Assessment Increase Due to Reserve Funding

Started by RichardM29 • 37 replies • 605 views

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RichardM29 (Virginia)
Posts: 43

Posted:

I've just taken over a rather small HOA (16 single family units with no common facilities) that has had no formal budgeting process since inception 35 years ago. There are a number of areas that need to be improved: D&O insurance coverage, proper Registered (in my state, Maryland "Resident") agent, plus regular budget amounts (heretofore lacking) covering tree maintenance, an emergency fund, etc. It appears for at least the next three years, these increases can be covered with a 3% increase in our annual assessment.

Our Bylaws allow annual increases of 5% or less purely through Board actions rather than homeowner votes.

On top of these operational budget increases, our state requires our Reserve accounts to be funded. Although required since the beginning of 2023, the HOA had previously ignored the law. I am now in the position of implementing this, and to properly fund our Reserves, a further increase of the assessment amounting to ~17% is needed.

Taken together the previous annual assessment will go up about 21% effective 1 Jan 2024.

There are those in the community who say a vote of homeowners is required because the 21% exceeds the BOD authority to raise it by no more than 5%. I say the raise consists of two components: a BOD directed increase of 3%, and a state law directed increase of ~20% to fund Reserve Accounts. Homeowner voting is not required.

Is this correct? Were homeowners to vote and reject the increase, they would be putting the HOA on record as not complying with State Law.

LoriM15 (Florida)
Posts: 1,009

Posted:

I don't know the state statues in Maryland. But it appears to me that if you add the 17% increase for reserves to the other "normal" increase, you are overstepping your authority to raise assessments. On paper they are separate increases to the monthly assessment, but in fact you're increasing the monthly assessment and just allocating to different accounts.

What do your documents say about special assessments? If they are allowed and don't require a vote of the members, you would be better off do a separate special assessment for the reserves.

CathyA3 (Ohio)
Posts: 6,299

Posted:

I'm not a lawyer, but I don't remember ever seeing the assessment increase broken into the components like that, although you're correct that one component is state mandated.

The regulars around here have heard my rants a number of times, so they can skip the next bullet pointd, but two of those rants are:

* Lawmakers never think about how the laws will play out over time, or look for inconsistencies.

* Requiring a homeowner vote for assessment increases is a license to commit financial suicide, and it irks me no end to see laws like this labeled as "consumer protection". In states that impose limits on the amount of assessment increases, associations that fail to increase their assessments to proper levels can dig themselves into a financial hole that they won't be able to climb back out of.

FWIW, you're not alone. Inflation has exceeded many of the allowable assessment increases that are spelled out in the various laws, so I think most communities are facing the same issues whether they know it or not.

Unfortunately, I think the board needs to be prepared to convince homeowners. Lay out all of the budget items, show how much costs have gone up - and when they want to hold the line on the assessment increases, ask which services they want to be cut (eg. limit pool or clubhouse hours). Too many people engage in magical thinking when it comes to money, and your job is to make that impossible.

ElleN (Idaho)
Posts: 4,420

Posted:

Quote:

Posted By RichardM29 on 01/25/2024 7:13 AM
It appears for at least the next three years, these increases can be covered with a 3% increase in our annual assessment.

Our Bylaws allow annual increases of 5% or less purely through Board actions rather than homeowner votes.

On top of these operational budget increases, our state requires our Reserve accounts to be funded. Although required since the beginning of 2023, the HOA had previously ignored the law. I am now in the position of implementing this, and to properly fund our Reserves, a further increase of the assessment amounting to ~17% is needed.

Taken together the previous annual assessment will go up about 21% effective 1 Jan 2024.

There are those in the community who say a vote of homeowners is required because the 21% exceeds the BOD authority to raise it by no more than 5%. I say the raise consists of two components: a BOD directed increase of 3%, and a state law directed increase of ~20% to fund Reserve Accounts. Homeowner voting is not required.

