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Categories: PoliciesPublished On: April 9th, 2020

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There are, or will be soon, a lot of Board members asking about delinquent assessments and how to best navigate delinquent accounts during a pandemic and economic downturn. We are already taking calls from homeowners wanting to know what their Utah community association is doing to help distressed owners.

The answer is not simple. Board members need to understand the financial operations of their community in great detail to know how to best help distressed owners, while also maintaining their fiduciary duty to the community as a whole…

Communities Cannot Just Defer Dues

To understand why it’s not as simple as just eliminating the need for homeowners to pay assessments during the current crisis, it’s important for homeowners to understand how community financials work. The Community Association Institute has shared a brief explanation of the financial model of a community association that may be helpful to share with residents, including:

  • Community associations are usually organized as non-profit corporations in the state.
  • The non-profit corporation has shareholders (every owner in the community). The owners each pay their fair share of the non-profit corporation expenses by paying assessments. Further, the owners select, via elections, the board of directors to make decisions on their behalf. The management company (a third party vendor) should not/does not make policy decisions for the community.
  • Assessments can be thought of like property taxes. The assessments pay for the services delivered by the community; possibly including trash and snow removal, street maintenance, lighting, insurance, recreation facilities, stormwater management, landscaping, and more.
  • Assessments are usually the only form of income for an association and most associations only carry reserve funds that are earmarked for capital improvement projects. Most governing documents don’t allow expenditure of the reserve fund on any other items than what is included in the Reserve Study.
  • Association expenditures are usually fixed expenses that are spent on contracts like trash removal, elevator maintenance, roof maintenance, landscaping, street maintenance, insurance, and payment for maintenance and repair of other amenities. Unfortunately, these expenses haven’t gone away with the outbreak of COVID-19. In some cases, the expenses may have increased as the community association board of directors has engaged additional cleaning services and/or consultation with legal counsel to determine the appropriate course of action to manage these unprecedented times, to name a few.

Community association boards of directors have an obligation, by statute, to act in the best interests of the corporation and one of these actions is to work to ensure the financial health of the corporation. One way to do this is to continue to manage the financial affairs, by collecting assessments from the owners. The collection of community association assessments is a very serious and important responsibility of the governing board. Failing to collect assessments may impair a community association’s ability to pays its bills, provide essential services, obtain financing for continued operations, and may impact the ability of a potential purchaser to obtain a mortgage.

What Can Association Boards Do to Help Owners in Financial Distress?

Step One: Figure Out What You Can Handle

After gaining a better understanding of how associations financially operate, here are some strategies to consider for your community regarding distressed owners and delinquent assessments:

  • Check your Governing Documents, including the collection policy. The Board has specific authority to act. The Board needs to uphold its fiduciary duty to the community. During this unprecedented time, make sure you know your authority and what changes you can make without an owner vote. The governing documents may restrict the Board ability to offer significant help to distress owners. If this is the case, the Board should communicate openly with all owners why they have not done more to help those with financial hardships.
  • Review the Budget. Do you know how much wiggle room is really available in your operating budget? Do you maintain an operating cushion or rainy day amount that can be used in tough times? Do you budget a certain amount of late fee revenue to help your budget breakeven? Do you budget for bad debt (uncollectible assessments)? Review each line item and compare it to contracted services to determine if your budget has any wiggle room. If you’re operating with net income at the end of each year, you may be in a good position as the economy weakens. If you barely breakeven, you may need to consider as a Board what services are essential to the community and which could be stopped for a few months. Consult with your management company to determine a financial forecast and how long the community can pay its bills without making any adjustments. A good analysis will build in “what if” scenarios so that it can be quickly updated as the delinquency rates change from month to month.
  • Negotiate. Now that you know how long the community can operate on the varying delinquency levels, you could negotiate with service providers to your community. Many banks, utility, and other entities are offering payment deferrals or other concessions to help get through this rough patch.

Step Two: Put a Crisis Policy in Place

You should now have a good handle on what the community can and can’t afford while bearing high delinquency rates. The Board can now consider what concessions should be offered to distressed owners who are looking for relief. Remember, any delinquent assessments not collected are born by other owners who are still making payments.

The Community Association Institute is advocating the following set of principles for community associations to adopt:

  1. If an owner is unable to pay assessments on time, the owner should notify their community association to work out a payment plan. Homeowners with financial hardship should be encouraged to apply for government assistance, if available.
  2. Community associations should adopt a moratorium on foreclosures for a period of 60 days (or until at least June 1, 2020).
  3. Community associations should waive late fees and penalties for owners who face temporary financial hardships due to COVID-19.
  4. Community associations should amend, temporarily relax, or follow existing non-foreclosure collection policies that are fair and applied equally to all members of the community association.
  5. Community associations should continue to record liens to protect their interests.
  6. Community associations should emphasize the importance of owners paying their assessments on time, if possible.

Given the unprecedented pandemic and economic downturn, HOA Strategies recommends placing a moratorium on late fees and interest penalties for all owners, if the budget and financial position of your association allows for it.

If the financial position or governing documents of your community won’t allow for this, the Board should be transparent with owners as to why they can’t do more to help in this time of need and should be seeking help to ensure the community is better prepared for the next crisis.