SAMPLE: Covenant Language on the Collection of Assessments, continued
D. The amount of the annual assessment, which is hereby defined as the amount determined in A above, plus the amount determined in B above, minus the amount determined in C above, minus excess funds, if any, from the current years operation; and E. That portion of the annual assessment which shall be payable by the owner with respect to his dwelling unit each month until the next annual assessment or revised annual assessment becomes effective, which monthly portion shall be equal to one twelfth (1/12th) of the annual assessment multiplied by the dwelling units undivided interest.
PAYMENT OF ASSESSMENT
On or before the first day of the fiscal year, and on or before the first day of each and every month thereafter until the effective date of the next annual assessment, each owner of a dwelling unit shall pay to the association, or as it may direct, that portion of the annual assessment, which is payable by such owner.
NONPAYMENT OF ASSESSMENTS
Any assessments or other charges or payments that an owner is required to make or is liable for hereunder which are not paid when due shall be deemed delinquent. If an assessment or other charge or payment is not paid within thirty (30) days after the due date, it shall bear interest from the due date at the contract rate permitted in _____, but not to exceed eighteen percent (18%) per annum, and the board (i) may bring an action against the owner personally obligated to pay the same, together with interest, costs, and reasonable attorneys fees of any such action, which shall be added to the amount of such assessment or other charge or payment and shall be included in any judgment rendered in such action and (ii) may enforce and foreclose any lien which it has or which may exist for its benefit, together with interest, costs, and reasonable attorneys fees of any such action, which shall be added to the amount of foreclosure judgment. In addition, the board may in its discretion charge reasonable late fees for the late payment of assessments or other charges. No owner may waive or otherwise escape liability for the assessments or other charges or payment provided for herein by nonuse, abandonment, or transfer of his dwelling unit.
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Establishing Annual Assessments

Annual assessments are based on the communitys budget for the fiscal year. The amount of the total annual assessment is the amount of income that the board decides to obtain from owner assessmentsgiven the community associations other income sources. (See the discussion of revenue and expenses in Chapter 5.) Each owner is assigned a share of the communitys annual obligation. Frequently, an owners share is based on the number of owners in the community or on the square footage the owners unit occupies. In condominiums, an owners share is based on his or her percentage interest in the common elements. Here is the formula for calculating assessment fees for condominium owners: Total Assessments Required Percentage Interest as Found in Annual Budget X in the Declaration Number of Installment Payments in a Year For example 1. Assume a total required assessment of $410,000 2. Assume a percentage interest in the common elements of .4682% for a two bedroom unit 3. Assume monthly payments $410,000 x .004682 = $160 monthly assessment fee 12 Always obtain percentage of interest as found in the declaration. Do not rely on prior years percentages as computational errors can occur and be perpetuated. Note that the above calculations are among the most common methods for determining an owners share of the total annual assessment. But also be aware that there are others.
INTRODUCTION TO ESTABLISHING A COLLECTION POLICY

A formal collection policy is the foundation of a successful program for: I Maintaining necessary cash flows I Reducing financial loss from owner defaults on assessment payments It provides a systematic approach to delinquencies. It can be done without special owner approvalunless it requires amendments to the governing documents.
When a board formulates such a policy, it will become more familiar with collection tools it already has available. It may also find areas where its authority is lacking or where the governing documents could be amended to provide for additional collection remedies.
Consequences of Delinquent Payments

Because a community association relies on the timely collection of assessments in order to meet operating expense requirements, delinquent payments may result in: I Assessments having to be increased to cover the deficit I Essential maintenance becoming unaffordable I Property beginning to appear run-downwhich in turn reduces property values I Shortfalls added to the next years operating budget if any monies are outstanding at the end of the year I Borrowing from otherwise restricted community association funds I Borrowing from a lender I Disharmony between paying owners and delinquent ones If the ratio of delinquencies to paid-up assessments is out of proportion, mortgage lenders may begin to reject applications for the property.
Benefits of Having an Established Collection Policy

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

An effective collection policy should: 1. Be established by a proper formal resolution of the board that I Specifies the problem to be solved I Delineates the authority for taking the approved action I Designates the procedures to be followed I Designates the circumstances under which the procedures are required or permitted 2. Specify only actions that are within the power of the community association and its board. 3. Set a firm due date for assessments. All members of the community association must have proper advance notice of the due date for assessments. 4. Outline the steps to be taken by the person(s) responsible for collecting assessments when a payment is late. Be sure that whatever steps are taken to collect assessments are authorized by enabling statutes, governing documents, and fair debt collection requirements under the federal Fair Debt Collection Practices Act. Any steps taken should be automatic and systematically increase in severity. 5. Allow for discretion in special cases. The burden of requesting special consideration should be placed upon the owner. 6. Specify when a delinquent assessment should be referred to legal counsel. This step should be automatic once a delinquent assessment reaches a specified age or amount. Once an account is turned over to legal counsel, it is critical that all further communication be between the community associations attorney and the delinquent owner or the owners attorney. The manager and/or board should not be involved in discussions with anyone other than the associations legal counsel. 7. Provide for the collection of any costs associated with collecting delinquent assessments. The right to recover attorney fees and costs from a delinquent party should be guaranteed by state statute or the governing documents. On the next five pages you will find a sample formal resolution establishing a collection policy for delinquent owner accounts. It illustrates the characteristics of an effective policy.
SAMPLE RESOLUTION: A Collection Policy for Delinquent Accounts
WHEREAS the board of directors of the association is charged with the responsibility of collecting assessments for common expenses from homeowners pursuant to Article _______, Section _______ of the declaration; and WHEREAS from time to time homeowners become delinquent in their payments of these assessments and fail to respond to the demands from the board to bring their accounts current; and WHEREAS the board deems it to be in the best interests of the association to adopt a uniform and systematic procedure for dealing with delinquent accounts in a timely manner, and further believes it to be in the best interests of the association to refer these accounts promptly to an attorney for collection so as to minimize the associations loss of assessment revenue; and WHEREAS the board has retained the associations attorneys for their experience in representing condominium and homeowners associations in collections and other matters; and WHEREAS the board has directed the associations attorneys to represent the association on the terms outlined in the resolution; NOW, THEREFORE, BE IT RESOLVED that the associations attorneys shall pursue all collection and other matters which the board, acting through the manager, may from time to time refer to them and to provide any advice and counsel which the board may from time to time require; and BE IT FURTHER RESOLVED that the manager, acting on behalf of the association, shall pay the associations attorneys their usual and customary charges for time incurred in connection with their representation of the association, together with all costs incurred by the firm, including but not limited to fees and charges for filing, service of process, messenger service, photocopies, postage, long distance calls, investigators services, credit reports, and title reports, promptly upon receipt of the monthly invoice; and continued
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SAMPLE RESOLUTION: A Collection Policy for Delinquent Accounts, continued

BE IT FURTHER RESOLVED that pursuant to Article _______, Section ________ of the declaration and RCW 64.34.364(13) there is hereby levied against any assessment account which is not paid in full as of the fifteenth (15th) day of the month a late fee in the amount of ________ dollars ($) which the manager is authorized and directed to charge to and collect from any delinquent homeowner; and BE IT FURTHER RESOLVED that the manager is directed to send to any homeowner who is more than fifteen (15) days delinquent in the payment of regular or special assessments, or other charges authorized by the associations governing documents (hereinafter referred to as assessments), a written notice (hereinafter referred to as the First Notice) of the late fee and a request for immediate payment; and BE IT FURTHER RESOLVED that the First Notice sent by the manager to the delinquent owner shall also state that unless the owner disputes the validity of the debt, or any portion thereof, within thirty (30) days after receipt of the notice, the debt will be assumed to be valid; and if the owner notifies the manager in writing within the thirty-day period that the debt, or any portion thereof, is disputed, the manager will obtain verification of the debt and a copy of such verification will be mailed to the owner by the manager; and BE IT FURTHER RESOLVED that the First Notice and the Second Notice sent by the manager to the delinquent owner shall state that any request for special consideration of hardship circumstances, including all reasons why the board should consider the request, must be submitted in writing to the board before the assessment becomes sixty (60) days delinquent, together with a request for a hearing, or in the alternative, a request that the determination be made by the board based on the written request, and if not so submitted, then such request shall have been deemed waived; and BE IT FURTHER RESOLVED that the manager is directed to send to any homeowner who is more than one (1) month delinquent in
the payment of assessments written notice (hereinafter referred to as the Second Notice) that, if the account is not paid in full within fifteen (15) days, a Notice of Claim of Lien will be recorded and a copy thereof will be forwarded to any lender with a mortgage against the unit; and BE IT FURTHER RESOLVED that the manager is directed to file a Notice of Claim of Lien against the delinquent unit as described in the letter to the homeowner and is further directed to send a copy thereof to the homeowners lender if the homeowners assessments remain delinquent for fifteen (15) days after the date of the Second Notice; and BE IT FURTHER RESOLVED that the manager is directed to send to any homeowner who is more than sixty (60) days delinquent in the payment of assessments, a written notice (hereinafter referred to as the Third Notice), that if the account is not paid in full within ten (10) days it will be turned over to the associations attorneys for collection and the homeowner will be liable for payment of all charges imposed by the associations attorneys to cover fees and costs charged to the association; and BE IT FURTHER RESOLVED that the manager is directed to refer any account which remains delinquent for ten (10) days after the Third Notice to the associations attorneys for collection and to accelerate the total amount of assessment due by sending a notice of acceleration [see page 134] to the owner via certified mail, return receipt requested; and BE IT FURTHER RESOLVED that the manager is directed to consult with the associations attorneys and turn over for collection immediately any account where the owner files or is the subject of a petition for relief in bankruptcy or a lender has commenced any action for foreclosure of its lien against the unit; and BE IT FURTHER RESOLVED that the membership rights of any owner whose account is thirty (30) days past due may be suspended at any time at the discretion of the board during the period that any continued
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installment, charge or assessment remains unpaid, subject to the terms of the governing documents; and BE IT FURTHER RESOLVED that the following policies shall apply to all delinquent accounts turned over to the associations attorneys for collection: 1. All contacts with a delinquent homeowner shall be handled through the associations attorneys. Neither the manager nor any association officer or director shall discuss the collection of the account directly with a homeowner after it has been turned over to the associations attorneys unless one of the associations attorneys is present or has consented to the contact. All sums collected on a delinquent account shall be remitted to the association in care of the associations attorneys until the account has been brought current. A three month security deposit shall be assessed on the account as authorized by Article ____, Section _____, of the declaration; however, the associations attorneys are granted the discretion to waive this security deposit in whole or in part under circumstances which they deem to be appropriate. The associations attorneys minimum legal fee shall be assessed against each delinquent unit and its owner (including repeat offenders) when the account is turned over to the associations attorneys for collection. That amount shall be credited against the fees and costs actually incurred in the collection of the homeowners account. All legal fees and costs incurred in the collection of a delinquent account shall be assessed against the delinquent unit and owner and shall be collectable as an assessment as provided in Article ____, Section ____ of the declaration and RCW 64.34.364(14). In the event that a delinquent unit is rented by its owner, the associations attorneys are authorized, pursuant to Article ________, Section _______ of the declaration, to demand and collect the rent from the tenant in the unit.
2.
3.
4.
5.
6.
Where at the expiration of the period specified in the associations attorneys demand letter, an account remains delinquent and without a payment plan embodied in a signed Stipulation for Judgment, or in the event of a default under the terms of either agreement, the associations attorneys are authorized to take such further action as they, in consultation with the board president, believe to be in the best interest of the association, including but not limited to: a. Filing suit against the delinquent homeowner for money due pursuant to Article ______, Section ______ of the declaration, and RCW 64.34.364(12); Instituting a nonjudicial action for foreclosure of the associations lien, pursuant to Article _____, Section _____ of the declaration, and RCW 64.34.364(9); or Filing a proof of claim in bankruptcy; or Instituting a judicial action for foreclosure of the associations lien, pursuant to Article ______, Section _______ of the declaration, and RCW 64.34.364(9) and seeking the appointment of a receiver for the unit pursuant to Article ________, Section ________ of the declaration, and RCW 64.34.364(10) or RCW 64.32.200; and
b.
c. d.
BE IT FURTHER RESOLVED that a copy of this resolution shall be sent to all homeowners at their last known addresses. This resolution was adopted by the board of directors on _________, 20 __, and shall be effective on ___________, 20__. President __________________________ Secretary __________________________ ATTEST:
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INTRODUCTION TO COLLECTION PROCEDURES AND REMEDIES

Enforcement of collection procedures and remedies should be prompt, systematic, and aggressive. Do your best to be all three when collecting delinquent payments! When a payment is late, your community associations collection policy should tell you: I When late notices are to be sent and how frequently I What late notices should say I What late or collection fee to assess the delinquent owner I When collection should be turned over to legal counsel I When to accelerate assessment payment Acceleration is the collection of all assessments due through the end of the fiscal year. For exampleIf an owners payments on the annual assessment are due monthly and become delinquent at the end of March, all monthly payments through December of that year are due immediately. Various state statutes generally govern the legal remedies available to a community association for collecting delinquent payments from owners. Because statutes and case law vary from state to state, your board and attorney should determine what is allowed by law before implementing any policy or procedure. Furthermore, always assess the cost effectiveness of taking various actions to recover delinquent assessments.
Basic Legal Procedures and Remedies Available to Community Associations

In this section, we will discuss some of the procedures and remedies available to a community association for collecting delinquent payments from owners.
Extra-Judicial Remedies
As the sample collection policy indicates on pages 129-133, there are remedies outside the courts that a community association can use to encourage a delinquent owner to pay what is owed. If your board wants to use any of the following procedures, it must be provided for in a state statute, the governing documents, or a formal resolution of the board. Verify your community associations authority to use any of these extra-judicial procedures before implementing them. Extra-judicial procedures to get an owner to pay off a delinquent account include: I Imposing a late charge or interest penalty on delinquent accounts I Collecting the rent from a delinquent owners tenant I Requiring a security deposit of a certain number of months of estimated assessments from an owner with a history of delinquency
Suspending the owners user privileges, such as removing the owners assigned parking space Suspending the owners voting and other participation rights
Other more drastic legal measures an association may employ to collect delinquent payments from owners include the following:
Put a Lien on the Unit

A lien is a legal claim by one party (community association) on the property of another (delinquent owner) to obtain the payment of a debt or the satisfaction of an obligation. Placing a lien on an owners property protects the community associations interests. It encourages payment of the debt. Among other consequences of a lien, the owner cannot sell or transfer the unit without settling the debt. The recording of a lien against an owners unit must be authorized by your community associations applicable statutes or governing documents. Most statutes enabling the establishment of a community association or governing documents require that assessment liens be subordinate to any mortgages or government claimssuch as taxes or assessmentsagainst an owners property. Subordinate means that these other claims would be satisfied before that of the assessment lien. In certain states with some version of the Uniform Common Interest Ownership Act, the recording of the declaration constitutes a prior recorded assessment lien against the unit owners interests. Some state statutes have authorized a super lien or community asset protection lien. It provides a limited six-month priority for the community associations assessment lien over the lien of a first mortgage holder. Your attorney can handle the recording of any liens against the title to a unit in the land records. The form used varies by state. A sample appears on page 137.
Foreclose on the Unit

Foreclosure is a legal proceeding filed in court whereby a party with a claim against an owner can claim ownership of the unit involved in order to recover the money it is owed. The unit is usually auctioned by the court and sold to the highest bidder. If a community association purchases a unit that is foreclosed, it may rent it or use it to put an employee on-site. A community association may foreclose on an owner if it thinks it can recover what it is owed. Sometimes the act of foreclosing will prompt an owner to pay what is owed especially if the owners mortgage payments are current. If an owner has little equity in
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the unitthat is, still owes most of the mortgagethe community association stands little chance of getting the money it is owed. When a community association or another creditor foreclose on a unit and it is auctioned off, the association still may not get the money it is owed. The unit must sell for a price that is high enough to pay off the delinquent assessments as well as any other debts that take precedence over the associations claim. Precedence is determined by: 1. Statute: For example, the precedence of claims by the IRS and other taxing bodies over other creditors claims is established by law. 2. Governing documents: For example, many governing documents give the first mortgage holders claim precedence over other creditors claims. 3. The time of lien filing: It is important to file liens promptly in order to be as high on the list of creditors as possible.
Sue the Owner for a Personal Money Judgment

A personal money judgment or summary judgment is a decision by a judge to allow the community association to claim the owners personal property to settle a delinquent account. The association must file court papers, appear before a judge, and convince the judge that the owner owes the association money. If the judge recognizes the community associations claim, it may be able to attach the owners bank account, claim any rent being paid by a tenant in the unit, garnish the owners paycheck, or take possession of the owners car or other personal property. This is a good alternative to consider when the amount of money owed is small. However, it can be difficult to gain satisfaction of the debt from the delinquent owner.
Be Prepared for Bankruptcy Petitions by Owners

A community association should have procedures in place to protect its interests in case a delinquent owner declares bankruptcy. When an owner files a petition for relief from bankruptcy, this action affects:
I
The likelihood of the community association collecting any delinquent assessments it is owed The steps it can take to collect those monies
SAMPLE: Statement of Lien

This is to certify that the property described as _________________, (city), MD located in ______________ County, is subject to a lien under Title 14, Subtitle 2 of the Real Property Article, Maryland Annotated Code in the amount of_________ for the period from _____________ to ______________ plus late fees, interest, collection costs, and attorneys fees. The property is owned by: _____________. I hereby affirm under penalty of perjury that notice was given under Section 14-203(A) of the Real Property Article, and that the information contained in the foregoing Statement of Lien is true and correct to the best of my knowledge, information, and belief. President ____________________________________
A bankruptcy filing imposes an automatic stay against any debt collection efforts. It is illegal for a creditor to violate that stayeven if the creditor does not have notice of the bankruptcy. There are things a creditor can and cannot do under the law when a debtor declares bankruptcy. Immediately contact legal counsel when you become aware of a bankruptcy filing by an owner. Immediately forward any bankruptcy notices to your legal counsel. Immediately stop all collection efforts. There are ways for a community association to collect what it is owed, even though an owner declares bankruptcy. Dont give up. Consult with your attorney and be aggressive. One of the factors that influences the order of creditors is the date a lien was filed. Prompt filing can make a difference in getting money owed to the community association. There are three types of bankruptcy: 1. Chapter 7: Chapter 7 is called straight bankruptcy or liquidation. It involves the: I Prompt conversion of all the individuals or corporations non-exempt property to cash I Payment of creditors to the extent possible
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The law establishes the order in which creditors are paid. Where the community association is in the order of creditors will affect whether it is paid what is owed and, if so, how much. Typically, an association receives a small percentage of the amount it is owed when an owner files a Chapter 7. 2. Chapter 11: Chapter 11 is called a reorganization because it is designed to allow for an orderly payment to creditors that enables a corporation to continue. Chapter 11 involves the development of a plan to pay off debts in a timely manner. Once a judge approves a plan as fair and equitable, it is binding and discharges all debts not provided for under the plan. Creditors usually receive more of what they are owed under a Chapter 11 than a Chapter 7. However, they dont necessarily receive all they are owed. 3. Chapter 13: Chapter 13 is used to reorganize personal or noncorporate debt. A plan is submitted to a judge for paying off all or nearly all of the debt over a specified period of time. Chapter 13 sets limits to the amount of debt that can be involved and the time period for repaying it. Creditors do not have to agree to the plan. Again, a creditor has more of a chance of being repaid under Chapter 13 than Chapter 7.
Uncollectible Payments
A payment that cannot be collected from an owner is called a bad debt. When a community association determines that a debt cannot be collected from an owner after a reasonable effort has been made, it must take a bad debt write-off. A bad debt write-off consists of recording an uncollectible debt as an expense that the association must absorb. This usually requires a resolution of the board. (See the next page for a sample resolution.)
Solutions for Collection Shortfalls

How does a community association make up any collection shortfalls? The alternatives available to an association include: I Levy a special assessment I Raise the regular assessments for the coming year I Create a reserve fund for bad debts I Cut this years expenses I Borrow money If your community association finds itself with a collection shortfall, your board will expect a prompt, effective recommendation from you, as manager.
SAMPLE RESOLUTION: Bad Debt Write-Off

WHEREAS, Article IV, Part C, Section 14 of the bylaws gives authorization to the board of directors to have all the powers and duties necessary to manage the affairs of the association, and WHEREAS, Article VIII, Section 2, states that the unpaid share of common expenses assessed prior to the acquisition of title to a unit by mortgagee pursuant to the foreclosures sale shall be collectible from all owners in proportion to their units respective percentage interest, and WHEREAS, unit ______at that time owned by___________ was foreclosed on by the lender on __________________, ratified on _______________ and there were no excess proceeds; NOW, THEREFORE, BE IT RESOLVED, that the board of directors hereby resolves to write off the balance of $ _________ to bad debt expense. This resolution is adopted and made a part of the minutes of the meeting of_____________.
President, Association __________________________ Secretary, Association __________________________ Date: ________________________
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FOCUS QUESTIONS
Use the following questions to help you identify and review the core concepts in this chapter. (Hint: Once you look up the answer to a question, you may want to jot down the page number next to the question for future reference.) 1. Explain the difference between assessments and special assessments. 2. Name the three sources of a community associations authority to collect assessments. 3a. How is the amount of a community associations total annual assessment determined? b. Describe the most common methods for determining an owners share of the total annual assessment. 4. List some possible consequences for a community association when owners are delinquent in paying their assessments. 5. List some benefits a community association receives from an established policy for collecting assessments. 6. What are the seven characteristics of an effective collection policy? 7. What are the basic collection procedures to use when an owners assessment payment is late? 8a. What extra judicial remedies are available to a community association for collecting delinquent assessments? b. What legal remedies are available? 9. How does a foreclosure affect the collection process? 10. How does an owners bankruptcy affect the collection process? 11. What must a community association do when it cannot collect a bad debt from a delinquent owner? 12. What are some ways a community association can make up any shortfall in collecting assessments?
Use the following questions to help you apply the information in this chapter to your own situation. 1. What authority to collect assessments can you find in your community associations governing documents and the specific statute enabling its establishment, if any? 2. How does your community association assign each owner his or her share of the total annual assessment? 3. Does your community association have a formal collection policy for collecting delinquent assessments? If so, which of the seven characteristics of an effective policy discussed in this chapter does it have? If not, what reasons can you give your board for adopting one? 4. What are your community associations procedures for collecting late payments from owners? 5. What extra-judicial remedies for collecting delinquent payments has your community association used in the past? (Hint: Check any formal collection policy, ask people who have been involved with the association for awhile, or look in its files.) 6. What legal remedies for collecting delinquent payments has your community association usedor can it use? (Hint: Look at your associations governing documents, any state statute enabling its establishment, any formal collection policy, or the community associations legal files.) 7a. Does your community association have a standard statement of lien it uses? b. Does it have a standard bad debt write-off resolution it uses? 8. Has your community association ever had a collection shortfall? If so, how was it handled?
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RESOURCES
For further information on collecting assessments, we suggest the following: Assessment CollectionLegal Remedies (Guide for Association Practitioners Series, Report #5), Third
Edition, by Thomas J. Hindman, ESQ. and Loura Sanchez, ESQ. This report describes formalized collection procedures, including sample letters and legal remedies such as liens, small claims court, and notice to lenders. (Community Associations Press, 2000.)
Collecting AssessmentsAn Operational Guide (Guide for Association Practitioners Series, Report #10),
Fourth Edition. This report explains how to set up a collection system and make it work. It includes sample documents, forms, and other communications. (Community Associations Institute, 1996.)
Increase Income, Not Assessments: 35 Ways to Make Money for Your Community Association, by
Nancy K. Bianconi. Provides instruction for fundraising and conducting profitable events. Includes sample checklists and legal and insurance considerations. (Community Associations Institute, 1994.)
Tips for Protecting Your Association Finances. A handy brochure for board members and key
employees regarding finances. Offers tips on important aspects of association finances: audits, financial statements, signatory control, investment policies, and more. (Community Associations Press, 2002.)
CHAPTER 7
F INANC I AL STATE ME NTS, A U D I TS, I NC OME TAXES, & INVESTMENTS

KEY TERMS
Accrual basis of accounting, p. 145 Assets, p. 149 Audit, p. 159 Balance sheet, p. 149 Bond, p. 169 Cash basis of accounting, p. 145 Certificate of deposit, p. 169 Commercial reporting method, p. 147 Comparison to budget, p. 148 Compilation, p. 161 CPA, p. 151 Deficit in members equity, p. 149 Engagement letter, p. 152 Excess of revenues over expense, p. 147 Expense, p. 148 FDIC, p. 167 Fund balance, p. 149 Fund reporting method, p. 147 GAAP, p. 151 GAAS, p. 153 Income, p. 148 Investment liquidity, p. 168 Investments, p. 165 Investment safety, p. 167 Investment yield, p. 169 Liabilities, p. 149 Management letter, p. 160 Members equity, p. 149 Modified cash basis of accounting, p. 145 Net income, p. 148 Net loss, p. 148 Notes to financial statements, p. 159 Opinion letter, p. 153 Representation letter, p. 152 Revenue, p. 147 Review, p. 161 Statement of cash flows, p. 154 Statement of changes in members equity (or fund balances), p. 154 Statement of income and expense, p. 147 Statement of revenue and expense, p. 147 Treasury bills, p. 168 Treasury bonds, p. 168 Treasury notes, p. 168
This chapter provides an overview of additional financial operations for community associations. It explains: I Financial reports I Independent certified public accountant services I Federal income taxes I Investments
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What You Will Learn

After reading and reviewing this chapter, you should be able to explain and understand the: I Purpose of financial reports I Sources of variation in reports among community associations I Accounting methods used for reports I Warning signs to watch for when reviewing reports I Commercial and fund reporting methods I Statement of income and expense I Comparison to budget I Balance sheet I Role of a CPA I Engagement and representation letters I CPAs letter or opinion I Statement of revenue and expense I Statement of changes in members equity (or fund balances) I Statement of cash flows I Notes to financial statements I Audits, reviews, and compilations I Federal income tax filing responsibilities for community associations I Federal income tax filing options for community associations I Investments for community associations I Investment checks and balances I Managers typical investment duties I Investment policies and procedures for community associations I Essential investment objectives This section provides some background information on financial reports in general. Financial reports have two primary purposes: 1. To provide their internal and external users with the economic information needed to make appropriate decisions on behalf of the community association. 2. To enable the community association board and manager to control the communitys financial operations.
Sources of Variation in Reports Among Community Associations

Do not be surprised if the form and content of your community associations financial statements differ from those of other associations. Variation may be due to the: I Community associations unique informational needs I Software package used I Expertise and experience of the internal usersthe owners I Expertise and experience of the preparers I Reasons for preparing the report
Accounting Methods Used For Reports

A community associations financial reports will reflect one of three possible accounting methods: 1. Cash basis: This method records income when it is collected and expenses when they are paid. 2. Accrual basis: This method records income when it is earned (or assessed to owners) and expenses when they are incurred or acquired. 3. Modified cash basis: This method records income and expenses on a cash basis with selected items recorded on an accrual basis. Modified cash varies in format depending on the number of items accrued. The most common modified cash basis financial statements record income (assessments) on the accrual basis and expenses on the cash basis.
Warning Signs to Watch for When Reviewing Reports

Here are some warning signs about the financial health of a community association to watch for when you review its financial reports:
I
A steady decline in the amount of cash on hand The inability or failure to set aside planned additions to reserves (no formal reserve study) An increase in the amount of owners assessments owed to the community An increase in the amount the community association owes for bills The failure to resolve any differences between bank statements and the financial reports in a timely manner
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Significant and/or unexplained differences between actual and budgeted figures for items (See page 148 for an explanation of the difference between actual and budgeted figures.) Members equity (operating fund balance, retained earnings) balance is less than one to three months of operating expenses Unpaid amounts showing as due between funds (when fund presentation is used)
Statistical analysis is helpful in this area. A useful indicator is to evaluate assessment delinquencies as a percentage of annual assessments: Percent Delinquent 3% or less 4% to 5% 6% to 10% Greater than 10% Rating Excellent Good Poor to Average Deteriorating Financial Position
An associations operating fund should be at 10% to 20% of annual assessments.
INTRODUCTION TO INTERIM FINANCIAL REPORTS

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

Most community associations use the commercial reporting method for their interim financial reportsas do most of the samples in this chapter. However, there is a growing trend for community association financial reports to be prepared according to the fund reporting methodwhich is based on fund accounting. The fund reporting method consists of preparing separate columns for operating, reserve, and any special funds. This is different from the commercial method which combines operating and reserve activities in the same column. Where significant reserve expenditures are occurring or a special assessment is in progress, consider using the fund reporting method to issue separate reports on normal operations, reserve transactions, special assessments, and for the receipt and expense of any litigation/insurance proceeds. The American Institute of Certified Public Accountants recommends the use of fund reporting for community associationsespecially for year-end financial reports. The two reporting methods also use some different terms for key items: Commercial Members Equity Statement of Income and Expense Income Net Income (or Loss) Fund Fund Balances Statement of Revenue and Expense Revenue Excess (or Deficiency) of Revenue Over Expense
Statement of Income and Expense