In my opinion you are mistaken on what the law says, and it matters. Elaboration:

I am going to assume this is a Maryland Condominium subject to the Maryland Condo statute, and having residential owners. If this is wrong, please say so.

The statute sub-sections in question are "MD Code, Real Property, § 11-109.2 Preparation of annual budget," subsections (c), (d) and (e). The subsections on which to focus for the moment are these (underlined emphasis added by me):

Amount of reserves
(c)(1) Subject to paragraph (2) of this subsection, the reserves provided for in the annual budget under subsection (b) of this section for a residential condominium shall be the funding amount recommended in the most recent reserve study completed under § 11-109.4 of this title.

(2) If the most recent reserve study was an initial reserve study, the governing body shall, within 3 fiscal years following the fiscal year in which the initial reserve study was completed, attain the annual reserve funding level recommended in the initial reserve study.

Adoption of budget by council of unit owners
(d)
(1) The budget shall be adopted at an open meeting of the council of unit owners or any other body to which the council of unit owners delegates responsibilities for preparing and adopting the budget.

(2)
(i) The council of unit owners or other governing body of unit owners shall submit the adopted annual budget to the unit owners not more than 30 days after the meeting at which the budget was adopted.

(ii) The adopted annual budget may be submitted to each unit owner by electronic transmission, by posting on the condominium association's home page, or by inclusion in the homeowners association's newsletter.

Expenditures resulting in increase of assessments
(e) Any expenditure made other than those made because of conditions which, if not corrected, could reasonably result in a threat to the health or safety of the unit owners or a significant risk of damage to the condominium, that would result in an increase in an amount of assessments for the current fiscal year of the condominium in excess of 15 percent of the budgeted amount previously adopted, shall be approved by an amendment to the budget adopted at a special meeting, upon not less than 10 days written notice to the council of unit owners.

The Council of Unit Owners is defined in the Condo statute to be all unit owners.

Statute section 11-109, says the Bylaws may delegate powers of the Council of Unit Owners to the Board. Please state what the bylaws say about the Board having the powers you claim with regard to budgeting.

You asked a big legal question. Please be prepared to dig in, read your bylaws carefully and quote them here.

CathyA3 (Ohio)
Posts: 6,299

Posted:

Quote:

Posted By LoriM15 on 01/25/2024 7:38 AM
... snip ...

What do your documents say about special assessments? If they are allowed and don't require a vote of the members, you would be better off do a separate special assessment for the reserves.

Just FYI: Check to see what your state laws say. They may have language stating that the reserve requirement was enacted to eliminate the need for special assessments, or something of that nature. My state's lawmakers were pretty clear that they were beefing up our reserve requirements for that reason. They were sick and tired of listening to their constituents wailing about having to cough up thousands of dollars on fairly short notice.

TimB4 (Tennessee)
Posts: 21,059

Posted:

Richard,

It does appear that MD statute allows such an increase by the Board even with the conflicts in the governing documents.

You need to be fully transparent about this.

Provide copies of the reserve study, the applicable statute requiring funding, the applicable statute allowing the board to increase, a summary of finances showing the numbers.

You also need to explain why the reserves are important with simple examples: x away now every year vs $x,xxx later when the work is to be done.

I would also add that the Boards hands are tied in this action.
Along with providing ways the Board has reduced costs as much as they could.

RichardM29 (Virginia)
Posts: 43

Posted:

Quote:

Posted By LoriM15 on 01/25/2024 7:38 AM
I don't know the state statues in Maryland. But it appears to me that if you add the 17% increase for reserves to the other "normal" increase, you are overstepping your authority to raise assessments. On paper they are separate increases to the monthly assessment, but in fact you're increasing the monthly assessment and just allocating to different accounts.

What do your documents say about special assessments? If they are allowed and don't require a vote of the members, you would be better off do a separate special assessment for the reserves.

