Published in the ECHO Journal, October 2010

A Silver Lining In The Midst Of Economic Turmoil

Introduction

Community associations are not immune from the current economic crisis. When people lose their jobs and stop paying their mortgages, many also stop paying their association assessments. How have California community associations been affected? This survey of nearly two thousand (primarily Northern) California community associations reveals a mixed bag: a weakening of financial strength (in terms of receivables) but an optimistic improvement in the reserves percent funded (for approximately 1,300 surveyed associations). For purposes of this survey, financial strength has been limited, generally, to looking at cash balances, assessments receivable, the reserve obligation (liability) and resultant reserves percent funded.

The Survey

The population of surveyed associations consists of approximately 1,800 mostly Northern California community associations [1,774 in 2009, 1,823 in 2008 and 1,920 in 2007; not all associations are included in all computations if certain specific financial data (e.g. reserve liability) was not available]. The majority of associations are managed by a management company, and most are within the nine Bay Area Counties. Data is drawn from year-end financial statements for year-ends between April 1, 2009 and March 31, 2010 for 2009 data, and similar date ranges for 2008 and 2007 data.

The survey was sponsored by three leading Northern California professional service providers in the CID industry:

Berding & Weil      Alamo , CA Attorneys At Law
Levy, Erlanger & Company San Francisco,CA Certified Public Accountants
Pro Solutions Pittsburg, CA Assessment Collection
See additional information about the authors and sponsors at the end of this article.

Survey Results – Assessments Receivable

From 2007 to 2009, a period of two years, the overall average number of days of assessment revenues in assessments receivable has increased by more than 40% from 21 days to 30 days (Exhibit A). This means that it now takes the Association an average of 30 days to collect its assessments, an increase of more than 40% from the previous 21 days.

In terms of dollars, this represents an increase of $17.4 million (not adjusted for inflation) from $17.9 million in 2007 to $35.3 million in 2009 for the roughly 1,800 surveyed associations. If these numbers were extrapolated to the estimated current statewide total of approximately 48,000 associations (1), total current assessments receivable could approximate 27 times the survey number or nearly $1 billion (potentially double the balance of two years earlier).

When one looks at the size of the association (Exhibit B), smaller associations have generally fared better than larger ones:

  Days assessment revenues in 2-year receivables  Days assessment revenues in 2-year receivables  2-year Percent Change
  2009 2007  
Small associations (2-25 units) 28 19 +47%
Medium associations (26-100 units) 31 24 +29%
Large associations (101+ units) 30 22 +36%
Generally speaking, delinquent assessments are up by one third to one half from their base in 2007.
(1) 2009 California Community Association Statistics, Levy, Erlanger & Company, CPAs, September 2009.

Survey Results – Assessments Receivable (Continued)

When one looks at the type of development (Exhibit C), planned unit developments (PUDs, consisting largely of detached single family homes in suburban and rural areas) have generally fared better than condominiums (consisting largely of attached, apartment-style projects in urban and suburban areas). In California, condominiums (including condominium conversions) generally outnumber PUDs by a factor of two to one.

  Days assessment revenues in 2-year receivables Days assessment revenues in 2-year receivables   2-year Percent Change
  2009 2007  
Planned Unit Developments  35 27 +30%
Condominiums 27 19 +42%

When one looks at the location of the association (Exhibit D), urban (represented by San Francisco) associations have generally fared worse than suburban (other Bay Area Counties) in terms of managing delinquencies (measured by days assessment revenues in receivables), and the latter have generally done worse than rural associations (represented by the Central Valley). These results, while counter intuitive relative to a higher expectation of foreclosures in the Central Valley, might be explained by a smaller sample size and predominance of professional management in our Central Valley sample.

  Days assessment revenues in 2-year receivables  Days assessment revenues in 2-year receivables  2-year Percent Change
  2009 2007  
Urban associations (San Francisco) 16 11 +45%
Suburban associations (Bay Area) 33 24 +38%
Rural associations (Central Valley) 46 39
+18%

Survey Results – Reserves

Reserve Cash Balances

From 2007 to 2009, aggregate reserve cash increased by 25% based on an average balance of $202,000 per association in 2007 (1,920 associations, $388 million aggregate cash) vs. $254,000 per association in 2009 (1,774 associations, $450 million aggregate cash).

Reserve Liability

From 2007 to 2009, aggregate reserve liability increased by almost 4% based on an average balance of $681,000 per association in 2007 (1,138 associations, $775 million aggregate reserve liability) vs. $706,000 per association in 2009 (1,278 associations, $902 million aggregate reserve liability).

