Tough Situation

Started by ChrisK12 • 25 replies • 341 views

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ChrisK12 (South Carolina)
Posts: 23

Posted:

We moved into a small private community that is twenty years old and where there is no operating reserve. Now there are major repairs that need to be done (stormwater drains, road, clubhouse pool, etc). The needed repairs will cost at least $200,000 over the next few years. The residents don't want anymore assessments (they've had 2-3 in the last five years) and they don't want to approve an HOA Heloc to pay for emergency repairs as they come up. Given that the HOA Board has the responsibility to keep the infrastructure up, what is their recourse in this situation.

MarkM19 (Texas)
Posts: 1,459

Posted:

Chris,
While no one ever wants a Special Assessment (SA) the math is the math. I think the board needs to be very open about the finances and this can be done by having an open forum and have all of the facts on the table.

The best way to handle your long- and short-term problems is by raising the dues and making repairs on a priority basis. Dues increases are never easy but usually are better tolerated than a SA. If the repairs do not get done, they won't go away they just get worse and more expensive later. I would remind people that these repairs would have costed 30% less if they would have been done just a few years ago.

It is important to get as many listeners as possible to understand how the reserves work and that they end up stopping SAs down the road. You will never get 100% support on any increase. You are trying to get enough support to pass the increase and then you need to have a plan for what needs to be done first.

It helps with similar posts if we have more information like the following.

How large or small is your HOA?
Is it SFHs or Condos?
How many board members?

ChrisK12 (South Carolina)
Posts: 23

Posted:

21 homes. Currently have estimates totaling $65000 for infrastructure repairs needing immediate repair. Both have been stalled for a year, making each of them a greater financial cost and community risk.

LoriM15 (Florida)
Posts: 1,009

Posted:

Also, what powers do your governing documents give to the board to be able to raise funds without homeowner approval? Can they get the load without a vote from owners? How much can they raise monthly assessments without homeowner approval? Do they have to get owner approval for any amount of special assessment?

Nobody wants to have a huge special assessment. But if you have repairs that need to be done and no funds to do them, the board has to do something. As unpopular as it might be, the board needs to be transparent about the situationa and either raise the monthly assessment, take out a loan and special assess, or both.

ElleN (Idaho)
Posts: 4,420

Posted:

Quote:

Posted By ChrisK12 on 12/04/2023 11:05 AM
We moved into a small private community that is twenty years old and where there is no operating reserve. Now there are major repairs that need to be done (stormwater drains, road, clubhouse pool, etc). The needed repairs will cost at least $200,000 over the next few years. The residents don't want anymore assessments (they've had 2-3 in the last five years) and they don't want to approve an HOA Heloc to pay for emergency repairs as they come up. Given that the HOA Board has the responsibility to keep the infrastructure up, what is their recourse in this situation.

What is the board's recourse? It must turn to the Declaration and have tatooed on their collective heads the sections of the Declaration that say the the HOA is legally obligated to maintain the stormwater system, road, pool et cetera. They should do likewise with state statute sections that say the same.

If damage to owners' property or health occurs due to the lack of maintenance, the HOA can be sued.

I agree with MarkM19's approach (massive education). I also feel this board has to be strong and somewhat automaton-like, ignoring the whining about the assessment going up and paying full attention on their covenant-based (and so contractual) obligations as a board and the covenant-based obligations of the HOA.

For inspiration, I recommend reading this:
https://www.sarasotamagazine.com/home-and-real-estate/an-unlikely-heroine-steps-in-to-save-crumbling-dolphin-tower

The typical director will not like having to support a special assessment or an increase in the assessments. Particularly when safety is involved, to such people I say: You need to resign from the board.

MarkM19 (Texas)
Posts: 1,459

Posted:

Chris,
I agree with Lori. If you have the ability to raise the dues by less than 10% which is in some CCRs you should do it asap. And then do it again the following years.

CathyA3 (Ohio)
Posts: 6,299

Posted:

While it may be the board's responsibility to deal with this, they can't conjure money out of thin air. Homeowners knew that things would need to be fixed at some point, yet they chose to kick the can down the road. And now you're running out of road. Nobody likes assessment increases, but not liking them doesn't make them go away.

You have three options here: special assessments, loans, or not repairing/replacing things. That's it. And realistically you may not be able to get loans at all.