The Maryland Statute does not provide for an elective process when it comes to Reserve funding. You determine what the amount is, and you collect it.

A special assessment is a one time cash infusion to deal with an unforeseen expense. In a sense, the Maryland HOA law --- as well as HOA Best Practices --- is designed to avoid the use of special assessments. Reserve funding is collected throughout the life of the HOA.

NA1 (Massachusetts)
Posts: 190

Posted:

Check your bylaws. Ours has some clauses that allow the board to implement changes that would normally require a supermajority if they are needed to remain legal.

ElleN (Idaho)
Posts: 4,420

Posted:

Quote:

Posted By RichardM29 on 01/25/2024 11:19 AM
The Maryland Statute does not provide for an elective process when it comes to Reserve funding.

Oh yes it does.

RichardM29 (Virginia)
Posts: 43

Posted:

One thing I know for sure is that some serious education and outreach will be needed. I've already begun explaining on a chance meet basis what a Reserve Fund is and what the law says. There is little comprehension.

JohnC46 (South Carolina)
Posts: 14,265

Posted:

Richard

Your are trying to pull and end run. I say no matter what you cannot increase dues by me then 5% without owner approval. Raise the dues by 5 for the next few years and it should work out.

RichardM29 (Virginia)
Posts: 43

Posted:

"In my opinion you are mistaken on what the law says, and it matters. Elaboration:

I am going to assume this is a Maryland Condominium subject to the Maryland Condo statute, and having residential owners. If this is wrong, please say so."

Yes, you are wrong. This, as I stated in the question, is a 16 unit individual residence HOA. Title 11B applies.

NA1 (Massachusetts)
Posts: 190

Posted:

Quote:

Posted By RichardM29 on 01/25/2024 11:37 AM
One thing I know for sure is that some serious education and outreach will be needed. I've already begun explaining on a chance meet basis what a Reserve Fund is and what the law says. There is little comprehension.

If its like ours, most will get it. A few may not and then it usually comes down to trust.

We had the person who did the reserve analysis come in to present it and explain, and made sure we could handle follow up questions ourselves. It worked pretty well.

RichardM29 (Virginia)
Posts: 43

Posted:

Quote:

Posted By ElleN on 01/25/2024 11:31 AM

Posted By RichardM29 on 01/25/2024 11:19 AM
The Maryland Statute does not provide for an elective process when it comes to Reserve funding.

Oh yes it does.

I would be grateful for a reference, hopefully in the Maryland statute that applies, Title 11b.

ElleN (Idaho)
Posts: 4,420

Posted:

Quote:

Posted By RichardM29 on 01/25/2024 11:44 AM

Posted By ElleN on 01/25/2024 11:31 AM

Posted By RichardM29 on 01/25/2024 11:19 AM
The Maryland Statute does not provide for an elective process when it comes to Reserve funding.

Oh yes it does.

I would be grateful for a reference, hopefully in the Maryland statute that applies, Title 11b.

I quoted it word for word in a post above. I underlined certain parts on which one should focus. I asked what your bylaws say on certain subjects.

You do know what the "Council of Unit Owners" is, right? You do understand that this is not synonymous with the "board," right?

RichardM29 (Virginia)
Posts: 43

Posted:

Quote:

Posted By JohnC46 on 01/25/2024 11:39 AM
Richard

Your are trying to pull and end run. I say no matter what you cannot increase dues by me then 5% without owner approval. Raise the dues by 5 for the next few years and it should work out.

I'm trying to comply with the Maryland law, which says HOAs must fund their Reserves. How is that an end run?

ChristineS7 (Minnesota)
Posts: 58

Posted:

I empathize with you because you have two separate issues to deal with, dues and reserve funds. Is it possible to increase the dues by 5% and then assess each unit a few thousand dollars to start funding your reserve account. In Minnesota and certain % of our dues has to go into our reserve account. We have had to increase our dues by about 20% the last 2 years because of inflation. It seems as though your governing documents might need to be changed if they specifically that you cannot raise the dues over 5%. When your governing documents were written I suspect no one was thinking about a pandemic that would change worldwide inflation rates.

