Bylaw amendments to limit dues increases

Started by AlvinK1 • 21 replies • 1713 views

💬 Join us to post & get advice from 50,000 HOA & Condo leaders.

⚡ Takes 30 seconds

Already a member? Log in

AlvinK1 (Virginia)
Posts: 2

Posted:

Our small HOA is facing major costs to repair and resurface about one half mile of hard surface asphalt roads. Our HOA Board has seen this coming for five years, has a very modest reserve, done no reserve studies and now realizes outside a special assessment that dues will have to be raised from a very modest amount to cover the costs in a very short period of time. There is a strong faction on the Board that is opposed to any dues increases and is proposing an amendment to our Bylaws to cap how high the dues can be raised on an annual basis as well a an upper-limit cap. Are such caps legal? Might they be considered breaching the Board's responsibility to members by trying to redudce or limit its obligations to them by arbitrarily restricting the amount of resources available?

GeorgerwilliamsW (Indiana)
Posts: 975

Posted:

Quote:

Posted By AlvinK1 on 07/28/2008 4:17 PM
Our small HOA is facing major costs to repair and resurface about one half mile of hard surface asphalt roads. Our HOA Board has seen this coming for five years, has a very modest reserve, done no reserve studies and now realizes outside a special assessment that dues will have to be raised from a very modest amount to cover the costs in a very short period of time. There is a strong faction on the Board that is opposed to any dues increases and is proposing an amendment to our Bylaws to cap how high the dues can be raised on an annual basis as well a an upper-limit cap. Are such caps legal? Might they be considered breaching the Board's responsibility to members by trying to redudce or limit its obligations to them by arbitrarily restricting the amount of resources available?

Whoa! This is a switch. You want your dues increased?! I suppose you could look at the problem the way you describe. However, I think a better way to look at the problem is balancing the need for maintenance with the ability of owners to pay substantial increase in dues. Consider the potential financial hardship it might impose on some owners.

Our association is limited to no more than 10 percent per year increase in annual fees per the declaration of covenant. A special assessment requires an affirmative vote of 2/3rds of the owners.

The problem here is the absence of a reserve study and reserve fund.

Another option to explore is borrowing the money to resurface the road with a 10-20 year pay back (life expectancy of the asphalt). Dues would have to increase to cover the principal and interest, but it would be a smaller increase than if a resurfacing fund had to be built in 2-3 years. And if the board were smart, they would start building a reserve fund at the same time.

I would like to hear what others have to say about this.

DonN (Michigan)
Posts: 357

Posted:

As with many questions on HOA Talk, the answer is likely in the governing documents for you Common Interest Development (CID). Start with a thorough reading.

Likely, the authority for assessment of dues is contained in the CC&Rs which run with the land and are likely the superior document. The CC&Rs deal with property rights, and also likely establish an owners association for the administration of the CID.

Bylaws are likely authorized under your state's nonprofit corporation act or POA Act, and deals with governance of the association. Typically, the amendment requirements for the bylaws are less stringent than those for the CC&Rs. This often leads boards to try (incorrectly) to amend the bylaws to define a matter that is controlled by the CC&Rs.

The CC&Rs could be amended to place whatever limits the owners will approve on the authority for dues increases and any limitations thereof. But such provisions should be responsibly developed to ensure that the CID can be properly maintained. Run-down and poorly maintained facilities adversely affect property values.

Bite the bullet and ask the owners for the money needed to preserve the assets of the association.

Don Nordeen
Governance of Property Owners Associations

KirkW1 (Texas)
Posts: 1,665

Posted:

I commend you for wanting to raise dues to cover the situation. Though the amount may be enough that you just have to have a special assessment that allows for people to pay it off in payments.

As for the idea of financing the road, should be the last resort and you should only finance the portion that you just don't have the money for. Once interest is added into the mix, if you finance the road and try to build reserves you could end up in the same place for the amount of dues.

You need to get the bums off the board. They are neglecting their fiduciary duty. The longer you wait to raise the dues, the worse you will be. And the way things are going the longer you put off the work, the more it will be. I just saw on the news discussion of how much the materials for road work have risen recently. Much more then the pace of inflation.

GeorgerwilliamsW (Indiana)
Posts: 975

Posted:

Quote:

Posted By KirkW1 on 07/28/2008 8:51 PM
I commend you for wanting to raise dues to cover the situation. Though the amount may be enough that you just have to have a special assessment that allows for people to pay it off in payments.