Ironically, this is how you maximize the eventual cost of replacements. Delaying fixes means the eventual repair will be bigger and the cost higher. Loans mean paying interest. Special assessments mean individual owners may have to take out loans in order to pay the assessments, so they'll have to pay interest. Some number of owners will probably not pay, so you can add collection costs on top of it. And lenders *hate* this kind of stuff - they'll either charge higher interest rates for buyers in your community or won't approve mortgages at all. So owners who may plan to jump ship before things go sideways may not be able to sell their homes, or at least not for the price they want.

I agree with Mark that the board needs to lay out the community's financial needs and be very open about what this means. Ideally the board would have a reserve study done - these should have been done periodically all along - so that they can have a solid plan about when things will need to be replaced. It would be interesting to know what South Carolina says about reserves in community associations, if anything. Some states mandate them or at least strongly encourage them.

I wish I were more optimistic about this.

KerryL1 (California)
Posts: 14,550

Posted:

Yes, with Mark, this is an excellent example of a situation where you need to hold a well-publicized Town Hall to educate and explain the absolute necessity to raise dues and to, probably, have a special assessment. You'll need handouts. Imo, and having ben trough similar situations as a bad member, your fellow owner will be more persuaded if an expert of some sort speaks to them.

It sounds as if your HOA has no reserves study done by a professional? If you don't have a reserves special or analyst, your HOA needs one to prepare a study. that person would be ideal to present information to owners on this topic and your dilemma.

KerryL1 (California)
Posts: 14,550

Posted:

I see Cathy & I crossed, and that we're basically on the same page.

JohnC46 (South Carolina)
Posts: 14,265

Posted:

Chris

While I do not know what your docs say, in our SC Association our BOD can raise the dues as much as they want. There is a procedure to follow, but no limit on how much.

KerryL1 (California)
Posts: 14,550

Posted:

I thought I saw replies by Cathy & by me--2 minutes apart-- but they're now gone?

KerryL1 (California)
Posts: 14,550

Posted:

It's Ok, I see 'em now.

CathyA3 (Ohio)
Posts: 6,299

Posted:

Quote:

Posted By KerryL1 on 12/04/2023 12:03 PM
I thought I saw replies by Cathy & by me--2 minutes apart-- but they're now gone?

I just added another reply and yes, it's gone. Maybe they hit at the same time and the site had the vapors.

SheliaH (Indiana)
Posts: 6,964

Posted:

No issues with what's been suggested. Start with Mark's suggestion for a town hall/come to Jesus meeting and lay out the information and the numbers - sometimes people won't believe anything you say until they can review it on paper (and yes, some people still won't read, thus deserving whatever they get!) You may also throw assorted news articles on the Surfside disaster and its underlying causes (starting with homeowners balking at not paying the assessments needed and board members who just kicked the can down the road for someone else to deal with). We know how that ended.

Oh, and can't forget association master insurance - those premiums are increasing all over the country, and what do you think yours will do if they find out you have no reserves whatsoever? The association risks even higher premiums or being dropped altogether and have trouble finding someone else to cover the common areas, and then the homeowners might be looking at more special assessments in the coming years (that may already be the case, they just haven't been told or accepted it yet).

This will cost money, any way you slice it, and the homeowners may as well own up to that fact. If you get a loan, assessments will have to cover operating expenses (the stuff you pay every month), reserves (which you'll have to establish whether you want to or not), and the loan payment (including the interest that goes with it). If they do a special assessment, that'll have to be paid in addition to current assessments - a pain in the ass, but if they'd planned for the future years ago, they might not be in this situation. It's like people who don't plan for retirement - they end up working longer, even though they don't want to or really can't do it because their health isn't what it used to be, but they have no choice.

It may be best for the community to do a special assessment to get the tougher repairs addressed first, so a general contractor may be able to help with prioritizing them - I'd focus on the ones that can impact the health and safety of the community the most. If your documents state assessments can only be increased by the board for a maximum amount without a homeowner vote, call for the homeowner vote, perhaps suggesting they approve increases of, say 15% every year for the next 5 years and then you can see where you are. In the midst of this, you'll also need a reserve study so you can see how much you need to save over the next 20-30 years.

Good luck to you and strap in - saying this is a tough situation is putting it mildly.

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

JohnC46 (South Carolina)
Posts: 14,265

Posted:

Quote:

Posted By SheliaH on 12/04/2023 1:46 PM
No issues with what's been suggested. Start with Mark's suggestion for a town hall/come to Jesus meeting and lay out the information and the numbers - sometimes people won't believe anything you say until they can review it on paper (and yes, some people still won't read, thus deserving whatever they get!) You may also throw assorted news articles on the Surfside disaster and its underlying causes (starting with homeowners balking at not paying the assessments needed and board members who just kicked the can down the road for someone else to deal with). We know how that ended.

