Beware of Costly Flaws in Your Assessment Declaration

One of the most important things that a Community Association can define through its Declaration is the method and mode of operation regarding how assessments will be generated and collected. However, many associations make the mistake of treating their Declaration as boilerplate -- a mistake that could lead to fiscal heartbreak for the association in later years. Take a look at the flaws identified below and see if your association's Declaration contains any (or all) of them. Never fear if you find these flaws dwelling in your Declaration; there are steps you can take to reduce the damage or avoid it altogether.

Declaration Flaw #1: Artificial Caps on Annual Assessment Increases
By virtue of a fixed-dollar sum or percentage, many Declarations contain clauses restricting the allowable annual assessment increase not requiring a vote of the membership. This may have been a developer's marketing ploy to entice buyers initially, but what it entails in the long-run for an association is a board that is powerless to generate required revenues for unexpected maintenance shortfalls.

How to correct the flaw: the Declaration must give the board discretionary authority to increase annual assessments based on forecasts of upcoming maintenance costs. Since board members owe a fiduciary duty to the community association, they should be trusted to raise rates responsibly; besides, board members pay the same proportional assessment as other members of the community association and as such, have no incentive to increase assessments without cause.

Declaration Flaw #2: Incorporating the CPI into Allowable Annual Assessment Increases
So what the heck is a "CPI" anyways? Precisely. The CPI, or Consumer Price Index, is a complex economic formula used for indexing the cost of living as it pertains to inflation. Yeah, and what does this have to do with managing a community association? You guessed it -- nothing. Assessments should reflect the costs of running an association, such as insurance premiums, utilities and salaries.

How to correct the flaw: simple. DON'T USE THE CPI. Instead, rely on the "discretionary" model discussed above for allowable assessment increases that doesn't enforce a hard cap on what the board can impose.

Declaration Flaw #3: Failure to Provide for a Mid-year Budget Revision
If the board lacks the authority to conduct a mid-year budget revision to accommodate unanticipated expenses, then it is stuck trying one of two measures: either convince the membership to accept a special assessment (always an exercise in diplomacy) or manage the association on a reduced "shoestring" budget. One example of an unexpected expense could be an increase in landscaping charges for common areas on the property affected by severe drought (particularly relevant here in Texas).

How to correct the flaw: most often, this flaw is one of omission because the Declaration fails to discuss it within the specific language of the document. The board must be given express authority to perform the mid-year assessment revision if necessary.

Declaration Flaw #4: Incomplete Foreclosure Rights
A community association must make sure that its power of foreclosure regarding delinquent assessments as granted by the Declaration ALSO includes fees for the COLLECTION of that debt. This includes attorney's fees, late charges, and other incidental costs related to the collection. If the Declaration fails to account for these items, then it can severely limit the leverage that an association can exert to collect on its past-due debts.

How to correct the flaw: make sure that your Declaration account for the costs involved in collection of the delinquent assessments -- the net effect can be a powerful incentive for late-pay/no-pay members to seek out non-foreclosure solutions to their delinquent conduct and avoid the hassle of a protracted legal battle.