Last night (4/9/12), the Maryland General Assembly went home without adopting a State budget. The Governor will likely call a special session to complete that process. Before going home, they managed to agree and to adopt a bill that will raise the so called Flush Tax from $2.50 per month to $5.00 per month. For a homeowner with their own water meter, this increase will be reflected on the quarterly water bill. Associations with master water meters will be billed the extra $2.50 per month for each unit. For a 100 unit association, this is $3,000 per year. There is no cap until we reach 2,000 units and that would be $60,000 per year. This newly increased fee will begin appearing on your July 1, 2012 water bill—right in the middle of our budget year.
 
They’re not done yet. Among other items being considered is an increase in our Maryland Sales Tax from 6% to 7%. And, you currently pay no sales tax on property management fees, but if HB 1051 passes, you will pay the sales tax not only on our fees, but on janitorial services, answering services, credit reporting, security system service, motor vehicle repairs, exterminating and stenographic services. These are all services used commonly in condominiums or homeowners associations. They have also adopted a recycling bill to impact our associations—at our own expense, of course.
 
If you don’t mind paying taxes, relax—you will. If it bothers you that our legislature is just raising taxes when most other states are looking for ways to reduce taxes, call Annapolis. If it bothers you that Maryland just received the distinction of being ranked one of the 20% most corrupt states, vote for the same people in November. If you think it’s time to look at some cost cutting measures instead of returning to the tax well to fund every little pet project, well, you’re going to need to call the existing House & Senate members and maybe replace some of them in November.

RENTAL MANAGEMENT EDITION

One might think that the biggest breach of a lease is to not pay your rent.  Well, as one area judge said when a landlord presented that case in court, “Not in these parts.”  While it is a breach of lease not to pay rent, Failure to Pay Rent (FPR) is handled in a totally different manner in Landlord-Tenant Court.  Non-payment is a whole separate subject for another post.

Here we will deal with the other breaches and what to do about them. Some of the more common breaches include:

• Overcrowding
• Unauthorized Pets
• Illegal Use of the Premises (commercial, drug)
• Excessive Property Damage

In each of these cases, the landlord must demonstrate that the condition or action was a violation of the lease and that the condition or action actually exists.  Looking at the list, most of these are visible, although maybe not at all times.  But, if you want to remove your tenant, you may have to be a detective and conduct a stake-out so you can catch ‘em in the act.  Then, as the saying goes, a picture tells a thousand words.

It will also play well in the landlord’s favor if there was a notice issued to correct or to cease & desist and the condition or activity continued.  Then, the tenant cannot claim they did not know.  In most cases, the landlord issues a warning and, if the breach continues, a notice to vacate.  That notice must be in proper form and allow the proper time to vacate.  Only then do we proceed to court on the breach because the tenant failed to vacate.

When arguing a breach case, as always, it is the duty of the plaintiff to prove the case.  This begins, like any rental trial, with the establishment of who are the parties in the courtroom (identification of landlord and tenant), that a tenancy exists and that there is a written lease.  Nothing is to be assumed—do this even if the tenant fails to show-up and defend.  From there, the landlord will present evidence of the breach, including photos, repair estimates or invoices, housing violation notices and photos.  The evidence should support the alleged breach and the landlord will draw the attention of the court to the specific language in the lease that the tenant is violating.

Of course, anyone being sued or charged has the right to present a defense.  They also have the right to be represented by an attorney.  If you are unfamiliar with the court process, do not know how to mark and introduce evidence or are intimidated by a strong defense or adversarial lawyer, you should not represent yourself.

The objective will be to secure judgment for possession showing that the tenant has breached the lease and that the vacate notice was proper and enforceable.   This will give us the ability to obtain a writ and have the Sheriff enforce the writ with eviction being the final step.

Chris Majerle, PCAM
www.AccessMMI.com

A fidelity bond is purchased to protect the cash assets of others.  For our purposes, there are bonds purchased by community associations to protect their own assets and bonds purchased by management companies.

Under Maryland Law, a condominium or homeowners association is required to purchase a bond that covers an amount of cash equivalent to the total amount of cash in the operating and reserve accounts on any given day of the year plus 3-times the amount of monthly assessment income.  For example, if on a particular day, there is $20,000 in operating and $80,000 in reserve, that is $100,000.  Add to this the monthly assessment income budgeted (let’s say $25,000) times three.  This adds another $75,000 to the minimum fidelity coverage or $175,000.

A community association fidelity bond covers theft by board members and any employees of the association.  At no added cost, the management company can be named, as well.  Under Maryland Senate Bill 74 (SB 74), cross-filed with Maryland House Bill 741 (HB 741), management companies will be required to purchase up to a $3 million fidelity bond to protect their managed communities in the event of theft by the management firm.

