Long-term planning is one of the primary duties a person undertakes when seated on the board of directors for a condominium or homeowner association. There is a constant balance that must be found between a desire to keep assessment levels steady (and low) and ensuring that items the association is responsible for repairing, replacing and maintaining are properly handled in the short and long-term. Long-term planning is critical to maintaining this balance. More than ever, community associations will likely have owners questioning the long-term soundness and structural integrity of the project. Below are some suggestions to help board members navigate the long-term planning process and help protect the community for the benefit of present and future residents.
1. What is here today will still be here tomorrow
Some of the strongest tools a board has at its disposal to prevent deterioration and avoidable expenses are routine and preventative maintenance. Boards should incorporate routine or preventative maintenance as part of the association’s budget. Allocating a budget for such maintenance can help address needed repairs before issues escalate. Putting maintenance off will create more expensive problems in the future. Boards should consider a regular maintenance schedule to clean common areas known to accumulate dirt and debris such as entryways, hallways, pools, clubhouses, and air ducts. Potential problem areas such as windows, doors, and common water heaters should also be assessed to identify whether there are any leaks. If discovered, these leaks should of course be properly addressed, which will help avoid more substantial wall or ceiling water damage that may result if the issue is ignored. Regular heating and cooling maintenance can avoid costly repairs, or even fires, and save on energy.
Boards, in conjunction with management, should periodically conduct inspections of roofs, gutters, drainpipes, insulation, and ventilation, and repair any identified damage. Inspections should be done on a regular basis but can be spread out over the course of the year. Spring walk-throughs are common to review the exterior, outdoor areas of the community. Fall or winter walk-throughs can be utilized to similarly review interior areas.
The board should also be mindful of properly repairing the underlying cause of issues, not using band-aids or quick, superficial fixes. This is especially true when it comes to things such as water intrusion issues – if a water leak is identified, sometimes simple fixes, such as caulking, may alleviate the problem, however, more involved remedies, such as the proper installation of flashing, may be required. Boards should seek input from appropriate professionals to determine underlying cases and recommended fixes. Cutting corners may keep costs down in the short-term but will likely create significantly more expensive problems down the road.
2. Strategic Planning
While the board has the control over the present and can decide to conduct inspections or authorize repairs, there are several factors that a board should consider when making a comprehensive, long-term strategic plan. Funding reserves for repair and replacement of the community’s major components is the responsibility of the association’s board of directors. In terms of budgeting to help avoid additional or special assessments, the board must determine how much should be going into reserves.
As it relates to condominiums, the administrative rules under the Michigan Condominium Act provide a requirement that an association maintain a reserve fund of, at a minimum, 10% of the association’s annual budget on a noncumulative basis. For example, if the association’s yearly budget is $500,000, the requirement would be to have a minimum of $50,000 in reserves. For subdivisions, there is no such statutory requirement. Regardless, the board of directors for a community association owes fiduciary duties to the association members which include strategic, long-term planning. Even the minimum reserve requirement may be insufficient, and the board will need to plan appropriately based on the needs of their community.
If no one on the board has the background or feels comfortable making these types of projections, the best way to assess what an association needs to be placing into their reserves above any minimum statutory requirements is to have a professional reserve study performed. A reserve study is a funding plan which evaluates common areas that are the association’s responsibility and their useful remaining life and analyzes replacement/repair of these items, and what costs that can be anticipated over time. Ultimately, the reserve study is intended to make sure that, when the time comes for a major repair or replacement, most (if not all) of the money is already there. It is not as simple as looking at the size of the community or what its budget is. Much is dependent on what components the association has an obligation to repair or replace. For example, a community responsible for private roadways may have different planning requirements than one with public roadways.
While a reserve study is a useful tool, they generally provide conservative estimates and recommendations, so it should be considered a starting point. The board should then take the study and review it to determine what is appropriate for their particular community and adjust the funding recommendations as needed. To do so, the board may want to consult with its contractors regarding the projected costs to assess their accuracy. If an immediate contribution is recommended to play “catch up,” the board should consider if it is feasible to slowly implement an increase in the regular assessments over time, rather than utilizing an additional or special assessment, which can create their own issues and will be discussed further below.
While the board can adopt a multi-year plan, it only has the ability to set a budget and establish assessments one fiscal year at a time. Without an amendment to the governing documents, there is no way to bind future boards to the plan, but those board members will share the same obligation to plan appropriately. Creating a thorough, written record of the plan will be helpful to guide future boards.
3. Why Additional or Special Assessments Can Hurt
Section 105 of the Michigan Condominium Act requires that a condominium association adequately fund a reserve account for future capital repairs and replacements. Funding repairs and replacements via additional assessments in lieu of establishing a reserve does not satisfy this requirement. As referenced above, in Michigan, subdivision associations do not have a similar statutory requirement, but the board still should consider reserving for long-term capital needs when setting a yearly budget. Beyond the fact that the board may have an obligation to meet minimum reserve requirements or even exceed them, relying on additional and special assessments can potentially hurt the community and its owners.
