By Emily Ramirez, Associa
Analyzing the financial health of a homeowners association is a crucial task to ensure its ability to maintain and enhance the community and common areas. For a variety of reasons, sometimes the association will be faced with deferred maintenance. Creating a funding plan to address maintenance helps establish a sustainable financial foundation. Completing an assessment of deferred maintenance is the first step in determining the current state of the community.
Once a comprehensive list of maintenance needs and associated costs has been created, the next step is to review realistic funding and budgeting options. We recommend having a reserve study prepared to assist with the details and expectations. Using the data provided, the association can prioritize the items based on their urgency and potential impact on safety, functionality, and the overall value of the property. Allocating funds strategically ensures that critical repairs are addressed first, mitigating the risk of further deterioration. Reserve studies will provide a schedule of maintenance and elements to be addressed each year. Start by reviewing the the projected expenses set forth in the reserve study against the association’s reserve funding. That will give you a better picture of when each element will need to be replaced. Budget for all elements that need to be replaced in the upcoming year and include a contribution to catch up on prior years, if necessary. It is important to get your reserve study updated every 3-5 years to ensure that you are setting aside the proper amount of capital replacement reserves each year and keep up with increasing construction and maintenance costs.
Deferred maintenance it is often the result of financial constraints in an association. Deferring maintenance, repairs, and replacements due to lack of funds further compounds the issue. Once you are no longer able to defer the issue you are now faced with funding on a much larger scale.
Catching up on deferred maintenance often requires a financial investment that may not be readily available. In such cases, a full review of the current state of the community is in order. Follow these steps to see if a loan or special assessment may be necessary:
Obtain and review financial statements, including the income statement, balance sheet, and cash flow statement. Analyze the budget to understand the association's income sources, expenses, and reserves.
Evaluate the reserve fund to ensure it is adequate for long-term maintenance and major repairs. Compare the current reserve balance to the recommended reserve study, considering the age and expected lifespan of community assets.
Examine the operating fund to ensure it can cover ongoing expenses like landscaping, security, and utilities. Analyze the ratio of income to expenses to ensure a sustainable budget.
Assess the collection rate for homeowner dues and fees. A high delinquency rate can strain the HOA's finances and impact the association’s ability to qualify for a loan. Implement effective collection policies to ensure consistent revenue flow.
Despite best efforts, there are times when the current financial position of the association is just not enough to cover the maintenance needs. It is then when you will consider a special assessment and/or exploring loan options.
Loan vs Special Assessment. There are several factors that come into play when considering which option to take. Does the Board take out a loan, do they special assess, or a combination of both. First, the association must consider how quickly it needs the funds. If you special assess, how long will it take for owners to pay the assessment? If the special assessment is large, you may opt for the loan route. Loans are more manageable from a homeowner perspective vs a special assessment. A loan repayment can be spread over 5-10 years thus making the monthly obligation more manageable to each homeowner. Check your governing documents as some communities will require approval from the membership for one or both options.
Whether you take a loan or opt for a special assessment you may experience an increase in delinquencies because of the higher financial obligations. You will want to take this in consideration when determining how much funding is needed. When it comes down to it, certain situations do require the association impose a special assessments. You may not like the amount or even what the assessment is for, but your responsibility as a property owner is to pay your portion of the expenses. Loans or special assessments aren’t necessarily bad. If managed the right way by the Board of Directors, they can further the association’s best interest. The money will go to the betterment of the community by attending to deferred maintenance and raising property values. After all, no one wants to live in a rundown community with dilapidated amenities.
Even with a clear understanding of the current financial balance in reserves, loans, and special assessments, many associations still turn to the experts for assistance. Your association’s legal counsel, CPA, management company, and/or bank representative can all play a vital role in the consideration of how to fund for large projects or deferred maintenance.
Written by Emily Ramirez, Director with Associa
By Joshua Flanagan, Blue Frog Roofing
A roofing Preventative Maintenance Agreement (PMA) is a key component in property up-keep. This article will cover the basics of roof preventive maintenance: what it is, why it’s important, and what to look for with different roofing systems.
To start off, roof preventive maintenance is scheduled maintenance and cleaning designed to help maintain the overall health of a roof and remediate small issues before they can become larger issues.
Why is it important to perform preventative maintenance for a roofing system?
Studies from Carnegie Mellon and others, show that 80% of roofs are replaced before reaching their life expectancy. Some of this is due to natural disasters that involve hail or high winds, but most of it is due to deferred maintenance. Deferred maintenance can also cause loss when a preventable windstorm causes a total loss on an unmaintained roof. This is why preventative maintenance is known to increase the life of a roof by up to 50%. Just like regular maintenance on a vehicle, small repairs and cleaning done every year will keep a roof performing how it should.
Additionally, having a reactive approach to maintenance (waiting for leaks and problems to appear before performing maintenance) can cost four times more than a proactive approach. This is primarily because when leaks begin to appear, interior damage is already a factor, and a reactive approach will typically involve more trips with trip charges associated. If most issues and potential issues can be remediated with 1-2 trips a year, very few to no other trips should be necessary.
