HOA or Condo board members may have anxiety about making repairs to association common area and just as importantly—how to fund those repairs. In reality, many community associations may be apprehensive to get a contractor or vendor out and make repairs, large or small. What results is that maintenance is delayed until it’s too late, major repairs must be made, and the community has to spend more than they would have from the get-go. Why aren’t repairs made proactively? Why isn’t the up-keep better? It’s all about the money.
Understanding how to properly fund repairs isn’t just good governance; it’s a legal responsibility under Utah law that protects your community’s property values, allows associations to plan for the future, and prepare financially for emergencies. Plus, this keeps association members happy with a well-maintained community.
This guide breaks down the three primary financial mechanisms available to your association and the board: (1) annual budgets, (2) reserve accounts, and (3) special assessments.
What is the Annual Budget (or Operating Budget)?
A board may think that the operating budget is a catch-all for any expense that arises. But an operating budget must be more—it must be dedicated to the predictable, ongoing administration of the association. Utah law requires boards to prepare and adopt a budget at least annually and present it to the members. See Utah Code § 57-8-7.6 and § 57-8a-215.
What repairs can this budget be used for?
The operating budget is designed for day-to-day operations and routine upkeep. It covers regular cleaning, utilities, and minor, predictable repairs. For example, if a landscaper needs to be paid for upkeep, a sprinkler system needs adjusting, or a broken lobby door lock needs replacement, those funds come from the operating budget.
What is the Reserve Account?
Many boards think reserve funding is simple: save extra money, spend it when you need it. There’s actually more to it. By law, reserve funds can only be used for specific repairs (explained below). Boards must conduct a formal reserve analysis every six years and review or update it every three years. Furthermore, the board is legally required to maintain reserve funds in a separate account.
What repairs can the reserve be used for?
Utah law dictates that reserve funds are strictly for repairing, replacing, or restoring common areas and facilities that have a useful life of 3 years or more, and a remaining useful life of less than 30 years that cannot reasonably be funded from the annual or operating budget (such as, roofs, asphalt, or exterior siding). Pro-tip: A low-hanging fruit for a cost-effective repair from the reserve account could be new paint on the association’s exterior. Check out the podcast “HOA Insights: Common Sense for Common Areas” Episode 161 for more.
What are special assessments?
Even with the best operating budget and fully funded reserves, disasters happen and unforeseen capital deficits arise. This could be a major concrete repair after years of neglect or replacement of roofing after a storm. Special assessments are one-time additional charges levied on a lot or unit owner to cover these major, unfunded community repairs.
What is the role an attorney can play in advising boards on budgeting?
When there is a funding shortfall or a scary major repair, boards have many problem-solving tools at their disposal.
An attorney plays a vital role in interpreting Utah law and the Declaration or CC&Rs, advising boards on the annual budgets, budget approval, establishing and maintaining reserve accounts, the exact voting procedures required to pass a special assessment, and preventing the illegal commingling of funds. Furthermore, when owners fail to pay these carefully planned assessments, an attorney ensures that collection efforts, including the perfection of liens and potential foreclosures, are executed legally and effectively.