Via our involvement in collecting unpaid assessments for our association clients, we see firsthand that unanticipated additional or special assessments can create financial difficulty for some, which leads to assessments not being timely paid and accounts falling delinquent. When talking with the owners that have fallen delinquent, they express that they budget for regular assessments, and when faced with the additional assessment, they simply cannot afford it. While board members are acutely aware that owners do not like hearing their assessments will be increasing, properly reserving and helping the community plan for major repairs in the future will be an investment in everyone’s peace of mind and ability to budget finances accordingly. It will be less objectionable for owners to pay slightly increased amounts each year as opposed to being faced with larger amounts coming due at once. It is not uncommon for additional assessments to be several thousand dollars, which not only creates financial difficulty within the community, but can generate push back from owners. Thinking ahead and putting a long-term plan into place to help avoid these situations will benefit the community.
A history of additional assessments can also raise a red flag when it comes to both conventional and FHA-insured financing underwriting requirements. While lenders will understand that an association has a right to levy additional assessments, the more they are used, the more lenders could potentially question whether an association is adequately planning and funding their reserves. Lenders typically want to see a line item on the budget for minimum reserve requirements and actual reserve transfers reflected on the year-end financials, and if a community cannot show that reserves are being adequately funded, it may impact their owners’ or potential owners’ ability to obtain financing.
4. Communication and transparency
Do not underestimate the power of communication and transparency. Good communication is crucial to all businesses, including running a community association, and trust between board members and the homeowners is important. If it has not been experienced already, associations may begin seeing an influx of owners questioning the integrity of the project itself or what is being done to protect an owner’s long-term safety and investment. Boards should share important information as it becomes available and present the community’s plan for funding of repair and replacement of major structural components of the project (particularly as it relates to attached condominiums).
For example, if the association is planning a major roof replacement in two or three years, sharing the plan with the community may help avoid interim complaints about the roof. Educating the community will help owners understand the association’s capacity to tackle repairs and replacement, and the need to prioritize projects. Since there are finite resources, be open about maintenance and repair issues and when outstanding projects are anticipated to be completed. If the association uses a wait list for certain repairs, such as concrete, that process should be shared with owners, so they know what to expect when a request is submitted. Transparently acknowledging major maintenance or repair needs will reassure the community that the board has a vision for the future and is acting on it.
Some individuals in your community will have different views on long-term visions and goals. The board may be concerned that transparency will “open the door” to questioning, negative feedback or owner attempts to micromanage the association’s affairs. Information should be shared in a forum that the board has control over such as a newsletter or other written communication, or at the annual meeting. Online forums such as Nextdoor may be appropriate for day-to-day communications and fostering a personal relationship among the community’s residents. However, important and larger scale information regarding long-term planning should be shared in a manner that can allow feedback to better controlled by the board, and gives the board an appropriate way to formulate responses available to all members.
Regardless of the forum, the board should consider owner feedback, even if it appears negative, to gain an understanding of the community’s perception of how issues are being handled. It is true that, at times, people will want to just complain, rather than offering any solutions. Those complaints should be acknowledged, people simply thanked for their feedback, with the board moving on to the next question. While some owner discontent and complaining is inevitable, overall, allowing owner participation in an open dialogue about the community will allow people to feel like their opinion is being heard.
For many owners, their residence is one of their primary personal investments. It is important to help these individuals feel like those in charge of managing that investment are doing so with diligence and care, and are at least listening to owner concerns.
5. Educating Board Members and Utilizing Experts
Board members are responsible for important decisions that impact their community. There are many aspects of long-term planning, such as financial management and understanding the infrastructure, which may seem like an overwhelming and daunting task for newly elected board members to jump into. There are resources available to assist new board members, including through the Community Associations Institute’s national and Michigan chapters. CAI has many opportunities for networking (such as conferences and events), educational resources (webinars, educational courses, publications, and at the national level a CAI Board Leader Certificate course is available), as well as resources on service providers and vendors.
However, board members do not assume responsibility for becoming experts in every area that they need to consider. To determine what level of maintenance, repair or replacement is required so the board can ensure they are meeting their fiduciary duties, the board is entitled to and should rely on its experts. The board needs to make decisions that touch on a variety of areas of expertise, and the board should look to reserve consultants, contractors, engineers, and attorneys to assist them in determining what action is appropriate for their community.
Effective long-term planning is essential for board members of homeowner associations to ensure the stability and success of their communities. By considering budgeting, maintenance, assessments, and community engagement, board members can create a proactive and comprehensive plan for the long-term benefit of all residents. If your Michigan condominium association or HOA board has any questions regarding long-term planning for your community, one of the experienced attorneys at Makower Abbate Guerra Wegner Vollmer will be more than happy to assist.