PMA’s can also be very helpful from an insurance perspective. After maintenance has been completed, the contractor should send out a detailed report indicating what was completed with photos and an explanation. In the case of a potential insurance claim, this detailed report can act as a ‘No Loss Report’, which can be proof of no damage prior to the loss date. If a community does not have a No Loss Report completed prior to an insurable event, then an insurance adjuster will classify the claim as ‘previous damage’ and deny the new claim. A No Loss Report makes sure this doesn’t happen.
The amount and type of preventative maintenance will differ depending on the roofing system. The first system is called Steep Slope Roofing, which includes many different types of materials, but the most common material is asphalt shingles. With asphalt shingle communities, the most important items to look for during preventative maintenance are:
Roof penetrations and roof to wall transitions are typically the most popular leaking points, so it’s important to make sure those are sealed and functioning properly. Depending on the condition and age of the roof, preventative maintenance should be performed 1 to 2 times per year for steep slope roofs. With new, well performing roofs, once a year should be enough.
The next roofing system is a Low Slope (flat) roofing system. Low Slope roofs are much different and typically require more maintenance. When maintaining low slope roofs, the key items to check are:
Johns Manville, one of the largest low slope roofing manufacturers in the world, describes the importance of maintenance in their “Protect Your JM Roof Guarantee” handout on their website. This handout includes a maintenance checklist and a do’s and don'ts list on the right way to maintain a JM roof. This checklist explains much of what is listed above, but also recommends inspections and maintenance twice a year; at the end of summer and the end of winter, when it has gone through the most thermal stress. The handout also recommends inspections after unusual events such as heavy rains, high wind, hail, and nearby fires.
With low slope roofs, a manufacturer warranty is usually tied to a preventative maintenance/service plan. If a service plan is not in place and a manufacturer warranty issue comes up, the manufacturer may deem the roof as neglected and deny the warranty claim.
A PMA will ensure that if a manufacturer warranty issue does come up, it will be noticed in time, and a warranty claim can be made. This is important for both low and steep slope roof types and is a reason why preventative maintenance is critical to brand-new roofs.
In conclusion, PMA’s will save communities money, increase their roofs’ longevity, and help look out for potential manufacturer and insurance issues.
Joshua Flanagan joined Blue Frog Roofing in June of 2022 to assist in business development. Blue Frog Roofing is a premium roofing company servicing from Fort Collins to Colorado Springs and the I70 corridor. Blue Frog takes an educational, consultative, and preventative maintenance approach to the industry, specializing in multi-family and commercial roofing including large loss/projects and a dedicated service department for repairs and maintenance.
By Kiki Dillie
When this article publishes, we will be about 18 months out from when HB22-1137 took effect on August 9, 2022 and made significant changes to portions of the Colorado Common Interest Ownership Act (CCIOA). The law requires associations, management companies, and attorneys to handle delinquencies and covenant enforcement in very specific ways. It required changes to already-mandated policies and resulted in additional expenses be incurred to comply with the new laws. HB22-1137 was meant to make delinquencies and covenant enforcement easier on homeowners, but now that we have a year a half or so to look back, what are some of the continuing issues with it? HB22-1137 mostly impacts delinquencies and covenant enforcement and the continuing issues with each are somewhat different.
In the delinquencies realm, the majority of the continuing issues with HB22-1137 have to do with several portions of the law that are unclear and can be interpreted in different ways. For example, it requires an 18-month payment plan be offered to homeowners before they are sent to collections. The prior laws required a 6-month payment plan, with equal payments. However, the new changes reference two different payment plan options – one for 18 months of equal payments and the other for 17 months of at least $25.00 then presumably a balloon payment of the remaining balance due in month 18. Some legislators involved with HB22-1137 have indicated that these were not meant to be two different options, but it is written as two different options in the law. So, this makes compliance complicated for associations and management companies.
The law also requires notice to the homeowner be posted to the unit (along with sending it to the homeowner two additional ways). Anecdotally, it appears that this requirement has resulted in more homeowners paying their balance due to the association before having to be sent to collections. However, it has also resulted in homeowners’ personal business being broadcast to their neighbors and their tenants, if the unit is rented. It is also unclear if the additional cost for posting should be charged back to the homeowner or paid by the association. On one hand, one of the stated purposes of HB22-1137 was to decrease costs to homeowners, so charging the cost to the delinquent homeowner appears to go against that, but otherwise, the paying homeowners are the ones paying the extra costs, through the Association’s main funds, which is only funded by assessments.
Finally, the 18-month payment plan requirement has the potential to cause associations financial difficulties. Most costs to an association are planned and predictable and so are budgeted for and paid through assessments. However, sometimes unpredictable events happen that require a special assessment or large increases in regular assessments. For example, if an association needs a special assessment to pay for emergency work, they may not be able to pay for the work if too high a percentage of the homeowners choose to pay the money over an 18-month payment plan. Similarly, many associations are currently experiencing huge increases in insurance premiums, resulting in large increases in regular assessments. Again, if too many homeowners don’t pay on time then elect to pay their arrears balance through a payment plan, an association that is statutorily required to have insurance may not be able to pay the insurance premium on time. This could destroy a community if a disaster occurs with no insurance coverage. Alternatively, paying homeowners may have to pay even more to make up for those not paying timely just so that the association is able to cover the cost of their insurance premium.