On first glance, it seems reasonable that a management company controlling all this money should have a bond.  And, this proposed law comes on the heels of several notorious cases in Virginia and Maryland where the management firm did abscond with money.  But, who really benefits and who pays?  As was just pointed-out, the association’s money is protected, by existing law, and that protection may be extended to the management firm.  So, it seems this coverage is a duplication, each with its own separate cost.  Sounds like one entity benefitting would be the insurance companies.

It seems reasonable that the insurance paid for by management should pay if management steals.  Well, fidelity coverage available to management firms does not pay if the owner of the management firm is the guilty party.  So, the liability would fall back to the association’s coverage.   And, the recommended practice is for management to have no access to your reserve funds in the first place!

In the end, every business passes-along all operating costs to its customers.  That is how they stay in business.  In fact they generally add 25% of all costs to cover administrative costs and profit.  This second layer or duplicate coverage will cost management firms $3,000 to $10,000 annually.  Add the overhead and profit and you’re looking at $4,000 to $12,500.  Your association will be asked to pay a portion of this cost, as will all associations by all management firms—it’s simple economics.  On top of this, it is likely that manager licensing will be passed in Maryland in 2012.  This will come with a cost of about $375 per year per manager.  A portion of that cost will be paid by the manager or management firm and the rest would be paid, under current proposals, by a fee assessed to the associations who theoretically benefit from having managers licensed.    Look for management companies to build their license cost (including administrative costs and profit and cost of manager continuing education) into their fees next year.  By some estimates, licensing and bonding will add $5 to $10 per year per unit to management costs; much more for small companies, so the big ones see this as a competition eliminator and that never benefits the consumer.

While this may not seem like much, what do you think any unnecessary costs will do to your delinquency rates?  Manager licensing has been a long time coming.  It is necessary to raise the caliber of managers in the industry.  Maybe that is enough for one legislative session.  There will be a hearing in the Maryland House on 3/1 at 1:00 PM.  If you would like not to put more money in the pockets of insurance companies for no added benefit, contact your House Representative immediately and tell them NO to HB 741,

Chris Majerle, PCAM
www.AccessMMI.com

RENTAL MANAGEMENT EDITION

In today’s market you hear over and over again, “My home is underwater and it is not worth what it was just a year ago”. You are upside down”. You may even owe more on your mortgage than what your house is worth now. Some people are able to wait for the real estate market to bounce back; some are not.  Most economists believe it already has.  Housing prices of 2005-2007 never really belonged where they were; they belong where they are today.

For those who do not have the option of riding it out or retaining ownership until the loan is paid-off, an option may be to consider a short sale to avoid a bank foreclosure.  A short sale is when the house or property is sold for less than the balance due on the mortgage.  The lender takes the loss.  A short sale is not always the best option for everyone.

Mortgages are recourse loans.  That is, they are secured to the property, but the individual signing the documents is personally liable.  In a typical foreclosure scenario, the property is sold at auction.  The bank will bid up to the amount of the mortgage balance.  If a third party buyer wins the bid, the original borrower is off the hook.  But, it the value of the property is less than the highest bid and the bank takes it for less than the amount owed, there is a deficit.  The original borrower may be held liable for the amount of the deficit.  Short sale can avoid a personal judgment.

Short Sale Pros-

• No Foreclosure
• Lender may forgive the difference in debt between what you actually owe and the final price for your home
• Your credit score may recover more quickly than if you had a foreclosure (with a foreclosure on your credit report, your score may take a hit of 100 points or more)
• You may qualify for a new mortgage on another home more quickly than if you had a foreclosure

Short Sale Cons-

• Your credit rating will still be damaged
• The bank could demand payment for their loss
• Your lender does not have to consent to a short sale on your property
• For future employment your employer may check your credit rating and see that you had a short sale or foreclosure and it may affect their decision to hire you
• Also a short sale unlike its name is not a short process but actually can take a long time
• If you have a 2^nd mortgage or home equity line of credit, each lender has to be consulted for approval which can take a long time and they may not release you from personal liability

Gaining short approval can be a long process. There are a lot of details, paperwork and approvals to be taken care of, but the short sale option is generally better than a foreclosure. To short sale or not to short sale, that is the question and hopefully after weighing the pros and cons you will be able to make an informed decision.

For more information on the short sale process please note the websites below:

BankofAmerica.com/homeloanhelp

FastShortSaleHelp.com

Tanya Glover
AccessMMI.com

COMMUNITY MANAGEMENT EDITION

Is your condominium or homeowners association a Maryland corporation? If so, you receive certain protections from individual liability provided you remain in “Good Standing.”

