Hypothetical: Owner lives in a decades old association. Owner consistently pays assessments in a timely manner. Owner’s association needs to make a major renovation to replace siding and repair wood structures, which will cost the association approximately two million dollars. The association does not have an adequately funded reserve fund and a special assessment is necessary. Each owner will be assessed between $12,000 and $15,000. Owner cannot afford the special assessment and the association is considering foreclosure of the owner’s unit.
Does this scenario sound familiar? Unfortunately, many older associations are faced with this issue. Special assessments are commonly used to pay for expenses outside of the budget, which can create hardships for both owners and associations.
The Colorado Legislature attempted to provide a solution by passing House Bill 1359 during the 2009 legislative session.
This law, which went into effect on August 5, 2009, required all associations to:
Become educated about reserve studies, investment vehicles, and funding options;
Adopt a policy that addresses:
when a reserve study will be done and how often it will be updated;
whether the study will be based on a physical and/or financial analysis; and
the association’s plan for funding the work recommended in the study, and the possible sources of such funding; and finally,
COMPLY with the policy.Has your association had a reserve study prepared and then adequately funded reserves? If so, congratulations!
If not, how should your association plan ahead for future repair and replacement projects without burdening owners with significant special assessments?
First, hire a professional to conduct a reserve study. If you had a study prepared some time ago, have it updated. While updating is not legally required, it is highly recommended. A reserve study will give your association information about the remaining life of the physical components the association is required to maintain and the anticipated time frame and costs associated with the replacement of and major repairs to those components. The study can significantly aid associations in their budgeting process so that adequate reserves can be funded to pay for significant future expenditures.
Second, understand your budget. An association that plans far enough in advance can make small and incremental increases to regular assessments in order to fund reserves. While the general ownership may not be ecstatic about increases to assessments, you should educate owners so they understand that if the association does not fund its reserves incrementally over time, owners could be subject to a significant special assessment in the future to cover the costs of repairs.
Third, your association may be able to obtain a loan to cover some or all of the costs associated with a repair or improvement. Although lending guidelines are stricter now than they have been in the past, this option still may be viable if your delinquencies are in a reasonable range (generally below 5-7% and no more than 60 days delinquent) and the association can provide the bank with key information (such as financials and cost estimates for the anticipated project) and collateral (typically an assignment of the right to future assessments).Your association can stay ahead of the game and be able to fund significant repairs and replacement projects without special assessments by updating its reserve study regularly, keeping delinquencies low, and creating a plan of attack for raising reserve funds.
For questions and answers to some frequently asked questions about reserves and reserve studies, please reference our webpage, and specifically our article “Ins and Outs of Reserve Studies”. If you’d like assistance in drafting or modifying your reserve study policy, or investment of reserves policy, please contact one of our attorneys at 303-432-999 or send us an email.