Community Next: Mandatory Reserve Funding and Beyond…

In a previous post we introduced the readers to the paradigm-changing panel report published by the Community Association’s Institute (CAI) in March 2016.  The report titled Community Next: 2020 and Beyond is, in many ways, a ground-breaking change in the HOA management industry’s stance on a number of issues that impact how HOAs are governed. In some respects the report is a legislative agenda that is being set forth by the CAI; a “call to action,” if you will. For many people, including HOA members themselves, it is an alarm bell that should not be ignored.

Among the most radical changes being proposed by the CAI are compulsory education and certification of HOA board members and a mandate that all HOAs be required to conduct reserve studies and to fund the reserves according to the recommendations of the reserve study provider. The report even goes so far as to suggest that perhaps the payment of reserve contributions by HOA members should be included in the escrow process similar to the way property taxes and homeowner’s insurance are paid for when someone has a mortgage on a home.

The report goes on to suggest that the time may have come to consider whether or not the board of directors should be paid a fee for serving on an HOA board. In a true leap of faith, it even suggests that it may be worth considering whether HOAs would be better served by hiring professionals to serve in the capacity of board members. Turning to page 3 of the report we can see what the CAI and its panel of industry “experts” has in store for the future of HOAs, if they have their way:

“…At some point, board expertise and qualifications will have to be more carefully controlled. As this may stifle some amount of volunteerism, associations may turn to professional board members. These individuals won’t necessarily live in the community. Like portfolio managers, they might work for several associations simultaneously.”

Yet another example of what’s in store can be found in the very next paragraph of the report which states:

“Communities may also turn to a corporate model in which the association president is the CEO. This position would be paid, and this person would make the big decisions. This CEO position might be filled by a manager, by a community resident or by a corporate executive. The balance of the board would include volunteers who would function under the CEO/president’s guidance. In this model, the CEO would work closely and directly with a professional manager.”

Anyone who is familiar with the association management industry business model and the CAI can see where this is going…At some point, probably in the not-too-distant future, it is all but certain that we will see management companies offering – among their myriad of fee-based services – to provide board of directors services for the communities they manage (all for an additional fee of course); and when the situation requires, to provide a “CEO” to serve on the Association’s board and make “the big decisions.” To that end, the last sentence of the previous paragraph should not be overlooked. The part about, “…work closely and directly with the professional manager,” should not be taken lightly!

Among the issues that are not addressed in the report is the need for mandatory education, testing and licensing of association managers, or the long overdue need for regulation of the management industry itself. Perhaps we shouldn’t be too surprised considering that the CAI is, in actuality, a defacto trade organization that represents the interests of the management industry while posing as an outreach organization for homeowners who live in HOAs.

The HOA Detective has touched on the issue of education, testing and licensing of HOA managers in the past as well as the need for regulatory oversight and standardization of management industry business practices. Suffice it to say the industry’s view (which the CAI represents) is that there is no need for regulation and that the industry and homeowners are better served by “self-regulation,” an oxymoron if ever there was one.

While the CAI’s vision for the future doesn’t include regulating HOA managers, the panel report is quick to suggest that HOA board members need to be trained and certified in order to serve on a board of directors, that is if you are not going to “hire a professional” to do the job.

The issue of mandatory reserve studies and mandatory funding of the reserves raises  significant questions about whether reserve study providers are going to be required to possess any specific education that might qualify them to perform reserve studies. Or whether they should be subjected to testing and licensing by state regulators, in the same way that real estate agents, accountants and a host of other professional disciplines are regulated.

If the industry is going to apply a true professional standard to the conduct of reserve study providers, much less a minimum level of specialized education and/or licensing at the state level, then it will invariably lead to a substantial increase in the cost of reserve studies for the HOAs that are required to hire these professionals.

Of course the panel is quick to suggest that appropriately qualified practitioners would be those reserve study providers who carry the CAI’s Reserve Specialist® designation, but frankly the certification doesn’t mandate anywhere nearly enough in the way of demonstrable professional competence to be used as a basis for determining who is and isn’t qualified to conduct a reserve study. Nor is the Professional Reserve Analyst® (PRA) credential which is available for purchase from the Association of Professional Reserve Analysts (APRA), and like the RS certification offered by the CAI, requires only a perfunctory level of experience and expertise to qualify for “certification.”

At the present time community managers and reserve study practitioners in almost all states are not subjected to mandatory education, testing, licensing or regulatory oversight by an independent government agency.

As with the management industry, “oversight” of the reserve study business is of the “self-regulating” form. This lack of professional standards is reflected in the fees charged by reserve study providers as there are few, if any barriers, that prevent someone from entering the market as a reserve study provider. Raise the bar and the fees these service providers charge will go up.

If reserve study providers are going to be charged with the legally binding responsibility for determining what the proper reserve contributions for a homeowners association should be; and if that recommendation is going to be imposed on the HOA members with the force of law (much less mandatory funding via the escrow process), then it only stands to reason that the industry needs to take a long look at the need to establish a formal curriculum for educating, testing and licensing of reserve study providers to ensure a minimum level of competency and adherence to a strict code of conduct.

It is simply  not sufficient to assume that someone who has been “certified” by the CAI or the APRA as a reserve study provider is suitably qualified to render a binding opinion on a matter as important as a reserve funding recommendation that is made mandatory by virtue of state or federal law.