“Funding Factors in Community Association Finances” – KSN attorney Omar Malik reviews the top funding factors community associations should follow while maintaining the association’s financial well-being. (15 mins.)

The KSN Podcast examines various aspects of association law, landlord/tenant issues, property tax appeals, and more. In each episode, KSN attorneys share their experience and knowledge as they discuss legal updates, best practices, industry trends, and more. KSN Podcast episodes are available at www.ksnlaw.com/podcast.

Since 1983, KSN has been a legal resource for condominium, homeowner, and townhome associations. Additionally, we represent clients in real estate transactions, collectionslandlord/tenant issues, and property tax appeals. We represent thousands of clients and community associations throughout the US with offices in several states including Florida, Illinois, Indiana, and Wisconsin.

For more info about our law firm and legal services, please visit www.ksnlaw.com

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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, collectionslandlord/tenant issues, and property tax appeals. We represent thousands of clients and community associations throughout the US with offices in several states including Florida, Illinois, Indiana, and Wisconsin.

For more info about our law firm and legal services, please visit www.ksnlaw.com.

 

Episode Transcription

Nikki: You are listening to the KSN podcast and today we’re talking about crisis management in community associations in regards to construction, cash and communication. 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 Nikki and today we’re joined by KSN attorney Omar Malik. Omar practices condominium, townhome, and homeowner association law, has a background as a litigator and is a part of our deconversion team. Hi, Omar. Welcome to the podcast.

Omar: Hi, Nikki. Great to be here.

Nikki: Our topic today will be the five funding factors in community association finances and as I am sure you have seen Omar, underfunded community associations can be at risk of falling behind on much needed repair, restoration or replacement. We also know that maintaining the association’s financial wellbeing is a very vital fiduciary responsibility for any condo homeowner or townhome board members. So, in your experience, why might some board members struggle with maintaining a healthy financial status for their association?

Omar: Nikki, that’s a good question. I think there’s a number of reasons. Number one, I’d say that there’s unchanging and or reduced assessments will reduce owner complaints. That is just a common sentiment amongst board members. They think that from year to year, they have to, and they should maintain assessment levels at the same amounts to prevent owners from getting angry with them or feeling like those assessment values are constantly increasing year over year. In addition, I mean, the increasing assessments is just a key factor for a lot of board members because they think that whether it’s grounded in data or not, that increasing assessments will scare away potential buyers or may hurt resale value. In addition, I think that some board members may feel as though it’s acceptable to constantly utilize reserve funds to maintain or reduce assessment fees. I’d say also that some board members think about the association with a short time horizon and they think about it just in the current year and they think that perhaps these major maintenance concerns can be addressed by a future board.

So, they’re not necessarily thinking about the big picture and more thinking along a shorter time horizon, what they need to accomplish within the current year. I’d say also keep in mind that board members are unpaid volunteers, as such they’re unable to navigate complex issues involving building codes, inspections, safety regulations that may be best addressed by engineers and construction professionals. The problem with all of this is that the delays or disregarding any of these items can really create a financial fiasco. For example, overdue maintenance items can discourage sales by prospective buyers. Assessment levels should really be reviewed to ensure they address the changing community needs and inflation. Also, strictly addressing immediate concerns and expenses can create situations where an association is forced to levy a special assessment, take out a loan or explore alternative financial arrangements to address deferred maintenance issues and big-ticket repairs.

Nikki: So, Omar we’ve touched on what may cause an association to have an undesirable financial status, but let’s talk today about what an association can do to ensure that they are acting in the best interest for their community. We need to make sure that we’re collecting on assessments so that projects can stay current and that they’re not falling behind. So, how might that assessment collection help?

Omar: Nikki, yeah, I’d say when I speak with boards, one of the most common topics that comes up is really the collection of assessments. Consistently collecting the funds necessary for the ongoing operation of the corporation from members of the association is part of a board member’s fiduciary duty, the failure to actively pursue the collection of the Association’s financial resources can prevent the association from carrying out its maintenance responsibilities in ways that can cause irreparable damage to the Association’s reputation and property value for years to come. If your association does not have a collection policy, I recommend the board work with its legal counsel to establish a policy that is in alignment with your community’s governing documents.

Nikki: You’re absolutely correct, Omar. Assessment collection is the basis for some community associations. So, when we’re talking about money, budgeting obviously goes hand in hand with that. So, what can you tell us about how an association should plan to budget these assessments that they are collecting from owners?

Omar: Board members should ensure the association has proper funding to address the community’s operational expenses and these can be landscaping, utility, maintenance, insurance coverage, snow removal, et cetera. These types of expenses are relatively predictable when preparing the annual budget. In addition, the budget should also anticipate and address projected income from assessments, delinquent, and unpaid assessments, the rising cost of supplies and utilities, increases in costs of vendor services, current and outstanding projects as well as long term projects.

Nikki: And so, Omar, you’re saying that these expenses should be relatively projectable and if the board is budgeting correctly, they should also be able to budget for reserves then, right?