In the covenant enforcement realm, there are also continuing issues with HB22-1137. For non-health and safety violations, the law requires two 30-day cure periods before proceeding with covenant enforcement action through an attorney. While this change does give homeowners more time to cure any violations without being sent to an attorney for covenant enforcement, it has had the impact of essentially making it impossible for associations to enforce rules that are violated, then cured, then violated again. Some types of violations that are considered repetitious violations, and therefore very difficult if not impossible to enforce, are homeowners not picking up dog waste from common areas, frequent noise violations, and trash can violations. Short term rentals are also difficult to enforce under the new laws, as arguably each new short-term tenant is a new violation, so they never last long enough to take legal action against the homeowner.
Another issue with enforcing against short term rentals is the $500.00 fine limit imposed by HB22-1137. A total of $500.00 in fines is not high enough to discourage violations of short-term rental prohibitions because it is still financially beneficial to the owner to violate and rent. The $500.00 could be considered simply a cost of doing business when the homeowner can make several thousands of dollars renting out a unit as a short-term rental, even when it is in violation of the Association’s documents.
Finally, HB22-1137 does allow for expedited enforcement against health and safety violations, but it did not provide any definition of what health and safety means. So, associations, management companies and attorneys are left with trying to determine what sorts of issues are legitimate health and safety concerns such that the shorter time periods are justified. A lack of clarity makes compliance difficult.
HB22-1137 required many specific changes be made to how associations, management companies and attorneys handle association delinquencies and covenant enforcement. Although this article focuses on the issues that remain with the new laws, some portions of it were successful in providing some relief to homeowners before they are sent to an attorney for either collections or covenant enforcement. However, the remaining issues have and continue to cause hardships to many associations that are following the rules but are also trying to provide the best possible community to their owners and residents. Hopefully these lingering issues can be clarified through the legislature or the judicial system to the benefit of everyone involved with community associations.
By Devon Schad, Schad Agency
For community associations, managing insurance costs can be a challenging but crucial task. Focusing on maintenance, replacement, and risk mitigation can significantly impact insurance premiums especially when dealing with separate carriers for property and general liability insurance. Below, we explore strategies for community associations to proactively maintain and replace key elements, ultimately reducing the risk of insurance claims and maximizing cost savings.
Property Insurance: A Costly Focus
Property insurance constitutes the most significant portion of an association's insurance expenses. To optimize cost savings, it's essential to concentrate efforts on reducing losses. However, some carriers bundle general liability and property insurance together, making it crucial to tailor strategies accordingly.
Maintenance Tips for Property Insurance:
General Liability: Mitigating Risks
While property insurance focuses on physical structures, general liability insurance addresses potential accidents and injuries within the community. To minimize liabilities and associated insurance costs, community associations should implement proactive measures.
Maintenance Tips for General Liability:
Risk Mitigation Strategies:
In the dynamic landscape of community associations, a strategic focus on maintenance, replacement, and risk mitigation can lead to substantial insurance savings. By educating and engaging residents, addressing potential liabilities, and proactively managing risks, associations can create a safer and more cost-effective living environment for everyone involved. Ultimately, the effort invested in preventative measures will not only result in financial benefits but also contribute to the overall well-being of the community.
Devon Schad, currently serves as the Vice President of the Board of Directors for the CAI Rocky Mountain Chapter and is a CAI Educated Business Partner. Beyond his board position, Devon is the visionary owner of the Schad Agency, a family-owned business that has been at the forefront of the insurance industry since its establishment in 1976. As an expert in his field, Devon is instrumental in crafting insurance language for CC&R's, contributing insightful articles to the industry, and imparting knowledge through teaching certified CMCA classes.
By Stephane Dupont, The Dupont Law Firm
Over the last several years, Colorado common interest communities have seen an increase in the number of hail, flood, wind and other casualty related events. While, historically, proper insurance coverage has absorbed the brunt of the financial impact from these events, increasing insurance deductibles and coverage gaps now beg associations to not only carefully review their existing coverage but to also advise owners as to why they should, or must, obtain insurance to cover association assessed deductible expenses and to advise and plan for the possibility of an uninsured loss.
Proper Insurance Coverage is the best Funding Mechanism
The best manner to protect against the financial effects of a casualty event is for an association to ensure that it has obtained proper insurance coverage in accordance with the requirements of its governing documents and applicable law. This means that an association should make a concerted attempt and effort to amend its governing documents, if necessary, to clarify and clearly define and delineate the insurable obligations of both the association and homeowners.
