HOA Capital Expenditure

Started by MarkM40 • 23 replies • 982 views

💬 Join us to post & get advice from 50,000 HOA & Condo leaders.

⚡ Takes 30 seconds

Already a member? Log in

MarkM40 (Pennsylvania)
Posts: 5

Posted:

When an HOA Board proceeds with a Capital Expenditure ($600K Legal Action) without taking a vote of the HOA members as required in the HOA Bylaws, what can the HOA members do if the action then results in a special assessment?

SheliaH (Indiana)
Posts: 6,964

Posted:

Need more information on what this legal action is about. A capital expense is usually a major repair or replacement of the common area, such as roofing for a clubhouse or group of townhomes. If this is legal action, it could be related to hiring a new association attorney who's about to do some major work on the massive behalf.

So, what was the board's response when you asked them about the money. If you didn't ask them, why not?

If it is not right do not do it; if it is not true do not say it. Marcus Aurelius

MarkM40 (Pennsylvania)
Posts: 5

Posted:

Seven years ago prior to me moving here, the board on their own filed a lawsuit against the builder in response to certain units of the TownHouse community having a moisture issue behind the stucco. Not all units of the 149 had moisture issues. They are isolated to certain units based on the subcontractors that did the work. The board at the time did not hold a vote, as defined in the Bylaws. Now that existing board and the current board have spent 7 yrs and $600K to come to a resolution. I purchased a unit in May 2019. At the time, the board and their attorneys would not provide any details on the litigation or even a projection of what a special assessment may amount too. In hindsight, I should have passed on the property, however I am here now. The board now has gone through mediation and has projected the special assessment would be approximately $13,400 per unit for remediation. However their plan is to deconstruct all units exterior even those that did not show any moisture.
They are also including upgrades in the special assessment by changing the outside look of the units. And including these costs in to part of the special assessment that really has nothing to do with the remediation of the moisture. My concern, first is that this Capital Expenditure took place without the consent by vote of the HOA Members and second they do not have a second option other then the special assessment. Do I as a homeowner have any recourse against this because it was an unapproved Capital Expenditure?

MarkW18
Posts: 1,290

Posted:

How old is the complex? Does it have a specific warranty such as a 10 year warranty on the units?

MarkM40 (Pennsylvania)
Posts: 5

Posted:

The complex dates back to 2004. The lawsuit was apparently filed in 2013.

BillH10 (Texas)
Posts: 1,217

Posted:

Mark

Sheila's comment is on point: just because the expenditure is $600k+ does not necessarily mean it is a Capital Expenditure. What do your documents say about Capital Improvements/Assets, approvals for Capital Expenditures, and approvals for expenditures, regardless of size, which are not defined as Capital Expenditures?

For example, many association documents permit expenditures for repairs or other needs which do not require approval of the owners.

DeidreB (Virginia)
Posts: 113

Posted:

Just sharing my similar experience Mark for what it's worth.

We bought a new town home about 15 years ago. There were about 5 different models of town homes that the builder built in our community. Two of those models had a plumbing system issue that caused occasional interior leaking in about 10 homes out of 100 homes although at the time we did not know how many homes would be affected or if it was truly isolated to just a few. It became apparent that only two models had an improper plumbing installation that was in code when built but the code changed right after the homes were built. The owners who had those leak issues aggressively lobbied our HOA to take action (including a lawsuit if necessary) against the builder and its subcontractor to address the plumbing issues as a quality issue.

After much deliberation our HOA board and management company convinced all the owners that these issues were individual homeowner issues to be resolved by the affected homeowners as they saw fit. Reason: they were tied to the specific homes and were on the interior of the homes and each home was separately owned from roof to foundation even though they were town houses.

We had the discussion in an open special association meeting. No vote ever took place because it became apparent to the majority and the board that these issues were home owner issues versus HOA issues.

It might be of interest to check your HOA documents to see if interior moisture falls under owner maintenance responsibility. Town homes are usually not managed like condos but as separate, detached single family homes.

