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May 25, 2005
Do Reserves Need to Be Fully Funded?
In some states, reserves must be 100% funded. In those states someone must believe that there is a fail-proof (or should I say fool-proof) system for identifying need in dollars for the next 30 years. In California, THERE IS NO LAW THAT SAYS RESERVES MUST BE 100% OR FULLY FUNDED. There, I said it. However, the flip side is that a Board has a fiduciary duty (and in case that one gets by you - it means a special duty related to protecting finances) to fund the (operations and) reserves accounts sufficiently to meet association needs. What does this gibberish mean? A board must do its best to estimate the needs of the association and avoid large special assessments that result from very poor planning. And it must do its best to collect the money from the members needed to pay the association's expenses including maintaining and replacing the infrastructure and major components. And it must do its best to avoid borrowing from the reserves unabashedly.
And last but not least, voluntary board members should use trained professionals to help determine what is money is needed to satisfy that duty. It is not something that can be determined easily. A reserve study with specific statutory requirements is required at least every 3 years. Borrowing from reserves also comes with specific legal requirements. And last, but not least (again), the "wise" board members who consult appropriate experts receive some statutory liability protection if things go awry.
Unanticipated expenses certainly arise that get in the way of even the best financial planning, but to find out more about what happens when a board pinches pennies too tightly, check out the Articles at http://www.californiacondoguru.com.
Posted by Beth Grimm at 11:14 AM
May 24, 2005
Fines - Are They A Viable Means Of CC&R Enforcement?
"FINES UPHELD IN COURT" This is a headline you may have read lately. One thinks "Alas, all is not lost." There have been some recent newspaper reports about a case in Santa Barbara saying that a court upheld $277,000 in fines imposed by a homeowners association against an owner. The owner was described as "the neighbor from hell". Ever had one of those? If so, then you are probably thinking "there is a God." The person had continuing, multiple rules violations. They included things like: blocking horse trails, putting screens around his property, and installing flood lights which caused the “parking lot” or “ballfield” look on the property.
The Owner apparently refused to comply with the association's rules, and the board fined him $100 per day. This was the first time out-of-the-chute (according to the newspaper articles) for this association to fine anyone. As you can probably imagine, the Board had to have been at its wit’s end with this Owner. Luckily (and probably quite justifiably), the court said:
“Hope Ranch did not abuse its discretion in finding continuing violations of the building guidelines or in imposing monetary penalties against [the owner] until such time that [the owner] demonstrated that the violations had been cured. Despite warnings and extensions of the correction or abatement periods, defendants delayed, failed to respond and have their own intransigence to blame for the large amount of the accumulated penalties.
. . . [the] Board acted upon reasonable investigation, in good faith, with regard to the best interests of the Association, and not in an arbitrary manner and its actions are entitled to deference ... The amount of $277,000 as a monetary penalty is not unreasonable on its face given the contribution of [the owner's] own actions and inactions to the amount of the penalty ... The monetary penalties ... were not impermissibly punitive because [the owner] could have prevented the imposition of damages by simply curing the violations and providing evidence to Hope Ranch in a timely manner showing that the violations had been cured.”
This ruling provides hope; it illustrates that courts are willing to uphold fines when boards act reasonably in enforcement options. However! Do not rush to rely on newspaper reports as the status of the law in this State. The case has been divided into parts to be heard and there is not a final judgment yet on all issues. Even when it is final, and even if in the final judgment there is a ruling in favor of upholding the fines, there still is a chance of appeal of the case. Until an appeals court hears the case, there is no binding decision that will prevail in other fines cases. And even then, any decision may be deemed not fit for publishing which is fairly common in HOA cases - it means the decision cannot be recited as binding legal authority.
I don't want to sound like a "doubting Thomas" because the treatment of fines in this case by the court is very important and very hopeful since the legislature has taken away the right of associations to collect fines via most means, leaving the necessity of filing a court action as the ultimate remedy. But there is more to this situation than the impression given by the press (ah, what else is new). I am in the process of researching and following the case, anticipating a full-blown article about enforcing the governing documents to come in the summer edition of The California Homeowners Legal Digest. Are you a subscriber yet? If not, get on board! Visit http://www.californiacondoguru.com and sign up!
Posted by Beth Grimm at 2:42 PM
May 19, 2005
Lease Limitation Clauses - Are They Legal in California?
