HOAleader.com - Tip of the Week - October 15, 2021
Published: Fri, 10/15/21
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HOAleader.com - Tip of the Week - October 15, 2021
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In this week's tip, we answer a reader's questions about how flexible your use of reserves can be and how far you can deviate from your budget when it comes to funding litigation.
An HOAleader.com reader asks: "We're a small (11 homes zoned residential estate) Colorado self-managed HOA. One of our owners decided to install a steel shipping container over the architectural review committee denial of their request. They now claim (wrongly) that the ARCC didn't act within the statutory 30-day required by the CCRs at the time.
They've also amassed five trailers and park a commercial truck not in a fully enclosed garage. They're trying to use a poorly worded CCR sentence to justify these items. The board's enforcement actions have resulted in their filing a lawsuit.
When we passed this year's budget, this litigation wasn't anticipated. We have reserve funds beyond what the reserve study requires, and this funding has been used to pay for this enforcement. Does the board have the authority to pursue this enforcement without owner approval or comment? Is there a limit on how far a volunteer board can deviate from a presented and approved budget element?"
Funny thing: HOAleader.com just had an entire webinar on building and using reserves. Our experts' general advice was to avoid using reserves for things for which they're not earmarked.
That's also the practice recommended by Zulema Mendoza, LCAM, regional vice president at KW Property Management, who oversees about 20 condo and HOA communities in Southwest Florida and North Carolina. "Reserves are meant for the replacement of the capital assets," she says. "I'm not an attorney, but I'd venture to say no, the community shouldn't use reserves to fund litigation. But they could recast their budget and enter money to allow for that expense."
Ditto in Michigan, reports Jeff Vollmer, a partner at Makower Abbate Guerra Wegner Vollmer PLLC, whose firm advises nearly 2,000 association clients throughout Michigan. "In Michigan, that's not at all possible," he says. "State law mandates that they can be dedicated only toward the major repair and replacement of common elements. That's for condos; we don't have a separate statute for HOAs."
For Vollmer's clients, the solution would likely be a special assessment. "I think if we're in the middle of the fiscal year, and most documents are set up this way, the board has the right to levy an additional assessment in its discretion if the existing operating funds are insufficient for the administration of the association," he explains. "Litigation to enforce the community's restrictions fits in that definition. So this would be an opportunity to levy that additional assessment."
The law is more flexible in Missouri and Illinois. Find out how, and whether our experts think this is a fight worth busting the budget over, in our new article:
https://www.hoaleader.com/members/4403.cfm
Best regards,
Matt Humphrey
President
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