MarkW18
Posts: 1,290

Posted:

Seriously, how is legal expenses part of a capital improvement or asset? Than to top that off, a special assessment of $13K plus is slapped on them by a decision made by a couple of people very possibly without the knowledge of the homeowners.

My vote would be to have the individuals who started this, refinance their homes and pay the $600K.

Then for someone to say many association documents permit expenditures for repairs or other needs which do not require approval of the owner, my response would be put a gun to my head and pull the trigger.

ShirleyC (California)
Posts: 117

Posted:

Does the insurance cover any of this cost for the repairs?
The law suit should have been disclosed when you purchased, should have been in escrow documents. You may have a claim against the seller, title company and/or real estate company representing the seller

SheliaH (Indiana)
Posts: 6,964

Posted:

Do you know if homeowners took a vote to authorize a special assessment before you bought your unit? I would hope they didn't authorize this before knowing what the cost would be (you have to factor in inflation, which nearly everyone forgets about). You may want to talk to some of the long-time homeowners to get more history.

As for the board, you should start with asking them about a vote and they should be able to tell you when and where it was done, how many homeowners cast a vote, how many voted yea vs. nay, etc. Written documentation would also be helpful to review. If they stammer or try to blow you off, you need to rally together your neighbors and demand answers - certainly another vote of that wasn't done according to the documents.

While you're doing all this, you do need to keep in mind the work may still need to be done (the moisture repair). It may be the board wants to do all the units as a precaution - ascertaining already have problems, but there's a chance others have issues that aren't get apparent. It may be best to deal with all this now than to wait for another set of problems to erupt - and they'd have to be repaired at a higher price.

As for the other work, you could ask for more details on that. Perhaps the work on the outside of the units is being done to fix some long standing issues, so rather than putting that off too, the board wants to bite the bullet and deal with that now rather than later.

You should also be reviewing the finance records - start with income/expense records for the last 5 years, along with the most recent reserves study (if it's older than 5 years of the association hasn't had one at all, that probably explains the need for a special assessment).

Bottom line, you should insist the board ask for homeowner input/approval of a special, but if everyone says no, they're probably looking at higher expenses in the future and they won't be able to avoid it. If you don't want a special assessment, you may have to face assessments will need to be jacked up A LOT to cover the repairs you do need.

If it is not right do not do it; if it is not true do not say it. Marcus Aurelius

MarkW18
Posts: 1,290

Posted:

There are lawyers who specialize in this type of business, construction defects within HOA communities. Some are ethical, many are not. Most will not, or should not, go after builders who don't have proper insurance. Lawyers will go after them during the warranty period, hopefully not at the very end.

The other problem, at the beginning, the Boards are controlled by the builder and the management company works on behalf of the builder. So the playing field is far from level.

MarkW18
Posts: 1,290

Posted:

Quote:

Posted By ShirleyC on 05/12/2020 9:41 AM
You may have a claim against the seller, title company and/or real estate company representing the seller

OR the management company

MarkM40 (Pennsylvania)
Posts: 5

Posted:

From our Bylaws:

5.8 Rejection of Budget; Limitations on Expenditures and Borrowing.
Anything herein to the contrary notwithstanding, the Association, by majority vote of all votes in the Association, may reject any budget or capital expenditure approved by the Executive Board, within thirty days after approval by the Executive Board. The power of the Executive Board, to expend funds, incur expenses or borrow money on behalf of the Association is subject to the requirement that the consent of Unit Owners entitled to cast at least two-thirds of the votes in the Association obtained at a meeting duly called and held for such purpose in accordance with the provisions of these Bylaws, shall be required to (i) expend funds or incur expenses in the budget(including reserves) to be exceeded by more than 5% of such aggregate amount after taking into account any projected increases in income, and (ii) to borrow so the loans of the Association then would exceed 5% of such aggregate amount.

I did ask them about the VOTE, there was no vote take to start the lawsuit.

There is some type of Insurance policy, however pulling any details from this board is not easy.

MarkM40 (Pennsylvania)
Posts: 5

Posted:

The lawsuit was disclosed but only that there was a lawsuit, and the HOA Boards legal team would not disclose any details about the litigation. Only that they filed a remediation lawsuit against the builder for the moisture behind some of the stucco on certain units. The potential special assessment was not disclosed at all. This was finally brought to the HOA homeowners this week, 7 years later.

