Many Factors Included in Setting Assessment

QUESTION: Our condominium consists of 31 units. A spa and swimming pool are the only amenities. The water supply for the whole complex is on a master meter. How can I determine if the assessment amount that is being charged to all the owners is reasonable?

ANSWER: Even if you find another 31-unit complex with the same amenities in your area, costs can vary considerably from one association to another. Many factors contribute to the differences, including the amount of landscaping and janitorial maintenance that is required or desired. Some associations hire very cheap labor for these services while others expect a more professional approach.

Insurance costs vary greatly from one association to another. Some associations get by with purchasing the bare minimum in coverage while others purchase workers’ compensation, extra liability and earthquake coverage even though their documents do not require it.

The Institute of Real Estate Management publishes the results of a national survey of expenses for community associations. The book is called “Expense Analysis: Condominiums, Cooperatives and Planned Unit Developments.”

The data includes utilities, maintenance and insurance costs, as well as taxes. Metropolitan, regional and national statistics are grouped according to the association and building type. The cost of the publication is $110 plus postage and shipping costs. You can obtain a catalogue of IREM’s publications by writing to: IREM, P.O. Box 109025, Chicago, Ill. 60610-9025 or call the IREM office at (312) 661-1953.

Insurance a Protection for Entire Association

Q: Our association’s legal documents are not specific about the type or amount of liability insurance the association should have. I am sure you have recommended in your column that every board of directors should have directors’ and officers’ liability insurance that is similar to a corporation’s errors and omissions policy.

I cannot persuade our board to purchase this coverage because there is one very intimidating member who feels it is an unnecessary expense. She says a general liability policy is sufficient.

Could you please give us your opinion?

A: Associations should always obtain insurance according to the stipulations in the legal documents at the very least. If the documents are outdated or non-specific, the board should be very conscientious about making sure that coverage is adequate.

Since your association’s documents are not very specific I can give you some general guidelines. Besides having at least $500,000 general liability coverage if your association is under 100 units, your association should purchase directors’ and officers’ coverage. If your association consists of more than 100 units, the coverage should be at least $1 million of general liability plus the directors’ and officers’ coverage.

Directors’ and officers’ liability coverage protects the board members and the association if the board or one of its members makes a decision or takes action that results in legal action.

For instance, if your replacement reserves are not adequately funded an owner might decide to sue the board for negligence or mismanagement. This kind of legal action is not a result of property loss or damage. It is the result of a decision or lack of proper action on the part of the board of directors.

Boards that are very careful about making all the right decisions are still vulnerable to a lawsuit because of the complexity of the business affairs of the association. Even an unjustified suit requires legal expenses to get the action dropped or take it to mediation or arbitration. Every owner shares in the cost of legal action so it is in the best interests of all the owners to have proper protection.

I recommend that your board discuss its liability with the association’s attorney and insurance agent and then make an informed decision as soon as possible.

Consultant Suggested for Major Undertaking

Q: There are numerous hairline cracks in the exterior stucco of the structures owned by our homeowners’ association. Since our reserves will not cover the $46,000 needed for painting, our board has determined that we should take out a long-term loan. The owners will have to pay $25 a month for the next 10 years.

I am not convinced that the repairs are needed immediately. I would prefer increasing the assessments to build up the reserve funds so that we will be able to afford this kind of expense when it becomes necessary.

Will the extra $25 added onto our monthly assessment make the units more difficult to sell? Will the rental population increase if owners are unable to sell their units?

A: I doubt if the long-term loan will make the units sell any slower than a general increase in assessments. It appears that your association has to increase its reserve fund besides providing for the cost of the painting work.

Perhaps the rental population will increase if owners cannot sell. That will be the case also if the association has an inadequate reserve fund. Buyers and mortgage lenders are becoming very wary of associations that do not have adequate money set aside for future repairs and replacement of the major components of the property.

From the tone of your letter, it appears that you are convinced this costly project is not needed at the present time. Do you feel the board failed to conduct proper research before making the decision?

If the board has not contacted an independent consultant, that is what I would recommend. By hiring a consultant who is not involved in bidding on the work, the board should be able to obtain impartial advice. Perhaps the cracks are simply cosmetic. If the problem is more than cosmetic, waterproofing and texture coating may be preferable to just painting.

Since the association is not wealthy, it may be difficult to persuade the board to pay a consultant, but wiping out the reserve fund or saddling the association with a 10-year loan is not the type of action the board should approve without thorough study and planning.

Hickenbottom is past president of the Greater Los Angeles chapter of the Community Associations Institute (CAI), a national nonprofit research and educational organization. She welcomes readers’ questions, but cannot answer them individually. Readers with questions or comments can write to her in care of “Condo Q&A;,” Box 5068, Thousand Oaks, Calif. 91360.