040 | When State Laws Make Leading An HOA Challenging

Melissa Garcia: 0:00

If you're doing that, and you're getting all that information ahead of time and and getting people on board, then you can do sort of a two step thing, which is okay, right now in front of us, we need to amend the budget to increase it over the 5% cap, and then it's already in their minds so that you can then delete or amend the documents to get rid of that cap. And it's already you've already reached momentum with the homeowners. If you are able to persuade them initially that you know, this this this cap is, is it doesn't work.

Announcer: HOA Insights: 0:35

Common Sense for Common Areas exists to help all 2 million volunteer board members nationwide have the right information at the right time to make the right decisions for their future. This podcast is sponsored by four companies. They care about board members, association insights and marketplace, association reserves, community financials, and Kevin Davis Insurance Services. You'll find links to their websites and social media in the show notes.

Robert Nordlund: 1:06

Hi, I'm Robert Nordlund of Association Reserves. And I'm

Kevin Davis: 1:09

Kevin Davis of Kevin Davis Insurance Services. And this is HOA Insights where we promote common sense for common

Robert Nordlund: 1:15

areas. Well, welcome to episode number 40, where we'll be speaking with insurance expert and regular co host Kevin Davis to talk about the challenges you face when your governing documents or the law restricts your ability to lead. But before we get going, I want to encourage you to check out episode number 39, which was a fascinating conversation with a gentleman who was both a board hero and a subject matter expert, where we talk about special assessment success how their special assessment had fixed a safety problem and boosted property values. While the catch prior episodes you can listen from our podcast website, which is www.HOAinsights.org. Watch the podcast from our YouTube channel. And to avoid missing any episodes, subscribe to this podcast on any of the more popular podcast platforms. And if you have a hot topic a crazy story or a question you'd like us to address in an upcoming episode, we'd love to hear from you. Leave us a voicemail message at 805-203-3130 or send us an email at podcast@reservestudy.com So Kevin for this episode, we had a Colorado listeners share the following challenge that I thought might be representative of what many boards face question is, what should the board do when they know they need to increase their budget to offset inflation and fund reserves. Yet their bylaws require homeowner approval on any increase over 5%. And I thought that was going to be interesting dynamic between what they're responsible to do their decision point, the restrictions that they live within anyway. They say they don't have enough money in reserves. They're not setting aside 10% of their budget towards reserves to satisfy the FHA, Fannie Mae and Freddie Mac requirements. And they're barely keeping up with inflation. While to this type of challenge, we thought we'd get an expert answer so we have a special treat for you today. We reached out to Melissa Garcia noted attorney with the Altitude Community Law firm with multiple locations throughout Colorado and you can get in touch with Melissa or one of their other attorneys at altitude.law So Melissa, welcome to the program.

Melissa Garcia: 3:28

Thank you for having me. Obviously, I love these kinds of things and and being able to communicating whatever kind of best practices we can communicate to whoever is willing to listen. So thank you for having me. So

Robert Nordlund: 3:42

what can we what kind of advice can we give to this board member who's kind of stuck between governing documents that limit their assessment increases? And knowing that just inflation is eating them up? So how are they catch up?

