Community associations (HOAs and condos) 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 see associations that kept 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. Any association reserves may be earmarked for specific future needs. In the event of a shortfall, an association can only really increase revenues (assessments) or decrease expenses (services).
Saying that assessments must be increased or services decreased sounds simple, but it can be difficult for a community association. The association may have little control over certain services like water, sewer, power, or insurance premiums. The 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.
Options for addressing financial shortfalls will vary by state statute, type of association (condo association or homeowner association), and governing document language. However, here are some 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 assessment payments (sometimes simply speeding up the process can make collections more successful).
- Ensure the association isn’t covering expenses that should be the responsibility of unit owners (as sometimes happens in townhomes and condos).
- See if there is governing document language to bill back utility charges (or other expenses) to owners based on usage.
- Increase assessments to the full amount permitted by the board alone without member involvement (and continue several years in a row).
- Increase assessments beyond the amount permitted by the board alone through a membership vote.
- If allowed by the governing documents, impose a special assessment for a specific purpose.
- 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 recommended, it might allow the association to survive into the coming year when assessments could again be increased by the board. See Association Loans: What You Need to Know.
- Amend the declaration to change either the assessment increase amount or the vote required to change assessments.
- Depending on facts, statute might authorize a specific membership vote to amend the declaration even if the documents are vague.
- Depending on on facts, some of the member votes described above may be possible by mail ballot or electronic 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, discuss the possibility of association bankruptcy with an attorney who focuses on community association law.
In addition to these legal options, association finance problems also involve political considerations. After all, why are members unwilling to provide funds to keep the association functioning? When unit owners will not vote to do something, the impact of which could destroy the association, you have to wonder if a different political approach would help. Such approaches could include 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 homeowner and condominium laws (including budgets, assessments, and calling board or membership meetings), visit FAQ’s About NC Homeowner Homeowner & Condominium Associations -Part I and FAQ’s About NC Homeowner Homeowner & Condominium Associations -Part II. For other states, visit the State Laws and Resources Page of the Community Associations Institute.