“Community Association Assessments” – KSN Attorney Michael Kreibich reviews condominium, homeowner (HOA), and townhome assessments in this episode of the KSN Podcast. He discusses board member responsibilities, special assessments, reserves, collection policies, and more. (24 mins.)

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Since 1983, KSN has been a legal resource for condominium, homeowner, and townhome associations. Additionally, we represent clients in real estate transactions, collections, landlord/tenant issues, and property tax appeals. We have multiple office locations, serving hundreds of clients and thousands of communities throughout Illinois, Indiana, and Wisconsin.

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Episode Transcription:

Bernie: You’re listening to the KSN podcast and today we’re talking about community association fees. Welcome to the KSN podcast where you’ll hear from KSN attorneys as they share their experience and insight on legal issues surrounding community associations, collections, property tax appeals, and landlord tenant law. I’m Bernie and today we’re joined by KSN attorney Michael Kreibich. Michael practices association law. He represents condominiums, townhomes, homeowner associations, and works with thousands of associations within the Chicagoland area. Mike, welcome to the podcast.

Michael: Hi, Bernie. Great to be here.

Bernie: All right, Mike. So, our topic today is community association fees. New condominium and homeowners may have a lot of questions when they first join a community association. Board members, property managers, have to be prepared to address those inquiries, address those questions, particularly when they revolve around the fees that the owners are paying as members of the community association.

Michael: That’s right. Some of the questions that we usually see while we see a myriad of different questions, sometimes people move into communities and they have absolutely no idea that they’re actually part of a miniature government. One of those functions of the miniature government is that they have an obligation to pay assessments. That’s the fee, it could be either a monthly, it can be a yearly. The yearly fee is more common for single family homeowners’ associations, monthly fees are more common for condominium and townhome associations. But when somebody moves into a community, one of the first things they ask or what they should ask is what is my obligation to the association. Not only do they have an obligation to follow the governing documents, within those governing documents, there’s going to be a provision or provisions that obligate them to pay assessments. So, some of the questions we get are what is the condominium association fee or assessment, who’s responsible for those fees and what does the condominium or HOA association fee cover?

Bernie: So, let’s start with that first one Mike, what is a condo or HOA association fee? What’s an assessment?

Michael: Okay, so an assessment is an association fee, also known as we said, an assessment is a fee paid by owners to an association. These fees are paid to cover a number of different things. Really, it’s the running of the association but if we break that down, that’s the cost of amenities, the cost of maintenance, capital improvements, and any other association operational expenses. So, really you want to look at it as anything that costs the association money, that money has to come from somewhere and that somewhere is the association membership. So, while each community association is different, if you’re an owner you want to review the governing documents to get a really good handle on what it is that your money, your assessments that you pay, what it is they go to and that can go to an absolute myriad of different things.

Bernie: So, let’s get into that. So, some of these assessments are used to pay for, like you said, a myriad of different things, including sometimes community services, right? Security, trash removal, internet?

Michael: Correct. So, the association has obligations under the governing documents. Those obligations, as you just stated, could include utilities, include municipal services, if you have security guards, if you have a front monument, if you have a pond, if you have janitorial services, if you have internet, if you have an Intercom system if you have a pool, if you have staff, if you have an accountant, if you have an attorney these are all things that your assessments– the pool of money from all of the owners goes to cover these different things. Additionally, the association, depending upon what type of association it is, has insurance obligations. Those obligations in a condominium association are a little greater. They generally ensure the structure. So, there’s a higher insurance obligation. If you have flood insurance is another example. If you happen to be in a flood plain. There is just really an unbelievable number of different things that the association that board members have to ensure that the assessments cover. I know it’s popular or when people run for the board, one of the positions they run on is well, I’m going to keep assessments low.

Well, we all know what’s going on in the world right now, the cost of everything is going up; gasoline, milk, you name it, in reality a board that simply says, I want to keep assessments flat or low is maybe not necessarily doing what’s in the best interest of the community. In reality, because the cost of everything is going up, all services, all materials, if you have any projects the reality is the assessments are probably going to need to go up and that’s just something that the board’s– working with management, if you have professional management, working with your attorneys, working with your accountant, those are all things that need to be taken into consideration.