Unknown: 3:57

It's not even just inflation. In Colorado, we are we are hit with a lot of things. We have insurance costs that are skyrocketing. That was kind of out of left field. We have a legislation that was passed a couple of years ago, that has necessitated increased costs for collections and enforcement. So there's there's a lot and of course we've got the tail end of COVID people are still recovering that so there there's a lot that's happening that's kind of caught boards off guard and made something that wasn't really a an urgent issue. And I think that's one of the problems right there is not seeing reserves or not seeing funding proactively as an urgent issue. And it's caught him off guard. So yeah, there's there's a lot of problems and that the issue that you raised the 5% cap, sometimes we'll see a 3% cap, sometimes a 10% cap. It is common in a lot of the older governing documents in Colorado, what is called a maximum annual assessment. So every year you get something. And so unfortunately, if you're looking at how to raise the budget, and you've got this cap, there's really instead of how to maybe fund your, you know, coffers some other way, but actually how to increase the budget with with this cap, there's really only in my mind two ways of doing this mean one, which is get rid of the cap. And we'll talk a little bit about about that the amending of the governing documents to get rid of the cap. But I think the better way and the techniques used for this better way is to actually convince the members, which is convincing the community to, to approve the increase over that 5%. And if you're doing that, and you're getting all that information ahead of time, and, and getting people on board, educating them and everything, then you can do sort of a two step thing, which is okay, right now in front of us, we need to amend the budget to increase it over the 5%. Cap, we'll we'll talk about why. And then it's already in their minds so that you can then delete or amend the documents to get rid of that cap. And it's already you've already reached momentum with the homeowners, if you are able to persuade them initially, that, you know, this this this cap is, is it doesn't work

Robert Nordlund: 6:24

in the best interest of the association. Right? So I think

Melissa Garcia: 6:28

on the front end, when you're trying to convince it, here's where I see a lot of boards go, you know, don't go down the right path, they essentially just go to the annual meeting. And they say we need an increase in the budget. And this is how much and this is why. And there's not really as much preparation ahead of time to get get all the homeowners to understand and why we need this. There's not a lot of education, they don't maybe have the numbers in place. specific numbers, not just here's what we have in the budget for next year. This is why we need it. The numbers of well, why why do you need it? And why is this happening now? Why do we have these insurance increases? Why do we have these collections increases? And I think the other thing that you can do prior to that annual meeting, which is typically where you would get the budget increased, is prepare that over communicate prior to that meeting, and hear it you know, educate them, tell them why this is what we're going to be doing at the annual meeting. And this is we want you prepared, and we want you to come with questions. Here's the long term impact if we don't increase the budget, now, here's the short term impact. You know, here's what some of the consequences that are going to happen, we're gonna have to get rid of services, we're going to have the rural falling down, whatever it is, have all that information ready. But also, there's always neighborhood naysayers. I mean, that's just that's just typical, right? Be ready for whatever their concerns are, I mean, the last thing you want is somebody to sort of pull the rug from underneath you, because you can't address that very specific concern that's obviously going to come up at the annual meeting. So a lot of proactive education. Another thing too, is, I think the the problem I sometimes see is how it's presented to the homeowners, you need to have that right communicator, the good communicator is able to sway and to influence and to speak at the level of, of those who aren't on the floor. So they can explain everything. So it doesn't look like you know, you're hiding behind the skirts of an attorney. Maybe if you have an attorney, it's going to come at it sometimes it's a great thing. Sometimes it's a bad thing. So I think it depends on the community. Also, just getting the um, homeowners involved early on. Maybe there's a there's a taskforce about some of these issues with finances. And maybe you have if you if you get others involved, so it's not just that board. And there's this, you know, there's this invisible wall that comes up in front of the board. It's not us against them, you get more people involved, their eyes are opened, and all sudden they have more ownership about the decision making processes moving forward, and they can communicate with you. I think it's really important to just have all your ducks in a row and just get as many people involved as possible. So people aren't getting hit from left field.

Robert Nordlund: 9:30

Right. It's not the it's not board versus the homeowners, you can get allies and it's good to have those