Oh, and can't forget association master insurance - those premiums are increasing all over the country, and what do you think yours will do if they find out you have no reserves whatsoever? The association risks even higher premiums or being dropped altogether and have trouble finding someone else to cover the common areas, and then the homeowners might be looking at more special assessments in the coming years (that may already be the case, they just haven't been told or accepted it yet).

This will cost money, any way you slice it, and the homeowners may as well own up to that fact. If you get a loan, assessments will have to cover operating expenses (the stuff you pay every month), reserves (which you'll have to establish whether you want to or not), and the loan payment (including the interest that goes with it). If they do a special assessment, that'll have to be paid in addition to current assessments - a pain in the ass, but if they'd planned for the future years ago, they might not be in this situation. It's like people who don't plan for retirement - they end up working longer, even though they don't want to or really can't do it because their health isn't what it used to be, but they have no choice.

It may be best for the community to do a special assessment to get the tougher repairs addressed first, so a general contractor may be able to help with prioritizing them - I'd focus on the ones that can impact the health and safety of the community the most. If your documents state assessments can only be increased by the board for a maximum amount without a homeowner vote, call for the homeowner vote, perhaps suggesting they approve increases of, say 15% every year for the next 5 years and then you can see where you are. In the midst of this, you'll also need a reserve study so you can see how much you need to save over the next 20-30 years.

Good luck to you and strap in - saying this is a tough situation is putting it mildly.

Sound advice. Get homeowners to buy into what is needed.

ChrisK12 (South Carolina)
Posts: 23

Posted:

Thank you to everyone for this sound advice. I think we are in a situation where we ha e to leverage the value of our commons areas, clubhouse, etc. into a LOC to pay for these immediate needs. If we wait another year, a $10K problem may become a $50K problem.

MarkM19 (Texas)
Posts: 1,459

Posted:

Chris,
I hate to push back but feel I must here. If you do not have reserves and it appears no extra funds in your operating account to pay for repairs based on the dues currently collected how can your HOA afford to repay a loan? Have you looked at interest rates in today's market? They are going to be very high if the HOA will even qualify. It would be a BIG Red Flag to any lender if a HOA needed funds for a project of this size. Once you show them your books expect the rejection letter.

The old saying goes something like "When you are in a hole to best way out is to stop digging" A loan is a terrible idea and all it will do is lead to more trouble and may make a few happy in the short term.

Not sure if we ever heard if you are on this board but if you are and you are truly here for advice, I suggest you listen. I do not recall anyone saying a Loan is the best idea.

Leaders are not supposed to make everyone happy they are supposed to make hard decisions when needed.

ChrisK12 (South Carolina)
Posts: 23

Posted:

While I hear what you are saying, we have an infrastructure repair that is a necessity (road/drain/pipe). An assessment means that we have to give the members a year to pay the assessment. Right now, the fix is expected to be $10k, but if we wait a year, which the assessment would require, it could, with erosion and wash, turn into a 50K fix. Is your recommendation that we assess the members for 50K, wait a year for them to pay it and then fix it (if the county doesn't force us to fix it sooner) or should we assess for 10K, wait a year and then reassess again if it costs more? At the very least a LOC allows us to fix emergency infrastructure items as needed and then issue an assessment vs. waiting a year. Our management company assures us we would qualify for a LOC.

MarkM19 (Texas)
Posts: 1,459

Posted:

Chris,
So, I will start at the bottom. Your management company got you into this mess. They are paid to guide a board in a forward direction. This should never have gotten to this point if they gave sound advice. Unless they plan on underwriting the loan, they have no idea if it will be approved.

I agree with you that the repairs may need to be made asap. It is time to look at cutting other budget items and moving funds to the repairs in the interim. Without knowing your budget or community hard to tell what cuts need to be made. I would suggest something dramatic. This sends the signal that hey we need to get a handle on this asap. You still need to raise the dues to pay the loan you hope to get so that must happen right away.

I personally think there is lots of people to blame but of them the PMC is the one who should have known better.

ChrisK12 (South Carolina)
Posts: 23

Posted:

Thanks so much. We are new and we've never seen anything quite like it, especially in a neighborhood that is 20 years old. The old management company has been dumped. You're correct, they didn't manage anything other than to take $14k a year in fees and insurance out of our pockets. I don't think there was ever a reserve study, facilities study, maintenance study, etc. done. Sad situation, but it can be saved!

