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2020 and Beyond Association Governance Model

​​​​​CommNextWebHdr.jpgAssociation Governance Model

As common-interest communities (CICs) continue to become an even larger percentage of the U.S. housing market, legislators and the courts will have no choice but to reform current statutes to facilitate both growth in the industry and to reflect the governance realities facing associations. However, the panel felt strongly that these changes could be brought about earlier through a concentrated effort by the community association industry— homeowners, managers, business partners, and CAI and its concert affiliates, such as AARP, the National Association of Home Builders (NAHB) and the National Association of Realtors (NAR).

The community association governance model of today does not fit all associations. By extension, it will not fit the associations of the future without changes in state statutes, in municipal requirements and in association governing documents. 

 Association size is a distinction seldom considered by legislators, developers and even community association professionals. It’s no surprise, therefore, that municipalities require developers to create associations for even the smallest projects. These associations are then saddled with governing documents and become subject to irrelevant codes that create obstacles to their operations. In small associations, two of the biggest problems are the burdens placed on board members and the issue of underfunded reserves.

Although many associations lack financial and volunteer resources, these challenges are magnified in small associations. Associations, lawmakers, developers and managers of the future will need to find ways to ease the burdens of the association model for very small associations. Ideally, small associations would be exempt from irrelevant or inappropriate state statutes. And developers of these small associations would be relieved of the requirement to establish an association unless a minimum number of homes are built. Restrictive covenants and deed restrictions would be among the alternatives that provide homeowners in these projects with some measure of protection in matters such as architectural control. 

These more flexible requirements seem to be working well, and th​is success should be communicated to other state legislatures. Ideally, municipalities would support the development of new, small communities, and small developments could be free to establish voluntary associations if they wish. 

Statutory exemptions, however, neither eliminate the need for governing documents, nor do they adequately address the full issue or change the small association’s model. That model might offer different, unique or “scaled” documents, reserve requirements or number of board members. Success might be found in relaxed governance models for future small associations. 

On the other end of the spectrum, large-scale associations of the future have already given rise to a new type of service provider—the professional amenity manager. Amenity management is becoming a significant aspect of many community managers’ job descriptions. However, it does require a different skill set and knowledge than traditional community management. Large-scale associations of the future will likely contract with managers or management companies that have qualified experience in amenity management or sell their amenities to third parties who would pay a percentage of earnings to the association. 

All associations need well-qualified volunteers to serve on their boards. Savvy future developers as well as existing associations should be encouraged to set minimum requirements for board service, such as education level, professional experience, prior leadership positions and attendance at accredited board education programs.
At some point, board expertise and qualifications will have to be controlled more carefully. As some already do, governing documents of the future may contain provisions for the automatic removal of inadequate board members. In the absence of qualified volunteers, communities in the future will likely explore creative alternatives to seating competent board members, such as turning to professional board members or a corporate model.

Some associations in the future might pay a modest stipend to board members, similar to what city council members receive. Although such stipends would create an incentive for residents to volunteer, they would not ensure competence, which only will be achieved by requiring board members to attend accredited board education programs. Eventually, state or local government statutes and ordinances also may require formal board education. While mandatory requirements may reduce the number of people who volunteer, they will also eliminate at least some unsuitable candidates. 

Board members—both now and in the future—also need solutions for policing residents’ behavior. Even when public laws are broken (nuisance, malfeasance), municipalities frequently claim, “It’s a private matter; take it up with your board.” Many people who are new to association living, and especially those who have different cultural paradigms, have difficulty comprehending the idea of neighbor “police” enforcing rules they don’t know about or don’t understand. Board member performance in this area will be enhanced by training in mediation, dispute resolution and talking to people informally to work out problems. Professional mediators, establishing more formal “law enforcement” style divisions for the association and outsourcing rules enforcement to professionals are additional solutions boards might employ.

Other associations might update their governing documents to include a standing community relations committee, turn to local government entities or to private sector resources more frequently for fee-based alternative dispute resolution before embarking on rules enforcement proceedings, and they may make use of government liaison programs or ombudsmen to field questions from homeowners.

Finally, board roles will be impacted by the presence of millennials at the board table in the next 10 to 15 years. As a group, millennials are civic minded and want to have an influence in shaping their organization and its future, but they distrust institutions. Under the current association model, millennials’ influence is limited, therefore the environment must be less governmental and more flexible and social to gain their participation in the future.

Today’s community association governance model is a product of state and local statutes, ordinances, planning board requirements and the influence of developers who are required by those statutes and government entities to create associations in the first place. The success of these associations rests squarely on the quality of the documents that these developers file. Unfortunately, however, many developers and their attorneys don’t focus on the future operational and governance needs of the association after the developer departs. In fact, developers are unlikely to be aware of problems that arise later from cookie-cutter or antiquated documents that don’t address the unique needs of a particular association. 