The statement of income and expense records the community associations financial transactions during a given period of timegenerally for a given month plus the fiscal year to date. It is a way to keep track of the communitys financial activity. The sample statement of income and expense on page 150 reports on a community associations financial activity for the month of April in the first column and the year to date in the second.
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There are three major components of a statement of income and expense: 1. Income: Income represents the earnings of the community association. I Income on a cash basis statement consists of money received and deposited. I Income on an accrual basis statement consists of money earned, including amounts assessed to owners in accordance with the budget. I Income can either be received or earned on a modified cash basis statement. Generally, however, income is on the accrual basis for a modified cash statement. What three types of income are recorded on the sample statement on page 150? 2. Expense: Expenses are the cost of goods and services used to operate and maintain the communitys property. I Expense on a cash basis statement consists of any amounts paid. I Expense on an accrual basis statement consists of any amounts owed, whether or not paid. I Expense on a modified cash basis statement is generally calculated on a cash basis. What two broad categories of expenses appear on the sample statement on page 150? 3. Net income (or loss): Net income is the amount left after deducting expenses from income. A net loss occurs when expenses are greater than income. A loss is indicated on a statement of income and expense by putting the figure in parentheses. The net income or loss can be significantly different depending on whether a cash, accrual, or modified cash basis is used. What is the net income for the actual year to date on the sample statement on page 150?
Comparison to Budget
Comparison to budget involves comparing the communitys actual income and expenses with its planned or budgeted income and expenses. This is more meaningful when the budgeted amounts are shown in the months the income or expense occur, rather than simply dividing the total expense by 12 and showing 1/12 each month. For example, snow removal would show in winter months, pool lifeguard in summer months, etc. When you compare actual figures with budgeted figures: I Identify all significant differences or variances between actual and planned figures I Determine the reasons for the differences and notify the board I Advise the board of any necessary corrective action it needs to take as soon as possible I On accrual basis reports, the budgeted assessment income should equal the actual assessment income
On the sample statement of income and expense on the next page, the second column consists of the actual income and expenses for the year to date. The third column consists of the budgeted figures for the year to date. Often financial reports will have an additional column showing the variance/difference between actual and budget. Do you see any significant differences between the two sets of figures that the community association should monitor?
Balance Sheet
A balance sheet is a summary of a communitys financial position at a specific point in time. It tells you how things stand on a certain date. A balance sheet summarizes: I What your community association owns I What your community association owes I The net worth of the association It is called a balance sheet because what the community association owns and what it owes to others (including the owners) must balance out. A balance sheet typically is prepared on a monthly basis to allow the community association to track its funding for reserves and accounts receivable. (The sample balance sheets on pages 155 and 156 were prepared for the entire fiscal year.) There are three major components of a balance sheet: 1. Assets: Assets include anything owned that has value. Unlike commercial businesses, however, the actual land and buildings of the community association are not generally shown as an asset. For cash basis reports, cash is the only asset. 2. Liabilities: Liabilities consist of what is owed to others or collected in advance (e.g. owner assessments received prior to the billed month). 3. Members equity: Members equity is called the fund balance under the fund method of reporting. It equals the difference between the community associations assets and liabilities. Industry standards suggest a minimum balance of 2-5% of gross assessments with 10-15% being very good. When a community associations liabilities exceed its assets, this condition is known as a deficit in members equity. It occurs when a community association has incurred expenses that it cannot pay until it collects future assessments from owners.
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SAMPLE: Commercial Reporting
ABC Condominium Association, Inc. Statement of Income and Expense for the Month Ending April 30th and 20XX to Date (Four Months Ended) With a Comparison to Budget
April 20XX INCOME Assessments Interest Other Total Income EXPENSES Administrative: Management Fee Legal & Audit Insurance Telephone Other Total Administrative $ 62,623 3,894 2,050 $ 68,567 Actual Year to Date $ 250,492 15,577 8,198 $ 274,267 Budget Year to Date $ 250,490 15,248 5,667 $ 271,405
$ 3,316 528 2,182 416 1,553 $ 7,995
$ 13,265 2,111 8,727 1,664 6,212 $ 31,979 $ 49,052 1,149 95,857 4,116 1,313 2,127 6,438 5,328 24,879 1,000 3,677 $ 194,936 $ 226,915 $ 47,352 (42,056) $ 5,296
$ 14,465 2,363 8,653 2,364 6,322 $ 34,167 $ 46,726 2,000 103,979 4,637 570 3,406 7,003 6,229 17,811 2,821 $ 195,182 $ 229,349 $ 42,056 (42,056) $
Operating: Payroll & Related Taxes $ 12,263 Professional Fees and Training 287 Utilities 23,964 Elevator 1,029 Security 328 Lawn Maintenance 531 Trash Removal 1,610 Pool 1,332 General Repairs & Maintenance 6,220 Depreciation 250 Income Taxes 1,838 Total Operating $ 49,652 Total Expenses $ 57,647 Net Income Before Contribution to Reserves $ 10,920 Contribution to Reserves (10,514) Net Income $ 406
A community association may have an operating deficit but will reflect replacement reserves. When this occurs the association is in effect borrowing from reserves to fund operations. Occasional small deficits are common during a normal fiscal year due to such things as seasonal fluctuations in expenses. A continued or increasing deficit, however, is an indication of an inadequate level of assessments or overspending, and a signal for board action. Can you locate all three components of a balance sheet on the samples on pages 155 and 156? Notice how the three components balance out: ASSETS = LIABILITIES + MEMBERS EQUITY and ASSETS LIABILITIES = MEMBERS EQUITY
INTRODUCTION TO YEAR-END FINANCIAL REPORTS

Accounting standards are called GAAP, Generally Accepted Accounting Principles. Their purpose is to provide uniformity among reports from different organizations. GAAP requires the following set of year-end financial reports for a community association: I Balance sheet I Statement of Income and Expense (or Revenue and Expense) I Statement of Changes in Members Equity (or Fund Balances) I Statement of Cash Flows I Notes to Financial Statements I Unaudited supplementary information on future major repairs and replacements GAAP also requires the use of accrual accounting (see page 145) for certified annual reports. Because many state statutes and community association governing documents specify the role of a CPA in preparing annual reports for associations, we will begin this section with a discussion of that role. Then we will move on to discuss the various types of reports prepared.
Role of a Certified Public Accountant (CPA)

Community association governing documents and state statutes may require that an independent certified public accountant be involved in preparing a communitys annual reports (audit, review, or compilation). An independent certified public accountant (CPA) is one who is not a community association employee or owner. There are certain circumstances, however, such as in very large community associations, where an owner is considered to be independent.
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A CPA is certified by a state examining board as having fulfilled the requirements of state law to be a public accountant. These requirements usually include a certain amount of experience, passing the CPA exam, and quality or peer review. Reports prepared by CPAs must meet standards for both the community association profession and the accounting profession. CPAs must meet standards as set forth by the Financial Accounting Standards Board (FASB) and by the American Institute of CPAs. There is no requirement that they meet any other standards. For this reason, it is important to select CPAs that are familiar with community associations. When your community hires a CPA, he or she will send an engagement letter. An engagement letter describes the: I Nature of the work to be done I Type of report to be prepared I Fee for services I Time frame for the assignment I Accountants disclaimersstatements about what the accountants services do not include A CPA will also give the community association a representation letter to review and sign. A representation letter:
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States that the information the community association provides is true to the best of its knowledge Describes the steps the community association has taken to provide for the preparation of accurate and complete financial statements
The community association will be required to sign the representation letter and return it to the accountant. The accounting profession continues to debate how to present certain types of financial information for community associations. When your community selects a CPA, be sure he or she has experience with community associations and is familiar with the accounting issues they face.
Opinion Letter
Whenever a CPA prepares year-end financial reports for a community association, the reports will come with a letter (review) or opinion (audit). This is a report on the CPAs stationery describing:
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The financial statements and time period covered by the report The degree of responsibility the accountant takes for the accuracy of the information presented in the statements The CPAs conclusions or opinion
The format and wording of these letters are established by GAAS, Generally Accepted Auditing Standards. (See page 162 for a sample letter.)
Year-End Balance Sheet

One of the year-end reports for a community association is an expanded version of the balance sheet. Its purpose is to give a more complete picture of the community associations financial condition. Additional elements that may appear on a year-end balance sheet include:
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An allowance for uncollectible fees from owners Depreciation of equipment owned by the community association Prepaid insurance premiums for the coming year Expenses the community association has incurred, but not been billed for yet, e.g. income taxes payable Income received, but not yet earned, e.g. prepaid assessments Income earned, but not yet received, e.g. interest earned on a certificate of deposit, but not yet received
A sample year-end balance sheet using the commercial reporting method appears on page 155. Can you find any of the additional items we just described?
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After you review the balance sheet, compare it to the fund reporting sample on page 156. Notice how the fund reporting method provides a clearer picture of replacement fund activity and the relationship between normal operating activities and the replacement fund.
Statement of Income and Expense

Again, a year-end statement of income and expense reflects the financial transactions that took place during the year (see page 147). Notice that the commercial reporting sample on page 157 has a column for actual figures and another column for budgeted figures. After you review the statement of income and expense on page 157, compare it to the sample statement of revenue and expense prepared according to fund reporting on page 158. Note where key terms differ. Also notice how you can distinguish replacement fund activity from normal operating activities.
Statement of Changes in Members Equity

A statement of changes in members equity (or fund balances) is a year-end financial statement that reconciles the beginning and ending members equity with results of operations for the period. Although this is a required statement by GAAP, the new manager will not spend much time reviewing this particular report.
Statement of Cash Flows

A statement of cash flows is another year-end financial report. It is a summary of the flow of funds into and out of the community association. Summaries are prepared for normal operations, investment activities, and any borrowing activities. Although this is a required statement by GAAP, as is the statement of changes in members equity, the new manager will not spend much time reviewing this particular report.
ABC Condominium Association, Inc. Balance Sheet December 31, 20XX

ASSETS Cash Operating Cash Savings (NOTE 5) Assessments Receivable Prepaid Income Taxes Accrued Interest Prepaid Insurance Total Assets LIABILITIES AND MEMBERS EQUITY Accounts Payable Prepaid Assessments Total Liabilities Replacement Fund (NOTE 3) Unappropriated Members Equity Total Members Equity Total Liabilities and Members Equity See accompanying Notes to Financial Statements. NOTE 5As of December 31, 20XX, the association had invested its cash-savings as follows: $319,671 Money Market, $424,985 Treasury Bills. $63,688 2,778 $66,466 $610,454 104,635 $715,089 $781,555 $15,388 744,656 15,069 4,647 182 1,613 $781,555
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SAMPLE: Fund Reporting
ABC Condominium Association, Inc. Balance Sheet December 31, 20XX

Operating Fund ASSETS Cash Operating Cash Savings Assessments Receivable Prepaid Income Taxes Accrued Interest Prepaid Insurance Interfund Receivable (Payable) Total Assets LIABILITIES Accounts Payable Prepaid Assessments Total Liabilities FUND BALANCES Total Liabilities and Fund Balances $ 15,388 125,640 12,509 4,647 1,613 (11,596) $148,201 Replacement Fund $ 619,016 2,560 182 11,596 $633,354 Total $ 15,388 744,656 15,069 4,647 182 1,613 $781,555
41,258 2,308 43,566 104,635 $148,201
22,430 470 22,900 610,454 $633,354
63,688 2,778 66,466 715,089 $781,555
See accompanying Notes to Financial Statements
ABC Condominium Association, Inc. Statement of Unappropriated (operating) Income and Expense For the Year Ended December 31, 20XX
Actual INCOME Assessments Interest Other Total Income EXPENSE Administrative: Management Fee Legal and Audit Insurance Telephone Other Total Administrative Operating: Payroll and Related Taxes Professional Fees and Training Utilities Elevator Security Lawn Maintenance Trash Removal Pool General Repairs and Maintenance Depreciation Income Taxes Total Operating Total Expenses Net Income Before Contribution to Reserves Contribution to Reserves Allocation of Reserve Interest NET INCOME See accompanying Notes to Financial Statements $751,470 46,732 24,595 $822,797 Operating Budget (Unaudited) $751,470 45,744 17,000 $814,214
$39,794 6,332 26,180 4,991 18,637 $95,934 $147,156 3,446 287,571 12,348 3,940 6,381 19,315 15,983 28,622 3,001 2,426 $581,130 $626,123 $196,674 (126,164) (36,520) $ 33,990
$43,394 7,090 25,960 7,092 18,967 $102,503 $140,178 6,000 311,938 13,912 1,709 10,217 21,010 18,686 53,434 8,463 $585,547 $688,050 $126,164 (126,164)
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SAMPLE: Fund Reporting
ABC Condominium Association, Inc. Statement of Revenue and Expense For the Year Ended December 31, 20XX
Operating Fund REVENUE Assessments Interest Other Total Revenue EXPENSE Administrative: Management Fee Legal and Audit Insurance Telephone Other Total Administrative Operating and Repairs: Payroll and Related Taxes Professional Fees and Training Utilities Elevator Security Lawn Maintenance Trash Removal Pool General Repairs and Maintenance Depreciation Income Taxes Total Operating and Repairs Total Expense EXCESS OF REVENUE OVER EXPENSE $625,306 10,212 24,595 $660,113 Replacement Fund $126,164 36,520 $162,684 Total $751,470 46,732 24,595 $822,797
$ 39,794 6,332 26,180 4,991 18,637 $95,934 $147,156 3,446 287,571 12,348 3,940 6,381 19,315 15,983 28,622 3,001 2,426 $530,189 $626,123 $ 33,990
$ $ $ $ $ $ $ $ $ $ $ $ $ 46,014 $ 4,927 $50,941 $ 50,941 $111,743
$39,794 6,332 26,180 4,991 18,637 $95,934 $147,156 3,446 287,571 12,348 3,940 6,381 19,315 15,983 74,636 3,001 7,353 $581,130 $677,064 $145,733
See accompanying Notes to Financial Statements (Ed. Note: Budget comparison would normally be presented on a separate schedule due to space limitations.)
Notes to Financial Statements

Notes to the financial statements accompany the CPA-prepared financial statements. These footnotes provide additional information to help the reader understand the community associations financial situation. They:
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Describe the type of community association and its characteristics Examine significant allocating policies Provide information about the community associations reserve and investment policies, tax filing status, and debts Explain the purpose and time period of special assessments Describe significant commitments and possible events that could have a financial impact on the community association, e.g. pending lawsuits that could affect its financial health Explain related party transactions Detail the information related to loans
These notes explain the amount of work done by a party related to management or to the board and the nature of the relationship.
AUDITS, REVIEWS, AND COMPILATIONS

AUDIT
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Definition: An examination of the accounting records and procedures of an organization by a CPA for the purpose of verifying the accuracy and completeness of financial records. Purpose: An annual audit may be required by your community associations governing documents and/or your states statutes. (Hint: Check yours.) External verification of the accuracy and completeness of your communitys financial records is a sound business practice. Scope: May include I Confirmation of selected transactions and balances with outside parties (such as banks and contractors)
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Physical inspection of records Tracing of transactions to supporting documentation and authorization by someone within the community association (such as treasurer, manager) Review of community associations legal documents and minutes Any other procedures the auditor considers appropriate, given the community associations situation
Outcome: An opinion letter is issued. There are five possible outcomes: 1. The auditor issues an unqualified or clean opinion that says the auditor finds everything in order. This is the desired outcome. (See sample clean opinion on page 162.) 2. The auditor issues a qualified opinion that says the statements taken as a whole are fairly presented with certain exceptions. 3. The auditor simply provides explanatory paragraphs that impart important information for the reader about the community association. 4. The auditor disclaims or refuses to issue an opinion. Usually this occurs when the client organization or the circumstances surrounding the audit restrict the accountants ability to collect sufficient evidence to form an opinion. 5. The auditor issues an adverse or negative opinion. In this case, evidence indicates that the financial statements do not fairly reflect the community associations financial position or operating results. (This can occur if your community associations financial statements differ materially [significantly] from GAAP for community associations.)
A management letter is a separate report that often accompanies the audit or review. This is a separate narrative (descriptive) report discussing the community associations accounting system and controls and any weaknesses found in them during the audit. Follow up on any issues raised in a management letter as soon as possible.
REVIEW
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Definition: A less thorough, and therefore less costly, review of a community associations financial activities. Purpose: Provides some assurance to the board and other interested parties that the financial statements make sensewithout going into the detailed examination of an audit. Scope: I Interviews of management personnel I Analytic review of financial procedures: Make comparisons between budget and prior year Look for unusual items or changes Outcome: Provides a significantly lower level of assurance than does an audit. Report states that the CPA is not aware of any material or significant changes that should be made to the financial statements in order for them to be in conformity with GAAP for community associations. As is also the case with audits, it is important to use a CPA who is familiar with community associations. (See the last two sentences in the sample opinion letter on the next page for an example of the level of assurance in a review.)
COMPILATION
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Definition: A presentation of financial statements by a CPA without the assurance that the information conforms to GAAP. Purpose: The community association asks a CPA to prepare its year-end reports. Scope: The CPA prepares the community associations financial statements based on information the association provides. Outcome: The CPA cannot make any claims about the accuracy and completeness of the financial statements.
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SAMPLE: Independent Auditors Opinion Letter

Board of Directors: We have audited the accompanying Balance Sheets of_____________ as of December 31, 20XX and December 31, 20XY, and the related Statements of Income, Members Equity, and Cash Flows for the years then ended. These financial statements are the responsibility of the associations management (and board of directors). Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the association, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of _______________as of December 31, 20XX and December 31, 20XY, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. The supplementary information on future major repairs and replacements on page ___ is not a required part of the basic financial statements of _____________, but is supplementary information required by the American Institute of Certified Public Accountants. We have applied certain limited procedures, which consist principally of inquiries of management regarding the methods of measurement and presentation of the supplementary information. However, we did not audit the information and express no opinion on it. February 21, 20XX
INTRODUCTION TO FEDERAL INCOME TAXES

The purpose of this section is to provide basic information on federal income taxes and community associationsnot to advise you on how your community association should handle its tax matters. Furthermore, the tax code and IRS rulings continually change. Consult your tax professional for the most up-to-date information on federal income taxes and advice on how to fulfill your community associations income tax responsibilities. Community associations typically are organized as nonprofit corporations under state statutes. Nonprofit status: I Must be applied for I Is not the same as being exempt from taxes on income Any community association interested in tax exempt status must apply for that status and qualify under Section 501(c)(4) of the Internal Revenue Code. Very few community associations qualify. Community association managers must be familiar with federal income tax requirements and options for two reasons: 1. Under the federal tax code, all organizations are taxed on their income unless specifically exempted. 2. If your community association has significant non-owner income, it is to the associations advantage for you to explore ways to reduce its potential income tax with a tax professional familiar with community associations. Note also that most tax-saving opportunities must be acted on during the tax year in question.
Federal Income Tax Filing Responsibilities

Here are some general federal income tax filing responsibilities for community associations:
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All community associations must file a federal income tax return every year. The filing of a tax return does not necessarily mean that your community association owes any tax. Further, the lack of taxable income does not eliminate the need to file.
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A community associations federal tax return is due 75 days after the end of its tax year (the fifteenth day of the third month). It is possible to obtain up to a six-month extension of time in which to file a return. If a community association needs an extension, it must file an extension request form and pay any expected tax due by the original filing deadline. If previous boards failed to submit tax returns for previous years, the current board is not absolved from filing a return for the current year and for any previous year one was omitted. If you discover that your community association has not filed returns for previous years, immediately contact your associations CPA. A community association may be required to make quarterly payments of its estimated annual tax, depending on the tax filing method it uses. When a tax professional prepares your community associations tax return, he or she will notify the association if it needs to make estimated tax payments for the coming year.
Note: State income tax filing requirements vary from state to state. They are not necessarily the same as federal requirements.
Federal Income Tax Filing Options

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

Unless associations have tax exempt status Section 501(c)(4) of the Internal Revenue Code, they are taxable entities. As taxable entities, they have the option to file under Section 277 or Section 528 of the corporate code. There are a variety of elements and variations related to income that is or is not taxable under each method and what expenses are appropriate for deduction under each method. The bottom line is that if there is a net taxable income under either method, there will be a tax obligation.
INTRODUCTION TO INVESTMENTS
The purpose of this section is to provide basic information on community associations and investmentsnot to advise you on how your community association should handle its investments. Investments involve the purchase of anything with money value for the purpose of generating additional money over time, e.g. savings accounts, certificates of deposit, U.S. Treasury securities, stocks, etc. This last section of the chapter presents the basic information you will need as a manager to oversee your community associations investments.
Investment Checks and Balances

Every community association needs a system of internal checks and balances to protect its investments:
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A community association board should vote to invest funds based on an investment policy it has approved Two signatures should be required to withdraw funds from investment accounts Community association managers, employees, and volunteers should be covered by fidelity insurance to protect the association from losses due to employee theft (See page 193 in Chapter 8 on Risk Management and Insurance for an explanation of fidelity insurance coverage.)
If your community association is approved by FNMA (Fannie Mae) or FHLMC (Freddie Mac), it may have to conform to the investment checks and balances established by either of these agencies.
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A Managers Typical Investment Duties

Typically, a community association manager is expected to:
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Maintain an accurate accounting system for the community associations investments and generate timely reports. Document all transfers of funds. Develop methods for tracking investments so opportunities to earn money are not missed. For exampleFailure to track the date a certificate of deposit matures and funds can be transferred or reinvested may result in obtaining a lower rate of interest than is available. Provide prudent advice and referrals to the board and officers regarding financial institutions and investment advisors. A managers role is to encourage and enable the board to set investment policies and take actionnot to be its investment counselor. A board should obtain investment advice from sources other than its management.
Investment Policies and Procedures

A well-run community association should have a written investment policy and a set of procedures for insuring that the policy is implemented. Some governing documents and some state statutes establish investment policies for community associations. For example, certain states require that community association funds can only be invested in federally insured lending institutions and government securities. Check your community associations governing documents and state statutes for any investment policies that your association must follow. Here are some examples of common investment policies to give you an idea of what to look for:
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Not more than $100,000 will be invested in any one financial institution Investment income must be optimized to get the best results under the given conditions without any risk of loss to the principal (amount of the original investment)
Your community associations CPA can recommend investment procedures to fit your communitys particular circumstances.
Here are some examples of common investment procedures:

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Management is to deposit all collected monies on a daily basis Transfers of budgeted additions to reserves are to be made on a monthly basis Certificates of deposit, passbooks, bonds, etc., are to be under direct board controlnot management control A quarterly special report of earnings on investments is to be prepared by management or the treasurer and approved at a board meeting Reserve funds may be loaned to the operating fundprovided a repayment schedule with appropriate interest is maintained
Essential Investment Objectives

The three essential investment objectives for community associations in the order of their importance to a community association are: I Safety I Liquidity I Yield
Safety
Safety for community association investments consists of protecting the principal (amount of original investment) from loss as much as possible. Here are some key questions to ask to determine the safety of an investment: 1. Is the principal insured? By whom? For how much? For exampleBank deposits of up to $100,000 per investor (not account) in a single FDIC institution are insured (FDIC stands for Federal Deposit Insurance Corporation, a government agency that guarantees investors deposits in member institutions). 2. How stable is the institution? The institution offering the highest rate of return may be taking risks which will influence its overall stability. 3. Is the investment speculativethat is, is there a chance of a financial loss, as well as a chance for a financial gain? Normally, anyone acting on behalf of a community association would not take this kind of risk in order to gain a higher return than usual.
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4. Would a prudent investor choose this investment? Among the safest investments available to all community associations are certificates of deposit under $100,000, which are FDIC insured, and certain obligations of the U.S. government such as: I Treasury or T bills I Treasury notes and bonds These are the safest investments because payment is guaranteed by the government. Treasury bills are short-term instruments that mature in 13, 26, or 52 week periods. They are issued in minimum denominations of $10,000. Anything larger must be in $5,000 increments. As soon as one is purchased, the buyer receives the promised earnings. Then, when the bill matures, the buyer receives the face value (value indicated in the wording of the T bill). Treasury notes mature in one to 10 years. Treasury bonds mature in more than 10 years. Both notes and bonds are issued in denominations from $1,000 to $100,000. They are also interest-bearing with interest paid every six months. When the note or bond matures, the buyer receives the full face value. Your community association may pay more or less than the face value to purchase a Treasury bill, note, or bonddepending on the market demand for them.
Liquidity
Liquidity refers to the ease with which an investment can be converted into cash or a cash equivalent. Due to unexpected events, a community association may need access to its invested funds at times other than planned. Here are some common ways to provide for that access:
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A community association should avoid tying up all its invested funds for extended periods of time. On the other hand, a community association usually does not invest only in short-term options. This would limit the yield of its investments. (See next page.) A community association can match investment maturity dates to the time the association expects to use the money.
A community association can always leave a portion of investments available on relatively short noticesuch as 30 to 60 days. There is little reason to keep investments in non-interest-bearing accounts with immediate access. In an emergency, certificates of deposit could be used as collateral for a short-term loan.
Yield
Yield is the amount of return on an investment. The ultimate earnings from an investment are not necessarily the stated rate of interest. For example
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Certificate of deposit (CD)When a CD is reinvested together with its accumulated interest, the ultimate yield will be higher than the stated rate of interest. BondsBonds can also yield more or less than their stated rate of interest. Because the prices at which bonds are bought and sold fluctuate in response to current interest rates: I The community association may pay more than the face value of a bond if its stated rate of interest is attractive to buyers I The community association may buy at a price lower than the face value if the stated rate of interest is not attractive
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FOCUS QUESTIONS
Use the following questions to help you identify and review the core concepts in this chapter. (Hint: Once you look up the answer to a question, you may want to jot down the page number next to the question for future reference.) 1. Explain two reasons for preparing financial reports. 2. What are some reasons why the form and content of one community associations financial reports may be different from the form and content of anothers? 3. Explain the difference between the cash basis, accrual basis, and modified cash basis accounting methods used for reports. 4. List some warning signs about the financial health of a community association to watch for when you review its financial reports. 5a. Explain the differences between the fund and commercial reporting methods for financial statements. b. Which one is recommended by the American Institute for Certified Public Accountants? 6. Name and define the two financial statements that are the minimum required for interim reporting purposes? 7a. Define income and expenses. b. Give an example of each for your community association. 8a. Explain what comparison to budget in a financial report involves. b. Why should a comparison to budget be prepared? 9a. List and define the three major components of a balance sheet. b. Why is it called a balance sheet? 10. What is the role and purpose of a certified public accountant? 11a. What is GAAP? b. What is it used for? 12. List and explain the various typical year-end reports for a community association.
13a. Explain the difference between an audit, a review, and a compilation. b. Give at least one reason for using each. 14. Explain the five types of opinion letters that an auditor might prepare. 15. What is the purpose of the management letter that accompanies an audit? 16a. Give some reasons why it is important for you to be familiar with federal income tax requirements and options for a community association. b. List some federal income tax filing responsibilities for a community association. c. Will state income tax filing requirements be the same as federal requirements? d. Does a community association have a choice of forms for filing its federal income tax return? 17a. Define investments. b. Give some examples. 18a. List some checks and balances a community association should have to protect its investments. b. List some of a community association managers typical investment duties. 19a. List at least two possible sources of investment policies for a community association. b. Give an example of a possible investment policy for a community association. c. Give at least two examples of investment procedures for a community association. 20. List and define the three essential investment objectives for a community association in their order of importance. 21a. What are some questions to ask in order to determine the safety of an investment? b. Whats the difference between U.S. Treasury bills and U.S. Treasury bonds and notes? c. Why are they considered among the safest investments available to community associations? 22. What are some common investment strategies with regard to liquidity? 23. Why is the stated rate of interest not necessarily the yield a buyer will receive from certain investments?
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Use the following questions to help you apply the information in this chapter to your own situation. 1a. What accounting method does your community association usecash or accrual? b. Do you use an independent CPA? 2. Locate copies of interim and year-end financial reports prepared for your community association, either by employees or an independent accountant. a. Identify each report. b. Identify the major elements in each report. c. Can you tell which accounting method was used for the reportscash or accrual? d. Which reporting method was used for each reportfund or commercial? How can you tell? e. When you review the reports, can you find any of the warning signs this chapter mentions? 3. Did your community association have any audit, review, or compilation prepared during the past year? If so, what general conclusions can you draw from the CPAs letter or opinion and any management letter he or she prepared? 4. a. b. c. d. e. Find out the following information about your communitys tax status: Is your community a nonprofit organization? Is your community tax-exempt under the Internal Revenue Code? What is the tax filing year for your community? Was your communitys last federal tax return filed by its due date? Does your community file as a regular corporation (IRS form 1120) or as a homeowners association (IRS form 1120 H)? f. Is your community required to make quarterly payments of its estimated annual tax? Find out the following information about your communitys investments: Who makes the investments for your community association? Does your community association have an investment advisor? What types of investments does your community make? What investment policies is your community association required to have? What other investment policies does your community association havewritten or informal? What investment procedures does your community association havewritten or informal? Describe the safety of each of your community associations investments. Describe the liquidity of each of your community associations investments. Describe the yield for each of your community associations investments.
5. a. b. c. d. e. f. g. h. i.
RESOURCES
For further information on financial statements, audits, income taxes, and investments, we suggest the following: Common Interest Realty Associations: AICPA Audit and Accounting Guide. A guide prepared to help
independent public accountants conduct compilations, reviews, and audits of financial statements for community associations. It describes conditions and procedures unique to the industry and illustrates the form and content of financial statements. (American Institute of Certified Public Accountants, 2003.)
The Ledger Quarterly. A quarterly online newsletter that reports on audit and accounting guidelines and practices, association taxes, and recent court cases and IRS rulings. (Community Association Institute.)
Property Taxes and Homeowner Associations, (Guide for Association Practitioners Series, Report #6),
Fourth Edition, by George R. Grasser. If your association holds title to common areas and facilities, theres a possibility they may be taxed twice. You may be surprised to learn that small mistakes in the original subdivision process can go unnoticed for years! Learn what you and your tax accountant can do about it. (Community Associations Press, 2002.)
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Note taking
CHAPTER 8
RISK MANAGEMENT AND INSURANCE