A Domestic Corporation files its Articles of Organization with the Secretary of the State of Maryland.  This creates the corporate entity.  From there, the objective is to remain in “Good Standing” in order to continue to receive the protection of “the corporate veil.”

For legal purposes, a corporation is treated as a person.  If you were to sue a person, you would serve papers on the person.  For a corporation, there must be a real person identified who can accept service on behalf of the corporation.  That person is designated as the Registered Agent and must live or work within Maryland and be available during normal business hours to receive papers. These documents include but are not limited to anything sent by the State of Maryland or any lawsuit information that is filed against that corporation.  A corporation should think seriously about who they assign as their resident agent.  They must fully trust this person to notify you immediately upon receipt of any such documents.  Often, communities change lawyers or managers and never recognize that the lawyer or manager served as registered agent and represented the official mailing address.  Talk about trust… do you trust your former manager or former attorney?

Annually, each corporation must file a Personal Property Return.  Businesses that are “for profit” must list assets on which they will pay Personal Property Tax and pay a filing fee.  Not for Profit entities file the form, but do not list assets and pay no fee.  The form is due on April 15 of each year and must list the names and addresses of the directors and officers.

In order to see if your Corporation is in Good Standing with the State of Maryland, go to www.dat.state.md.us.  Here you will find the official address of your corporation, the name and address of your registered agent and the last year for which your personal property tax returns were filed.  Try it—you’d be surprised how many corporations fail to keep-up on these requirements and show “Forfeit” on the status of their corporations.  For a community association, this may mean that anyone injured on the property can individually sue each and every homeowner!

Most reputable management companies check this information periodically and arrange to file the personal property return or change the registered agent or mailing address.  If your status is forfeit, you must file Articles of Revival to restore the corporation to good standing.  All of the necessary forms can be found on the DAT website.

Kim Hirsig, PCAM
AccessMMI.com

Rental Management Edition

Your Tenant’s lease has expired and they are still living in your property. What can you do?

If a tenant has given or been given proper notice to vacant and remains in the property, this is termed a “Hold Over Tenant.”

Liability to Pay Rent

A tenant who unlawfully holds over after termination of the lease, is liable to the landlord for all actual damages caused by the holding over , and at the least, is liable for the apportioned rent for the period of holding over  at the rate provided in the lease. Many leases do not allow for apportionment of the rent, so the hold-over tenant is liable for the full month of any hold-over period.  In fact, some leases provide for rent 20%, 50% or higher increases automatically during hold-over periods.

A landlord may be awarded judgment in Tenant-Holding-Over (THO) cases if the court finds that the tenant was personally served.

You may ask, “What if the tenant still is making payments, can I still seek to evict the tenant? Acceptance of payment after the notice to vacate is given, but prior to the eviction, does not constitute a waiver of the notice or a waiver of any judgment for possession, unless all parties have agreed in writing.

Eviction Procedure

Whenever the landlord has given to (or received from) the tenant proper written notice to vacate the premises, and the tenant does not comply, the landlord may make a complaint in the District Court for the county where the property is located.  Most residential leases revert to month-to-month and continue forever, until someone gives the proper notice as prescribed by the lease or the local law.  Absent notice, a tenant merely remaining after the termination of the initial lease term is continuing lawfully under the same terms and conditions as contained in the initial lease.  Proper written notice is required.  The notice need not be served or sent certified, but either of those methods would support the testimony that the proper notice was given and no money judgment can be taken without personal service.

The court will issue a summons notifying the tenant to appear in court on the stated day to tell the court why the property should not be returned to the landlord. The constable or sheriff will serve the court summons on the tenants or post a copy of the summons in a conspicuous place on the property.  The posting of the summons will be conclusively presumed to be sufficient service to support a judgment to restore the property to the landlord.

If after the hearing the court rules for the landlord, it will order the sheriff to remove the tenant from the residence. The court may also order the tenant to pay the landlord’s costs for filing and prosecuting the lawsuit suit.

The sheriff or constable must be present at the actual eviction of the tenant, as an officer of the court. As in any eviction, the sheriff will not participate in physically moving tenant’s possessions. That is the landlord’s responsibility.  The landlord will hire an eviction crew for this action.  There are many companies that will serve as an eviction crew for you.

So if you have a “Tenant Holding Over” you as the landlord can use the court system to get the tenant removed from your property.  Remember, eviction may allow a reasonable extension in the timeline required for notification deduction from the security deposit, but it does not relieve the owner from documenting damages and sending the notice.

