As we continue to face the uncertainty of these times, many community association boards are beginning to question the ways in which their associations should respond to community finances, as well as assist homeowners financially with regards to deferring collecting of assessments. Board members and management professionals alike are endeavoring to think ahead about the impact on the community, and what can be done to alleviate the financial strain these decisions will have. It is essential to understand, though, that it is tremendously harder for a residential association to change how handles it's finances than a for-profit business. Therefore, here are some reality's that association boards need to think through before implementing changes.
The Board is Responsible To The Association As A Whole
The board has the sole fiduciary responsibility to the association. By statute, association directors must discharge their obligations "in good faith" and in a manner that is in the best interest of the corporation. A community association is a legal business corporation. While we want to encourage empathy and understanding during what is a difficult situation, the board must remember that their community is a business and they are responsible for that businesses well-being.
Assessments Are The Most Vital Revenue Stream
In almost all instances, the only revenue stream that a community association has is from the assessment that it collects. Assessments fund the operations of the community association, and every dollar in the budget is allocated for expenses for the year or put into reserves for future major repairs. Therefore, if the association is not collecting assessments, the association, as a business entity will owe its debts and have no funds in which to pay them. If the association does not receive the funds necessary to pay its service providers, the community may experience service interruptions, and a decline in curb appeal, which ultimately impacts resale values. The money has to come from somewhere, and when there is a shortfall, there are only a few ways in which they can be made up.
- Increasing assessments in the future, which may cause affordability issues for some owners and in some cases create even more financial hardship to the entire community.
- Implementing a special assessment to the all owners at a later date, if permitted, remembering that those have to be approved and can often be difficult to pass as a measure.
- Borrowing from a lender. Small Business Administration Economic Injury Disaster Loan (EIDL) - Some community associations may qualify if organized as non-profit corporations in their state.
- Borrowing from reserves may be a temporary solution that many board seek, but it's important to note that those fund will have to be repaid and will likely require one of the more drastic measures to be enacted.
Association Expenses Are Normally Fixed
Community associations are often non-profit corporations, unlike other industries such as banks and mortgage companies that are for-profit. Even though an association does not profit, it is designed so that it pays the bills for the community. The money that a homeowner pays into the association is for the owner's share of the common expenses, which can include insurance, utilities, landscaping, general maintenance, and even governmental based fees. As associations don't operate like for-profit businesses, the funds to pay for all of these common area amenities and services is directly from homeowner assessments. These assessments are often legally binding financial obligations that owners cannot refuse to pay without consequences because of the added burden they put on other owners.
Can And Should We Defer Payments?
We understand that deferring payments may seem like the most empathetic way to handle a crisis where millions of Americans are without jobs and struggling to pay their bills, but the consequences of deferring can be even more devastating in the long run. Deferrements is essentially just extending when a payment is due, it does not reduce the amount or even provide protections for how much debt can build during that time. The responsibilities and financial burdens often accumulate and can leave owners without a way to pay back the debt.
As an example, imagine an association that charges a monthly fee of $100. If this association chooses to defer payments for owners with a hardship for a year, the amount due is $1200. While that $1200 can and often is then set up on a payment plan, this causes the monthly fees to go up and creates more financial strain on the association who may not be able to pay for gate repair, yard maintenance, security services, etc in the meantime. Next, because the association put itself into a corner by deferring payment, they only have a couple of options left to collect payment other than legal action and even foreclosure, which adds even more money than the owner has to pay. The crux of this is if the association had stayed with something similar to their normal collection process, then other options exist for the owner to pay down the amount without the added legal expenses.
What Options Are Available?
Below are a few suggestions for consideration. However, remember that as a board member, you should consult with your community management team and even legal counsel to determine the best course of action for your particular association.
- Delay or completely cancel repairs or construction work that is not urgent or will not immediately affect your homeowners in any negative ways
- Look at reducing service levels from vendors, or obtaining bids if contracts are up for renewal to ensure your rates are competitive
- Pause discretionary services temporarily (social events, newsletters, etc., anything that again will not negatively affect your homeowners
- Be open to considering non-traditional payment plans and discuss payment plans with your vendors
- Delay internal association collection actions, for instance, if your current plan is 30-60-90, maybe change it to 60-90-120, etc.
- Consider halting suspending privileges or services for non-payment assessments
- Take a closer look at the budget for next year to see if there are any expenses that can be realistically cut. RealManage regularly advises boards to budget for a two to three months cash flow to help their association get through times of crisis such as this.
- Look at reserves and see whether those funds should be used and when realistically you can expect to pay them back without negative repercussions
- Pause on more aggressive collections such as foreclosures.
During these times of uncertainty, it is important the board members approach all of these matters with a calm head and think of the community as a whole. And of course, always work with your assigned legal counsel team and association management professionals to help guide you along with way.