By Connor B. Wilden, Orten Cavanagh Holmes & Hunt, LLC
In theory it sounds great: “Annual assessments may not be increased by more than the increase prescribed by the Consumer Price Index.” No unexpected assessment increases! No ability for a board of directors to arbitrarily choose to increase dues for some vanity project! What more could a homeowner ask for?
The reality, though, is that fixed annual assessment increases present far more issues than potential solutions. While a fixed annual assessment increase may cause a wide multitude of problems, those problems generally stem from one singular issue: an underfunded community. When a community becomes underfunded due to restrictions imposed by a fixed annual assessment increase, its obligations do not go away.
To best show potential downfalls and solutions for when a community becomes underfunded due to a fixed annual assessment increase, let’s look at an example which may be familiar to many communities throughout the Front Range.
There is a hypothetical community somewhere south of Denver, but north of Colorado Springs. It has a provision in its declaration which caps the annual assessment increase to no more than a 3% increase each year. This hypothetical community (“HOA”) consists of twenty townhomes and was founded in the late 1980s. It has not regularly increased its assessments since its creation.
In the past decade, the area in which this HOA exists was hit by multiple catastrophic hailstorms. Fortunately, the HOA has not been directly impacted by any of the hailstorms. However, this does not mean the HOA has escaped unscathed, as many of its neighbors have been hit and damaged by the hailstorms. As such, insurance premiums across the entire Front Range have substantially increased so that insurance carriers may meet their increased obligations due to the higher-than-average amount of significant hailstorms.
When the HOA received its insurance renewal notice this year, its insurance premiums had increased nearly 50%! In developing the proposed budget for the next year, the Board of Directors quickly concluded that there was no way the HOA would be able to meet all its obligations when, as per the Declaration’s assessment cap, it can only increase the annual dues of its members by 3% each year.
This HOA must come up with a creative solution in order to meet the obligations set forth in its Declaration, while also accommodating the challenge of insurance premium increases.
Often, communities in Colorado which have fixed annual assessments increases will also have provisions in the assessment section that states if more than the fixed increase is desired, such an increase may take effect if approved by a certain portion of the community. Unfortunately, this HOA lacks any language in its documents that permits its owners to approve an annual assessment more than 3%.
Without that authority, the HOA has a few choices of how it may proceed:
- The HOA could seek a special assessment to cover the increase of costs from insurance. This may be a practical way to address a budgetary shortfall within one calendar year, but where insurance premiums have increased significantly, it is highly improbable that the premiums will decrease the following year. A special assessment may be a good stopgap but is certainly more of a band-aid than a real solution.
- The HOA could seek to amend its Declaration to remove any caps on the annual increase in assessments. Depending on the Declaration amendment approval requirements, approval of the proposed amendment will take the affirmative vote or agreement to which more than 50% of the votes in the HOA are allocated or any larger percentage, not to exceed 67%, the Declaration specifies. Depending on the level of community involvement or support for the amendment, this may be difficult. While amending the Declaration to remove the cap is a potentially long and expensive process, it is essentially the only permanent solution to address the underfunding issues brought on by fixed increase assessments.
Having a reasonable and balanced budget is vital to a healthy common interest community. Although it is difficult to forecast factors such as significant insurance increases, one tool a community has to ensure an adequate budget for major expenditures while keeping an eye out for its owners’ pocketbooks is to make sure it has an up-to-date reserve study. Having an up-to-date reserve study allows a community to have a great understanding of what community elements may need replacement soon, or what may need replacing in ten or twenty years. This allows a community to adequately plan and save for large projects.
While fixed increase annual assessments may present challenges for your community, these challenges are not without solutions. Unfortunately, these solutions may not be straightforward or easy to implement. As such, if your community is currently facing any problems due to fixed increase annual assessments, you should contact your community association attorney.
Please note, this article, while attempting to be general in nature, is not reflective or indicative of any specific community and may not apply to your community.
Connor B. Wilden is an attorney at Orten Cavanagh Holmes & Hunt, LLC. He provides general counsel and transactional services to community associations throughout Colorado.