Unfortunately, most association insurance policies come with high dollar deductibles. This is especially the case with regards to wind and hail claims which may carry a 3-5% deductible in the event that a claim is filed. While this may not seem significant at first glance, the deductible expense is commonly assessed on the value of an insured building which may contain multiple units or townhomes. It is, therefore, not unusual to see deductible expenses in the tens or even hundreds of thousands of dollars. Fortunately, loss assessment insurance coverage (commonly called HO-5 or HO-6 coverage) provides reimbursement to homeowners for most special assessments or loss assessments relating to repayment of large association deductible or uninsured expenses. Reminding homeowners to obtain this coverage, even if not specifically required by the association’s governing documents, is often the most significant action that an association can take to protect the homeowners against large assessments relating to deductible expenses. Sending this information to new owners and reminding them regularly through e-mail blasts, newsletters, or a brief letter provided to owners together with their proposed annual budget are just a few methods that an association can communicate this information to owners.
Transparency Relating to Gaps in Coverage
There are times when there is a lack of available insurance in the marketplace to cover a particular form of loss. For example, associations located in certain areas may not be able to purchase flood insurance. If a flood occurs, the cost of repair may fall entirely on the association and, ultimately, its owners. To make matters worse, homeowner obtained loss assessment coverage may not cover payment of loss assessments related to a flood. Associations that are in this unfortunate situation will want to clearly communicate this lack of coverage to owners in the community and work together to help mitigate its financial effects should such an unfortunate loss occur. For example, in the event of a flood, the association and its owners may be entitled to receive limited financial assistance from the Federal Emergency Management Agency (FEMA). Public assistance programs may also be available to assist homeowners with uninsured expenses incurred.
Time to Assess
An association will need to ultimately decide how deductible expenses and/or uninsured expenses will be funded after reviewing their governing documents. Typically, a special assessment or ‘loss assessment’, can be assessed against the homeowners to recover the expense. It is advisable that associations consult with an attorney to confirm that they are following the assessment procedures correctly.
Once a special or loss assessment has been approved, the association will want, to the extent feasible, to provide homeowners with sufficient time to file and process claims with their insurance carriers before the assessment comes due. Rushing the payment due date will often result in a sizeable amount of delinquencies and possibly delay the collection of the funds from the homeowners further.
If, by chance, the association is unable to pass the requisite assessment it may be forced to explore the adoption of a new or revised annual budget to fund the repairs or consider utilizing a portion of its reserve funds to fund the repairs. If reserve funds are permitted to be utilized, a plan should also be promptly implemented to replace the reserve fund withdrawal(s). Neither option above is advisable and, therefore, it is a good idea for associations, prior to the occurrence of a casualty event, to review their governing documents to confirm that there are no unreasonable obstacles to passing a loss assessment and then attempt to amend and revise the documents to avoid any issues.
Stephane Dupont is the owner and an attorney with The Dupont Law Firm that provides, at an affordable cost, comprehensive legal services including collections, litigation, covenant enforcement, contract review, covenant interpretation and general counsel work on behalf of common interest communities throughout Colorado.
By Gabriel Stefu, WesternLaw Group, LLC
In 2022, Colorado adopted legislation that revised the covenant enforcement process of Homeowner Associations. Many questions have been raised since the adoption of HB22-1137 regarding repeat covenant violations and cure periods for repeat violations.
In general, repeat violations are violations of the same covenant rule that are usually cured soon after the violation occurred (usually within a matter of days), but they are repeated over time by Owners or residents, becoming continuing violations.
Currently, HB22-1137 has procedural provisions for two types of violations:
The Notice and compliance process for both is different and once an Association determines the type of violation, the processes outlined in HB22-1137 must be followed. Since fines should be applied to any Owner’s account without giving the Owner the opportunity for a hearing in front of the Board of Directors, it is recommended that all covenant violation notices contain language about the opportunity for a hearing.
However, since both types of violations could also be repeat covenant violations, HB22-1137 processes become hard to apply because a specific instance of a repeat covenant violation will probably be “cured” before the mandatory notice requirements expire. Since the new legislation does not define or provide specific guidance regarding the processes required to handle repeat covenant violations, Associations need to define what a repeat covenant violation is as well as provide some examples of what could be considered a repeat covenant violation (e.g. parking violations) and create an enforcement process that fits the general guidelines of HB22-1137.
The first step an Association must take in order to be able to properly address covenant enforcement, including application of fines or legal actions, is for the Association to adopt and follow a written Policy (“Covenant Enforcement Policy”) governing the imposition of fines and outlining the process for enforcement procedures. This written Policy should be the instrument that defines repeat/continuing covenant violations and the cure periods required for these violations. Please see C.R.C.P. 38.33.3.209.5, 2(c)(II) for specific requirements of the Covenant Enforcement Policy regarding the application of fines that are continuing in nature.
It is also recommended that the Association’s Covenant Enforcement Policy clearly identify the types of violations that are considered threats to public safety or health and the types of violations that are NOT considered threats to public safety or health, the process that the Owner must follow, the possible fines or remedies that the Association may utilize, and that the policy state the fine schedule as appropriate for each type of violation, etc.
If the repeat covenant violation is considered to reasonably threaten public safety or health, then the cure period for a repeat violation could be as short as 72 hours as mandated by the new legislation. After that, the Association could proceed with fines applied to the Owner’s account every other day, pursuant to HB22-1137, but only if the opportunity for a hearing has been provided to the Owner. It should be noted that HB22-1137 does not limit the total amount of fines that can be applied to an account for covenant violations that are considered to reasonably threaten the public safety or health. After the expiration of the 72 hours grace period, in addition to fines to the account, the Association could take action to remedy the violation as provided by the governing documents of the Association or commence legal proceedings against the Owner (e.g. injunction).