Tanya Glover, Property Manager
www.AccessMMI.com

The next two classes in the MMI Board Member Development Program will be offered on February 4, 2012 at the Holiday Inn Greenbelt.

At 10:15 AM, BMDP 202 – Reserves and Investing will introduce you to a professional reserve study and, more importantly, how to read it.  From there, we will examine investment vehicles appropriate for use by condominium and homeowner associations and the proper (and improper) use of reserves.  The concept of reserving for the future is the single most important aspect of community management that determines the ultimate success or failure of a community.

At 11:30 AM, BMDP 203 – Risk Management and Disaster Planning will help your board of directors understand the kinds of disaster we face and how we can best prepare to handle disaster, not if, but when it occurs.  While there are many types of potential disasters, there are common elements like loss of power or water damage.  Our residents look to the board and management much like they might look to FEMA and we need to rise to the occasion.  It’s not hard, but does require some thought.  We will give you the basics of how to develp a plan and we will discuss how to minimize the emotional and financial effects of disaster.

All course materials are included.  This venue has very limited seating.  Registration is on a first-come basis.  Register at www.AccessMMI.com/register.

COMMUNITY ASSOCIATION EDITION

For most communities, those on a calendar fiscal year, we just saw the end of another financial year.  The clock is now ticking for the filing of your Federal and State Income Tax Returns.  Businesses, and community associations are businesses, have 2-1/2 months from the end of the fiscal year to file their returns (unless they pay their estimated tax liability and file an extension.)  Individuals have 3-1/2 months, hence the April 15 deadline, but your association must file by March 15.

You (or your management firm) should now be closing out the previous year.  That means issuing W-2’s to employees and 1099’s to vendors.  Incorporated vendors need not receive a 1099 this year, but that may change by next year, so begin requiring tax ID numbers before issuing any payments in 2012.  You’ll want to review your balance sheet to see if it is in order and make the necessary adjustments in 2011.  Your income statement will automatically zero-out because income statements report current year revenue and expenses while balance sheet s represent the complete financial history of the business.  You may still have time to defer any profits to reserves to avoid taxation—consult your accountant on that issue.

While the accountant is reviewing the books for tax prep, he or she will likely be preparing for the audit.  Audits come in three forms:  a review, a compilation or a full-blown audit.  Reviews and compilations are less involved and less costly, but your governing documents may require an audit.  If not, talk to your accountant to see if you could save a few dollars.  They will still make sure the numbers appear to be in order and, with bank reconciliations, your funds are relatively safeguarded even under the lesser scrutiny.

The audit report will show the balance sheet and financial picture the way they have been reported for tax purposes.  This may differ from the way your accounting staff or management may have reported them.  Once the report is out, there may be some adjusting entries needed to bring the in-house reports in line with the official record.  It’s not a sign of incompetence to need some adjustments; just a difference in the purpose of the reports.  We tell our clients that we are not their tax accountant; that the primary purpose of our report is to ensure that the board knows every dime has been accounted for.

Now is the time to file your Personal Property Return.  Often, the accountant prepares this form, but it can be completed online at www.dat.state.md.us and printed.  Your office staff or manager will be better able to list board members and their addresses, but let the accountant do it if history shows that you have to report personal property for a personal property tax payment.  If not, you need only complete one page of the four-page form.  If you do not file this form, even though no money is due in most cases, you would see your corporate protection forfeit.

There are a number of CPA firms in the Washington/Baltimore/Annapolis region who specialize in community association tax and audit preparation.  The Community Associations Institute (www.CAIOnline.org) website has a Find a Service Provider link that will enable you to search for accountants in the Chesapeake or DC Chapters.  These accounting firms are familiar with the industry and equipped to conduct the audits rapidly and, therefore, at lower rates than other accounting firms.

Chris Majerle, PCAM
www.AccessMMI.com

Rental Management Edition

It costs only about $150 to winterize a home and about $15 if you do it yourself.  We find a lot of owners who would rather not spend the money because they have the heat on, anyway.  Well, when it’s your personal residence or a tenant occupied house and the heat goes out, someone gets cold and calls the HVAC contractor.  But, whether it’s the wind that blows-out a pilot light, a malfunction or someone forgets to pay the gas or electric bill, heat can fail at vacant homes.  And, when they’re vacant, no one knows.

It takes only a few hours of 30 degree or lower temps to freeze the water pipes.  Water expands when it freezes and is so powerful, it will actually tear a gash in a copper pipe.  Frozen pipes are no problem—the ice blocks the flow of water.  But, when the temperature rises, the ice will thaw and that water will begin to flow.  Of course, there’s no one home then, either.   So, the water will flow until the basement fills and the water flows out the front door.  That is when you’ll hear you have a problem.