Bernie: Along with that, Mike, you have fees that go towards more visible cost; landscaping, maintaining a fitness center, maintaining a clubhouse, but then you have some of those what seem to be invisible fees that go towards a reserve fund, the savings account for the association.

Michael: Great point. So really when you talk about your money going into your association, it’s kind of is a fork in the road. If you want to look at it from a conceptual standpoint, you have your regular maintenance items, things that are reoccurring, but you touched on it, landscaping, snow removal. If you have reoccurring fees that happen either monthly or annually, that you’re aware of, those are the types of things that are in your operating budget. What’s the fork in the road is then you have your reserve account, your reserve account where portion of your assessments should be going. Association should be putting money into reserves and that amount can be determined by a number of different factors. One could be a reserve study that your association does. You take into account all those different factors, the life of different things; if you have roofs that you’re responsible for, if you have driveways, you’re responsible for, those are the types of things that are called capital improvements or expenditures. Those are the types of things that are not reoccurring, that are not common or operational. Those are the types of things that are paid for generally from your reserve account.

So, your association assessments really do a fork in the road. Part of it goes into your operational expenses, part of it would go into your reserve account to fund major projects. If you’re replacing, if you have to rebuild your pool, if you have to put in– the ones I see commonly again, are roofs, facades, driveways, if it’s landscaping, if you have to replace trees, those are the types of things that would be considered to be reserve items and properly reserving is an important thing for an association board to consider. You need to take into consideration the concept that if you don’t pay for it and you don’t properly reserve, the money has to come from somewhere. At the end of the day, the individual owners, the money’s coming from them. The question is does that money come from them in regular assessments paid for overtime or does that get you into the concept of something that, well, a special assessment? That’s a lump sum that an association and a board comes to the membership because they don’t have proper reserves or something was unanticipated because in the world we live in just because they say the roofs are going to last 14 years or 15 years, you’ve been putting money in the reserves thinking that you’re going to need to replace them in 15 years and they fail in year 13, you have a shortfall and if you have a shortfall in your operating or in your reserves, you have very limited options of how you can fund that and one of those options would be what we call a special assessment

Bernie: By way of an example, in my own association, we actually had many years ago a car that went into the pond and I think with even the best fiscal preparation that a board and a property management team could do, you could never plan for something catastrophic like that to happen. So, while you may have your budget in line with everything accounted for, and like you mentioned, with the rising cost of labor, maintenance and resources, you may be able to plan for that, but a car in a pond is just impossible to plan for. So that’s when you get into things like you were mentioning, special assessments for those unforeseen major expenses that happen that have to be addressed by the association, because it’s just outside of the purview, outside of the planning of the operational budget.

Michael: Sure, and while we’re not talking about insurance, obviously in what you just said, there’s insurance aspects to that but a good example that I recently experienced was there was a bad storm, they had roof damage. In that roof damage, they had insurance claims, but the insurance payouts were insufficient to cover the work that was necessary for whatever reason. Maybe there was insufficient insurance coverage. There was an endorsement that didn’t address acts of God and that resulted in a shortfall, that resulted in a need for a special assessment to bridge them from what they had in reserves to what it was going to cost, adding in the proceeds from the insurance claim, but there was a shortfall and that resulted in the need for a special assessment. So, at the end of the day, what the takeaway is is that the money that’s going to be paid for everything that happens at your association is going to be coming from the individual owners. There is no other pot of gold, there is no other source. When you buy into a community association, whatever type it is, the understanding needs to be and when you buy a unit, you should be well aware of the different costs.

The questions that could be asked are what do you have in reserves? How much are assessments? And those are considerations when you purchase. Once you’ve purchased, you’re bound by the governing documents, it’s a contract, it’s a recorded covenant against your property and you are bound by the governing documents and you have an obligation to pay, whether it be regular or special assessments.

