Congratulations, you were just elected to your homeowner association’s board of directors! This likely means one of two things: (1) the members of your HOA trust that you and several other volunteer board members can manage the HOA’s large budget and make good decisions about the community, and/or (2) no one else wanted to serve on the board. Either way, you are now faced with being put in the position of discharging the HOA board member duties, which can require a fair amount of work, and is a pretty thankless job. There are also certain legal standards that you must comply with in making decisions while serving on the board. Minnesota law requires all directors to discharge their duties in good faith, in a manner the director reasonably believes to be in the best interests of the association, and with the care an ordinarily prudent person in a like position would exercise under similar circumstances.
This is the same standard that applies to a director of a corporation, and in many ways, your homeowner’s association is just that – a corporation. While serving on the board you will be in charge of hundreds of thousands of dollars, or in some cases, even millions of dollars and you will also be tasked with making decisions regarding maintenance, construction projects, and other administrative decisions. Not only is there a lot of money involved, but also these decisions are regarding how to use other people’s money. This makes doing your due diligence and taking the responsibilities seriously even more important.
However, if you have never been in charge of a corporation, let alone a multi-million dollar operation, you are likely not familiar with how to formulate a budget and have never had an opportunity to be in charge of expensive construction projects, conduct a competitive contractor bidding process, or be responsible for making administrative decisions. How are you supposed to act “with the care [of] an ordinarily prudent person?” Although you do not need (nor are you required to have) an MBA or PhD in math to understand the finances of your association or how to make reasonable choices to benefit your community, there are steps every director should take to ensure that they are doing their due diligence and making informed decisions that meet the standard of care required.
Minnesota law does not have any prerequisites for an owner to volunteer to serve as a director in an association. However, this is not the case in every state. For example, in Florida legislation was passed that requires every volunteer board member serving in an association to either complete an educational certification program administered by an approved organization or each board member must sign a written document attesting that they will carry out their fiduciary duties owed to the association’s members and that they have read and will uphold the association’s governing documents. There is good reason for Florida to input these requirements, as the housing market in Florida is quite different than Minnesota. Florida has more than 6 times the amount of HOAs than Minnesota and almost half of Florida residents live in these communities. Notwithstanding, the reasoning behind the Florida law addresses the same issues we face here in Minnesota, only on a smaller scale; how can we make sure board members make good decisions?
There are several options for owners in a homeowner’s association to consider if they are considering serving on the board of directors or if they are currently serving in that role.
1. Get to know and understand your association’s governing documents.
All homeowners associations will have distinct articles of incorporation, bylaws, declarations, and rules and regulations. Most are governed by the Minnesota Common Interest Ownership Act, Chapter 515B (“MCIOA”). However, some associations are not and the only Minnesota statute applicable is the Minnesota Nonprofit Corporations Act, Chapter 317A.
At a minimum, a director should review these governing documents and understand if their association is governed by MCIOA or not. This does not mean you need to become an expert at deciphering legal jargon or spend countless hours researching the law. However, I am always shocked to hear that many board members have actually never taken the time to review these documents, or in some cases, do not even have copies. A quick review of these documents will provide a great reference for simple issues and administrative tasks.
Many questions that arise while serving on a board can easily be answered by a quick review of these documents. For example, if there are basic questions such as how many directors there should be, how long are the terms of directors, how notices should be provided to owners, or if annual meetings are required to be held in a certain month each year, a quick review of the bylaws can answer questions such as these and also allow directors to check to ensure they are operating correctly. Reviewing these documents is an easy first step to ensure a director is informed and has a minimal understanding of how the association is structured and should be operating.
2. Make an effort to understand what expenses the association pays for and how the budget is structured.
Understanding the association’s finances and expenses related to its operations is a crucial part of serving as a director. Almost all decisions made by the board of directors in one way or another comes back to budgeting, saving, and spending money. This is also particularly important because the scale of an association’s finances and operational scope is typically much more complicated than the personal finances of an individual volunteer board member. Directors should review the previous year’s budget and obtain a basic understanding of what services the association provides and how those costs impact the association’s financial planning. Additionally, directors should make an effort to review the association’s reserve study and understand what major projects will be coming up in the future that the association will be required to fund. Without having an understanding of the association’s budget, expenses, and plans for major projects, a director cannot make reasoned informed decisions related to finances.
3. Discuss major decisions with other directors and think about the standards applicable to directors.
All decisions should be reviewed and analyzed by directors asking themselves “are we making this decision in good faith and do we believe it to be in the best interest of all owners in the association? In other words, do we have any ulterior motives or reasons for the decision and has the board done its due diligence in making the decision? Surprisingly, many directors do not engage in this type of conversation, which is the foundation of directors abiding by their duties. The requirement imposed in Florida for directors to sign a written document attesting that they will carry out their fiduciary duties owed to the association’s members and that they have read and will uphold the association’s governing documents is not a bad idea. Many associations will create and implement a board of directors “code of conduct” or similar type of document that must be signed by all directors. These documents reiterate the duties of a director and impose a remedy and/or procedure to follow if directors are not upholding their duties properly.
4. Continue learning and educating yourself about how your homeowner’s association operates and what the best practices are for board members to follow.
This is likely the most important advice for board members to follow. Even though Minnesota law does not require a director to obtain any certifications or take any classes, by doing so, a director ensures they are well informed, upholding their duties owed to the association, and doing everything possible to make sure they are making their community the best it can possibly be.
We are fortunate to have some amazing resources in Minnesota for board members who wish to learn more about successfully operating homeowner’s associations. A great example is the educational offerings of CIC Midwest, which includes lunch and learn programs, board trainings, and formal certification programs. These offerings cover all aspects of operating a homeowner’s association and are taught by experienced property managers and legal professionals with decades of collective experience. The board trainings cover the essential topics that every board member should know about, such as budgeting, running meetings, maintenance, collections, and understanding the statute governing most associations, MCIOA. Lunch and Learn offerings are tailored to address timely and trending topics and CIC Midwest is able to obtain some of the most knowledgeable and experienced speakers for specific topics. Even if you are a seasoned director, educational opportunities will ensure you are keeping up with the times, you are up to date with changing legal requirements, and you receive the latest and greatest tips for operating homeowner’s associations.