KEY TERMS
Actual cash value (ACV), p. 185 Admitted insurer, p. 180 Advertising injury, p. 189 Aggregate amount, p. 190 Agreed amount endorsement, p. 185 American agency system of insurance, p. 180 Assessment fees receivable insurance, p. 194 Bind the insurer, p. 180 Bodily injury (BI), p. 189 Boiler & machinery insurance, p. 187 Building ordinance insurance, p. 187 Business income insurance, p. 194 Casualty insurance, p. 191 Claims made coverage, p. 190 Coinsurance, p. 186 Commercial general liability insurance (CGL), p. 190 Commercial package policy insurance (CPP), p. 181 Commercial umbrella insurance, p. 191 Common declarations, p. 181 Common policy conditions, p. 182 Contingent liability, p. 188 Contractual transfers, p. 178 Covered cause of loss, p. 182 Cross liability, p. 190 Deductible, p. 186 Directors & officers liability insurance, p. 192 Direct writer system of insurance, p. 180 Electronic data processing (EDP), p. 188 Employers liability insurance, p. 195 Endorsements, p. 182 Excess & Surplus Lines, p. 180 Exposure avoidance, p. 178 Extra demolition, p. 188 Extra expense insurance, p. 194 Fidelity insurance, p. 193 Flood insurance, p. 188 Glossaries of terms, p. 182 Hired & non-owned automobile liability insurance, p. 191 HO-1,-2,-3,-4,-5,-6 policies, p. 201 Income exposure to loss, p. 192 Increased cost of construction, p. 188 Inflation guard endorsement, p. 186 Insurable replacement cost, p. 185 Insurance, p. 179 Liability exposure to loss, p. 188 Loss prevention, p. 178 Loss reduction, p. 178 Non-admitted insurer, p. 180 Occurrence, p. 190 Personal injury (PI), p. 189 Personal property, p. 184 Personnel exposure to loss, p. 194 Policy forms, p. 182 Property damage (PD), p. 189 Property exposure to loss, p. 184 Real property, p. 184 Risk control, p. 178 Risk financing, p. 179 Risk management, p. 176 Segregation of exposures, p. 178 Third-party insurance, p. 191 Waiver of subrogation, p. 186 Waiver of the transfer of recovery rights, p. 186 Workers compensation insurance, p. 195 Wrongful acts, p. 192
This chapter provides an introduction to risk management and insurance for community associations.
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The chapter explains the: I Risk management process I Insurance coverages and related insurance issues for community associations Risk management is the process of making and carrying out decisions that will minimize the adverse effects of accidental losses upon the community association. Making these decisions requires the five steps in the risk management decision process (see the next page). Implementing these decisions requires the performance of four activities to all types of management: planning, organizing, leading, and controlling. The creation of a comprehensive community association insurance program lies at the heart of an effective risk management program. Although the duty to purchase insurance for a community association lies with its board of directors, a manager is expected to advise and assist the board in implementing this financial responsibility. The community associations risk management and insurance program seeks to minimize harm that might result and pay for that harm if it does occur. The aggregate resale value of all homes in community associations is over $2 trillionthe insurable replacement value is less, but it is still significant!
What You Will Learn

After reading and reviewing this chapter, you should be able to explain and understand: I Risk management I Five-step risk management process I Four types of exposure to loss for a community association I Risk control I Risk financing I Basic organization of the insurance industry I Characteristics of insurance as a contract I Parts of an insurance policy I Sources of community association insurance requirements I Primary types of insurance coverage required by most community associations I Basic components of a community association insurance program I Insurance claims I Relationship between community association insurance coverage and owner coverage
INTRODUCTION TO RISK MANAGEMENT

Risk management is the process of making and carrying out decisions that will minimize the unfavorable effects of accidental losses on a community association. There are five steps to the risk management decision-making process: 1. Analyze your community associations exposures to possible loss 2. Examine alternative risk management techniques 3. Select appropriate risk management techniques for your community association 4. Implement the techniques 5. Monitor the results of your risk management program
Four Types of Exposure to Loss For a Community Association

There are four types of accidental loss to which a community association is exposed:
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Property exposure to lossProperty losses can be to tangible community association property (buildings, contents, etc.) or to intangible association property (information, proprietary Web site, etc.). Liability exposure to lossLiability losses arise when a person or entity threatens or actually brings a legal claim against the community association, its members, or others whom it must indemnify by contract (such as a management company). Income exposure to lossIncome losses are net losses that may involve a reduction in income or an increase in operating expenses, or both. Personnel exposure to lossPersonnel exposures usually involve claims of employees.
Ways to identify a community associations exposures to possible loss include: I Conducting surveys I Examining financial statements including audits and reviews I Reading records and files I Constructing flow charts I Making personal inspections I Hiring experts such as reserve specialists
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Examine Alternative Risk Management Techniques

There are two ways to treat the primary exposures to loss: risk control and risk financing.
Risk Control
Risk control activities include: 1. Exposure avoidance: This involves avoiding the circumstances that would expose the community association to certain type of loss. For exampleto avoid problems with serving alcohol in the clubhouse, the community association has a rule prohibiting the use of alcohol in the facility. 2. Loss prevention and reduction: Loss prevention involves taking steps to reduce the frequency of a potential loss. For exampleconducting weekly fire safety inspections where flammables are stored. Loss reduction involves taking steps to reduce the severity of a potential loss. For exampleinstalling a sprinkler system where flammables are stored. 3. Segregation of exposures: This involves establishing some type of backup to prevent a loss. For examplebacking up all computer files and storing the backup files in a separate place, or keeping a hard-to-replace mechanical part on hand. 4. Contractual transfers: This involves entering into a contract that will, among other things, transfer the community associations legal responsibility for any loss. For examplecontracting for landscape services, instead of using community association employees and incorporating clauses such as a hold harmless agreement into the contract, or the association transfers some aspects of management to a company.
Risk Financing
Risk financing is the other primary risk management technique. It is the process of obtaining resources to pay for any financial consequences of accidental losses. There are two approaches to risk financing: 1. Retention of the financial consequences of the loss through some program of self-funding. A community association may decide that it is in its best interests to cover a potential loss with its own savings. Insurance deductibles are the most obvious category of retained losses. If the community association has large deductibles, then careful financial planning may be required. From another perspective, the community association may own a truck that is so old that it prefers to use its own funds to cover any physical damage to the truck, rather than cover such damage with commercial auto insurance. Whenever a community association decides to cover a potential loss with its own savings, it should include this self-funding in its budget as an expense or the association should identify an alternative source of funding, e.g. a disaster relief program. Furthermore, the deductible for a policy is a form of self-funding and should be accounted for in the budget. Allocating community association deductible responsibility to homeowners may or may not be feasible. 2. Transferring the financial obligation to some other party. Insurance is a form of risk financing which transfers the financial burden of paying for certain losses to a third partya commercial insurance company. Not all exposures to loss, however, may be covered by insurance. As you consider risk control and risk financing, keep these four factors in mind with respect to property exposures to loss: 1. Who is obligated to insure? 2. Who is obligated to maintain? 3. Who is obligated to replace? 4. Who owns or is responsible for the property in question?
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INTRODUCTION TO INSURANCE
The rest of this chapter discusses insurance as a risk financing technique for community associations. This section explains the: I Basic organization of the insurance industry I Characteristics of insurance as a contract I Parts of an insurance policy I Sources of community association insurance requirements
Basic Organization of the Insurance Industry

The insurance industry is a highly regulated legal environment at the state level. There are certain aspects you should be familiar with in order to effectively use insurance as a risk management strategy for your community association. Insurers are either admitted or non-admitted at the state level. Both, if licensed, can write insurance, but only admitted insurers are eligible for state guarantee funds if the insurer becomes insolvent. Nonadmitted insurers are often called Excess & Surplus (E&S) Lines insurers. The insurance industry is highly regulated at the state level in terms of policy forms and rates, claims practices, financial operations, and other basic business practices. Non-admitted carriers are not subject to the same state regulations as admitted carriers, and community associations should be doubly cautious when an insurance policy is proposed to be placed with a non-admitted carrier. In general, these carriers are used only when coverage is not available from an admitted carrier. Property and liability insurance are distributed through two primary systemsthe American Agency System and the Direct Writer System. The relevant difference between the two systems lies in how broadly they can look for coverage for your community association. The American Agency System is comprised of insurance agencies which place insurance for more than one insurance company. Insurance companies who participate in this system include Aetna, Chubb, CNA, and Travelers. The Direct Writer System is comprised of employees of a single insurance company who only place the insurance of that company. Insurance companies who participate in this system include Allstate, Farmers, Nationwide, and State Farm. Both systems use agents or brokers to place their insurance. A key question to ask any agent or broker you deal with is whether he or she has the capacity to bind the insurer. This means the agent or broker has the authority to enter into a property or liability insurance policy contract with you on behalf of the insurer.
Your state insurance commissioner can provide information about any insurer licensed to conduct business in your state. You also can obtain information about the financial status and rating of an insurer from one of the established insurance-rating servicesA.M. Best & Company, Standard & Poors Corporation, Moodys Investor Services Inc., or Duff and Phelps Inc.
CHARACTERISTICS OF INSURANCE AS A CONTRACT

Like other contracts, an insurance policy is
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An agreement between two or more parties Enforceable by law By which each party promises to do, or not to do, something
An insurance policy contract also has several unique characteristics that the community associations risk management process must take into account:
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Insured losses are expected to be accidental, unforeseen, and unintended from the point of view of the insured (the community association in this case). You can not use the insurance contract as a maintenance contract. The insured must stand to suffer some type of economic loss. The words in a policy will be given their plain, ordinary, and popular meaning in a court of law. Because the policy or contract is prepared by the insurer, the courts will interpret any ambiguity of meaning against the insurer. The insurance policy is a personal contract which requires the highest degree of good faith between the insurer and the insured. The character, credit, and conduct of the parties are very important. This is especially true in presenting and handling claims. Dishonesty or fraud in the formation of an insurance contract or failure to disclose vital information could lead the courts to void coverage.
Parts of an Insurance Policy

Community associations purchase commercial package policies (CPP), sometimes called package policies, which combine property and liability insuranceand possibly other insurance coverages. All commercial package policies contain the following: 1. Common declarations: This section of the policy is like the title page of a book. It typically includes such information as the name and address of the insured and the period of coverage.
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2. Common policy conditions: These are the basic provisions that apply to all insurance coverages in the package. For examplewhen to file proof of a loss, what happens when a premium is not paid, etc. 3. A selection of forms: Policy forms define the type of insurance coverage providedfor example, property, liability, and boiler and machinery. The forms also define how comprehensive each type of coverage iswhat is included and what is excluded. 4. Optional endorsements: Endorsements are forms that can be included in the policy to: I Add or subtract items that are covered I Add or subtract causes of loss Endorsements can be standard preprinted forms or forms developed for the particular community association with the latter called manuscript endorsements. 5. Glossaries: These are sections of a policy that define key terms and concepts. In the past few years, some basic terms in the property liability insurance field have changed. Because you are likely to hear some GLOSSARIES people use the old terms, Old Terms Current Terms here is a chart that matches the old terms with the SMPSpecial Multi-Peril CPPCommercial Package Policy current ones.
CGLCommercial General Liability Waiver of the Transfer of Recovery Rights Covered Causes of Loss (CCofL) Basic Form CCofL Broad Form CCofL Special Form CCofL
CGLComprehensive General Liability Waiver of Subrogation Perils Basic Perils Fire & Extended Coverage All Risk
In addition to these terms, may purchase means the community association has discretion in meeting the stated insurance obligation, and shall purchase means the association must meet the stated insurance obligation.
As a manager, it is important to always read an insurance policy in order to determine I Who is insured? I What time period is involved? I What is insured? I What is a covered cause of loss, or peril insured against? I What is excluded? I What is limited?
It is also important to read definitions of policy terms to find out if there are any restrictive definitions that exclude items your community association wants to insure. For example, is the definition of a building so narrow that it does not cover a certain type of structure your community association wants to insure?
Sources of Community Association Insurance Requirements

As in other areas of community association management, insurance requirements may be established by: 1. State enabling statutes: Most states have statutes that enable the establishment of condominiums and corporations. These acts always include some type of insurance obligation. If your community association is a cooperative or planned community and your state has an enabling statute establishing your type of association, check the statute for insurance requirements. 2. Association governing documents: Some type of insurance requirement will appear in: I The declaration and bylaws for a condominium I The CC&Rs (Covenants, Conditions, and Restrictions) for a planned community I The proprietary lease or occupancy agreement for a cooperative I Resolutions adopted by the board of directors (For example, the board may adopt resolutions dealing with the allocation of deductibles and the funding of catastrophe deductibles.) 3. Local, state, and federal law: A variety of local, state, and federal laws effect the purchase of insurance by a community association. I Local examplesbuilding codes and health ordinances I State examplesworkers compensation laws, automobile financial responsibility laws (required coverage of driver based on the type of vehicle driven) I Federal exampleflood insurance 4. Secondary mortgage market, agency, and lender requirements: The four important entities that usually have some type of impact on community association insurance obligations include: I Fannie Mae (Federal National Mortgage Association) I Federal Home Loan Mortgage Corporation (FHLMC, or Freddie Mac) (These two are technically government sponsored enterprise or GSEs. Both GSEs buy mortgages from lenders and in doing so require certain types of insurance to be in place.)
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Federal Housing Administration (FHA) I Veterans Administration (VA) (These two are actual agencies of the federal government, the former insures mortgages and the latter guarantees mortgages. Both require certain types of insurance to be in place.)
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5. Contractual obligations: Community associations may have entered into contractual obligations with a local government entity for animal control or other activities. Management company contracts also contain community association indemnity provisions that are usually funded through insurance. 6. Good business judgment: The absence of explicit requirements from any of the sources listed above should not preclude the community association from obtaining coverage if the exposure is present and self-funding is not a viable option. The absence of an explicit requirement will not excuse a managers failure to fulfill his or her professional dutyor a board from fulfilling its fiduciary duty.
PRIMARY TYPES OF INSURANCE COVERAGES REQUIRED BY MOST COMMUNITY ASSOCIATIONS

This section of the chapter explains the primary types of insurance coverages required by most community associations for each of the four types of possible exposure to loss property, liability, income, and personnel. For each exposure to loss, the section discusses: I Risk management issues I Insurance contract issues I Insurance coverages and endorsements
PROPERTY EXPOSURES TO LOSS

For insurance purposes, property consists of: 1. Real propertye.g. buildings, land, and the newest type of property exposureinformation such as Web sites, logos and similar electronic information. Information loss is a new exposure for some community associations that have Web sites and use email to communicate electronically with members. 2. Personal propertye.g. inventory, furniture, fine arts, equipment, supplies, machinery, electronic data processing (EDP), and valuable papers and records.
Risk Management Issues

Here are some common risk management issues related to property exposures to loss: 1. Certain property exposures to loss are either uninsurable (such as land) or they may be too expensive to insure (such as coverage for physical replacement of a dam). The issue of being uninsurable or too expensive to insure can also arise with the three other types of exposure to loss. In situations such as these, it is necessary to explore alternative means of risk control and risk financing. 2. Most sources of property insurance requirements for community associations are likely to require property insurance to be written at insurable replacement cost property limits for the associations real property. The replacement cost of property is the amount of money it would cost to replace the property at todays prices and that would include the land, foundations, underground piping, and so forth. Insurable replacement cost would be the cost to replace property that can be insured and it would exclude the land, foundations, underground piping, and other components not typically insurable. The most reliable way to determine insurable replacement cost limits is to obtain an insurable replacement cost valuation. These valuations can be updated every year in much the same manner as a reserve study.
Insurance Contract Issues

Here are some common insurance contract issues related to minimizing a community associations property exposures to loss: 1. To have full insurable replacement cost protection in most property policies, it is necessary to:
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Obtain a replacement cost endorsement that deletes depreciation; it is standard for most property policies to cover the depreciated value of an itemcalled actual cash value (ACV)not its replacement cost. As a community manager, it is important that you not confuse insurable replacement cost or actual cash value with either the market value of a property or the assessed value for tax purposes. Obtain an agreed amount endorsement that suspends the coinsurance clause. An agreed amount endorsement provides for an agreed upon limit of property insurance.
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Coinsurance is a standard element in most property policies that obligates the insured to maintain a certain limit of property insurance based on a stated percentage. If the insured does not maintain this percentage, the insured will not be reimbursed for the full loss of the property.
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Make sure the property limit shown on your property policy is for the full insurable replacement value. Obtain an inflation guard endorsement, if the economic climate is an inflationary one. This type of endorsement will automatically raise the coverage to keep up with inflation.
2. A property policy should be used for catastrophe protection, not as a source of funds for maintenance expenses. If a community association files too many claims for a situation that can be remedied with proper maintenance, its insurer may raise the cost of coverage or refuse to insure the item. 3. Premium expenses can be kept low by raising the deductible level for specific items. The deductible is the amount that the insured must pay on each loss. Deductibles can be split between covered causes of loss so that water damage may carry a large deductible, but other perils may carry smaller deductibles. Note: Do not raise a deductible level without first going through the risk management decision-making process (see page 77). 4. It is to a community associations benefit to have the property insurance deductible apply to all of its buildings on a blanket basis, rather than to each building separately. If a covered cause of loss (such as a fire) occurs for more than one building, it will be less expensive to pay one deductible as opposed to paying a deductible for each building. However, it may not always be possible to obtain this; many insurance companies insist that deductibles for water damage claims apply separately to each unit in which damage occurs. 5. The standard property policy for a condominium contains several standard features or endorsements (condominium endorsement), such as the fact that the community association policy is primary with respect to an owners policy for the same loss. It also deletes the insurers right to seek reimbursement for a covered loss from an owner causing the damage. The endorsement that deletes the right is called a waiver of the transfer of recovery rights (formerly a waiver of subrogation.) The right of an insurer to collect payment of a claim from a third partyin this case, the owneris called subrogation.
Property policies for cooperatives and planned communities often do not have the benefits of those features found in the standard condominium endorsement. They can usually be added for no extra premium.
Insurance Coverages and Endorsements

Common insurance coverages and endorsements for property exposures to loss include: 1. Commercial package policy (CPP) insurance: The property insurance part of the CPP can provide coverage for real and personal property. The most comprehensive property coverage is obtained through the Special Form Covered Causes of Loss insuring agreement. Policy limits should reflect the full insurable replacement cost of real and personal property. The interface between a unit and common areas in a condominium or cooperative requires both a CPP and a unit owners policy. See page 201. 2. Boiler and machinery insurance: This insurance is sometimes called mechanical breakdown insurance. If a community association has mechanical equipment of any kind (including elevators, pool equipment, and electrical transformers), it should consider this coverage. This is because commercial property insurance does not cover damage from mechanical breakdown, electric arcing, or power surges. Some policies also insure computer equipment, security systems, closed circuit TV, and similar information technology property. Policy limits should reflect the value of the machinery and equipment. If a steam boiler is involved, policy limits should also reflect the value of the property at risk (such as a building and its contents). Some boiler and machinery insurers base their premium on the entire value of the property even though the machinery and equipment is worth less. The broadest coverage is through a comprehensive format as opposed to a blanket group format. Protection should be on an insurable replacement cost basis. Building ordinance protection (see below) can be obtained separately for this coverage. 3. Building ordinance insurance: This type of insurance is usually obtained by endorsement to the CPP. It is necessary because increased costs caused by meeting the requirements of new building laws are excluded causes of loss in the CPP. This protection has three components: contingent liability, demolition, and increased cost of construction.
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Building ordinance insurance covers three areas: I Contingent liabilitycovers the value of any undamaged portion of a building which may have to be replaced because of building laws I Extra demolitioncovers the value of demolishing any undamaged portion of a building I Increased cost of constructioncovers construction costs due to changes in the building laws since original construction took place, e.g. wider door frames, installation of sprinkler systems Policy limits should reflect the community associations estimate of its actual exposure. As a manager, you should take the time to find out what changes in building laws your community association would have to conform to if it had to rebuild. 4. Flood insurance: This type of insurance is typically obtained through the National Flood Insurance Program (NFIP), a federal insurance program. It provides coverage for damage caused by flood and mudslides to buildings and contents. Policy limits are driven by the internal requirements of the NFIP. The community association must maintain limits at least equal to 80% of insurable replacement cost to avoid coinsurance penalties. 5. Electronic data processing (EDP): This insurance may be needed for computer equipment, networks, Web sites, security systems, protection from hackers, and similar information technology exposures. Coverages vary so much that the community association needs to carefully evaluate its exposures and the ability of the EDP to meet those exposures to loss. Exposures to loss from information technology components may also have to be insured with special liability insurance and special income insurance. Every community association should have internal procedures governing the proper use of information technology.
LIABILITY EXPOSURES TO LOSS

For a community association to be held liable, a civil legal claim must be brought against it because of a legal wrong it is alleged to have directly committed or for which it is supposedly responsible because of liability arising from agency relationships, contractual obligations, or vicarious relationships. This alleged legal wrong must have led to property damage (PD), bodily injury (BI), personal injury (PI), or advertising injury (AI) to a third party if there is to be coverage in commercial general liability insurance.
Wrongful acts that do not lead to property damage, bodily injury, personal injury, or advertising injury claims could be covered under directors and officers liability insurance. (See page 192.) The community association and manager should always ask to be an additional insured on the CGL policy of any contractor or vendor doing work for the association. In the event of a claim involving both the association and the contractor, the claim can then be tendered to the contractors CGL insurer.

Liability claims can be brought against a community association because of: 1. Property damage: For examplean improperly maintained light pole falls on a car. 2. Bodily injury: For examplea slip-and-fall on a crumbling sidewalk. 3. Personal injury: Injury arising from libel, slander, false arrest, invasion of privacy, wrongful entry, or malicious prosecution. For examplea community newsletter inappropriately and incorrectly lists an owner as delinquent in assessments. 4. Advertising injury: Advertising injury provisions in CGL include language providing coverage to the community association with respect to damages resulting in misappropriation of advertising ideas or style of doing business or infringement of copyright, slogan, or title. Community associations with newsletters, directories, and Web sites that contain advertising have this exposure. Even the best managed community association can be the subject of liability claims in the areas of property damage, bodily injury, personal injury, and advertising injury. But the best managed community association is likely to experience fewer of these claims than does a poorly managed one.

Here are some common insurance contract issues related to minimizing a community associations liability exposures to loss: 1. Typically, liability insurance policies insure against civil legal claims other than those involving breach of contract. Either the insurer or a court must determine the community association to have committed legal wrong that resulted in actual harm to a person or property.
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2. Liability insurance usually does not have a deductible. However, coverage may have aggregate limits. That is, there may be a limit to the total amount that the insurer will pay out under the policy. 3. For most liability policies, coverage is based on occurrencethat is, the event has to happen during the period of policy coverage. If the amount the insurer will pay for one incident (occurrence) is the same as the aggregate amount it will pay, try to obtain coverage that will either increase the aggregate or delete it altogether. If that fails, then the community association should consider purchasing a commercial liability insurance umbrella that will increase the CGL limits. Sometimes coverage has a claims made basisthat is, the claim must be made during the period of policy coverage. (Hint: This is almost always true of directors and officers liability insurance. See page 192.) 4. The community associations defense costs (attorney fees and related costs) are usually not included in the policy limits; the insurance pays these costs without their reducing the policy limits, i.e. the amount of money available to pay the claim (unlike most directors and officers liability insurance). In addition, in liability situations the insurer will usually retain all rights to select the attorney and settle claims. 5. Cross liabilities refers to the right to sue another party insured under the same liability policy. Virtually all CGL policies for community associations include this right. Cross liability allows an owner to bring a claim against his or her community association. This coverage is in the owners interest. It is standard for owners to be insured in liability insurance for condominiums and cooperatives, while planned communities must see to it that this concept is present in their liability coverage. 6. Commercial general liability coverage (CGL) policies contain three broad categories of insured: (1) The first named insured should always be the community association. (2) Automatic insured includes the managing agent. (3) Additional insured must be added by endorsementsuch as contractors working on community association property. Because the managing agent is an automatic insured in CGL coverage, it is not necessary to have a community associations management company named by means of an endorsement. Because the managing agent is an automatic insured, this helps the association fund the indemnity agreements often found in management contracts.
Note: Liability insurance is also called casualty insurance or third-party insurance. It is third party because of (1) the insurer, (2) the community association, and (3) the claimant. Property insurance is sometimes called first party insurance because (1) there is only the insurer and (2) the community association.

Common insurance coverages and endorsements for liability exposures to loss include: 1. Commercial package policy (CPP) insurance: The CGL part of the CPP provides insurance coverage for legal claims arising from bodily injury (BI), property damage (PD), advertising injury (AI), and personal injury (PI). The most significant limiting changes in most CGL policies currently deal with exclusions or caps on damages arising from (1) mold, (2) pollution, and (3) information technology. The community association needs to carefully review these exposures. 2. Hired and non-owned automobile liability insurance: This insurance covers legal claims arising out of the use of automobiles that are not owned by the community association, but that are used while acting on behalf of the association. Thus, the use of automobiles belonging to board members, volunteers, employees, or management staff may be covered under certain circumstances. Hired and non-owned automobile liability insurance covers property damage and bodily injury claims brought by a third party against the community association. Damage to employee or volunteer vehicles or persons is not insured under this type of policy. This type of insurance covers claims in excess over other valid and collectible insurance. This means that the insurer would pay only that amount of a claim that is not covered by another policy. 3. Commercial umbrella insurance: This insurance may provide broader coverage and additional coverage, but usually it follows the form of the underlying liability insurance. It extends the amount of coverage beyond the limits of scheduled underlying liability policies such as: I Commercial general liability insurance (Commercial umbrella insures a few more items than does the CGL. It also goes into effect when the policy limits of the CGL are exhausted.) I Other liability insurance (For examplehired and non-owned automobile liability insurance, employers liability insurance [see page 195].)
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4. Directors and officers (D&O) liability insurance: This insurance is designed to pay for damages arising from wrongful acts that do not lead to property damage, bodily injury, advertising injury, or personal injury. For instance, the board or the community association may be at fault for not fixing hand rails (someone falls and is hurt), but the result of that wrongful behavior led to bodily injury (BI), which is insured in the CGL and not in the D&O policy. The definition of an insured should specifically include the community association, committee members and employees, as well as board directors and officerswhether they are elected or appointed and whether they are past or current. The property manager should also be added as an additional insured this is not automatic and must be requested from the insurance carrier. Legal claims can be brought against a community association based on the manner in which it conducts its business. Examples of wrongful acts include the failure to file taxes, collect assessments, maintain reserves, or deliver core services to its residents (member/owners and tenants). Directors and officers liability insurance involves claims made coverage. The claim must be made during the period of policy coverage, even though the wrongful act may have occurred much earlier. This is just the opposite of a CGL policy. Another notable fact about this type of coverage is that the communitys defense costs may be included in the policy limits. However, higher D&O limits may be needed if the community association anticipates significant defense costs. The insurer may or may not have the right to select the defense counsel for the association. Most of these policies have limitations and exclusions that a community association should consider. For example, they have a narrowly-named insured. And they may exclude claims for non-monetary damage, insurance decisions, and acts of discrimination. The community association should purchase coverage with as few of these exclusions as possible. With some D&O insurers, the managing agent can be added as an additional insured. This helps the association fund the indemnity provisions often found in management contracts. The CAI endorsed D&O program provides some of the broadest protection available for community associations.
INCOME EXPOSURES TO LOSS

Be sure to apply the risk management decision-making process to all sources of income for your community association. Review the associations income & expense statement and budget to determine its sources of revenue.