MarkW18
Posts: 1,290

Posted:

From experience, this is not an uncommon occurrence. I worked for a lawyer who owned a management company who was an "ambulance chaser", a lawyer looking for construction defect cases in HOA and then promising miracles at the association's expense. Worse, the management company didn't legally disclose the lawsuits during escrow.

DouglasK1 (Florida)
Posts: 2,046

Posted:

Quote:

Posted By MarkM40 on 05/12/2020 8:24 AM
When an HOA Board proceeds with a Capital Expenditure ($600K Legal Action) without taking a vote of the HOA members as required in the HOA Bylaws, what can the HOA members do if the action then results in a special assessment?

In most states there is no department or ombudsman that assists homeowners with concerns about how their association is run.

A couple of options for dealing with associations that do not follow their governing docs are:
1) replace directors, either through regular elections or a recall.
2) Sue the association.

Escaped former treasurer and director of a self managed association.

CathyA3 (Ohio)
Posts: 6,299

Posted:

Quote:

Posted By MarkM40 on 05/12/2020 8:47 AM
Seven years ago prior to me moving here, the board on their own filed a lawsuit against the builder in response to certain units of the TownHouse community having a moisture issue behind the stucco. Not all units of the 149 had moisture issues. They are isolated to certain units based on the subcontractors that did the work. The board at the time did not hold a vote, as defined in the Bylaws. Now that existing board and the current board have spent 7 yrs and $600K to come to a resolution. I purchased a unit in May 2019. At the time, the board and their attorneys would not provide any details on the litigation or even a projection of what a special assessment may amount too. In hindsight, I should have passed on the property, however I am here now. The board now has gone through mediation and has projected the special assessment would be approximately $13,400 per unit for remediation. However their plan is to deconstruct all units exterior even those that did not show any moisture.
They are also including upgrades in the special assessment by changing the outside look of the units. And including these costs in to part of the special assessment that really has nothing to do with the remediation of the moisture. My concern, first is that this Capital Expenditure took place without the consent by vote of the HOA Members and second they do not have a second option other then the special assessment. Do I as a homeowner have any recourse against this because it was an unapproved Capital Expenditure?

I'm going to assume that previous boards verified that the issue was the HOA's responsibility to fix as spelled out in CC&Rs.

Re: putting this to a vote, if the faulty stucco is the HOA's responsibility, they must repair it - it's not optional. Like Sheila, I also question whether this was a capital expenditure - I would consider this routine maintenance. For both of these reasons, unless the OP's governing docs require a vote for any expenditure over a certain dollar amount, there was no need to get approval.

Given that the issue was the result of a construction defect that affected multiple units and the repair could have seriously damaged the HOA's financial health - and the special assessment suggests that this would have been the case - I think the board was fully justified in going after the builder. They would have been irresponsible not to. Unfortunately these sorts of issues are not as uncommon as we would like. In fact, my association's attorney lists Construction Defects as one of their areas of practice on their web site.

The only thing I would question is including upgrades. But without knowing what these involve, whether building code has changed and the upgrades are in fact necessary, or any other considerations that affected this decision, I can't state that the board was wrong. More info is needed.

CathyA3 (Ohio)
Posts: 6,299

Posted:

One item I forgot: if the board is also looking at the other units, even ones that don't appear to have moisture, this suggests to me that there may be some issue with the design or construction of all the buildings that may make them prone to moisture intrusion. This would also help explain things that appear to be upgrades in the proposed remediation of the damaged units.

In this case, it's prudent to be proactive. Water can do a lot of damage before it announces its presence, mold is a serious health hazard, and it's much much much cheaper to remediate sooner rather than later. In addition, the HOA can get much better pricing for large amounts of work - doing bulk bids for repairs is more cost effective than doing the repairs piecemeal.

My take is that this board knows what it's doing.

CathyA3 (Ohio)
Posts: 6,299

Posted:

It's time for one of Cathy's Rants du Jour, and I promise to pipe down after this.

