Published in the ECHO Journal, March 2009
The year 2007 was a tough year for homeowner association boards financially, 2008 was worse, and now in 2009 we are facing even more challenging problems. Decisions will have to be made about homeowner association buildings, facilities, and grounds maintenance. Where to put the dollars, if any can be found, is the question.
Recently the discussion at an ECHO Resource Panel meeting was about, as is common these days, the problems that association boards face every day because of foreclosures and shortfalls in the reserves. We shared thoughts and came to some conclusions that may work to help convince boards to honor their “fiduciary duties” under the law without scaring them into running for the hills or getting them “run out of town on a rail.”
Here is a reality: “Tough Love” is in order in many associations.
A big part of the problems boards face today is, of course, a shortage of funds in reserves for big projects. This has long been a problem for many associations, especially those that are self-managed (who do not have someone reminding them on a regular basis of their fiduciary duty). Now this virus is spreading rapidly to many more associations because of the foreclosure crisis, the fallout of the sub-prime loan debacle, and the raiding of reserves to pay the shortfall in operating expenses resulting from these recent conditions. Boards need to take measures that may be painful to the members, but they are necessary. That may mean pushing a special assessment to do a needed project through the membership, even if the result is more foreclosures, or turning the heat off in the swimming pool.
It is also important to acknowledge that a big part of the reason that many homeowner associations are in trouble today is pinching pennies too tightly in the past years, assuming that, when the big projects came up, the board would be able to find sufficient options for members to be able to pay, such as through a bank loan or individual equity loans, and/or including special assessments. But guess what? You cannot squeeze blood out of a turnip; today a lot of those options have either dried up (property equity, for example) or become more difficult (like qualifying for a commercial loan when delinquencies are high.)
That does not mean building maintenance or reconstruction has to come to a halt or life as we know it should stop.
There are some viable cost cutting options today that are not always available and there may also be light at the end of the tunnel for some of the important projects since competition and market factors are driving the cost of services and products down.
In past years, the mind set has commonly been to lump projects together to save money, such as replacing siding when painting was accomplished, or combining those projects with a re roofing project—even if not all the siding needed to be replaced or the roofs were not at the end of their life—to take advantage of the economy of scale. The common assumption was that doing things on a larger scale led to an overall savings and also that a better plan was getting one loan over imposing smaller separate assessments or raising the regular assessment
Today, what is different is that boards need to focus on the other side of the equation too, such as, if we bite off more than we can chew, will we cause the solid owners to go down with the less fortunate. For example, consider an the association that cannot obtain a loan. If there is a big assessment that 10 percent of the owners cannot pay so that their homes go into foreclosure, will they take down another 10 percent (or more) who cannot withstand the added expense of the assessments that were not recovered from the foreclosures? Will this situation result in a revolt by the owners? It’s a serious concern, but not the only one for sure.
All this said, homeowner associations are not without remedies. Here is some food for thought:
Cut The Fat
Like the government, some associations would do well to cut the fat … but where and how?
Here are some suggestions. Think in these terms: tighten the belt, but do not cut off the circulation, to make it through these times.
- Review all HOA contracts, decide if you are getting your money’s worth and consider whether you want to seek competitive bids for some services (but see warnings below before going off in the wrong direction).
- Consider whether temporary closure of less-used facilities that are draining funds and offering little benefit to owners; consider whether alternating days or weeks in offering services makes sense.
- See if there are any non-necessities or amenities that can be reasonably be cut out of any contract or service that the association is receiving. Investigate whether there are any viable energy savings alternatives.
- Look at technology if you have a paid office staff or equipment to see if there is anything that can be done electronically or technologically to minimize staff needs or replace a piece of machinery that needs to be maintained with something more efficient.
- Ask the question as to whether association work crew volunteers might be a solution to some of the work normally done by paid contractors. Hey, it’s a fair question to ask if a bake sale each week might help might help keep the lights on in the clubhouse.
- See if there are any “green” alternatives available for utilities or amenities that might lessen costs.
- And last but not least, get on the web and research what cities, counties and towns are doing to cut costs. They are in the same boat you are; the tax base is threatened and their income has been cut drastically.
Do Not Defer Projects that are Necessary
Do not defer projects that are necessary to prevent or resolve safety issues, or that are critical, or maintenance that is necessary to preserve or enhance the condition of the major components of the association.
Holding onto reserve funds too tightly, anticipating doom ahead and thereby deferring all projects because of the state of the economy could result in disaster. Don’t let the “house” come tumbling down around you.
Consider using contractors for specific tasks that, when accomplished on an ongoing basis or priority schedule over time, might get the association through these hard times without compromising the integrity of the buildings, carports or recreational facilities. You could consider whether hiring a contractor with pertinent licenses as an employee to work on the facilities is cheaper than hiring an outside contractor. (That plan worked for one association as discussed in the January ECHO Journal.) And I believe that you will find that contractors who have been serving homeowner associations for years and recommending major maintenance and lumping jobs together are often willing to think outside the box and offer services on a smaller or “menu-type” of scale.
And even when substantial rehabilitation projects are necessary, and you want to make sure the work will last, that the contracts are solid, and you cannot cut out the important [team, management, or integrated] components, consider that the marketplace has become more competitive than it has been for a long time. Costs for products like asphalt are at an all time low. So get busy. Understand that such creative ideas are important factors in winning over the owners who want to be on the “right side” and enjoy the savings they can achieve by doing a big project in the current economic environment.
Of course, be sure as always to investigate licenses, bonding, insurance (homeowner association specific when required) experience and capabilities of contractors and beware of the contractors from other fields, such as residential remodels, that are swooping in and begging for work. While these contractors may be able to do small jobs, they may not have the right kind of insurance and they often have little or no experience working with large complicated multi-residence building structures.)
It is time to think outside the box—but keep these pointers in mind.
- Do not scrimp on professional assistance.
- Do not choose a contractor who is too hungry without paying considerable attention to the things previously discussed.
- Do not fail to do due diligence.
- Do not drop good management to save money.
- Do not assume your association will be sufficiently creditworthy to qualify for a loan.
- Be sure adequate funds can be raised before signing a big contract.
- Do not delay too long if you are facing a substantial project.
Do not overlook the importance of educating the owners at your association to get their support. Once they know what the board knows, they will more easily align their thinking about these tough decisions with those of the board and rally to support the tough choices the board must make..
Beth Grimm is a community association attorney in California. She is a member of the East Bay Resource Panel and the Legal Resource Panel and is author of various publications and books about condominium living and the law and a frequent contributor to the ECHO Journal. You can take advantage of free information on her website at www.californiacondoguru.com.