By Bryan Farley, RS, Association Reserves - Colorado
As the population in Colorado continues to grow a steady rate, one may notice the many new housing developments, high rises, and condo complexes popping up around the state. These properties look great, with fresh paint on the walls, roofs that do not leak, and elevators that work when called. However, within a few years these buildings will start to experience the same issues that plague every other building in the area, asset failure.
This dilemma is not only limited to new projects, but also to older buildings that have just undergone a renovation or remodel. In fact, all new construction will experience a state of deterioration once the project has been completed.
How can owners be motivated to raise Reserve Contributions after the board just special assessed the owners to fund the remodel? How can a board of a brand new condo building justify raising Reserves when the majority of the owners closed on their units six months ago?
The answer of course is that as soon as the new construction has been finalized, the assets will begin to decay and deteriorate at a predictable rate until all of the assets have failed completely. However, the assets will not all fail at the same time. For example, the roof may last twenty-five years, but the carpet may only last eight years. If the failure and replacement of the assets do not occur at the same time, how will the costs of these assets be evenly distributed throughout the life of the building?
It is only fair that each owner pay for the predictable deterioration of the assets that are gradually deteriorating each month/quarter/year. That is fundamentally what a Reserve Study attempts to help owners accomplish, take all those irregular Reserve expenses and distill them down to a steady deterioration rate that the association can then offset be collecting contributions from all the current owners in order to keep pace with the ongoing deterioration of the common area.
That is why the Reserve contribution rate recommended in a Reserve Study is not for a future expense that is some other unlucky person’s problem. The recommended Reserve contribution is designed so each homeowner pays a fair share of ongoing Reserve component deterioration during the months and years that they own in the association. It’s only fair. In fact, it is unfair for any current owner to pay less than ongoing deterioration, forcing some unlucky future owners to over pay due to past under-reserving.
Moving forward, how much should current owners contribute to Reserves? In our experience, “adequate” Reserve contributions typically make up anywhere from 15% to 40% of an association’s total budget. The cost of Reserve component deterioration can be expensive, so there are ways to minimize your Reserve contributions:
Reserve components are expensive and are deteriorating every day. A Reserve Study will provide guidance on how much money will be needed each year to pay for the ongoing asset failure. Each year, owners should hire a professional to review and update their Reserve Study.
By commissioning a Reserve Study, a board takes the first step toward a calmer and proactive future. Prudent planning for inevitable repair and replacement costs will benefit future owners, but present owners benefit also. With a Reserve Study boards and managers can help the present generation of owners understand that they, too, can enjoy their share of the benefits of prudent reserve planning.
Bryan Farley (RS #260) is the president of Association Reserves – Colorado. Bryan has completed over 1,000 Capital Reserve Studies, and is a frequent speaker and author on the topic of Reserve planning for community associations.
By April L. Ahrendsen, Mutual of Omaha Bank
Have you ever heard these words uttered at your Board meeting? If not you are one of the fortunate ones. It seems that for years the badge that most association’s wanted to wear read;
“We haven’t raised our dues in years!”
While this sounds great it can be your downfall and eventually place you in a position where a loan is your only way out. By not raising your dues to keep pace with inflation, your association may have done more harm than good. Even though Colorado does not require a Reserve Study they are necessary for the association to prepare for future expenses. The study outlines a plan to fund the association’s reserve so when an asset needs to be repaired or replaced the association has the money to make it happen.
But what happens when the asset needs to be repaired or replaced and the association does not have the funds on hand? Well, that’s when the association needs to review its options because the problem is not going away without some type of action.
Now that the association has identified the need and the cost of reconstruction, what are the Homeowners’ options to meet their portion of the associations funding requirements?
There are 4 options for every association;
What are the advantages of borrowing?
a.Downward slide of property values slowed or eliminated. Structural problems, which must be disclosed to potential buyers, will retard the sales process and lead to falling home prices. Rapidly improving the appearance and eliminating structural integrity problems can slow or eliminate falling home values.
b.Needed repairs/improvements completed quickly. By borrowing the money, total needed funds become available for use much faster than through the traditional special assessment process. Passing a special assessment will give the board of directors the power to collect the money. There is still the difficulty of collecting from those homeowners who do not have the ability to pay.
c.Reduced financial impact on homeowners. By participating in the loan, homeowners avoid having to make a lump sum special assessment payment. Homeowners can pay their share over time to reduce the impact on their personal finances.