20206.PNGRaising the consciousness level of developers will require effort and time. Unless and until filing and approving governing documents becomes as detailed and specific as site plan approval, making sure governing documents are relevant and appropriate will be an ongoing education project. 

Developers need to understand that drafting appropriate documents in the beginning is far better than amending inappropriate documents later. Most important, developers need to appreciate the unique opportunity they have, not just to improve an association’s governing documents, but to improve the quality of life in their developments for years to come. 

Connecting with developers and their attorneys early in the process is vital but challenging in accomplishing these imperatives. Working with other key groups such as NAHB and the American Bar Association (ABA) is an obvious first step, with further discussions and outreach needed. 

In the interim, however, CAI—through the College of Community Association Lawyers (CCAL) and with financial support from CAI’s President’s Club—might consider developing an updated model governing documents that includes flexible provisions. These new model documents should be made available to developers’ attorneys along with an explanation of why flexible provisions should replace those that are contained within their current “standard” documents. 

At the very least, developers and their communities would benefit from a checklist of appropriate ways to draft these enlightened governing documents. Moreover, CCAL, in conjunction with the ABA, might develop variable checklists that cover the many possible exigencies in various types of communities. Another model that might be considered would be “flexible” documents. For example, documents could be written so that only some provisions are fixed and as many sections as possible are flexible. This would provide protections for developers through transition, while leaving remaining sections customizable by the owners after transition. 

An additional challenge that compounds the problem discussed above is the misperception among developers and others that real estate attorneys are the appropriate professionals to draft and file documents establishing CICs. While many real estate attorneys excel at CIC law, they are the exception, not the rule. Too many understand too little of a community associations’ unique nature. 

Developers must be educated about the value of retaining attorneys who specialize in CIC law. Likewise, real estate attorneys need to understand the value of collaborating with CIC ​attorneys or of gaining a deeper understanding of CIC law themselves. It’s an excellent step toward this end when CCAL fellows work with the ABA to achieve recognition for CIC law. Furthermore, we need to require that only attorneys qualified in CIC law be allowed to draft documents for new communities, and developers and prospective attorneys should be required to sign an affidavit attesting to the attorney’s knowledge of CICs and CIC law.

Despite their obvious value, inadequately funded reserves remain the biggest challenge for nearly all community associations. Recent economic conditions have severely diminished many associations’ reserves, and few have been able to catch up. These same economic conditions slowed the housing market in many parts of the country and increased the time from groundbreaking to turnover from three to 10 years in some instances.
20205.PNGDevelopers who now face an extended sales period have little incentive to fund reserves. Instead, some developers fund reserves just before turnover, while others follow best practices and fund reserves according to the reserve study recommendations. Still others believe the newly established homeowner board is responsible for funding the reserves, and the new community effectively starts out with an inadequate reserve fund. Subsequent assessment increases are necessary to catch up reserve funding, which then creates a financial burden for new owners.

Although many state statutes now require associations to conduct some type of reserve study, a number of these same statutes also include loopholes and exemptions that allow associations to forego funding reserves. State reserve laws and governing document requirements notwithstanding, many associations are not adequately funding their reserves. For very small associations with no amenities and no structural maintenance requirement, there may be no need for reserve funding, and any such state requirement should be relaxed or eliminated for those associations.

The Uniform Common Interest Ownership Act (UCIOA) exempts homeowners associations with fewer than 25 units from the reserves requirement. Uninformed homeowners perceive reserves as increased financial burdens rather than financial protections. These homeowners remain unaware of the financial burden that a future special assessment may cause them and their neighbors. Conversely, informed homebuyers know exactly what a small reserve fund means—potential special assessments or escalating assessment increases—and they will go elsewhere to find a home. But these buyers are likely to remain a minority. Older residents living on fixed incomes are particularly hard hit by ​​​​​​​precipitous assessment increases or by the special assessments that are required to make up the reserve fund shortfall.

If developers, legislators and other key players truly understood the costs to run an association, they might take a different approach to funding reserves before transitioning an association to homeowners’ control. It’s a woefully common scenario to see an individual or family stretch their financial envelope when buying a new home, only to lose that home when they get hit with hefty annual assessment increases or special assessments. This is one reason why the Federal Housing Administration (FHA) has placed special requirements on reserve funding in its loan approval process. It’s unfortunate that this requirement currently applies only to condominium mortgages.

Homebuyers’ understanding also is integral to the financial health of community associations. The process of buying a home does not foster homeowner understanding of the nature and obligations of living in a community association. Most association financial woes could be reduced significantly if homebuyers had access to unambiguous, understandable documents and more disclosure before they purchase.