Reserve Percent Funded

From 2007 to 2009, the average reserve percent funded increased by approximately 8% based on an average percent funded of 49% in 2007 (1,138 associations) vs. 53% per association in 2009 (1,278 assoc-iations) (Exhibit E). This last computation was made by averaging the actual percent funded for each of the 1,278 and 1,138 associations. The computation results would suggest that, on average during the past two years, association Boards are properly paying attention to the importance of funding reserves, despite tough economic times.

On the down side, even the 53% funded is virtually unchanged from similar survey results in 2003 of 54% funded (based on 687 primarily Northern California associations) and 2006 of 53% (based on 1,254 primarily Northern California associations)(“Failure Of Voluntary Reserve Funding,” Tyler Berding and David Levy, ECHO Journal, November 2006).

When one looks at percent funded based upon the parameters of size (Exhibit F), age (Exhibit G), and type of development (Exhibit H)…

Reserve Percent Funded (Continued)

Size (2,3) 2009 2007 2006 2003
Number of associations 1,275 1,137 1,252 687
Small (2-25 units) 46% 38% 47% 43%
Medium (26-100 units) 51% 48% 51% 53%
Large (101+ units) 59% 56% 58% 55%

Consistent with prior survey findings, larger associations tend to be better funded than smaller ones. Also, in all size categories between 2007 and 2009, percent funded has generally improved.

Age (2,4) 2009 2007 2006 2003
Number of associations 1,275 1,135 1,248 680
New (1-5 years) 63% 56% 75% 80%
Young (6-10 years) 65% 62% 70% 81%
Adolescent (11-15 years) 64% 65% 60% 77%
Mature (16-20 years) 58% 53% 53% 63%
Old (21+ years) 47% 42% 45% 43%

Consistent with prior survey findings, newer associations tend to be better funded than older associations. Also, in most age categories between 2007 and 2009, percent funded has generally improved.

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(1) “Failure Of Voluntary Reserve Funding,” Tyler Berding and David Levy, ECHO Journal, November 2006.

(2) Based on the 2009 Community Associations Statistics book, in Northern California (approximately 15,000 associations total) 49% are small, 32% are medium and 19% are large. Of the surveyed associations in 2009, 20% are small, 48% are medium and 32% are large.

(3) Based on the 2009 Community Associations Statistics book, in Northern California (approximately 15,000 associations total) 17% are new, 11% are young, 9% are adolescent, 92% are mature, and 54% are old. Of the surveyed associations in 2009, 8% are new, 11% are young, 9% are adolescent, 10% are mature, and 62% are old.

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Reserve Percent Funded (Continued)

Development type (4) 2009 2007 2006 2003
Number of associations 1,273 1,135 1,180 648
Condominiums and conversions 817 745 650 400
Planned unit developments 456 390 530 248
Condominiums and conversions 47% 44% 46% 52%
Planned unit developments 62% 58% 63% 59%

Consistent with prior survey findings, planned unit developments are generally better funded than condominiums and condominium conversions. This is often due to the fact that PUDs have far fewer common area major components than condos, and the fact that condominium conversions often begin their lives in an underfunded state. Also, in all development type categories between 2007 and 2009, percent funded has improved.

Assessment Revenue

From 2007 to 2009, assessment revenue per association increased by 30% based on an average annual income of $213,000 per association in 2007 (1,920 associations, $408 million aggregate assessments) vs. $276,000 per association in 2009 (1,774 associations, $490 million aggregate assessments). The large increase is probably due to special assessments.

Reserve Assessment Allocation

From 2007 to 2009, budgeted aggregate reserve assessment revenue increased by 23% based on an average annual allocation of $51,000 per association in 2007 (1,920 associations, $98 million aggregate reserve assessments) vs. $68,000 per association in 2009 (1,774 associations, $121 million aggregate reserve assessments).

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(1) “Failure Of Voluntary Reserve Funding,” Tyler Berding and David Levy, ECHO Journal, November 2006.

(2) Based on the 2009 Community Associations Statistics book, in Northern California (approximately 15,000 associations total) 53% are condominiums and condo conversions, 45% are planned unit developments, and 2% are other. Of the surveyed associations in 2009, 66% are condos/conversions and 34% are PUDs.

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Reserve Funding Percentage

From 2007 to 2009, the allocation of reserves from total assessments increased by approximately 2% from 22% in 2007 to 24% in 2009 (Exhibit I).

When one looks at the size of the association (Exhibit J), smaller associations have generally allocated a lower (though increasing) percentage of assessment revenue to reserves than larger ones:

  Days assessment revenues in receivables  Days assessment revenues in receivables  2-year Percent Change
  2009 2007  
Small associations (2-25 units) 18% 16% +13%
Medium associations (26-100 units) 27% 26% +4%
Large associations (101+ units) 25% 24% +4%

Because the financial statements surveyed were generally prepared on the accrual basis of accounting, as required by California state law and generally accepted accounting principles (GAAP), it is not possible to ascertain the percentage of associations that have actually funded the budgeted (allocated) reserve assessments.

