When we speak with directors and other leaders from Michigan community associations, especially those from homeowners associations and subdivisions, we hear some common refrains when discussing the inadequacy of their regular monthly assessment/dues amounts. The Board may be fully aware that income is not sufficient to meet projected future costs, but for many reasons, the Board feels its hands are tied. Additionally, some issues may not be considered properly because it is difficult for the Board to see them.
Long-Term Versus Short-Term Interests
Because it is not readily apparent, many members and directors who plan on owning their property for a long time have no understanding of how their low assessments likely mean they are giving money away to those who only own for a few years or less.
For example, the Board of a development that historically has operated only in peace and harmony may assume that they will be fine just levying an additional assessment whenever they need money for legal fees. There may be little to nothing appearing as a line item for legal fees in the association’s budget which determines the regular assessment. Then one day, perhaps the association needs to enforce the Bylaws against one new member in the development who doesn’t believe they should have to comply. So, an additional assessment is needed to pay for the legal fees, and perhaps some other unrelated, unanticipated costs arise at the same time. Maybe the local economy happens to be in a downturn, and many have difficulty paying. Collections ensue, and perhaps the Board finds that the best decision is to settle the delinquent accounts for significantly less than what was owed. Other association liens may be wiped out by first mortgage foreclosures. Members who have the ability to pay then have to make up the difference.
Instead of taking the above approach, it would have been advisable to have built up the money needed over time as part of the regular assessment, ensuring everyone paid their fair share. In the case above, the members who just happened to be unlucky enough to be members at the point in time when there was trouble and had the ability to pay their full amount effectively ended up subsidizing short-term members who had since moved away.
Internal Politics are a Barrier to Effective Budgeting
When it comes to raising assessments, some Boards are simply terrified of what their members would do in response. They may have even run on a platform of keeping assessments low, which paints them into a corner. They might expect members to come knocking on their door to complain about any higher assessment and maybe even utilize a carton of eggs in protest!
In our experience, the fear that association directors feel with respect to their membership is unwarranted. In fact, it is beside the point, as directors have a fiduciary duty under the law to act in the best interests of the association and not allow individuals to bully them into acting otherwise. Although some push back can naturally be expected, we generally find that when the reasons for raising assessments are sound and the Board makes a concerted effort to clarify those reasons to the membership, the Board can minimize political fallout.
Communicating With Members is Difficult
How can you get your membership to understand the finer points of budgeting and assessments? If you are like the average Michigan community association, most of your members likely plan on holding their property for a long time. So, part of your goal should be to help them realize their best interests as long-term property owners, which means properly assessing for long-term items such as legal fees, contingencies and maintenance/repair items.
We find that advance notice and an opportunity to engage in conversation about the issues is key. If members have a chance to be part of the conversation, you will likely find that you are quickly building a wall of support and enlisting key allies who can assist you in addressing what needs to be done. Use the facts on your side, such as the date when assessments were last raised, if at all; inflation figures; how much you currently have in your accounts; and what percent reserves are funded. Make clear the developer’s original interest in keeping assessments low as possible in order to make sales, which is opposed to owners’ interests in ensuring appropriate funds are available in the future. Make charts and other depictions that will help your members easily visualize the issues. Have your association experts, including legal counsel, attend your member meetings to advocate for the cause.
We understand that Board members occupy difficult volunteer positions where thanks and rewards for their efforts are few and far between. The political considerations within an association are complex, and sometimes it seems there are no good answers to resolve the above issues. One answer may be legislation that requires budgeting for contingent items so the Board will not be faced with the political backlash associated with raising assessments. If it becomes a matter of complying with the law, association members wouldn’t be able to object to the Board’s actions, and incumbent directors would be less likely to face removal from the Board. Additionally, this would level the playing field with respect to marketability of properties for associations that properly prepare their budgets, as they would be less likely to face negative valuation from prospective buyers as a result of relatively higher assessments.
Remember, as we always say, “You can’t afford to assess too little at whatever cost.”
By Robert Meisner, Esq. and Mark Petrie, Legal Assistant