Melissa Garcia: 9:35

reaction. It's a knee jerk reaction if you don't do that. So and then on the other piece, if you know, just amending this type of cap is just it just doesn't work today. It just doesn't you never know what's going to hit you. Regardless of inflation. Just you just never know what's going to hit you. The best way to do it is to after if you're able to get them to increase it over a 5% then a min The documents, which sometimes it's a high percentage, and I know in other states, but here, it can't be any higher than 67% of the entire community, it can't be any lower than 51%. But you will mend it in a way that doesn't just increase the cap, because that just prolongs the problem, you amend it so that you change the process. And we have a lovely thing called the veto process here, that is applicable to all the newer communities, but not the older ones. So the older ones have the caps, if you amend to get rid of that cap, and just say, here's the budget, we're going to prove, I mean, propose it to you every year, and then you come and you have the opportunity to veto that budget, that's very different than having to get approval, because then it becomes a two way street. And board's hands are tied, because it can't get people to show up at the meeting to approve a budget instead, it's a you know, show up if you if you care about the community, and you have a voice, and you can veto it, if you think you know, we're out of our minds. With this interesting. There's still yes and balances. Yes, yes, yes, yes.

Robert Nordlund: 11:07

Right. Well, fantastic. What I heard you talking about was, don't just walk into the annual meeting and bracing for the homeowners to say vote for their pocketbooks and just say, well, given a choice of a little bit more, a little bit less, I vote for a little bit less. Because that's, you know what the answer that question is, so prepare, build consensus, educate in advance, maybe get your emissaries out there, when they're walking in the hallways, walking their dogs, playing tennis, whatever, touching other people and building a momentum to the idea that yeah, we need to do this at our association. And then yes, you have to eliminate the problem by amending the requirement. So good stuff. Yes,

Melissa Garcia: 11:53

yes, yes. I mean, I think there's, unfortunately, and I touched on this, in the beginning, it's not an urgent issue, until it becomes an urgent issue. It's sorta like if you don't draft a will, because you don't think you're ever gonna die, you know, you don't take care of that it doesn't. And then all of a sudden, you know, you're in the hospital. So it's the same thing. And I think more and more these days, the decisions that boards make are being scrutinized more, and I think the ones that hit the pocketbook are scrutinized the most. And so those are the ones where you really want to over communicate and and know who the person on the board or in your, you know, a committee person, whomever it is, that has that way of communicating, because you can have two people say the same thing in an annual meeting, or write the same newsletter, and it's going to come out differently. So know who that is. I think that's more important than then than many things. It's hard when you're on the board, because you're often on the defense, you know, and you're often you what's the what's the phrase about the deer in the headlights, right. And unfortunately, because of that invisible wall, any chance you can do to break down that wall, it's going to happen through communication. Otherwise, you're going to get that knee jerk reaction that you only want more money, because it's something you want. It's not going to help the community in general, even though the board might have spent, you know, 20 hours going over how can we do this? What's the most feasible option? What what's going to impact the greatest with the least amount of, you know, effort, if you don't communicate that, unfortunately, there's apathy and communities and so they don't really a lot of members don't attend board meetings. So you don't have that opportunity because they don't remember the board means the only company annual meeting, really Defy. So throughout the year, proactive communication, flushing, you know, maybe strategic planning every single year, at the beginning of the year, saying this is what we need to do. By the time we get to November or October, December to discuss the annual meeting for next year. Guess what, everybody's not even, it's not even going to be an issue. Everybody will know. So a lot of

Robert Nordlund: 14:13

status points throughout the year. Yeah, making it ongoing. This is this is how we are doing at our community. It's not the board versus the homeowners. It's Our Community. You've heard about inflation. You've heard about insurance, your personal insurance is going up whatever it is, I think board members often think of their role as running the association. And not in this case. They need to be salesman, a salesman and someone like you say someone has the best salesman voice salesman hat. Maybe that's the board member who's at the door welcoming people to the Annual Meeting someone that that friendly face or committee person or the manager someone on the team, but yeah, you need to stack your ducks.