Lots of board members in condominium and townhome homeowner associations ask about lease limitation restrictions. Usually, boards want to propose the clauses to Owners for approval so that rentals in the development can be limited. The desire often arises because of bad experiences with rented units. Boards often find that there are more problems with rented units than owned units. Further exploration raises important questions about financing options - because they are limited in high percentage rental developments. The higher the rental percentages, the more likely that there will be financing issues. There are pros and cons to these provisions. Find out more at http://www.californiacondoguru.com.
Posted by Beth Grimm at 10:46 PM
Pros and Cons of "Good Standing" Qualifications
What does "good standing" mean and why would anyone like it?
These are my thoughts on the subject. “Good standing” means current with regard to payments of assessments and not in violation of any governing document provisions, including the CC&Rs and Rules. I believe having a “good standing” requirement is great - for board member service. If the Bylaws or CC&Rs provide for it, it assures that the Board sets a good example for the membership, and respects the obligations of the governing documents. If the documents provide, a board member who does not qualify or falls out of "good standing" can be "ousted".
As to voting, it is my belief that requiring members to be in "good standing" to be allowed to vote complicates elections and due process procedures within the community. Generally, my experience indicates that members who violate the regulations or fail to pay assessments don’t care if their voting privileges are revoked (and generally don’t even bother to return proxies - although they may attend meetings just to stir up issues).
As for use of the Association facilities, it may work well as a deterrent to poor conduct in the case of pool or clubhouse use. In other words, if a member must be in "good standing" to use the association facilities (or to allow the tenant to use the facilities), bad conduct may be minimized. A violation of the pool rules is a violation of the governing documents.
In associations with documents that do require owners be in "good standing" to vote at elections, I find that some Boards tend to apply the “good standing” requirement only sporadically or with regard to controversial issues (often just to keep members from voting who they don’t like or keep people out of the pool that they do not like). In the course of using it, boards often fail to provide owners with adequate notice and a hearing (arguably required for such disciplinary actions) that voting or facilities privileges will be revoked because of an outstanding violation or non-payment of assessments. That conduct could be found to be improper on the part of the Board.
For more on the hottest CID issues, visit http://www.californiacondoguru.com.
Posted by Beth Grimm at 7:58 PM
May 17, 2005
Can the Davis Stirling Act be Simplified?
The California Law Revision Commission has taken on a big job. It will concentrate once again on trying to simplify the Davis Stirling Common Interest Development Act. This may take years. The CLRC started this process in 2002-2003 but found it to be a daunting task, and decided that focussing on nonjudicial resolution of various matters was a more reasonable approach. As a result, bills relating to ADR (alternative dispute resolution), IDR (Internal Dispute Resolution) and reasonable architectural policies were recommended, authored and passed into law. These all focus on "fair and reasonable" procedures and "prompt" timelines for resolving disputes and for resolving architectural control processes and issues. It also worked on oversight and as a result two "ombudsperson" bills were introduced, that are being handled as "two-year" bills. They are discussed in an earlier post. Now for them it is time to consider rewriting and reorganizing the entire Act, and incorporating pertinent provisions of the California NonProfit Mutual Benefit Corporation Laws that affect most of the HOAs in California. Their process is much more reasoned, deliberative and sound than knee-jerk reactionary legislation that comes from constituent pressure and bad press. Check out the agendas, reports, and comments found at the state's website at http://www.clrc.ca.gov.
Posted by Beth Grimm at 11:04 PM
May 4, 2005
Debunking Some Myths About Collections
Is it fair to foreclose on property in HOAs for nonpayment of collections? It sounds like a horrible remedy to collect a few dollars in delinquencies. The press all over the state has a heyday everytime there is a story about a foreclosure for a small assessment amount. It does not happen every day, and not really very often in the scheme of all things in HOA land. There was a big hullabaloo over a story in Sea Ranch, California more than 5 years ago, and then another big hullabaloo more recently over a story in Copperopolis, California. That's two cases involving annual assessments of under $200. Considering there are more than 35,000 HOAs in this state, well, .... you do the math. Scheduling a foreclosure sale on a CID property is not taken lightly by anyone. An association's preferred resolution is collecting the owner's fair share of assessments, to be sure. But that is not always possible. In both the Sea Ranch case and the Copperopolis case the owners ultimately had to admit they had been told foreclosure was a remedy that could be used - they apparently did not believe it and resisted until late in the processes which resulted in attachment of considerable costs of collection to a small original debt. Neither owner thought they should have to pay these costs. Depending on where you are sitting, you may have differing opinions on this. However, what is true is that if an Owner does not pay assessments in a CID the other owners will be adversely affected by that.