If the repeat covenant violations are not considered to threaten public safety or health, then the cure period should be at least thirty (30) days to be in compliance with the first notice requirement and grace period of HB22-1137. If the repeat violation in question keeps occurring during the thirty (30) day period, the violation will not be considered cured and the Association should send a second thirty (30) day compliance notice after the first notice has expired. Although this second notice is mandatory if the violation is not cured during the first thirty (30) day grace period, the Association is allowed to proceed with applying fines to the account as soon as the first thirty (30) day notice expires if the opportunity for a hearing has been provided. Unfortunately, for covenant violations that are not considered to reasonably threaten the public safety or health, the amount of fines limitation imposed by the statute is $500.00. If necessary, after the expiration of the second thirty (30) period, the Association could proceed with other available means provided by the governing documents or commence legal proceedings against the Owner.
Considering the intricacies and complexity of the statute, and the lack of specific guidance for repeat covenant violations, we recommend that Associations consult with legal counsel to determine the compliance process and the needs that are specific to their community. Adopting a clear and concise Covenant Enforcement Policy and ensuring that it is properly implemented with each and every compliance action will ensure the Association’s success in enforcing the covenants of their Homeowner’s Association.
Gabriel Stefu is the managing partner of WesternLaw Group LLC, a law firm dedicated exclusively to Homeowner Associations in Colorado and Wyoming. WesternLaw Group has been in existence for over 16 years and proudly serves many Colorado HOAs.
By Bryan Farley, Association Reserves - Colorado
Inflation increasing, bank instability, rising insurance costs, material shortages...
With news like this, it seems the sky is falling, or at least a roof is failing due to a lack of proper funding in a reserve account. Why would that happen? It is because the board has been unable to increase or collect the money necessary to take care of the assets of their property due to homeowners being significantly impacted by the rising cost of everyday items and the rising cost to insure their homes.
Consider the following email we received from a concerned board member: “Our bylaws require us to get majority approval for any increase above 5%, as well as for any special assessment amount. Right now it seems residents, if given the option, vote any increase down, even if it will be to their eventual detriment.”
How can a community association operate if there is no capital to maintain the community’s assets?
Based on data analyzed by CPR News, the average Colorado home increased 37 percent in value over just two years. That means even a small, 5-unit condo community is now collectively valued over seven figures. A condominium with over a million dollars worth of real estate should be run like a well oiled machine. Monies are needed to repair, replace, and enhance the common area assets in a community. Boards need to make sure that monies are collected in a timely manner to maintain the assets of the community association that the Board is tasked to oversee.
There are few issues that board members may face in the next year that could make their collection process a top priority.
Rising Insurance Premiums
Based on conversations with board members and community managers, there have been insurance premium increases from 25% all the way up to 500%. One board member mentioned that the annual premium for his 100-unit condominium increased from $75,000 to $460,000 this year.
The problem with these premiums is that many of the insurance contracts renewed in Q3 of 2023, but the budget that will now pay for these premiums will not be implemented until Q1 2024. That means many boards had to borrow money from the reserve account in order to cover the gap until the monies could be collected from the homeowners.
That means there is a ‘due to, due from’ in the books for many properties across Colorado. If the monies are not collected, then the reserve account will be short of the necessary funds needed to adequately fund the repair and maintenance of the property assets. This shortfall will either lead to increased contributions, special assessments, or loans. All of these options will cost the homeowner much more money.
This puts the board in a hard place since the HOA must be insured in order to secure mortgages and be compliant with the Colorado Division of Real Estate. Therefore, the board is obligated to have insurance and pay the large increases. The costs are now going to be shared by all homeowners moving as part of the budget and increased dues.
However, what if a homeowner cannot pay the increased dues?
Legislated Payment Plans
In 2022, Colorado legislature passed HB22-1137, which became effective on August 9, 2022. One of the outcomes of the legislation was the extension of the payment plan offered to delinquent homeowners. In the past, associations were required to offer homeowners a 6-month payment plan before sending the matter to an attorney or collection agency. HB22-1137 required that associations now offer an 18-month payment plan.
The minimum payment allowed as part of this payment plan is $25 a month. After this 18-month period, the payment will balloon to the final balance with interest accrued capped at 8%.
When a roofing replacement project needs to occur, the monies will be needed immediately to cover the cost, not in 18 months. The intermediary period could require some creative solutions if a majority of the owners are unable to pay the increased assessments in a timely manner. However, if the board cannot come up with a payment plan that works for everyone, owners could fall into delinquency.
However, homeowners that live in a property that has multiple owners delinquent could face home resale obstacles.
Freddie Mac now requires that any condominium, housing cooperative, or any multi-family common interest ownership association with more than five attached units have no more than 15% of owners more than 60 days delinquent in paying their assessments. If 15% or more of the owners are delinquent, then this could cause issues with mortgages being underwritten on the property, which could put homeowners that are selling in that property in a difficult situation.