What are the disadvantages of borrowing?
a.May increase monthly assessments. A special or increased assessment may be implemented to support the loan. Allocating portions of the reserve contributions can offset some or all of the increase.
b.Interest costs incurred may be high. This depends upon the loan structure. However, construction savings may significantly reduce the final effect on the association’s total reconstruction costs if done over a longer period of time.
How is the loan secured?
Assignment of association assets that may include but are not limited to monthly assessments. No liens are placed on individual units by the bank.
A vote of approval may be required;
Some banks will require that the Board of Directors be directly empowered to assign association assets by a vote of your membership. The vote is considered important because:
Getting through your special assessment membership meeting;
The special assessment meeting can be very difficult. However, there are some key steps you can take to improve the probability of your meeting going well and the vote being passed.
a.Bring allies – banker, attorney, property manager, contractor etc. Your Board does not have the credibility of the “experts”.
b.A Board representative reviews the process of the steps outlined earlier with the membership as the introduction to the meeting.
c.Experts present their area of expertise to the membership such as the banker on the loan program.
d.All questions are fielded by the expert present.
Selecting a Bank;
Selecting a bank to provide your loan can be daunting as the vast majority of banks do not offer loans for community associations. Although these loans appear to be real estate construction loans, the majority of banks who provide these loans treat them as a unique form of a commercial business loan. Some factors to consider when selecting your bank:
Finally, the approval period;
Usually, it will take up to 30 days from the receipt of all required documents for the loan to be approved. Loan documents are completed for signing within 10 to 30 days upon receipt of the signed commitment letter by the bank.
While this article has not answered every possible question with regard to lending, my intention is to give you, the HOA Member, a solid understanding of what it means should you ever heard the words, “We need to borrow money to repair our association!”
April L Ahrendsen, VP
Mutual of Omaha Bank
The views and opinions expressed in this article are those of the author(s) and do not necessarily reflect the views of Mutual of Omaha Bank.”
By Heather L. Hartung, White Bear Ankele Tanaka & Waldron
You have heard the saying that April showers bring May flowers, but have you thought that possibly pool keys cure delinquencies? Thinking outside the box is key to a successful collection effort on behalf of an association as following the standard collection process is not always the most expeditious way to collect.
The “standard” collection process starts with the association or management company sending the required reminder and warning letters noted within the collection policy and providing delinquent owners who qualify with an opportunity to enter into a six month payment plan. When these letters are ignored, and let’s face it most are likely thrown in the trash, the file is turned over to legal counsel. At this point, the standard process is for the law firm to send a demand letter and when a response is not received the next step is a personal lawsuit. None of these actions typically catch the owner’s attention. There likely is not a reaction until the owner is served with a lawsuit and then that reaction seems to occur at 4:55pm the day before the scheduled return date at court.
Is it possible to catch a delinquent owner’s attention earlier in this process? In some instances, yes. This brings us back to pool keys and delinquencies. If an association’s governing documents provide that access to amenities, such as the community pool, may be withheld when an owner is delinquent USE IT. Withholding pool privileges September to April will not have much of an impact, but notifying owners a month or so before the pool season or cutting off pool privileges during the pool season will likely result in a response. At this point, the association can, depending on the language within the governing documents and rules and assuming the association has already complied with the requirement to offer a six month payment plan, either require full payment in order to reinstate pool privileges or offer to reinstate pool privileges if the delinquent owner enters into a payment plan and remains current on the plan. When the pool season is over the owner may return to his delinquent ways, but at least there was successful collections up until the completion of the pool season. In addition, during this process associations gain valuable information that may be used later if judgment is obtained and the association seeks to collect through a bank or wage garnishment.
Accelerating dues is another alternative collection technique available in a majority of the newer declarations. These provisions typically provide after an account has been delinquent for a specified number of days that the association can call the balance for the remainder of the year due. Then, that total amount is the amount that is collected. This is typically most effective during the first or second quarter of the year and is useful when an owner is habitually delinquent.
Another alternative collection tool is to proceed with a receivership action when a property is tenant-occupied or vacant. This is the process by which the court, upon motion, appoints a disinterested, third-party to temporarily divest the owner of control over the property. The receiver seeks to rent the property (if vacant) and the rent collected is used to pay for the receiver’s time and cost and to pay the owner’s delinquent account to the association. When the property is already rented, the receiver notifies the tenant that all future rent payments until otherwise notified are to be paid to the receiver. This usually prompts delinquent owners to contact the association and/or receiver. Although not always looked upon favorably by the courts, receivership actions can be successful given the right set of circumstances.