This second and latest story (Radcliff is the name of the owners - have you heard about it?) has lead to the proposal of legislation that would curtail foreclosure as a remedy for all (although advertised as “small”) association owner debts. Legislators are jumping on the bandwagon to condemn those who take steps to exercise the foreclosure remedy to collect assessments. The truth is that the threat of foreclosure is more valuable as a basis for incentive to pay HOA assessments than use of the remedy itself. Without it, Associations could end up on the bottom of the list to be paid by homeowners, and that list is considerable in today's world of credit card living.
But let's examine a recent story in The Press Enterprise, an Inland Southern California newspaper, a typical HOA banger type of story feeding off the Radcliff craze. Dissected, maybe things look different. See clips (clips in quotes) and my comments (in italics) below:
"When Teddy Sheldon got a bill from her homeowners association demanding back payment for what she contends are unauthorized assessments by an unelected, self-appointed board, she resisted."
Right off the bat, it is clear the owner decided to make the rules rather than giving credence to recorded property restrictions .
"It was just a clique that got together and began collecting dues," said Sheldon, who lives in the unincorporated community of Pedley north of Riverside. "I didn't recognize them as legitimate."
Again, the question arises as to what qualifies this owner to make this determination on whether the assessment was legitimate.
"Seven years later, she has filed two small-claims court cases and a lawsuit, paid more than $2,000 under protest to stave off threatened foreclosure and has gone through three attorneys. All over what began as a dispute over a $7 monthly assessment."
One has to wonder what "gone through" three attorneys means. In could mean that the owner was difficult and at least two attorneys eventually opted out, which tends to happen when a client demands to assert a losing case. And there is no indication this owner prevailed in the two small claims matters. Surely had she won, this reporter would have been more than anxious to say so - it would have bolstered an argument that the position the owner took was correct.
"Critics of the power wielded by homeowner associations say cases like Sheldon's -- where minor disputes lead to costly and emotionally exhausting litigation -- highlight all that is wrong with common-interest developments and the elected boards that oversee them."
It takes "two to tango" as they say and this is true in protracted litigation. An owner can protract litigation as easily as an association. An attorney for either party that wants a viable client (without regard to whether the case is good or not) can protract litigation. The Courts are notorious for delays resulting in increased costs and drawn out cases. Litigation is costly by nature. It sounds from this article that the owner initiated court actions that were not successful. Had any one of them been successful, then the successive actions should not have been necessary.
"I think a lot of the homeowner associations have lost sight of American freedoms," said former Assemblyman John Longville, a San Bernardino Democrat. "(They) think they can decide for you what you can think and see. They are extraordinarily paternalistic."
If Mr. Longville ever served on an Association board and had to deal with the difficult issues, the delicate balancing acts, and the rising costs for HOAs that Boards face every day, he might tender his comments with some understanding of the difficult role of a Board of Directors. It is true that Homeowner Association Boards do wield a considerable amount of power via governing documents. However, along with that power comes a world of responsibility. Reporters seldom speak of the fact that HOAs have been given a huge burden of supporting a good portion of the state's infrastructure and the obligation to collect sufficient funds to pay for it. HOA Boards have been given a huge burden of running these associations and budgeting and accounting for millions of dollars. They are in fact charged with many of the tasks and responsibilities of local city and county government officials, and in fact their job is even harder because they are usually charged with responsibility for preserving and sometimes even enhancing property values in the development. They are charged with the responsibility of refereeing disputes between owners, and keeping the peace. But do you know else what is different between municipal officials and Board Members? HOA Board Members are unpaid volunteers. They don't get compensated; they don't get sick or stress leave; and they don't get vacation pay. They do not share the statutory immunity from lawsuits that municipal officials have for their behavior and official acts. They do not have the ability to schedule a tax sale for nonpayment of assessments. [So some people do not take the assessment obligation seriously.] And there is no selection process through interviews where qualifications, education or experience can be considered. HOA Members are not as a rule standing in line to run for the Board. Most HOA dwellers to not want to be bothered with such things. Many Boards have to draw people out to serve, begging and pleading. There is little competition for elections in most associations. The positions are not generally coveted. What drives people to serve can be self-centered and self-serving. However, many owners step up because it is a job that has to be done and they have property to protect.
“Sheldon said she stopped paying her monthly assessments after learning her association had a bank balance of just $4. Assessments used to care for a 0.63-acre park were not being collected, Sheldon said.”