If the board of directors is unable to complete a project on-time due to the lack of funds available, then the board may need to defer the project. Yet, there is a risk of seeing the price of the project increase.
Increasing Labor and Material Costs
In 2021 and 2022 a common response from clients regarding completing a project on time was that the board decided to defer the project until inflation normalizes. The problem with this line of thinking is that inflation will at some point indeed ‘normalize’ to historical averages, but that does not mean that the prices will deflate to pre-2020 costs. Inflation is perpetual and compounding.
For example, per The Mortenson Cost Index, indexed construction costs have increased ~40% since 2019. Within the last year, when national CPI inflation was tracked at 3.2%, construction costs in Denver increased by 3.8%, and Denver construction labor costs increased by 5.2% during the same period.
Internally, Association Reserves has tracked the following increases on typical Colorado association assets:
The board of directors has the obligation to run the association in a fiscally responsible manner. Increased costs on the life safety systems of the association (such as the roof and elevators) require adequate funding. Adequate funding requires that owners pay their fair share of the deterioration of these expenses, and not just defer the projects until something potentially dangerous could occur.
What Can be Done?
It is never easy to raise dues. It is tough to tell your neighbor that the fees will be more than last year. However, based on the increasing costs and external pressure on HOAs that boards may see in the near future, the risk of not having adequate funding could cause much greater problems for the owners that live in an association.
During this volatile time, the board and the owners need to be proactive to protect the interests of their community. The board needs to remember that they have a a fiduciary responsibility to maintain, repair, and enhance the common area assets. The owners will also need to remember that the board was elected in order to protect the community’s interest.
It is recommended to have a Reserve Study completed and updated to provide a non-biased opinion on how much should be collected and contributed into the reserve account. Having an updated Reserve Study will help both the board and the owners realize that there are important projects in the community that need to be taken care of.
Therefore, plan to have a Reserve Study completed. Use the Reserve Study like a map for the financial future of the community. If the community runs into a detour (like a large hail deductible), then update the Reserve Study and to find out how to stay on the correct course.
The future is not predictable, however, a professional Reserve Study will provide the board with the information to decide what the best course of action is given what we know today.
Bryan Farley is the President of Association Reserves – Colorado. A Reserve Specialist, Bryan has completed ~3,000 Reserve Studies and has been a frequent speaker on the topic of Reserve Studies.
By David Graf, Moeller Graf
The word “transparency” gets used a lot in the media, the legislature, anti-HOA forums, and at annual meetings. I’ve seen a number of public meetings recently where a few owners have complained about a “lack of communication” from the board to them. In listening to these owners, I have discovered that they feel that their boards have not been proactive in affirmatively pushing out information to them even though they may not have requested information. They feel left out, unheard, or outside of the association loop. The boards that can get the most information to owners at a low-cost and in an interesting manner will, all other things being equal, have the most satisfied residents.
But good communication is only one aspect of transparency. It’s an important one, because if the owners feel unheard, there would be a lack of satisfaction and reduced trust on the part of the membership, no matter how good of a job the board is otherwise doing. But transparency goes far beyond email blasts about relevant community events. It starts with how the board does business.
The corporate model of governance is based upon deliberative action by a group of directors at an open meeting where owners can be present. This is the gold standard for conduct because it is consistent with law, it involves collaboration, and it allows the board members the benefit of hearing different perspectives from the various community members who are in attendance. Regular open meetings of the board are the foundation of good governance.
Of course, Colorado law does not define what a meeting is and is not. Furthermore, the law is unclear about what notice needs to be provided to the owners about upcoming board meetings, and when that notice might be provided. Lastly, the nonprofit act states that unless prohibited by the bylaws, association boards can take action on virtually any association issue by email outside of a meeting. These three features of Colorado law have been abused by a few boards and have fueled public perception that boards are secretive bodies that take action in private.
Here are a few suggestions on how to best increase board’s actions. First, have regular and well-publicized open meetings. Whether this means that notice will be mailed out to the owners before every board meeting or whether there will be one notice of a regular board meeting scheduled for the entire year will depend on the community and its documents. But giving the owners certainty as to when the board will make decisions is a great first step.
Next, consider developing protocol for giving owner notice for special board meetings that are not held at the regular date and time. This might be an email blast, sandwich board notification in a conspicuous place within the community, or some other method. This allows the owners to know that if there is a special meeting of the board that will be called, they will have the opportunity to participate.
If the board is going to have a “working session” to discuss, advertise it as if it were a board meeting. Because it is not technically a meeting, particularly if no decisions are being made, there’s an argument that the board does not have to take public comment. However, unless the would-be attendees have proven themselves not to be civil, then letting the attendees speak is a good way to gain additional information and build community.
Sometimes there is a concern among board members that they need to get a handle on a complicated issue, such as a budget, in private so that they don’t look unprofessional in front of the owners. There can be some truth to this belief but having “secret meetings” can make the board look unprofessional in a much more damaging way. Furthermore, allowing owners to see the work that goes into revising the budget, disagreements and all, can go a long way to build the credibility of the board. For these reasons, I believe that an open and advertised “working session” is the only way to hold one these days.