Here are some common risk management issues related to income exposures to loss: 1. Dealing with income loss exposures primarily requires sound financial practices. Does your community association require and practice: I Separation of duties for recording income and paying expenses? I Multiple signatures on bank and investment accounts? I Monthly reconciliations of bank statements with financial reports? I Performance of an independent compilation, review, or audit? (See Chapter 7.) 2. It is necessary to be informed about the risk management practices of any entity that handles your community associations funds. That entity can be a management company, a service bureau, a bank, or an investment house.

One of the primary forms of insurance coverage in this area is fidelity insurance. People often will use the words fidelity bond to refer to fidelity insurance.

Common insurance coverages and endorsements for income exposures to loss include: 1. Fidelity insurance: This insurance protects against employee dishonesty which may lead to the theft of money, securities, or property. For the community association, this coverage must insure all persons (e.g. board members, committee members, volunteers, property manager) who handle funds whether they are salaried or not. Often fidelity insurance will be combined with the CPP. Fidelity insurance limits are often set by GSE standards. With some insurers, like with D&O, the managing agent can be added as an insured on the community associations fidelity policy which helps it recover in the event of a claim of theft by the management company. A management company should have its own fidelity insurance that insures community association funds for which the company is legally responsible even if the company is also named on the associations fidelity insurance policy. However, the association should not rely solely on the management companys fidelity coverage for the following reasons: I The limits may not be adequate for all of the community associations with whom the management company does business I The management companys policy almost always excludes coverage for losses caused directly by the principals of the management company
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2. Business income insurance: This insurance covers the loss of certain types of business income. It can be used to cover rental income when the community association owns and rents out a unit. It can be used to cover the loss of income if an income-producing clubhouse or vending machines should they be destroyed by a covered cause of loss in the CPP. Business income can also be extended for contingent exposures. 3. Assessment fees receivable insurance: This insurance actually has a certain limited value. It applies to situations where a covered cause of loss happens to the property (for example, a fire destroys a unit) and the community association is unable to collect its assessment from the owner. Housing cooperatives can protect their assessments through Loss of Rents coverage, a type of business income. Assessment fees receivable insurance does not provide coverage for assessments lost because an angry owner withholds payment. Requirements for an insurance payment to be made include the unit owner still having a legal obligation to pay the assessment and unsuccessful collection efforts having been made by the association. 4. Extra expense insurance: There is usually a certain amount of this coverage in the CPP. It is useful to consider the community associations income exposure as a net exposure to loss because both lost revenue and increased operating expenses may be insurable. This insurance applies when a covered cause of loss either increases operating expenses or diminishes the income produced by normal operations. An example would be the extra expense of a temporary office, temporary equipment, temporary help, all of which may be needed if the community associations on-site office was destroyed by fire.
PERSONNEL EXPOSURES TO LOSS

In this section, personnel exposures to loss are limited to loss of services due to injuries received while working on behalf of the community association. This section will not address medical, dental, hospital, life, disability, pension, or retirement coverage. Traditional personnel exposures to loss involve death, disability, retirement, unemployment, and resignation.

The key risk management issue for personnel exposures to loss is the question of whether a person is an employee or an independent contractor for the community association.
The determination of whether someone is an employee or an independent contractor is often left to the state agency that administers the workers compensation program or to the courts. An independent contractor may inadvertently become the community associations employee if it controls some significant aspects of the means and ends of the work performed by that contractor. Thus, your community association should always consider carrying workers compensation and employers liability insurance on an if any employee basis, even if it does not have employees on its books (see below).

Here are some common insurance contract issues related to minimizing a community associations personnel exposures to loss: 1. Every commercial general liability (CGL) policy contains an exclusion for claims that should otherwise be covered under applicable state workers compensation statutes. 2. Volunteers, including directors and officers, can only be insured if the state statute permits such coverage. If coverage of volunteers under workers compensation is permitted and desired, a volunteer will be covered at a salary level the state agency applies to the persons activities.

Common insurance coverages and endorsements for personnel exposures to loss include: Workers compensation and employers liability insurance: State statutes determine the classes of employees to be insured and coverage for loss of services due to employmentrelated injuries. In most states, the actual insurance is obtained from commercial insurers. Commercial insurers include employers liability insurance with workers compensation protection. Employers liability provides protection for claims made by injured employees (and their spouses) for certain types of liability that is excluded in the CGL, such as third-party-over actions, dual capacity actions, and so forth. Every community association should consider obtaining workers compensation and employers liability insurance.
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COMMUNITY ASSOCIATION INSURANCE PROGRAMS

This last section of the chapter discusses: I Basic components of a community association insurance program I Insurance claims I Relationship between community association insurance coverage and owner coverage
Basic Components of a Program

The three components of a community association insurance program that require a managers attention are the bidding process, program maintenance, and program evaluation.
The Bidding Process

When you solicit bids for insuring your community association in any area of coverage, be sure to do so in a way that will allow you to review and evaluate the bids in a systematic manner. On the next two pages you will find a sample insurance bid request. The form on page 200 is a partial sample of a form that a community association can use to compare bids that are submitted. When the form is reformatted with a single column, it can be used as an insurance agents bid form. Evaluate agents/brokers in terms of their I Experience I Specialty in the field I Knowledge of community associations I Participation in professional and trade associations, such as Community Associations Institute I Professional standing, types of insurance licenses, bonding Four important designations in the insurance field are: 1. Chartered Property and Casualty Underwriter (CPCU) 2. Associate in Risk Management (ARM) 3. Certified Insurance Counselor (CIC) 4. Community Insurance & Risk Management Specialist (CIRMS) If more than one agent/broker wants to use the same insurer, the insurer will usually ask your community association to designate the agent to represent the insurer by an agentof-record letter or a broker-of-record letter.
SAMPLE Insurance Bid Request

Bidding Requirements 1. Each proposal must be accompanied by a completed insurance agents bid form. A current rating from __________ must be provided for each insurer. Only insurers with a rating of__________ will be considered. Each insurer must be licensed and admitted in this state. Each proposal must include an explanation of all modifications to the specifications. Each proposal must include a statement indicating compliance with the associations governing documents, or indicate exceptions. Each proposal must include a statement indicating compliance with applicable federal, state, and local laws, regulations, and ordinances, or indicate exceptions. Copies of the proposal and insurance agents bid form should be provided and sent to: Name: Address: City/State/Zip: All bids are due by the close of business on ______________. All bids must be firm and valid until 12:01 a.m. on_____________. Revisions will not be accepted beyond the close of business on _____________. No provisional or conditional bids will be considered.
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10. If possible, all loss control recommendations must be included with the proposal.
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SAMPLE Insurance Bid Request, continued
Each proposal should also include: I Summary of agency qualifications to insure community associations and membership in CAI I Biographical information for account representative who will handle account I Brief description of claims services, loss control services, and educational services provided by the insurer and the agent/broker I Description of how mortgagee interest certificates will be issued I Reference list of other insured community associations I Details of the relationship between the associations insurance and an owners insurance IMPORTANT NOTEOnce submitted, proposals become the property of the association and will not be returned. Failure to meet the above specifications may jeopardize consideration of your bids by this insured. Attachments: I Insurance agents bid form I Declarations I Bylaws I Property lease I Articles of incorporation I Plat of survey I Site plan I Blue prints I Contracts I Construction specifications I Insurable value appraisal I Three year loss history I Budget and/or audited financial statements To inspect the community association, please contact:
Program Maintenance
Insurance coverage is on an annual basis, typically called a policy period. Different policies will have different annual dates. Thus, it is necessary for a community association to maintain a chronological schedule of the coverage inception dates for its various policies. This will prevent policy lapses through oversight. Whenever possible, all policies should have the same expiration date.
Program Evaluation
A community association should assign a specific person, committee, employee, or consultant the responsibility of handling the bidding process and reviewing the associations insurance program on a regular basis. The dynamic, technical nature of insurance issues requires conscientious attention to an associations insurance program in order to protect its assets. Some CC&Rs and bylaws require that an insurance trustee be appointed for the community association.
Insurance Claims
A community association should specifically designate someone to be in charge of filing and monitoring claims, so that requirements are met and reports are made in a timely fashion. Here are some important tips about filing insurance claims:
I
Every insurance contract has its own requirements for filing claims. If these requirements are not met, the insurer could void the coverage for the claim. Any possible claim that could have an adverse economic impact on the community association should be reported to the insurer. Claims may require the filing of formal proofs of loss. The preservation of life and property are paramount concerns in any insurance contract. Do not hesitate to minimize further loss because of the incorrect belief that nothing can be touched until the adjuster arrives. Claims involving liability issues should be sent to the insurer without any admission of negligence on the insureds part.
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SAMPLE Comparison of Bids Form

_____________________________ Association Insurance Proposals Effective Date: _____________, 12:01 a.m. DESCRIPTION Agent Insurer Rating PROPERTY COVERAGES
Bldg. limit Bldg. deductible Replacement cost Guaranteed replacement cost Special form Agreed amount Broad form water: Sewer/drain backup Wind-driven rain Exterior damage required Surface water Leakage/seepage Building glass: Deductible Limit per pane Limit per loss $ $ Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes $ $ No No No No No No No No No No $ $ Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes $ $ No No No No No No No No No No $ $ Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes $ $ No No No No No No No No No No
(Hint: A complete comparison [or bid] would list all the property coverages sought, as well as coverages for all liability, income, and personnel exposures to loss the community association wants to insure.)
Relationship Between Community Association and Owner Insurance Coverages

The community associations insurance agent should provide an explanation of the interaction between the associations insurance coverages and those of the individual owner. This explanation should be given directly to the owners by mail, newsletter, or meeting. No matter what type of association is involved, the governing documents and the applicable state statute enabling the creation of this type of community association must be consulted when preparing an explanation. The nature of the explanation usually varies with the type of association involved. Condominiums and cooperatives usually have to explain where the building coverages interface with the units coveragesthe interface between the common elements and the units. For example, are the finished interior surfaces insured? Are improvements and betterments, such as floor and wall coverings, covered? How is the owner protected under the associations insurance? In a planned community, the focus is reversed. How is the community association protected from the owner? How can the association be sure that the owner is carrying insurance on his or her residence? Some planned communities, however, insure themselves as though they are a condominium. Terminology: Terminology varies with insurer, but homeowner (HO) policies are usually referred to by the following numbers: I HO-1, HO-2, HO-3, and HO-5 refer to policies for owner-occupied units I HO-4 is a tenants policy I HO-6 is a policy for a condominium or cooperative unit owner If a planned community insures on a blanket basis as do condominiums and cooperatives, then the owners must purchase an HO-6. There is a current trend to allocate community association deductibles to the owner. This may be governed by statute. Homeowner policies often only provide limited protection for loss assessments relating to allocated community association deductibles. Similarly, less than 50% of condominium and cooperative unit owners actually carry an HO-6 while less than 20% of renters carry an HO-4. Lastly, in planned communities, 37% of all homeowners do not have a mortgage so that there is no mortgage company requiring that the owner carry a homeowners policy.
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Concluding Comments:
Community associations provide for three cores services to be delivered to residents. This matrix gives examples of those services in the context of the four primary exposures to loss faced by all community associations.
THREE CORE SERVICES

Type of Exposure Business to Loss & Insurance Service 1. Property Meets the needs of mortgagees and homeowners to protect their sizeable investment Governance Service Protects information technology equipment that is used increasingly for the online access to documents Provides similar protection as the leadership of the community association interprets documents and resolves disputes Can provide the community association with a continuous source of revenue to continue with the conduct of business Same Community Service Similarly, protects IT equipment that is used to provide more open access to the community association via Web sites and email Provides similar protection as the leadership of the community association communicates with the residents
2. Liability
Protects the volunteers from adverse financial consequences if their delivery of business services is challenged, e.g. improper reserve funding For community associations with sizeable non-assessment revenue, protects against possibly having to increase assessments because of theft of funds The determination of who is or is not an employee of the community association can impact the delivery of all three services
3. Income
For community associations that depend on advertising revenue from various activities, protection is available if an important advertiser can not pay Same
4. Personnel
FOCUS QUESTIONS
Use the following questions to help you identify and review the core concepts in this chapter. (Hint: Once you look up the answer to a question, you may want to jot down the page number next to the question for future reference.) 1. Explain risk management, risk control, and risk financing. 2a. List the five steps in the risk management decision-making process. b. Illustrate each step with an example that could be applied to your community association. 3a. What are the four types of accidental loss to which a community association is exposed? b. List some different ways to identify a community associations exposure to possible loss. c. Give an example of each that could be applied to your community association. 4a. Name and define four different risk control activities. b. Give an example of each that could apply to your community association. 5a. Explain the two basic approaches to risk financing. b. Give an example of each that could apply to your community association. 6a. Name the two primary insurance systems in the United States. b. Explain the difference between them. 7. What are some characteristics of an insured loss? 8. Name and define the five basic parts of an insurance policy. 9. List the different sources of community association insurance requirements. 10a. What are some examples of real property that your community association owns? b. What are some examples of personal property that your community association owns? 11. What endorsements are needed for full insurable replacement cost coverage for property?
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12a. List some types of insurance that commonly provide coverage for a community associations property exposures to loss. b. Explain how they differ in their coverage. 13a. What does liability consist of for a community association? b. What are the four basic types of liability claims that can be made? c. Give an example of each. 14a. List some types of insurance that commonly provide coverage for a community associations liability exposures to loss. b. Explain how they differ in their coverage. 15a. What types of claims does directors and officers liability insurance cover? b. What types of claims does it not insure against? 16a. List some types of insurance that commonly provide coverage for a community associations income exposures to loss. b. Explain how they differ in their coverage. 17a. Explain the key risk management issue for a community associations personnel exposures to loss. b. List the two related types of insurance that commonly provide coverage for a community associations personnel exposures to loss. c. Explain how they differ in their coverage. 18. What are some criteria that should be used to evaluate an insurance agent or broker? 19a. Why is it necessary to maintain a chronological schedule of the coverage dates for a community associations various policies? b. Why is it necessary to explicitly assign someone responsibility for the bidding and review processes for a community associations insurance program? 20a. List some important tips for filing insurance claims for a community association. b. Explain why each is important. 21. What is the difference in emphasis between condominiums or cooperatives and planned communities when explaining the relationship between community association and owner insurance coverages?
Use the following questions to help you apply the information in this chapter to your own situation. 1. How would you determine exposures to loss for each of the following in your community association: I Property I Liability I Income I Personnel 2. Keeping the four types of exposure to loss in mind: a. What exposures to loss has your community association decided to selffundwhether purposefully or through inaction? b. What exposures to loss has your community association financed by means of insurance? 3. Does your community associations insurance agent or broker have the capacity to bind insurers? 4. Using one of your community associations insurance policies, locate the: I Common declarations section I Common policy conditions section I Selection of forms I Endorsements, if any I Glossaries of terms 5. What insurance requirements are set for your community association by: I Your community associations governing documents I Applicable federal regulations I Any state statutes enabling its establishment I Applicable local, state, and federal laws 6a. Does your community association have any exposures to loss that it has identified as uninsurable or too expensive to insure? b. If so, what alternative means of risk control and risk financing has it adopted? 7a. Does your community association know the insurable replacement cost valuation for its property? b. What is it? c. How recent is it?
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8. Which of the insurance contract issues for property exposures to loss mentioned in this chapter are issues your community association is addressing or needs to address? 9. What insurance coverages and endorsements does your community association have for property exposures to loss? 10. What insurance coverages and endorsements does your community association have for liability exposures to loss? 11. What risk management techniques does your community association apply to its internal financial practices? 12. What risk management techniques are used by any organizations (such as management company, bank, or investment firm) that handle your community associations funds? 13. What insurance coverages and endorsements does your community association have for income exposures to loss? 14. What insurance coverages and endorsements does your community association have for personnel exposures to loss? 15a. What bidding process does your community association use to obtain insurance? b. Can you think of any ways to improve the process? 16. Does your community association have a chronological schedule of the coverage dates for its various insurance policies? If not, can you set one up? 17. What procedures has your community association set up for evaluating its ongoing insurance program? Can you think of any ways to strengthen its procedures? 18. Does your community association have any written or unwritten policies and procedures for filing and monitoring insurance claims? If so, what are they? If not, what are some basic policies and procedures to begin with? 19. What is the relationship between your community associations insurance coverages and its owners coverages? (Hint: If you cant find any written explanation, ask your associations agent or broker.)
RESOURCES
For further information on risk management and insurance, we suggest the following: Community Association Insurance: A Guide for Condominiums, Cooperatives, and Planned Communities (Guide for Association Practitioners Series, Report #4), by Clifford J. Treese, CIC, CPCU, ARM,
CIRMS,
and Katharine Rosenberry. Covers community insurance obligations, amount needed, types of coverage available, and more. (Community Associations Institute, 1997.)
Community Association Risk Management: Evaluating and Managing Risk in Condominiums, Co-ops, and Planned Communities, (Guide for Association Practitioners Series, Report #25), Third Edition, by Clifford J. Treese, CIC, CPCU, ARM, CIRMS. This report explains how to manage risk by using a five-step decision-making process and how to implement a risk management program by engaging in four key activities. Learn why insurance alone isnt enough to control risk. Addresses the growing risks for community associations in the Internet age, special considerations after September 11, 2001 and how to integrate reserves and risk management programs. (Community Associations Press, 2002.) Community Insurance and Risk Management Specialist (CIRMS)designation, offered by CAI, recognizes a demonstrated high level of competency within the risk management profession. This designation is useful for managers and community board members looking for qualified professionals to help them protect their most valuable investments.
Disaster Management for Community Associations (Guide for Association Practitioners Series, Report #14). Describes the 16 major perils and their probability of occurrence and the seven
essential steps for successful disaster planning. This is an absolute must for your resource library. Some associations even order this report in quantity to distribute to all key people. Appendices contain a sample plan for emergency preparedness and a six-page outline to help you construct your own disaster plan. (Community Associations Institute, 1999.)
Tips for Community Association Insurance. A handy brochure to help associations define insurance
needs, outline steps for buying property and liability insurance, and ease the insurancebuying process. (Community Associations Institute, 1999.)
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Note taking
PART I I I
FACI LI TI ES MANAGEMENT
As we explained in Chapter 2, management is the process of planning, organizing, leading, and controlling an organizations use of its resources in order to achieve its goals. For a community association, facilities management is the process of operating, maintaining, repairing, and replacing common propertythat is, the common elements or common areas. As such, it involves the management of both physical assets and human resources.
Contents of Part III

Part III of this program is intended to introduce you to three key components of facilities management for a community association manager:
I I I
MaintenanceChapter 9 ContractingChapter 10 Human Resources ManagementChapter 11
These chapters will not tell you all that you need to know about facilities management or human resources management. However, they will provide you with a good foundation for developing your management skills in these areas.
CHAPTER 9
MAINTENANCE
KEY TERMS
Analysis sheet, p. 215 Emergency services maintenance, p. 221 Facilities management, p. 211 Inspection checklist, p. 222 Inspection report, p. 222 Inventory, p. 214 Maintenance calendar or schedule, p. 222 Maintenance contact sheet, p. 218 Maintenance record, p. 222 Management control, p. 212 Preventive maintenance, p. 221 Requested or corrective maintenance, p. 221 Responsibility chart, p. 218 Routine maintenance, p. 221 Scheduled replacement, p. 221 Work order/response form, p. 223
For a community association, facilities management is the process of operating, maintaining, repairing, and replacing common propertythat is, the common elements or areas. Maintenance has three goals in a community association: I To meet the needs of the individual residents I To preserve and enhance the common property I To limit injury to residents, guests, and employees An effective maintenance system depends on a managers ability to get all the relevant participants involved as appropriateresidents, employees, consultants, contractors, and the developer. The management of physical assets or resources requires the management of human resources (see Chapter 11 on Human Resources Management). The purpose of this chapter is to help you to organize and manage the maintenance that your community association requires. Whenever the term maintenance is used in this chapter, it refers to maintenance, repairs, and replacement of physical assets or resources. This chapter introduces the five steps in establishing a maintenance system for a community association: 1. Develop maintenance management controls. You will need them at each step in establishing a maintenance system.
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2. Identify the physical assets to maintain. 3. Analyze your assets maintenance needs. 4. Establish five basic maintenance programs. 5. Evaluate your maintenance system and efforts. Notice the similarity between the steps in establishing a maintenance system and the risk management process described in Chapter 8. Both cases involve protecting the communitys assets or resources.
What You Will Learn

After reading and reviewing this chapter, you should be able to explain and understand: I Five steps in establishing a maintenance system (above) I Maintenance management controls I How to categorize physical assets I Sources of information on a communitys physical assets and their maintenance needs I Necessary information on maintenance needs I Five basic maintenance programs I Methods for evaluating the effectiveness of a maintenance system and its implementation I Characteristics of an effective maintenance system I Characteristics of an ineffective maintenance system
DEVELOP MAINTENANCE MANAGEMENT CONTROLS

The first step in establishing a maintenance system is to develop effective management controls for developing, implementing, and evaluating your communitys system.
Maintenance Management Controls

A management control is any means used to track, record, remind, or command attention. Usually these means are forms or documents. Examples of maintenance management controls include: I Checklists I Charts of information I Calendars or schedules I Records of actions taken I Inventories I Work orders I Request forms I Response forms
Effective maintenance cannot occur without management controls. If a manager relies too heavily on memory and verbal communication, it becomes impossible to accurately and completely track, record, prompt, or draw attention to maintenance needs and their resolution. This chapter provides sample forms that other managers have developed and found useful. It is up to you to create or modify forms to meet the maintenance needs of your community. Remember, any forms, checklists, or other samples included in this course are done so by way of example and are not intended to be utilized as a substitute for legal, accounting, or other professional advice where appropriate. If you use any form, checklist, or other sample, it may be necessary to tailor it to your particular community associations needs and requirements.
IDENTIFY THE PHYSICAL ASSETS TO MAINTAIN

In order to identify the communitys physical assets or resources that need to be maintained, you will have to: I Establish a set of comprehensive categories for your communitys physical assets I Research available sources of information
Establish a Set of Physical Asset Categories

The purpose of establishing a set of comprehensive categories for your communitys physical assets is to ensure that maintenance tracking, recording, and reminders do not overlook any item. Here is a suggested set of categories for your communitys physical assets: 1. Common real property I Recreation facilities (for examplepool and spa, tennis courts, and clubhouse) I Community service facilitiesFacilities for services provided by the community association to individual residents in order to maintain the communitys physical assets (for exampletrash storage, recycling facilities and equipment) I Landscaped areas (for examplecommon areas, front yards, and entrance beds) I Building exteriors (for exampleroofing, gutters, and brick walls) I Building interiors (for exampleentrance access system, plumbing system, and elevators) I Site improvements (for examplestreets and drives, exterior parking lot, street light fixtures, common sidewalks, retaining walls, and drainage facilities) 2. Common personal property I General (for examplecommunity-owned vehicles, mowers, and furniture) I Office (for examplesoffice furniture and equipment)
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Research Available Sources of Information

Research legal documents to identify the physical assets your community association is responsible for maintaining:
I
Governing documentsfrequently the declaration or master deed will include a maintenance schedule for particular assets (See the typical language describing maintenance responsibilities in the excerpts from a condominium associations declaration and bylaws on pages 216-217. We included the excerpts to give you an idea of the kind of maintenance-related information you are likely to find in your governing documents.) State statutes Board resolutions
After you have identified the physical assets for which your community association has maintenance responsibilities, identify the assets maintenance needs by means of:
I
Physical inspection of the property to be maintained Examination of available building plans and specifications Review of any reserve studies Examination of any maintenance records Interviews (for examplecurrent board members, authors of any reserve studies, any association maintenance employees, and any contractors providing maintenance services) Review of product or equipment information from manufacturers
The typical management control used to identify physical assets and their maintenance needs is an inventory. This is a record of all real and personal physical property owned and maintained by the community association. (See page 184 for a definition of real and personal property.) Inventories usually record the following information for every item listed: I Date of purchase I Warranty I Quantity I Description
I I I I I I
Original installer/builder or service contractor Extended warranty and provider Cost Special maintenance needs Estimated replacement data Other
Some community associations assume maintenance responsibilities for physical assets which they do not ownfor example, assets that belong to owners, such as exterior trim on townhouses in a planned community. However, the governing documents and applicable state statutes must provide for a community association assuming maintenance responsibility for specific owners assets. An association must be very careful not to expend funds on maintenance items not clearly defined as the associations responsibility in the governing documents, resolutions, or government mandates.
ANALYZE YOUR ASSETS MAINTENANCE NEEDS

To analyze your communitys maintenance needs, you will have to analyze each physical asset in order to: I Identify what maintenance must be done I Identify responsible parties for doing the maintenance
Identify What Maintenance Must Be Done

To identify what maintenance must be done, you will have to record the following information for every physical asset: 1. Description of the asset from a maintenance point of view. 2. What maintenance needs to be done? 3. How often? 4. How long it will take? 5. Criteria for satisfactory maintenance. 6. Preventive and emergency plans needed. You will be able to obtain much of this information when you conduct an inventory of your communitys physical assets. Another source of this information is in the appropriate section of your community associations service contracts, which specifies the scope of work to be done for each physical asset (see page 248). An appropriate management control for this task is the use of a facilities/equipment analysis sheet to record the information listed. See the sample on the following pages.
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Typical Language on Physical Assets and Their Maintenance From Governing Documents For a Condominium Association
From the declaration Definition of units Each unit consists of the space measured horizontally between the unit side or inside of the unfinished surface of the exterior walls enclosing such unit, and where walk and partitions separate such unit from other units, to the unfinished surface of the unit side of such walls and partitions, and measured vertically from the unfinished surface of the unit side of the floor to the underside of the unfinished surface of the ceiling of such unit. Included as part of a unit are a) the sliding glass door to the patio or balcony of a unit, b) the front entrance door and any other entrance door of a unit, c) all windows of a unit, and d) all carpeting of a unit. Common elements The common elements consist of a) the land described in Schedule A, b) all foundations, columns, girders, beams, and supports of all buildings, c) all exterior walls and exterior surfaces of the buildings; all doors other than unit doors; all floors and ceilings enclosing a unit; all walls and partitions separating units from hallways, corridors and stairways, and the terrace floor, d) roof, roof drainage pipes, gutters, headers, halls, corridors, stairs, stairways, crawl spaces, entrances, and exits of all buildings, and e) all yards, gardens, play and grass areas, all parking and driveway areas, and streets. From the bylaws Owners maintenance responsibility Each owner shall have the obligation to maintain and keep in good repair all portions of the unit and those other portions of the condominium hereinafter specified, including any interior walls; interior ceiling and floors; kitchen and bathroom fixtures and equipment, including refrigerator and range, dishwasher, clothes washer, clothes dryer, and disposal; lighting, heating, and air conditioning unit; those parts of the plumbing, mechanical, utility, and electrical systems which serve only his or her unit, whether located within or without the boundaries of his or her unit; and all carpeting, patio doors, screens, windows, drywall, doors, doorways, frames, and hardware that is a part of the entry system and window system of the unit.
Typical Language on Physical Assets and Their Maintenance From Governing Documents For a Condominium Association, continued
Each owner shall keep the interior of his or her unit and its equipment in good order, condition, and repair and in a clean and sanitary condition, and shall do all repair, maintenance, redecorating, painting, and varnishing which may at any time be necessary to maintain the good appearance and condition of his or her unit. In addition, each owner shall be responsible for all damages to any and all other units or to the common elements resulting from his or her failure to make any of the repairs required to be made by him or her by this Section, including, but not limited to, damages caused by water leaking from the plumbing fixtures of one unit into another unit. Condominium associations maintenance responsibility The condominium association shall maintain and keep in good repair as a common expense all of the condominium property not required to be maintained and kept in good order by an owner. Except to the extent that insurance required to be maintained or maintained by the board covers any damage or loss, the board shall not be responsible for any maintenance or repair to the interior of any unit nor for lack of waterproofing to any part of the unit or common elements. The board shall be responsible for all exterior surfaces, specifically including the painting of the exterior surface of the front door of each unit, whether or not included within the boundaries of a unit.
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Identify Responsible Parties for Doing the Maintenance

