Every community association is unique. Therefore, most management companies offer a variety of custom service packages to meet the unique needs for each of its clients. Many smaller associations lack the need or the resources for full time management services and opt for self-management. Although self-management may be the cheapest option in the short term, the inherent responsibilities involved with self-management can be overwhelming to many boards of directors. Those responsibilities may include:
- Association law
- Accounting procedures
- Bid development
- Vendor relations
- Owner relations
- Facility management
- Risk management
- Community leadership
In spite of these difficult requirements, many boards have opted for self-management, resulting in overworked (and under-appreciated) directors. Board members are often unaware of the extensive and complex federal and state laws, requirements, accounting procedures, and disclosures with which every association, regardless of its size, must comply. Too often, this can lead to an insolvent association and diminished property values. Further, board members who are operating an association without proper guidance may be vulnerable to personal liability.
Community associations with fewer than fifty homeowners often struggle to meet maintenance, insurance and administrative obligations while also paying for the additional cost of professional management. Often, management companies are unable to offer significantly reduced prices to smaller associations due to a workload comparable to that of a medium sized development of 50 – 100 units. Accordingly, many small associations seek scaled down or financial-only management packages, which many small communities have found more in line with their restricted financial resources.
NOTE: A small associations is not defined only by number of units. A small budget, regardless of the number of units, is also a defining characteristic of a small association. For example, a housing development may have 150 homes, but very little common area to maintain and, as a result, low assessments and minimal financial resources. It might be difficult for this association to earmark the majority of their dues towards management fees. For the purposes of this discussion, these large membership, small budget associations are considered “small associations.”
For this reason, many management companies offer consulting services to associations who want to manage themselves The broad scope of knowledge and experience needed to run a common interest development effectively makes it very important that boards seek some professional guidance and assistance to maneuver through these tricky subjectsbut wisely seek professional advice for the more technical issues. Associations with 10-50 units may be large enough to afford a regular contract with a management company. The very small associations (10 units or less) may be almost entirely self-managed but still seek professional advice on certain issues, as they arise.
The following consulting services offered by management companies can assist Board members to run their homeowner associations effectively:
- Initial association evaluation
- Assist board to develop a system that will accurately and completely record association business.
- Verify that a complete set of governing documents is on file.
- Verify that vendor contracts and proof of insurance certificates are on file.
- Verify that accounting systems and procedures are in compliance with generally accepted accounting procedures.
- Verify that your association is carrying required insurance and has copies of all policies and proof of insurance from vendors. Assist the board in limiting their risk exposure.
- Verify that association is meeting all owner disclosure requirements including distribution of budgets, year ended financials, and proof of insurance and alternate dispute resolution.
- Verify that all required reports (e.g. Reserve Study, Pro Forma Budgets, Year-end Financial statements, etc.) are on file.
- If any required materials are not present in association files, to assist board in procuring missing documents.
- Review internal systems, including contracting, owner relations, declaration enforcement and maintenance programs.
- Review internal financial procedures, including assessment collection, disbursements, financial reporting, bankcards, reconciliations and budgeting.
- Review delinquent owner collection procedures.
- Assist board in conducting board meetings in a business-like manner.
The goal of using professional management on a consulting basis is to empower the board with the necessary information to effectively self manage their common interest development. Remember, when you work with a reputable management company you are working with an ensemble of knowledgeable and experienced lawyers, accountants, general contractors and other vendors that have been found to be exceptional in their respective fields.
Economies of Scale and Cutting Costs
Because there are usually fewer homeowners in a small association contributing money “into the pot,” there is a higher per unit cost for all goods and services. For example, a $500 per month pool maintenance contract will cost $10 per unit per month in a 50-unit complex. However, in a 200 unit complex, the per unit cost drops to $2.50 per month. Whether you are a large community or a small community, a standard sized pool will require significant resources to maintain, not to mention heat and saving for its long-term repair.
These same economies of scale exist for management firms. Whether it is for a 50 or 100-unit complex, many of the redundant tasks that a management company must perform are identical. Of course there is some correlation between size of community and managerial workload, but often that difference is insignificant. Many management companies will not even consider an association of fewer than 100 units for this very reason! Some management companies will gladly contract with a small community, offer basement prices, and then do one or both of the following:
- Completely neglect the community and collect the monthly fee.
- Bill a lot of “extras.”
In either case, the association is at a disservice, but these conditions occur all too often.
It is critical to know the primary cost driver of all management companies—employee salaries. Community association management is part of the service economy. Since management companies do not manufacture a product, their value is not derived from producing and selling widgets. A management company’s value is a function of time (and its efficient use thereof). The management firm must pay its employees to perform a service. The company will be profitable only if the employees create enough value within their allotted time to cover the expenses and generate a profit for the firm. Typically management companies are compensated for their time based on a per unit fee schedule (e.g. $15 per unit). If an association has only 15 units, at $15 per unit, the management firm will generate only $225. This sum is hardly enough to produce a financial statement, much less to pay for other management services. Therefore, the challenge for the smaller association is to prioritize its managerial needs with an emphasis of minimizing the amount of time the manager will need to spend dedicated to the community. All this must be done without a lapse in the level of service the association provides its members. Here are some ways to significantly cut the management company’s time on task:
- Cut down on the number of meetings that your association conducts or at least the number the manager attends. Consider quarterly or bi-annual meetings. Another option is to schedule meetings during normal business hours at the manager’s offices.