Omar: Absolutely. 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 areas, 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 facade repairs. States have different legal requirements for reserve funds. So, for example, here in Illinois, the Illinois condominium property act requires any budget adopted by a board to provide for reasonable reserves for capital expenditures and deferred maintenance for repair and replacement of the common elements. Reserve amounts can truly vary depending on a number of factors, including the size of the association and the common element property components. Conducting a reserve study is one way to proactively identify if there are any repair, restoration or replacement concerns that the association should be aware of.

Nikki: Omar and I are going to take a quick break, but when we get back, we’ll continue discussing funding factors in community association. Finances

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Nikki: And we’re back. I’m here with attorney Omar Malik, and we’re talking about community association finances. So, Omar we’ve talked about ensuring boards are collecting assessment, budgeting and even reserve funds and typically we know that that is more than enough preparation for any type of financial obligation that an association may encounter. But let’s say that that association didn’t properly prepare. What can you tell me about special assessments?

Omar: Like you said, Nikki, a well thought out budget reduces the likelihood that a special assessment will need to be levied in addition to the regular assessments. The pay for association expenditures is not included in the annual budget. They’re technical and legal conditions that must be met in adopting a special assessment. Failure to even meet 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 assessment funds. An experienced attorney can help guide the association smoothly through the special assessment process, whether it be advising about the timing requirements from a legal perspective the amounts that the special assessment can be for and how to avoid a challenge by the ownership seeking to overturn that special assessment so that the special assessment can be properly adopted and put in place that the association can address its needs. In terms of a special assessment that I’ve seen, I’d say over time, one of the most common special assessments you can see is a roof special assessment where oftentimes an association will be utilizing more of a band aid fix where they’ll go for the less expensive fix in the hopes of prolonging lifespan of a roof.

The problem with this is first and foremost, this kind of ties into what we were talking about earlier, where maybe the current board is really thinking about only the immediate needs and what can be done to keep the regular monthly assessment amounts constant without having to raise them. The problem with that is that ultimately the useful life of the roof is going to come to an end and roofs, as many of you may know, are not cheap to replace. So, oftentimes the board needs to pass a special assessment to cover the cost of that roof repair and one of the items I just touched on was there may be some owners who seek to challenge that roof repair. So, your association council can guide you through the ways to avoid that ownership challenge and what sort of dollar amount the special assessment can be for to avoid such a challenge but at the end of the day, I think your board members have to evaluate whether or not they want to go for the complete fix and truly replace the roof in its entirety or go for the more band aid fix and a lot of our associations navigate this situation. It’s very tricky to deal with, but I suggest you reach out to your council and they can help you address the Association’s needs and properly adopt the special assessment so that you can set up the association to be in a good physical and financial position.

Nikki: That’s a great example, Omar. I know here in the Midwest; the winters can definitely be hard on our roofs and then we get the springtime summers where we get the high winds and storms and whatnot. So, I can definitely see how roofing can definitely be a big, special assessment for associations. So, if all those fail and a board finds themself in a pinch, can the association apply for a loan?

Omar: Yes, Nikki, that is another option. Association board members may find themselves– I mean, this truly does happen from time to time where they’re in the position where they have to pay for necessary or even emergency maintenance for players or replacement of the common elements that go beyond what is budgeted for in the annual budget, or is available in reserves. In this sort of situation, one viable option may be for the association to utilize a loan that’ll effectively fund and be used to complete the necessary projects. Unlike a personal loan, where you have an individual who is liable or a commercial loan secured by a mortgage on real estate, association loans are typically secured by a pledge of the association assets. So, for example, the right to receive future income, bank accounts, et cetera, banks will also grant associations loans in exchange for a lien on assessments

Nikki: And Omar, I think we both can agree that as a board member, setting your association up for financial success in the present and the future is a very important duty and I think we’ve both kind of referenced that a few times today already. So, do you have any final thoughts for our listeners?

Omar: What I would say is the decision to raise assessments or levy special assessments or take out a loan may be unpopular. Part of serving on a board requires the board members to consider the well-being of the association months and years into the future, perhaps even beyond their own time living in the association. So, adopting a long-term budgeting perspective and best practices are necessary to ensure the community prospers for years to come. If your association has any questions whatsoever regarding assessment, collections, budgeting, reserves, or other legal concerns, please do not hesitate to contact me.

Nikki: That was KSN attorney, Omar Malik. He practices condominium, townhome and homeowner association law in the city of Chicago and surrounding suburbs. KSN is an experienced legal resource, ready to provide you with quality advice and exceptional service. We look forward to demonstrating how we have earned the trust of thousands of clients over the past 35 years. If you’d like to reach Omar or anyone of KSN’s experience attorneys, please call 855-537-0500. You can also visit ksnlaw.com and complete the contact form to send us a message. Thanks for listening.

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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. © 2021 Kovitz Shifrin Nesbit, A Professional Corporation.