As for the idea of financing the road, should be the last resort and you should only finance the portion that you just don't have the money for. Once interest is added into the mix, if you finance the road and try to build reserves you could end up in the same place for the amount of dues.

You need to get the bums off the board. They are neglecting their fiduciary duty. The longer you wait to raise the dues, the worse you will be. And the way things are going the longer you put off the work, the more it will be. I just saw on the news discussion of how much the materials for road work have risen recently. Much more then the pace of inflation.

I don't agree with Kirk on this one. From my humble perspective, it doesn't help to characterize board members as "bums" either. My guess is (until I know differently) that they are concerned, well-meaning people who have a somewhat different perspective on the issue.

My focus would be on the owners and residents, not on the association. Raising dues substantially in one fell swoop may be more that people in the association can handle, even though repairs are badly needed. It could create a serious financial hardship.

I would agree that the lack of a reserve study, and the lack of a properly funded reserve, is the root cause of this issue. I hope others can learn from it.

I would suggest some sort of poll of owners, explaining the options and asking for guidance. But think carefully about it. There may be some residents who may not be able to afford a special assessment or substantial dues increase. What are their options? Should they be penalized for the omission of the board in the past for not conducting a reserve study or funding reserves? Legally, probably. But morally and ethically . . .??

Given that perspective, and given the board's failure to fund reserves in the past, you ought to seriously consider borrowing.

The only other option, which is equally legitimate of course, is to do nothing. Maybe that is the best course for now.

Keep us posted. Let us know how things turn out.

SusanW1 (Michigan)
Posts: 5,202

Posted:

Back to the main question: unless the bylaws give the power to the Board, the Board has no authority to set ANY dues. Your bylaws should outline the procedure for how any amendments are processed.

Can the Board PROPOSE a bylaws change? Make s suggestion for a bylaws. Maybe.

In that case, if it gets as far as a vote, turn it down by a members vote.

You haven't explained how ANY amendment is done to your bylaws. The process for this particular amendment is no different than any other one.

MaryA1 (Arizona)
Posts: 7,043

Posted:

Quote:

Alvin,

I doubt there is anything illegal about the BOD wanting to put a cap on the % by which the annual assessment can be raised, especially if the bylaws give the board the authority to set the assessments. AZ has state law putting the cap at 20% for planned communities; there is no cap for condos. Are bylaws amendments made solely by the board or must they be voted on by the membership? But, regardless, this is definitely something that should be discussed with the membership. I think it very wise of the board to want to do this especially if the assn has a high rate of seniors on fixed incomes. I know of many assn's that are between a rock and a hard place because they really need extra money for certain projects but the members just can't afford continual increases in assessments. If the members know there is a % cap they can plan accordingly and won't be surprised by a 50% increase in one year. Although I believe a % cap is OK, I would not suggest an upper-limit cap, which would be like saying the assessments can never exceed a certain amount. This would be very poor planning.

The fact that the funds are not available to repair and resurface the roads smacks of poor planning on the part of the board. A reserve study needs to be undertaken and adequate deposits put into the reserve fund each month. Perhaps the project can be undertaken in stages. Also, have you checked into city/county grants? The city where I live gives neighborhood grants each year to defray the cost of special projects. All that is required is some sweat equity on the part of the h/o's and perhaps a % of the cost paid by the HOA or neighborhood group.

JoeK1 (Michigan)
Posts: 37

Posted:

A few words for thought. Spending caps can be introduced to an association by following the proper approval procedures outlined in governing documents. However, I believe that putting a cap on the amount of annual dues increase, assessment, or special project cost is a bad idea for any homeowner or condo association board. So is a requirement to obtain membership approval for spending over a certain amount. It severely ties the hands of the board members and introduces complexity and time to the decision making process.

Think about who would support a provision such as this – it is someone not on the board! It certainly would not be a board member. “If I had this veto power, then I could pseudo-manage the association finances in the background and from the comfort of my home. The best part is that I do not have to be a board member and take on all the other responsibilities (making decisions, settling disputes, enforcing CCR’s, managing finances, staying informed of association business, addressing the needs and concerns of members, etc). Depending upon my personal situation, I could block responsible spending for the association and let the board figure out how to meet expenses without the necessary funds.”

