Sunday, November 6, 2016

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Thursday, October 23, 2014

The Case of the Missing Building: (A General Common Area Element Conundrum)

Should Common Area Elements within HOA's be exempt from taxation?

The Building No One "Owns"

When is a Common Area Element no longer a Common Area Element? If one constructs a dog house, installs carpet, paints a number over its door, adds a mailbox, and receives Postal Delivery Service (not unlike the 1947 Christmas classic: Miracle on 34th Street) does the fact that it receives postal delivery make it an apartment?

In 1967, a duplex (with attached garage and carports) was constructed in western El Paso County. Per the recorded Condominium Map and the Condominium Declaration (1979) this duplex (with attached carport) was identified as a General Common Element “…for the lodging of janitors or caretakers of the property”. In 2008, the covenants were amended and this language was deleted. In 2011, an El Paso County District Court Judge affirmed that any relationship to the 1979 covenants was extinguished in 2008. Although an address was penciled in on the property plat map, a recent Colorado Open Records Request to both the El Paso County Assessor’s Office and Pikes Peak Regional Building Department revealed the following:

1)      No plans are on record for addressing.

2)      “PPRBD could not find plans for this building….” 

3)      Common spaces are not addressed by PPRBD.

4)      Since addressing does not exist for this structure, it was never assessed for taxation and valuation purposes.

5)      Labeled as “…existing duplex over garage….” The “Building was platted as a carport with General Common Element space….”

6)      Certificates of Occupancy were not issued prior to 1999.

7)      Any work done after the permit would require inspections.

RBC104.1.1 Existing Buildings. Buildings or structures to which additions, alterations or repairs are made shall comply with all the requirements for new buildings or structures except as specifically provided in this Section. The value or valuation of a building shall be the estimated cost to replace the building in-kind, based on current replacement costs as determined by the Building Official.

In 1993, this structure was modified for residential use. Since this time the association has leased out the two (2) units to tenants as a means of supplemental revenue. To date, a property valuation has never been conducted. Therefore, neither the Association nor any of its members have paid property taxes on this structure.  

RBC110.1.1 New Use or Occupancy. No new building or structure or portion thereof requiring a permit in accordance with RBC105 of this Code shall be used or occupied and no change in the existing occupancy classification of a building or structure or portion thereof shall be made until the Building Official has issued a certificate of occupancy therefor as provided herein.

In summary, the existing building was never platted as a duplex, but rather as a carport only. As such, the addresses are non-existent and therefore the building does not exist in any public records or maps making any response by emergency personnel problematic. Therein lies just one of many issues related to this non-existent building. Not to mention that it was never platted for condominium/residential living space and therefore may not be suitable for living space or properly covered under the existing Commercial General Liability Policy.

RBC104.8 Modifications. Whenever there are practical difficulties involved in carrying out the provisions of this Code, the Building Official may grant modifications for individual cases, provided the Building Official shall first find that a special individual reason makes the strict letter of this Code impractical and that the modification is in conformity with the intent and purpose of this Code, and that the modification does not lessen any life safety or fire protection requirements or any degree of structural integrity. The details of any action granting modifications shall be recorded and entered in the files of the Building Department.

Based upon this information, what would you do?

Make the Call:

Q. General Common Elements: In your opinion, does this unit qualify as a General Common Element?

Q. Inspections: If the building was never inspected and/or platted for residential use as a Condominium Unit, should the Association cease its practice of leasing until properly inspected and a CO issued?

Q. Health/Safety: If the structure fails to meet current code for Fire & Safety, Lead Based Paint, Aluminum Wiring, etc., as an Association Manager, what would you advise as a Plan of Action?

Q. Risk Management: If a property valuation does not exist, what would be your recommendation regarding insuring the property has proper coverage?

Q. Financial: If bringing the building up to code is not a financial reality, or it is condemned by the Pikes Peak Regional Building Department, would you recommend its demolition?

Friday, April 4, 2014

(DORA) Division of Real Estate - Property Manager Licensing (HB13-1277) Open Comment Period

The state of Colorado, Department of Regulatory Agencies (DORA, Division of Real Estate, Office of the Ombudsman, is currently seeking public comment regarding the proposed rules for the licensing of community association managers. A public comment form has been provided in which individuals and trade groups may make comments on the proposed guidelines. Although licensing will not be required for "ALL" association managers until July 1, 2015 the proposed rules (if adopted) will take effect on January 1, 2015.

