Questions to our firm about how homeowner and condominium associations should respond to the coronavirus (COVID-19) epidemic have come in waves. When news of the virus broke, we were asked by HOAs and condos how to keep homeowners safe. (See: Coronavirus: What Should Homeowner and Condominium Associations Do?) Then, once health concerns cancelled board and membership meetings, questions turned to how to transact association business without having physical meetings. (See: The Coronavirus, Flu, and HOA/Condo Association Meetings and “Let’s Have Our Meeting Online!”) Now, with the extended health and economic crisis, association boards are concerned both about the association’s finances and how to possibly assist owners financially, such as by deferring collection of assessments.
These directors’ concerns are commendable, and emphasize the “community” aspect of community associations. However, before making any significant changes, the whole picture and circumstances of the specific association must be considered. This article provides a few suggestions for considerations for associations in difficult times. But recognize: It’s far harder for a community association to change its finances than it is for a business. Here are some of the difficult realities specific to HOAs and condo associations as they consider options:
Association Expenses Are Likely Fixed
Unlike banks, mortgage companies, or other for-profit businesses, community associations are nonprofits. Homeowner and condominium associations aren’t designed to make money. They’re designed to pay the association’s bills. Monies collected aren’t retained by the association, but are forwarded to others, such as the power company, plumber, insurance carrier and so forth, even the government. For instance, one of our associations recently paid the premium covering 300 townhomes to an insurance company. Unless third-party vendors have also stopped requiring payment (which is very unlikely), the association’s expenses will remain constant. In addition, the association likely has signed yearly or multi-year contracts with vendors that prevent the association from simply cancelling or reducing services and costs.
Assessments Are Likely the Only Revenue Stream
Usually, assessments are the only income for an association. As a result, if the association fails to collect owed assessments, the association will owe debts but lack the funds to cover them. Such a shortfall can usually only be made up by:
Not paying necessary obligations and suffering legal consequences
Charging paying homeowners higher amounts
Charging a special assessment to all owners later (if permitted)
Allowing the community’s common elements to deteriorate
Association finances are pretty much a zero-sum game. The only money the association has to pay out for services is what its members pay in.
Directors’ Duties Are to the Association as a Whole
While thoughts about what is best for current owners should certainly be a consideration, board members are fiduciaries of the association. By statute, directors must discharge their obligations “in good faith” and in a manner that is “in the best interests of the corporation.”
The Money Has to Come from Somewhere
By statute, assessments paid by owners are intended to cover the association’s current expenses, fund a reasonable surplus, and designate appropriate funds for future reserves. That means that every dollar in the budget is supposed to either be needed now, or in the future. A reduction in collected funds today means that future owners will be charged more to make up for the missing surplus and/or reserves needed for future expenses, such as inevitable common area repairs, storm damage, or unexpected events.
Deferring Assessments May Not Be Fair to Owners
While not requiring owners to pay in difficult times may seem like a considerate gesture, we’ve seen it have an unintended opposite effect. During past financial crises, some associations suspended their usual collection policies. Eventually, the association had expenses that had to be paid and then had to insist upon immediate payment -- in full -- from owners who had been given a deferment. By that point, some owners had accumulated amounts due that were impossible to pay. In other words, the owner might have been able to pay $100 a month if required, but was incapable of paying the $1,200 now due. The unfortunate consequence was that the association had boxed itself into few options, other than legal action and possibly even foreclosure -- which would have been unnecessary if it had stuck with something similar to normal collections. (Also, due to court costs and attorney’s fees, the amounts owed by those owners was higher than they would have been had the association simply pursued collections.)
This doesn’t mean there is nothing an association can do to help finances or assist owners. It’s just that there are likely few options to discuss with the community manager. (By the way, if you don’t have an association manager, now may be the time to get one. While hiring a community manager may seem an odd approach to cutting costs, credentialed managers are trained and experienced in budgeting and advising on services and also tend to have contacts for vendors who work with community associations. For more details on manager credentials, here’s a Professional Credentials for Managers and Companies At-A-Glance from the Community Associations Institute.)
Depending on the association’s specific circumstances, there are possible options a board may wish to consider when it comes to assessments during this unprecedented time. Different suggestions will not work for all associations; each association should consult with its community manager and even its legal counsel to determine if any of the following measures can be taken, as well as whether they should be taken in the context of the specific association:
Decrease discretionary services -- even if only temporarily -- if doing so will not have a significant negative impact on the association or reduce property values
Cancel or delay non-urgent repairs or construction
If contracts are up for renewal, look at reducing services or obtaining bids
If budget time, take a close and critical look at the coming year’s assessment and expenses
If the association has emergency reserves (which few have), consider whether those monies should be used (and such use may not be appropriate, depending on the governing documents)
Determine if the association is paying for expenses that are an owner responsibility, as sometimes happens in townhomes and condos
Investigate the governing documents to see if they allow the association to bill back utility charges (or other expenses) to unit owners based on usage
Delay internal association collection actions (such as late letters or final warning letters) for nonpayment of assessments. In other words, if the usual process is to send 30-60-90 day notice letters to owners, those could be changed to 60-90-120 or 30-60-90-120 days before additional steps are taken, even if only temporarily
Be more willing to offer or accept non-traditional payment plans for owners in arrears
Hold off on more aggressive aspects of collections, such as foreclosure. (Due to actions in different court systems, some judicial processes are likely not presently available in some jurisdictions anyway. Our current firm policy for accounts sent to us is to send the standard demand letter and file the statutory claim of lien, but not file foreclosure.)
Stop suspending privileges or services for non-payment of assessments
For now, our message is that directors should approach these issues as they would any crises—reasonably and calmly. The association board should discuss developments with its community association professionals as necessary, and take such steps as are warranted in its best judgment for the community and its members as a whole.
This advisory is offered as a service to clients and friends of Black, Slaughter & Black PA and The Cooperator, and is intended as an informal summary of certain recent legislation, cases, rulings and other developments. This advisory does not constitute legal advice or a legal opinion and is not an adequate substitute for the advice of counsel.
Jim Slaughter is Managing Partner of North Carolina-based law firm Black, Slaughter & Black. He is a Fellow with CAI’s College of Community Association Lawyers (CCAL) and served as CCAL’s 2014 national President. He also serves on the NC Bar Association’s Community Associations Committee,and was 2016 President of the NC Chapter of the Community Associations Institute.