RichardM29 (Virginia)
Posts: 43

Posted:

You understand Maryland has a law, Title 11 that applies to CONDOMINIUMS, and one that applies to HOA's Title 11b, right?

And no, I have no idea what a "Council of Unit Owner's" is.

If you can locate and quote the law requiring HOA members to vote to fund a Reserve Fund in Maryland, I remain open to reading and reviewing. I don't care what condo people need to do.

ElleN (Idaho)
Posts: 4,420

Posted:

Quote:

Posted By RichardM29 on 01/25/2024 7:13 AM
I've just taken over a rather small HOA (16 single family units with no common facilities)

To repeat my earlier questions about what this association is:

Is this a condominium?

I ask because in my experience, "units" normally refers to units within a condominium, and not say a subdivision's single family homes.

ElleN (Idaho)
Posts: 4,420

Posted:

Quote:

Posted By RichardM29 on 01/25/2024 11:43 AM
"In my opinion you are mistaken on what the law says, and it matters. Elaboration:

I am going to assume this is a Maryland Condominium subject to the Maryland Condo statute, and having residential owners. If this is wrong, please say so."

Yes, you are wrong. This, as I stated in the question, is a 16 unit individual residence HOA. Title 11B applies.

Strike my last post. I will speak to 11B in a minute or so.

RichardM29 (Virginia)
Posts: 43

Posted:

Thanks for your input.

We can raise dues more than 5% with a 2/3 vote of the lot owners. I know all of them well. Given an opportunity to vote to increase their assessment by 20%, we could not muster 2/3.

Despite what others have said, there is nothing in the Maryland HOA law making Reserve funding optional. You must do it.

We have a "Savings Account" that will be used for the initial deposits in each component Reserve sub-account. I am hoping to reveal all the elements causing the change, educational meetings, etc. between mid Feb and June 1. The changes won't go into effect until 1 Jan 2025.

ElleN (Idaho)
Posts: 4,420

Posted:

From 11B-112.2:

Amount of reserves
(d)
(1) Subject to paragraph (2) of this subsection, reserves provided for in the annual budget under subsection (c) of this section shall be the funding amount recommended in the most recent reserve study completed under § 11B-112.3 of this title.

(2) If the most recent reserve study was an initial reserve study, the governing body shall, within 3 fiscal years following the fiscal year in which the initial reserve study was completed, attain the annual reserve funding level recommended in the initial reserve study.

Adoption of budget
(e)
(1) The budget shall be adopted at an open meeting of the homeowners association or any other body to which the homeowners association delegates responsibilities for preparing and adopting the budget.
(2)
(i) The board of directors or other governing body of a homeowners association shall submit the adopted annual budget to the lot owners not more than 30 days after the meeting at which the budget was adopted.
(ii) The adopted annual budget may be submitted to each lot owner by electronic transmission, by posting on the homeowners association's home page, or by inclusion in the homeowners association's newsletter.
(3)
(i) Notice of the meeting at which the proposed budget will be considered shall be sent to each lot owner.
(ii) Notice under subparagraph (i) of this paragraph may be sent by electronic transmission, by posting on the homeowners association's home page, or by including the notice in the homeowners association's newsletter.

Expenditures requiring approval
(f) Except for an expenditure made by the homeowners association because of a condition that, if not corrected, could reasonably result in a threat to the health or safety of the lot owners or a significant risk of damage to the development, any expenditure that would result in an increase in an amount of assessments for the current fiscal year of the homeowners association in excess of 15% of the budgeted amount previously adopted shall be approved by an amendment to the budget adopted at a special meeting for which not less than 10 days' written notice or notice by electronic transmission shall be provided to the lot owners.