So far we have been talking about planning and organizing your community associations maintenance system. Management also involves leading or directing the human resources involved in your associations efforts. One management control you can use to keep track of who is responsible for the maintenance of various property elements or areas is the responsibility chart. It commonly is used as a handout for owners and tenants. Typical responsible parties include the owner, the association, the developer, a committee, or a manufacturer. (See the sample responsibility chart for a planned community on the next page.) If you prepare a responsibility chart for your community association, it must be based on your associations legal documents and board policies. Some legal documents specify that the community association must perform a particular maintenance, repair replacement, or upgrade, but the individual owner must pay any financial costs involved.
SAMPLE CARPET ANALYSIS

1. Description of the asset I 2,000 square yards total carpeted area in common halls with no padding I Commercial grade, 32 oz., Class A, flame spread, manufactured by Dupont Company I 100% continuous loop nylon filament, polypropylene backing, static proof, and treated for stain protection I Direct glue down on concrete floor 2-4. Maintenance needed, how often, how long it will take I Carpet requires daily vacuuming due to traffic and abuse (estimated time to vacuum is 4 hours) 5. Criteria for satisfactory maintenance I No resident complaints I Carpet clean upon inspection I Carpet cleanliness meets standards set by board 6. Preventive and emergency plans needed I Carpet requires annual professional cleaning by outside contractor (estimated cost is $1200)
To identify who should perform the maintenance for a particular physical asset, you will have to decide whether association employees can do the workor whether it will be necessary to use a contractor. (See the discussion in the Contracting chapter on pages 236239 to help you with this decision.) Here, a useful management control is the maintenance contact sheet. This is a form that records the contacts for various maintenance services and any pertinent information needed during an emergency. (See the sample maintenance contact sheet on page 220.) Every community manager should have an up-to-date maintenance contact sheet and carry it with him or her at all times. Emergencies do not keep normal business hours!
SAMPLEResponsibility Chart for Residents in a Planned Community
Whom to contact
ITEM 1. Owners equipment/appliances 2. Interior unit construction 3. Interior alterations to unit 4. Exterior alterations to unitapproval 5. Trash collection 6. Exterior pest control 7. Interior pest control 8. Plumbing 9. Air conditioners 10. Window glass replacement 11. Exterior painting 12. Roof repairs 13. Insurancefire or damage to structure 14. Insuranceowners contents 15. Common area landscape problems 16. Pool/spa maintenance 17. Recreation facility maintenance *If a warranty matter X X X X X X X X X X X Developer* Developer* X X Owner X X X Association Other Equip. Mfg. Developer* Developer* Architectural Committee
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SAMPLE: Community Association Maintenance Contact Sheet

Date_________________ Manager________________________________ Assn Name________________ City_______________ # of Units ______ Cross Streets and Address ______________________________________ Management Company ________________________________________ CONTACT Accountant: ______________________Phone:______________________ Air Conditioning: __________________Phone:______________________ Architect/Engineer: ________________Phone:______________________ Attorney: ________________________Phone:______________________ Cleaning Contractor:________________Phone:______________________ Electrician: ________________________Phone:______________________ Exterminator: ______________________Phone:______________________ Schedule: __________________________________________________ Fire: ____________________________Phone:______________________ Handyperson: ____________________Phone:______________________ Heating System: __________________Phone:______________________ Insurance: ________________________Phone:______________________ Landscaper: ______________________Phone:______________________ Emergency/After hours: ______________________________________ Mail Boxes: __________________________________________________ Patrol Service: ____________________Phone:______________________ Plumber:__________________________Phone:______________________ Police: __________________________Phone:______________________ Pool/Spa: ________________________Phone:______________________ Pool Keys: ________________________________________________ Pool Location: ______________________________________________ Roofer: __________________________Phone:______________________ Warranty Info: ______________________________________________ Snow Plowing: ____________________Phone:______________________ Street Sweeper: ____________________Phone:______________________ Schedule: __________________________________________________ Towing: __________________________Phone:______________________ Towing Procedure: __________________________________________ Trash Contractor: __________________Phone:______________________ Schedule: __________________________________________________ TV Cable/Master Antenna: __________Phone:______________________ Utility Emergencies: ________________Phone:______________________ Phone: ____________________________________________________ Developer: ________________________Phone:______________________
ESTABLISH FIVE BASIC MAINTENANCE PROGRAMS

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

Use your analysis of the associations maintenance needs and the boards related policies to establish five basic maintenance programs for your community: 1. Routine maintenance: This is the regular, recurring upkeep that must be done (for examplecleaning, cutting grass). Typically, the job description for a maintenance employee or a service contract is used to define the routine maintenance that is expected. 2. Preventive maintenance: This is periodic maintenance to avoid disruptive breakdowns and to prolong the useful life of the physical asset in question. (Examples include rebuilding pool pumps with a life expectancy of eight years every five years, and cleaning problem sewer lines every month to avoid backups.) Literature from the manufacturer is one of the best sources of information on preventive maintenance for equipment. 3. Emergency services maintenance: This is the ability to respond to unpredictable problems (for examplesewer backups, slope failures, roof leaks, frozen pipes, etc.). The key to a successful response to an emergency is to anticipate the different possibilitiesand to develop a plan for responding to each one. Especially important is the development of a disaster plan to address possible natural and terrorist catastrophes. For information on preparing for emergencies, see GAP Report #14: Disaster Management for Community Associations, published by Community Associations Institute. 4. Requested or corrective maintenance: This is maintenance requested by an owner, a tenant, or the boardor identified during routine inspection of the property. See the discussion of work order response forms on page 223. 5. Scheduled replacement: This consists of replacing physical assets as they wear out or break. Scheduled replacement is considered a part of maintenance because it addresses the useful life of a physical asset.
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The basis for your scheduled replacement is the reserve study and replacement fund budget (see pages 103 and 108). However, the maintenance needs of a replacement item may require adjustments in both your reserve study and replacement fund budget to allow you to replace the item sooner than originally planned.
Create Controls For Ensuring the Work is Actually Done

In addition to planning, organizing, and leading, management also involves controlling the communitys use of its resources. The following are some common management controls for ensuring that maintenance work actually gets done in a timely manner:
I
Maintenance calendar: This is a calendar or schedule that identifies what needs to be done during the yearand how frequently. See the sample maintenance calendar on page 224 for a pool and spa. Maintenance record: While the calendar tells you when maintenance ought to be done, the record tells you when it actually was done. Sometimes you can enter the date work was done right on the maintenance calendaras we suggest for our pool and spa sample. A separate maintenance record is useful when you contract work out. Use the records to verify that work was done before you pay any invoices. See the sample on page 225 for grounds maintenance. Note that by including the budget and contract columns in the maintenance record, the manager has added a financial control that will allow him or her to take quick action when necessary.
Inspection checklist: An inspection checklist I Documents your current maintenance standards I Helps you to identify potential problems See the sample checklist on page 226 for building inspections. You can use it to inspect one or more buildings.
Inspection report: An inspection reportcommonly called a punch listis a compilation of all the maintenance needs identified during an inspection. Use it to: I Assign maintenance tasks to your staff or contractors I Budget for maintenance needs I Identify any preventive maintenance that needs to be done I Determine when on-site staff or independent contractors are not properly performing work on time
For example, when you look at the sample inspection report on page 227, you will notice that several rear doors are not closing properly. The manager should arrange for someone to make any necessary adjustments on all the rear doors as soon as possible.
I
Work order/response form: A work order is a form for assigning work to be done in any one of the five maintenance programs described earlier. With some planning, it can be used I To document owner and tenant requests I To assign maintenance tasks to both maintenance staff and contractors I As a response form to be returned to an owner or tenant, indicating that work was completed or confirming that it was assigned I As a basis for allocating charges, when appropriate A work order/response form has several benefits. It I Identifies whether the need is an emergency or not I Requires attention I Allows follow-up to evaluate satisfaction I Provides a means of monitoring costs I Provides a history of the repairs that have been made I Documents any problems with contractors reported by owners or tenants I Indicates if the work is a recurring problem necessitating further evaluation On page 228 you will find a sample work order/response form.
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SAMPLE: Pool and Spa Maintenance Calendar
ACTIVITY
FREQUENCY
JAN
FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC
Acid Wash Chemicals: Maintain Balance Chlorinators: Monitor/Inspect Coping: Clean Filters: Backwash Filters: Clean Pool/Spa Tile: Clean Pumps: Empty Lint Baskets Pumps: Maintenance Railings: Clean Railings/Fence: Inspect/Tighten Safety Equipment: Maintain Signage: Maintain Skimmers: Inspect/Clean
As needed Daily Weekly Weekly As needed Weekly Weekly Weekly Weekly Weekly Weekly Weekly Ongoing Weekly X X X X X X X X X X X X X X X X X X X X
X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X
Underwater Lights: Check/Replace Ongoing
Note: When a task is performed, fill in the date on the chart. Keep a copy of the chart in a pending file in the managers office and an other copy on a clipboard at the pool.
SAMPLE: Grounds Maintenance Record 20XX
Item No. Budget Contract Mar

WEEK
April
WEEK
May
WEEK
June
WEEK
July
WEEK
Aug
WEEK
Sept
WEEK
Oct
WEEK
Nov
WEEK
1 2 3 4
1 2 3 4
1 2 3 4
1 2 3 4
1 2 3 4
1 2 3 4
1 2 3 4
1 2 3 4
1 2 3 4
Cuttings Edgings Pruning Per Season
19 4
$525 $293
$525 $293
6 16 6
28 7
18 27 4 16 4
29
16
31 31
10 20 27
10 21 21
5 19
20
$1574
$1574
3 half payment
27 half payment 30 4.5 hrs 14 .5 hr 23 2.5 hrs 27 1.0 hr
Spraying 10 hrs.
$63/hr.
$63/hr.
17 24 .5 hr .5 hr
27 .5 hr 2 3
Broadleaf Crabgrass Fertilization Liming
1 1
$752 $746
$752 $746
1 1
$539 $908
$539 $908 15
22
Weedbed Control
Include w/ mulching
Include w/ mulching
Soil Test Mulching 1 $3071 $3071 2/20 half 3 half payment
TOTALS
Note: This is a record for a nine-month contract.
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SAMPLE: Checklist
Rate 1 5: 1=Poor 2=Fair 3=Satisfactory 4=Good 5=Excellent Inspected by:____________________________ Date: ____________
Address
10200 10202 10204 10206 10208 10210 10212 10214 10216 10218 10220 10222 10224 10226 10228 10230 10232 10234 10236 10238 10240 10242 10244 10246 10248 10250
Trash Room
Hall Floors
Stair Treads
Glass
Cleaning
Common Parking Area
SAMPLE: Inspection Report or Punch List
Prepared: 1/11/XX By:_______________________________________
10206
Adjust the rear door closer Replace the split stair treads; several split stair treads Repair the fresh air vent leak at top hallway rear Top floor, replace the door closet bolts with the proper type Cut off the hallway door; it drags on the carpet Install fire alarm glass at front fire pool Adjust the terrace room fire door so it doesnt hit the frame
10220
Replace the weather strip at the rear entry door Lubricate the rear entry door Install the proper bolts at the terrace level door closet Replace several split stair treads Re-secure the fire alarm at the front entrance Lock the attic access
10228
Adjust the rear door so it closes properly Replace the fire alarm glass at the rear entrance Adjust the terrace level door closet Replace the logo and the front entry glass Replace the fire alarm glass at front entry
10240
Adjust the rear door so it closes properly Exit face missing at the rear entry Adjust or replace the terrace level door Reposition the emergency light at front entrance Replace split stair tread as needed 1/16/XX 1/16/XX 1/16/XX 1/16/XX
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SAMPLE: Work Order/Response Form

Work Order No. __________________
Association: __________________________ Date: ____________ Time: ______________ Homeowner Name: ________________________________________________________ Address: __________________________________________________________________ Home Phone: _________________________Work Phone: ________________________ Email Address: ____________________________________________________________ Service Requested:__________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ Comments: ______________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ Request Taken By: ___________________________________ Keys Needed? __________
Assigned to: ___________________________________________ Date: ______________ Date Job Completed: ______________________________________________________ Completed By: ____________________________________________________________ Comments: ______________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ Signed: __________________________________________ Date: __________________ Owners or Tenants Signature: _________________________________ Date: __________________
EVALUATE YOUR MAINTENANCE SYSTEM AND EFFORTS

In order to evaluate your communitys maintenance system and implementation efforts, you will have to: I Develop appropriate evaluation methods for your community association I Recognize the characteristics of an effective maintenance system I Recognize the characteristics of an ineffective maintenance system
Develop Appropriate Evaluation Methods

Here are some common methods community association managers use to evaluate their maintenance systems and implementation efforts:
I
Have your board of directors fill out a report card that addresses your basic maintenance programs in specific terms. Survey residentseither periodically or at the time their maintenance request has been handled. Review budget costs for the previous year to determine I How monies have been allocated I What the results were Review all maintenance work orders in terms of I Nature I Time spent I Money disbursed I Any other key factors Physically inspect the property. Drive through and/or visit other similar community associations to obtain a first-hand comparison or self-check.
Lack of complaints does not necessarily mean that you have a good maintenance system that is well-implemented. Take steps to obtain feedback.
Recognize the Characteristics of Both Effective and Ineffective Maintenance Systems

The chart on the next page compares and contrasts the characteristics of effective and ineffective maintenance systems for community associations. Use it to evaluate your
229
CHARACTERISTICS OF A MAINTENANCE SYSTEM EFFECTIVE INEFFECTIVE
Cost-effective Smooth daily operation of the community
Budget overruns Crisis-oriented maintenance Absence of established routines for performing maintenance Slow response time Poor record-keeping Increased frequency of maintenancerelated insurance claims
Efficient use and replacement of equipment Buildings and grounds in good condition Health and aesthetic standards of the community are being met Positive outlook and atmosphere among community members
Frequent equipment break-downs Buildings and grounds are run-down Local health or building department citations for corrective action A board that gets involved in day-to-day maintenance issues Residents or a board that show lack of respect toward management, employees, and all parties involved with maintenance Defensive employees
communitys maintenance system and implementation efforts.
FOCUS QUESTIONS
Use the following questions to help you identify and review the core concepts in this chapter. (Hint: Once you look up the answer to a question, you may want to jot down the page number next to the question for future reference.) 1. What are the maintenance goals for a community association? 2. What are five steps in establishing a maintenance system for a community association? 3. What are some sources that can provide information on a community associations physical assets and their maintenance needs? 4a. What kind of management control does an inventory provide? b. What kind of information does it typically record? 5a. What kind of management control does an analysis sheet provide? b. What kind of information does it typically record? 6a. What kind of management control does a responsibility chart provide? b. Name some typical parties responsible for maintenance in a community association. 7. What kind of management control does a maintenance contact sheet provide? 8. Name five basic maintenance programs for a community association and give an example of each type of maintenance. 9a. Compare and contrast a maintenance calendar or schedule and a maintenance record. b. Why do you need a form or forms for both? 10a. What is the purpose of an inspection checklist? b. What can an inspection report be used for? 11a. What can a work order form be used for? b. What are some benefits of using a work order/response form? 12. What are some common methods for evaluating maintenance efforts in a community association? 13a. What are some characteristics of an effective maintenance system? b. What are some characteristics of an ineffective maintenance system?
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Use the following questions to help you apply the information in this chapter to your own situation: 1. Which of the five steps in establishing a maintenance system has your community association carried out? 2a. What physical asset categories does your communitys maintenance system use? b. Are there any ways you can improve on the categories you use? c. If your community doesnt have a set of categories, how would you modify the set suggested in the chapter for your communitys use? 3a. Which sources of information have you used to identify your associations physical assets and their maintenance needs? b. Try the information sources listed in the chapter that you havent used yet and familiarize yourself with them. 4a. Which of the five types of maintenance programs described in the chapter does your community association have? b. Are there any you think your community association should add? Why? 5a. What maintenance management controls does your community association have? b. After reading this chapter, what maintenance management controls do you think your community association needs? c. After reading this chapter, what improvements do you need to make in your maintenance management controls? 6a. What methods has your community association used to evaluate its maintenance efforts? b. Why have they been effective or not? c. After reading this chapter, what evaluation methods do you think your community association could add? 7a. Which characteristics of a good maintenance system apply to your communitys system? b. Which characteristics of a poor maintenance system apply to your communitys system? c. What steps can you take to eliminate any characteristics you identified in b?
RESOURCES
For further information on community association maintenance, we suggest the following: Disaster Management for Community Associations (Guide for Association Practitioners Series, Report #14).
Describes the 16 major perils and their probability of occurrence and the seven essential steps for successful disaster planning. This is an absolute must for your resource library. Some associations even order this report in quantity to distribute to all key people. Appendices contain a sample plan for emergency preparedness and a six-page outline to help you construct your own disaster plan. (Community Associations Institute, 1999.)
Elevator Maintenance Guide. A thorough manual covering every aspect of elevator maintenancethe
managers role, management and maintenance routines, safety codes and compliance, out-ofservice and emergency procedures, and selecting consultants and contractors. Includes a prototype maintenance agreement and many useful forms. (Property Managers Association, 1995.)
Enhancing Outdoor Spaces for Community Associations (Guide for Association Practitioners Series, Report #17), by Douglas M. Kleine, PCAM. Presents ideas on how to improve outdoor common
areas for both new and mature communities. Contains several easy-to-implement landscaping and recreation ideas. (Community Associations Institute, 1998.)
Grounds Maintenance for the Community Association (Guide for Association Practitioners Series, Report #11), Second Edition, by Bette Weseman, PCAM. Contains the pros and cons of in-house
vs. outside contracting and helpful advice on establishing landscape maintenance projects, including common lawn care problems and how to hire the right tree care professional. (Community Associations Institute, 1998.)
Playgrounds for Young Children, Sue Wortham and Joe Frost, Editors. Discusses community playground safety, design, play environments, infant and toddler playgrounds, and advances in playground equipment. Contains important information on playground safety and practical guidance for maintenance training, checklists, and documentation. Includes a useful checklist for assessing equipment safety. (Community Associations Press, 1999.)
The Road Repair Handbook: The Complete Guide to Fixing Roads and Driveways, by Roderick D.
Johnson. Written for anyone who wants an understanding of how to plan and manage the time, money, and labor needed for community road repair and improvement. (Trans Mountain Publishing, 2002.)
Trash Collection and Recycling. How to set up a recycling plan that covers each type of material to be recycled. Covers government regulations and provides advice on how to contract for waste
removal and recycling services. (Property Management Associations, 1993.)
The Urban Forest Management Handbook. Definitive work on all aspects of managing urban
forestsdiscusses planning, maintenance, planting, and how to conduct forest inventories. Contains technical information clarified for the novice audienceaddresses urban water quality, species diversity, and wildlife habitat issues. Contains over 100 pages of worksheets, charts, and checklists, as well as 12 appendices covering practical areas like funding a forestry program, sources of assistance, pruning standards, forest buffers, invaM-100: The Essentials of Community Association Management
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Note taking
CHAPTER 10
CONTRACTING
KEY TERMS
Assignability provision, p. 253 Bid request, p. 239 Bid specifications, p. 239 Certificate of insurance, p. 251 Contract, p. 235 Default, p. 251 Entire obligation provision, p. 253 Governing law provision, p. 253 Modification provision, p. 253 Payment bond, p. 252 Performance bond, p. 252 Progress payments, p. 249 Prospective bidders questionnaire, p. 243 Qualifications sheet, p. 243 Request for proposal, p. 239 Severability provision, p. 253 Waiver of lien, p. 252 Waiver provision, p. 253 Warranty, p. 243
Management of a community associations resources frequently involves the use of contracts to obtain the products and services required. As we said in Chapter 8, a contract is I An agreement between two or more parties I Enforceable by law I By which each party promises to do, or not to do, something Whenever a community association enters into a contract, it is binding itself both legally and financially. Therefore, as a community association manager, you must assist your community to enter contracts as carefully as possibleseeking legal or technical advice whenever necessary. The purpose of this chapter is to introduce you to the basic bidding and contracting process from a community association perspective. It will introduce you to: I Deciding whether to contract work out I Preparing a bid request or request for proposal I Evaluating bids I Key contract provisions I Negotiating contracts
235
What You Will Learn

After reading and reviewing this chapter, you should be able to explain and understand: I Criteria for deciding whether to contract work out or use association staff I Preliminary steps in preparing a bid request or request for proposal I Ways to locate potential contractors I Importance of thorough and accurate bid specifications I Contents of bid requests or requests for proposal I Steps in evaluating bids I Key contract provisions for community associations I Basic steps in negotiating contracts I Tips on successfully completing a contract
DECIDING WHETHER TO CONTRACT WORK OUT

Deciding whether to have a task performed by association staff members or by a contractor requires an analysis of several work requirements I Personnel I Time I Cost I Tools, equipment, and supplies I Insurance coverage I Licenses and permits I Storage facilities See the decision chart on the next page for a summary of the following considerations:
Personnel
When deciding whether to have staff members or a contractor perform a task, consider the required: I Number of people I Expertise I Supervision I Availability When you look at the number of people a task requires, is it more than the community has available? Can the staff members available perform the task in addition to their routine assignments? If you try to stretch your people too thin, there is the danger of demoralizing the staff and delaying completion of all tasks. In comparison, contractors can add workers as necessary, even though they have established crew sizes.
When you look at the expertise a task requires, do the available staff members have the training and skills needed? Will it be possible to make up a work crew of one or two experienced people who will be assisted by less-experienced ones? Will it be possible to bring your people up to speed with a short training period? Always consider the possible costs of using inadequately trained people to do a job. In comparison, if the skill involved is a specialized one, an experienced contractor will know where to find trained workers. When you look at the supervision a task requires, do you have someone available and qualified to supervise staff members if they do the work?
DECISION CHART FOR CHOOSING BETWEEN ASSOCIATION STAFF & CONTRACTING OUT
I
Place a check in a column if the party meets the work requirement. If the work requirement is not necessary, put an N/A for Not Applicable in a column. After you have reviewed all the work requirements, select the party that best meets the set of requirements as a whole.
CONTRACTOR
Chances are that someone is the manager. Be realistic about the amount of supervision that will be necessary and whether you or anyone else on site can provide it.
WORK REQUIREMENTS ASSOCIATION An adequate number of people are available to do the job The people available have the necessary skills Adequate supervision is available Available to do the work immediately Available for a job of this length Will not be pulled off assignment to do other work Least expensive option Has access to the necessary tools, equipment, and supplies Has adequate insurance coverage for this job (liability, workers compensation, vehicle) Has the necessary license(s) and permit(s) Storage facilities are available for any tools, equipment, parts, or materials
In comparison, a contractor can and should be contractually bound to provide adequate supervision for a work crew. Your contract must specify what will happen if a contractors work crew does not perform the task at all, performs it inadequately, or otherwise behaves inappropriately on the job. (See the discussion of contract provisions on page 246.)
237
Time
When deciding whether to have staff members or a contractor perform a task consider: I The urgency of the work I How long it will take to complete the task If a task must be done immediately, staff members are already on siteall other factors being equal. If a task has low urgency, staff members might be able to work on it as their regular duties allow. When you estimate how long it will take to complete a task, include both start-up and clean-up time in your estimate.
Cost
When deciding whether to have staff members or a contractor perform a task, look at both the cash outlay required and the real labor costs involved. The only cash outlay required if you use employees would probably be for materials and equipmentand possibly for permits and licenses. On the other hand, employees are a real cost element in a special work project, even though they are already budgeted for in terms of training time, compensation, taxes, and benefits. This cost element should not be overlooked. Depending on the project, it actually could cost more to use employees instead of contracting out.
Tools, Equipment, and Supplies

When deciding whether to have staff members or a contractor perform a task, consider whether specialized tools, equipment, or supplies will be needed for timely, complete, and accurate work. Does your association already own what is neededor a reasonable substitute? Is anything needed worth purchasing for continuing use? Can anything needed be rented or leased for a reasonable price? Are the employees properly trained on how to use the tools or equipment? Are there any Occupational Safety & Health Administration (OSHA) requirements that the employees need to be aware of? When analyzing work requirements, dont forget to consider the possibility of borrowing or trading tools or equipment with other community associations. In comparison, a qualified contractor will provide any tools, equipment, and supplies a task requires.
Insurance Coverage
When deciding whether to have staff members or a contractor perform a task, consider which party or parties haveor can obtainthe necessary insurance coverage(s).
Check with your associations insurance agent to verify that its policy or policies cover the work to be done by staff members. If a task requires a specialized skill, your associations liability insurance may not cover it. In comparison, all qualified contractors will carry the necessary coverage, including I Commercial general liability I Use of owned or non-owned vehicles I Workers compensation See Chapter 8 for an explanation of each type of insurance.
Licenses and Permits

When deciding whether to have staff members or a contractor perform a task, consider whether any special licenses or permits are needed. Are the site employees properly licensed? Do you have the time and expertise to obtain required permits? Check with the proper authorities to confirm what licenses or permits are needed for a job. Then, dont just take the contractors word that he or she has them. Ask to see them. An experienced contractor should be required to have the necessary licenses and can obtain the required permits on behalf of the association.
Storage Facilities
When deciding whether to have staff members or a contractor perform a task, consider where tools, equipment, and supplies will be storedand the liability involved. Make sure that all supplies are stored and labeled in accordance with OSHA standards. Both security and safety are the issues here. You want to avoid theft and accidents. Depending on the tools, equipment, and supplies involved in a task, your association may not be able to securely and safely store them for the duration of the project.
PREPARING A BID REQUEST OR REQUEST FOR PROPOSAL

A bid request or request for proposal (RFP) is an announcement that an organization is interested in receiving proposals for a particular project. The bid request or RFP includes
I
The bid specifications or detailed instructions about the products or services requested. All contract terms should be included in the bid request. This will help the association avoid a situation where the successful contract bidder receives a written contract whose terms may not be acceptable to the contractor.
239
Information about the association that the contractor will need in order to prepare a bid. Information about work conditions, such as hours, uniforms, parking, storage areas, license requirements, daily clean-up requirements, and time requirements. A request for information about the contractor that will help the association evaluate the contractors ability to perform the work and meet the specifications.
Preparing a bid request or RFP involves: I Gathering preliminary information I Identifying potential contractors I Preparing thorough and accurate bid specifications I Preparing a complete bid request or RFP I Conducting a pre-bid walk through I Possible consultation with a professional engineer or architect Because of the amount of effort the bidding process requires of both the community association and the bidders, it should be used primarily for larger jobs or purchases or for on-going services, such as lawn maintenance. If the bidding process will be needed, confer with your board to determine the minimum size of a contract that requires competitive bidding.
Gathering Preliminary Information

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

You can begin identifying potential contractors while you are developing your bid request or RFP. It usually takes five or six requests for proposals to obtain at least three bids. Some contractors will choose not to bid for one reason or another. You can obtain the names of potential contractors for a specific job from:
I
Past work done for your community association or management company Referrals from other community associations in the area Referrals from supply firms doing business with your community association Referrals from the manufacturer or distributor of any equipment involved Referrals from any architects or engineers who have worked with your community association Referrals from other members of your nearest chapter of Community Associations Institute Referrals from local trade associations that represent the type of contractor for whom you are looking
Before you send a contractor a bid request, call first to see if the company is interested in bidding. You want to avoid sending out bid requests and waiting for a responseonly to find out that none of the receivers were interested or available.
241
Preparing Thorough and Accurate Bid Specifications

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

If the task involved is a small one, your bid request or RFP may simply be a letter. If the request is more complicated or larger, you may want to use a short cover letter that tells the contractor that a bid request is enclosed. A complete bid request or RFP includes:
I
The full name, address, and telephone number of the community association that is the contracting party. A detailed description of the work to be done (or the product to be purchased). These are your bid specifications; be as specific as possible in describing the scope of work or the product desired and the results expected. For example For an asphalt resurfacing job, do you want one-and-a-half or two inches of asphalt overlay, or the entire area dug out, compacted and four inches of new asphalt installed? What specific areas require remedial work? Mark the areas to be repaired/replaced and provide the total square footage. Prepare specifications only for those services or products you adequately understand. To prepare some service specs, you may need to draw on the technical skills and knowledge of such parties as an engineer, architect, or supplier.
Key dates I Deadline for submitting a bid I Date of a pre-bid walk through to review the specific areas where the work is to be performed I Date work expected to begin I Date work expected to be completed or products expected to be delivered Whom to call for information or inspection of site? Where to submit bid? Request for three to five references from previous jobs of similar size and scope. Warranties required: A warranty is a promise or guarantee that parts, materials, or labor will last for a designated period of time.
The bid request should state I What parts, materials, or labor it wants guaranteed? I For how long? I What it expects the contractor to do if any parts, materials, or labor are defective? For very large and complicated jobs, you will also want to enclose a prospective bidders questionnaire or qualifications sheet. This is a document that asks for certain types of information to determine if the bidder is technically and financially qualified to handle a job of this scope. For large or complicated jobs, hold a pre-bid meeting with all the contractors at a designated time. This will allow the contractors to all see the work at the same time, and will provide you, or the consulting engineer or architect, the opportunity to answer questions. This will save you and the contractors a significant amount of time, and allows all of the contractors to get the same answer to each question. Notice how the sample RFP for lawn maintenance services on the next page is set up to allow the bidder to fill in his or her prices right on the RFP. This approach works best with bid specifications that can be described as a list of separate tasks. The manager who prepared this RFP purposefully broke out the job into separate tasks. By asking for a price per service, instead of a fixed price for the complete list, this community association will be able to pay for, track, and adjust its costs separately. This means it can cut back on specific services when necessary without much difficulty or confusion. We included the sample RFP for asphalt work on page 245 to illustrate the amount of detail needed in bid specifications for certain types of services.
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SAMPLE: Request for ProposalLawn Maintenance

