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This article is reproduced from the Summit Daily News, October 28, 2009, by permission of author Noah Klug.
Long Run and Short Run are both older condominium projects in the mountains of Colorado. The units are owned by individual homeowners, but the exterior of each building, including the windows, siding, decks, and parking areas are “common elements” owned by all the unit owners (which is typical in a condominium).
It was the best of times: An HOA With Money in Reserve
Twenty years ago, Long Run recognized some day all of the common elements would wear out or become outdated and need to be replaced. Its board commissioned a study of how long each significant part of the common elements would be expected to last; it then determined how much it might cost to replace each part as needed (adjusted for inflation). It calculated an amount that each owner would be required to pay monthly into a “reserve” account (in addition to the regular dues) so funds would be available to pay for needed renovations in the future. The siding and windows needed replacement this year, and Long Run had the money available in its reserve account for the work. The Long Run owners are pleased with the renovations and thankful that the prior unit owners had the foresight to plan ahead and contributed their share to the replacement costs.
It was the worst of times: An HOA That Relies on Special Assessments
Short Run's board of directors figured replacement of the common elements could be addressed when needed in the future. It did not collect any amount for “reserves”; as a result, it was able to keep the regular dues lower than at Long Run. This year the siding and windows needed replacement. There was no money to pay for this work, so Short Run's board approved a large “special assessment” on each owner to raise the money. Some of the owners can afford this payment, and they are looking forward to the renovations. Other owners are upset because they don't have the money readily available. They are irate that prior unit owners did not plan ahead or contribute their share to the replacement costs. The Short Run board told the owners that they have 30 days to pay and, if they don't pay, the HOA will be forced to take enforcement action. It doesn't seem fair to some Short Run owners that they could be forced to make such a big payment on short notice.
Colorado law gives the board of directors of each HOA the power, but not the obligation, to place money into a reserve account. If an association has conducted a “reserve study” for the common elements, the association must disclose to the owners how the study was done, whether there is a funding plan for the work recommended by the study and, if so, the projected source(s) of funding.
Colorado law does not place any restrictions on the ability of an HOA to impose a “special assessment” for irregular expenses (although restrictions might appear in an HOA's covenants). It is not uncommon for an HOA to approve a renovation project requiring each owner to pay thousands of dollars on short notice; failure to pay can result in the HOA foreclosing on its lien for unpaid assessments.
The moral of the story is clear: Condominium owners and potential buyers should be aware of whether the HOA collects a reserve and that the absence of an adequate reserve may mean that a hefty special assessment is in their future. Perhaps some HOAs should plan now for a different ending to the tale ....
Noah Klug is an attorney with the Breckenridge law firm of Bauer & Burns, P.C. He may be reached at 970-453-2734, or Noah@BreckenridgeLawyer.com.