Obligation of homeowners association for expenditures
(g) The adoption of a budget does not impair the authority of the homeowners association to obligate the homeowners association for expenditures for any purpose consistent with any provision of this title.

ElleN (Idaho)
Posts: 4,420

Posted:

Quote:

Posted By ElleN on 01/25/2024 12:11 PM
From 11B-112.2: [snippage]
Adoption of budget
(e)
(1) The budget shall be adopted at an open meeting of the homeowners association or any other body to which the homeowners association delegates responsibilities for preparing and adopting the budget.

What exactly do your HOA's bylaws say about who adopts the budget?

DouglasK1 (Florida)
Posts: 2,046

Posted:

So quick question, did you have a professional reserve study done or are you determining "required reserves" by some other method?

Escaped former treasurer and director of a self managed association.

ElleN (Idaho)
Posts: 4,420

Posted:

Quote:

Posted By RichardM29 on 01/25/2024 7:13 AM
There are those in the community who say a vote of homeowners is required because the 21% exceeds the BOD authority to raise it by no more than 5%. I say the raise consists of two components: a BOD directed increase of 3%, and a state law directed increase of ~20% to fund Reserve Accounts. Homeowner voting is not required.

Is this correct?

Short Answer
For that part of the assessment increase pertaining to funding reserves, I agree no owners' vote is required.

Long Answer
I think this is the most relevant part of the Md HOA statute:

(2) The governing body of a homeowners association has the authority to increase an assessment levied to cover the reserve funding amount required under § 11B-112.3 of this title, notwithstanding any provision of the declaration, articles of incorporation, or bylaws restricting assessment increases or capping the assessment that may be levied in a fiscal year.

See Md statute section § 11B-117. "Responsibility of lot owners for assessments, charges, and liens."

My conclusion is that, without a vote of the owners, a Md HOA board can increase the assessment any amount it desires as long as the increase is for the purpose of achieving "the estimated annual reserve amount necessary to accomplish any identified future repair or replacement" (from 11B-112.3).

RichardM29 (Virginia)
Posts: 43

Posted:

Thanks

DeanJ
Posts: 1,786

Posted:

Quote:

Posted By RichardM29 on 01/25/2024 7:13 AM
I've just taken over a rather small HOA (16 single family units with no common facilities) that has had no formal budgeting process since inception 35 years ago. There are a number of areas that need to be improved: D&O insurance coverage, proper Registered (in my state, Maryland "Resident") agent, plus regular budget amounts (heretofore lacking) covering tree maintenance, an emergency fund, etc. It appears for at least the next three years, these increases can be covered with a 3% increase in our annual assessment.

Our Bylaws allow annual increases of 5% or less purely through Board actions rather than homeowner votes.

On top of these operational budget increases, our state requires our Reserve accounts to be funded. Although required since the beginning of 2023, the HOA had previously ignored the law. I am now in the position of implementing this, and to properly fund our Reserves, a further increase of the assessment amounting to ~17% is needed.

Taken together the previous annual assessment will go up about 21% effective 1 Jan 2024.

There are those in the community who say a vote of homeowners is required because the 21% exceeds the BOD authority to raise it by no more than 5%. I say the raise consists of two components: a BOD directed increase of 3%, and a state law directed increase of ~20% to fund Reserve Accounts. Homeowner voting is not required.

Is this correct? Were homeowners to vote and reject the increase, they would be putting the HOA on record as not complying with State Law.

Does your declaration provide your board the authority to pass an emergency assessment without owner approval?

RichardM29 (Virginia)
Posts: 43

Posted:

No.

As far as "what should be done," I agree that trying to recoup the past differential, which spans a number of years, is not worth pursuing. The point now is to get things normalized, and the best way to go about it.