Job: Location: For property information contact: Proposal due by:
LAWN SERVICES 18 2 2 1 1 1 Lawn cuttingstrim every time around all signs, guard rails, and light poles. Fall fertilizingsOctober and late November. Broadleaf weed controls as neededApril & June. Pre-emergent crabgrassApril. Liming1/2 ton/acreDecember. Prepare beds and mulch five entry beds at brick entrance walls. Edge with spade and mulch in March/April to a depth of 3". Fluff mulch two times during season. Weed all beds monthly. Season of pruning of all trees and shrubs at or around all five entry walls. Plantings of flowers at five entrance signs and seasonal maintenance of these beds. Flowers to be rotated during the season. Watering of flowers to be included as needed. Spring, summer, and fall flowers to be planted. Sprayings of common trees and shrubs located at five entrance areas. PRICE PER SERVICE $ 1,312.00 $ 1,426.00 $ 1,925.00 $ 1,670.00 $ 2,519.00
$ 2,888.00 $ 1,008.00
$ 1,200.00
(per seasonal planting)
$ 512.00
(estimate 8 hours)
SAMPLE: Request for ProposalAsphalt Work
______________________________is soliciting unit price proposals for asphalt work to be done between June 15th and August 15th, 20XX with at least two weeks advance notice. The board of directors of the association will select a contractor for the project. The yardages given are estimates. The job will have to be field measured before submitting your proposal. Unit prices must include all material, labor, tools, equipment, insurance, supervision, barricades, traffic safety devices, etc., to perform the seal coating and topping to do a complete job. Moving cars will be the associations responsibility. All work and materials must be in accordance with contract specifications and guaranteed for one year after completion and acceptance. When the paving and/or seal coat is completed, the parking lots must be restriped using white traffic paint for lines and caution signs painted on road. All handicapped markings, fire lanes, and no parking lane curbs and reserved stencils or similar markings must be repainted as currently shown. The contractor must note the appropriate locations. Please submit your bid to: To inspect the property, obtain directions from ____________ at _________________________ . Remember, submit unit prices and your material specifications. If you can only bid on seal coating, please so state. Include striping as outlined. All bids need to be received by February 15, 20XX.
ATTACHMENT Location Allen Court Black Court Shore Drive Sq. Yds. 3,400 9,000 16,000 Work Item to be Bid 1-1/2" topping 1-1/2" topping Seal coat only Bldgs. 7,8,9 Bldgs. 10, 11, 12, 13
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EVALUATING BIDS
In order to evaluate the bids you receive, take the following steps: 1. Review each bid to verify that it conforms to your specifications. Contact the bidder for clarification if you have any question about a term, a price, or a promised service. Dont assume anything! 2. Check each bidders references. 3. Check each bidder with your local Better Business Bureau and the local Office of Consumer Affairs to see what type of complaints it has receivedif any. 4. Verify insurance requirements. 5. Verify licenses (if required). 6. Eliminate any bids that are unacceptable based on steps #1-5. 7. Compare the remaining bids in terms of price. (See the sample bid comparison spread sheet on the next page for a comparison of the bids based on our earlier sample bid request for lawn maintenance services.) Be wary of extremely low or high-priced bids. A price that is noticeably lower than the rest may mean that the low bidder doesnt understand what the job involves or is willing to cut corners. A price that is noticeably higher than the rest may mean that the high bidder doesnt understand what the job involves or wants a high profit margin. 8. Recommend a contractor to the board based on the following criteria I Demonstrated understanding of what needs to be done I Possesses the necessary qualifications to do the job I Reasonable price
KEY CONTRACT PROVISIONS

Your community association should have a standard contract prepared or reviewed by its attorney. Provisions should be added or deleted based on the particular agreement involved. The following are key provisions that ought to be in every contract. As a manager with a professional duty to your community association, you must take steps to protect its interests when it enters into a relationship with a contractoreven if it seems unlikely that any problems will arise during the relationship. The discussion of key contract provisions goes into a level of detail appropriate for new managers. Each provision can include more detail.
SAMPLE Bid Comparison Spread SheetLawn Bids: 20XX Season
COMPANY A
COMPANY B
COMPANY C
COMPANY D
Item
Budget Budget Budget Bid Qty Unit Total Qty (in $) (in $)
Unit Total (in $ )
Unit
Total (in $)
Unit Total (in $)
Unit
Total (in $)
Cuttings Fertilizing Broadleaf PreEmergent Liming Prepare & Mulch Entrances Pruning Entrances Plant Entrances Tree/Shrub Spray TOTAL
18 1,075 2 1 1 1 1,200 1,250 1,300 1,500
19,350 18 2,400 2 1,250 2 1,300 1 1,500 1
1,168 825 950 950 1,000
21,024 1,200 1,650 2,600 1,900 2,600 950 1,700 1,000 1,500
21,600 5,200 5,200 1,700 1,500
1,100 1,500 1,620 1,620 1,620
19,800 3,000 3,240 1,620 1,620
1,028 18,504 900 800 800 840 1,800 1,600 800 840
1 1 1 3
1,000 200 7,000 150
1,000 1 200 1 7,000 1 450 3 $34,450
2,064 255 1,980 130
2,064 1,500 255 1,980 2,500 390 $31,213 100
1,500 N/B 2,500 300 $39,500
1,850
1,850 INCL. 150 3,695 150
INCL. 150 3,695 450 $27,839
4,530 175
4,530 525 $36,185
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Parties to the Contract

A contract should state the complete names, addresses, and telephone numbers of the two parties to the contract. The community association should clearly be identified as one of the contracting parties.
Scope of Work
A contract must spell out specifically what work is to be done by the contractor. The larger the dollar amount and size of the project, the more detail should be included. Both parties (and possibly a court) must understand precisely what the contractor is responsible to do. Instead of referring to prior correspondence that describes the work, provide a completed, detailed description in the contract or provide the specifications as an attachment. The scope of work should also include:
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Requirement that contractor conform to applicable codes, industry standards, or manufacturers specifications Requirement that contractor provide sufficient employees necessary to perform the scope of work as described in the contract Requirement that contractor clean up after the work is performed and restore the common elements or areas to their prior condition Exact location where work is to be performed Working hours Provisions for tools and equipmentinclude security, storage, insurance, rental, and repair terms Materials I Quality, type, quantity, color I Who provides them I Delivery and storage I Who provides insurance coverage I Disposal of leftover materials Storage I Where I Who is responsible for security and for any missing equipment Job site safety requirements
Compensation
A contract should state: I Total agreed-upon amount that will be paid for the product or service I When payment(s) will be made I In what manner payment(s) will be made I On what terms payment(s) will be made I Amount of retainage amount, if any For example, a contract may allow for progress payments. These are partial payments based on some demonstrable progress in completing the work involved. It is reasonable for a contractor to negotiate progress payments. Just be sure to tie them to observable progress. Your final payment should be based on the work being completed to the community associations satisfaction (see discussion of standard of performance below). This means the final payment should be large enough to provide an incentive to the contractor to complete the work satisfactorily. As an alternative, some contracts call for the association to retain a certain percentage of the contract price until the terms of the contact are fulfilled.
Time Period
A contract should state when the work is to begin and when it must be completed. It should also provide for liquidated damages payments by the contractor, or reduction in cost if the contractor is responsible for the deadline not being met.
Standard of Performance
A contract should provide a standard against which a contractors work can be judged. For example, the contract may require the contractor to create a specific result, such as an appearance identical to that existing immediately prior to the commencement of the work or a structure substantially similar in design and appearance to existing structures of the same type in the community association. Even without such a provision, contractors will generally be held to the standards established by prevailing custom and practice in their particular industries. But as with other terms of an agreement, it is always best to expressly state the expected standard of performance. Whenever possible, try to use an objective standard of performance, such as manufacturer specifications, American Standard Test Methods (ASTM), or American Institute of Architects (AIA) standards.
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Warranty
A contract should state the agreed upon warranties clearly and in detail. As we said earlier in the chapter, a warranty should state: I What is covered I For how long I What the contractor will do if the work or product proves defective
Restoration
A contract should contain a clause stating that if the contractors employees, agents, or subcontractors damage any common or individual property in the community while performing contracted work, the contractor agrees to fully restore the property to its original condition. This clause may also provide for the community association to retain part of the contract price until restoration has been completed. Or it may provide for deducting from the contract price any costs that the community association is forced to spend to do the restoration itselfif the contractor does not do it within a specified period after completion of the work. Even without this clause, a contractor will be liable to repair any damage caused by its negligence. But such a clause in a contract provides better protection for the community association.
Indemnification
A contract should expressly state that the contractor will indemnify and hold harmless or reimburse the community association for any amount the association is required to pay because a claim was made against the association as a result of the contractors workas well as for any legal costs associated with defending the association against any claims. For example, if an owner sues the community association because the owner tripped and injured himself or herself on the stairs that a contractor was in the process of resurfacing, this provision would require the contractor to pay any amount for which the community association is found liable, as well as the legal costs involved. The provision should be broadcovering any claims of any type by any party arising from the contractors work.
Insurance
A contract should expressly require the contractor to have all necessary insurance for the projectincluding liability, workers compensation, and vehicle insurance. The contract should also require the contractor to provide the community association with certificates of insurance, which prove that it has coverage, before work begins. Have the community association insurance agent review the contractors insurance policies to assure that coverage is adequate. Depending on your section of the country and your insurance carrier, it may be possible to get a contractor to name the association (and its management company, if any) as additional insured parties on the contractors policies.
Licenses and Permits

A contract should require the contractor to demonstrate to the community association that it has the necessary licenses and permits for the work before work begins. A contract should also specify that the contractor is required to comply with all federal, state, and local laws, regulations, or codes that are applicable.
Notices
A contract should clearly state the names and addresses of the individuals representing both parties for the purposes of that contract. These will be the official addresses to which correspondence related to the contract must be sent.
Termination
A community association should always have a way to get out of a contract if it so desires. This is particularly true for long-term service contracts. A service contract should contain a provision that gives the community association the right to terminate the contract with or without cause after a specified period of prior notice to the contractor.
Default
A contract should specify:
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What constitutes a default or failure of either party to fulfill the terms of the contract What each partys rights are if the other defaults
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Financial Protection
A contract should provide for the community associations financial protection if the contractor should default. This is important at all times, but especially during a weak economy, or for larger projects. Depending on the type of project, a contract may require:
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Performance bond: This is a guarantee by a surety (a third party) to protect the community association if the contractor fails to perform or finish the work. Because there is a cost to the community association involved, a performance bond typically is used with certain large projects. Payment bond: This bond comes in a package with the performance bond. The surety guarantees that the contractors suppliers and any subcontractors will be paid if the contractor does not pay them. Waiver of lien: This is a document which gives up the right to make a claim against the community association for payments not received. When a contractor does the work and receives payment, the contractors representative provides a waiver of lien signed by the contractoras well as waivers signed by the contractors suppliers and any subcontractors. If the project involved is a large one with multiple payouts, it is possible to receive waivers of lien more than once during the project as each payment is made. Use a waiver of lien when a project involves the heavy use of materials or subcontractorse.g., some type of construction projectand your community association wants to avoid the risk of having to pay for materials or subcontractors if the contractor fails to do so. Be sure to obtain any waivers of lien before making final payment on a projecteven a small one. If you do not, your community association could end up paying for supplies or subcontractor services twice!
Although we discussed progress payments and retention of a portion of the contract price under the compensation provision, notice how they are also forms of financial protection for your community association.
Provisions That Address the Legal Binding of a Contract

A contract should contain the following provisions which address the legal binding of the contract:
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Assignability: This provision states that neither party may assign its obligations under the contract to any other person without the express written consent of the other party. The contract should specifically state that the contractor cannot use subcontractors without the express written consent of the association. Modification: This provision states that the contract may not be modified in any way unless such modification is written and signed by both parties. Waiver: This provision states that a waiver (permission) by one party of any breach of contract (failure to fulfill a provision) by the other party shall not act as a general waiver of future breaches. In other words, each party says to the other, If we let you slide on any contract requirement at any time, it doesnt mean were letting you slide on any other requirements, or even on that one a second timeunless we decide to let you do it again. Governing law: This provision states that the law of a particular state will be applied if there are any disputes about the contract after it is signed. This is particularly useful when the community association and the contractor are based in different states. Severability: This provision states that if a court finds that any clause of the contract is illegal or unenforceable, that clause shall be severed (separated) from the rest of the contract, so that the whole contract need not be invalidated. Entire obligation: This provision states that the written, signed contract constitutes the entire agreement between the parties. Except for any documents that are expressly referred to in the contract, neither party can claim that any other correspondence, communication, or documents contain obligations, promises, or requirements that are part of the binding contract between the parties.
Make sure that if you or the board have any questions or concerns that legal counsel is consulted. Also, for larger contracts, the associations attorney should perform a thorough review of the contract.
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NEGOTIATING CONTRACTS
In this last section of the chapter, we would like to discuss: I The basic negotiating process I Tips on successfully completing a contract
The Basic Negotiating Process

Here are the basic steps in negotiating a contract: 1. Have the associations attorney review the proposed contract before it goes to the contractor. 2. Present your associations contract to the contractor whom the board selected. 3. The contractors representative will either sign it as is or propose changes. 4. Negotiate any changes the contractor proposes, have the attorney review them, and have those changes initialed by the contractor. 5. Present the initialed version of the contract signed by the contractors representative to the authorized community association representative for his or her initials on any changes and signature on the contract. The president and/or secretary of the community association should sign contracts on its behalf. As a manager, you should not sign a contract as you are not the party entering into the agreementthe community association is. 6. Give the contractor and the board copies of the contract signed by both parties. One word of caution: Dont try to operate outside the basic bidding and contracting process. You will only harm your community association and yourself. A typical example is the situation where a manager asks a contractor to come in at a lower price if he or she really wants the job.
Tips on Successfully Completing a Contract

Although this chapter is just an introduction to bidding and contracting, we would like to end with a few important tips on successfully completing a contract:
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Monitor the job site while work is in progress. You need to verify that work is proceeding as contracted. Take your contract with you when you visit the site. You also need to verify that your contractor is taking adequate steps to ensure job safety. Is the contractor protecting your residents and your employeesas well as its own employees and any subcontractors? Inspect the completed job before final payment. Prepare a punch list (see example on page 227) when the work is completed. Take the contract with you and walk the job with the contractor when the work is done. Point out the items in writing that need attention before final payment is made. You cannot see a completed job from behind your desk! Prepare a payment schedule if you are going to make progress payments. Develop some kind of form you can use to keep track of progress payments for a project. Experienced managers warn that theres a real possibility of overpayments without one.
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FOCUS QUESTIONS
Use the following questions to help you identify and review the core concepts in this chapter. (Hint: Once you look up the answer to a question, you may want to jot down the page number next to the question for future reference.) 1. Why is it important to assist your community association with entering into contracts and to do so as carefully as possible? 2a. What are some work requirements to consider when deciding whether to have a task performed by staff members or by a contractor? b. For each work requirement you name, explain the considerations involved. 3. What does a bid request or request for proposal include? 4. What are the five steps to take before developing a bid request or RFP? 5. Name some sources that can be used to obtain the names of potential contractors for a specific job. 6. Why is it important that bid specifications be as thorough and accurate as possible before the bid request or RFP is sent out? 7. List the basic items of information a complete bid request or RFP should include. 8. What are the eight steps to take in order to evaluate a set of bids for a project? 9a. Why is it important to have a standard contract with certain key provisions in it? b. Name some of the key provisions that should be included in every contract. c. Explain each provision you named in b. 10. What are the six basic steps in negotiating a contract? 11. What are some tips for successfully completing a contract?
Use the following questions to help you apply the information in this chapter to your own situation: 1. Identify a project or routine service your community association is considering or has decided to undertake. Use the decision chart on page 237 to decide whether staff members or a contractor would best meet the work requirements involved. 2. Identify a project or routine service for your community association whose bidding and contracting process you have either participated in or observed. (If you are relatively new to your community association, interview another employee or a board member about a recent process.) Based on what you have read in this chapter a. Review the steps taken to gather preliminary information for the bid request. How could they have been improved? b. Review the process used to identify potential contractors for the project. How could it have been improved? c. Review the bid specifications. How could they have been improved? d. Review the complete bid request or RFP. How could it have been improved? e. Review the steps taken to evaluate the bids received. How could they have been improved? f. Review the steps in negotiating the contract for the project. How could they have been improved? g. Are there any ways execution of the contract could have been improved? 3a. If your community association has a standard contract it uses, identify the clauses which represent the key contract provisions mentioned in this chapter. If there are key provisions not represented in your community associations standard contract, ask your immediate supervisor or communitys attorney about them. If your standard contract has clauses which represent provisions this chapter hasnt mentioned, ask about those, too. b. If your community association does not use a standard contract, what are some reasons you could use to convince your board that it needs one?
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RESOURCES
For further information on bidding and contracting for community associations, we suggest the following Bid Specifications and Contract Negotiations (Guide for Association Practitioners Series, Report #9),
Third Edition, by Stephen R. Bupp, CMCA, AMS, PCAM. Provides readers with the information needed to write simple, effective specifications and contracts, ensuring that repairs or maintenance of your common areas will go smoothly. Contains a 27-point specifications chart, a checklist that will prevent you from overlooking any aspect of the project, and adaptable samples of specs for a repainting project plus a bid for a preventive maintenance contract. (Community Associations Institute, 1997.)
Choosing a Management Company (Guide for Association Practitioners Series, Report #8), Fifth Edition,
by Michael E. Packard, PCAM. This report examines what to look for in a manager, including an eight-step selection process with supporting information and sample forms, and guidance on how to work with the manager. (Community Associations Press, 2002.)
Community Association Legal Counsel: How to Select & Use Association Legal Counsel, (Guide for Association Practitioners Series, Report #13), Second Edition, by Thomas J. Hindman, ESQ. and
Loura K. Sanchez, ESQ. Contains information on how to get the best out of your association attorney as well as what to consider when searching for a new one. Offers guidance for working out various fee structures and includes a five-part appendix consisting of a sample request for proposal, interview questions, evaluation criteria, billing statement, and more. (Community Associations Press, 2002.)
by Thomas Burgess, PCAM. Reviews how to recruit a new on site manager and how to work successfully with the manager. Also guides the reader through the transition period. (Community Associations Institute, 1996.)
Selecting the Landscape Maintenance Contractor (Guide for Association Practitioners Series, Report #12),
by James B. Cranford, AMS, PCAM. Discusses the criteria for searching for, selecting, and hiring the landscape maintenance contractor. Outlines how to design the contract. (Community Associations Institute, 1996.)
CHAPTER 11
HUMAN RESOURCE MANAGEMENT

KEY TERMS
Employee handbook, p. 261 Employment at will, p. 261 FICA, p. 268 FLSA, p. 268 Human resources management, p. 259 Job description, p. 263 OSHA, p. 269 Performance evaluation, p. 279 Performance goals, p. 276 Performance planning, p. 276 Performance standards, p. 276 Personnel manual, p. 261 Progressive discipline system, p. 282 Sexual harassment, p. 267
As a service organization, one of a community associations primary resources is people. A community association relies on human resources to operate, maintain, repair, and replace its facilities. These resources may be paid employees, volunteers, or contractors. The purpose of this chapter is to introduce you to the human resources management of employees. Human resources management (HRM) is the process of planning, organizing, leading, and controlling an associations human resourcesin this case, its employeesin order to achieve the associations goals. In community associations managed by a management company, the management contract will specify who has the authority to hire, fire, supervise, and compensate any association employees. Some boards retain authority in some of these areas when they engage a management company. It is important not to confuse employees with independent contractors. Determining whether a worker is an employee or an independent contractor is beyond the scope of this chapter; however, the determination is made on the basis of multiple factors, rather than an agreement that purports to designate the worker as an independent contractor. The most important factor is how much control the worker exercises over how he/she performs assigned tasks. Human resources management involves: I Establishing and administering HRM systems I Complying with applicable federal, state, and local laws and regulations I Recruiting, screening, and selecting people
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I I I I
Training and developing people Establishing performance objectives and evaluating work performance Supervising people Dismissing people, when necessary
An effective human resources management process helps both management and employees to fulfill their basic obligations to one another. Management is obligated to provide: I Fair pay for services received I A safe work environment I Proper supervision In turn, employees are obligated to: I Possess the skills needed to perform assigned tasks I Use reasonable care in performing assigned tasks in order to protect the communitys assets and interests I Complete assignments in conformity to performance standards within a reasonable time frame
What You Will Learn

After reading and reviewing this chapter, you should be able to explain and understand: I Human resources management I Basic obligations of management and employees to one another I Personnel manual or employee handbook I Job descriptions I Basic employee files and records I Basic areas of employment addressed by federal, state, and local laws, regulations, and case law (court decisions) I Basic process for recruiting, screening, and selecting a new employee I New employee orientation, initial job training, and ongoing training I Performance planning and evaluation I Basic principles of supervision I Progressive discipline system I Grounds for dismissal I Dismissal procedures
HUMAN RESOURCES MANAGEMENT SYSTEMS

Human resources management systems typically include: I A personnel manual or employee handbook I A set of job descriptions I A compensation and benefits program I Employee records and files
Personnel Manual or Employee Handbook

Even if your community association has just one part-time employee, it should have a written set of policies and procedures that: I Define the relationship between the community association and the employee I Explain the rights and responsibilities of both the employer and the employee The content and wording of any manual or handbook have legal ramifications. As a result, any personnel specialist or attorney whom you consult may make one or both of the following recommendationsdepending on the state you are in. One possible recommendation is that your manual or handbook contain an employment at will statement. This is a statement to the effect that the community association retains the right to dismiss an employee without cause at any time. Your personnel advisor may also recommend that your manual or handbook contain a disclaimer to the effect that it is not an implied contract or promise of employment. In addition to these possible wording precautions, to protect the associations and the employees legal interests, you should: 1. Set up an established procedure to ensure that each employee has received and read a copy of the manual. 2. Provide existing employees with written changes and additions to the manual as they are made, and document receipt. 3. Have an experienced attorney or personnel specialist review your original manual and any updates before they are circulated to any employees. Here are some typical policies and procedures included in a manual or handbook: I Equal Employment Opportunity/Affirmative Action policies I Sexual harassment policy I Work day I Full-time versus part-time status I Paycheck procedures I Behavior on the job
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I I I I I I I I I I I I I I I I I I I
Appropriate dress Probationary period Progressive discipline system Performance reviews Pay increases Separation (retirement, voluntary departure, dismissal) Insurance Sick leave Maternity and family medical leave Annual leave Long-term absence Bereavement policy Jury duty Holidays Vacations Reimbursement for continuing education Attendance at professional meetings Fingerprinting policy Drug-testing policy
SAMPLE: PERSONNEL MANUAL POLICIES AND PROCEDURES

Behavior on the Job A. The association expects all employees to treat all co-workers, homeowners, board members, colleagues, and anyone they deal with during the course of their work in a courteous, professional, and friendly manner. If an employee is unable to proceed in this manner with someone, he/she should request help from his/her supervisor. Foul language is unacceptable. Employees who deal with property belonging to homeowners should treat this property with the utmost care. Homeowners units should always be left in a neat, clean condition. Use of illegal drugs or alcohol during any working hours will be a reason for immediate dismissal. The pay period is biweekly, ending on Friday at the normal end-of-day time. All timecards should be turned in at the end of this day or on a more frequent basis if requested by your supervisor. Paychecks will be issued on the following Thursday before the end-of-day time. Final paychecks will be issued within twenty-four hours of the last day of work.
B. C. D.
Paycheck Procedures A.
B. C.
Always consult with legal counsel before advising adoption of a personnel manual or employee handbook to make sure that it complies with the laws of your state. See the previous page for a sample policy for behavior on the job and sample paycheck procedures.
Job Descriptions
A job description is a specific description of the I Required duties of a position I Skills and knowledge necessary to perform required duties I Reporting relationships of the position A written job description should exist before you hire an individual for a position: I It tells you and the potential employee what is expected of the person in the position I It is an aid for planning and budgeting for the use of personnel I It is an aid for evaluating job performance If no job description exists, your employee may not understand what is expected of him or her. In addition, you have a more limited legal basis for evaluating job performance as unsatisfactory and taking any necessary actionif such a situation should arise. For the above reasons, it is important to take the time to periodically review and update job descriptions. An outdated job description leads to misunderstanding at best and legal problems at worst. See the sample job descriptions on the following pages for a maintenance employee and a manager employed by a management company.
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SAMPLE: Job Description

Title: Maintenance Employee Reports to: Management agent and receives all directions from management agent. Employee must respect positions of the board of directors, but should not receive direct work orders from board members, unless receives prior authority from management agent to do so. Hours: Regular8:00 a.m. to 4:30 p.m., Monday through Friday On-callEmployee shall respond to emergencies such as common plumbing leaks, roof leaks, sewer back-ups, and common electrical problems 24 hours a day, 7 days a week, and will notify management agent in advance of pending absences so that other arrangements can be made. It is anticipated that on-call scheduling will be divided among maintenance staff members. Emergency duties shall include corrective action plus cleanup. Duties: 1. Perform authorized requests for common element maintenance. 2. Complete management work orders. 3. Assist in maintaining and repairing all common elements, that is, building exteriors, roofs, downspouts, sidewalks, parking lots, signs, fencing, lighting, common plumbing pool repairs, electrical repairs, etc. 4. Police grounds and parking lots, pick up all trash, and sweep sidewalks and curbs as necessary. 5. Replace all stairwell and exterior light bulbs as necessary. 6. Inform on-site secretary when contractors are on property. 7. Carry a beeper during working hours and whenever the answering service cannot contact by phone. 8. Distribute board mail and post notices as requested by management agent. 9. Monitor the parking lot for vehicles without stickers, expired tags, inoperable vehicles, etc., and report to management agent. 10. Handle snow removal as assigned by management agent. 11. Lock the community building as directed by management agent. 12. Follow established safety policies and procedures. 13. Perform other services which may be requested by the board of directors through the management agent. Qualifications: I Able to perform basic maintenance and repairs for the property I Able to maintain positive, cordial, businesslike relationships with residents at all times I Able to work cooperatively with other staff members I Able to work without supervision when necessary I Able to work in a safe manner Other: 1. The employee must sign for all keys, beepers, tools, etc. that are provided for his or her individual use. 2. All keys, beepers, tools, etc., owned by the association must be turned over to the association prior to the release of a final paycheck, should the employee quit or be dismissed. 3. The employee will be liable for all missing tools owned by the association.
SAMPLE: Job Description

Title: Site Manager Reports to: Management agent and receives all directions from management agent. Manager must respect positions of the board of directors, but should not receive direct work orders from board members, unless receives prior authority from management agent to do so. Hours: Monday, Saturday 10:00 a.m. to 4:00 p.m.; Tuesday, Thursday, Friday 12:00 p.m. to 8:00 p.m.; Wednesday, Sunday off-duty Duties: 1. Answer telephone in on-site office. 2. Handle all owner and resident requests for common element or association services. 3. Inspect property for services needed, prepare work lists, and schedule repairs with contractor after first reviewing with management agent. 4. Prepare property inspection reports, maintenance punch lists, and common area inspection reports. 5. Oversee all contractors working on the property. 6. Attend all board of directors meetings and attend all hearings of the board of directors, serving as the witness at those hearings as necessary. 7. Type minutes of board of directors meetings and copy as requested. 8. Code and approve all bills, and order all supplies. 9. Maintain service request log, contractor check-in book, and community room rental forms. 10. Prepare monthly service log. 11. Assist in writing and typing newsletter and flyers as requested. 12. Coordinate delivery of mail, newsletter, flyers, etc. 13. Maintain individual owner files and obtain copies of leases from non-resident owners. 14. Maintain on-site association administrative files. 15. Coordinate mailings and notice distribution as necessary. 16. Make community room reservations and perform required inspections of community room. 17. Type and photocopy documents and other materials as directed by management agent. 18. Be familiar with the governing documents and board policies and procedures. 19. Perform other administrative and management duties as requested by management agent and/or board of directors. Qualifications: I Able to communicate orally and in writing with owners, residents, volunteer leaders, and contractors I Able to maintain a positive, cordial, businesslike relationship with all owners and tenants I Able to oversee contractors working on the property I Able to inspect property for maintenance and repair needs I Able to perform basic administrative tasks for a community association I Able to work without supervision when necessary I Able to work cooperatively with other staff members I Able to use word processing software, a personal computer, and a printer I Able to work in a safe manner
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Employment Records and Files