All in all, successful collections requires thinking outside of the box and utilizing alternative collection tools when available. So the next time you think about April showers bringing May flowers also think of pool keys curing delinquencies.
Heather L. Hartung is an associate at the law firm of White Bear Ankele Tanaka & Waldron where her practice focuses on collections for homeowners associations and metropolitan districts. She may be reached at (303) 858-1800 or email@example.com.
By Melanie L. Millage, BA, CMCA, CAM, TMMC
Budget season is quickly approaching. As a Board Member or Community Manager there are many factors to consider when developing the budget for your Homeowner’s Association.
Melanie L. Millage, BA, CMCA, CAM
Director of Operations
TMMC Property Management
TMMC has been providing HOA Community Management Services to our local communities for over 20 years. TMMC is dedicated to transforming HOA Community Management through our commitment to professional standards, education and relationships – acting with honesty, integrity and transparency. Melanie can be reached at firstname.lastname@example.org.
By Sara B. Duginske, M.S., Director, Credentialing Services Community Association Managers International Certification Board (CAMICB)
If you’re one of many CMCAs gearing up for the Fall and Spring recertification cycles, the summer months are a perfect time to regroup and recharge by participating in fun and educational learning opportunities. It’s never too early to make sure you’re on track to successfully complete the process. Recertification means you’re an accomplished professional committed to developing your skills and knowledge.
Recertification is a critical component to promoting and demonstrating continued competency in the community association management profession. In order to maintain the CMCA credential, recertifying CMCAs must participate in continuing education in the field of community association management totaling at least 16 hours of continuing education coursework every two years, and pay the $105 annual maintenance fee.
The CMCA examination is NCCA-accredited and in the professional credentialing industry, NCCA accreditation represents compliance with best credentialing industry practices. As a CMCA you can continue to enhance your marketability, show your dedication to your profession, and provide the highest level of guidance to your associations by continuing your education and maintaining your certification.
Recertification also provides the opportunity for you to reaffirm your commitment to the CMCA Standards of Professional Conduct to your community associations, your employers, your peers and the millions of people living in community associations.
There are numerous professional development opportunities for CMCAs, ranging from college degrees and coursework, to conferences, professional coaching, community workshops, seminars, symposiums, and webinars. There are many courses offered that cover a wide range of topics including community association management operations, administration, legal requirements, accounting, human resources, and public administration.
In February 2017, the CAMICB Board of Commissioners approved a new continuing education policy for individuals seeking CMCA recertification.
Make sure to familiarize yourself with those changes, many of which are located in the Credit Specification section which can be found here: https://www.camicb.org/Pages/ContinuingEducation.aspx
In addition, it’s important to note that anyone who meets the continuing education requirements to maintain the following credentials will meet the CAMICB continuing education requirement:
Are you receiving the CAMICB SmartBrief, exclusive to CMCA credential holders? This weekly snapshot of both industry and CAMICB news will keep you up to date on what’s happening in the field of community association management: https://www.camicb. org/Pages/Smartbrief.aspx
Upcoming Chapter Events And Approved Educational Programs/ Offerings can be found at http://www.cai-rmc.org/Events
Visit www.camicb.org for useful resources, links, approved continuing education courses and providers.
By Tia M. Zavaras, Benson, Kerrane, Storz & Nelson
As a Coloradan, you don’t need to be a meteorologist to know a couple truths about our weather. It can be extreme. And it can be unpredictable. Three weeks ago, I was seeding my lawn and planting flowers. Today, I’m watching the sun melt the remnants of the last snow storm off my deck. I love the unpredictable Colorado weather, but I have seen many cautionary tales of communities caught off guard when Mother Nature invariably strikes. Because we don’t have a crystal ball to tell us when our next weather event will occur, this is the time of year to take inventory of the preventative measures you can implement in your communities. These measures go a long way in preventing costly damage to residential and business structures and their contents.
The best way to get communities ready for Mother Nature is to do a site walk with a trusted licensed contractor. Take time to walk around every building to observe the conditions. The most important function of a structure is to keep Mother Nature out.
After a storm, take the opportunity to look at how water is being managed around the community. Pay attention to window and door leaks. They can and will damage the contents and finishes of the home or business but, over time, prolonged and continued water intrusion into a structure will also damage the building framing. If water is entering the structure at multiple units in the same community, contact a licensed architect or engineer to determine the cause of the water intrusion and to provide a repair recommendation that can be implemented by a licensed contractor.