The specific rulemaking areas are as follows:

If you have questions or need assistance call Cory Nicholson at 303.894.2334 or email at
If you are a homeowner, board member, or property manager, now is the time to provide your constructive input into the licensing process. Additional changes may be required and will most likely be introduced during the upcoming 2015 Legislative Session.

Sunday, November 17, 2013

Support for Microsoft Products expiring April 8, 2014. What will your organization do?

On April 8, 2014, support for Windows XP and Server 2003 will no longer be available. With an estimated 45% of the small and mid-size businesses currently utilizing Windows XP, financial challenges lie ahead. For most, the standard practice will be to run down to their local retailer and begin purchasing new equipment either in mass or on a as needed basis. The major problem with this strategy is that it is inefficient and may lead to spending additional funds for unnecessary software. For example, if one purchases a new computer at their local retail outlet they will generally find that the version of Microsoft Office is either a Student or Home version. Very limited in its features and/or capacity. Thus, the purchaser will be required to upgrade to a larger version of Microsoft Office. This upgrade will cost the small and mid-size business more money. In addition, the software license is a per device license (one software download per device). However, one way to remedy this problem would be to merely contact a member of the Microsoft Business Partner Network and a Value Added Reseller (VAR) and purchase a Software Assurance Agreement. This way, the small business owner is protected and receives the latest upgrades and software support per license. Another strategy would be for the small business to purchase the software upgrades directly from a Microsoft Business Network Partner and Value Added Reseller (VAR) directly and add additional devices and/or software to its licensing agreements. Thus, protecting the entire organization. However, this still leaves us with the issue of current hardware. Although the organization will now have the latest version of Windows (Windows 8.1), the question becomes one of whether or not the current equipment has the capacity to run the full version of Windows 8.1 on the present equipment. Those are questions that a Microsoft Business Partner and Value Added Reseller (VAR) are trained to provide you with directly. However, is that the best option available? What if your organization could keep its current hardware, upgrade to Windows 8.1, and have access to several Microsoft Office 2013 programs at once? What if you could obtain licensing for not just one device, or per individual but obtain licensing for five (5) devices per individual instead? What if those five (5) devices could include a variety of smart phones, tablets, desktop PC's, etc.? What if it were possible to retain your present On-Premise Server configuration and still access the data 24/7, 365 days per year? What if all of the employees within the organization could actually do the same (either on-premise or remotely)? The answer? Microsoft Office 365. With Windows 8.1 and Office 365 the organization may (in many cases) retain its current hardware, and by utilizing Windows and Microsoft Office Apps., conduct business anywhere in the world simultaneously. True collaboration and integration with Microsoft Outlook, Linc, and SharePoint allows such capabilities. Instead of purchasing large volumes of equipment, and even larger volumes of software, the small business owner can cuts his/her IT overhead costs dramatically. For example, it is estimated that the costs (in real dollars) for IT and technical support (on a per employee basis) costs the business organization as much as $75,000.00 per year, per employee). By migrating much of this technology to the cloud, and obtaining software via a Lease Agreement, the small to mid-size business will experience an immediate savings in technology costs. In addition, the organization will have access to the latest software programs and upgrades, and will be able to maximize its resources by have licensing on a per individual (versus per device) basis. Now is the time to start thinking about how to position your company for future growth and expansion with minimal overhead costs. Microsoft Office 365 can offer what no other program package offers, true collaboration and integration along all of the Microsoft Software packages. Also, with compatibility view, the business owner can still operate their older software programs (those that operated with Windows XP) without having to replace them as well. the best of "ALL" worlds and a significant cost savings for the organization. Team Strategy Inc. is a Microsoft Business Partner and Value Added Reseller (VAR) specializing in the small and mid-size business application arena.

Tuesday, November 12, 2013

Funding for Homeowner Association HOA Capital Improvement Projects. What are the choices?