Employment records and files are a means of verifying and controlling employment and job performance. Typically, files for individual employees contain I Job description I Performance evaluations I Original application form, if any I Federal, state, and local withholding tax forms I Any benefits forms recording the employees selection or application I Signed releases for community association beepers, uniforms, credit cards, etc. I Salary history I Correspondence, including letters of praise from residents I Written confirmation of any disciplinary actions I Any record of personnel conversation (see page 280) In addition to files for individual employees, a community association should also maintain general files. Typically, these files contain I Time sheets or cards I Payroll records, including taxes withheld The content of files and records and access to them continue to be defined by statutes, regulations, and case law at various governmental levels.
COMPLIANCE WITH APPLICABLE LAWS AND REGULATIONS

This section will provide an overview inasmuch as legal requirements at all three governmental levels are constantly changing and vary from one state to another and one locale to another. You will have to stay current on statutes, regulations, and case law (court decisions) at all three levels. Many federal statutes and their related enforcement agencies have equivalents at the state level and sometimes at the local level. Applicable statutes, regulations, and case law at all three governmental levels address: I Discriminatory treatment of employees based on non-work related characteristics I Hiring I Promoting I Dismissal(see the section on dismissal beginning on page 282) I Compensation I Working conditions Always consult an attorney if you have any questions about the legal aspects of a specific situation for your community association.
Anti-Discrimination
Statutes, regulations, and case law at all three governmental levels prohibit discrimination in hiring, promotion, dismissal, compensation, and working conditions based on specific personal characteristics. The federal government prohibits discrimination against otherwise qualified people based on I Race and ethnicity I Color I National origin I Age I Gender I Religion I Pregnancy I Disability State and local governments vary in terms of the characteristics which they recognize in their anti-discrimination statutes and regulations. A new trend is for a growing number of states and localities to prohibit discrimination based on sexual preference. Sexual harassment is considered a form of gender discrimination under federal law and is prohibited by all three levels of government. Unwelcome sexual advances, requests for sexual favors, and other verbal or physical conduct of a sexual nature constitute sexual harassment when:
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Submission to such conduct is either explicitly or implicitly a term or condition of an individuals employment Submission to or rejection of such conduct by an individual is used as the basis for employment decisions affecting the individual Such conduct has the purpose or effect of unreasonably interfering with an individuals work performance or creating an intimidating, hostile, or offensive working environment
The best way to avoid employee claims of alleged discrimination is to: I Avoid any kind of preferential treatment of employees. I Make all employment decisions based on bona fide job requirements. I Document the basis for each employment decision.
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Compensation
Statutes, regulations, and case law at all three governmental levels also regulate employee compensation or payment. Examples at the federal level include:
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Fair Labor Standards Act (FLSA): This act addresses minimum wage requirements, maximum hours of work, and overtime pay. Federal Insurance Contributions Act (FICA): This act requires employers and employees to make matching contributions to Social Security. The employer must withhold the employees share of the tax from his or her wages or salary.
Examples at the state level include:

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Workers compensation laws: This legislation requires employers to obtain insurance that will provide most employees with medical benefits and compensation for loss of income due to injury or illness related to employment. Unemployment insurance laws: States administer unemployment insurance programs and jointly contribute to them with the federal government. Child labor laws: States also establish requirements for the employment of minors.
One major source of confusion for community association managers is whether employees who supervise other employees should be salaried or hourly workers. A typical example is the maintenance supervisor who picks up the work orders, supervises a few maintenance workers, does the maintenance work with them, and reports to the community association manager. Many associations erroneously consider this position a salaried one because the person is supervising other employees. Under Department of Labor regulations, to be salaried, a person must: I Spend 80 percent or more of the time in supervising I Supervise two or more people I Have control over hiring and dismissing people in the supervised positions Anyone who does not meet these requirements must be paid on an hourly basiseven if the persons title is supervisor. However, certain professional or executive positions may be salaried, even though they do not meet these federal criteria. In addition, both federal and some state laws require that non-exempt (hourly) workers be paid time-and-a-half or double time pay under certain circumstances. Consult with legal counsel for details.
When in doubt about salaried versus hourly status, consult your attorney or personnel specialist. If you classify someone as a salaried worker who should be classified as an hourly worker, you are violating federal labor laws. Your community association is subject to penalties and back taxes. In addition, your worker may file a claim with the labor board for overtime pay for all hours worked over 40 hours in a given pay week.
Occupational Safety and Health

Statutes, regulations, and case law at all three levels of government also regulate occupational safety and health on the job. The most common example is regulations established by the federal Occupational Safety and Health Administration under the Occupational Safety and Health Act (both called OSHA). However, state and local governments also regulate and monitor workplace safety and health. Various regulations require I Specific working conditions I Specialized training I Safety equipment I Posting of warnings related to products and work site conditions I Reporting of accidents Again, penalties may be levied for lack of compliance. If you dont think and talk safety and health, your employees will not either. Do not ignore your obligations in any of the areas we have discussed in this sectionno matter how small your community association. Instruct your communitys attorney, as well as its personnel specialist and insurance agent, to keep you informed and in compliance with all applicable statutes, regulations, and case laws. You are obligated to your community association and to its employees to do so.
RECRUITMENT, SCREENING, AND SELECTION

The goal of recruitment, screening, and selection of employees is to select the best candidate for a positionwhile complying with all anti-discrimination requirements.
Recruitment
When you prepare to recruit a new employee, begin with a clear understanding of the position you need to fill. Create or update the job description involved (see page 263).
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Depending on the type of position to be filled, decide what recruitment techniques will be most effective. Some of the techniques most commonly used by community associations include I Referrals by current employees I Help wanted ads in the classified section of the local newspaper I Local office of state employment service I Local trade and business schools I Posting of jobs to notify current employees who may want to apply Use of a single recruitment method can limit your pool of applicantsand possibly leave you open to charges of denying certain groups the opportunity to apply.
Screening
Try to eliminate those applicants who do not meet the job requirements before you invite anyone in for an interview. Review written applications or talk to applicants on the phone before setting up an appointment to meet with them. Only interview those applicants who appear to meet the positions skill and experience requirements. Here are some tips from experienced managers on interviewing job applicants:
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Prepare for the interview so you can make the most of your time with the applicant. Arrange your schedule so you can have a private, uninterrupted interview with the applicant for 30 to 60 minutes. Ask appropriate questions. Ask questions that will encourage the applicant to describe his or her relevant work experience and training or education. Listen for indicators of work habits and attitudes, as well as specific technical skills.
Do not ask any questions during a job interview that could I Be interpreted as unrelated to bona fide job requirements I Create the impression that you are screening applicants on illegally discriminatory criteria Common examples would be any question related to a persons marital status, children, age, or sexual or religious preferences. Californias Department of Fair Employment and Housing (DFEH) generated a list of questions (Employment Inquiriessee page 272) which may not be asked
SAMPLE: Form for Evaluating Job Applicants

Applicants Name: ________________________________________ Position Applied For: ______________________________________ Able to Start Work: ________________________________________ Hours Available: __________________________________________ Wage Requested: __________________________________________ Benefits Desired: __________________________________________
EXCELLENT GOOD SATISFACTORY FAIR POOR
Skills for Position Knowledge for Position Communication Skills Interest in Position Overall Attitude
Comments ______________________________________________ ________________________________________________________ ________________________________________________________ ________________________________________________________ ________________________________________________________ ________________________________________________________
Overall Rating: 1 Poor
9 10 Excellent
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EMPLOYMENT INQUIRIES
AC C E P TA B LE
Name Place of residence Statements that hire is subject to verification that applicants meets legal age requirements. Statements/inquiries regarding verification of legal right to work in the United States.
SUBJECT
NAME RESIDENCE AGE
U N AC C E P TA B LE
Maiden name Questions regarding owning or renting. Age Birth date Date of attendance/completion of school Questions which tend to identify applicants over 40. Birthplace of applicant or applicants parents, spouse, or other relatives. Requirements that applicant produce naturalization or alien registration card prior to employment. Questions as to nationality, lineage, ancestry, national origin, descent, or parentage of applicant, applicants spouse, parent, or other relative. Questions regarding applicants religion. Religious days observed. Questions to indicate applicants sex, marital status, number/ages of children or dependents. Questions regarding pregnancy, child birth, or birth control. Name/address of relative, spouse, or children of adult applicant. Questions as to applicants race, color, or sexual orientation. Questions regarding applicants complexion, color of skin, eyes, hair, or sexual orientation. Any report which would indicate information which is otherwise illegal to ask, e.g., marital status, age, residency, etc. Questions as to applicants height/weight. Requiring applicant to affix a photograph to application or submit one at his/her option. Require a photograph after interview but before employment. Any inquiry into the applicants general health, medical condition, or mental/physical disability. Requiring a psychological/medical examination of any applicant. Any inquiry into the applicants general health, medical condition, or physical/mental disability, if not job-related and consistent with business necessity. Any inquiry into the employees general health, medical condition, or mental/physical disability, if not job-related and consistent with business necessity. General questions regarding arrest record. General questions regarding military service such as dates/type of discharge. Questions regarding service in a foreign military. General questions regarding organizations, clubs, societies, and lodges. Questions of applicants former employers or acquaintances which elicit information specifying applicants race, etc. Name, address, and relationship of relative to be notified in case of accident or emergency.
BIRTH PLACE, CITIZENSHIP
Languages applicant reads, speaks, or writes if use of language other than English is relevant to the job for which applicant is applying. Statement by employer of regular days, hours, or shifts to be worked. Name and address of parent or guardian if applicant is a minor. Statement of company policy regarding work assignment of employees who are related.
NATIONAL ORIGIN RELIGION SEX, MARITAL STATUS, FAMILY
RACE, COLOR, SEXUAL ORIENTATION
CREDIT REPORT Statement that a photograph may be required after employment. PHYSICAL DESCRIPTION, PHOTOGRAPHS, FINGERPRINTS
Employer may inquire if applicant can perform job-related functions. Statement that employment offer may be made contingent upon passing a job-related mental/ physical examination. A medical/psychological examination/inquiry may be made as long as the examination/ inquiry is job-related and consistent with business necessity and all applicants for the same job classification are subject to the same examination/inquiry. A medical/psychological examination/inquiry may be made as long as the examination is job-related and consistent with business necessity. Job-related questions about convictions, except those convictions which have been sealed, expunged, or statutorily eradicated. Questions regarding relevant skills acquired during U.S. military service. Requesting lists of job-related organizations, clubs, or professional societies omitting indications of protected bases. Name of persons willing to provide professional and/or character references for applicant. Name and address of person to be notified in case of accident or emergency.
MENTAL/PHYSICAL DISABILITY, MEDICAL CONDITION (APPLICANTS)
MENTAL/PHYSICAL DISABILITY, MEDICAL CONDITION (POST-OFFER/PRE-EMPLOYMENT)
MENTAL/PHYSICAL DISABILITY, MEDICAL CONDITION (EMPLOYEES) ARREST, CRIMINAL RECORD MILITARY SERVICE ORGANIZATIONS, ACTIVITIES REFERENCES NOTICE IN CASE OF EMERGENCY
NOTE: Any inquiry, even though neutral on its face, which has an adverse impact on persons on a basis enumerated in the Fair Employment and Housing Act, is permissible only if it is sufficiently related to an essential job function to warrant its use.
during a job interview. While the specifics and legality of each question can vary significantly from state to state, the list is nevertheless illustrative of generally acceptable and unacceptable inquiries.
I
Answer any questions the applicant has about the job. Provide basic information about the job requirements and compensation and benefits. Give this information even if the applicant does not ask for it. Ask the applicant for employment references. Be sure to ask the applicants relationship to the reference. Follow up on each interview. Consider filling out a standard form after each interview to make it easier to compare applicants on the same basis. See the sample form for evaluating job applicants on page 271. After you finish your interviews, select the two or three most qualified applicants and check their employment references. The easiest way to obtain an applicants permission to contact his or her references is to have a signed statement on your application form that gives you permission.
Selection
After you finish gathering information on the two or three most qualified job applicants, decide on one for the job. To do this, weigh each finalists I Skills and experience I Work habits and attitudes I Potential for getting along with other staff members and community residents Dont select a person just for the sake of filling a position. If you have serious doubts about whether the person fits the position, be fair to both your community association and the applicant and continue your search. If you decide that one does fit the position, be prepared to give the reasons for your selection. Depending on the terms of your contract, your board may retain the authority to decide whom to offer a position tobased on your recommendation. When you offer a person a position, your offer should include a statement of I Compensation and benefits I Starting date and time The first day on the job, have a new employee fill out all the necessary government and community association forms.
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TRAINING AND DEVELOPMENT

When a person is appointed to a job, he or she will require three types of training: I Orientation to the job I Initial job training I Ongoing training as needed Depending on the individual and the job, training may include technical skills, interpersonal skills, and basic work habit skills as well. Because much employee training within a community association occurs on the job, it is important to remember that on-the-job training must be as carefully planned, implemented, and monitored as is any formal classroom training. Development refers to acquiring skills that either are not job-specific or not needed for the current job. Even when a person is promoted within the association, he or she will need all three types of training for the new position.
Orientation to the Job

It is important that the manager provide new employees with their orientation to ensure that employees develop a proper understanding and attitude from the very beginning of their employment. Expedience has shown that the more people understand where they fit in and what they contribute to an organizations effectiveness, the more effectively they perform on the job. During new employee orientation, a manager should provide the following: I General introduction to community associations and to your association including the governing documents and board policies (CAIs An Introduction to Community Association Living is an excellent resource for those employees new to the community association experience.) I Overview of the total operation I Explanation of how this persons position relates to the operation I Explanation of policies and procedures in the personnel manual or employee handbook (see page 261) Give a new employee time to read the manual and ask questions. If reading will be a problem, talk the employee through the manual. Encourage the person to come to you with any questions that might come to mind later.
Initial Job Training

To ensure that initial training is adequate, develop a checklist based on the job description and a working knowledge of the day-to-day responsibilities of the position. If you dont have a working knowledge of a position, talk to an employee who does.
Typical items covered in initial job training include I Standard operating procedures for different duties I How to use specific pieces of equipment I Safety practices (Dont overlook training on safety practices for office personnel.) I Customer service relationship with residents I Walk-through of the typical routine Initial job training should focus on regular and immediate duties. Training for tasks that are performed only occasionally should occur closer to the time they must be performed.
Ongoing Training
Many employers make the mistake of thinking that employees are finished with training after they receive their initial training for a job. Nothing could be further from the truth. Common reasons for ongoing training include I Duties and technologies change I Duties are added I The community association needs to cross-train employees in one anothers duties for backup purposes I Ongoing training can be a means of motivating and rewarding employees Dont overlook the training potential of regular staff meetings. Provide an opportunity for sharing ideas that will strengthen everyones work performance. People can learn from one another and reinforce one another. Use the tell/show/do/review technique for all on-the-job training: 1. Tell the person what to do. 2. Show the person how to do it. 3. Have the person do it. 4. Review what the person did correctly and then point out any omissions or errors. Keep a record of any formal training an employee receives, as well as any reimbursements for training the community association provides him or her. If your standard personnel forms do not have a section for recording this information, consider using something like the sample individual development plan on the next page.
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PERFORMANCE PLANNING AND EVALUATION

Positive reinforcement and constant communication are key in developing and retaining staff. If a person is properly oriented, receives adequate initial and ongoing training, and receives regular feedback on work performance, then he or SAMPLE INDIVIDUAL DEVELOPMENT PLAN she will work more productively, there will be less job dissatisEmployee Name: faction, and costly turnover will be avoided. An organized Date Name & Source of Training Cost approach to performance planReimbursed ning and evaluation will help you to provide regular feedback Sept-Nov Basic Public Speaking N/A and motivation to your staff. 20XX Dale Carnegie Institute Spring 20XX M-100: The Essentials of Community Association Management Community Associations Institute (self study/passed exam) $_______
Performance Planning
Performance planning is the process of establishing performance goals and standards for an employee.
Performance planning has several benefits. It is a means of: I Linking the employees performance goals with the associations goals I Planning and assigning work I Motivating an employee I Providing feedback to an employee on his/her performance I Holding an employee accountable for meeting performance standards Performance goals are those regular and special tasks management expects an employee to perform during a certain time period. The job description can be the basis for setting goals. But goals are more specific than a restatement of duties listed in the job description. This is because they relate to the community associations current needs. Performance standards are a description of the results management expects an employee to accomplish during a certain time period. They are reflected in the criteria used for performance evaluation (see page 279). See the sample maintenance staff evaluation criteria on the next two pages.
SAMPLE: Maintenance Staff Evaluation Criteria
I.
DEPENDABILITY A. Attendance/punctuality: The employee is expected to arrive no later than and depart no sooner than the specified times each day. Appointments are to be met as scheduled. Exceptional attendance is considered to be no more than one day missed per quarter, other than planned vacations. The employee must request time off one (1) week in advance and extended vacations one (1) month in advance. In case of emergency or sickness, the employee must call early in the morning and inform the office. Leaving a message with the answering service is unacceptable. Meeting required deadlines: All work orders must be dated and returned by the requested date. Following instructions: Work must be performed in accordance with managements instructions. Unapproved changes are generally not permitted. If the employee has questions, he/she should ask. Adherence to association regulations: The employee can be counted on to follow regulations regarding proper language, dress, prohibition against engaging in non-company activities during company time, and posting notices within the allowable time frames. Ability to work without supervision: The employee can be relied on to work steadily when alone, make proper decisions regarding how work should be accomplished, and give proper responses to residents questions.
B. C.
D.
E.
II.
PROFESSIONALISM/CRAFTSMANSHIP A. Organization/use of time: The employee is able to organize his/her day to prevent several trips to the same place and too frequent trips for supplies. When completing work orders, the employee checks the area for other problems while there. Knowledge of job: The employee is responsible for knowing the proper way to perform his/her required tasks and for advising the manager if he or she does not have the necessary knowledge. Quality of work/thoroughness: The employee strives for neatness and professional results in a safe and effective manner. Work sites are kept picked up, drop cloths used when necessary, and furniture moved out of harms way. Work is completed in one trip. Quantity of work: The employee is able to produce and complete jobs quickly and move on without sacrificing quality.
B.
C.
D.
continued
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SAMPLE: Maintenance Staff Evaluation Criteria, continued

E. Maintaining appearance Self/dress: The employee wears his/her uniform every day. The employee takes pride in his/her appearance, that is, shirt kept tucked in, uniform kept clean. He/she is well-groomed. Shop/tools: The shop is kept neat, clean, and repaired. Tools are maintained properly. If a board member walked into the shop without notice, he/she would be favorably impressed. Initiative/trouble-shooting: The employee identifies and solves problems on his/her own. The employee suggest new methods or ideas. Self-reliance: The employee is able to solve problems without assistance. He/she works well alone. He/she instills confidence in residents and staff. Judgment/alertness: The employee is able to handle emergency situations well. He/she is able to recognize potential serious problems. Solutions to problems are well thought out.
F. G. H.
III. RELATIONSHIPS WITH OTHERS A. Attitude: The employee conveys a positive attitude regarding the association. He/she accepts criticism and suggestions well. He/she is ready and willing to pitch in during emergencies. Ability to cooperate with staff: The employee cooperates well with both the office staff and other maintenance staff. Ability to cooperate with management: The employee follows management instructions without challenging them. He/she has a positive attitude toward management. Communication with residents: The employee treats residents cordially and with respect. He/she avoids the use of offensive language or inappropriate comments at all times. Ability to work under supervision: The employee responds well when working under supervision and does not resent the presence of a supervisor. Respect for resident property: Employees are not to smoke in units, use residents towels without permission, walk on carpet/rugs with muddy boots, etc.
B. C.
D.
E.
F.
Always involve an employee in his or her performance planning in some way to get the person to buy into the goals and standards. For example, you could: I Offer the employee a set of goals and standards and ask for feedback I Develop goals and standards together I Ask the employee to propose some goals and standards and finalize them together I Discuss the performance standards or evaluation criteria at the beginning of the time period involved
Performance Evaluation
Performance evaluation is the process of reviewing a persons work performance to determine the extent to which his/her established goals and standards have been met.
When
Review a new employees performance with him or her after hiringusually sometime within the first 90 days. Conduct a formal performance evaluation on an annual basis. Conduct an interim review at least once during the yearand whenever either party considers a discussion necessary.
How
Always schedule a performance review or formal evaluationin fairness to the employee and to you. Be prepared or reschedule. Arrange for your meeting to be private and uninterrupted. Even informal reviews can make people anxious. Talk strengths and areas for improvement. Give the person an opportunity to say whats on his or her mind. What ideas, concerns, goals, or training and development needs does the person want to talk about? Document your conversations with your employees about their performance. Use something like the sample record of personnel conversation on the next page to document these discussions. Forms like this should be used to document commendations as well as corrective actions to improve performance deficiencies. Use a standard evaluation form for performance evaluations (see the sample maintenance staff evaluation form on page 281).
Benefits
Admittedly, conducting performance evaluations takes effort. But there are several benefits to conducting a formal performance evaluation at least once a year.
279
It provides a basis for: I Letting an employee know where he/she stands I A salary review I Consideration for promotion I Identifying training and development needs I Documenting unsatisfactory performanceyou must document corrective or disciplinary actions in case an employee or former employee makes a claim against you or the community associationincluding any inappropriate application for unemployment payments I Checking on the effectiveness of your recruiting, selecting, and training efforts
SUPERVISION
The ability to supervise people, including employees, is a developed skill that comes with learning and experience. The ability to get along with people is not enough.
SAMPLE RECORD OF PERSONNEL CONVERSATION

Employee: ______________________________________________ Supervisor: ____________________________________________ Date: __________________________________________________
We will restrict ourselves in this section to a few key tips from experienced community association managers because there are so many resources available on supervising employees. An effective supervisor is consistent, fair, honest, understanding, and supportive. An effective supervisor:
I
Issues Discussed: ________________________________________ ____________________________________________________ ____________________________________________________ ____________________________________________________
End Result: ____________________________________________ ____________________________________________________ ____________________________________________________ ____________________________________________________
Employee Signature and Date: ______________________________ Supervisor Signature and Date: ______________________________
Honors the employees right to rely on one individual for supervision and directionand encourages everyone else to do so. Committee members, board directors, owners, and other staff should provide input to an employee through his or her immediate supervisor.
cc: Personnel File
SAMPLE: Maintenance Staff Evaluation Form
Employee __________________________________________________________ Job ______________________________________________________________

UNSATISFACTORY LESS THAN EXPECTED SATISFACTORY CONSISTENTLY EXCEEDS EXCEPTIONAL COMMENTS
DEPENDABILITY Attendance/Punctuality Meeting Required Deadlines Following Instructions Adherence to Association Regulations Ability to Work Without Supervision PROFESSIONALISM/ CRAFTMANSHIP Organization/Use of Time Knowledge of Job Quality of Work/ Thoroughness Quantity of Work Maintaining Appearance Self/Dress Shop/Tools Initiative/Trouble-Shooting Self Reliance Judgment/Alertness RELATIONSHIPS WITH OTHERS Attitude Ability to Cooperate With Staff Ability to Cooperate With Management Communication With Residents Ability to Work Under Supervision Respect for Resident Property
SUMMARY: Current Hourly Wage: $ __________________________________ New Hourly Wage: $ ____________________________________ Effective Date: __________________________________________ Date of Review: __________________________________________ Supervisor Signature: ______________________________________ Employee Signature: ______________________________________ Date: __________________________________________________
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Involves employees in the decision-making process where appropriate. When staff members help to develop policies and procedures, they are more committed to implementing them. They also have unique insights based on their positions in the association that can benefit the community association. In addition, people who are involved in an organization tend to have higher morale on the job. Encourages a businesslike atmosphere. Businesslike means always being aware that you are in a business setting. It does not mean that you have to be cold and impersonal. Overly-casual behavior can hinder work performance. And if problems arise, it is easier to resolve them if work relationships have been businesslike all along. Is fair and honest. Employees are tempted to leave if they perceive a supervisor as unfair. Employees who stay under such conditions tend to experience low moralewhich affects their work performance. In addition, a supervisors unfair or dishonest behavior with employees leaves the community association open to legal claims.
DISMISSAL
There are three ways an employee can be separated from an employerretirement, voluntary departure, and dismissal. Dismissing an employee is always difficult. But it will go as smoothly as possible if your community association has: I A progressive discipline system I Established dismissal policies and procedures
Progressive Discipline System

A progressive discipline system is a procedure whereby performance problems are brought to the employees attention and the employee and employer take appropriate actions to correct them. An effectiveand legally defensiblesystem requires that the employee has received: I Written job description I Orientation to the job and initial job training I Performance evaluation at the end of an initial probationary period (see page 279) When an employee performance or discipline problem arises, there are four steps to the progressive discipline procedure: 1. Give a verbal warning.
If the situation persists... 2. Give a written warning. You can use something like the sample record of personnel conversation on page 280. Your statement of the problem and the agreed-upon solution should be specific. Document dates and times of the problem. Ideally, the agreed-upon solution should be one proposed by the employee. If the situation persists... 3. Give the employee a specific probationary period. Use a written notice. Again, something like the record of personnel conversation would be adequate. Both you and the employee should sign the notice to acknowledge that you both have read it. Note that the employees signature on a written notice of probation does not mean that he or she agrees with the need for a probationary period. If the situation persists... 4. Dismiss the employee. Your boards policy may require that you confer with the board in executive session before dismissing anyone.
Dismissal Policies and Procedures