Since most associations limit the financial decision making to the board members, a major incentive for many to run for a board position or serve on the board is to protect their personal interests. You likely have a sizeable investment in your property and want to make sure that it is secure and hopefully increasing in value. With the amount of power vested to BoD members, you essentially have entrusted your investment in the hands of other people if you are not a board member. This may sound self-serving, but it is true. Therefore, if you eliminate this incentive for being a board member, then you will likely introduce another problem of getting qualified people to run for a board position.

A major complaint for many board members is that they do not make decisions in a timely fashion. Restrictive financial caps requiring member approval will definitely eat away at precious time and energy of board members, which is not an unlimited commodity. Trying to get board members to agree on an unpopular financial decision is hard enough. Getting a majority plus of association members to agree on an unpopular financial decision presents a daunting challenge.

In summary, I would recommend against introducing new restrictive spending caps to your governing documents. If a board is not fulfilling its fiduciary responsibility or managing its finances poorly, then your replace the board.

Good Luck
JoeK

GeorgerwilliamsW (Indiana)
Posts: 975

Posted:

Joe,

I have to disagree with your thoughts regarding a cap on the amount that fees can be increased. It is one of the few controls that homeowners have to control a rogue board.

As I carefully read your posting, it seems to me that you are putting the interests of the board ahead of the interests of the association members/owners. It appears as if you are saying that ease of making decisions trumps the needs of homeowners to be able to afford fees. That is not right.

There may be some homeowners that simply cannot afford a steep increase in fees. I can personally attest to one development where fees went from $130 per year to now $650, driving many owners away. The fees go for amenities that more than one-half of the residents do not use or want.

Going from 100 percent occupancy four years ago, more than 15 percent of the units are now up for sale, and have been for a couple of years. The problem is that prospective purchasers look at the fees, and say "no way."

The board is controlled and voted in by a number of better-off residents who can afford such an increase and value the amenities.

The function of the board is to serve the residents, not act in a way that financially hurts residents. The association serves residents; residents don't serve the association. If fees cannot be increased sufficiently to do what the board wants to do, then so be it.

Here is how my covenants address the issue:

"A. From and after December 31, 1994, the maximum annual assessments may be increased each year not more than 10% above the maximum assessments permitted for the previous year, on a cumulative basis, without a vote of membership.

B. From and after December 31, 1994, the maximum annual assessments may be increased by more than 10% above the maximum assessments permitted for the previous year by a vote of two-thirds (2/3) of the total votes of the Members who are voting in person or by proxy, at a meeting called for this purpose."

If that were not the case, we could have a rogue board building a swimming pool and clubhouse.

GlenL (Ohio)
Posts: 5,491

Posted:

Mary I'm sorry but you hit one of my hot buttons with the "senior's on a fixed income" comment. Almost everyone is on a "fixed" income; especially these days. Why should being old give them a special pass? Although I haven't read every CC&R out there, I've not seen any that says everyone will be assessed equally unless they're old.

The BOD has a fiduciary duty to do what is right for the Association and if that means raising assessments to accomplish the necessary repairs then that is what needs to be done. Evidently either through stupidity or design this BOD has evidently kept the assessments artificially too low to generate the funds needed to make the necessary repairs. It's a bitter pill to swallow but something must be done either raise the assessments or special assess.

Studies show that 5 out of 4 people have problems with fractions

GeorgerwilliamsW (Indiana)
Posts: 975

Posted:

Quote:

Posted By GlenL on 07/29/2008 8:28 AM
Mary I'm sorry but you hit one of my hot buttons with the "senior's on a fixed income" comment. Almost everyone is on a "fixed" income; especially these days. Why should being old give them a special pass? Although I haven't read every CC&R out there, I've not seen any that says everyone will be assessed equally unless they're old.

The BOD has a fiduciary duty to do what is right for the Association and if that means raising assessments to accomplish the necessary repairs then that is what needs to be done. Evidently either through stupidity or design this BOD has evidently kept the assessments artificially too low to generate the funds needed to make the necessary repairs. It's a bitter pill to swallow but something must be done either raise the assessments or special assess.

Glen,

Your hot button is my hot button. Seriously, friend, what would you do if a homeowner could simply not afford increase? What if they are already up to their ears in debt? What if their credit cards are maxed out? What if they had a second or third mortgage on their home? What if they have serious medical bills? Force them to sell? Force bankruptcy?

That's cruel and wrong to empower a board to have that power.

There is a balance that needs to be achieved here. When it gets to the point that a substantial increase in fees is required, let the homeowners vote. They may choose to put up with potholes for a few more years rather than have their fees skyrocket.

