You have wanted to get more involved in your community. You run for, and win a spot on the Board of your community association. You have met your fellow Board members, and you are excited to get down to business and make changes to the community that you have been dreaming about making for years…only to be totally blindsided. You find out at your first Board meeting that there is a laundry list of costly maintenance issues and the Association’s finances are comparable to a college freshman’s bank account.
Similar to planning for retirement, the best time for a community association to implement a strategic plan was years ago, but the second-best time to start planning is today. Here are tips that will assist your Association in becoming financially successful and well-prepared to handle routine maintenance, unanticipated expenditures, and a disaster event or ongoing crisis, with an eye toward getting to a financial state where you can tackle those dream projects of yours.
1. Open a capital reserve account
If your Association does not already have a capital reserve account, this will be the important first step. Similar to maintaining a household budget, a community association should have an operating account for day-to-day expenses and a reserve account for more significant and/or long-term projects. The operating account should be used to pay for expenses such as utilities, insurance and taxes, accounting and attorney’s fees, and contracted services (landscaping, energy, etc.). The reserve account should be used for expenses such as a fence or roof replacement project, new playground equipment, and replastering the community pool. The operating and reserve accounts should be kept separate, and it is a good idea for your Association to use a checking account for operating expenses and a savings or money market account for the reserve account.
Given the ongoing COVID-19 crisis, reserve accounts are more important than ever. With so many owners experiencing financial hardship, collection rates for the 2020 assessment and recent monthly assessments will not be on par with previous years. Less money coming in coupled with maintenance fees remaining consistent, many associations can expect an appreciable decrease in their operating accounts for a number of months and thus may need to withdraw from the reserve account to cover operating expenses.
2. Develop a maintenance schedule
If the last time your Association checked its sprinkler system was in the 90’s, you’re probably looking at a significantly more expensive replacement project than if it had been routinely maintained. Routine checks of the common area amenities and utilities, such as the roof, electrical system, and the pool, will save the Association a significant amount of money in the long run. What may be considered “routine” could vary depending on the type of association, but a comprehensive inspection every 3-5 years should suffice for most associations.
3. Undertake a reserve study
A reserve study, based on an on-site inspection of the community and its facilities, provides community associations with a funding plan to assist the Board with anticipating and preparing for major repair and replacement projects. A reserve study assists community associations in creating a budget that ensures that owners are contributing their fair share toward the reserve account. Reserve studies are often completed by an independent consultant hired by the Association. The benefits of completing a reserve study are numerous:
- Ensures that your Association has enough money on hand to make necessary repairs to common amenities/ utilities;
- Offsets long-term and costly repair/replacement projects;
- Lessens the risk of your Association having to impose a special assessment on its members; and
- Instills confidence that the Board is meeting its obligation to the owners by the Board’s reliance on the findings of the reserve study.
The costs of a reserve study also vary. An association with only a clubhouse and a pool may expect to pay several hundred dollars, yet an association with significantly more amenities, such as a golf course or tennis courts, could pay several thousand dollars.
4. Develop an action plan for new amenities
Should your Association’s funds be sufficient to cover all short and long-term expenses, the Board now has the luxury to consider new projects that will enhance the aesthetics and appeal of the community and the happiness of its owners. However, the last thing your Association wants is to have rushed into a new project with a less-than-stellar contractor where the Board is left with an unfinished project, sunk costs, and a lot of unhappy owners. To avoid this situation, the Board should appreciate that it has the ability to shop for reputable contractors and should seek references for contractors as to the quality and cost of service. Furthermore, if it is a more expensive project, the Association should refrain from signing a contract that is little more than a one-page invoice that provides the Association with little to no protection from liability should issues arise before, during, or after the project is completed. For more substantive projects, it is best to consult an attorney for review of the contract and, if appropriate, an attorney can draft a much more equitable contract that provides the Association with sufficient protection to propose to the contractor.
5. Disaster Preparedness
It is becoming an unfortunate reality that unforeseen disasters and crises are occurring with greater frequency. Severe weather events and the ongoing COVID-19 crisis have upended our normal way of life and, as mentioned previously in the Reserve Account section, are cause to refocus and perhaps rethink your Association’s strategic planning and governance.
Your Association should take appropriate measures to plan for these potential disasters so that the impact to both the Association and its residents is as minimal as possible. First and foremost, the Association should have adequate general liability and property insurance coverage that protects all common areas and buildings. Other important insurance policies an Association should purchase are directors and officers liability, crime insurance, cyber liability and flood insurance. Insurance coverage and minimum policy limits are often mandated by your Association’s governing documents. It is always a good idea to review your Association’s insurance policies routinely to determine if your Association has adequate coverage in the event of a disaster. If your Association has questions regarding its policy, reach out to the Association’s attorney or insurance agent.
If your Association is facing a time-sensitive issue, immediate options are available. To address time- sensitive concerns if the Association is strapped for cash, your Association could consider a one-time special assessment. Special assessments should be viewed as more of a last resort since it is highly likely that any special assessment will not be popular with your members. In addition, be mindful that your members may not be immune to financial distress as a result of these disasters. Even if a special assessment has been planned and scheduled for months before a disaster event, assessing and charging members in the midst of, or immediately after a crisis, is not advisable as it could create an optics issue for your Association. It is a much better idea to hold off from charging members for a special assessment for at least a few months after the crisis has been abated.
When a disaster hits, your Association should be well-equipped to provide timely, ongoing information and updates to the membership. For example, with COVID-19, information regarding closure of common areas and how that information was communicated to the members became very important. Your board should also be prepared to act quickly to develop a comprehensive plan for responding to the crisis, with special consideration given toward collection action and deed restriction enforcement. A fluid and compassionate approach is advisable, but it is also recommended to continue business as usual while allowing affected owners to bring hardship requests to the Board.
If you are uncertain about specific actions your Board should take with regard to strategic planning for your Association, we encourage you to reach out to fellow Board members, your Association’s property manager, and your Association’s attorney for further assistance.