Your community association should have established dismissal policies and procedures that appear in its personnel manual or employee handbook. They should address: Grounds for dismissal: Unless you are in a jurisdiction where employment at will (see page 261) is restricted, your community association is within its legal rights to dismiss an employee with or without cause. If you are going to dismiss an employee with cause, that cause or reason should be a legally acceptable one. If you are concerned about a dismissal, consult your communitys attorney or personnel specialist. Typical examples of reasons for dismissal following progressive discipline include I Willful violation of rules I Incomplete or inadequate work performance I Repeated disregard of reasonable instructions I Neglect of duties I Insubordination I Sexual harassment I Unauthorized absence from work I Sleeping on the job
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Typical grounds for immediate dismissal without progressive discipline include I Stealing I Fighting I Substance abuse on the job I Illegal actions I Sabotage Specific examples of reasons for dismissal following progressive discipline may be serious enough to warrant immediate dismissal without progressive discipline. Unacceptable or illegal reasons for dismissal include
I
The employee has one of the personal characteristics listed in the antidiscrimination section beginning on page 266 The employee is exercising one of his or her legal rights (for exampletrying to organize employees) The employee refuses to perform dishonest or illegal acts
Whatever the reason for dismissing an employee, it should be well-documented. Dismissal procedures: The act of dismissing an employee should be short and specific. Just outline the facts and prior discussions. If you are dismissing for cause, anything you say or put in writing should focus on deficiencies in work performance, not on the person. Many employers provide only basic employment information regardless of the reason for a former employees departureto avoid possible claims against them by a former employee based on what was allegedly said. Try to resolve all issues at the time of dismissal in order to avoid the need for further contact between the former employee and the community association:
I
Make arrangements for the employees final paycheck. There are two current legal requirements here that employers tend to overlook. Most states specify how soon a dismissed employee should receive a final paycheckusually within 24 to 48 hours. And the employer cannot deduct from the paycheck any monies the employee owes to it, unless the employee agrees. Arrange for the employee to return any community association property in his or her possession. This includes such items as keys, credit card, tools, and uniforms.
Discuss the extension or termination of the employees benefits. Tell the employee the information that you will provide when potential employers call asking for a reference I The person has been employed at your association I The dates of employment I The persons last job title and salary Notify other parties affected by the dismissal. Notify your other employees and your board immediately. Notify residents and contractors as necessary.
After dismissing an employee make notes on your reasons for dismissal and what you said to the employeeto help you when you complete unemployment forms.
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FOCUS QUESTIONS
Use the following questions to help you identify and review the core concepts in this chapter. (Hint: Once you look up the answer to a question, you may want to jot down the page number next to the question for future reference.) 1. What areas of activity are included in human resources management? 2a. What are managements basic obligations to its employees? b. What are an employees basic obligations to management? 3. What are the typical components of a human resources management system? 4a. What are some steps a manager should take with a personnel manual or employee handbook to protect both the associations and the employees interests? b. What are some typical topics addressed in the policies and procedures found in a manual or handbook? 5. What are the benefits of having written job descriptions? 6a. What is the purpose of maintaining employment records and files? b. What are some items that are typically kept in an individual employees file? c. What are some employment items that are typically kept in general files? 7. What areas of employment or personnel practices are currently regulated by various levels of government? 8a. What characteristics or information about an employee cannot be used to make employment decisions according to current laws and regulations? b. What are some things a manager can do to avoid employee claims of alleged discrimination? 9a. What are some areas of employee compensation regulated by the federal government? b. What are some areas of employee compensation regulated by state governments? c. What are some areas of occupational safety and health regulated by various governmental levels?
10a. What are some typical techniques for recruiting new employees? b. What are some steps to take to efficiently and effectively screen candidates for a job? c. What criteria should be used to select a person for a community association position? 11a. Explain the three types of training an employee needs. b. Explain the tell/show/do/review technique for on-the-job training. 12a. What are the benefits of doing performance planning with employees? b. How can you get an employee to buy into his or her performance goals and standards? 13a. When should performance evaluations take place? b. What are some suggestions for conducting an effective performance evaluation? c. What are the benefits of conducting formal performance evaluations? 14. What are some of the things a supervisor can do to effectively supervise the employees who report to him or her? 15. What are the three ways an employee can leave an employer? 16a. What are the prerequisites for an effective progressive discipline system? b. What are the four steps in a progressive discipline procedure? 17a. What are some typical grounds for dismissal following progressive discipline? b. What are some typical grounds for immediate dismissal without progressive discipline? c. What are some unacceptable or illegal grounds for dismissal? d. What are some basic procedures to follow when dismissing an employee?
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Use the following questions to help you apply the information in this chapter to your own situation: 1. Does your community association have a written personnel manual or employee handbook? If so, can you identify any areas for improvement? If not, what reasons can you give your board for developing one? 2. Does your community association have written job descriptions? If so, can you identify any areas for improvement? If not, what reasons can you give your board for developing written ones? 3. Does your community association maintain employment records and files? If so, can you identify any areas for improvement? If not, what records do you think your association should be keeping? If not, what files do you think it should set up? 4a. What steps does your community association take to ensure that it is in compliance with applicable employment statutes, regulations, and case law at all three governmental levels? b. How can it improve its compliance efforts? 5. Think about the steps you took the last time you recruited, screened, and selected a new employee. How could you have improved the process? (If you are relatively new to community association management, interview another manager who recently hired a new employee.) 6a. What does your community association do for I orientation to the job? I initial job training? I ongoing training? b. Are there any ways each one could be improved?
7a. Describe your community associations performance planning process. How can it be improved? b. Describe your community associations performance evaluation process. How can it be improved? 8. Does your community association have a progressive discipline system? If so, how does it work? If so, why has it been effective or not? If not, what are some reasons why it might be beneficial to have one? 9a. What grounds for dismissal appear in your community associations personnel or employment policies? b. What established dismissal policies and procedures does your community association have? c. Are there any ways your community associations dismissal policies or procedures can be improved?
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RESOURCES
For further information on human resources management for community associations, we suggest the following An Introduction to Community Association Living. Focuses on the rights and responsibilities of an
owner and the role of an owner as a volunteer. Learn about the key documents that govern community associations, the function of association boards, and what they can expect from community managers. Gain a greater understanding of exactly how a community association works from both an organizational and people standpoint, and how owners can enjoy and benefit most from community association living. (Community Associations Institute, 2003.)
Community Association Manager Compensation and Salary Survey. Discusses industry salaries, benefits, geographical areas, and other data relative to the community association management field. Includes salaries by job title, association budget size, region, and more. (Community Associations Institute Research Foundation, 2000.)
PART 4
ADDITIONAL RESOURCES
The following publications are excellent resources for those new to community association management and for those managers interested in obtaining additional information about community associations. For further information on any of these publications, call CAI for a bookstore catalog at 703-548-8600 or visit the online bookstore at www.caionline.org/bookstore.cfm. The A-B-Cs of Parliamentary Procedure. A brief, illustrated booklet that outlines the basic process involved in running a meeting according to Roberts Rules of Order. (Channing L. Bete, 2003.)
A Complete Guide to Reserve Funding & Reserve Investment Strategies (Guide for Association Practitioners Series, Report #24), Fifth Edition, Mitchell H. Frumkin, P.E., P.P., RS, MBA and
Christopher J. Juall, Editors. How to set up and implement reserve funds. Chapters cover investing reserve funds, investment policies and options, and lists the pros and cons of each. Contains a summary of state reserve fund requirements, the complete reserve standards, and the reserve specialist code of ethics. (Community Associations Press, 2001.)
Alternative Dispute Resolution & Consensus Building for Community Associations, (Guide for Association Practitioners Series, Report #26), Second Edition, by Mary Avgerinos. Provides
associations with an alternative to the traditional justice system and has been embraced by attorneys and judges alike. Covers the key ADR techniques such as negotiation, mediation, and arbitration. Provides samples of many useful letters, documents, and agreements. (Community Associations Institute, 1997.)
An Introduction to Community Association Living. Focuses on the rights and responsibilities of

an owner and the role of an owner as a volunteer. Learn about the key documents that govern community associations, the function of association boards, and what they can expect from community managers. Gain a greater understanding of exactly how a community association works from both an organizational and people standpoint, and how owners can enjoy and benefit most from community association living. (Community Associations Institute, 2003.)
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Architectural ControlDesign Review, (Guide for Association Practitioners Series, Report #2), Fourth
Edition, by Byron R. Hanke and Richard S. Ekimoto. Explains how to organize a system that works, including developing a manual on design objectives, standards and practices, and review procedures. (Community Associations Institute, 1998.)
The Art of Successful Meetings, by William Dixon Southworth. Comprehensive treatment in one
useful resource. Covers basics like chairing a meeting, motions, committees, voting and membership, what to do about conflicting motions, and how to handle unusual procedures like correcting minutes or rescinding. Contains valuable tips for ensuring that your meetings are positive and productive. (McGraw-Hill, 2000.)
Assessment CollectionLegal Remedies (Guide for Association Practitioners Series, Report #5), Third
Edition, by Thomas J. Hindman, ESQ. and Loura Sanchez, ESQ. This report describes formalized collection procedures, including sample letters and legal remedies such as liens, small claims court, and notice to lenders. (Community Associations Press, 2000.)
Basic Parliamentary Procedure Workbook, Sixth Edition, by Joyce L. Stephens. How-to manual on
conforming to basic parliamentary procedure. Covers decorum, how to write a resolution, meeting minutes, proper language for presiding officers, completing action on motions, and common errors to avoid. (Frederick Publishers, 2001.)
Be Reasonable! by Kenneth M. Budd. A compendium of expert opinions from over 30 leading

community association attorneys, managers, and directors. Provides effective strategies for drafting and enacting reasonable rules, identifying unreasonable rules and restrictions, working with owners, and reasonable enforcement procedures. (Community Associations Institute, 1998.)
Bid Specifications and Contract Negotiations (Guide for Association Practitioners Series, Report #9),
Third Edition, by Stephen R. Bupp, CMCA, AMS, PCAM. Provides readers with the information needed to write simple, effective specifications and contracts, ensuring that repairs or maintenance of your common areas will go smoothly. Contains a 27-point specifications chart, a checklist that will prevent you from overlooking any aspect of the project, and adaptable samples of specs for a repainting project plus a bid for a preventive maintenance contract. (Community Associations Institute, 1997.)
Choosing a Management Company (Guide for Association Practitioners Series, Report #8), Fifth Edition, by
Michael E. Packard, PCAM. This report examines what to look for in a manager, including an eight-step selection process with supporting information and sample forms, and guidance on how to work with the manager. (Community Associations Press, 2002.)
Collecting AssessmentsAn Operational Guide (Guide for Association Practitioners Series, Report #10),
Fourth Edition. This report explains how to set up a collection system and make it work. It includes sample documents, forms, and other communications. (Community Associations Institute, 1996.)
Common Interest Reality Associations Audit and Accounting Guide, by the AICPA. Provides the
AICPA recommendations on the application of generally accepted auditing standards plus audits of financial statements of community associations. Also describes and recommends reporting principles and practices. (American Institute of Certified Public Accountants, 2003.)
Common Interest Realty Associations: AICPA Audit and Accounting Guide. A guide prepared to help
independent public accountants conduct compilations, reviews, and audits of financial statements for community associations. It describes conditions and procedures unique to the industry and illustrates the form and content of financial statements. (American Institute of Certified Public Accountants, 2003.)
Community Association Insurance: A Guide for Condominiums, Cooperatives, and Planned Communities (Guide for Association Practitioners Series, Report #4), by Clifford J. Treese, CIC, CPCU, ARM,
CIRMS,
and Katharine Rosenberry. Covers community insurance obligations, amount needed, types of coverage available, and more. (Community Associations Institute, 1997.)
Community Association Law: Cases and Materials on Common Interest Communities, by Wayne S.
Hyatt, ESQ. and Susan F. French. Contains more than 300 legal cases illustrating concepts. Topics include types of common interest communities; creating common interest communities; association functions and powers; constitutional issues; association governance, financing, design standards and control; rule enforcement; amending governing documents; liability; and declarant control of board and transition. Fully indexed and copiously noted. (Carolina Academic Press, 1998.)
Community Association Law Reporter, Wayne S. Hyatt, ESQ., Editor. A monthly newsletter that
reports on current laws and legal decisions affecting community associations. (Community Associations Institute.)
Community Association Leadership: A Guide for Volunteers, Anne M. Calmes, Editor. Covers how to
attract more residents to association volunteer work and how to enable them to perform better by gaining a thorough understanding of committee work and the volunteers role. (Community Associations Institute, 1997.)
Community Association Legal Counsel: How to Select & Use Association Legal Counsel, (Guide for Association Practitioners Series, Report #13), Second Edition, by Thomas J. Hindman, ESQ. and
Loura K. Sanchez, ESQ. Contains information on how to get the best out of your association attorney as well as what to consider when searching for a new one. Offers guidance for working out various fee structures and includes a five-part appendix consisting of a sample request for proposal, interview questions, evaluation criteria, billing statement, and more. (Community Associations Press, 2002.)
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Community Association Manager Compensation and Salary Survey. Discusses industry salaries, benefits, geographical areas, and other data relative to the community association management field. Includes salaries by job title, association budget size, region, and more. (Community Association Institute Research Foundation, 2000.)
Community Association Risk Management: Evaluating and Managing Risk in Condominiums, Co-ops, and Planned Communities, (Guide for Association Practitioners Series, Report #25), Third Edition, by Clifford J. Treese, CIC, CPCU, ARM, CIRMS. This report explains how to manage risk by using a five-step decision-making process and how to implement a risk management program by engaging in four key activities. Learn why insurance alone isnt enough to control risk. Addresses the growing risks for community associations in the Internet age, special considerations after September 11, 2001, and how to integrate reserves and risk management programs. (Community Associations Press, 2002.) Community Insurance and Risk Management Specialist (CIRMS)designation, offered by CAI, recognizes a demonstrated high level of competency within the risk management profession. This designation is useful for managers and community board members who are seeking qualified professionals to help them protect their most valuable investments.
Condominium and Homeowner Association Practice: Community Association Law, Third Edition, by
Wayne S. Hyatt, ESQ. Contains a comprehensive overview of the basics of community association ownership, including creating associations, governance, financing, design standards, enforcement, liability, and amending documents. Appendices contain a document drafting checklist, a sample table of contents for the declaration of a condominium association, and a sample table of contents for the bylaws of a condominium association. (American Law Institute-American Bar Association, 2000.)
Conducting Meetings: A Guide to Running Productive Community Association Board Meetings, M.J.
Keatts, Editor. Helps community association directors and managers run effective, efficient board meetings. Discusses how to prepare for a meeting, how to take proper meeting minutes, the potential benefits and drawbacks of recording meetings, and appropriate agenda items for executive sessions. Includes an outline of Roberts Rules of Order thats perfectly tailored for association meetings. (Community Associations Institute, 1998.)
Disaster Management for Community Associations (Guide for Association Practitioners Series, Report #14).
Describes the 16 major perils and their probability of occurrence and the seven essential steps for successful disaster planning. This is an absolute must for your resource library. Some associations even order this report in quantity to distribute to all key people. Appendices contain a sample plan for emergency preparedness and a six-page outline to help you construct your own disaster plan. (Community Associations Institute, 1999.)
Drafting Association Rules, (Guide for Association Practitioners Series, Report #7), Fourth Edition, by
Gurdon H. Buck. Presents a step-by-step process for drafting rules to which community association residents will adhere. (Community Associations Press, 2002.)
Elevator Maintenance Guide. A thorough manual covering every aspect of elevator maintenance
the managers role, management and maintenance routines, safety codes and compliance, out-of-service and emergency procedures, and selecting consultants and contractors. Includes a prototype maintenance agreement and many useful forms. (Property Managers Association, 1995.)
Enhancing Outdoor Spaces for Community Associations (Guide for Association Practitioners Series, Report #17), by Douglas M. Kleine, PCAM. Presents ideas on how to improve outdoor
common areas for both new and mature communities. Contains several easy-to-implement landscaping and recreation ideas. (Community Associations Institute, 1998.)
Grounds Maintenance for the Community Association (Guide for Association Practitioners Series, Report #11), Second Edition, by Bette Weseman, PCAM. Contains the pros and cons of in-house
vs. outside contracting and helpful advice on establishing landscape maintenance projects, including common lawn care problems and how to hire the right tree care professional. (Community Associations Institute, 1998.)
Guide to Annual Meetings, Special Meetings, and Elections (Guide for Association Practitioners Series, Report #21), by P. Michael Nagle, ESQ. Addresses all aspects of meeting procedures from
giving notice of a meeting to conducting and controlling the meeting. Topics include quorums, ballots, voting, elections, nominations, and proxies. (Community Associations Institute, 1998.)
Guide for the Presiding Officer: A Functional Guide for Presidents and Chairmen, Third Edition, by
Joyce L. Stephens. Will help readers chair meetings with confidence in spite of disagreements, diverse opinions, and even outright conflict. Contains detailed descriptions of key rules, tips on communicating more effectively, even advice on body language. (Frederick Publishers, 1997.)
The Homeowners Association Manual, Fourth Edition, by Peter M. Dunbar, ESQ. and Marc W. Dunbar, ESQ. A practical guide for the operation of homeowner associations. Useful for leaders and board members of single-family, townhome, condominium, mobile, and masterplanned community associations. (Aras Publishing, 1999.)
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Increase Income, Not Assessments: 35 Ways to Make Money for Your Community Association, by
Nancy K. Bianconi. Provides instruction for fundraising and conducting profitable events. Includes sample checklists and legal and insurance considerations. (Community Associations Institute, 1994.)
Introduction to Community Association Management, Governance, & Services, (Guide for Association Practitioners Series, Report #1), by Clifford J. Treese, CIC, CPCU, ARMS, CIRMS. Written for
board members, this report provides an excellent overview of the various aspects of managing a community association. (Community Associations Press, 2002.)
The Ledger Quarterly. A quarterly online newsletter that reports on audit and accounting guidelines and practices, association taxes, and recent court cases and IRS rulings. (Community Associations Institute.)
Pet Policies: How to Draft and Enforce Rules That Sit, Stay, and Heel (Guide for Association Practitioners Series, Report #28), by Debra H. Lewin. Offers practical suggestions, helpful alternatives, and lots of new information on societal changes that impact your associations approach to pets. (Community Associations Press, 2001.)
Playgrounds for Young Children, Sue Wortham and Joe Frost, Editors. Discusses community playground safety, design, play environments, infant and toddler playgrounds, and advances in playground equipment. Contains important information on playground safety and practical guidance for maintenance training, checklists, and documentation. Includes a useful checklist for assessing equipment safety. (Community Associations Press, 1999.)
Property Taxes and Homeowner Associations, (Guide for Association Practitioners Series, Report #6),
Fourth Edition, by George R. Grasser. If your association holds title to common areas and facilities, theres a possibility they may be taxed twice. You may be surprised to learn that small mistakes in the original subdivision process can go unnoticed for years! Learn what you and your tax accountant can do about it. (Community Associations Press, 2002.)
Reinventing the Rules: A Step-By-Step Guide for Being Reasonable, by Lucia Anna Trigiani, ESQ.
Describes in detail the challenge that must be met in order to put our communities first by looking at rules from a new perspective. (Community Associations Press, 2002.)
Rights and Responsibilities for Better Communities: Principles for Homeowners and Community Leaders.
This brochure establishes an ideal standard to which communities can aspire, a goalbased statement of principles designed to foster harmonious, vibrant, responsive, and competent community associations. For a free, easily photocopied, single-page version, visit www.caionline.org/rightsandresponsibilities.
The Road Repair Handbook: The Complete Guide to Fixing Roads and Driveways, by Roderick D.
Johnson. Written for anyone who wants an understanding of how to plan and manage the time, money, and labor needed for community road repair and improvement. (Trans Mountain Publishing, 2002.)
Roberts Rules of OrderA number of inexpensive paperback versions are available. The League
of Women Voters publishes an informative flyer that summarizes the basic points.
The Role of the Association President (Guide for Association Practitioners Series, Report #23), Second
Edition, by Robert T. Dennistoun. Offers tips and advice on how presidents can improve the overall quality of life in their communities. (Community Associations Institute, 1996.)
The Role of the Association Secretary (Guide for Association Practitioners Series, Report #18), Second
Edition, by Anita Hagerty Schenk, PCAM and P. Michael Nagel, ESQ. Explains the secretarys duty to record the history of the association, handle correspondence, and maintain the filing system. Includes examples of agendas, minutes, and other forms needed. (Community Associations Institute, 1999.)
by Thomas Burgess, PCAM. Reviews how to recruit a new on site manager and how to work successfully with the manager. Also guides the reader through the transition period. (Community Associations Institute, 1996.)
Selecting the Landscape Maintenance Contractor (Guide for Association Practitioners Series, Report #12),
by James B. Cranford, AMS, PCAM. Discusses the criteria for searching for, selecting, and hiring the landscape maintenance contractor. Outlines how to design the contract. (Community Associations Institute, 1996.)
Self-Management: A Guide for the Small Community Association, Second Edition, Ellen Hirsch de
Haan, ESQ., Editor. Addresses the unique role of the self-managing board, and presents significant information on financial management, insurance, meetings, communications, and taking over from the developer. Also includes an appendix containing model documents, sample forms, and helpful checklists. Provides information on governing documents, compliance with rules, working with professionals, maintenance, public policy, and important legal considerations like fair housing and fair debt collection. (Community Associations Press, 2001.)
Tips for Community Association Insurance. A handy brochure to help associations define insurance
needs, outline steps for buying property and liability insurance, and ease the insurancebuying process. (Community Associations Institute, 1999.)
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Tips for Protecting Your Association Finances. A handy brochure for board members and key
employees regarding finances. Offers tips on important aspects of association finances: audits, financial statements, signatory control, investment policies and more. (Community Associations Press, 2002.)
Transition from Developer Control, (Guide for Association Practitioners Series, Report #3), Third Edition, by Amanda G. Hyatt. The transition from developer control is a critical phase in a community associations evolution. This report presents information on the various methods of transfer and the legal framework within which the transition takes place including how to draft important legal documents. Contains an association transition checklist in the appendix. (Community Associations Institute, 1998.)
Trash Collection and Recycling. How to set up a recycling plan that covers each type of material
to be recycled. Covers government regulations and provides advice on how to contract for waste removal and recycling services. (Property Management Associations, 1993.)
The Urban Forest Management Handbook. Definitive work on all aspects of managing urban
forestsdiscusses planning, maintenance, planting, and how to conduct forest inventories. Contains technical information clarified for the novice audienceaddresses urban water quality, species diversity, and wildlife habitat issues. Contains over 100 pages of worksheets, charts, and checklists, as well as 12 appendices covering practical areas like funding a forestry program, sources of assistance, pruning standards, forest buffers, invasive plants, and much more. (Community Forestry Network, 2001.)
Thank you for participating in the M-100: The Essentials of Community Association Management. We hope that you have enjoyed the learning experience. CAI also offers the following Professional Management Development Program (PMDP) courses that provide community association managers the necessary information about insurance, law, leadership, governance, and finance to help their clients create and maintain strong and vibrant communities. M-201: Facilities ManagementUnderstanding maintenance is essential to your job. Take
this course to learn how to more effectively preserve and enhance your associations property. Hear proven strategies on maintaining an associations physical assets and learn how to contract for specific needs. Gain tips for disaster and evacuation planning knowledge that is essential for a well-prepared manager.
M-202: Association CommunicationsOne of the most essential skills in community association management is communications. Association Communications will give you guidance on top-notch communication techniques. This course can benefit new and experienced managers by providing the skills necessary to better understand owners and volunteers. Using your own communitys letters and reports, you will demonstrate your new communication skills in the classroom, and youll leave the course knowing how to better serve the needs of your community.
M-203: Community LeadershipCommunity Leadership is one of the building blocks of successful community association management. Learn how to work with board leaders, achieve management goals, and set a more positive tone for the whole community. This course gives you proven ways to help board and committee members accomplish more at every meeting. Whether its a step-by-step procedure, a clearer understanding of whos responsible for what, or a parliamentary strategy that avoids unnecessary confrontations, youll find your time at this course is very well spent.
M-204: Community GovernanceThis hands-on course gives you immediate answers to some of the most troubling problems in management. In Community Governance, youll
get a detailed grasp of board and management responsibilities. Youll learn how to steer clear of problems and give your board and owners the support and advice they need. Using your own community documents, youll become skilled at how to spot potential problems, how to revise policies and procedures to comply with current laws, and how to recommend management practices. This course provides an understanding of a community association as a legal entity and clarifies the corporate, contractual, and ethical basis for a managers role in community governance, gives you proven ways to avoid legal problems, and helps you get better cooperation from owners.
M-205: Risk ManagementThrough this invaluable course, learn how to identify your associations current risk management situation and how to respond to those issues needing immediate attention. Youll return to your job with a knowledge of strategies and
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resources for identifying and reporting loss exposures and for managing the insurance claims process. Your community will benefit from its position of strength, as you prepare to reduce and react to possible loss. Course materials for Risk Management include a full course manual plus articles on selecting an insurance agent for your association and shopping for insurance.
M-206: Financial ManagementFinancial Management teaches managers how to analyze,

manage, and develop an association budget. Understanding and applying the principles of financial management can make all the difference to your community association. Take this two-day course and return to your job better prepared to address, analyze, and report on association finances. See how the budget development process works, from the identification of items and their importance through budget approval. Managers who are responsible for the administration, maintenance, or enhancement of association finances wont want to miss this fact-filled course!
M-310: Management Company AdministrationThis course provides executive-level

managers and CEOs with an opportunity to learn from their peers. If you run your own business, or aspire to, this course will give you the skills and knowledge to improve efficiency and effectiveness. Learn how to market your services, manage and train your staff, and develop additional sources of income. This course will explain the fundamentals of organizational theory that will help you in setting up your management office and management systems.
M-320: Advanced Physical MaintenanceThis course provides an in-depth analysis of the

physical elements of a building. Designed for property managers wanting to have a hands-on walk-through of a central plant, roof, and recreational amenities. Construction and operation details of a building are covered in this advanced level program. The class will visit a high-rise building, see major systems in operation, and will discuss maintenance operations and procedures with building staff.
M-330: Advanced Insurance and Risk ManagementThis course, a follow-up to Risk Management (M-205), is an in-depth examination of insurance and risk management
issues. Youll evaluate properties, review inspection reports used by insurance companies, and study insurance policy details. Discover the importance of a variety of insurance coverages including workers compensation, fidelity bonds/crime coverage, professional liability for managers, directors and officers coverage, and equipment and property coverage.
M-340: Managing the Large-Scale AssociationThis on-site course examines the special
needs of large-scale associations and gives you tips on how to meet these needs. Explore the relationships between large-scale associations and municipalities and between master associations and sub-associations. Learn to recognize open, commercial, and residential types of property. For this course, a large-scale association is defined as one that has more than 750 lots or units and an annual budget in excess of $1 million.
M-350: Manager and the LawThis course is a follow-up to Community Governance (M-204).
Youll have the opportunity to review cases pertinent to community associations, understand how the legal system works, and review the anatomy of a case step by step. Learn
about how the law affects managers and their day-to-day operations. Discover realistic ways to deal with the challenges these laws and regulations create for you on the job.
M-360: Leadership Practices in Community BuildingLearn how to create a more cooperative, smoother-running, more people oriented community in this course based on the most popular conference presentation in CAIs history. Youll gain the skills and techniques to use the latest management strategies as you learn to shift your focus from function to service. Discover how to give your homeowners more than they expect and look forward to better relations within the community as well as increased job satisfaction and career growth.
M-400: Contemporary Issues in Community Association ManagementThis course

covers current issues that impact professional managers and the communities they manage. Topics will vary and may cover issues such as fair housing policy and practices, advanced company management, employment trends and effective recruitment strategies, or telecommunications legislation. The course is offered in conjunction with CAIs national conferences and will be an invaluable addition to your professional development. Notification of topics offered for the course are sent out at least three months before each national conference.
PCAM Case StudyThe Case Study is a comprehensive examination of an actual community

association that combines classroom instruction with an extensive on-site inspection. Explore a communitys profile in depth when you meet with its manager, board of directors, and other key personnel. To apply for the PCAM Case Study, you must successfully complete all PMDP courses and receive written confirmation that your PCAM application has been approved. The final narrative Case Study paper covering the skills acquired in the PMDP courses is due within 30 days of completing the Case Study. Successful completion of the Case Study is the final step toward professional recognition as a PCAM member. You will then be inducted in a formal ceremony at a CAI conference, where you will recite the PCAM oath with your classmates.
For more information about any of these classes, or to obtain more information about the CMCA (Certified Manager of Community Associations), AMS (Association Management Specialist), LSM (Large-Scale Manager), RS (Reserve Specialist), CIRMS (Community Insurance and Risk Management Specialist), AAMC (Accredited Association Management Comany), or PCAM (Professional Community Association Manager) designations, please call 703-548-8600 or visit www.caionline.org.
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Community Associations Institute 225 Reinekers Lane, Suite 300 Alexandria, VA 22314 (703) 548-8600, (703) 684-1581 FAX www.caionline.org
Copyright 2003, by CAICommunity Associations Institute. All rights reserved. Reproduction in whole or in part is not permitted without the expressed, written consent of CAI.

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PARTI C I PANT W O R K B O O K

PROFESSIONAL MANAGEMENT DEVELOPMENT PROGRAM

Community Associations Institute

ABOUT THIS COURSE

HOW TO USE THIS COURSE MANUAL

PART II: Financial Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93

PART III: Facilities Management. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209

2 Professional Management Development Program

LEGAL BASIS FOR COMMUNITY ASSOCIATIONS

M-100: The Essentials of Community Association Management

What You Will Learn

Definition of a Community Association

4 Professional Management Development Program

Alternative Names for a Community Association

Purpose of a Community Association

Types of Residential Community Associations

M-100: The Essentials of Community Association Management

6 Professional Management Development Program

Sources of Legal Obligations for a Community Association

INTRODUCTION TO STATE STATUTES

General State Statutes

M-100: The Essentials of Community Association Management

Specific State Statutes

8 Professional Management Development Program

Uniform State Statutes

INTRODUCTION TO GOVERNING DOCUMENTS

M-100: The Essentials of Community Association Management

General Hierarchy of Authority for Governing Documents

Recorded Map, Plat, or Plan

10 Professional Management Development Program

Declaration, CC&Rs, or Master Deed

The declaration, CC&Rs, or master deed generally:

Proprietary Lease or Occupancy Agreement

12 Professional Management Development Program

M-100: The Essentials of Community Association Management

Public Offering Statement

M-100: The Essentials of Community Association Management

16 Professional Management Development Program

M-100: The Essentials of Community Association Management

18 Professional Management Development Program

What You Will Learn

M-100: The Essentials of Community Association Management

LEGAL BASIS FOR COMMUNITY MANAGEMENT

INTRODUCTION TO ROLES AND RESPONSIBILITIES

Role and Responsibilities of Owners

M-100: The Essentials of Community Association Management

22 Professional Management Development Program

Role and Responsibilities of Board of Directors

24 Professional Management Development Program

M-100: The Essentials of Community Association Management

26 Professional Management Development Program

Role and Responsibilities of Committees

M-100: The Essentials of Community Association Management

Guidelines for Successful Committees

28 Professional Management Development Program

INTRODUCTION TO MANAGERS ROLE AND RESPONSIBILITIES

Role and Responsibilities of the Manager

A managers authority and responsibility are defined and limited by:

Three Forms of Management

30 Professional Management Development Program

COMPARISON OF THE FORMS OF COMMUNITY MANAGEMENT

Association-Employed Management Manager Company

Continuity depends on individual hired

APPROVED: Date: ____ President: Secretary: