“Few things help an individual mare than to place responsibility
upon him and to let him know that you trust him. -Booker T. Washington -
In a previous column With Regard to Owner Associations I wrote:
‘While the authorities, purposes and intents of these Owner Associations are legally spelled out in the C.C.&
R's, their more practical purposes are contained in the following five areas:
[1] To provide
management, maintenance and administration for the property, both real and personal, which is owned by the Association
and/or its Members.
[2] To protect the investment and enhance the value of the property owned by the Association
and/or its Members.
[3] To provide an efficient mechanism for the numerous people with diverse interest, background and lifestyles
to share common possessions with a minimum of inconveniences and loss of personal rights.
[4] To provide a matrix within which social contact between owners/members can develop as they enjoy the benefits
of ownership/membership such as exchanging.
[5] To act as agent for the owners/members in the collection and payment of taxes, the creation of reserves and
disbursements from those accumulated funds for their intended purposes.’
Of those, the idea of protection the investment and enhancing the value of the property should be of particular
interest to Owner elected Board Members. While the C.C.&R’s of a resort may be very specific about the
duty to operate and maintain, in many instances they may not be as specific with regard to the protection of the
physical assets and enhancing the value of the property. Such references could be similar to these:
Declaration of Dedication Article II Definitions. (H/T). Common Expenses / Operating
Expenses means expenses determined by the Association to be expenses attributable the existence, preservation and
maintenance of XXX Resort and expenses of operation the Common Area and the Residence Units thereof. Such expenses
shall include, without limitation, (4) creation of reserves for (a) operation, improvement,
refurnishing, remodeling, restoration and/or major repair of the Common Area and the Residence Units, (b) construction
or acquisition of new facilities or equipment related to the preservation, or maintenance of the Common Area and
the Residence Units or their Furnishings, (c) to compensate for damages to or arising out of the existence, preservation
or maintenance of the Common Area and the Residence Units or there Furnishings which are not fully covered by insurance.
Declaration of Dedication Article II Definitions. (Z). Special Assessments means an
amount determined by the Association and assessed against an Fractional Interest on a nonrecurring basis as the
Allocable Share for such Fractional Interest of the expenditures for (1) capital improvements, (2) amounts
in excess of available reserved expended for construction or acquisition of new facilities or equipment,
(3)...
No matter how well Designed, Constructed or Decorated, sooner or later refurbishing or redecorating will need
to occur. No matter how well the furniture, fixtures and equipment of a resort are maintained, sooner or later,
replacements will be necessary. Roads will need re-paving, roofs will need replacing, trees will out grow their
planting areas, and age will raise its ugly head. When these things occur, and they will, management must deal
with them. To the best of our knowledge there are only four ways to do so; (1) Accumulated Reserves (1) Special
Assessments (3) Borrowed Funds (4) All of the above
If Accumulated Reserves is the method chosen by the resort, it’s HOA/POA and its BOD; the Owner elected representatives
on the Board should be specifically concerned with three issues. First that the reserve program will provide adequate
funding for future requirements, second that both the developer and the owners are making the appropriate contributions
to the fund and finally that the accumulated reserve funds are not commingled with other resort funds.
Because of the very intent of accumulating reserve funds is to deal with future considerations the issue of
reserves is not necessarily one that the Development entity will have an overriding interest in. The Developer
and his sales team have to deal with the objections raised at the closing table concerning high annual assessments
or maintenance fees. Included within those assessments/fees will be the amount set aside as the Reserve Allocation.
In order to keep assessments down the developer may understate the reserve funding requirements. It’s been known
to happen! One way to insure that this does not occur is for the owner elected representatives to make every effort
to insure that an Independent Reserve Study has been commissioned and that the assessments for
reserve funding are compliant with that study. The last industry study with respect to reserve funding adequacy
indicated that only 1/3 of all resorts had accumulated adequate reserves.
In many instances the Resort C.C.&R’s will provide for the resort to be operated under a developer subsidy.
Such a reference could be as follows:
Declaration of Dedication Article VI Assessments, Section 6.04 Developers Liability for Assessments.
Developer shall not pay the General, Tax, Special or Individual Assessments assessed against any Unconveyed Fractional
Interest in any year for which a subsidy agreement between the Association and the Developer is in effect.
Such subsidy agreements typically require the Developer to subsidize the Resort and Association operations in
an amount equal to the difference between the assessments collected from owners
other than the Developer and the total expenses incurred. The typical subsidy agreement contains a clause which
allows the Developer (after a designated time) to pay the same assessment on Unconveyed Fractional interest as
the owners other that the Developer are paying. The Developer usually exercises this option after about 75% of
the interest has been conveyed. The existence of such a subsidy agreement does not preclude the Developer from
making the same contribution to the accumulated reserve fund as that being paid by the owners other than the Developer.
What does this mean in layman's terms?
Assume that the operations cost for a year were budgeted to be $1,000,000, property taxes were budgeted to be
$50,000 and contribution to reserves was budgeted to be $200,000. Farther assume that there are 5,000 Fractional
Interest and 20% of them had been conveyed by the Developer to others. The operational assessment would be $1,000,000
divided by 5,000 or $200 per Interest, the property tax would be $50,000 divided by the same 5,000 or $10.00 per
Interest and the reserve assessment would be $200,000 divided by 5,000 or $40.00 per interest. Assuming a 100%
collection of assessments and on budget operations, the Developer would be required to subsidize resort and association
operations in an amount of approximately $800,000, property taxes in an amount of $40,000 and deposit $160,000
into the reserve fund.
It becomes obvious that in the early stages the Developer bears the brunt of the expenses and how easy it would
be to let the contribution to the reserve fund slip, to slide in non-operational personnel payroll such as a concierge
who is actually an in-house lead generator for the marketing department or the operation of a rental department
whose primary responsibility is to accommodate mini-vacations with hooks. These comments are not intended to indicate
that all Developers are involved is such pursuits or even that such occurrences are commonplace, they are however
intended to alert owner elected board members that they have surely occurred on
more that one occasion and that being aware and diligent is a good thing.
[G] If a HOA or POA exist its purpose is clearly spelled out in the C.C.&R’s as we have indicated
in [A] above and in order to achieve that purpose is must have the necessary powers. Such powers may be indicated
as follows:
Articles of Incorporation - Fourth: Powers. (i) To levy assessments upon its members and the Developer and
to declare the same a lien against the Fractional interests subject thereto in accordance with the Declaration.
By-Laws of XXX Resort Association, Inc.: Article IV, Directors A. Powers (8). To levy assessments and to
do all things provided by an in the manner required by the Articles and the Declaration.
Equally important is the power to collect those assessments.
Articles of Incorporation - Fourth: Powers. (k) To enforce collection of all delinquent assessment liens
by whatever means possible, including but not limited to, exercising the power of sale as set forth in the Declaration.
Declaration of Dedication Article VI Assessments, Section 6.09 Enforcement. A lien created as provided
herein may be enforced by the sale of the Fractional interest by the Association, its Attorney or other person
authorized to make the sale after failure of the Fractional interest owner to pay such an assessment in accordance
with its terms, said sale to be conducted in any manner provided by law.
If there is an existing subsidy agreement and the Developer is fully compliant with its terms, the financial
condition of the Association may appear sound, however there may be problems lurking just below the surface. Typically
the subsidy agreement indicates the Developer is responsible for the payment of all costs not
paid by funds collected via assessments from Owners. There are three areas with respect to assessment
collection that the owner elected representatives on the BOD need to be attentive too. We have covered the one
about understating the expenses to keep the assessments low and we have mentioned the Developer funding of the
reserves, however, collection of assessments is equally vital.
For purposes of illustration as to the potential problems let us assume that the XXX Resort has 5,000 Fractional
interests, the Developer has sold 4,200 of them and has elected to pay the assessment on the 800 interests which
have not been conveyed. Again the annual budget was for $1,250,000 thus each interval had an annual assessment
of $250.00. The Developer paid 800 X $250.00 or $200,000.00 and the balance of the payments were to come
from the owners who had purchased the interests from the Developer. These 4,200 owners were responsible for funding
$1,050,000 of the Association's anticipated income. The assessment-billing department has sent out the 4,200 statements
and had received back payments of $840,000 or 80%. Communications with the 20% who were in default indicated
that about 100 of them were in temporary financial binds but intended to pay their assessments within a matter
of days. Another 74 indicated that they didn’t own the Fractional interest at XXX Resort and 666 were already in
default on their mortgage payment and indicated that they were not going to continue to pay the annual assessment.
The mortgage firm indicated that in fact there were 665 accounts in default. When asked if the firm was going to
foreclose on those accounts the response was very vague.
If you have already worked the numbers you now know that our fictitious resort is in deep
trouble because their budget indicated expenses were going to be $1,250,000 and their income has been
only $1,040,000 to date with the potential of another $25,000 coming in within a matter of days. With the ownership
of 740 Fractional interests in limbo, the Association is facing a shortfall of $185,000 which the Developer
is not required to pay because the subsidy has expired. This illustration may seem farfetched; however, I assure
you that it, or one similar to it, has been repeated far too often during the transition period from developer
control to owner control of an HOA/POA.
FINAL THOUGHT
One of the ways that BODs attempt to insure that everyone one of its members understand and meets the Duty of
Care, Loyalty and makes good business judgments is to maintain a record of what
they did.
By-Laws of XXX Resort Association, Inc.: Article IV, Directors R. Minutes of Meetings. Minutes of all meetings
of the Board of Directors shall be distributed to the members of the Association within sixty days after the meeting.
Roberts Rules of Order 9th Edition. §47. Minutes and Reports of Officers. Minutes. The record
of the proceedings of a deliberative assembly is usually called the minutes… In an ordinary society, unless
the minutes are to be published, they should contain mainly a record of what was done at the meeting, not
what was said by the members. When the ‘minutes’ are to be published, they should contain, a list of speakers
on each side of every question, with an abstract or the text of each address.
Some owner elected members of the BOD feel that they cannot be effective because they are outnumbered outvoted
and even overruled by the Developer's veto power.
This may well be true at present, however that too shall pass and being ‘on the record’
voicing concerns about issues such as those indicated in Parts 2 and 3 would surely make others think twice about
moving forward with actions that are clearly not in the best interest of all the owners. In the end you’ll be glad
you did!
SEE: a BOD Part 1; a BOD Part 2
