Last month I had the privilege of teaching the webinar “Help We Need More Money,” which was all about generating more income for associations. Whether an association needs more money because it has unexpected repairs, or insurance costs have quadrupled, or just due to inflation and other uncontrollable costs, many boards fall into the rhythm of reacting to financial needs vs. proactively taking steps to place the association in a much better financial position. This article goes into a deeper dive of both traditional ways of raising money (i.e., assessments, special assessments, etc.) and other more creative ways to get dollars in the door (i.e., getting your cut from Airbnbs, charging nonrefundable contributions at every sale, charging pet assessments, etc.).
1. Raising AssessmentsThrough Budget Increases
The most common way of generating more revenue is through increasing the budget. Most associations have to follow the budget veto process under C.R.S. §38-33.3-303(4) of the Colorado Common Interest Ownership Act (“CCIOA”).
Under the budget veto process, the board adopts a budget, mails or otherwise delivers the summary of the budget to the owners, and holds an owners meeting at which the owners can consider the budget. At that meeting, a majority of all owners (not of those owners present at the meeting, but of all owners in the community), or any higher percentage stated in the declaration, must veto the budget, or it is deemed approved. If the budget is vetoed, then the existing budget continues until a new budget is adopted and ratified pursuant to the above process. Note that quorum need not be satisfied at a meeting that is held solely to consider and potentially veto the budget.
Two exceptions apply to the budget veto process:
- Exempt communities do not need to follow the budget veto process. If you are wondering if your association is exempt, review the following exemption sections of CCIOA: C.R.S.§38-33.3-116, 116.3, 119, and 121.
- Pre-CCIOA communities (i.e., communities that were created prior to July 1, 1992) do not have to follow the budget veto process if the declaration sets a maximum assessment amount or limits the increase in the annual budget to a specific amount. As long as the board’s proposed budget does not exceed that maximum amount or limit, the board may adopt the budget without owner approval or veto. If the board’s proposed budget exceeds the maximum amount or limit, then the board will need to follow whatever requirements the declaration prescribes, which is likely owner approval of the proposed increase.
Also, keep in mind that some post-CCIOA associations (i.e., communities that were created on or after July 1, 1992) might have declarations that require owner approval of the budget, whether outright or over a certain triggering threshold, in which case the association must follow the requirements of the declaration.
2. Special Assessments
Another way to generate income is through a special assessment, which is a one-time assessment that is typically levied against all units in the community. The board may require the special assessment to be paid in one lump sum or to be paid out over installments. Special assessments can be levied for a variety of reasons, but are often levied in response to unexpected expenses.
Keep in mind that you must follow any express requirements contained in the governing documents for how a special assessment may be used, how it may be paid, against whom it shall be levied, whether it needs approval by all or only some owners, or any other specific requirement. Some declarations, for example, require additional notice for special assessment meetings or a higher quorum requirement.
As far as whether a special assessment needs to be approved by the owners, this is document specific. Some declarations will require approval, others will follow the same veto process as the regular budget, others will require approval but only if the special assessment exceeds a certain cap. You should also review the Articles of Incorporation and Bylaws for any specific requirements. You’d be surprised by where some requirements may be hidden!
If your governing documents are silent on special assessments, then treat it like an amendment to your regular budget (i.e., follow the steps for the budget veto process).
3. Supplemental / Individual Assessments
Some declarations contain the right to levy assessments against only one or more, but less than all, units, often called supplemental assessments, individual assessments, or default assessments. The supplemental assessment provisions are useful because the expenses for which they are levied only relate and/or benefit a single or more, but less than all units.
For example, a condominium community may have several buildings but only one building has balconies. If the association was responsible for repairing and replacing the balconies, a supplemental assessment provision would allow the association to charge any balcony expenses incurred to the units that have balconies, rather than spreading the cost against the entire community. Or, an association might assess costs incurred in repairing any limited common elements (“LCE”) (i.e., common elements reserved exclusively for one or more units, but less than all units), such as LCE parking spaces, patios, yard enclosures, etc., to the unit that is assigned such LCE.
Keep in mind that for post-CCIOA communities, the supplemental assessment provision must be stated in the declaration in order to charge back the expense to the unit(s). C.R.S. §38-33.3-315(3) of CCIOA provides the following:
To the extent required by the declaration: (a) any common expense associated with the maintenance, repair, or replacement of a limited common element shall be assessed against the units to which that limited common element is assigned, equally, or in any other proportion the declaration provides; (b) any common expense or portion thereof benefitting fewer than all of the units shall be assessed exclusively against the units benefitted; and (c) the costs of insurance shall be assessed in proportion to risk, and the costs of utilities shall be assessed in proportion to usage. [Emphasis added.]
Post-CCIOA associations without the above language do not have authority to charge back common expenses against less than all units, as they must charge them back per the allocation formula set forth in the declaration, i.e., equally or some other formula such as by square footage, number of bedrooms, etc. If the association does not have supplemental assessment authority in its declaration, it should consider amending the declaration to include it.
And, for those who want to generate more revenue based on the supplemental assessment authority, you might want to consider adding the following to the declaration, as applicable:
- Airbnb and Other Rental Assessments: Instead of fighting against Airbnb and other short-term rentals, some associations are embracing them, but asking for their cut. The declaration could be amended to state that owners who are renting units on a short-term or long-term basis pay an extra assessment to the association. This can be structured so that the owner pays an additional yearly (or other timeframe) assessment, or it could be based on each rental instance or other such criteria.