Conclusions

The current survey shows an increase in the overall average number of days of assessment revenues in assessments receivable. This means that it takes more time and more effort by associations to collect their assessments. Providing timely information to the directors may help to manage the assessments receivable of the association. Without prompt payment of their assessments by the homeowners, the association cannot operate, so delinquent assessments must be addressed and collection efforts made. Assessments receivable may be reduced through monthly homeowner billing statements, lockbox services, contacts with collection agencies, monthly payment reporting, and homeowner payment history reports.

This 2010 version of our survey reaches conclusions similar to those reached in prior years and finds that the trend toward underfunding of reserves has continued. Essentially, the average community association has about half of the reserve funds on deposit that its reserve study recommends. This does not mean that they are halfway to their goal. It means that they have only half of what they should have reserved by that point in time–leaving unanswered the question of where the funding will come from to restore common area components when it’s needed. The long term impact of this trend is that many community associations will have to resort to special assessments or bank loans in order to perform necessary repairs and rehabilitation.

The trend is especially prominent in older, smaller condominium associations which average less than half of the reserves on deposit than what is recommended. On the other hand, larger, newer, planned developments have above average amounts in their reserve accounts, although less than recommended in most cases. This is largely due to the fact that newer associations have not encountered the unexpected repair and maintenance expenses that often plague older projects. Also, condominium associations have responsibility for more of the structural components of a building than do associations in planned developments. Deterioration in hidden and inaccessible areas of the buildings–in deck and roof sheathing, framing, and inside of walls–can surprise even an association with well-funded reserves. If an association with underfunded reserves encounters unexpected reconstruction issues, it can severely strain its financial well-being.

Properly funded reserves can not only insulate a community association from surprise expenses, they can add positive value to the homes in the community. As more buyers understand the role that reserves play in a community, the more a well-funded program will be recognized as an asset. This 2010 survey indicates that such recognition may still be a few years away. 


About The Authors And Sponsors
Berding & Weil is a 26-attorney law firm which emphasizes common interest development law and construction defect litigation. Partners in the firm have represented hundreds of community associations for over 30 years. Berding | Weil offers a unique approach to the practice of community association, construction defect, and real estate law. A firm of seasoned, highly skilled condominium attorneys, we bring a thorough understanding of the people who underpin our clients. It is not enough today for condominium lawyers to just know the law. Good condo attorneys must also appreciate the social and economic needs of their community association clients and know a little psychology as well. For example, while homeowner association law is well established by California’s Davis-Stirling Act and a condominium association’s governing documents, it cannot be applied in a vacuum. Owners are individuals and a good homeowners association lawyer must be able to distinguish between someone who will respond to an offer to mediate, for example, and one who will reject such offers and require a more aggressive approach. Berding | Weil takes pride in the realistic and considered approach taken by its attorneys, whether the issue is a defective building, a board of directors election, or the enforcement of CCRs. A thoughtful strategy and a thorough understanding of the specific facts will trump a “one size fits all” approach every time.
Levy, Erlanger & Company, CPAs is an 11-person (including 6 CPAs) professional services firm specializing in nonprofit California housing and other organizations since 1986. Clients include more than 1,000 common interest developments (CIDs) ranging in size from 3 to 5,616 units. Services include preparation of original and updated long-term replacement reserve funding plans, annual pro forma operating budgets and assessment and reserve funding disclosure summaries (in accordance with California Civil Code Section 1365), audited/reviewed/compiled year-end financial statements, federal and California income tax returns, litigation support, expert witness testimony, computer, document imaging (computerized records storage) and other consultation services. Partners have testified before committees of the California legislature on CID practices and legislation, co-authored a major publication for the California Department of Real Estate (DRE) on reserve study practices, and actively served as Board members, speakers and authors for the three major Northern California community association organizations: ECHO (the Executive Council of Home Owners), CAI (the Community Associations Institute) and CACM (the California Association of Community Managers).
Pro Solutions has provided comprehensive delinquent assessment collection services, in most cases without direct cost to community associations, and mediation services since 1996. All collection costs are advanced to the association, and in turn collected directly from the delinquent owner or other responsible party(s). In the event that assessments prove to be uncollectible, the association is not obligated to pay for the costs or fees incurred. The association receives 100% of assessments collected upon receipt. The Board of Directors is provided with a written update on the status of each account in collection on a monthly basis. The collection service offered is flexible and, with concurrence of the Board, can provide for short-term payment plans to owners experiencing temporary financial difficulties.