Melissa Garcia: 14:57

Wedding spurts Yeah, yeah. And also just use your experts. So you don't have to go out and be an attorney or an accountant or reserve study specialist or anyone if you're on the board. But you should be asking those questions from everyone. So you have the data, if it if it makes sense, have those experts at your meeting a lot of times that me that's their that's their bailiwick there are going to be up there with the presentations of why if you don't increase it here, all the bad things are going to happen. So I mean, that that comes out of the experts mouth better. So sometimes you it makes sense to bring your experts to the annual meeting or let them have a q&a session, whatever it is, I think the other thing too, and this is more of a last resort, if you can't get an amendment or you can't get that budget increased, that it's still I mean, you could do it incrementally just tried it, you know, unfortunately, you're probably going to have to cut services here or something. But But, but you'll get to it at some point. One last point I we didn't really talk about ZZ consequences, but also just what's on everybody's mind is when they're selling their units, you want to be able to, you know, maximize property values. And here's how you do it. And this is one way even though it might be hitting you in the pocket right now, guess what, this is going to be very favorable for you if you're trying to refi or sell. You know, I mean, those are the things that they should concentrate on as well. So, yeah,

Robert Nordlund: 16:26

those are the sales watch. Well, Melissa, it's been fantastic. To everyone listening, this is exactly the value of having an expert on your side. So Melissa, we look forward to have you back on the program at a future point in time. And thank you again for your time here today. Thank you so much for our we'll be right back after a quick break to hear from one of our sponsors.

Russell Munz: 16:44

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Robert Nordlund: 17:16

And we're back. So Kevin, what struck you about Melissa's response?

Kevin Davis: 17:21

Yeah, I'm glad you asked that she first of all, she did a great job and talking about some of the things that need to be done, especially the education part of it a and she has great solutions. The thing is for me is that when you talk about needing to raise assessments, or needing to increase the budget is different than must, you know, it's interest responsibility to enforce the documents, right, there is their responsibility to do to handle the financial situation. And to maintain the common area. That's their job to do, they have to make decisions about that. We talk about the budget and impacts to them to finances, and it impacts the maintenance of the association. So when they fail to do that, when they fail to do to make the proper choices, they have to make an informed decision. At the end of the day, when they make that informed decision. It stops them from really getting in trouble. Because it's about breach of fiduciary duty. That's the key word that that listen to it and talk about is their duty to make sure the budget is handled correctly. You know, costs have increased, Robert, I'm paying more money, you're paying more money. The difference is, is that I can't say that I'm not gonna pay my electric bill. You know, I'm not gonna pay my insurance bill, I got to figure out a way to pay it the associations must figure it the same thing out,

Robert Nordlund: 18:43

they have to do it. I like that you got to figure out a way. I guess what this, the Colorado listener was talking about was almost an excuse to raise their hands and surrender. Is that okay? Is that my excuse for not doing what I'm supposed to do? And I think what Melissa talked about was, you've got to just double down and work hard. You you can't use an excuse that well, the homeowners didn't want it. Well, that just means you didn't try enough as a board member is that? Is that fair?

Kevin Davis: 19:16

Exactly. No decision is a decision. kicking the can down the road is a decision passing a buck and put your hands up is a decision. And boards have to understand that that is a decision and that decision come back and haunt them again. When that word breach of fiduciary duty because it's their responsibility to handle the finances. They must do it. They'll have a choice. Yeah, okay. When

Robert Nordlund: 19:40

I don't have a choice. I am up late. I am up early. I don't sleep well. I may miss for me. I may miss a meal. Because I'm trying to figure it out. And I think that's maybe what we're trying to encourage board members share that. Sometimes your job your job does get challenging if you have constraints, because if you just let it go, then you just have a bigger problem next year. So how can we convene a town hall meeting? How can we convince the board members of what we actually mean not the board members, the homeowner. So what we know, we know it has to happen. That's why we're willing to put our money into this to where we're raised, ready to raise our assessments? We, we think it's such a strong idea, do you get that sense of urgency? Exactly.