We often feel the wrath of Mother Nature first at the top of the structure. Is it time to perform maintenance on the roof penetrations such as plumbing vents and skylights? Are the boots on the vents cracked and damaged? Has the sealant at the vent or flashing deteriorated? These are all common areas of water intrusion following heavy precipitation. Inspecting and maintaining these areas will go a long way to prevent Mother Nature from wreaking havoc on the roofs.
Move to the sides of those roofs and observe how the gutters are performing. Roof gutters serve to remove snow and water away from the structure. Are the gutters clogged with the leaves and debris from last fall? In the winter, they can become blocked or damaged by ice damming. Gutters need to maintain proper slope so that the water does not sit against the roof structure any longer than necessary. Follow the gutter to the downspout extension. Is the extension still attached or has it been removed and is lying next to the building? Is the elbow bent up against the structure, preventing proper discharge of the water? Re-route any extensions that discharge water near a window well. Make sure that the extension has positive slope to properly discharge water at least six feet away from the building foundation. Speaking of foundations, walk around them. Is water ponding against the foundation because the grade is flat, or has little or reverse slope towards the building?
Step back from the buildings and observe whether water collects and saturates the sod even though it has been days since there has been precipitation. Is there an area that is referred to as the community’s “mosquito coast” because of a constant source of stagnant or ponding water? If so, it’s a good idea to have an engineer provide grading recommendations. You’d be two steps ahead of Mother Nature.
In summer, even when Mother Nature has been quiet for five minutes, it is not uncommon for sump pumps to be working overtime to remove water from the foundation. Is that sump pump discharging on to the sidewalk, making it a mossy mess during the warm months and a sheet of ice when it’s cold? If so, your engineer can help re-route the sump pump discharge.
One smart way to get ahead of Mother Nature, is to review your communities’ liability insurance policies with your favorite insurance broker to determine if they are adequately insured for losses due to Mother Nature. More and more communities are having to opt for high deductible policies, especially for hail claims. If your community will incur a significant deductible on their next hail or flood claim, the association will invariably have to specially assess owners to pay that deductible. Those assessments can run in the thousands of dollars. If any of your communities have these high deductible policies, it’s a good idea to notify the owners and recommend they add a very inexpensive “special assessment” endorsement to their own personal owners’ insurance policies to cover the special assessment.
An ounce of prevention is worth a pound of cure, and this couldn’t be more true for community associations in Colorado. Taking steps now will save you and your communities from headaches in the future. As Mother Nature has shown us in recent years in Colorado, we never know exactly what to expect, be it wildfires, blizzards, wind storms, hail, or floods. However, by being proactive and taking a few steps now before disaster strikes, you can position your communities to weather whatever Mother Nature decides to throw at them.
Tia M. Zavaras is a Partner at Benson, Kerrane, Storz & Nelson. When she is not attending her boys’ sporting events or litigating construction defect cases, she enjoys gardening and working in the yard.
Governor Hickenlooper signed SB13-126 into law (2013), requiring community associations to permit owners to install Type 1 and Type 2 electric vehicle charging stations on their lots and on limited common elements designated for an individual owner’s use. SB13-126 adds Section 106.8 to the Colorado Common Interest Ownership Act and states the following reason for the legislation: The primary purpose of this section is to ensure that common interest communities provide their residents with at least a meaningful opportunity to take advantage of the availability of plug-in electric vehicles rather than create artificial restrictions on the adoption of this promising technology.
The new law further encourages associations to apply for grants to assist with funding electric vehicle charging stations on common elements. SB13-126 goes on to state requirements for electric vehicle charging stations that associations must permit. With this new legislation, which is effective immediately, associations cannot prohibit installation of electric vehicle charging stations on an owner’s unit or limited common element designated for the owner’s use and cannot charge owners a fee for the right to install a charging station.
While SB13-126 grants owners permission to pursue the installation of electric vehicle charging stations, the law does not require associations to incur expenses related to the installation or use of these stations. Some properties may require upgrades to electrical wiring and disruption to common areas as part of the installation work for a charging station. Associations can and should address these issues through policies and agreements with owners who are seeking permission to install charging stations.
As part of their policies concerning electric vehicle charging stations, associations can require the following:
Because the law goes into effect immediately, associations should consider adopting policies now so that procedures are in place before owners submit architectural requests for charging stations. A number of industry professionals testified at committee hearings as SB13-126 moved through the legislative process and are available to assist associations and owners with designing solutions that fit the unique aspects of their properties.
If your association needs help with a policy, or seeks professional assistance on installation options on site, contact one of our attorneys for information and resources.
