Wait! You have to write an annual report?
As it happens, some states require condos/HOAs to provide an annual report to homeowners. But what to include? That’s the question we got from an HOAleader.com reader. Specifically, our reader asked for tips on what to include and not to include in an HOA annual report. Our experts walk us through what’s typically required and what to include and not.
Minnesota Says Yes
The Minnesota Common Interest Ownership Act does require annual reports, and the statute is very specific about what to include, according to Nancy T. Polomis, a partner at Hellmuth & Johnson PLLC in Edina, Minn., whose clients include local and national residential builders and developers and condos and HOAs throughout Minnesota.
It’s 515B.3-106, if you’re inclined to look it up. “It states that the annual report must be prepared by the association and a copy provided to each owner at or prior to the annual meeting,” she says. “The report must contain, at a minimum, a number of things.” Those include:
- A statement of any capital expenditures of more than 2 percent of the current budget or $5,000, whichever is greater, approved for the current fiscal year or the next two fiscal years
- A statement of the condo’s/HOA’s total replacement reserves, the components of the community for which the reserves are set aside, and the amounts of the reserves the board has allocated for the replacement of each component
- Revenue and expense statements for the association’s latest fiscal year and an end-of-fiscal-year balance sheet
- A statement of the status of any pending litigation or judgments to which the association is a party
- A detailed description of the insurance coverage provided by the association, along with other insurance information
- A statement of the total past due assessments on all units for a specified period.
“That last requirement trips associations up,” says Polomis. “They should be providing a total past-due assessment amount. They shouldn’t be showing each individual account information.”
California requires community associations provide some financial details, but not a full annual report, explains Andrea L. O’Toole, a community association lawyer for 15 years and the founder and shareholder at Andrea L. O’Toole PC in Lafayette, Calif. “Associations are required only to provide a financial report, which is usually prepared by an accountant, within 120 days after the fiscal year ends,” she says.
“In addition, no later than 30 days before the fiscal year begins, they need to provide an annual budget report and the annual policy statement, which includes all the rules, such as the architectural policy, and all other disclosures the law requires,” she adds. “The budget report has the budget and all sorts of disclosures, such as the insurance carried and a reserve study update. Those are in addition to the annual financial report.”
When Presidents Report
Several of our experts noted that presidents often like to deliver a report to owners at the annual meeting.
“In Oregon, there’s no annual report requirement,” explains Katie Anderson, PCAM, AMS, CMCA, the founding owner of Aperion Management in Bend, which manages nearly 70 condo, HOA, and townhome associations throughout Oregon. “There’s an annual financial report that’s required if funds exceed certain thresholds. We association managers don’t write those reports; CPAs do.
“But the president might provide a report because that’s generally the one time of the year where you may have a captive audience,” she adds. “Even if owners don’t attend board meetings through the year, many attend the annual meeting. Especially now with attendance virtually, we’ve seen attendance go up.
“The president’s report will generally include all the significant actions taken and the things the board or community has accomplished,” says Anderson. “That’s your opportunity to report back to the community what the corporation has achieved, where you are, and where you’re headed. That’s how we approach the annual meeting, with officers or managers also providing reports on anything from their perspective.”
That’s also true among the clients of Alessandra Stivelman, who is board-certified in condo and planned development law and a partner at Eisinger Law in Hollywood, Fla. “There’s no state requirement of an annual report that I’m aware of,” she notes. “But I have presidents who, at the annual meeting, voluntarily prepare an annual report to the membership. A lot are from northern states, and maybe there were requirements there, so they’re adamant about giving their annual report.
“I actually think it’s a great idea,” she adds. “I’m all about communicating to the membership where the community is, what they’ve done, upcoming projects, and some of the issues and obstacles they’re facing.”
O’Toole’s clients also include presidents’ reports. “Sometimes the president will give a sort of state of the union report,” she says. “They’ll write that out, but it’s not required by law. While the election inspector is counting ballots, the president will give a report, the treasurer will give the treasurer’s report, another officer or committee chair might also give a report, and sometimes the manager will give a short report because that’s the one time of the year when they all get together. That’s pretty much it.”