For the vast majority of Homeowner Associations HOA in America, capital improvement needs nearly always outpace the financial resources available to fund such projects. For many, Capital Improvements, Reserve Studies, Reserve Allocations, Annual Assessment Increases, and Special Assessments all send chills up and down ones spine. Especially, if you are on the Board of Directors. Today, many Homeowner Associations HOA's are feeling the pinch of greatly depressed interest rates. CD's (Certificates of Deposit)that once could be counted on to provide 7 to 8%, are barely eclipsing 2%. Even Federally-Backed Securities (such as the 10-year Treasury) cannot be counted upon to provide the type of returns necessary to keep up with inflation. Inflation, you ask? Yes Inflation. But inflation has been at an all time low! Yes, inflation has barely eclipsed the radar screen. However, one cannot merely look at the Consumer Price Index (basket of goods) and assume that inflation doesn't exist. Closer analysis will reveal that several products, especially those utilizing petroleum or other fossil fuels, have steadily increased. Asphalt, roofing materials, and concrete have steadily increased over the years. What one must really consider is the loss of Purchasing Power. For example, if you track the price in value of the goods $1.00 would purchase dating back to 1900, one will find that purchasing power has decreased (on average) a whopping six (6)% per annum. Ask any Senior Citizen if their Pension or Social Security Cost-of-Living increases have provided the financial security they had hoped they would. The same can be said for Homeowner Associations. With approximately 10,000 people retiring each day, HOA's were once thought of (for older Americans) as a being a safe bet. No more home maintenance or landscaping worries, and a well established set of standards and guidelines that aided in Real Capital Preservation. Thus, Senior Citizens could easily rely upon the Association and its governance to provide peace, tranquility, and resale value. Those days, however, are quickly dwindling. With interest rates at an all time low, Seniors are faced with homes and communities with rapidly deteriorating infrastructure, and the possibility of marked increases in monthly assessments and/or financial obligations looming over the horizon. Never mind that most homeowners in America have experienced a thirty (30) percent or greater decrease in their home values. What does one do? For most Homeowner Associations (HOA), the strategy is merely to preserve the associations capital (Reserve Funds) for future use. Whenever necessary, raise annual assessments, and seek either a bank loan or special assessment when a crisis hits. Much of the loss can be absorbed by having the potential financial impact covered under the commercial general liability coverage. This strategy, however, presents two major problems. First, just how much in monthly premiums will it cost to cover these items and what will be the deductible? And secondly, it is extremely difficult to find a risk underwriter that is willing to cover items that should have been addressed via a routine maintenance program. SELF-FUNDING: What then is the solution? One alternative would be to seek to Self-Fund Capital Improvements. What is Self-Funding? Self-Funding, is much like Self-Insuring. Instead of paying high monthly premiums, many HOA's set their deductibles to higher levels and place adequate funds in their Reserves as an Insurance Deductible Reserve Allocation line item. Then, when a crisis strikes, they have the funds in their Reserves available to off-set their deductible commitments. Another strategy, however, would be for the Association to invest in itself. For example, a Special Assessment is often viewed by the individual homeowner as a one-way street. Owners are assessed, the funds are collected, the project is completed, and those who do not pay find that a lien is placed upon the unit, or they end up in foreclosure. What if Special Assessments were treated more like an investment. If the Association is going to shop for a loan, whether it be collateralized by real estate, or the future assessment earning potential of the Association, would not the Association be required to pay back the funds with interest? What if the Association loaned the funds to itself? If it did, the Association would be paying back itself, and could negotiate its own interest rates. It would not have to pay origination fees, settlement costs, and the Association Board of Directors could in essence determine the length of the loan. In addition, the interest payments that would be allocated from the Operating Fund and would be normally forwarded to servicing the debt, could actually serve as interest payments or dividends to the Association members. This is just one idea. CERTIFICATES OF PARTICIPATION: What if individuals outside of the HOA Community could provide funding to the Association in the form of a Certificate of Participation? Unlike Crowd Funding as it relates to equity, a Certificate of Participation is an investment (much like equity investing) in which there is risk and returns are not guaranteed. Also, the investment is not federally insured by the FDIC or some other federal agency. However, consider this. Numerous government entities throughout the state of Colorado have effectively marketed Certificates of Participation for the building of infrastructure without raising tax revenues. However, unlike an Investment Bank or Broker/Dealer, these Certificates of Participation could be marked and managed by Registered Investment Advisors. All at a fraction of the cost. Better yet, if a bank or other financial institution will only lend at 6.5 to 7.0%, the Homeowners Association would agree to pay say 4 to 5% for the loan for a set amount, and over a set period of time. The Angel Investors would receive monthly payments of 4 to 5%. Either way, both parties would win. This Win-Win situation would be a benefit to Associations as they may require funds for short-term projects, emergency needs, and/or large-capital improvement projects. With the Registered Investment Advisor receiving only an origination fee on the original amount borrowed, the long-term costs of such a process are greatly diminished. In addition, there aren't any credit checks, and the Association still retains its autonomy, and assessment/lien authority. Better yet, the property is not collateralized, and neither do the owners of the Certificates own equity in the Association. With our ability to earn and save diminishing each and every day, Homeowner Associations are being challenged in ways never before imagined. The true test for any Property Manager is their ability to aide their clients with these financial challenges. Unfortunately, most Property Managers do not possess the educational, financial, and licensing necessary to propose such alternatives. Team Strategy Inc. is currently formulating such a program for its clients and Colorado residents. If you would like more information, please feel free to contact Team Strategy Inc. at (719) 594-4003 or visit our website at Team Strategy Inc. is a full-service property management company headquartered in Colorado Springs, Colorado providing administrative, financial, legal, and technology services. The financial team at Team Strategy Inc. are Colorado Registered Investment Advisors and are FINRA members. The views and opinions expressed in this article are those of its author and do not necessarily represent those of Team Strategy Inc., its staff, and/or employees. This information is not a solicitation and should not be construed as such. Interested individuals and/or investors are encouraged to request a Prospectus and conduct due-diligence research prior to investing. Additional information regarding Team Strategy Inc. can be obtained from the state of Colorado Department of Regulatory Agencies (DORA), Securities Division and/or the Financial Industry Regulatory Authority (FINRA).