Serving as a volunteer is becoming more challenging with each passing year. Regulatory pressure, increasing prices, negative public perception, and a general lack of civility have all contributed to make otherwise committed volunteer leaders rethink their commitments to their neighborhood. It is stressful but very important work. And it is understandable that volunteer leaders, who are generally very diligent and capable people, do not like to be criticized by people who have incomplete information and who may not be showing up at their best. However, adding a layer of secrecy over the board’s operations only increases the animosity among the owners and the stress on volunteer leaders.
By Anthony Smith, SJJ Law
Homeowners Associations (HOAs) hold a vital role in safeguarding the value and integrity of residential communities. Securing appropriate property insurance coverage is crucial for HOAs as they oversee shared spaces and amenities. However, choosing the right property insurance policy can be a complex task. Below are three essential considerations to be aware of when purchasing insurance.
Consideration #1: Understand and Plan for Your Deductibles
Deductibles for property insurance policies have evolved over time, becoming more intricate. Most property insurance policies for HOAs feature different deductibles for different types of losses. While some losses still involve a single flat rate deductible, others employ a percentage-based deductible. In states like Colorado, where wind and hail storms are common, percentage-based deductibles place a significant financial burden on HOAs and their members.
Fortunately, HOAs subject to the Colorado Common Interest Ownership Act (“CCIOA”) can shift the deductible expense downstream to their owners through pro rata assessments. This means owners' HO-6 insurance policies can cover the deductible assessment. However, HOAs not subject to CCIOA must either have an explicit right in their governing documents to assess the deductible back to the owners or rely on special assessments, which can cause delays or barriers to necessary repairs.
Older HOAs not subject to CCIOA should consider amending their governing documents to grant them the right to assess their property insurance deductible back to the owners.
Consideration #2: Pay Attention to Exclusions
Insurance policies may appear similar at first glance but they often vary significantly in terms and conditions. HOAs must be attentive to potential exclusions in their policies. Here are three common exclusions that HOAs should strive to avoid:
a) Functional Damage, Cosmetic Damage, and Marring Exclusions: These exclusions pertain to damage that doesn't impact the structural integrity of the property but can still detract from its aesthetic appeal. These exclusions hinder an HOA's ability to address issues that may affect the property's overall value and appeal.
b) Ordinance or Law Exclusions: These exclusions limit coverage for costs associated with complying with building codes or laws that may have changed since the property's original construction. For older communities, this exclusion can be particularly significant as repairs may require updates to meet current building codes, leaving the HOA responsible for the additional costs.
c) Matching Exclusions: Matching exclusions restrict coverage for the replacement of undamaged portions of a property to achieve visual consistency with the repaired or replaced sections. This limitation makes it challenging for HOAs to restore or replace damaged portions of a property to match the undamaged areas.
HOAs should negotiate with insurers to eliminate these exclusions, ensuring they have comprehensive coverage that adequately protects their assets, maintains aesthetic appeal, and positively contributes to property values.
Consideration #3: Be Mindful of Your Duties and Responsibilities
Finally, HOAs have important duties to fulfill to their insurance companies in the event of a loss. The most significant duties include:
a) Prompt Notice of Loss: HOAs must promptly notify their insurance companies of any loss or damage to the insured property. Timely notification is critical and generally outlined as a requirement in the insurance policy.
b) Cooperation with the Insurance Adjuster: HOAs are obligated to cooperate with the insurance carrier's adjuster during the claim investigation. This involves providing access to the damaged property, facilitating inspections, and offering necessary documentation to support the claim.
c) Proof of Loss: Insurance companies may require HOAs to submit a formal proof of loss document. This document details the loss, including the items damaged, estimated repair or replacement costs, and other pertinent information. Timely submission of a proof of loss is often crucial, as failure to provide one may result in the claim being denied.
As HOA managers and board members, understanding the nuances of property insurance policies is essential for protecting the interests of residential communities. By keeping three key considerations in mind, HOAs can make informed decisions when purchasing insurance:
First, comprehending and planning for deductibles is crucial. Whether dealing with percentage-based or flat rate deductibles, HOAs should explore their options to shift the deductible expense downstream to owners, either through CCIOA provisions or by amending governing documents.
Second, paying attention to exclusions is vital for comprehensive coverage. Negotiating with insurers to eliminate exclusions related to functional damage, cosmetic damage, marring, ordinance or law compliance, and matching can help maintain aesthetic appeal, address repairs, and protect property values.
Last, understanding and fulfilling duties and responsibilities to insurance companies is essential in the event of a loss. Promptly notifying insurers, cooperating with adjusters, and providing necessary documentation such as proof of loss facilitate efficient claims processes and ensure that HOAs receive the coverage they need.
By being well-informed and proactive in insurance matters, HOA managers and board members can effectively safeguard the assets, integrity, and overall value of their residential communities. Making thoughtful choices and fostering constructive relationships with insurance providers lead to greater protection and peace of mind for everyone involved.
Anthony (“Tony”) T. Smith has been representing property owners for most of his career. Tony’s practice focuses on the diverse legal needs of common interest communities. He regularly advises condominium and townhome associations on all aspects of operation, management, governance, and litigation.