It looks like the OP's governing docs do have a provision that allows the membership to reject spending over a certain limit. (And now we know the likely reason they're having to resort to special assessments.)

I refer to these as the Let's Be Stupid and Commit Financial Suicide provision.

Let's assume the OP's membership decides they don't want to pay for the repairs that are the HOA's responsibility. And let's pull out Cathy's Magic Crystal Ball and look into the future, shall we?

..... ominous music plays in the background .....

Unit owners interiors are damaged by the continuing moisture intrusion. These owners sue the HOA for failing the make repairs *that the HOA is required to do* according to the governing documents.

Some others also develop health issues. One of them is even forced to abandon their home because of mold growth. Oh hey, lookee here: more lawsuits because the HOA failed to make repairs *that it is required to do*.

And now the HOA has to defend itself, and this is going to take muchos buckos. And our membership decides they are by golly not going to pay for no stinkin' lawsuits and vote down that expenditure, too.

Of course property values have fallen as news about lawsuits and construction defects and mold gets around, and homeowners can't give their homes away. The investment community starts to lick their chops.

The HOA's insurer has also caught wind of this and says "Hope, outta here". If the HOA manages to find a new insurer, and that's IF, it will pay through the nose because of the increased premiums. And if no insurer will touch them, then HOA is uninsured, which means our homeowners are now **jointly and personally liable** for any issues that arise.

The former board members, who had appeared to know what they were doing, have long since jumped ship, so the HOA may also be on their way to receivership.

Boy, ain't we got fun?

...... music fades ......

OK, that was snarky and a bit sarcastic, but lawsuits resulting from the failure to make the required repairs are very possible. Generally I think lawsuits against HOAs can be overdone, but they would be fully justified in this case.

Most of us are aware of the level of apathy and ignorance displayed by too many HOA owners, and allowing them to get themselves into this much trouble is ridiculous. (In my state, the only financial item our membership can vote on is not funding the reserves according to the most recent reserve study), and the vote must be unanimous. Every homeowner must acknowledge that they are getting themselves into financial trouble).

"Too soon broke, too late smart" - that's no way to run an HOA.

MarkW18
Posts: 1,290

Posted:

Quote:

Posted By CathyA3 on 05/13/2020 8:24 AM
It's time for one of Cathy's Rants du Jour, and I promise to pipe down after this.

It looks like the OP's governing docs do have a provision that allows the membership to reject spending over a certain limit. (And now we know the likely reason they're having to resort to special assessments.)

I refer to these as the Let's Be Stupid and Commit Financial Suicide provision.

Let's assume the OP's membership decides they don't want to pay for the repairs that are the HOA's responsibility. And let's pull out Cathy's Magic Crystal Ball and look into the future, shall we?

..... ominous music plays in the background .....

Unit owners interiors are damaged by the continuing moisture intrusion. These owners sue the HOA for failing the make repairs *that the HOA is required to do* according to the governing documents.

Some others also develop health issues. One of them is even forced to abandon their home because of mold growth. Oh hey, lookee here: more lawsuits because the HOA failed to make repairs *that it is required to do*.

And now the HOA has to defend itself, and this is going to take muchos buckos. And our membership decides they are by golly not going to pay for no stinkin' lawsuits and vote down that expenditure, too.

Of course property values have fallen as news about lawsuits and construction defects and mold gets around, and homeowners can't give their homes away. The investment community starts to lick their chops.

The HOA's insurer has also caught wind of this and says "Hope, outta here". If the HOA manages to find a new insurer, and that's IF, it will pay through the nose because of the increased premiums. And if no insurer will touch them, then HOA is uninsured, which means our homeowners are now **jointly and personally liable** for any issues that arise.

The former board members, who had appeared to know what they were doing, have long since jumped ship, so the HOA may also be on their way to receivership.

Boy, ain't we got fun?

...... music fades ......

OK, that was snarky and a bit sarcastic, but lawsuits resulting from the failure to make the required repairs are very possible. Generally I think lawsuits against HOAs can be overdone, but they would be fully justified in this case.