Careful What You Share
As a general rule, Anderson likes to air issues rather than avoid discussing them. “I believe conversations help solve problems,” she explains. “So if there was something brewing, you probably should have a conversation about it. Maybe you want to flesh out opinions from owners that the board doesn’t understand. But I can’t imagine something you wouldn’t want to talk to owners about.”
That said, presidents and other officers providing voluntary reports should avoid making improper disclosures. “Presidents’ reports should be subject to the confidentiality of legal matters,” says Stivelman. “For example, when you’ve filed suit against the developer, Florida law requires you to give notice and provide an engineer’s report.
“Maybe the president wants to let the community know they’re moving forward with that litigation,” she explains. “But they also want to go over the issues in the engineer’s report, the concerns over the case, how much money they think the case is worth or how much they think they’ll get if they win or settle. That’s where they think they’re giving members information, but they could really affect the outcome of the litigation itself.
“If a director wants to give a report verbally or send one out, I suggest they be careful about what they put in writing about contentious issues,” advises Stivelman. “They should keep those discussions more general than specific and run those comments by their community association lawyer first.”
O’Toole agrees. “I’d recommend against giving a report on actual or pending litigation or threats of litigation,” she says. “In California, boards aren’t required to provide disclosures to members regarding ongoing litigation unless it relates to construction defects. So if litigation is related to property damage or an enforcement action, for example, there’s no requirement to disclose it.
“But most boards do give periodic updates,” adds O’Toole. “I work with an association where there’s been roofing litigation for three years. If the president wanted to report on that, I’d recommend that the president be very careful. One of the things that association has spent a lot of money on is litigation and lawyers. Rightfully so, members will have questions. But be careful about disclosing anything to do with ongoing litigation.”
Presidents can also inadvertently inflame already-touchy issues. “My general advice would be that if an association wants to include more than the minimum information required in our state’s annual report, they should check with their counsel or, at the very least, management,” suggests Polomis.
“What they want to include may be fine or innocuous, or it may have unintended consequences,” she explains. “A lot of times, it’s not the topic of the item they want to include that might be a problem but the language they intend to use. I could easily see some associations pitting one portion of the community against the other, especially if you have different-styled homes in a community or if one phase of the community was built a significant number of years before subsequent phases. In those cases, wear and tear is well underway in phase one, and then the issue becomes a question of reserve replacement contributions and use.
“Sometimes the board simply wants to be transparent and say, ‘This is what’s going on,'” states Polomis. “But the way they say that can create division in the community. Maybe the first part of a community was built with vinyl siding, and the second part was done with wood, so the maintenance costs or requirements are different. No matter how often you say, ‘ABC community is ABC community as a whole,’ when developments are phased, it’s often perceived as a ‘we/they’ issue.”
Another way to veer off track: “Some presidents want to use the opportunity to put someone on the spot, but they end up doing it in a way that could be defamatory,” says Stivelman. “You have to be very careful about what to include. Definitely have reports reviewed before they’re presented.”
Gently Toot Your Own Horn
One thing you should definitely be doing in an annual report is letting homeowners know all the hard work that goes into running the community professionally.
“People need to see the work you’re putting in, and they need to know where their money is going,” says Stivelman. “Many owners think they’re overpaying, but they don’t understand the day-to-day expenses. And if you’re doing a special project, they need to see everything that goes into that.
“To the extent you can show them where the money is going and all the things going on behind the scenes, that’s important to include,” she recommends. “Maybe you should share all the records requests you’re dealing with. Or maybe the building is dealing with a lot of plumbing issues. That’s the kind of thing the membership would have no idea about unless you put it in a report to show them.”
O’Toole also suggests providing information that educates owners on the work being done on their behalf. “I think it’s great to highlight the things you’ve accomplished,” she says. “What goals did you set out to achieve and did you achieve them? If not, why not? Also, has the board set goals for the new year?
“And always thank the people who helped the board,” she stresses. “Everybody knows the board, but there are lots of people behind the scenes who work with the board. People like to be recognized, and doing it is also good for recruiting future volunteers.”