By Hal Kyles, Orten Cavanagh Holmes & Hunt, LLC
Based on recent legislative changes, Colorado homeowner associations have had to rethink the way they manage delinquencies. House Bill 22-1137 was signed into law in August of 2022 and imposes greater obligations and burdens on associations in the collection of delinquencies. Like any business, associations must be able to predictably budget for expenses. As assessments are the lifeblood of any HOA, when unit owners fail to pay assessments, the association can be in jeopardy of meeting its obligations. There are, however, steps an association can take to enhance its confidence that money will be available when members do not make timely payments.
Step One: Adopt an Updated Collection Policy
Colorado requires most associations to adopt and follow a written policy for the collection of unpaid assessments. The new law requires associations to update their collection policies to comply with the new obligations and restrictions on collecting delinquencies. Any association that has not already done so, should check with their community manager or HOA attorney to verify that it has a collection policy that is compliant with current laws. An association that does not have a current collection policy is prevented from referring a delinquent account to an attorney or collection agency.
Step Two: Familiarize and Adhere to Collection Policy
It isn’t good enough to simply have a collection policy. The purpose of the policy is to provide a suitable and fair process for managing the collection of delinquencies. Failure to follow the prescribed procedures can provide unit owners with a defense in the event legal action is taken against them. For this reason, associations and their managers should be familiar with the policy and adhere to the procedures specified. Additionally, the policy is intended to provide an efficient process to manage collection of delinquencies. This purpose can only be achieved by close adherence to the process outlined in the policy.
Step Three: Payment Plans Can Benefit HOA
The use of payment plans can be an effective means for the recovery of delinquencies. House Bill 22-1137 extended the minimum payment term from six to eighteen months. Experience has shown that the liberal use of payment plans can benefit both the association and delinquent unit owner. The Colorado Common Interest Ownership Act (CCIOA) requires associations to make a good-faith effort to coordinate with a unit owner to set up a payment plan before referring a matter to its attorney or collection agency. Entertaining requests from owners for a payment plan can create goodwill and avoid the need to seek legal action to collect the delinquency. Payment plans are intended to reduce additional collection expenses for both the association and unit owner. For these reasons, HOA boards are encouraged to utilize payment plans. All payment plans should be put in writing and acknowledged by both the unit owner and the association. In the event the owner fails to complete the payment plan, the documentation can later be used as evidence of the owner’s admission of the debt. Therefore, a signed payment plan can be a valuable document for the association’s attorney.
Step Four: "Manage” the Process
As discussed, adopting and following a written collection policy is a must, but equally important is the need to manage the entire process. Here, the key issues are record-keeping and communication. One of the greatest benefits to utilizing professional management are the accounting records and ledgers that can be generated with the use of industry leading software. Few things can cause a bigger problem than the failure to maintain accurate unit ledgers. This is especially true if the situation ends up in front of a judge. Having a professional community manager is likely to enhance the association’s success in collecting delinquencies. Of course, not all associations require professional management, depending on the association’s size and location. In most cases, however, having a dedicated individual (or individuals) whose primary responsibility is to maintain and enforce policies will greatly enhance the recovery of unpaid assessments.
The other key aspect to managing the process is effective communication. Associations have a variety of means to communicate with unit owners – mail, email, telephone, and even text, are a few examples. Modern life and technology dictate that associations utilize those modes of communication available. CCIOA requires associations to deliver notice of a delinquency by three different means. In some cases, an association may not possess a unit owner’s phone number, email address or current mailing address. Efforts should be made to obtain and periodically update an owner’s contact information. The county assessor can provide the legal owner’s mailing address. In the event the association receives returned mail, the envelope may provide a forwarding address or other useful information. A few minutes spent conducting a Google search may save time and unnecessary expense if the owner can be located. Indeed, the most frequent complaint I hear from owners is, “the association never talked to me.” Today, associations are required by state law to exercise more than diligent effort to communicate with a delinquent unit owner.
If it does become necessary to refer an owner’s account to the association’s attorney, it is just as important that the association maintain open and frequent contact with the attorney. Often the association (community manager or board member) is in possession of helpful information that can benefit the attorney in collecting the debt. Occasionally, unit owners will attempt to circumvent the attorney by communicating with the board or manager. The association’s collection policy typically specifies that once a matter is referred to legal counsel all communications from the association will come from the association’s attorney. Policing this part of the process can sometimes become necessary.
HOA delinquencies typically go hand in hand with the health of the local economy. When circumstances make collections challenging, successful collections can be enhanced if the association has already taken the appropriate steps – has a current written collection policy that is compliant with state law; identifies the individuals responsible for implementing the policy and managing the process; makes diligent efforts to communicate with the unit owner; periodically verifies that the association has up-to-date contact information; and finally, communicates with the association’s attorney to achieve an optimum resolution.
Hal Kyles is the managing attorney for collections at Orten Cavanagh Holmes & Hunt, LLC. He has practiced law in Colorado for thirty years, the last fifteen in support of owner associations. He is a former Marine officer and life-long runner.
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