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.

Owners Who Don't/Won't Pay

When meeting with boards, one of the things that I inevitably hear they are struggling with is what to do about the owners that simply don’t pay.  This has always been a problem and with the downturn in the economy it’s just gotten worse.  While there is no sure fire way to make everyone pay on time, the board can certainly take some steps to encourage owners to pay while allowing recourse for those who don’t.  Boards should first look to their governing documents to find out what is already laid out for delinquencies.  When are the assessments due and how long is the grace period?  Are there provisions for late fees or interest?  If so, the board already has a good backbone for enforcement.  If not, there are provisions in ORS 94 and ORS 100 that allows associations to impose reasonable late fees and interest against account that are past due.  Also per ORS, owners are personally liable for all assessments imposed.When the board has the basic information, the next step is to formally adopt a payment resolution that provides all of this information in a written form to all owners.  For more information about this resolution, please see my article entitled, “Resolutions!” posted on November 10, 2011.  It is prudent to have an expert in this field prepare the resolution for the board (the HOA’s attorney or community manager are best suited to this task).  This resolution, once adopted, should be sent to all owners of record before any new enforcement steps are undertaken.

At this point, the best thing the board (or the management company) can do is follow the steps outlined in the resolution exactly.  If the assessments are due on the 1st day of each month and late if not received by the 10th day of that month, then within the next few days follow up should be done.  At minimum, a statement should be send (via first class mail) showing the assessment, late fee, and any other penalties that the payment resolution provides for.  This statement should also include contact information - phone number, e-mail address - in addition to the payment remittance address, in case the owner has a question about the delinquency.  Owners are entitled to understand their account and any charges on it, so it’s better to make it easier for them to get their questions answered.

If owners continue not to pay, eventually the board will have to get a law firm involved.  Boards should talk to their law firm to determine if they do collections, and if so how they are compensated for their work.  Some firms bill as they go, so the association pays the legal charges up front and then is reimbursed those costs by the delinquent owner when s/he brings the account current.  Other firms will do the work and not charge the association anything up front but simply collect it from the owner as part of the delinquency.  Both arrangements have their advantages and disadvantages, so if the board doesn’t already have a relationship with a law firm (which it should; it’s better to know an attorney and not need him/or then suddenly discover one is needed and have no idea who to contact), both options should be explored to determine which will be best for the association.

Before the delinquent owner and his/her account are turned over to the law firm for collections, however, it is prudent to make one last attempt to collect the debt.  Management companies like to call this a ten-day demand letter, and that’s exactly what it is:  a letter that gives the owner ten days to pay his/her account in full before it is turned over to the attorney.  This letter should always include the following language, “This letter is an attempt to collect a debt and any information obtained will be used for that purpose.”  I also think it is prudent to include in the letter an opportunity for the owner to get on a payment plan, just in case s/he cannot pay the full amount due.  This payment plan cannot simply be, “I’ll pay when I can.”  A payment plan is a specific, written agreement, entered into by the owner and the association, that puts forth concrete deadlines that the owner must meet as well as the consequences for the failure to meet those requirements.  For example, let’s say an owner is behind by $500 (including assessments, late fees, interest, etc.).  A reasonable payment plan would be for that owner to pay the regular assessments on time and before the end of the month each month pay an additional $50.  This payment plan would bring him/her current within 10 months.  Once the payment terms have been worked out and are agreeable to both parties, a written agreement should be mailed (or e-mailed) to the owner, signed, and returned to the association.  This agreement should also detail what will happen if the owner fails to make a payment as agreed upon (or goes into foreclosure); in that case, normally the account is immediately turned over to the law firm for collections.  Likewise, the association should have a deadline on when the signed payment resolution should be returned by (10 days is generally considered reasonable) and the date it goes into effect.  These things are necessary to protect the association's interests.

Boards should remember that, even though their fellow owners are their friends and neighbors, they are charged with a fiduciary duty, which in this context means that personal feelings and relationships can’t be allowed to get in the way of doing what is right for the association, and holding all owners responsible for returning their assessments.