Bernie: We’re going to take a quick break, but we’ll be right back with attorney Michael Kreibich as we discuss community association assessments,

Kelly: I’m attorney Kelly Elmore and I’d like to ask you if you’ve downloaded the KSN app, here are some of the apps features; 247 real time access to KSN’s collection status online CSO portal featuring updates on active collection, foreclosure and landlord tenant matters, articles and booklets authored by KSN experienced association tax and landlord tenant attorneys, access to our schedule of upcoming educational events and you can view snapshot profiles of all KSN attorneys with contact info and mobile accessibility. The KSN app is now available for free download in the iTunes app store for your iPhone and iPad. The app is also available for free download in the Google play store for your Android phone or Android tablet, just search for Kovitz Shifrin Nesbit. We invite you to download the KSN app and learn what our law firm can do for you. We look forward to demonstrating how Kovitz Shifrin Nesbit has earned the trust of thousands of clients for over 30 years.

Bernie: And we’re back with KSN attorney Michael Kreibich. For the most part association management comes down to proactive planning, preparation, and policies. We’ve talked about assessments, we’ve talked about special assessments, but when we start getting into fines, into fees that come from violations of the associations, rules and regulations, those obviously can vary from community to community but what are the legal repercussions when a unit owner doesn’t pay their assessment, doesn’t pay their fee. That’s an important distinction, right. So, you have your assessments, you could have late fees, you could have fines. These are all ways that money can come into an association. So, if you really think about how money comes in? So assessments, which are regular and special assessments, which is kind of what we’re trying to address as much as we can today, but then there’s also, as you just touched on, there’s fines, there’s fees, those particular things you’re going to have policies and in your rules and regulations, there should be a fine schedule setting forth, okay, if it’s a first infraction, this is what happens, if it’s a second infraction, this is what happens, kind of segueing from that in your rules and regulations, I highly recommend that you also have a collections policy. That collections policy, cause we’re zeroing in on the whole concept of assessments, the collections policy is going to set forth the fines for nonpayment of assessments.

Michael: So that’s one of the big things that needs to be in your collections policy. You also wanted to address when it is and what triggers, whether it be the number of days that somebody is delinquent or whether it be an amount of money. I see amount of money more in annual assessment associations, which would be again, more likely to be a single-family homeowner’s association but in those scenarios, you want there to be a triggering factor, something that’s in writing, that’s in your policy, which is part of your rules and regulations that tells the management, your professional management, or if you’re self-managed, it tells your board, what is it that triggers your obligation to turn that over to the collections process. The association has a couple of tools that they can use one being a lien, which we’ve discussed and the other tool that you have at your disposal is your right to file a collection lawsuit and, in that lawsuit, you’d be seeking again, the money judgment, legal fees and an order of possession.

So, those are tools that are available. I look at it in two different ways, okay. You have a passive approach, so, concept of what are your options when people don’t pay their assessments. You have a passive approach, which would be to place a lien on that property. A lien on the property is simply something that is recorded, that if and when somebody was to do a title search on that property, the lean would appear and what it would do is it would tell anybody who is an interested party, which what we commonly see is either when somebody refinances or goes to sell, it tells all the parties, there is X amount of money owed as it relates to this particular unit. So, I call that the passive approach, because if somebody was to not pay their assessments and all you have done is place a lien on their account and on their unit it’s passive because if they do not go to refinance, they do not go to sell, what’s going to happen is that’s going to sit on their account and as we already talked about money sitting on somebody’s account is not money coming into the association. It is not sitting in the overall pot of money and everybody else is going to be picking up the slack for the people who choose or cannot pay their assessments or cannot pay what is owed as it relates to their unit.