On a typical house, there is a main water valve.  In a property with a basement, it is generally on the front, basement wall.  Homes without a basement will usually have the main valve located either in a utility closet, near the water heater or under the kitchen sink.  Your first task is to turn-off the main water valve.

Gravity is your laborer when you winterize most houses.  Simply open every valve in the house:  Sinks, showers, tubs, laundry tubs, outside faucets.  Flush the toilets to drain the tanks. Disconnect washing machines and lay the hose down on the floor—the water will drain out.  At this point, you have no water in your fresh water supply lines.  You still have water in toilet bowls and traps.  There is a trap under each sink, tub and shower.  At West Marine or any RV store, Home Depot or Lowes, you can purchase potable anti-freeze.  This is environmentally friendly anti-freeze that can be flushed into the sewer system.  Pour about a quart into each drain and about one-half gallon into each toilet.  You will now have protected your sewer traps and toilets.

What’s left?  You could actually drain the water heater, but they take a lot longer to freeze.  But, if you do, turn-off the gas or electric, first.  Then, there’s a valve at the bottom that will allow you to connect a hose and drain it into a floor drain or out a door.  If you have a hot water heating system, you will need to blow the water out of the radiators.  For this, you will need an air gun or, better yet, a plumber.

When it’s time to re-supply water to the property, simply close ALL of those valve you opened and turn-on the water supply.  That potable anti-freeze will wash right out of the drains and toilets with no damage to pipes or the environment.

Townhouse can freeze, too.  We recommend winterizing the.  Condos often have heat supplied from  multiple neighbors, but you may want to at least turn-off all the valves so that, if there is a broken pipe, water will not spew.

For a few dollars, you now can rest easy that, if the heat fails in your vacant home, you will suffer little or no pipe damage and absolutely no water damage to drywall, plaster, carpet or flooring and no mold.  It’s a small price to pay.

Chris Majerle, PCAM
www.AccessMMI.com

COMMUNITY MANAGEMENT EDITION

As management firms move from flat fee pricing to fees for services or a-la-carte menus, there is an increasing cry for a return to flat fee. Which is better? Well, generally, as both a management company CEO and a home improvement contractor, I will advise that it is always best to pay for what you get. Let’s look at a home improvement example. You have a plywood ceiling on your porch and it is rotted. You want it replaced and you want a price. I can easily price the piece of plywood, installed, primed and painted. But, I can’t see through it. I can’t determine whether you have rotted ceiling joists, rotted rafters, rotted roof sheathing or wet/moldy insulation. But, you insist on a flat, fixed price. I have two choices: price the replacement of only the plywood, even if that means attaching it to rotted structural members –or– assume all those conditions exist and price accordingly. Now, if I find that those conditions don’t exist, I profit. If they do, I don’t lose. Which is better for you? Seems like you’re forcing the process to be a gamble and you cannot win.

Management is the same. Most of the extras that management firms are charging for are services that are not typically offered at all communities or are not provided at the same level or in the same quantity. Take violations, for example. We have communities that do not cite violations. We have others where 80% of homes receive a letter every year. How do I offer flat pricing when I do not know what you will do this year, next year or beyond? Some communities participate to a great extent in our electronic notifications process, so mailing costs are reduced for them. Others don’t. I cannot forecast your level of participation.

Some of the more time consuming expenses and those most often priced as extras include postage, printing, mailing processing, delinquent accounts processing and legal turnovers, court appearances, extra meetings or site visits, issuance of pool and parking passes & administration of parking programs, clubhouse rentals and architectural application or violation processing. There is no way to fairly price flat-fee management to include an unlimited number of these tasks. Fair means fair to both parties. You may get a deal from an inexperienced management firm that includes these tasks at no added cost. In a few years, you’ll be changing management again because they raised their fees or they will be out of business. Most community management firms are operating in the 5% to 15% profit margin. 15% is good. 5% not so good. Even with all this nickel and diming, we’re not running to the bank every day with our huge profits.

In the home improvement example, it’s fair that you allow the contractor to assess the situation. This means getting into the job and seeing what is presently hidden. He can price the various components without seeing them, but you enter the agreement knowing that if one joist is bad, $100 will be added, if two, $150. If the rafters are bad, another $1,000… or whatever. Then, once the ceiling is open, you’ll know and he will know the extent of the work and the agreed price. Management is the same. We tell you how much each task costs and we charge based on actual experience. It’s fair to the management firm and fair to the client. The alternative is fair to only one side and that is not good for an on-going or long-term relationship, which is what you really need most from your management firm.

Chris Majerle, PCAM
www.AccessMMI.com