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By Dave Root, Colorado State Forest Service
It’s July, so it’s probably safe to say that the evening news is reporting on some community, somewhere, threatened by wildfire.
Every home, business or community within or close to wildland fuels, be they forests or grasslands, is at risk from wildfire. The specter of such destruction is frightening to confront, and perhaps that is why so many communities choose to ignore it—often at the cost of lives, property and the wildlands so loved by the residents. But communities that acknowledge this threat and take action in advance have the best chance of surviving a wildfire.
Take the example of Cathedral Pines, a community in the direct path of the 2013 Black Forest Fire north of Colorado Springs. The developer of Cathedral Pines had the foresight to thin the forests, removing unhealthy trees and dangerously unnatural fuel accumulations, before the homes were even built. As the fire burned through the community, the prior fuel reduction efforts reduced the fire’s intensity, and only one home, near unmanaged forest outside Cathedral Pines, was lost. Furthermore, the forest survived with the loss of only a few trees, so the community and its forest quickly recovered. If Cathedral Pines demonstrated that a community that is prepared can survive Colorado’s most destructive wildfire, why do so few communities plan and take actions for their own survival?
One reason is that oftentimes they don’t know where to begin. The first step is a simple phone call to your local fire protection district or Colorado State Forest Service (CSFS) district office. The CSFS is a service and outreach division of the Warner College of Natural Resources at Colorado State University, and assists communities and landowners with forestry and wildfire mitigation issues. Nineteen district and field offices are located around the state, with contact information available on the CSFS website at www.csfs.colostate.edu.
Every task also begins with a plan, and help is available to communities through the creation of a Community Wildfire Protection Plan. Although the name may conjure images of a complex document written in confusing jargon, CWPPs, as they are known, are actually written by the communities themselves, in language they understand, with the assistance of a forester. In plain English, these plans answer three questions:
Motivating the community to take action is the next task. There is help here as well. Your local fire protection district and CSFS representatives will work with your community, with firefighters available to speak at HOA meetings and community events. Many fire districts also will visit homeowners and provide confidential recommendations for reducing fire risks inside and outside the home.
The CSFS also provides information and literature on a wide variety of forestry and wildfire topics. Forest health and wildfire risk reduction are inseparable goals, and a forester can additionally offer advice about insect and disease problems and help communities improve forest health while reducing wildfire risk.
By Michelle Cruff, Gravely and Pearson LLC
Most of us in Colorado have had to deal with it at one time or another. Those dreaded ice-balls falling from the sky: hail. As many Coloradoans know, storms like the devastating early-May tempest that dropped nearly 2-inch hail and took out the Colorado Mills Mall are just the beginning of an often nightmare-like experience. But there are a few ways that homeowners and managers can make this experience easier on themselves and their communities. Here are 13 tips for what to do when you have found yourself and your community in the eye of the storm:
1. Document, Document, Document! Take photos before a loss. This can be a video of the property, photos, or any other form of evidence that shows that the property looked like in “good” condition.
2. Notify your insurance company of the storm that came through (in writing) even if you do not believe there were any damages. Why, you ask? It is your duty under the insurance contract. Plus, you, as a homeowner or manager, may not know of any damages right off the bat, as water intrusion can happen over time. Months down the road, owners and tenants may be complaining of leaky roofs where no leaks ever existed before, and it all relates back to a single hail-storm. By notifying your insurance company immediately, they will send out an adjuster to formally inspect the property for damages. In the event they say “no damages were found” or “minimal damages were noted, but not enough to meet your deductible” get a second opinion.
3. Document, Document, Document! When a loss has occurred, once again, document the loss, by taking photos, videos, etc. 4. Obtain a certified copy of your policy. Don’t get just the declarations page, get a full copy. This will ensure that you are able to identify key aspects of your policy such as limits, deductibles, and exclusions as of the date that the damage happened.
5. Designate “one voice” to interact with the insurance company. This can either be the manager, or the Board President. This will protect the community from any errors in communication and will help to prevent related delays in your claim.
6. Mitigate your damages. If you need to place a tarp over the roof to prevent further damages, do it. Keep any receipts that you paid out of pocket to mitigate any damages. However, DO NOT MAKE PERMANENT REPAIRS.
7. Document, Document, Document! Cooperate with your insurance company and be proactive about working with them. Document all of your communications; these should be done in writing and you should limit any verbal conversations
8. Contractors, public adjusters and roofers will come out of the woodwork after a storm. Check their references and keep in mind that contractors and roofers cannot advocate, negotiate claims, or discuss coverage and exclusions with the insurance company. Only a public adjuster or an attorney can do this. Also, anyone who promises to pay your insurance deductible is violating Colorado law!
