COVID-19’s Impact on HOA Budgets

Like many communities, Lake Ridge Parks and Recreation Association in Lake Ridge, Va., took measures to mitigate the spread of COVID-19 with increased cleaning and disinfecting procedures and the cancellation of activities and events.

When it came time to revisit its initial budget drafted in early March, the board of directors and finance committee found that projections for the upcoming fiscal year would need to be adjusted due to higher expenditures and revenue losses.

“It’s challenging. The goal every year is to meet budget and make sure that expenses equal revenues,” says Ike Mutlu, PCAM, Lake Ridge’s chief operating officer and general manager. “Under normal circumstances, that’s not terribly difficult to do, but it’s extremely difficult in this environment.”

The large-scale community relies both on assessment payments and supplemental income from amenity rentals, tuition from an on-site preschool, and fees from various recreational programs and social events to fund its operations—most of which had to be canceled in 2020.

COVID-19-related expenses have rapidly accumulated for community associations as frequent disinfecting has become the norm, management offices keep personal protective gear and cleaning supplies on hand, and boards continue asking attorneys for guidance on conducting association business during the pandemic. Communities also are anticipating indirect increases in some typical budget line items for 2021, particularly insurance, utilities, and other operating costs.

CAI research conducted in April showed a negligible impact of the pandemic and resulting economic shutdowns on community association assessment delinquency rates. At the time, more than 90% of community association homeowners were current paying their assessments—roughly the same percentage as late February, according to the survey.

It is unclear how delinquency rates have changed as the pandemic and economic shutdowns have dragged on, but many communities are proceeding with caution and discussing whether to budget for more bad debt.

COVID-19’s impact is also being felt in the insurance market as providers prepare to set aside reserves to cover increased liability claims, says Allen Hudson, vice president of commercial lines at Sahouri Insurance in McLean, Va.

He estimates that general liability insurance (which covers third-party bodily injury or property damage) could have anywhere from a 10%–15% increase in rates. General liability would cover claims alleging that an association did not take the necessary steps to prevent the transfer of COVID-19, such as lack of proper disinfecting or failing to notify the community of a positive case.

Some insurance carriers have an exclusion of coverage on communicable diseases. Others include the coverage and would have to notify boards within 45–60 days that the exclusion will go into effect at renewal, Hudson notes. Community associations may elect to purchase liability coverage for communicable diseases separately, but he says that it typically would be too high of an expense to be justified.

“Buying communicable disease liability is not going to be affordable for any type of operation other than for critical infrastructure like hospitals and schools. There is not enough money in reserve to issue the hundreds of thousands of policies for every business owner to have this coverage affordably, including community associations,” Hudson explains.

Ultimately, the effect of COVID-19 on general liability insurance rates will be felt by every policyholder and be mostly indirect for community associations, says Hudson. Depending on the increase, he advises boards to make adjustments based on the community’s history of losses from prior liability claims and to find ways to reduce their potential exposure.

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