Use of Special Assessment Funds

Advice Please--one of our clients does not believe in raising assessments to ensure adequate operating and reserve funds are on hand, they choose to seek approval of Special Assessments when costly projects arise. Mostly this works, every 24-30 months an unanticipated something rears up and bites the Board and owners in the posterior part of the anatomy.

A Special Assessment was approved in August to fund four specific projects described in the Special Assessment paperwork provided to owners. The checks have been received and deposited but no funds have been expended.

Fast forward to 10 days ago: a slab leak was detected in a unit which cost about $4,000 to isolate and repair. The slab is a common element as is the plumbing embedded within. Repair of the interior walls and flooring is the responsibility of the owner.

As background, this is an 8-unit condominium which dates to 1984. We have made it clear the Board and owners are playing with fire by not accumulating sufficient operating and capital reserve funds.

The $4,000 leak repair cost will deplete the operating checking account and then some; the State of Texas and many association documents in this state do not impose restrictions on the use of Reserve Funds many of you have described in posts. Regardless, the funds in the reserve account and operating account are barely adequate to pay for the leak repairs and provide operating funds for months to come. The SA projects are in limbo.

The Board wishes to transfer funds from the special assessment proceeds to pay for the repair expenses and projected operating expense shortfalls and use the remaining special assessment funds for the four identified projects as far as the funds will stretch.

We are opposed to this approach; our belief (without foundation to which we can cite) is the Special Assessment funds must be used for the projects for which they were collected. We believe the proper approach is to (with appropriate communication with the owners) refund the SA amounts and begin anew with an expanded SA to cover the repairs and the original projects. Only one SA may take place in a calendar year.

Thoughts? Guidance?

Thanks Mark, we appreciate your input.

Since I do not know who is posting/reading, and who may be able to put 2+2 together and find the result is 4, I will not comment further at this time.

-- TPC 81 and TPC 82 (sections pertaining to pre-1994 condos) appear to be silent on all points, including budgeting.

-- Please confirm/clarify: Do the Bylaws or covenants requires owners' approval for special assessments?

-- Do the Bylaws require the Board to prepare an annual budget?

-- Do the Bylaws require that the Board set the regular assessment pursuant to estimates of the coming year's annual expenses?

-- Little sidebar on condos created after 1993: TPC 82.112 (which does not apply to the OP's condo) has wording implying that post-1993 condos, post-Declarant, may use reserves to pay operational expenses.

-- If the answers to the above questions are all "No," then in my opinion the Board is free to move funds around willy-nilly, from reserves to the operating account and vice versa.

-- Assuming the answer to the above questions are all no, then the Board, while not violating any of the governing documents nor Texas statutes, is not being responsible. Furthermore and for one thing, I'd opine that this COA reflects on your company to no small extent. Your company is right of course to urge responsible budgeting for both operational expenses and reserves. If the slipshod way the board is running things is costing your company more time and so money than anticipated, then your company can certainly negotiate for a contract requiring xyz when it comes to assessments (special and regular).

-- If and when the subject of whether another vote by the owners should be conducted, I think the managing company's official stance should be something like: such an owners' vote is advisory only and not consistent with the covenants; should be seen as a survey for the greater part; and that only the board has the power to assess owners xyz via the regular assessment or a special assessment.

-- Surfside of course deserves a mention here and there. Surfside of course representing a condo association board that was not responsible.

-- Please confirm: Do the bylaws say only one SA is allowed per year?

You had a special assessment to pay for specific things. So why would you refund that special assessment?
Have the items that require the special assessments no longer need repair/replacement?
Use those funds for the items they were collected for (or borrow with a way to pay back).

Since you haven't been planning for the future by raising assessments, you now need another special assessment to address the leak.

That is just the reality of things.

Perhaps use this issue as a rally cry to raise assessments and plan for the future.

At the very least, use this as a learning tool about special assessments - they are needed when they are needed.

Having been there and done that, here is one suggestion. Because the slab leak possibly is an emergency, and if this were California, I would suggest to thee Board that an emergency special assessment was in order, and it appears to the tune of $800.00 per unit. This would allow the first special assessment to stay in place.

Small associations, especially those under 10 units are a challenge and generally will be flying by the seat of their pants forever. Just not enough units to divide the pain.

Contracts/covenants are black letter law. I presume the discussion preceding the Special Assessment vote spoke to the specific purposes of the assessment. Or the ballot materials spoke to this. Whence the Board is violating the covenants/bylaws by spending this SA on something else. (I grant that emergencies can and do happen.)

I agree with what BillH10 proposed in his first post as follows:I trust the "refund" will be in the form of a credit. I trust that communications will be extensive on the plan.

Do you know WHY they are operating this way? Do they think that it saves money in the long run, or avoids fights with the neighbors over raising assessments regularly. Are they just not good at budgeting or determining what their routine spending needs are?

If you know the reasons behind this, that may suggest a solution - especially if it's the first or third thing I mentioned. If their goal is to avoid annual squabbles over assessment increases, though, you may not get anywhere since the community size is against you. Emergencies have a way of overriding spending disagreements, and the board may think that the current situation is preferable to hard feelings among people they practically live on top of. I'm not sure they're wrong about that, even though this is likely more expensive method in the long wrong.

I agree and would not want to be associated with them if it was my business. When the crap hits the fan the homeowners will probably tell their friends that it was the PMC's fault. They are not worth the risk of damaging the PMC's reputation.

Cathy

We know why the President wishes to operate in this fashion, the Board does not. What is very puzzling is one of the board members is a board member at another property we manage, he knows better.

For others who commented--we evaluate our client portfolio at the end of each contract year prior to contract renewal. The previous management company told us three years ago they had fired the association but did not tell us why. We now know why.

However, we do not wish to take on a transition with 73 days left in this calendar year with the holidays upon us.

Augustin

Yes, the resale certificate used in Texas for TPC Chapter 81 and 82 condominium associations, and Chapter 209 homeowner's associations, does require that information if the allocation of reserves to a specific project has been made.

However, if no reserve allocation has been determined for the calendar year at the time the resale certificate is produced, there is no entry to be made.

My error, it is a Chapter 81 condominium

BillH10, yes, I am aware that the main problem here is being able to reason with the board and eight owners. Myself and others have opined that dropping this client may be in your company's best interests.

Like some of the others here, I think you may need to decide if this client is worth the hassle. Until then, the best you may be able to do is to express your concerns with illustrations on what's happened in the past.

You could add some Surfside stories in there, noting that many of those homeowners balked at assessment increases until it was too late. It sounds crass but it's possible some of them are no longer here to admit this was a mistake.

That may prompt the board to call an executive session to discuss this in more detail and if you're invited, that might be a good time to say you're no longer comfortable with their approach and have decided it's best that you resign do they can hire a property manager that will be more inclined to follow their directive in this regard.

If they're selling to reconsider, give them time to do do and if not, give them a year to find another manager and assist with a transition plan.

Thank you for all your thoughts and suggestions.

The situation was temporarily resolved this afternoon when two owners paid the 2023 assessment in total.

The payment does not solve the operating problems but does provide the cash to operate normally for the balance of the year.

For those of you who suggested we cut the cord, we reviewed a new client property this morning.