Underfunded community associations can be at risk of falling behind on much-needed repair, restoration, or replacement.
Some board members may feel that:
- Unchanging and/or reduced assessments will reduce owner complaints.
- Increasing assessments will scare away potential buyers and hurt resale value
- It’s acceptable to constantly utilize reserve funds to maintain or reduce assessment fees.
- Major maintenance concerns can be addressed by a future board.
- As unpaid volunteers, they are unable to navigate complex issues involving building codes, inspections, safety regulations, etc. best addressed by engineers and construction professionals.
However, delays and disregard can create a financial fiasco.
- Overdue maintenance issues can discourage sales by prospective buyers.
- Assessment levels should be reviewed to ensure they address changing community needs and inflation.
- Strictly addressing immediate concerns and expenses can create situations where owners are forced to levy special assessments, take out a loan, etc. to address deferred maintenance issues and big-ticket repairs.
Maintaining the association’s financial well-being is a vital fiduciary responsibility for condominium, homeowner (HOA), and townhome board members.
Below are five funding factors board members should consider in their community association.
1. Assessment Collection
Board members have a fiduciary duty to act in the best interest of the association. Consistently collecting the funds necessary for the ongoing operation of the corporation from members of the association is part of that duty.
Failure to actively pursue the collection of the community’s financial resources can prevent the association from carrying out its maintenance responsibilities in ways that could cause irreparable damage to the association’s reputation and property values for years to come.
If your community does not have a collection policy, the board should work with the association’s legal counsel to establish a policy that is in alignment with your community’s governing documents.
2. Budgeting
Board members should ensure the association has proper funding to address the community’s operational expenses (landscaping, utility maintenance, insurance coverage, snow removal, etc.). These expenses are relatively predictable when preparing an annual budget.
Additionally, a budget should anticipate and address:
- Projected income from assessments
- Delinquent and unpaid assessments
- Rising cost of supplies and utilities
- Increases in cost of vendor services
- Current and outstanding projects
- Long-term projects
3. Reserves
A reserve fund is a savings account for large scale association repair or replacement projects. Reserve funds can be used for emergencies such as unforeseen common area structural problems or clubhouse roof leaks. Reserves can also be utilized for long-term capital improvement projects including replacing community sidewalks, installing new fencing, and façade repairs.
States have different legal requirements for reserve funds. For example, the Illinois Condominium Property Act requires any budgets adopted by a board to provide for reasonable reserves for capital expenditures and deferred maintenance for repair or replacement of the common elements.
Reserve amounts can vary due to factors including the size of the community and the common element property components. Conducting a reserve study can proactively identify if there are repair, restoration, or replacement concerns.
4. Special Assessments
A thoughtful budget reduces the likelihood that a special assessment will need to be levied (in addition to regular assessments) to pay for association expenditures not included in the annual budget.
There are technical and legal conditions that must be met in adopting a special assessment. Failure to meet even a small requirement can invalidate the board’s decision and prevent the association from collecting the special assessment. Furthermore, once the special assessment has been adopted, the association must comply with legal restrictions around the use of those special funds. An experienced attorney can help an association smoothly navigate the special assessment process and maintain compliance throughout the term of the special assessment.
5. Loans
Association board members may find themselves in the position of having to pay for necessary (or even emergency) maintenance, repair, or replacement of common elements that go beyond the annual budget or available reserves. One viable option may be for the association to utilize a loan that will effectively fund and complete the necessary projects.
Unlike personal loans (where an individual is liable) or commercial loans (secured by a mortgage on real estate), association loans are typically secured by a pledge of association assets (e.g., right to receive future income, bank accounts). Banks also grant associations loans in exchange for a lien on assessments.
Conclusion
The decision to raise assessments, levy special assessments, or take out a loan may be unpopular. Part of serving on a board requires members to consider the well-being of the community months and years into the future, perhaps even beyond their own time living in the association.
Adopting a long-term budgeting perspective and best practices are necessary to ensure the community prospers for years to come.
Questions about assessment collections, budgeting, reserves, or other legal concerns in your community association? KSN is available to assist. Contact our law firm by calling 847-537-0500 or visit our website at www.ksnlaw.com.
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