Wouldn’t the better approach for someone making such a startling revelation be to volunteer to serve on the board with a goal toward more assertive collection efforts so that the Association could fulfill its responsibilities? In taking this owner's approach, one adds to the problem rather than contributing to the solution. Failure to maintain the park because of a shortage of funds can lead to all sorts of other problems, some quite serious, in ways that put all of the owners and properties at risk.
“The lawsuit contends that the association collected dues unlawfully, charged late fees in excess of what is allowed by law and has violated its own governing documents by failing to elect an architectural committee to maintain the integrity of the community. For all those reasons, Sheldon refused to pay her assessments. When the association threatened foreclosure, Sheldon said she paid $2,086.34 under protest. Sheldon said Monday that she had dropped her suit and referred further questions to her attorney. Mark Sabbah, whose firm was representing Sheldon, said Sheldon's health did not allow her to pursue the case at this time."
Contentions and allegations made in a lawsuit are not facts and truth. They are statements made that are yet to be proved. And dropping a lawsuit often means the lawsuit was not a winning case. If there had been a successful ruling in this case, this reporter certainly would have focused on that rather than resorting to reiterating allegations that could have been made by a disgruntled owner who simply refused to pay assessments.
[Talking about SB 137 - a bill mentioned under the Legislation heading on this blog site] "The bill is identical to one she introduced last year that received strong support in both houses. It was vetoed by Gov. Schwarzenegger, who called it "overly broad" with potentially negative impacts for homeowners living in common-interest developments.”
This is a true statement. In vetoing the 2004 bill the Governor recognized that protecting the assessment stream in associations is important, and a drastic change in collection rights and remedies would be detrimental.
"People were being evicted with less due process than a tenant gets," Ducheny said. "To lose your home for these small amounts of money seemed hugely inequitable." But supporters, including association board members, say nonjudicial foreclosures are a necessary tool that allows an association to collect assessments. Joan Urbaniak, former executive director of the Greater Inland Empire Chapter of the Community Associations Institute, said, "These associations are run as businesses, and they rely on assessments to maintain amenities." Nonpayment of assessments "can cripple an association and send it into bankruptcy," Urbaniak said. [The president] Holliday of the San Ravelle association likened the loss of nonjudicial forceclosure as an enforcement tool to taking away the power of the Internal Revenue Service to tax. "The government would not survive if it did not have the power to tax," he said.”
The debate will rage on. Where will you weigh in? If you are a responsible assessment paying owner, you have the most to lose. Every dollar not collected and every dollar spent on collections of assessments from itinerant owners must be covered by sums from the Association accounts. The expenses of the association are not diminished by an owner’s refusal to pay. The Board must still provide that owner the same amenities and maintenance work as provided for other owners. Associations will have to start budgeting for uncollectible debts if the power to collect assessments is undermined by legislation. Guess who will cover the shortfall? Not the cities, counties, legislators or delinquent owners.
The purpose of this "dissection" is to illustrate that it is important to read between the lines every time an article is published in the newspaper. Reporters sell sensationalism and in doing so, strive to get the public's attention, and in the case of CID stories, often strive for disdain. However, CID living is here to stay in California and unless a better model is derived providing for leadership by paid professionals who are educated, trained and experienced (at the consumer's expense) we have to work with what is, i.e., decisions made by unpaid volunteers. Everytime a debtor is protected, society pays the price, and this is true in each separate community association which is its own "society". And the smaller the association, and the higher the delinquency rate, the harder the responsible citizens of the development are hit. These are things to keep in mind in analyzing pending legislation and news reports.
And don't believe everything you read ...
Posted by Beth Grimm at 7:01 PM
May 3, 2005
AB 9
Take a look at AB 9, the Governor's new plan to fund education in California. The bill proposes to add various "specialized" services to items that are taxed to the consumer, such as accounting fees, attorney fees, management fees, architect and surveyor costs, and even membership fees. It's hard to condemn any plan to raise money for education. Many people backed the lottery, after all believing that would be the ultimate answer. (And many still wonder "what happened" there.) But consumers might have something to say about more taxes. Homeowners in homeowner associations will pay double. They will be burdened with all of the usual personal costs for the services they need individually, and their associations will be hit with rising accounting, management, legal and construction costs, if this bill passes. It's a little scary as costs are already rising each year for associations in insurance, utilities and managment. Keep your eye on this one.
Posted by Beth Grimm at 11:09 PM