Wednesday, April 24, 2013

Property Managers and Financial Education

I recently interviewed with a local HOA seeking to replace their present property management. One of the questions I was asked was "Why does it matter that a property manager have a background in finance and/or economics?" My response was to take their financials which I had received copies of and use it as an Object Lesson.  The HOA had approximately $157,000.00 in the Capital Reserve Account. A Reserve Study conducted in 2010 indicated that (at that time) they should have had approximately $210,000.00 in their Reserves. thus, a short-fall of $53,000.00. Move forward nearly three years and one can see that they remain behind.
Further, they had placed approximately 98% of the Capital Reserve Funds into a two-year CD earning approximately 1.75%. These funds were placed with a local bank. So, to that, I began my explanation.
1) Diversification: The funds were placed with a single bank and if the bank went in Receivership they might have difficulty obtaining their funds. Funds should have been spread among other local financial institutions.
2) Liquidity: The funds were placed into a commercial paper document that had an early withdrawal penalty of 10% and would be locked-up for two years.
3) Risk: There wasn't an indication that the funds were FDIC insured.
4) Return: The funds should have been laddered with various interest rates and lengths of maturity.
5) ROI: Based upon this scenario the rate of return (1.75apr) would have been lost if the association required the funds during the two year period. (Risk Aversion).
The Association's Reserve Fund policy required that the Association receive the highest rate of return (ROR) available. By not having a professional manage the funds, the present scenario resulted in an Opportunity Cost to the Association as the funds would be locked in and therefore not available for investing if and when rates began to move upward.  Needless to say, the President of the Board of Directors and their former property manager devised this strategy. Neither of whom hold any formalized training in budgeting, finance, investing, and/or economics. As a result, our organization did not end up managing the property for two reasons: 1) I informed the Board Members that I didn't do STUPID, and 2) We weren't really interested in as much as the President was the one who convinced the other Board Members to go along with the strategy.
To that end, as part of a Reserve Fund Management Strategy, property managers, management companies, and board members should (as part of a Full Disclosure Policy) be required to refrain from such decisions if a friend of theirs is the Local bank President, or they have personal funds and/or loans with the Financial Institution. 
David C. Stiver BA,MA is a Colorado Registered Investment Advisor, a FINRA member, and Property Manager.