- Pet Assessments: Similar to rental assessments, some associations are amending their declarations to require pet owners to pay additional assessments for costs incurred in pet clean-up and damage. That way, instead of spending money on enforcement (and trying to figure out which dog ‘did the dirty deed’), associations are levying supplemental assessments against all dog owners to cover the various fees incurred in clean-up (e.g., professional pooper-scoopers, poop bag dispensers) and damage (e.g., costs to re-sod).
4. Working Capital
Although not a new concept, working capital is definitely a trending topic in the community association industry today. A working capital provision requires a contribution fee, typically non-refundable, to be paid by an owner when purchasing a unit in the community. Many developers included working capital provisions in the declaration as a way to make the original owner of a unit (i.e., the owner who bought the unit from the developer) contribute to the infrastructure and other development costs of the community.
Today, however, given the increasing and uncontrollable costs faced by associations, declarations are being amended to either include a working capital provision, or revise an existing provision to require working capital to be paid at every sale of a unit (vs. just the original sale). The contribution is typically two to three months of assessments, with the amount being specified in the declaration. Depending on the number of unit sales, the non-refundable working capital contributions could add up to a hefty amount of extra income for the fiscal year!
A loan may be an attractive option to avoid relying on increased assessments, special assessments or reserves alone to fund the project. Ultimately, whether a loan is a good option for your community is up to the association to decide; however, there are a number of things to consider.
First, look to the governing documents, which may grant express authority to borrow, may impose conditions on the association’s authority to borrow (such as owner and even lender approval), or may prohibit borrowing altogether.
If the governing documents are silent as to borrowing, the association may be able to rely on C.R.S. §7-123-102 of the Colorado Revised Nonprofit Corporation Act (“Nonprofit Act”), which provides general powers to nonprofit corporations, including the authority to borrow money.
Second, make sure you can secure the loan with what most lenders require: pledging or assigning the association’s right to future income as collateral (i.e., the lender wants to be able to collect homeowners’ assessments directly in the event of default).
For post-CCIOA associations (created on or after July 1, 1992), C.R.S. §38-33.3-302(1)(n) of CCIOA allows your association to assign its right to future income only if the declaration expressly allows such assignment. If the declaration does not contain this language, then you will have to amend your declaration as part of the loan process.
Third, figure out how your community will repay the loan. Will you fund the loan through regular assessments, special assessments, a combination of both? Community associations should decide on how the loan will be re-payed prior to starting the loan process, as it may require extra steps.
Fourth, know your association’s legal and financial status. Whether the association has any existing loans, any pending/threatened legal actions, assessment delinquency status, and other such considerations can impact eligibility and/or the terms of the loan.
For a deeper dive into loans, see Loan Approval Process: What to Know Before You Start.
6. Potential Insurance Solutions
We all know that insurance costs in Colorado have risen dramatically over the past years. And, while an association can’t control the insurance industry, it does have the ability to change its declaration and certain practices, which may have the effect of reducing insurance costs.
First, look to whether the association is over-insured. A developer may have used template declarations with generic insurance language that is inapplicable to your community, and that may require the association to carry more insurance than what is required under state law.
Post-CCIOA condominium associations are required to carry certain minimum amounts of coverage over the unit, as specified in C.R.S.§ 38-33.3-313(2) as follows:
In the case of a building that is part of a cooperative or that contains units having horizontal boundaries described in the declaration, the insurance maintained … must include the units but not the finished interior surfaces of the walls, floors, and ceilings of the units. The insurance need not include improvements and betterments installed by unit owners, but if they are covered, any increased charge shall be assessed by the association to those owners.
A post-CCIOA condo community that has a declaration requiring coverage over finished surfaces of the Unit (e.g., carpet, tile, paint) and/or owner-installed improvements could reduce the coverage to meet the minimum required by the above. Other associations could reduce the coverage even further. Amending the declaration to reduce the association’s coverage over the unit might reduce the premium cost and/or the amount of claims the association has to file.
If you are unsure whether a particular association is over-insured, consider having an insurance audit performed.
Second, consider increasing the deductible amount on the association’s policy to an amount that is greater than the typical water intrusion repair costs per unit. Even though an association might be required to cover the unit pursuant to its declaration or Colorado law, if the estimated cost of repairs is less than the deductible, then no insurance proceeds are available and, therefore, no claim has to be filed.
And, if the declaration states that loss within the deductible amount is borne by the party who would be responsible for maintenance/repair in the absence of insurance, then that party, typically, would be the owner (because, typically, the owner is responsible for general maintenance/repair of the owner’s unit).
Third, consider adopting a claims submission/allocation of deductible policy that clearly establishes how repair and insurance obligations are determined, the procedures for filing an insurance claim on the association’s policy (including a requirement that all communication with the association’s insurance adjuster will be through the association), the owner’s obligations for reporting a claim to the HO-6 carrier, and responsibility for payment of the deductible amount.
By: (i) increasing the deductible amount to an amount that is greater than the typical water intrusion claim, (ii) ensuring that the declaration allocates the loss within the deductible amount to the unit owner, and (iii) adopting an insurance claims submission policy that clarifies the procedures for claims submissions, an association can dramatically reduce both the time and money spent on insurance issue.
The above are several ways an association can raise money in today’s costly world. We provide even more examples in the “Help We Need More Money” webinar referenced above, so be sure to watch it! If you are wondering how to implement any of the suggestions above or in the webinar, please contact any of our Altitude attorneys at 303-432-9999 or [email protected].