A rating system for association finances—including reserves—is being developed and soon will be included on the multiple listing service (MLS). While this is a good start, a oneor two-page disclosure checklist, possibly created as a joint project of CAI, NAHB and NAR, would be valuable as well.

Market incentives may be more effective than regulation, which tends to have loopholes or lead to lawsuits. The panel recommends that CAI pursue joint ventures with NAR, NAHB and other organizations not only to create meaningful financial rating systems but to educate their members about using the system to everyone’s advantage. It would be beneficial to provide financial and operational information to assist the potential buyer in selecting a home in a community that most closely fits his or her economic, social and cultural needs.

An aging population will bring several key developments to community associations. Naturally occurring retirement communities (NORCs) will proliferate in the next 10 to 15 years. Many associations will find themselves evolving into assisted living facilities, even though they’re not prepared for the additional burdens that will be placed on them by aging residents. Many governing documents contain restrictions on use or other provisions that preclude providing additional services to certain members such as the elderly. Nevertheless, aging residents will expect—perhaps ​demand—that associations make it possible for them to remain in their homes. 

Consequently, future associations may have to depend more on outside services to meet the needs of older residents. These needs will include not only the activities of daily living (ADLs)— which are basic self-car​e functions like eating, bathing, dressing, toileting, transferring (walking) and continence—but also will often require support to provide for the instrumental activities of daily living (IADLs), like managing finances, preparing meals and providing transportation. 

Aging in place is by far the preference of older residents, and access to support for both ADL and IADL is key to allowing them to do so. Managers and community association professionals will need to prepare their association clients for the accelerated changes in NORCs. Some older residents may require roundthe-clock (live-in) caregivers—both contracted healthcare providers and also family members, a requirement that may create a conflict with association occupancy requirements. Group homes, for example, might run afoul of single-family home requirements. Scheduled (drop-in) caregivers will create increased traffic and a need for additional visitor parking. The same holds true for deliveries and medical services that will increase the need for shortterm parking or concierge services from the association. 

Millennials will have a profound influence on the housing market in general and community associations in particular. In roughly 15 years this demographic will be 33 to 49 years old and in need of housing. Millennials grew up during the recession, lived through the instability of the housing market collapse, and many saw their parents lose their homes to foreclosure. Consequently, they may be less committed to the future and putting down roots and more likely to rent. Their impact is likely to motive lenders to create new tailored products—rent-to-own mortgages and portable mortgages—that follow buyers as they move about.

​Millennials also tend to make decisions informally, using lots of email and texting—methods that boomers will regard as slapdash. Boomers will adhere to the board meeting concept that millennials will find tedious and unnecessary. Many governing documents have bare minimum requirements for meetings and transparency that millennials will want to enforce. However, millennials are likely to find these requirements outdated and impractical in a few years; they are likely—eventually—to amend documents and association procedures manuals to provide for fewer meetings, decision-making by email or text, and homeowner engagement via social media.

Ethnic changes also will drive developments. According to the Pew Research Center, by 2060, Hispanics and Asians will make up 39 percent of the U.S. population—almost double the percentage in 2015. Language and cultural differences in the general population will require equivalent changes in association management and governance to prevent disenfranchising these homeowners. Hispanic, Asian and other ethnic association managers will be in demand, and bilingualism will be a valued job requirement. In all likelihood, it will be easier (and more practical for peaceful association living) to provide multilingual governing documents, rules, newsletters and websites to residents than to expect them to learn English.

As younger residents populate communities, associations will find it imperative to accommodate electronic communication and conduct business online. In addition, associations need to pay close attention to cybersecurity. Many associations have substantial reserves and a wealth of personal data and are vulnerable to cyberattacks. Upgrading technology and hiring specialists to conduct security audits will be essential.

Most legislators do not thoroughly understand common-interest communities or who their patchwork legislation is actually protecting. Legislators too often shoot from the hip, passing laws that ricochet and cause collateral damage. And they will continue to do so in the future unless the CIC interests undertake vigorous lobbying and education programs and awareness campaigns to enhance their understanding. It’s likely that increased legislative attention to CICs in the future will exceed volunteers’ capacity to advocate on associations’ behalf. As community associations become a larger issue for legislators, boards and their associations increasingly will need a voice—their own professional lobbyists—to advocate for them in the state legislatures and local jurisdictions.

While CAI plays a large role in advocating for associations, it is possible that management companies and homeowners may arrive at a point in the future where they require lobbyists representing their specific interests. Eventually, CAI’s leaders will need to take a hard look at the conundrum of advocating on behalf of community associations and board members when there may be CAI members on opposite sides of a legislative or legal issue.

The success of an organization is fundamentally impacted by its ability to govern effectively. Stakeholder understanding of the current landscape and future developments can create innovative approaches to remedy key issues. Building effective relationships with key groups will further advance the cause to have flexible, responsive, financially healthy and well-run associations.​