The fiduciary duty of the board is not to the association as a corporation, but to the members. The fiduciary duty of a for profit board is to the stockholders. We have got to get beyond the notion that the association is more important than the people it serves.

This is where a board sensitive to the desires and wishes of homeowners is more important than one this is only looking out for the health of the "association" comes into play.

MaryA1 (Arizona)
Posts: 7,043

Posted:

Quote:

Although I am a senior citizen I am not in favor of preferential treatment just because one has reached a certain plateau in life. When you say: "Almost everyone is on a "fixed" income; especially these days", I guess you're referring to the fact that not everyone gets a pay raise every year. Well, that justifies my position even more. So not only the seniors, who we all know are on fixed incomes, are affected but most everyone else in the assn. I'm not proposing giving seniors a special pass. All I'm saying is that some assn's do have a high % of "individuals" on fixed incomes which makes it very difficult for them to afford a large increase in assessments. If they know the yearly raise may be as much as, say, 20% they can budget for it. This also applies to anyone who is not on a fixed income but may be on a rather tight budget. A wise board will do what is best for the whole community taking into consideration the makeup of the community.

Glen, one day you'll be a "senior on a fixed income" and believe me that expression will no longer be a "hot button"! In fact, you'll be looking for all the "senior discounts" you complained about when you were younger. You may even start going to dinner at 3 PM and relish wearing orange and lime green pants!! LOL Believe all those things don't apply to my husband and I, but it's amazing what some people will succumb to when they reach that "golden" age.

GeorgerwilliamsW (Indiana)
Posts: 975

Posted:

Right on Mary! I could not have expressed it better than you did:

"A wise board will do what is best for the whole community taking into consideration the makeup of the community."

Thanks for the thought.

GlenL (Ohio)
Posts: 5,491

Posted:

Glen, one day you'll be a "senior on a fixed income" and believe me that expression will no longer be a "hot button"! In fact, you'll be looking for all the "senior discounts" you complained about when you were younger. You may even start going to dinner at 3 PM and relish wearing orange and lime green pants!! LOL Believe all those things don't apply to my husband and I, but it's amazing what some people will succumb to when they reach that "golden" age.

Mary what makes you think I'm not on a fixed income now? I squeeze my quarters so hard George Washington has tears in his eyes. This does not give me a pass on paying for necessary repairs of my community.

Studies show that 5 out of 4 people have problems with fractions

SusanW1 (Michigan)
Posts: 5,202

Posted:

Taking care of this road is NOT a choice, but rather an obligation of the Association. therefore, the Board has the challenge to figure out HOW to get those funds, before the road deterioates beyone repair.

Get three bids, call a special meeting for the purpose of DISCUSSING the issue and get more than the Board's input on this issue. the community needs to be together on this one. It's an opportunity for the Board to work with the residents, and the residents to share in the Board's dilemmas of governance and decision-making.

Am I right in about $5,000? (for a complete new road) why not chip seal or top it?

No action should be taken to amend the bylaws. IMHO.

SusanW1 (Michigan)
Posts: 5,202

Posted:

P.S. the "senior" argument doesn't go over with me. Young couples with kids have it much more rough.

If seniors - like any one else - become "property rich" and cash-flow poor, it's time to sell and move where they can afford it.

When THEY were young, they had the advantage their property increase in value. Most of their homes are paid for; taxes are what's left. They need to see if they are in afforable housing. They don't deserve any more than any other resident.

Saw some GREAT condos in the Dominican Republic on the web the other day. $44,000!!

MaryA1 (Arizona)
Posts: 7,043

Posted:

Quote:

Posted By GlenL on 07/29/2008 9:13 AM
Glen, one day you'll be a "senior on a fixed income" and believe me that expression will no longer be a "hot button"! In fact, you'll be looking for all the "senior discounts" you complained about when you were younger. You may even start going to dinner at 3 PM and relish wearing orange and lime green pants!! LOL Believe all those things don't apply to my husband and I, but it's amazing what some people will succumb to when they reach that "golden" age.

Mary what makes you think I'm not on a fixed income now? I squeeze my quarters so hard George Washington has tears in his eyes. This does not give me a pass on paying for necessary repairs of my community.

Glen,

Please don't put words in my mouth. I never said the seniors should get a pass. Please re-read what I said.

