Published in the ECHO Journal, July 2009
Homeowners campaign for election or re-election to their community association’s board of directors all too often with the promise of never increasing maintenance fees or imposing a special assessment on his or her constituents. Unlike our federal government, however, community associations cannot print more money when the coffers run dry, as they surely will if revenues aren’t increased to meet rising operating expenses.
When board members boast about keeping maintenance fees at the same rate for several years (or decades!), it’s definitely not time to praise them for their financial acumen. Consider this: even at an average inflation rate of 5 percent per year (remember inflation was above 20 percent back in the 1980s), your association has lost tremendous buying power while costs of repairs and services have skyrocketed. Even if previous and current boards had increased maintenance fees a minimum of the Consumer Price Index (CPI) each year, the association would still be in serious financial straits because budget line items such as utilities and insurance, and every building component affected by the price of oil, has far exceeded the CPI.
To comply with their fiduciary obligations, community association boards should retain the consulting services of a competent CPA to help the board draft a long-term financial plan. The financial plan should include hiring a well-qualified reserve analyst to conduct a replacement reserve analysis to determine the current condition of the physical components of the common and limited common elements, when those elements will need to be replaced, how much it will cost to replace them, and how much the association should be setting aside monthly for the eventual replacement of those components. Only with the big picture understanding of the current and future financial condition of your community can board members make reasonable, informed decisions regarding the appropriate level of maintenance fees.
There are some innovative sources of revenue that boards might consider when trying to balance the budget without increasing maintenance fees or imposing use fees. Here are just a few:
- If your building is a high rise, contact cellular telephone and satellite dish companies to offer the roof as a site for their equipment. Not only could you receive a hefty monthly rental fee, but you may be able to persuade the company to assume maintenance of the roof.
- Ask local retailers to underwrite social and administrative functions such as National Night Out, annual meetings and summer barbecues around the pool. If they’ll pay for the event, their name will be prominently displayed during the function and in the community newsletter.
- Accept advertising in your association’s newsletter or website (but be sure to craft an advertising policy with the help of the association’s attorney).
- Conduct an annual community-wide garage sale from which the association derives a percentage of the sales. This is a great way to discourage individual garage sales during they year while still offering residents the opportunity to get rid of unused items – or buy some from their neighbors.
What if your association needs to increase assessments more than the 20 percent allowed by the Davis-Stirling Act and thus must seek member approval of the budget or a special assessment. Then it’s time for board members to do their homework. Justify every single line item in the proposed budget with documentation that substantiates the expense such as notices of rate increases from utility companies, insurance companies and the lawn maintenance contractor. Retain the services of an reserve analyst to conduct or update the reserve study.
When all the information is compiled, prepare a packet for every single homeowner containing the proposed budget, budget narrative and supporting material such as bids and increase notices. Include the reserve study with its 20-year cash flow projection and a discussion on the physical condition of the community and needed repairs. Yes, the packets can be an expensive undertaking, but informed homeowners will make wise decisions.
In the cover letter accompanying the packet, explain to the homeowners that the association is experiencing financial challenges requiring additional income to offset rising costs. Include an invitation to attend one or more informal town hall meeting at which the board will review the material provided to each owner and answer any questions the owners might have. The cover letter should also serve as the formal notice of a special meeting to be held following the last scheduled town hall meeting, at which the owners will vote for the increase in maintenance fees.
The special meeting is obviously a critical component to successfully persuading members to approve an increase in their maintenance fees. Set the right tone by holding it in a business-like setting close to the community and providing nonalcoholic beverages and snacks. Ensure that the required number of owners is present. The board members should rehearse for the meeting so that it is conducted in a professional, confident manner, including in the preparation the association’s manager, legal counsel, CPA and Reserve Specialist who may each offer a brief presentation to the owners addressing their respective expertise. The board may consider asking a Realtor who represents owners in your community to discuss the impact on property values if the common elements are not adequately maintained because of a shortage of funds.
“No new maintenance fees!” A former president campaigned on a similar promise and had to admit the error of his good intentions. Board members have a fiduciary duty to ensure that their community is well-maintained and the governing documents upheld. Understand the obligations of the association and your role as a board member. Base your actions and decisions, including the amount of next year’s maintenance fee, on well-researched and documented facts. Understand that while homeowners may grumble over an increase in their maintenance fees, they’ll be more unhappy with you if their property values plummet because the association didn’t have funds to repair their roof leak or maintain the common elements.
Don’t make promises as a board candidate or board member that will later haunt you!
Marjorie Jean Meyer is a vice president and National Director of Education and Certification for Associa, a nationwide management company with headquarters in Houston, TX.