In this two-part series of nonprofit financial management tips, we’ll take a look at Home Owners Associations (HOAs) and their governance, financial responsibilities, accounting and tax requirements. When people think of HOAs, they rarely consider that these organizations, established for the maintenance and governance of a cooperative building, are typically registered as nonprofit, tax exempt organizations. As such, although they behave like a corporation rather than a charity, they must follow the accounting and tax guidelines established by the state in which they are incorporated.
Here, in this first of a two-part series on HOAs and nonprofit financial management, we’ll take a look at the financial responsibilities as well as the duties of the HOA board when it comes to financial management and accounting. In our next article, we’ll look at accounting and tax needs of HOAs and how your HOA might benefit from professional accounting and tax service for nonprofits.
What Is a Home Owners Association?
A Home Owners Association (HOA) is a legal entity established for the maintenance of a housing development, property, apartment building or condominium. The HOA’s purpose is plan, build, and maintain the property.
Most HOAs are incorporated as nonprofit organizations. As such, they are bound to state laws governing corporations and nonprofits. Members typically pay dues, or assessments, which are used for the maintenance of the HOA. The HOA develops rules and guidelines for members that govern how their property may be maintained.
For example, an HOA governing a housing development may enact rules about when people put their trash out on the curb for pickup. Residents in the housing development may need to call for special pickup of large items such as couches, furniture, or appliances. To put such items out on the curb before without calling for special pickup may incur fines or warnings to the homeowner. The reason for this is that the housing development residents have all agreed, through their HOA board representation, that to view large discarded furniture or appliances at the curb detracts from the appearance of the development. The HOA board, consisting of representatives from the residents living in the HOA, agrees upon the rules governing the property.
Financial Responsibilities of HOAs
As with any other nonprofit board, officers and directors of the HOA are legally obligated to act in the best interests of the members. This is a fiduciary obligation, or the obligation of someone entrusted with the care of money or property.
There are two broad duties that go along with fiduciary obligation:
- Upon their election to the board of a common interest development, directors become fiduciaries with powers to act on behalf of the association.
- As fiduciaries, directors are held to a higher standard of conduct and have two primary duties: (i) duty of care, and (ii) duty of loyalty.
Duty of care refers to the obligation of someone to act in a responsible manner, with the watchfulness, care and prudence that a normal person would make under similar circumstances. Duty of loyalty means that officers and directors in a company must be free from a conflict of interest.
The HOA should provide Officers and Directors Insurance for their Board. As with a corporate for-profit board, this is a courtesy that should be extended to protect the members when they act in their capacity as directors of the HOA board.
Financial Review and Analysis
Part of the HOA’s job is to provide financial oversight. This nonprofit financial management means that the HOA board:
- Creates and budgets their income evenly over a 12-month period. Budgets are essential to ensuring adequate cash flow to meet the HOA expenses.
- Keep receivables less than 3%, which is a sign of a healthy cooperative board.
- Review and pay accounts payables promptly to avoid debt or late fees
- Make other nonprofit financial management decisions as they pertain to the charter of the HOA
Additionally, HOA boards should fund studies for the development and future of the cooperative. Such studies may include planning, renewal, and major repairs.
The financial management and duties of a Home Owners Association board are very similar to that of a typical nonprofit board. In Part II of this two-part series, we’ll take a closer look at accounting and tax needs for nonprofit HOAs.
Beck and Company: Nonprofit Financial Management Expert
At Beck & Company, we have extensive experience and a tradition of creative thinking, technical expertise, and a collaborative spirit that can help your nonprofit achieve its goals. From accounting and tax service for nonprofits to consulting on issues impacting nonprofits today, Beck & Company can help. Contact us today or call 703-834-0776.