- Do not require the manager to take minutes at the meeting.
- Do not require the manager to deal with smaller “low-skill” jobs such as day-to-day landscaping or CC&R enforcement issues.
- Do not require the manager to perform weekly or monthly site inspections. Quarterly walkthroughs supplemented by an active grounds committee ought to suffice.
Just because the management company does not perform a given task should not mean that the task can be left undone. These tasks must be delegated to volunteer board members or committee members. Yes, this does mean more work for volunteer homeowners, but it also means lower monthly fees and lower monthly dues. It also means that the homeowners will be more involved in the day to day operations of the community, which almost always equates to a better-run, more harmonious community; nobody has a better idea of what a community needs that the people that live there! Note: Associations with a high volume of volunteer work may wish to purchase a worker compensation policy with an endorsement for volunteers.
Hybrid Management Packages
Hybrid Management: “Teaming up board and committee members, professional community association managers and professional financial managers into the overall community association management strategy.”
The question arises: What tasks should the board perform and what should be delegated to the management company? A hybrid management package should require your management company to provide a qualified manager to consult with the board, as needed, to oversee large complex projects (e.g. painting or re-roofing) or guidance on managing small day-to-day issues. Meanwhile, the management company will administer your association’s financial and legal obligations. The important thing is having a relationship with a firm that can provide, when needed, a qualified manager (preferably a CCAM or PCAM) to assist the board with more technical issues. With so much regulation coming in from Sacramento every year (e.g. case law, the Davis-Stirling Act, Corporate Code and other statutes) it may be difficult for a board member to navigate the shark-infested waters of association law and protocols.
Administration of Meetings
An example would be administration of annual meetings and elections or special meetings. It is important that an impartial competent party be involved to administer all aspects of an annual meeting to ensure that a fair and legal election is conducted. Having a neutral party convene the annual meeting is critical for associations dealing with controversial issues or a contested election.
A second example would be annual disclosures. There are countless documents that must be distributed yearly, or as needed, for a variety of association functions. Note: These requirements change yearly. Thus it will require a professional to keep track of what must be disclosed, when, and to whom.
A final example is financial accounting, wherein there are too many requirements, procedures, and pitfalls to begin mentioning in this venue.
The following is a list of tasks that a board would be well advised to have handled by a community association management company or a community association financial management company:
Fiscal and Accounting Services
- Provide owners with dues payment coupons and/or statements.
- Set up and maintain a lockbox system for assessment collections.
- Offer owners automatic electronic payment of dues.
- Assistance in developing an investment strategy of reserve funds.
- Reconciliation of all accounts; checking, savings, money market, Etc.
- Prepare checks as authorized by board.
- Provide board detailed monthly or quarterly financials, using the modified – accrual method of accounting.
- Monitor reserve investment rollover dates.
- Assist independent auditors with data gathering.
- Review financial statements with board.
- Assist board with preparation of pro forma operating budget.
- Collect and process assessment payments.
- Prepare and post accounts receivable.
- Prepare and post accounts payable.
- Assist board in obtaining and reviewing a current and accurate reserve study and funding study. Pursue collection of delinquent accounts per association’s Collection Policy. Keep reserve schedule current.
Protection of Property Against Risk
- Assist in securing coverage and costs for annual insurance premium(s) including; fire, general liability, fidelity, bonds and other statutory coverages
- File insurance claims on behalf of association.
Records and Correspondence
- Maintain association financial records and files in safe condition.
- Maintain current membership and mailing list.
- Maintain membership files on each individual owner.
- Provide up-to-date assessment and ownership information to title companies, on request, for use in title transfers and re-financing.
- Provide for duplication and mailing of copies of association documents as needed.
- Provide for duplication and mailing of correspondence, reports, newsletters, and flyers as required.
The following are other managerial functions that can be selected on an as-needed or consulting basis:
Rules Enforcement, Maintenance, Repairs and Replacements
- Enforce Rules & Regulations and Fine Policy
- Receive and follow up on maintenance requests and complaints.
- Inspect common area property as needed.
- Assist with preparation of contract specifications.
- Accept bids for board to review.
- Monitor contractual agreements of independent contractors or personnel.
- Obtain written proposals/contracts when requested by board.
Meetings of Association
- Attend Annual Meeting and election.
- Attend regular meetings.
- Arrange for and schedule place, date, and time for general membership meetings.
- Prepare and mail meeting notice, proxy, ballot, agenda, etc.
- Prepare and present special reports, as requested.
- Prepare and present minutes of board meetings.
- Attend Annual Meeting
NOTE: All management companies offer different billing structures. It is important to know which services will be performed under the base contract and which services will be billed as extras. A good way to cut down on extra billing is to assume responsibility for duplication and distribution of mailings, storing archived files onsite, and other administrative tasks.
Paul Collins is the co-owner of Collins Management in Hercules CA, an ECHO member company.