Architectural Review

Most homeowners associations and all condominium associations have provisions in their governing documents for an architectural review committee (sometimes called architectural control committee and abbreviated as ARC or ACC), which is responsible for reviewing and accepting or denying proposed changes to the property within the association’s jurisdiction.  While these areas are community- and document-specific, some generalizations can be made about what might fall within the ARC’s area of responsibility.  In single-family detached subdivision, where owners are responsible for the grounds and structures, the ARC is generally responsible for reviewing and approving any changes to the landscaping (front, back and side yards), fencing, house color or design, additions, and any additional structures (shed, pool, greenhouse, gazebo, windmill, deck, etc.).  For attached townhomes, the ARC likely reviews any exterior additions like flagpoles, satellite dishes* or other permanently affixed or placed items.  In condominiums, in addition to things listed under townhomes, the ARC may also have responsibility for reviewing items inside the units that may affect neighboring units or the common elements like changes to plumbing, installation of flooring, installation of an air conditioning unit, etc.  It’s important for owners to check with the governing documents (and any ARC resolutions) prior to making any changes to their units.

The governing documents for each community outline the basic information about the ARC:  how many members, when a response must be provided by, what types of applications they review.  Many documents give the board the ability to serve as the ARC.  It is also very helpful to have an ARC resolution in place, which can provide much more detail about the process and an application form as well as any items that have been preapproved by the ARC (for example, a certain type of storm door or screen or light fixture).  If there are design guidelines for the community (whether created before or after the developer set the community up), it is useful to include these as well.

One of the things I’ve run into time and time again with ARCs is a misunderstanding about the purpose of the ARC.  The ARC is not responsible for ensuring whatever is built is built properly; the ARC is an aesthetic body only.  It is, however, responsible for ensuring any and all changes made that fall within its jurisdiction are applied for and decided upon.  When this comes into play most is when an owner has made a change to his/her property without obtaining proper ARC approval (usually innocently not realizing he or she was required to do so) and the ARC is satisfied with the change.  Many times, the board and the ARC have felt that since the alteration was acceptable, there was no harm and thus no foul.  However, by not requiring this owner to submit for approval (albeit after the fact), the ARC is potentially revoking its power because it is selectively choosing what it will or will not enforce.  This comes into play when several owners have made acceptable changes to their property without obtaining approval (and without the ARC requiring them to after the fact) and then an owner makes an unacceptable change that the ARC denies and requires the owner to restore things to how they were.  If the owner refuses to do so and can demonstrate that other owners have made changes without approval, the ARC, the board and the association will have little or not power to disallow this owner’s changes.  Certainly if a lawsuit ensued, the outcome for the association would be grim.

Most owners who have made changes to their homes without obtaining approval first simply did not realize that they were required to do so, and most comply immediately with the request to submit (it’s generally easier for them because they can simply complete the form and submit a photo of the finished change).  It is still prudent to give them a written deadline (as is wise in any enforcement proceedings) and follow up immediately after the deadline has passed if no submission has been provided.  Failure to submit an ARC application for a change should be treated like any other rules violation, regardless of the acceptability of the change.  If the owner continues not to submit the required information and the board has adopted a fine resolution, fines should be imposed (after sufficient notice and the right to be heard has been provided to the owner).  While this may seem excessive to some, the board should realize that failure to enforce one section of the governing documents may also hinder its ability to enforce other requirements of those documents.  While it’s unlikely an assessment obligation would be overthrown by the courts due to failing to enforce architectural review standards, it is a possible outcome that would be disastrous to an association.