So that’s a passive approach. I don’t think you’re going to find any attorney that’s going to tell you that that is necessarily the best approach, because again, money is the lifeblood in assessments and money is the lifeblood of your association. If you don’t have money, you can’t do projects. You can’t get anything done. You can’t redo the driveways; you can’t redo the roofs. So, if you take the passive approach by placing a lien on the property, it’s a wait and see scenario. The aggressive approach and what I consider to be the appropriate approach would be to follow your collection policy that you’ve put in place, put the person based on the triggering factors, whether it be number of days, delinquent, or amount of money delinquent, put them into the collection process. What the collection process is is that would be turned over to the Association’s attorney and what they do is they begin the process. What happens is a notice goes out to the owners and it’s a statutory requirement that you send a notice and you give the person the opportunity to pay or potentially go onto a payment plan that is agreed to by the association. If they choose to not pay it triggers the next step in the collection process and that would be filing of a collection lawsuit and the collection lawsuit would be seeking a number of things.

It could be seeking a money judgment, it could be seeking an award of attorney fees, which you’re entitled to under most governing documents in most statutes that would apply to your association because again, if you don’t have the assessment money coming in, everybody else is picking up the slack and work is not getting done. So, the collection process, fork in the road again, is a passive approach is a lien and by the way, you can do both and in Illinois, it is a statutory lien. So, you can record a lien for all the world to see, but your assessments that are unpaid is a statutory lien on the property as well. It’s not going to be handled in a timely manner if you don’t take an aggressive approach and the aggressive approach can be 45 days, 60 days, 90 days delinquent. We’re coming back to a little bit more or seeing more foreclosures where it’s a race against the bank, which is why I recommend either 45 or 60 days. If somebody is 45 or 60 days old, that’s not an accident. They’ve now missed two assessments and if they’re not paying their assessments, they’re likely not paying their mortgage.

So, you’re now racing the bank to get made whole and, in a bank, in a foreclosure situation in Illinois, the bank is superior to the association. So, that’s a whole separate discussion and seminar in and of itself as far as the collection process itself but it’s important to understand that you have tools available in really dovetailing back to the purpose of our discussion is the assessments and how important it is that you actually collect your assessments.

Bernie: And you’ve said it a few times, the ultimate goal is for the association to me being whole, because their operational budget is contingent on having, like you mentioned, the lifeblood, which is the assessments, the monies that are coming in to pay those invoices that keep the association going and by having those policies in place that are a hundred percent contingent on, like you were saying, process, there are triggers in place that are not contingent on favoritism, they are not contingent on picking or choosing how you implement the policy, but are rather fairly black and white I imagine. If someone is delinquent, then these triggers go into place so that the policy can go towards the ultimate goal of making the association whole.

Michael: Absolutely correct. So, the importance of the policy and you just touched on it, it’s uniform, there’s no favoritism. It is administered fair and equal to all of the members and all the members include the board members. So, a board member doesn’t pay and you don’t have a collection policy, I can assure you that that’s one vote against turning that person over to collections, because that person’s going to say, wait a minute, I’m the board member, I maybe should get some deferential treatment and that’s not how an association should function. While you serve on the board, you also are a member of the community and have the same obligations as anybody else. I can tell you what we see in court; if you do not have a collection policy, and you’re not fairly and evenly administering your collection policy and process, you run the risk of a judge not allowing that lawsuit to proceed because for lack of a better term, you’re discriminating against other individuals and you’re only pursuing specific people and not others and what it does is it opens the door to claims of discrimination. Why me? Why are you going after me when the guy at the table over here or gal at the table who’s on the board owes as much money as I do.

The importance of the policy is to put triggering situations in place, whether it be amount of time, amount of money, that’s the process but the ultimate purpose of it is to ensure that there is a process and that it is fairly and evenly administered and if you are professionally managed, if you have a collection policy, it’s not going to be a case by case where you have to have a board meeting and you’re going to have to sit and vote to turn over an account. You have a policy in place that says any account that is X, Y, or Z, if it hits the triggers that it will be turned over to collections. It eliminates the need for the board to put their hands in the mud on every single one of the accounts that is delinquent, because if it meets the criteria, it automatically, as a process is turned over to collections and the process begins. Courts want to see it mechanical; they don’t want to see people picking and choosing and that’s why there is such an importance for a collection policy.