Kevin Davis: 20:27

And that's the key word there. Because again, if your insurance goes up, and your lecture goes up, and mowed, the grass, like UPS goes up, you talk to your wife, you sit down, and you communicate and say, This is what we have to do, we may have to cut back, we may have to say, well, we can't have cable anymore. But you have to make decisions together the same thing that the board has to do. And the more urgency that you just mentioned that word urgency or urgency it is, the tougher the conversations are a tough decision you got to make, but like you and your wife will make those kind of decisions. And I agree that maybe the cable may have to go or go out to dinner mat to go the board and that the unit owners, people will live, they gotta make decisions together and say, Okay, we have a choice. If we can increase the assessments, we have to do something in order to make sure these bills get paid. And again, when most of our communication is the same thing communication at home, how do we, how can we make these decisions about paying our insurance bill this year, when we know that insurance goes up, we go out, we communicate, we talk and we make decisions together, we don't put our hands up in the air and say, well, hopefully, that you know the rates go down, or they will understand you won't cancel this. And that's what it goes the too many off too often to boards, throw their hands up in the air and say we don't have a choice. One thing we didn't she talked about a little bit that I think it's important is the use of experts, outside experts. But experts who focus in on Community Association experts, you have reserve specialists means insurance specialists, her as a lawyer who specializes in community associations, right? Because as insurance person, I can tell them that if you don't make a informed decisions, you will be sued.

Robert Nordlund: 22:07

I want to follow up on that. So, okay, we have the board. They know they Well, what were rough numbers, inflation was 5-6-7 percent. And this association has 5% budget limit. The board knows they have a jam. And they know that media, so they need to start thinking with urgency. Let's presume it's a December fiscal year end, they need to start thinking in spring or June, that we got to have a town hall, we've got to tell everyone, all the homeowners what's going on, they've got to get their ducks in order. And it is it's going to be hard work. But when you talk about communication, how valuable would it be for the board to have a record? We decided this, we decided we're going to have a town hall, we're decided we're going to do this? How important is it to have a record of how hard they worked. In case someone sues them the next year.

Kevin Davis: 23:02

And that's it because again, at the end of the day we're looking for the decision they make was an informed decision. Not it was a right or wrong decision, but was based on information did they do step one, step two, step three, step four, they did look at the documents, understand the documents allow them to go 5%. But his situation right there, they have to do 10%, they have to go out now they can come back and get sued. But at the end of the day, they want to they're gonna go to the court and said, Listen, we had to make this decision, because we can't afford not to make this decision. Because we will be sued no matter what. If we make that if you make a decision to increase it or not increase it, we still open ourselves up for a breach of fiduciary lawsuit because the board either a fail to maintain a common area or they spent too much money, you know, try to collect the waste of corporate assets and try it. So it's a tricky thing. But that informed decision allowed them to go into court and say, Guess what? We did our jobs. You know, we had we made a decision that base was information, and we lived by it. And most judge at that point in time because they are volunteers will not hold them accountable as much as making a wall. Wait a minute, we don't know what to do now and just walk away.

Robert Nordlund: 24:14

Okay, two things are you talking about in this situation where the board knows they have a 5% limit? Are you talking about the board just raising assessments 7% and just breaking through that limitation?

Kevin Davis: 24:27

I will say no, I will say understanding the limitation of 5%.

Robert Nordlund: 24:31

Okay, and working within that, okay, because that's more what I was thinking go down the communication path, and because usually when they have a 5% limit, it's unless they get a vote of approval from the homeowners. And I think that's, that's what I was hoping to talk about. And that's what we're, that's your thoughts also.

Kevin Davis: 24:49

Exactly. Okay. They have a fibrous implementation, they understand the documents, they have to be able to go out there and educate the unit owners, the people who live there and say we Add 7% This year, just like you need 7%. Now, because your costs have gone up, in other words, again, we must have this as opposed to, it would make me feel comfortable as a board to get here. We that sense of urgency is there. And when you have a sense of urgency, people in there hopefully can understand sense of urgency, because, again, we're all in the same boat. But if they don't, that's where the issue comes into play. Sometimes you're gonna have to just, you know, do a little bit more than you have to make decisions is right, I, you know, I'm not a lawyer to say what decision you can make. But at the end of the day, they have to make that decision, and a decision has to be an informed one.

