Whether your community is a condominium, subdivision, or you live in a cooperative, one of the most important functions of your association is to plan for an execute repairs and maintenance of common elements, areas, or assets. This requires money, which almost always comes solely from the assessment of member homeowners. Proper maintenance and repair in a community requires adequate assessment to realistically meet long-term maintenance duties. Neglect of this duty can end up in the community being in the position of the grasshopper from Aesop who has not prepared for winter.
Michigan Law Regarding Reserves to Fund Major Repairs and Replacement
If you own a condominium, the Michigan Condominium Act contains a weak mandate to fund a reserve account to cover major repairs and maintenance of common elements. MCL 559.205 states that a reserve fund for major repairs and replacement of common elements shall be maintained. The standard that was established in response to Section 205 is a bare 10% of the association’s current annual budget on a non-cumulative basis. While the relevant provision, Rule 511, also mandates that condominium bylaws provide that these minimum standards may prove to be inadequate and that associations should carefully analyze their specific projects to determine if greater amounts should be set aside, the reality is that the exhortation of Rule 511 is often not taken nearly as seriously as it should be. Residential associations must review items that they are responsible for maintaining and must budget prudently and adequately to cover their long-term cost.
If you live in a subdivision with a homeowners association or in a cooperative, the governing documents should be examined to see if any specific standards have been set for reserves or funding of prospective maintenance.
Some Common Hurdles to Adequate Planning for and Funding of Major Repairs and Replacement
There are a number of reasons why Associations often find themselves caught short when it comes time for major repairs. This is common. However, associations should avoid being caught in a situation where a repair or replacement situation gets so advanced that it presents a health or safety issue for the community or that things get to the point where Association inaction affects property values. If conditions get to this point and the association is aware of it, there could be liability issues. Some of the common hurdles to adequate assessment are below:
(1) Pressure to keep assessments low: it sometimes seems that boards consider it a point of pride if they have not raised assessments in a decade. This is troubling. Costs go up and a lack of adequate funding today means a potential crisis tomorrow. Static assessments for a long period of time should reasonably prompt some inquiry from members and prospective purchasers about whether assessments are adequate. Unfortunately, the reality in most communities is that any assessment increase can generate a significant backlash from the membership, many of whom may have little idea about how much maintenance costs, and may have little experience in, or understanding of, the workings of the Association or the community as a whole. Given the controversy that can accompany assessment increases and funding of major projects, there may be an incentive to continue to “pass the buck” or defer such issues.
(2) Lack of institutional continuity: board turn-over can create issues for continuity of planning and knowledge for a community and can lead to a failure to execute on all but immediate or fairly automatic functions.
(3) Distractions caused by personal issues and agendas: boards should be focusing on the work that they are charged with doing under the governing documents and the law. Unfortunately, all too often, we see egos and intra-personal issues become a distraction from Association business and what is best for the community. Toxicity can also come from the membership. At their most extreme, these issues can cause a complete breakdown in the ability of an association to govern the affairs of the community.
(4) Lack of expertise on the board or in management: association boards are made up of lay people who may have little to no experience in maintaining property or long-term financial planning.
Some Ways to Help Overcome the Hurdles
▪ A reserve study is an expert service that provides an analysis of the physical condition of a community and guidance and recommendations regarding planning for funding for adequate maintenance. Residential communities that have major long-term maintenance responsibilities should procure reserve studies and those studies should be updated on a reasonable schedule. The Community Associations Institute (CAI) has established standards for reserve studies that it has termed the National Reserve Study Standards. An explanation of these standards can easily be found and reviewed online.
▪ Standards should be included in governing documents. Governing documents, including rules and policies can encourage planning and adequate assessment by requiring boards to follow specific procedures regarding planning for major projects and requiring the periodic commissioning and funding of reserve studies. HOAs can have more constraints regarding assessment power and the relevant provisions in a declaration of restrictions and any other governing documents should be closely examined.
▪ A skilled and qualified professional manager should be aware of maintenance status issues and should help a community stay on task and be a resource for best practices regarding, among other things, standards for adequate funding. A good manager should help keep communities “plugged in” to the wider world of residential community professionals, including major project funding solutions and options for reserve studies. Managers can also help to maintain institutional continuity as can staggered terms for directors.
▪ Communication and messaging is key. Boards need to balance sensitivity to members’ financial means with realistic messaging regarding prudent care of members’ investments and the actual cost of proper maintenance and repair. Reserve studies should be shared with membership. Long-term planning and adequate funding of maintenance should be a constant theme and discussion of these issues should be part of every annual meeting and should be included in newsletters in an effort to educate members and avoid controversy and potential negative repercussions.
Costs will often be higher without planning and associations should not wait for a crisis to take action to address long-term maintenance issues. While a loan may be a solution for a community that is caught short in some cases, appropriate long-term savings will reduce sticker shock, give a community more options, and result in a healthier community overall. We at Tilchin & Hall, P.C. are here to assist communities in reaching this goal and have many years of experience in these matters. Please reach out to us at (248) 349-6203 or email us using the form below.
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