Is there a "Right" Time for a Special Assessment?

Special assessment is a phrase that sends chills down the spines of community managers, board members and owners alike.  The term "necessary evil" is frequently used when boards are contemplating a special assessment; terms that owners use to refer to those assessments are generally not considered fit for publication.  So what is a special assessment, and why is it so commonly viewed in a negative light?

The governing documents for associations provide specific definitions for special assessments.  Generally defined, a special assessment is a one-time (or not regular) assessment, applied to owners in the same manner as other assessments, that is used to cover an expense that cannot be paid for from the operating or reserve accounts.  This expense could be one that did not exist previously (such as a capital improvement to the community like adding playground equipment to a common area or building a clubhouse or swimming pool), but most of the time special assessments occur for one of two reasons:  construction defect/deferred maintenance or significant delinquent accounts.

Construction defect/deferred maintenance.  This is probably the most common issue facing a board that is considering a special assessment.  When it happens in conjunction with construction defect, it's usually because the association sued the developer (and contractor/subs/etc.) for failing to build the community properly and received some funds in a settlement/lawsuit, but after paying the costs associated with construction defect litigation, found they had insufficient funds to do enough of the repairs.  While going through construction defect litigation does not necessarily mean a special assessment will follow, nowadays it is uncommon for an association to recoup fully for its needed/desired repairs. Older associations (those that were created prior to October 23, 1999 and thus not subject to reserve study requirements in ORS 94.595 and ORS 100.175) may find that they have significant deferred repairs/replacement but lack sufficient funds to undertake them, thus requiring the imposition of a special assessment (for more information about reserve studies, please see my article from March 2, 2012 entitled "Reserve Studies").

Significant Delinquent Accounts.  Another reason that boards find themselves in need of a special assessment is due to large and/or multiple delinquent accounts.  This is the prime reason that boards need to be vigilant whenever owners become past due, because it's much easier for an owner to get caught up with a small delinquency than when it has turned into thousands (or tens of thousands) of dollars.  An association that does not aggressively pursue past due accounts is one that may find itself facing a special assessment (which the past due owner is also likely not going to pay, continuing the problem).

When is the right time for a special assessment?  The only right time, in my opinion, is when failing to do so may cause further problems for an association.  As an example, let's say the community has a private parking lot, and the lines are worn/missing, there are large potholes in the asphalt, and it's getting unsafe for use by people and cars.  While owners and residents are probably aware that the parking lot isn't in good repair and are using caution, leaving the lot in its current condition is unwise because:  a) someone might damage him/herself and/or his/her car in the potholes, causing a potential insurance claim, b) owners looking to sell or refinance may be unable to do so because of the hazardous and unsightly condition of the parking lot, and c) owners may decide to withhold assessments or not worry about violating rules because it appears the board is failing in its duty to protect and enhance the community.

Special assessments are generally implemented for a specific purpose or purposes:  to repair a parking lot, to replace roofs, to put in a swimming pool.  Boards should always provide information as to what the special assessment funds will be used for in the notice of special assessment.  Whenever possible, owners should be given advance notice of the special assessment so that they have time to put together the necessary funds, and I personally think this notice should be not less than 30 days before the special assessment is assessed.

Remember that, like all board decisions, a special assessment must be approved at a duly noticed board meeting, which all owners must be invited to attend.  Depending on the complexity of the special assessment and the need that is requiring it, boards may also wish to draft a special assessment resolution (see my blog post from November 10, 2011 to learn more about resolutions), which must also be approved at a board meeting.

Special assessments should not be used in lieu of proper financial planning, but they are a tool for the board to use if it has found itself otherwise unable to meet the financial obligations of the community.  

Boards considering taking this step should discuss the matter with the association's attorney or community manager, who may be able to offer additional ideas/options in lieu of a special assessment or support if it is, after all, the last, best option.

Reserve Studies

Oregon Statutes 94 and 100 require boards of all but the oldest condominiums and planned unit developments to, “annually... conduct a reserve study or review and update an existing study to determine the reserve account requirements”  (ORS 94.595(3)(a) and ORS 100.175(3)(a)).  But what is a reserve study, who can do one, and it is really that important?

What is a reserve study? A reserve study is essentially a financial planning tool, a roadmap for the board to follow.  When done properly, it provides a way for the board to ensure sufficient funds will be available to fund major maintenance, repair or replacement of all items of common property* that will normally require such work over the next one to 30 years.

While there is no one proper format for a reserve study, each one should, at the bare minimum, have the following:

a.  Listing of common property/items of HOA maintenance responsibility.  This list should include the item, its year of installation, its anticipated lifespan, and the cost for this item at the end of its useful life.

b.  Listing of reserve income/expenses from current year through year 30.  This is usually a spreadsheet with income for each year as well as reserve expenses for each year, with a total showing the net anticipated balance at the end of each year.

