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.

The Ever-Important Meeting

Meetings are a critical part of the proper functioning of an association.  It is the time and place that all decisions should be made for the association as well as a great place to disseminate information.  There are three types of meetings an association can hold:  annual, board, or special meeting.  Each of these will be discussed in turn.

Annual Meetings.  This are meetings of owners, and the time at which owners are elected to the board.  As the name implies, it occurs annually.  The timing of the meeting is dictated in the governing documents, but generally occurs in the same month every year.  Prior to the annual meeting, an agenda, copies of last year’s meeting minutes, and a proxy (or a directed proxy or ballot) are mailed out to all owners at the address on record at least ten but not more than 50 days (unless the governing documents state otherwise).  The annual meeting is one of the few occasions that owners have an opportunity to vote (the rest of the time, decisions are made by the board on behalf of all of the owners).  Most annual meetings include approval of the previous year’s annual meeting minutes, election of one or more owners to the board, adoption of IRS Revenue Ruling 70-604 (for more information on this, see this fascinating article by Gary A. Porter, a CPA:  http://www.revenueruling70-604.com/), as well as a report of the current financial state of the association.

Special Meetings.  These are meetings of the owners and are held due to a specific need or desire.  For example, a common use of the special meeting is to discuss a proposed amendment to the governing documents or the removal of a board member.  The chair/president of the board can call a special meeting at any time, as can a majority of the board or a written request by a minimum percentage of the owners (this “minimum percentage” is in the Bylaws or, if none is provided, then at least 30% of the owners).  There is no requirement that any special meetings be held.

Board Meetings.  These meetings are the place that most of the decisions of the association are made.  Although board meetings (in the State of Oregon) are open to all owners, only board members may actively participate in discussions and vote on issues.  Board meetings usually begin or end with a time for owners to voice their concerns, but outside of these times owners should listen and watch.  The board is responsible for making fiscally responsible decisions on behalf of all of the owners, and the board meeting is the place where these decisions are discussed and made.

All three types of meetings should be run using Robert’s Rules of Order (which I discussed in my November 16, 2011, post entitled, “Running a Proper Meeting”) and meeting minutes must be taken and retained for future reference (as well as any ballots or proxies used).

Meeting minutes can be thought of as the lasting record of each type of meeting.  While the minutes will look somewhat different for each kind of meeting, at minimum they should all have the following:

• Date and time of the meeting
• Location of the meeting
• Type of meeting (Annual, special, board)
• Members present (if this is a meeting of owners, so annual or special, this may be accomplished with a sign in sheet)
• Members absent (this is optional with owner meetings but mandatory for board meeting minutes)
• Motions made (this can be thought of as decisions made, as each decision should be a motion)
• Time of adjournment

Meeting minutes should not be a verbatim report of the meeting.  Instead, they should focus on the decisions made.  For example, who was elected to the board, which landscaper did the board hire, the adoption of the annual budget.  The discussions surrounding the latter two decisions need not be recorded unless the decisions were not unanimous, and then each board member’s vote should be recorded individually.  I like the minutes to look a lot like the agenda, with each item having an approved motion.  That way, someone reviewing the minutes later on knows what decisions were made.

If the board is unsure if the meeting minutes being produced are acceptable, it’s prudent to review them with either their community manager or with their attorney.  Either expert should be able to review them and suggest any changes or improvements.

Remember, meetings are when all of the association’s business is done, so it is critical that the meeting minutes accurately reflect the decisions rendered.

Running a Proper Meeting

Meetings are the backbone and foundation of the association.  This goes back to an earlier entry, where I talked about open meeting laws (entitled “Welcome to My Blog!”).  The truth of the matter is that, in Oregon, all business (with four exceptions, which I’ll discuss in another posting) of the association is to be conducted at a board or an owners meeting.  When I say conducted, I mean that all discussions and all decisions should be made in front of all owners who opt to attend the meetings.  This can be as significant as determining to impose a hefty special assessment or as simple as whether or not to plant annuals by the monument this year.  Owners are entitled to not only be present at board meetings but to hear (but not participate in) the discussion and the subsequent motion, second and vote.

Oregon law requires that HOAs use Robert’s Rules of Order to conduct meetings of the board and of owners, including the annual meeting, unless other rules of order are required by the governing documents (or the board opts to adopt by resolution some other rules of order).  This provides a framework for the running of the meeting and, while it can feel stuffy and stilted to some at first, actually helps to accomplish the business of the association in a straightforward and simple manner.  Board members who do not have any experience with Robert’s Rules of Order can purchase a simplified guide through the CAI website:

https://cai.caionline.org/eweb/The_A-B-Cs_of_Parliamentary_Procedure

Using Robert’s Rules of Order helps ensure that the board spends its time considering items that a sufficient number of board members want to consider.  To give an example, let’s say “late fees” is on the agenda (and yes, every meeting should have an agenda).  One of the board members makes a motion to increase the late fee from $ 10 to $ 25.  If another board member does not second this motion, the motion is off the table.  At that point, the option is to a) make a new motion or b) table the discussion, presumably to the next meeting.  If instead this motion is seconded by another board member, then at that point the entire board can discuss the pros and cons of raising the late fee by $ 15.  When there is no additional discussion, the vote is taken and a decision made.  What this does is prevents one board member from monopolizing the meeting with an item no other board members are interested in or concerned about.

As I mentioned above, another critical component of the meeting is having and following a written agenda.  This is smart for any meeting but is necessary for a properly-functioning HOA one.  At a minimum, the agenda should have the following:

a. Call to Order
b. Verification of Quorum
c. Approval of the Meeting Minutes of the Previous Meeting
d. Old Business
e. New Business
f. Adjournment

Any items tabled at the last meeting should be placed under “Old Business” for the new meeting.

