WE CAN'T LIVE LIKE THIS FOREVER... OR CAN WE?

BY: ANNEMARIE HERNANDEZ SOCAL BUSINESS DEVELOPMENT, EMPIREWORKS RECONSTRUCTION

As the market, economy and inflation fluctuate and struggle to balance out, and goods and services increase and continue to get held up enroute, the financial dilemma is real. So why are HOA boards still trying to be popular by not raising assessments?

The State minimum wage has increased, utility costs have jumped, inflation has been running at more than 7.6% (August), and wholesale prices have increased more than 9%. Something has got to give. With homeowners struggling to make ends meet through job loss, pandemic business changes and everyday life adjustments, it’s up to community managers and board treasurers to explain why assessment increases are in the best interest of their community associations.

Technically, the California civil code allows HOA boards to raise assessments up to 20 percent, and implement a special assessment up to 5 percent, without seeking approval from membership. Managers and board treasurers have a fiduciary duty to recommend an assessment amount that is sufficient to operate, maintain, and sustain the association’s assets. However, they also recognize that board members may not want to impose a significant increase in the current financial atmosphere. So how do you maintain the quality of your association’s components?

Reserve studies help us plan for the future, but what happens when there are unexpected expenses that were not included in a previous reserve study? For example, the California SB 326 balcony inspection law and adding roofing weatherproofing underlayment to the reserve line items? Communities that have not added these components to the reserve study are not adequately funded for the large project costs these tasks will trigger.

Maintaining a healthy reserve and conducting maintenance when required or on schedule – including annual operational maintenance – is vital to reducing damage to infrastructure and extending component useful life. Insurance companies frequently require maintenance and repair of components to maintain coverage. So how do you plan for these unexpected hiccups?

The best plan is to actually PLAN.

Take a look at your community and be honest about what is failing, what is aging and what is in great shape and just needs periodic maintaining. Be realistic about your projects and engage a reserve analyst on the financial health of your community and budget as your first step. When was the last time the board checked the reserve study components against the actual infrastructure and reserve-maintained inventory? If the board is spending reserve funds to maintain components but not funding those items, the study needs an update. Based on that analysis, engage trusted vendors for an honest and deeper investigation into the cost of needed repairs and provide these estimates to the reserve study analyst to improve current actual costs to project future costs. Stay on top of CLAC (California Legislative Action Committee) legislative updates so you aren’t blindsided by upcoming new laws and bills. Start planning immediately for new regulations like SB 326, instead of deferring decisions until action is required, or when demand is high and costs increase. This will help you determine how to approach assessment increases with your board members and homeowners.

What should a community manager and treasurer do if your board members are not in agreement with this approach? How does a manager and board treasurer do their part to protect the community’s best interest and keep the board focused on their fiduciary duties?

Managers and treasurers need to keep their board members and association members educated and informed. They need to explain and interpret the budgets they have developed for their community and let the financials do the talking. The cost of contracts, supplies, services, and reserve funding speaks for themselves. The community manager and treasurer should explain to the board and members what they have done to eliminate costs, reduce costs, and manage costs while keeping the owners’ property values as high as possible. Other options you might have to keep costs low – conducting annual preventative maintenance, phasing projects, spreading out loans, or considering special assessments where all else has failed. Reach out to those trusted industry vendors for help. Your trusted vendors are your association’s business partner. Their guidance and recommendations are valuable for boards making decisions to maintain compliance with the business judgement rule.

Homeowners want the homes they purchased with their hardearned money to be safe, comfortable, and beautiful. But keeping the buildings, streets, landscaping, etc., up to date doesn’t just happen and it isn’t free. Owners should participate in protecting their investment for it to be of value in the future. We are familiar with the saying: Penny Wise – Pound Foolish. Every maintenance task that the association completes helps keep costs down in the long run. The more something deteriorates, the more it will cost to repair or renovate.

The best example of saving short term funds but causing a very large future repair bill is in deferring maintenance of annual or bi-annual tasks. Deferred maintenance can have a large and costly impact on homeowners. If communities are continually postponing necessary annual maintenance or repairs because they are trying to save money, it will cost the association more in the long run. Keeping assessments artificially low ultimately leads to lower property values, higher maintenance and sustainment costs, and may deter sales because of inadequately funded reserves and association member future liabilities.

Board members depend on their management company, community managers, and board treasurers to help guide them through it all. What conversations are you having with association members?