9. Get your own estimate of damages. It’s like getting a second opinion on a medical diagnosis. Hire someone who can obtain all damages. Hail storms can damage not just roofs, but also gutters, fences, siding, rtu’s (roof top units), brick, handrails, etc. Getting your own estimates will help you in evaluating whether your insurance company is paying sufficiently.
10. Document, Document, Document! Have we said that before?
11. If your insurance company requests a “proof of loss”, an “examination under oath”, or “appraisal,” tread lightly! These requests, if not handled properly can lead to severe limits of coverage or bar any recovery under your policy.
12. Make sure to mark your calendars; many Colorado insurance policies require communities to file a lawsuit (if necessary) within two years from the date of the storm.
13. Contact an experienced law firm in the event that you feel you are running up against the two year deadline, were treated unfairly, bad faith is involved, the claim was underpaid, or if you were denied payment of your claim. Make sure the law firm you choose has experience in insurance disputes and handling HOA matters, and has a successful trial record.
Michelle is the Vice President of Client Relations at Gravely & Pearson, LLP, a Texas-based law firm that handles hail damage and insurance recovery cases around the country.
By David Closson, HindmanSanchez, P.C.
With continued advancement in fracking technology, oil and gas operations continue to spread across Colorado. As a result of this increased development, more and more community associations are being faced with a multitude of decisions regarding the minerals underlying the community’s common areas.
Oil and gas companies perform extensive title work to determine the owner of mineral rights. After ownership is determined, the company will send a “landman” to contact the owner of the mineral rights in an attempt to acquire rights to develop those minerals. For a typical community association being contacted by a landman is the likely first indication that the association may own mineral rights.
The owner of real property in Colorado may separate or sever ownership of the surface estate of the property from the mineral estate so that ownership to the surface vests in one owner while ownership of the minerals vests in a different owner. Such separation is commonly done long before a residential subdivision is developed. This results in situations where community associations with common area parks and open space parcels may, or may not, own the minerals underlying their property.
Assuming an association owns mineral rights, the association has the following four options when approached by an oil and gas company interested in developing the underlying minerals: (i) sell the minerals; (ii) enter into a lease with the oil and gas company; (iii) become a partner in the drilling project; or (iv) do nothing and be subjected to Colorado’s “forced pooling” statute.
Sell the Minerals—As discussed above, the mineral and surface estate can be severed and separately owned. This would allow an association to sell the minerals under their common area parks, detention ponds, and open spaces while maintaining ownership of the surface estate of such property for its intended use.
Enter into a Lease—The association could enter into a lease with the oil and gas company allowing for development of the minerals. Under this option, the oil and gas company would pay a royalty to the association equal to a percentage (typically 15% - 19%) of the value of the oil and gas produced from the property.
Participate in the Drilling Project—A mineral owner is also entitled to participate in the drilling, thereby becoming a partner in the project. This option would allow the association to share in the profits from the project. However it would also require the association to pay its proportionate share of the drilling costs for the well. This option may be unappealing, as drilling and completion costs for a well today commonly exceed $5,000,000.
Do Nothing—If the association does not want to sell the minerals and refuses to enter into a lease or actively participate in the project, the association may elect to simply do nothing. The oil and gas company could seek a pooling order from the Colorado Oil and Gas Conservation Commission and the project could move forward under Colorado’s statutory pooling provisions. This option requires the other participants in the project to pay the association’s proportionate share of the drilling costs. The association will be entitled to share in the production revenue from the project, but only after the other participants recover 200% of their drilling costs. This is essentially a penalty for not sharing in the financial risk of the project.
The issues and options above implicate a myriad of legal issues for a community association holding mineral rights. For example, an association will need to determine if a proposed course of action can simply be approved by the association’s Board of Directors, or if a community-wide vote is needed. Such approval requirements will depend upon the specific nature of the proposed transaction, as well as the contents of the association’s governing documents.
In the event a lease is desired, the association should ensure that provisions within the lease addressing issues such as royalty amounts, surface use rights, warranties of title, and indemnifications adequately protect the community. Finally, although documents such as oil and gas leases may be presented as “standard forms,” they are nevertheless subject to negotiation and revision as may be necessary to protect the community.
David Closson is a partner at HindmanSanchez, P.C.. HindmanSanchez has been dedicated to representing community associations in Colorado since 1988.
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