The other area that ARC’s seem to get into trouble in is when they try to overstep their authority.  ARCs (and boards) should absolutely enforce regulations within their jurisdiction, but should try to avoid compelling enforcement for items that they do not (or do not clearly) have authority over.  I ran into this for one of my clients last spring (a condominium project that was also part of a master association).  Many of the homes were in need of repainting (the initial paint job was failing) and the board was in the midst of negotiating a contract with their desired painting contractor.  In the midst of this, I received a letter from the master association requiring the homes to be repainted (which was already planned for that summer) with an application and a request to submit the paint colors, the application, and a $ 100 review fee.  As it so happened, I had worked on behalf of the master association early in my career as the ARC administrator and compliance enforcement, so I was very familiar with their documents, and so I sent a letter back stating that as the condominium was not altering any of the colors, there was no requirement to submit any paperwork or a fee.  The master association responded that they were now requiring any and all repainting to resubmit and pay the fee, and required again that the condominium provide what they’d previously requested.  Well, that didn’t sit right with me.  It wasn’t about the money (the condo could easily afford the fee) and it wasn’t about the time to put together the paint colors (there were about 40 buildings all painted with different colors so this was not an inconsequential task) but it seemed that the ARC, rightly or wrongly, was overstepping its authority.  The master association and I went back and forth a few more times and in the end they backed down because they did not, in fact, have the authority to require this.  This is important to remember because, if the ARC had insisted and taken the condominium association to court (as unlikely as that seems), they would likely have lost and needlessly spent the association’s money in a frivolous manner (that could then get the board sued - possibly successfully! - for breach of fiduciary duty).

ARCs are a critical component of a successful community and care should be taken to ensure any and all changes within its jurisdiction are submitted and reviewed.  Documentation about those changes and approvals should be maintained for the duration of that change and maybe even for the duration of the association.  ARCs must also be cautious not to exceed its authority or jurisdiction, make all of its decisions in writing and require the same of all submissions to its aesthetic judgment.

* Although many governing documents, especially those written before the mid-90s, limit or prohibit the placement of satellite dishes, FCC regulations (known as the OTARD rule) allow owners to install a dish one meter in diameter or smaller.  ARCs cannot prohibit installation nor require a lengthy approval process.  Dishes must be permitted to be placed in a location with good reception.  For more on how the OTARD ruling might affect your association, please contact the association’s attorney.

Intro to Community Rules Enforcement a.k.a Compliance

My first role in this industry was doing rules enforcement and architectural review committee administration for a large planned unit development.  What I found out very quickly is that in order for rules to be effectively enforced, the enforcement has to be done in a consistent and timely manner and the rules themselves (as well as the consequences) must be clearly delineated.

First, let’s talk about the rules themselves.  The initial rules for the community are set by the developer/builder (also known as the declarant) in the governing documents themselves.  These are generally put together in a section with the words “rights” or “restrictions” and may be in the Declaration or Bylaws (depending on whether the community is a condominium or a PUD).  These are the most basic rules that all owners implicitly agreed to when they closed on their home and a board cannot opt to ignore violations of these rules (note, if there is a rule that is generally considered not to reflect the desires of the neighborhood, the board, with the consent of an appropriate percentage of the owners, can pass and record an amendment to remove that rule).  The documents usually also give the board the authority to pass additional rules that are deemed to the benefit of the owners, provided that these new rules do not conflict with the governing documents.

Once the rules are identified, the next step is to determine how the community will respond to infractions of these rules. Some communities choose to send a friendly reminder notice first before sending a formal violation letter.  I have had others opt to speak to the owner first (either by phone or in person).  Whatever process the board determines is best for the community, this process should be a) in writing and b) followed each and every time (this is where a compliance resolution can be very helpful).  A typical process looks like this:

a.  A compliance violation is reported to the board.

b.  The board confirms the violation exists.

c.  A compliance letter is mailed to the owner.  This compliance letter must include the nature of the violation, the date by which the violation must be corrected, what must be done to correct the violation, and, if a fine is to be imposed upon failure to correct, the fine amount and the right to be heard.

d.  If the violation is corrected within the specified period, the violation and correction are filed away and the matter ends.

e.  If the violation is not corrected within the specified period, a written notice of the intent to fine and the right to be heard is mailed to the owner (unless the initial notice included this).

f.  If the matter is still not resolved within the specified period and the owner has not requested a hearing, the fine amount indicated in the letter is applied to the account.

g.  Fines continue to accrue if the matter is still not resolved, until the matter is turned over to the association’s law firm or until the owner has resolved the violation.