Robert Nordlund: 25:44

Got it? Well, would, I think there's another side to this, or maybe two sides, when my notes here, board members, she got into this situation, because your volunteer, and now you're realizing it's not just going to the meeting, it's not just making an informed decision. It's going to be some hard work, I need to be proactive, we need to plan a town hall, we need to get the information in order, we may need to have an expert come to our next board meeting, and that may cost a few $100. So it's getting that information together. And it's yes, it's going to be some hard work. And that is unfortunate. And that's probably the last thing we want to be telling our audience. But I think we need to tell them clearly, being a board member is hard work. And sometimes governing documents estate law make it a little bit harder. The other thing, the gym, the prize that Melissa mentioned was property values. Now, why are we talking about a 5% or a 7% increase? When we're talking about what it will do to give us 10s of 1000s of dollars, increase to our property values, or keep our property values from dropping 10s of 1000s of dollars. The big picture is always property values. And so they've got to be able to play that card with strength and say that, you know, folks, yes, it's going to cost us another $17.52 per month. But our property values are at risk here.

Kevin Davis: 27:03

And the exact opposite is true also, because when they must have said there were consequences or consequences, the consequences of this, the property values go down. That is a bigger problem. And that's the see people will may understand negativity more than positivity. People may not understand that, well guess what? Your property value will increase. Okay, that's good. But guess what, you will lose the value of property, you will you don't want your property values to diminish by 10 15%. You want the condo next door to you, they'd be worth more than yours. When it comes time for you sell your unit, you realize that they are getting more money for that because guess what they've done? They paid their assessments at assessments, they kept up. Yeah, so I would focus in on the other part of it, which is, you know, the consequences are loss of value. More so than gain of angles, people, we, we we all want to lose money. You know, we we go gambling, the thought I was losing a lot more money. It makes us more depressed that much. That's scary. That's scary. Yeah, that's the scary part. Yeah,

Robert Nordlund: 28:01

I think that's the big deal. That's the big card that you can have up your sleeve, the board, talking about property values, because like you say you don't want when it comes time to sell your time may not be this year, your time may be five or 10 years from now. But there's always someone there. And you don't want the association next door to be the one that got painted. The one that the asphalt is smooth, the one that the gate open the closes regularly. It's not broken open, that takes money owning property is expensive. And we're talking about a situation here where you've got to keep up and make that point to the homeowners. And can we come back to I guess two things, urgency and communication.

Kevin Davis: 28:44

That's it. Education is a key. Also, they're educating the unit owners about the importance based on their own personal experiences. Guess what, right now we're all paying more money we paid before the cost of living has increased. So we have to be prepared, and we have to make these difficult choices. We have to do it. It is not something we like we do it because we think it'd be better for this. We have we must do it. Because we don't it come back to haunt us later on. We can't kick the can down the road any longer.

Robert Nordlund: 29:15

The consequences are too bad. Well, thank you, Kevin. It's always great to have the opportunity to speak with you any closing thoughts as we wrap up this program?

Kevin Davis: 29:25

You know, we talk about hope a lot in these things. And I have to tell you that the the boards are understanding and people live in these communities sociate understanding, I expect to see a lot more flames in this area. But guess what we haven't. And so their communication is happening. And people are understanding that the cost is greater. It costs a lot more money. And so I will tell you right now that we're not seeing what I thought we would see. So that's the good news. That's the

Robert Nordlund: 29:52

good news. Well, to our audience, we hope you are joining us in understanding that sometimes being a board member is hard work. and it takes commitment communication. There's a few other c words but we hope you learned some HOA insights from our discussion today that helps you bring common sense to your common area. We look forward to having you join us for another great episode next week.

Announcer: 30:17

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