Homeowners associations created since the mid-1990s are experiencing their first sustained widespread economic downturn and may not have a clue of what to expect. Associations that survived the recessions of the mid-1970s and the late 1980s may have forgotten the hard-learned lessons of those eras. Although we know that the economy is cyclical, we seem to train only for the good times.
It takes money for a homeowners association to perform every function at an optimum level to the satisfaction of its most demanding leaders and members. During good economic times, members may be eager to pay assessments at a level that ensures a “first-class neighborhood.” They are willing to pay for the necessary manpower, professional services and materials. During hard times, associations are forced to juggle while trying to balance on an uneven slippery surface. It’s not a question of whether balls will drop, but which ones and how often.
Each association is different and will be impacted in various ways during sustained economic downturns. Association decisions won’t—and probably shouldn’t—be easy, but it’s important to discuss them and find the right solutions for your community.
Less Income. During hard times, the association has an unreliable income stream because it cannot predict how many owners will default on their assessments or how many will be late-payers. When a measurable percentage of homeowners are unemployed and losing their homes to foreclosures, some assessments won’t be paid and can’t be recouped.
More Expenses. Not only does the homeowners association have less income during hard times, it also has some new expenses, such as mowing lawns and draining pools at abandoned homes. Should the association ignore the unkempt yards and mosquito infested pools, even though they create hazards and eyesores for the neighborhood? Or should the association tackle blighted lots with common funds that may never be recouped from absentee owners? Although defaulting owners are required to reimburse the association’s expenses, it often doesn’t work out that way, and the association is left holding the bag. How much should the association spend to go after nonpaying owners?
Assessments. Faced with less income and extraordinary expenses, the association’s leadership must make a fundamental decision—increase the amount of assessments paid by the contributing owners to cover the gap or reduce the association’s expenses to live within the income it receives. More often than not, the association will try to reduce expenses rather than increase assessments to help its members hang onto their homes. Even so, at some point, an assessment increase may be necessary.
Allocating Resources. Associations that decide to hold the line on assessments face difficult choices about allocating resources. Some opt to spend on functions that the members see, such as recreational amenities and staffing an on-site office. The deepest cuts may be less apparent to the average owner, such as reducing insurance coverage, not funding reserves, reducing employee benefits and using lower-priced and less-experienced vendors. Other associations cut back first on their most visible functions so their members can witness the belt-tightening. Other associations do a little bit of both—trying to perform every function at a minimal level, but no function at an optimal level.
Rules. Enforcement takes manpower and money, both of which may be needed for other functions during a downturn. When an association cannot afford to enforce every rule and restriction to the satisfaction of its most demanding members, should the association dilute the rules so there is less to enforce, or retain the rules for their aspirational value even if enforcement is not affordable during the downturn? In either case, the association may be forced to focus its limited resources on the violations that have the most adverse impact.
Community. One of the lessons that came out of the 1980s recession is that neighborhoods with a sense of pride recovered more quickly as measured by home sales and property values. People who enjoy living in a community try harder to keep and maintain their homes. How do you create a sense of community with fewer dollars? For one association, it means keeping the community pool in immaculate condition, at the expense of other functions. For another, it manifests as frequent changes of seasonal flowers at the community entrance. Another association may justify hosting an annual social event for its members. What may seem like a frivolous expense may actually be an investment in the human fabric of the community.Bottom Line.
When an association looks at its bottom line during a recession, it should be mindful that its residents have struggles and hopes and the community has rules. During downturns, when facing difficult choices about allocating limited dollars among many functions, an association’s leadership and management should be particularly aware of how their decisions and actions affect the intangible heart of the community.
Sharon Reuler is a real estate attorney in Dallas.