GeorgerwilliamsW (Indiana)
Posts: 975

Posted:

Quote:

Posted By SusanW1 on 07/29/2008 10:44 AM
Taking care of this road is NOT a choice, but rather an obligation of the Association. therefore, the Board has the challenge to figure out HOW to get those funds, before the road deterioates beyone repair.

Get three bids, call a special meeting for the purpose of DISCUSSING the issue and get more than the Board's input on this issue. the community needs to be together on this one. It's an opportunity for the Board to work with the residents, and the residents to share in the Board's dilemmas of governance and decision-making.

Am I right in about $5,000? (for a complete new road) why not chip seal or top it?

No action should be taken to amend the bylaws. IMHO.

Susan,

How do you conclude that repairing the road is an "obligation" not a "choice?"

Sure it is a choice. The board can choose deliberately not to repair it, or to postpone repair, or to make temporary repairs.

Help me understand your thinking here. I don't see the obligatory nature of the decision.

I'm serious.

SusanW1 (Michigan)
Posts: 5,202

Posted:

Road = HOA asset (really an obligation)

Bet the CCRs or bylaws talk about maintaining the road as one of its missions.

The Board is obligated to care for all the corporation's assets. I am assuming that this is a private subdivision; the association must provide a good road for the residents.

MUST be asphalt? Probably not. OK - pull up the asphalt and install a gravel road - whatever . . . but a good road it must be!

MaryA1 (Arizona)
Posts: 7,043

Posted:

Quote:

Posted By SusanW1 on 07/29/2008 10:49 AM
P.S. the "senior" argument doesn't go over with me. Young couples with kids have it much more rough.

If seniors - like any one else - become "property rich" and cash-flow poor, it's time to sell and move where they can afford it.

When THEY were young, they had the advantage their property increase in value. Most of their homes are paid for; taxes are what's left. They need to see if they are in afforable housing. They don't deserve any more than any other resident.

Saw some GREAT condos in the Dominican Republic on the web the other day. $44,000!!

Susan,

Believe me, if I've said it once, I've said it a million times, that the young couples w/children need the discounts, etc. much more than "some" seniors. I agree there are many seniors, who may be on a fixed income, but also have other investments generating income and don't need all the freebies being doled out to them. But there are many, many who only have SS and that's about as "fixed" an income as you can get. Apparently you're not near retirement age or you would have a better understanding of the situation. I'm not proposing these senior get special privileges. I'm only saying that if there is a large number of seniors living in a particular assn, the board should be aware of their situation. They should not be raising assessments 30%, 40% or more every year. Putting a cap on the % of increase is a prudent thing to do. The board needs to be more resp. by funding a reserve instead of relying on special assessments.

I know of many assn's that are in this predicament -- mainly condo assn's with a high number of seniors on fixed incomes, roads to maintain and no reserves.

KirkW1 (Texas)
Posts: 1,665

Posted:

I think there are several mistakes being made here. First, if you know you need more money in the budget and don't act to either cut spending or increase income, then you are failing. And the BOD has a responsibility to the association to act on this.

But it is also a mistake to simply get three bids and call a meeting. I think you should call a reputable contractor and explain the situation. Get a run down of options and then call the meeting. Explain the situation and look for the best way out.

Leaving the road is an option, but it is not a good one most of the time. All the same, i it is a choice between losing my home and having a poor road, I will keep the house. And in some areas this is the choice right now. If your market is in the dumps and units won't sell, then keep in mind that anything that forces owners out will make things worse not better.

Taking a loan may indeed be the only option, but it will in fact raise the overall cost. And you should work to minimize the loan since it will eat at the resources for as long as it exists.

As for capping of increases, I like our documents. There is no cap, but if the amount goes above a percentage then the owners have the right to petition for a meeting and call the measure to a vote. Sometimes you just have to take one on the nose.

EllenS1 (Florida)
Posts: 1,148

Posted:

Alvin,

Our docs call for an increase of assessment up to 5% per year. However, they also state that an unspecified increase can be made for landscaping expenses. Any member can call for a special meeting to address this expense so owners will know what may be required. Then if the board members request a vote of the members for an amendment they will have to convince whatever percentage of owners is required to pass on the amendment.

🎯 You've read this entire discussion

Join the conversation with 50,000 HOA & Condo Leaders:

✓ Ask follow-up questions
✓ Share your experience
✓ Get expert advice
✓ Access 350,000 discussions

Create Free Account →

⚡ Takes 30 seconds

Already a member? Log in here