In addition to the agenda, it is prudent to have all items to be discussed or used at the meeting provided to all participants in advance of the meeting.  For a board meeting, that would mean that all board members should be sent the agenda, draft meeting minutes for the previous meeting, and any other items to be discussed (for example, proposals for maintenance or other services, draft budgets, or architectural review committee forms) several days prior to the meeting so there is sufficient time for all board members to review them.

If at all possible, it is also a good idea to hold meetings at a usual time, day and location.  The location, as I’ve already mentioned, should be convenient to the community and accessible.  Planning to meet, for example, the last Tuesday of every other month also allows owners to plan ahead and schedule that time to attend.  It also provides concrete deadlines for various tasks assigned to board members at previous meetings, such as obtaining bids or drafting meeting minutes.

To conclude:  meetings are a critical component of a community association and the place where all business is transacted.  To make meetings as useful as possible, set a usual meeting time and location, be prepared with an agenda and all items necessary to make well-informed decisions at the meeting, run the meeting by Robert’s Rules of Order, and ensure you’ve complied with all of the open meeting law requirements.

Welcome to My Blog!

The intent of this blog is to provide straightforward, clear information for board members and owners in community associations in Oregon.  In addition to routine information, I also intend to provide less obvious information and experiences that I think will be helpful for owners and boards.

Let’s talk about the phrase “Community Association” and what it means. In the State of Oregon, there are three community association types, only two of which I’ll deal with on this blog: condominiums, planned unit developments, and timeshare communities. Since I’ve not dealt with timeshares, this blog will deal exclusively with condominiums and planned unit developments, both of which are also commonly referred to as HOAs.

There are three statutes in the State of Oregon that are applicable to community associations:

ORS Chapter 65 - Nonprofit Corporations
ORS Chapter 94 - Real Property Development
ORS Chapter 100 - Condominiums

All of these statutes are available online:

http://www.leg.state.or.us/ors/065.html
http://www.leg.state.or.us/ors/094.html
http://www.leg.state.or.us/ors/100.html

All community associations must follow ORS Chapter 65, regardless of whether or not they have been incorporated.  Then, depending on the type of association, they must also follow either ORS Chapter 94 (for planned unit developments, also known as PUDs) or ORS Chapter 100 (for condominiums).  With very few exceptions (and those generally being very old communities), the simplest way to determine if your community is a PUD or a condominium is by looking at the legal name:  if “condominium” or “condominiums” is in the entity’s legal name, then your community is a condominium and follows ORS 100; otherwise it is a PUD.  Some owners mistakenly believe that it is possible to tell simply by looking at how a community is constructed or by the items maintained by the HOA to determine the community type, but that is not the case. I have managed condominiums that were all single-family, detached homes (and the HOA had no maintenance responsibilities for those homes) and I have managed PUDs that were entirely responsible for the exterior of the home.  If  in doubt, consult your attorney to determine whether your community is bound by ORS 94 or ORS 100.

There are many important items that boards must follow in these statutes, so I generally recommend, especially if a community board is mostly or completely self-managed, that each board member have a copy of the current statutes in a notebook or other easy to access location.  As a community manager, I find myself frequently reaching for statute to ensure I  am providing proper guidance.  It is critical that board members follow statute as well as the governing documents for the community; these should be thought of as the three most important documents in your possession.

What’s in these statutes that is so important?  Truthfully I could discuss any number of the provisions that I’ve found boards either don’t know about or don’t understand, but one of the biggest ones that I have seen (usually unintentionally) missed has to do with open meeting laws.  In the State of Oregon, all board meetings are open to owners.  That does not mean that owners can take over board meetings and interrupt whenever they want, but it does mean that they have the right to be in the room and listening to the discussions and decisions being made.  These meetings require proper notice to all owners (which could be as simple as posting a notice at least three days before by the mailboxes or setting out a A-frame sign with the meeting details) and should be held in a location that is near the community and is easily accessible to all owners.  Board members cannot by chance (or intent) thwart holding board meetings or discussing business outside of those meetings.  For example, let’s say your three member board all shows up independently (but at the same time) at the local Starbucks and you begin discussing the proposals for gutter cleaning.  Whether or not a decision is reached, this case is a DIRECT violation of the open meeting laws.

Board members should also use great caution when discussing HOA business via e-mail. While e-mail can be a great tool, it also should not be used to circumvent holding open board meetings. I recommend that boards primarily use e-mail to distribute information, set meeting times/dates/locations (if these are not set in advance), and otherwise wait for the meeting to discuss or consider the items before the board.

For more information about the open meeting laws, please refer to ORS 94.640 or ORS 100.420.

Statutes can (potentially) change with every legislative session, which will now be every year.  So it is prudent for boards to follow the changes and understand how the changes may affect them.

How can you find out about changes to the laws?  There are educational opportunities for board members who would like to know more about community associations, including the laws.  One of the best sources is Community Association Institute (CAI), which has chapters nationwide.  The Oregon chapter, known as CAI-Oregon, holds luncheons at the MAC to discuss and explain changes in the laws and a variety of other important information about HOAs.  October’s presentation was called “Nuts and Bolts of Rules, Fines, and Effective Enforcement.”  You can find out more about CAI-Oregon at its website:

http://www.caioregon.org/link/linkshow.asp?link_id=232780

The next luncheon will be held in January.  In addition to the luncheons, classes are also held at other times throughout the year to provide board members more educational opportunities.

To recap on today’s blog:  1)  obtain a copy of ORS 65 and either ORS 94 or 100, depending on your community type; 2) read and understand how the provisions of these statutes affect the board and the community; and 3) if in doubt, consult your community manager or an attorney that specializes in community associations.