Should your community seek FHA Certification?

FHA Certification does two things for a community association and its members: it allows residents to obtain a Home Equity Conversion Mortgage (HECM) and it opens up the pool of eligible homebuyers who are seeking FHA-backed loans when purchasing their home.

An HECM is a reverse mortgage which is a loan that is available to qualified homeowners who are 62 years or older. A reverse mortgage enables seniors to stay in their homes while they receive advances on the loan, the repayment of which is secured by the equity in their homes.

An in-depth discussion on the pros and cons of a reverse mortgage is beyond the scope of this blog but a major advantage is that it does not need to be repaid as long as the homeowner resides in the property and does not otherwise default on the loan (i.e.. by failing to mainteain property insurance or by not paying property taxes).

Some private banks do offer reverse mortgages, however, the only reverse mortgage product insured by the U.S. government is the HECM which is insured by the FHA.

With regard to the second part of the certification equation, FHA loans permit a lower down payment which makes them very attractive to homebuyers.  In 2009, FHA loans comprised approximately 2% of the loan market; in 2010, that figure had climbed to 40%. Given the popularity of the FHA loan product, not being certified means community members may have a much smaller pool of people interested in buying their homes.

There are basic eligibility requirements which must be met in order for a community association to receive FHA certification. The certification process is not nearly as complicated or costly as some people believe. Well-managed and financially stable communities typically experience no problems in becoming FHA certified. If your community wishes to be certified by the FHA, the following guidelines must be met:

-No more than 15% of your units can be delinquent for more than 30 days.

-At least 50% of the units must be owner occupied.

-At least 10% of the association's budget must be allocated for reserve funding.

-The association must have adequate insurance coverage.

-There can be no pending litigation other than routine collection activity.

If your community wishes to seek FHA certification, please contact me via email at dberger@bplegal.com or by phone at 954-364-6031.

Does your community file the proper tax return?

Last week I was fortunate to sit in on a continuing education class provided by Donna Seidenberg and Steven Price of the Fuoco Group (www.fuoco.com), certified accountants and business advisors. The class focused on the issues pertaining to association tax returns.

Realistically-speaking, board members are not all likely to understand the complexities of accounting principles. Even though members of my family are certified public accountants, I chose law for my career so some of these nuances escape me as well. Board members do need to know, however, how to hire a competent accounting professional to assist their communities.

Here are some of my takeaways from this very useful class.I apologize in advance for the simplistic overview but this blog is designed to stimulate your board's desire to discuss these issues at greater length with your community's accounting professional.

Associations are not-for-profit corporations, they are NOT a non-profit corporation which is tax-exempt such as a 501 (c) (3) which is typically a religious or charitable institution. Some directors still erroneously believe that the association does not need to file a tax return as a result of its not-for-profit status.

90% of community associations file the one-page federal 1120-H return which is the easiest form to prepare for condominiums and HOAs. The 1120 return is a more complicated form and is, at a minimum, a five-page return which carries greater risk.

Naturally, a common question for most directors is which association revenue is taxable. An example of non-membership income would be laundry fees paid by renters. An example of membership income would be application fees and security deposits. It is important from an accounting standpoint to segregate the membership vs. non-membership income.

The tax treatment of reserve funds has some interesting nuances. Capital reserves are not taxable. A classic example of a capital reserve would be a roof reserve as it adheres to the structure. Non-capital reserves, on the other hand, are taxable. A painting reserve and a hurricane deductible reserve are two examples of non-capital reserves. If you pool capital reserves (ie roof reserve) with non-capital reserves (ie. painting reserve) then all of the reserves will be treated as non-capital reserves.  Pooling reserves are a big no-no for commercial condominiums as far as taxes are concerned.

The following associations cannot file the 1120H return.

Commercial Condominiums;

Condominium Hotels; and

Cooperative associations (they must file an 1120-C form).

There are certain thresholds which must be met in order for an association to avail itself of the 1120-H tax return. Those thresholds are:

• 85% of the units must be residential in nature.
•  60% of the association's income must be derived from assessments.
• 90% of the association's expenses have to go towards the "acquisition, construction, management, maintenance or care of association property."

Some associations with substantial recreational amenities fail this test. If your community provides an impressive array of amenities, services and facilities, you will need your CPA to prepare a very specific expense allocation.  For example, it becomes important to know just how much of the tennis pro's time is spent giving lessons and how much is devoted to maintaining the tennis courts and facilities as different activities trigger a taxable event.

Think there are no consequences for getting this wrong? Think again. Penalties may ensue for filing the wrong type of return. This is one area where you want to get it right the first time.

Moms' Best Advice for Community Associations

Yesterday was Mother’s Day and I was fortunate to not only be able to thank my mom for all her hard work raising my three siblings and me but also to have my two children spending time doing the same for me. Of course, this particular holiday wouldn’t be the same without reflecting on some of our mom’s best advice. Two of my mother’s favorites were “you can get more flies with honey than vinegar” and “never underestimate the importance of a thank you.”

In the community association setting, both of those pieces of advice might prove to be helpful for board members and residents alike. There are legitimate gripes in some private residential communities stemming from sometimes boorish behavior displayed, in often equal measure, by the leaders and the led. Still, I wonder how many of these situations could be defused with a tactful or, even better, a kind word as opposed to “pouring fuel on the fire”-another one of my mom’s favorite sayings.

Last week, the media reported that a woman went to the house of her HOA president to discuss the need to implement a neighborhood watch program due to security issues in the community. The conversation quickly got heated and the woman was arrested for assaulting the president. If I were to play psychologist for a moment, I would surmise that the woman likely believed the president was not taking her security concerns seriously and the president likely felt that his volunteer efforts were under attack or simply not appreciated. In any event, the outcome of the conversation benefited neither the community nor the individuals involved.

When legitimate concerns exist, they must be explored. Sometimes the outcome of that due diligence requires the recall of a director or directors who are not acting in the community’s best interests. The same decision-making process might result in a resolution to pursue enforcement action against owners who fail to comply with the governing documents. However, some of these issues on both sides of the fence could be avoided or at least defused if people took their moms’ best advice and acted with a little more deliberation, tact and sensitivity.

If you live in a community association but do not serve on the board, when was the last time you thanked someone who is serving on the board? If you serve on a board, when was the last time you encouraged members to attend your meetings and thanked those who took time to show up and do just that? Experience shows that positions harden in the presence of antagonistic words and hostile demeanors.

Appreciation is a two-way street and if we had more of them in our communities, we would have fewer mishaps.