Most of us are aware of the level of apathy and ignorance displayed by too many HOA owners, and allowing them to get themselves into this much trouble is ridiculous. (In my state, the only financial item our membership can vote on is not funding the reserves according to the most recent reserve study), and the vote must be unanimous. Every homeowner must acknowledge that they are getting themselves into financial trouble).

"Too soon broke, too late smart" - that's no way to run an HOA.

Couldn't disagree more

AugustinD
Posts: 5,144

Posted:

Quote:

Posted By MarkM40 on 05/12/2020 10:36 AM
[Bylaw] "5.8 Rejection of Budget; Limitations on Expenditures and Borrowing.
[snip]Anything herein to the contrary notwithstanding, the Association, by majority vote of all votes in the Association, may reject any budget or capital expenditure approved by the Executive Board, within thirty days after approval by the Executive Board. .... "

Did each year's annual budget included an estimate of the expected expense of litigation? From Bylaw 5.8, each of the past seven years the membership had the option to disapprove of the budget. It appears the membership never did.

Quote:

Posted By MarkM40 on 05/12/2020 10:36 AM
[Bylaw] "5.8 Rejection of Budget; Limitations on Expenditures and Borrowing. [continued]
... The power of the Executive Board, to expend funds, incur expenses or borrow money on behalf of the Association is subject to the requirement that the consent of Unit Owners entitled to cast at least two-thirds of the votes in the Association obtained at a meeting duly called and held for such purpose in accordance with the provisions of these Bylaws, shall be required to (i) expend funds or incur expenses in the budget (including reserves) to be exceeded by more than 5% of such aggregate amount after taking into account any projected increases in income, and (ii) to borrow so the loans of the Association then would exceed 5% of such aggregate amount."

I did ask them about the VOTE, there was no vote take to start the lawsuit.

So far, I am not persuaded a membership vote is required to start a lawsuit here.

Quote:

Posted By MarkM40 on 05/12/2020 8:47 AM
Now that existing board and the current board have spent 7 yrs and $600K to come to a resolution.

I suggest getting a hold of the budgets for each of the last seven years and see if there is a line item for litigation.

Quote:

Posted By MarkM40 on 05/12/2020 8:47 AM
I purchased a unit in May 2019. At the time, the board and their attorneys would not provide any details on the litigation or even a projection of what a special assessment may amount too.

Does the Pennsylvania Condo Act require disclosure of this?

Quote:

Posted By MarkM40 on 05/12/2020 8:47 AM
In hindsight, I should have passed on the property, however I am here now. The board now has gone through mediation and has projected the special assessment would be approximately $13,400 per unit for remediation. ... Do I as a homeowner have any recourse against this because it was an unapproved Capital Expenditure?

The cost has been projected. The money is not committed, is it? I think your best option may be to throw these directors out of office and put in new ones. The membership could do this through a recall or through the regular election.

At present, if a member of this condo were to sue over this, I do not like the chances of her or him prevailing.

AugustinD
Posts: 5,144

Posted:

I also agree with CathyA3's concerns and questions.

KellyM3 (North Carolina)
Posts: 2,239

Posted:

I'd say the legal expenses are part of the capital project due to the nature of your description. If you force a new HOA vote and it fails, the attorneys will lien your properties...and can.

If your Reserve Funds hold the $600,000 to settle up w/out a special assessment, I'd follow that route and then review what's needed to boost reserves going forward (though this kind of project is to really a Reserve Fund project as it cannot be reasonably planned).

Mark, you're in a tough spot.

JohnC46 (South Carolina)
Posts: 14,265

Posted:

MarkM

Help me understand. WaS the $600K spent pursuing the builder for construction defects? Was there a judgement for the HOA? If a judgement, how much was it for? What is the total cost of the repairs?

🎯 You've read this entire discussion

Join the conversation with 50,000 HOA & Condo Leaders:

✓ Ask follow-up questions
✓ Share your experience
✓ Get expert advice
✓ Access 350,000 discussions

Create Free Account →

⚡ Takes 30 seconds

Already a member? Log in here