There are many other items that may be included with a reserve study.  These typically include definitions of terms, assumptions about inflation, interest or other income, written evaluations of the components by the experts who assessed them, and sometimes also photographs and detailed information about each common property item.  In addition, most reserve studies also include a maintenance plan.

A maintenance plan is a critical component of a reserve study.  While it is not required to be updated annually, it is intended to be used in conjunction with the reserve study to help the reserve items last for their anticipated lifespans.  To give an example, let’s say the roof on your building is expected to last for another 25 years.  To help ensure that the roof actually lasts that long, the maintenance plan will call for periodic (probably at least annual) inspections of the roof and the removal of moss, cleaning of gutters (to avoid water backing up under the roof), etc.  Failing to clean the moss off the roof may not only void any warranty it has but will certainly shorten its lifespan.

Who should perform a reserve study?  Statute does not currently specify who may or may not produce a reserve study, but that does not mean that the board should just hire anyone.  Since the reserve study is a financial planning tool, it should be done by someone with knowledge of the maintenance, repair and replacement needs of the association’s common property or someone who has experts who can provide this knowledge.  Experts would include individuals/firms with the Reserve Specialist designation, a professional designation from Community Association Institute, the national community management organization (to learn more about this designation, please see:  http://www.caionline.org/reservespecialist).  There are several local reserve study providers who have this designation; follow this link for more information:  http://www.caioregon.org/Reserve-Studies-~232872~17084.htm.

Board members sometimes ask about self-performing reserve studies.  Even if one or more of the board members has construction/maintenance industry experience or education, it is not prudent for the board to try to take on this responsibility themselves.  There is simply too much potential risk if an error is made.  In good conscience, I cannot recommend it.

How important is it to update a reserve study every year?  Actually, it is extremely important that the reserve study is updated annually, and not just because statute says so.  The reserve study is a snapshot of the reserve income and expense over the next 30 years, and so each reserve study has a different window of 30 years.  So the 2011 reserve study should show income and expenses from 2012 through 2032, while the 2012 one shows 2013 through 2033.  If there is a big expenditure that happens in 2013 (say the roofs need to be replaced that year) and the board only relies on the figure from the 2011 budget (which doesn't show that big roof expense because it’s not required to since it happens in 31 years), the board is going to find itself seriously underfunded when it has to replace the roofs or whenever it does update its reserve study.  If the study had been updated in 2012 and the roof expense caught, the board would have much more time to consider how to get their funding to the proper level.  Even though it’s not an insignificant expense to have a reserve study prepared, it’s a small price to pay in the long run to help ensure the community has the proper funds to do what’s needed and avoid special assessments.

One final thought about reserve studies:  boards shouldn’t wait until they’re trying to put their annual budgets together to have a reserve study done.  Boards should plan to have the reserve study in hand at least four months prior to the beginning of the fiscal year (so if the fiscal year is the calendar year, that means by September 1).  Waiting on a reserve study to determine the amount to contribute to the reserves for the next year may delay the adoption of the budget, so the board should even consider contacting reserve study professionals now for quotes and getting the ball rolling for next year.

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* The term "common property" is being used to designate any items within the community that the association has maintenance responsibility over, regardless of who actually owns the item.

Wintertime Maintenance Planning (for Summer Maintenance Needs)

It’s raining in the Willamette Valley today (and it has been for a week).  So it’s hard to think about those glorious, sunny days to come later in the year, but now is the time to start planning for just such a time.  Why?  Well, for many maintenance responsibilities, the best time to undertake them is when the weather is most conducive.  Sure, roofs can be replaced in the rain, but it’s not when most of us would recommend the work be done (unless, of course, there’s no other option because it’s raining inside your building!).  Likewise would you want your windows washed in the rain?  Probably not.  But now, in the midst of this wet weather, is the perfect time to plan for the association’s maintenance needs for the year.The governing documents for each association delineate items that are the responsibility of the association to maintain, repair and replace.  ORS 94.595 and ORS 100.175 require associations to obtain and annually update a reserve study, which is to include those items over the next 30 years (there are some caveats to this for very small condominiums or developments created before 1999).  Statute also requires a maintenance plan to be developed, which should work in conjunction with the reserve study to help an association plan for and undertake its maintenance obligations.  These are the best places to look when planning the maintenance strategy for next year.

