Community associations can become cash-strapped for a variety of reasons—unexpected large repairs, increased utility expenses, weather related emergencies, or simply years of poor planning. Often the current board members are not the ones to blame. After all, they are simply trying to locate funds to pay necessary expenses, without which essential services such as water or electricity may be cut off. While there can be instances of financial malfeasance, most association financial crises are not the result of intentional wrongdoing. We most often see associations that have tried to keep assessments low for many years running headfirst into increased utility costs or unexpected expenses, at which point it is more difficult to deal with the problem.
Keep in mind that community association finances are pretty much a zero-sum game. As nonprofits condo and HOA associations tend not to have excess money sitting around. Even association reserves, if any, are often earmarked for specific future needs. In the event of a shortfall, an association can only really increase revenues (assessments) or decrease expenses (services).
While saying that assessments must be increased or services decreased may sound simple, it can be difficult in the community association context. Certain services (water, sewer, power) may be an obligation of the association over which the association has little control. And governing documents may restrict how much assessments can be raised each year by the board alone. Based on the language of some governing documents, approval of large assessment increases by the members may be difficult due to high membership vote requirements.
The options for addressing financial shortfalls will vary by state statute, type of association (condo association or homeowner association), and the language in the governing documents. However, here are some typical association approaches that may be worth discussing with association counsel:
- Decrease other services, even if only temporarily until revenue issues can be addressed
- Unless there are zero delinquencies, work to improve full and timely assessment payments (sometimes simply accelerating the process can make collections more successful)
- See if the association is covering expenses that should be the responsibility of unit owners (as is sometimes seen with townhome and condo associations)
- See if there is a governing document basis for billing back utility charges (or other expenses) to unit owners based on usage
- Increase assessments to the full percentage increase permitted by the board alone without member involvement (and do that several years in a row)
- Increase assessments beyond the percentage increase permitted by the board alone through a membership vote
- Impose a special assessment for a specific purpose through a membership vote
- See if the Declaration permits the board to impose an emergency assessment, as some older documents allow
- Consider a loan (usually guaranteed by future assessment stream). While a loan to cover operating expenses is not an option we would normally recommend, it might allow the association to survive into the coming year when assessments could again be increased by the board)
- Use the language of the governing documents to amend the Declaration (to change either the assessment percentage or the vote required to change assessments)
- Depending on the state and type of association, statutes might authorize a specific membership vote to amend the Declaration even if the documents are vague
- Depending on the language of the governing documents or state statute, take some of the membership votes described above by mail ballot vote rather than at a meeting
- Depending on statute, judicial relief (such as the appointment of a receiver to manage the affairs of the association) might be available
- If the association’s situation is truly dire, the possibility of association bankruptcy (as difficult as that may be) could be broached with an attorney who focuses on community association law
In addition to these legal options, almost all association finance problems must also involve political considerations. After all, why are members unwilling to provide funds to keep the association functioning? When I hear that unit owners will not vote to do something, the impact of which could destroy the association, I have to wonder if a different political approach would help, whether greater efforts at a full membership meeting, an informational Q&A session with members (where depending on the circumstances the association attorney or other professionals such as an engineer or a CPA should speak), or a door-to-door campaign.
For frequently asked questions on North Carolina HOA and condo laws (including budgets, assessments, and calling board or membership meetings), visit North Carolina HOA/Condo Law Frequently Asked Questions. For other states, visit the College of Community Association Lawyers (CCAL) State Law FAQ’s page (it’s an open page, so if a login box appears just close it, or just search “CCAL community association state law FAQs”).