Small associations are often undercutted as having less problems than their larger counterparts, but this is far from the truth. With less members comes problems finding board members, paying assessments, hiring management companies, and the list goes on. Find out the issues every small association has to face
The Difficulties of Managing a Small Association
Members of large associations with 300 or more members might sometimes wish they lived in smaller, simpler communities. They dream of a place where the budgets aren’t enormous, the volunteer board members aren’t performing the equivalent of a part-time job (or more), and the members don’t feel as though their association is out of touch with their needs. But small associations of 50 members or fewer must deal with unique issues and difficulties that are equally challenging, often much more acute, and not at all easy to overcome.
The three challenges small associations face can be generally categorized as:
- Administration issues – Smaller HOAs mean less members to serve on the board, and on top of this, fewer management professionals are willing to work with small associations.
- Financial issues – HOAs often incur fixed expenses that aren’t always priced according to size, meanning less people must bear the cost of running the HOA.
- Social issues – Members tend to interact more frequently and personally, making smooth administration critical to the success of the community.
To add to the challenges for small associations, these issues, and their solutions, are often interrelated.
A condominium or deed restricted community is operated, most often, by a not-for-profit corporation: the association. Governing an HOA relies on an elected member of boards and sometimes a community manager. However, for small HOAs, both of these can be difficult to obtain.
Finding a Sufficient Amount of Board Members
The HOA is administered by an elected board of directors. Many communities, large and small, often find that there are not enough members willing to serve on the board. But the fact is that every HOA realistically needs only five directors to serve on its board. In order to understand this, we’ll first break down the definition of a board meeting.
Board meeting – A type of meeting regulated by Civil Code Sections 4900-4955 that occurs anytime a quorum of the board, most often the majority, meets in person or over the telephone and discusses HOA business.
An odd number of directors is more pratical than an even number to avoid deadlock, making three board members seem to be the logical minimum amount. While three directors can certainly and legally administer an HOA, the Davis-Stirling Act requires most board meetings to be open to members. And while boards should always conduct important business in open meetings (for practicality), board members will still need to communicate and interact outside of properly noticed board meetings.
Therefore, anytime two members of a three member board meet and discuss HOA business, the majority of board members will be present, and by the above definition, a board meeting is taking place which must be noticed and open to members. This would make meeting and discussing HOA affairs troublesome and impractical. On a five-member board, two board members can meet outside of open board meetings and conduct necessary association business, as two board members do not constitute a quorum of such a board.
Because a five-member board is critical to the effective administration of any association, in small associations of 50 units or less, this requires at least 10% of the members to be willing to serve on the board. In an association of 20 or fewer members, at least 25% of the members must be willing to serve on the board. Such levels of interest in board service are rare, and small associations often have a hard time finding a sufficient number of volunteers.
Finding a Reasonably Priced Community Manager
One obvious solution to the reluctance of members to serve on a board is to hire a well qualified community association manager to assist with the administration of the association. Delegating many of the board responsibilities to a good manager can greatly reduce the required time commitment of board members. But community association management contracts are typically priced-based on the number of units in a community. Because of this, some community association managers are not interested in managing small associations since many managerial duties (such as attending meetings, obtaining bids on service contracts, and preparing budgets and financial statements) are equally demanding and time consuming regardless of the HOA’s size.
Small associations may try to entice managers to manage their HOA by paying them a premium over and above the typical rate structure. But the increased cost may unreasonably increase the financial burden of the members.
Perhaps the most difficult issue for small HOAs to overcome stems from fewer members available to pay the costs of operating the community. Fortunately, the amenities that are operated by a small association are usually small if they exist at all. In many cases, the small association may be part of a larger community, which owns and operates substantial facilities such as a clubhouse, pool, tennis courts and golf course. But there are some fixed costs and financial requirements that can create an unusually heavy burden on small associations.
Damage and Repair Costs
One such cost is unanticipated damages or repair costs. In certain circumstances, especially involving condominiums, damage from an earthquake or other disaster, or unexpected repair costs, can be an expense charged to all members where insurance proceeds are not payable.
In many of these situations, often involving water leaks, the damaged property is in a localized area of the community affecting only a few members. In large associations, the common expense of such an event can be spread over hundreds of members and is not likely to be a burden, but in a small association, each member’s pro rata share of the common expense is usually significant and must be addressed with a special assessment over and above the regular annual assessment.
Another critical financial issue for small associations arises when a member or two fails to pay assessments in a timely manner. Mathematically, two non-paying members in a 20 member community represent the loss of 10% of the community’s revenue. In a community of 300 members, even 10 nonpaying members barely registers and can be easily absorbed by the association, at least in the short term.
The problem for small associations is compounded because legal action is often necessary to collect the unpaid assessments. While the costs and reasonable attorneys’ fees spent by the HOA in collecting the assessments are generally recoverable from the non-paying member, the association must fund the collection effort initially, and that can create immediate cash flow problems for many small associations. Both this issue of non-payment, and the possibility of significant unanticipated expenses, highlight the need for small associations to maintain adequate surplus or reserve funds, and of course those funds come from the members.
Professional Services Expenses
In addition, certain insurance costs are essentially fixed costs that do not fluctuate precisely in accordance with the size of the association. Likewise, total legal and accounting costs are similar for large and small associations, or at the very least are not reduced for small associations in exact proportion to the size of the association. In the event litigation is necessary to enforce the covenants against a member or to address some defect in the property, the litigation process and costs incurred are the same regardless of the size of the association. Similarly, the costs of maintaining ledgers, financial statements and preparing audits are not reduced in direct correlation to the size of an association.
People who buy homes in small associations must be aware, hopefully in advance of purchasing their home, that their pro rata share of the financial requirements of the association is almost always going to exceed the burden on members in similar homes in larger communities.
The ability to get along and function well with other members, and the need to fulfill their responsibilities, are absolute requirements to maintain a well-run association.
To address the administration issues members must be willing to serve the association. It is much easier for substantial numbers of members in a large association to “lie low” and not affect the association’s operation. But member apathy in a small association can be devastating, either because of the absence of volunteers to diligently administer the association or because only one or two members may dominate the board, which, in some cases, can be to the detriment of the HOA.
Moreover, because of the financial effects of a member failing to pay assessments in a timely manner, or failing to follow the CC&Rs (which leads to enforcement action and litigation) members of small associations must value and respect their association and their neighbors, meeting their responsibilities to the community to a greater degree than members of a large association.
Small community associations may appear to be less complex and more manageable than large associations, but small associations have their own unique issues that are no less difficult to overcome. In the end, the best solution to meet the challenges of any community association, large or small, is for members to recognize their indispensable roles in serving the community, meeting their obligations and respecting the structure and objectives of the community that they chose to make their home.
Adapted from an article by Greg Marler that originally appeared in Community Update, a publication by Becker & Poliakoff Law Firm.