It is important to remember:  fines cannot be imposed unless the owner has been given the right to be heard.  Fines also cannot be imposed if the board has not adopted and published a fine schedule.  It is also critical to remember that fines are not an appropriate way for the association to make money and must not be unreasonable.  Instead, the purpose of the fine is to be a deterrent and to cover any costs associated with gaining compliance.

The absolutely best way for the board to set themselves up for rules enforcement is by adopting a compliance resolution.  This resolution includes the authority of the board to make and enforce rules, how infractions are enforced, the fine schedule, and the appeal process.  It is also prudent to include (as an exhibit or attachment) the rules being enforced.

It is also useful to determine how rules violations will be identified and followed up on.  As a manager I have done many compliance reviews (both by myself and with board members).  This can be good for spotting initial violations but is problematic for follow up as the board usually doesn’t want to pay the management company to drive back out in a week (or whatever the deadline is) to check on the status of the issue.  What I think works much better is for a committee to be established by the board (which can include less than a quorum of board members) to periodically inspect the community for infractions and return to those locations after the correction date to determine if the problem has been rectified or if further compliance action needs to be taken.  Unless the committee is very vigilant with its paperwork, I prefer that the management company sends the enforcement letters since we are normally the ones who receive the calls from the violators.  However, a thorough committee (or a self-managed community) can be successful with rules enforcement provided it is consistently and frequently done.

One final note:  board members are not exempt from following the rules.  If a board member has an infraction at his/her home, she or he should receive a notice just like everyone else.  It’s uncomfortable to have to enforce against a board member (for rules violations, failure to pay dues on time, etc.) but the board has a responsibility to treat all members equally.

Holiday Decorations

It’s the time of year again when many homes are being decorated for the holidays.  Strings of lights are on the homes or in the windows (and trees and bushes) and the inflatable Santas are sitting on the front laws.  There may be candy canes, sleigh bells and mistletoe.  Rudolph may be hiding among the greenery, and possibly even some elves.  While many people enjoy the holiday decor, most are ready for it to be down after the new year.  If your association don’t have a policy in place, now is the time to adopt one, to avoid Christmas (lights) in July.

The first step always in adopting new rules or regulations is to check the governing documents.  Does the board have the right to adopt a policy about holiday decorations?  If so, great.  There may even already be specifications in the declaration or bylaws that states when these decorations may be put up and when they must be taken down.  In that case, the board may not need to do anything else (assuming the board has already adopted a compliance resolution).  If, however, the documents give the board authority to adopt rules but nothing specifically addressed holiday decorations, now is the time to determine what is appropriate.

So what time frame is appropriate?  Most people have their own thoughts about what is the correct length of time for decorations to be in place, and they are probably different for different holidays (Halloween or St. Patrick’s Day, for example, versus Christmas).  Many boards that I’ve dealt with over the years felt that, for holidays between January 2 and Thanksgiving, it was sufficient to allow owners 10 days before and after the holiday to have decorations out.  For holidays between the day after Thanksgiving and the January 1, most boards wanted to allow owners from the day after Thanksgiving until January 10 to have those decorations in place.

Another good question is what decorations are permissible?  Again, check your documents, but the board may want to limit the wattage of lights or require that they cannot be directed into a neighboring home.  The board may want to allow strings of lights but prohibit those inflatable Santas (or Rudolphs or snowmen).  This may be a question of aesthetics or may be an issue of harmonious living, so the board should consider both.

Should the board have any restrictions on the installation or placement of the decorations?  If the exterior of the homes are the responsibility of the association, the board may want to prohibit any installation that penetrates the exterior siding or envelope of the home.  If the association maintains the landscaping, the board may want to restrict what may be placed on the lawn or in the bushes.

Ultimately the purpose of decorations is to celebrate and enjoy the holiday more, so while I think it is prudent for the board to consider these issues (and take action, if no rules or restrictions are in place), I also think the board should adopt rules cautiously and with the desires of the owners thoroughly considered.  If your community looks like Peacock Lane, it would be imprudent to ban holiday lights.  Whatever guidelines the board decides to adopt (whether for decorations or not), be sure to be in compliance with the governing documents and consider the desires of the majority of the owners in your community.

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.