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Ask the HOA Expert: Proxy Votes, Low Reserves, Transfer Fees, Special assessments

Question: Our Board dealt with a contentious issue recently. When it came time to vote, one of the directors pulled out a proxy from an absent director authorizing her to vote on his behalf. Is that proper?

Answer: Proxies are not appropriate for board meetings since directors are elected by the members to perform HOA business. Elected officials are not entitled to have others stand in for them. Proxies, of course, are appropriate for votes that involve the general members who are having someone represent their personal interests.

Question: A couple of our six-building condominium roofs are beginning to fail. We recently performed a reserve study and discovered we do not have enough in reserves to do all the roofs let alone the other components for which the HOA is responsible. In order to avoid a special assessment and/or increase in maintenance fee to catch-up, some directors are suggesting doing one building at a time. Another is suggesting we let the residents in each building pay for their own roof replacement. Do you have a good response?

Answer: Replacing roofs one building at a time is a very bad idea. It complicates the maintenance and warranty issues and provides some unit owners with an improvement that all do not enjoy. (Units with new roofs sell for more than those with old roofs.) The HOA cannot circumvent its maintenance responsibility by passing it off to owners. Besides contradicting the governing documents, individual owners simply will not do it properly.

If money is lacking, a special assessment is called for and the board has a fiduciary duty to move forward with it. And reserves require an adequate funding plan so this problem doesn’t continue.

Question: My HOA recently passed a Transfer Fee of 2 percent of a condo’s sale price. Many of the unit owners are up in arms about this fee. Do you have any advice?

Answer: All HOA governing documents define how expenses are to be allocated to the members. The norm is either equally or according to square footage where footage varies significantly.

Charging a Transfer Fee changes the prescribed allocation formula and blackmails buyers to pay if they want to “join the club.” Some HOAs justify the charge as newcomers contributing to the reserve fund just like current owners have. The problem is, newcomers don’t owe the reserve fund a penny since they haven’t benefitted from the assets. Proper reserve funding requires that money is set aside as the assets deteriorate. That way, each member pays for assets they directly benefit from, no more, no less. Charging a future owner for reserves is wrong and improper.

The general rule (and often described in the HOA’s governing documents or state statute) is that changing the expense allocation structure requires approval from 100 percent of the owners (or the owners being affected) and often their lenders since the fee structure directly impacts the lenders’ collateral. This will never happen because who will vote to pay more?

From a practical standpoint, transfer fees inhibit sales by reducing the pool of buyers that are willing to pay them. Reducing the pool of buyers has an adverse affect on market values. Maybe your HOA is one of a select few that can charge with impunity but during a buyers’ market, this policy will cause values to fall and sales to fail.

Question: When I purchased my condo, I bought loss assessment insurance coverage. My HOA recently filed a lawsuit against the builder for construction defects. To pay for the legal fees, the Board levied a special assessment of $2000 per unit. When I made a claim against my insurance for this assessment, I was told that costs of litigation were not included under the protection. Help!

Answer: Loss assessment coverage only kicks in as the result of a covered claim. That means that if the HOA’s insurance doesn’t cover a claim in full and the HOA needs to special assess the members for the balance, loss assessment coverage would cover an owner’s share up to the limits of the coverage which is usually $1000 unless the owner has purchased extended coverage. Legal fees are generally not a covered claim. But insurance policies vary from company to company. Press your agent to explain your coverage in detail.

Question: I made an offer to purchase a condo recently and was advised to review the reserve study. Basically, the HOA has almost no money set aside and is planning to special assess each member $1,000 to cover painting. I really love this condo but my gut instinct told me to steer clear of it because of the lack of reserve money. Did I make the right decision?

Answer: You did the right thing and would do the Board a big favor by passing on your reasons for backing out. More and more, informed real estate agents and buyers look closely at HOA reserve funding because lack of it always means special (and unpredictable) assessments and usually mean the property isn’t being maintained consistently. When reserves aren’t adequate, smart buyers move on to another property where they are adequate and often pay more money for a similar property. HOAs that lack adequate reserves will lose buyers and market value.


Written by Richard Thompson for Copyright © 2021 Realty Times All Rights Reserved.