Maintenance Plan.  At a minimum, the maintenance plan is to include a) descriptions of the maintenance to be conducted, b) include a schedule for the work to be done, c) be appropriate for the size and complexity required, and d) address issues including warranties and the useful life of the items (per statute).  The most practical format I’ve seen this in is a one page (for simple associations) calendar that shows what month each item should be undertaken in.  There are many other formats, but as long as it has the information it’s acceptable.  These are the first items that should go on the list of obtaining request for proposals (RFPs).

Reserve Study.  It’s also important to take a look at your reserve study to determine which larger projects need to be completed this calendar year.  This is not the time for the board to decide they do not want to take on a particular reserve item this year; if it’s on the reserve study for 2012, the board has an obligation to undertake it unless they receive compelling evidence that the work can reasonably be delayed (for example, two of the three painters who provide bids for the work tell you the current paint is still in fine shape; that might be an authentic reason for delaying another year or two, but then that change needs to be reflected in the updated reserve study).  Better yet, if the board thinks there are fallacies on its reserve study, the time to correct that is before it’s been accepted for the new year.  Take whatever reserve projects are listed as being accomplished this year and also put them on the list.

Other Maintenance Tasks.  There may be maintenance tasks that are not specifically called out in the governing documents but the board may consider undertaking for the greater good of the association.  The board should determine (and consult with their attorney, if there is any doubt) if there are such items and also include those on the list.  The board should also consider whether or not these “missing” items should be included in the maintenance plan or reserve study in future revisions.

Once the list is together of the maintenance needs for the year, written RFPs should be completed.  Remember, the more detailed and comprehensive, the easier it will be to determine if the bidders are providing “apples to apples” figures.  At a minimum, the RFP should include:

• Name of the Association
• Date the RFP is Sent
• Physical Address of the Association (also consider including a map, if the community is large or confusing in any way)
• Desired Timing of the Job (March, Summer, etc.)
• Deadline for Returning the RFP
• Contact Person for the RFP and Several Contact Methods (minimum two phone numbers or a phone number and an e-mail address)
• Specifications (this should include things like the number of items or buildings, products desired to be used, etc.  Remember that the more detail you provide here, the easier it will be for the bidders to bid on the same job!)

Also be sure that as part of the RFP package, bidders provide their licenses and insurance.  Association’s don’t need to take on the liability of an under- or uninsured vendor working on their property.

I recommend that bidders be given at least two weeks (but not more than 30 days) to get their proposals turned in.  This gives the board plenty of opportunity to review the proposals at the next board meeting and if there are any questions or negotiations that need to be done, there is still plenty of time to undertake those before the work needs to be completed.

Now is the time to get prepared for the maintenance obligations for the year.  By taking the time to get everything ready and lined up now will allow the board to focus on more critical and time sensitive issues throughout the rest of the year.

Winter Preparedness - No Burst Pipes!

The weather has been getting colder and colder, so now is the time to prepare our homes for freezing conditions to help prevent burst pipes.  Each association’s documents are a little bit different, so owners should check theirs to see which of the following items are their responsibility versus the responsibility of the HOA.  In general, if the suggested action can only be taken from inside the home, it is the responsibility of the owner.

Shut off and drain exterior hose bibs and cover them with a styrofoam cover.  Exterior water sources have their piping along the edge of the home, making them more likely to freeze and burst than pipes inside the home.  Turn the hose bib off (these should have individual shutoffs; if not, you may want to consider having a plumber install one), go outside, turn on the faucet and allow all the water inside to escape.  Once that is done, leave the faucet open and install a cover, which can be purchased for $2 or less, at a home improvement store.  That way, even if the small amount of remaining water in the pipe freezes, it has room to expand and is unlikely to burst.

When you leave, leave the heat on.  Many owners go on vacation or out of town around the holidays and do not consider that the temperature may drop rapidly.  Experts recommend that the thermostat always be set to at least 50 degrees during this time of year.  Even being away from your home for a few hours when the temperature drops sharply may leave your pipes vulnerable to freezing.

Open doors under sinks to allow air flow.  Although location of the pipes vary, whenever possible and especially when a home will be empty for a length of time, open the cabinet doors beneath all of the sinks to encourage air flow.  There is some speculation that leaving the taps dripping may also be useful, but experts seem to be divided on whether this is truly helpful or simply a waste of water.

Arrange for someone to check on your home every few day if you’re out of town.  The last thing anyone wants is to come home to a disaster.  Owners should have a family member, friend or neighbor stop by and go into their home periodically (at least every few days) to ensure nothing is amiss.

Know where the main water shutoff to your home is and know how to use it.  Even when owners take every precaution, sometimes water lines freeze and break.  If so, the owner needs to know how to turn off the water to the home to prevent additional damage.

With these few simple steps, owners can help lessen their chances of having to deal with broken pipes and the subsequent damage and potentially expensive repairs.