Unfortunately, this cannot be an arms length sanitized legal process. This problem nests among 15 lot owners whose ownership goes back 20 and 30 years. The current BOD/Officer lineup includes those who participated om -- and still support --- the original sin. My friend, in raising this issue, is looked on as a troublemaker. We can't see how hiring an attorney is a cost effective way to go. Only one or two homeowners would be plaintiffs, and calculating damages would be problematic.

We both believe the only solution is to get someone in the Attorney General's office interested in the violation. My friend is hoping to find a way to do this without becoming the outfront poster child for the action. After all is said and done, he still plans to live in that community for many more years.

ElleN (Idaho)
Posts: 4,420

Posted:

Contact the Maryland AG's office via the hotline number at the Md HOA site below. Ask if anonymity is possible. I doubt it, but one can only ask.

If an owner fears retaliation, explain this to the AG and see what sort of protection the AG's office can offer.

https://marylandhomeownersassociation.org/problem-solution/

JoeN6 (Virginia)
Posts: 94

Posted:

The hoa has no common facilities , what common properties does need to be maintained ? Is there a road that must be maintained , snow plowing ?

DeanJ
Posts: 1,786

Posted:

Quote:

The only way your proposal will work out is inflation zero or negative.

RichardM29 (Virginia)
Posts: 43

Posted:

Good advice.

RichardM29 (Virginia)
Posts: 43

Posted:

We have asphalt, streetlights, fencing, well pumps, mailbox clusters, plus more.

RichardM29 (Virginia)
Posts: 43

Posted:

As was pointed out earlier in the thread, Maryland Title 11b, the Maryland Homeowner's Association Act, specifically authorizes HOA's to raise assessments to fund Reserves without a homeowner vote. If you would like to get smarter on this issue, I can provide some links, or you could try Google.

It really has nothing whatsoever with inflation.

DeanJ
Posts: 1,786

Posted:

Quote:

Posted By RichardM29 on 01/27/2024 11:05 AM
As was pointed out earlier in the thread, Maryland Title 11b, the Maryland Homeowner's Association Act, specifically authorizes HOA's to raise assessments to fund Reserves without a homeowner vote. If you would like to get smarter on this issue, I can provide some links, or you could try Google.

It really has nothing whatsoever with inflation.

If the law overrides the declaration, pass the increase and drive on. Yes, inflation is a factor the rate of the funding increase is not sufficient to compensate for the rate of inflation increase. In other words, increasing your reserve fund 2.5% a year is fools errand when inflation is 3% a year.

CathyA3 (Ohio)
Posts: 6,299

Posted:

Quote:

The law may not specifically mention inflation, but it is a fundamental piece of the calculations in a reserve study. The persons doing the study look at the reserve components, estimate remaining useful life of each, look at current replacement costs, and then project future costs with estimates of how inflation will play out. Our last study broke it down with different projections based on different inflation rates. The study also estimated that inflation would eventually revert to the norm of around 2-3%, which I think is a common assumption - but we've been nowhere near that for the past few years (which means many communities' reserve projections are too low).

JohnC46 (South Carolina)
Posts: 14,265

Posted:

Quote:

Posted By DeanJ on 01/27/2024 8:37 AM

The only way your proposal will work out is inflation zero or negative.

With a 5% increase each year, the dues will be doubled in about 12-13 years. The present COL is increasing about 3% per year which says in about 20 years expenses will double. I say 5% per year, every year you will not only stay ahead but you will be able to build your reserves. This does assume no big cost items jump up and bite you.

RichardM29 (Virginia)
Posts: 43

Posted:

That is one approach. Unfortunately, the Maryland law governing Reserve Studies doesn't give one much flexibili9ty. The study is completed, the reserve amounts to be accumulated by a certain date identified, and then the HOA has three years to establish the funding stream that will deliver the required funds by the required date. I suppose the three year ramp up is to give time for homeowners who don't want to pay for Reserves time to sell.

In our case, an annual 5% increase won't deliver the funds when they are needed. Every case will differ based on the values and the timeline.

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