Bernie: So, as we kind of wind up, Mike, let’s talk about your role in this situation, because, again, you’re legal representation of the association, you’re looking out for the community’s best interest, you’re making sure that the governing documents reflect the community’s needs, what they would like the community to have. When it comes to collection policies, when it comes to assessment collection, how is it that exactly you can help a community to fulfill all those obligations to again, get those assessments in and to have that consistent policy in place if there is a collection situation?

Michael: Sure. So, the reality is this, for every community that we represent, we have a board, we sometimes have management and we have attorneys. So, whoever that attorney is, you’re a team and this is, I preach that religiously because I believe strongly that at the end of the day, all of our jobs, the board, management, if you have it, and the attorneys, our job is as a team to work together to the greater good. Board has to review contracts and determine which contractor to use and make the actual business decisions for the association. Management and attorneys, we are advisors, we are people who have expertise in specific areas, and we give you advice based on the facts about what you should be doing. As it relates to assessments, our job is to– one of the things we can do is create that policy for you.

So we can draft and work with the board and management to create and tailor that policy to the needs of that particular association, to ensure that there is that study flow of assessments being paid and if they’re not being paid, that there is somebody that’s, again, the legal side of this is our job is to be your partner and assist you in the process to collect in whatever best way necessary to make sure that you get that money in so that you have the funds necessary to operate your association. My partners and I are very in tune with the idea of us being your partner in this. We want to work with you on each and every account to make sure that it’s being handled in line with your governing documents in line with your policy and in the best interest, based on the facts to determine what’s the best process that we can follow to get that money in is inexpensively as possible and as time efficiently as possible so you guys at the board can do their job.

Bernie: That was KSN attorney, Mike Kreibich. He practices association law representing condominium, homeowner, and townhome associations. KSN is an experienced legal resource, ready to provide you with quality advice and exceptional service. We look forward to demonstrating how we’ve earned the trust of thousands of clients and communities since 1983. If you’d like to reach Mike or any of KSN’s experience attorneys, please call 855-537-0500. You can also visit ksnlaw.com, complete the contact form and send us a message. Thanks for listening.

Outro: The music for this show is provided by podcastthemes.com. Please note the material contained on the KSN podcast is for informational purposes only and does not constitute legal advice. No attorney-client relationship is established by your review or receipt of the information contained on the KSN podcast. You should not act on the information discussed on the KSN podcast without first obtaining legal advice from an attorney duly licensed to practice law in your state. While KSN has made every effort to include up-to-date information on the KSN podcast, the law can change quickly. Accordingly, please understand that information discussed on the podcast may not yet reflect the most recent legal developments. Material is not guaranteed to be correct, complete or up to date. KSN reserves the right to revise or update the information and statements of law discussed on the podcast at any time without notice and disclaims any liability for your use of information or statements of law discussed on the podcast or the performance of the podcast generally. The KSN podcast may be considered advertising in some jurisdictions under applicable laws and ethical rules or regulations.

 

Please note the material contained on the KSN Podcast is for informational purposes only and does not constitute legal advice. No attorney-client relationship is established by your review or receipt of the information contained on the KSN Podcast. You should not act on the information discussed on the KSN Podcast without first obtaining legal advice from an attorney duly licensed to practice law in your State. While KSN has made every effort to include up-to-date information on The KSN podcast, the law can change quickly. Accordingly, please understand that information discussed on the podcast may not yet reflect the most recent legal developments. Material is not guaranteed to be correct, complete, or up to date. KSN reserves the right to revise or update the information and statements of law discussed on the podcast at any time, without notice, and disclaims any liability for your use of information or statements of law discussed on the podcast, or the performance of the podcast generally. The KSN Podcast may be considered advertising in some jurisdictions under applicable law/s and/or ethical rules/regulations. © 2022 Kovitz Shifrin Nesbit, A Professional Corporation.