Resolutions!

Resolutions are one of my favorite tools for boards to use to address routine, common problems and procedures.  CAI describes a resolution as “...a motion that follows a set format and is formally adopted by the board...(they) may enact rules and regulations or formalize other types of board decisions.”  Simply put, resolutions are decisions by the board on topics that are commonly encountered in the day to day business affairs of the association.  Resolutions cannot contradict the rules and restrictions in the governing documents (or state or federal laws) but are instead considered an extension of them.

Resolutions must follow a set format:  citation of authority to adopt the resolution, which may include sections of state or federal statutes or of the governing documents; purpose, which explains why the board is adopting this resolution; scope and intent, which is who this resolution affects and for how long; and finally the specifications, which explains what those affected by the rule are expected to do.*

There are four resolutions that I think all boards should adopt:  payment resolution, insurance and maintenance resolution, architectural review resolution and rules enforcement resolution.  It can also be prudent to have a resolution to explain how resolutions are made and adopted, but it is unclear if that is truly necessary or not.  So what do these resolutions do?  Let’s take each of them in turn.

Payment Resolution.  The payment resolution, which may have several different names, is all about monies due to the association.  This resolution details the frequency of regular assessments, the due date, the grace period (how many days after the due date the payment is still considered not late), the late fee (which may be a dollar figure or a percentage of the assessment), as well as any other fees or penalties for failure to pay.  This resolution also details what actions are taken and in what time frame when an assessment is not received by the end of the grace period.  Typical steps you’ll see in this resolution is notice to the owner at 30 and 60 days, with a demand letter being sent around 90 days (provided this conforms with the governing documents).  It should also detail when an owner’s account will be turned over to a collections attorney (usually an amount or a minimum number of days without payment).  Things like NSF charges, attorneys' fees, etc., are generally also mentioned in this document, so that there’s no question the HOA has the right to recover these costs.

Insurance and Maintenance Resolution.  This resolution is especially critical for condominiums and those planned unit developments where the HOA and the owners share maintenance responsibility for the homes/units.  This two-fold resolution helps owners, the board, and the insurance agent to clarify the items that are the responsibility of the association (versus what each owner is responsible for) in accordance with the governing documents.  In addition to giving an overview of owner versus HOA maintenance responsibilities, it also explains insurance coverages, deductibles, and the procedures for filing an insurance claim.  When the association has its first insurance claim, the board will be glad to have this resolution in place.

Architectural Review Resolution.  Most governing documents give the board the authority to set up an architectural review committee (commonly called ARC or ACC) to help review and approve potential changes to the community.  Developers like to put this clause in their documents (and many owners like to see it in them) because an ARC can help ensure that the standards of the development are upheld and potential neighbor concerns are considered.  This resolution is generally a formalization of the procedures mentioned in the governing documents but may also include specific restrictions (such as no fences may be more than 6’ in height or all homes must use cedar shake or tile roofing).  It also usually includes a form that details the process and information to be provided for consideration.

Rules Enforcement Resolution.  The governing documents for your community most likely include some restrictions on use that may address such issues as rentals, trash cans and recycling bins, recreational vehicles, etc.  This resolution expands on those restrictions by putting into place the procedure to follow when a violation occurs.  Without such a resolution, and the accompanying fine schedule, a board may not be able to enforce the restrictions in its documents.  This resolution usually also includes a recap of the rules for quick reference.  Any board that wants to enforce its rules should adopt this resolution.

One important thing to note about all of these resolutions:  they cannot be contrary to your governing documents nor to state or federal laws.  So if your documents say that a boat cannot be in sight in the community, the board should not adopt a resolution that states that an owner can keep a boat in his/her driveway overnight.  The resolution should match the governing documents.  Likewise, if the governing documents allow owners a 30 day grace period to submit their dues payments, the board cannot opt to reduce that to 10 days in its resolution.

It is also a good idea to have any resolution being considered for adoption by the board be reviewed by legal counsel to ensure there are no invalid clauses nor anything imprudent contained with them, especially if the person drafting them does not have experience doing so.  Even though I’ve written countless resolutions (maybe 75 or so over the years), I still encourage my boards to run them past their legal counsel if they want to do so.

Finally, resolutions must not only be adopted by the board but must also be provided to all owners before they go into effect.  It is not sufficient to post them on the HOA's website; all owners must be notified and receive a copy of the resolutions (electronic or physical) before the board undertakes any enforcement of them.

Resolutions are incredibly powerful and somewhat underutilized tools of the board.  If your community does not have these resolutions in place, please consider which may be appropriate for you.

* This section is based entirely on the text on pages 52-53 of the M-100:  The Essentials of Community Association Management from CAI.