KellyM3 (North Carolina)
Posts: 2,239

Posted:

If the dues payers are resolute in opposition to maintaining infrastructure, then the HOA board will need to respect it and begin a form of decommissioning processing process for amenities that can be removed. While you can't decommission stormwater drainage and street maintenance, you can take hard looks at the pool and clubhouse...however unfortunate.

That said, you need to get pricing on the core work that needs completing in the next five years, then consult a bank on a five-year loan where your cashflow is the collateral for the loan (placing liens on common property to make that property "collateral" can be next to impossible).

Raise monthly dues to the amount of the five year note (or whatever term you choose) so that new revenue supports the monthly payment. Don't obtain a loan with a term that longer than the expected life of the amenity you're repairing.

You're in a terrible situation as HOA situations go.

LoriM15 (Florida)
Posts: 1,009

Posted:

I've mentioned this before, but one of our condo-subassociations was able to get a $1 million loan from the Small Business Administration to pay for their new roofs when they didn't have enough funds in reserve. I found out last night they got a rate of 1.8% for 30 years. That's an incredible deal. You might want to reach out to them for a long-term loan solution if your documents allow you to borrow without owner consent. We also recently opened a line of credit at a local bank. We don't plan on using it, but after the last hurricane and a cash crunch we think it's a good idea to have it available if needed.

ElleN (Idaho)
Posts: 4,420

Posted:

Quote:

Posted By KellyM3 on 12/04/2023 7:43 PM
If the dues payers are resolute in opposition to maintaining infrastructure, then the HOA board will need to respect it and begin a form of decommissioning processing process for amenities that can be removed.

By decommissioning process, I hope what KellyM3 means is: The owners will vote to amend the Declaration so that things like the pool and clubhouse can be ultimately removed/bulldozed/planted over.

I appreciate MarkM19's disparagement of loans. However if there are safety issues (and there seem to be), then IMO a loan/LOC has to stay on the list of options. own hall style meetings, within a board meeting preferably, the sooner the better, will be vital to getting a pulse and deciding if certain amenities can be terminated. These town hall style meetings should lay out the options in bullet-point form. E.g.:

-- Loan/LOC, which will be particularly costly. Being able to get one may not even be possible.

-- Special Assessment (which is going to happen, regardless of whether a loan/LOC happens).

-- Special Assessment may require drastic measures against those who cannot pay.

-- Terminate pool, clubhouse and ____ to reduce the special assessment and/or loan, requiring an owners' vote. Do straw poll at the meeting to see if there's any clue as to whether people will agree to give up certain items.

-- Shutdown pool for a few years, leaving winterized for the entire year.

ElleN (Idaho)
Posts: 4,420

Posted:

Quote:

Posted By LoriM15 on 12/05/2023 7:17 AM
I've mentioned this before, but one of our condo-subassociations was able to get a $1 million loan from the Small Business Administration to pay for their new roofs when they didn't have enough funds in reserve. I found out last night they got a rate of 1.8% for 30 years. That's an incredible deal.

I wonder if this loan was originated a few years ago, when interest rates were rock bottom.

This site and other sites say SBA loan interest rates are running over 10% at this time:

https://www.nerdwallet.com/article/small-business/small-business-loan-rates-fees

MarkM19 (Texas)
Posts: 1,459

Posted:

Lori,
I am with ElleN on this one. The reason why your HOA must have been able to get such a great rate was the market conditions when it was approved and also the Collateral your HOA had to post against the loan as well as ability to repay loan. It does not seem that Chris has the much other than a community that is in disrepair to offer as collateral. The times have also changed rates dramatically. Our HOA has recently renewed many of our reserve CDs at the current rate of .0475% when only a 2 years ago they were less than .005% the only way banks can do that is when they are charging borrowers much more than they are paying depositors. I would expect a ten percent rate at a minimum if one is even available.

LetA (Nevada)
Posts: 2,679

Posted:

Your HOA needs to get their affairs in order. I hope the board has a current D&O policy because you're going to get sued.

One option it to cut your losses with the pool & clubhouse and have them bulldozed. Storm drains and water infrastructure are a must.
You are likely going to have one savvy owner hire a lawyer and sue the board.. It is likely any award may not be paid out to the individual
homeowner, the award judgement would be used to pay for those repairs.

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