California Condo & HOA Law

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March 25, 2009

IRS RULING 70-604 - WHAT IS IT?

I am not a tax attorney. I am not a CPA. I will state that right off. However, it is my belief from everything I have read and heard about including the ruling that this is an important ruling, and HOAs and Condo Associations that file as same need to put an election to the members each year to vote on what to do about this resolution. It does not require the double envelope voting package, however, some associations do put it on the ballot with the other measures for the annual meeting for purposes of convenience (because people do not tend to come to meetings!).

Here is a question/complaint I received recently about this ruling and the homeowner election:

"They [meaning the association] put it on the ballot without ever explaining it to us. After all the ballots were submitted, they then explained what it was we were voting on.

Also, as far as the vote, they only gave us two options.
Rolling over the surplus, or not rolling over the surplus.
They never provided the option of having the surplus returned to us.

Seems to me they should have explained all of this before sending out the
ballots, or at least enclosed with the ballots."

I agree with this reader that this measure needs to be explained. As I understand it's origin, quite a few years ago the IRS started an effort to tax HOA assessments. After all, it would be quite productive, wouldn't you say? For the government at least; but obviously, it would place a huge burden on HOAs and COAs.

It did not seem fair to the industry folks and homeowners in HOAs or COAs to be taxed on money collected for maintenance on buildings and grounds, or even lawsuit proceeds that were intended for that purpose. After all, investors can write off these fees, and some (although I am NOT giving an opinion here and do not believe it myself - so consult your own CPA or attorney) believe homeowners can deduct them from taxes.

Anyway, the outcome was this ruling. HOAs and COAs must get approval of the members to either roll over any assessments collected and not used in one year into the budget for the following year, or put the excess money into the reserves, or else there is the possiblity of being taxed on the overage as a "profit". If there was a vote to return it to members, that would avoid the tax issue of course. However, in most cases that and more needs to be collected the following year either to pay the increase in the budget or to fund underfunded reserves, so it seldom happens that a board votes to return any overages. In fact, these days, overages are uncommon.

Approval of the election is important, whatever the measure. Not all experts agree on how to word the options regarding the overages, or which is more acceptable (roll into the operating budget or reserves) and what accounting entries are required. So there. I cannot answer that one for you. Work with your own (hopefully experienced, educated and HOA-savvy experts).

Posted by Beth Grimm at 8:20 PM

March 19, 2009

HOAS & CONDOS - SHOULD THEY HAVE FIDELITY BOND INSURANCE?

I get questions all the time about whether an HOA or a Condo Association must have fidelity bond insurance. The answer is: not unless the governing documents require it! There is no legal requirement in California that requires the boards to procure it. But it would be legally required if the Bylaws, the Articles of Incorporation, or the CC&Rs said it was required. Last time I checked, the rule of thumb was, I believe, 3 Xs the amount of money in the HOA or Condo Association reserves accounts, or maybe that was all accounts. I am not the one to determine that, talk to a provider to find out the standard in the industry.

The next question is, well, if the documents do not require it, why have it?

One reader sent me an email saying "The 2009 Condo Bluebook states this type of insurance is not required by law, but is required by some governing documents. It is advisable for large associations to obtain this type of insurance. Page 82 near the bottom."

The Bluebook is a good publication and hats off to my colleague Brandon Bickel for publishing it. I will say, however, that not all practitioners, boards, managers or even insurance providers necessarily agree on what should be. My feeling is that all HOAs and Condo Associations should protect their funds with fidelity bond coverage. And for proper protection, be sure to investigate how it works and who should or should not be on the bank signaturue cards for the protection purchased to be effective.

I think its a "no brainer". Boards should procure fidelity bond coverage to protect the association's assets.

There is more risk in today's world than ever before of theft. The economy is in a bad way (one might say it s _ _ ks if one were not an attorney writing for a wide audience). And HOAs and Condo Associations are managed by volunteer board members - who tend to have the following problems (I think its safe to say):

In more cases than not, Boards are without the assistance of a professional manager or any other professional or knowledgeable help.

More often than not, Board Members lack specific expertise that would help them identify inconsistencies in the financials.

More often than not, Board Members do not even have time to review the financials regularly.

Sometimes, hopefully not often, Board Members serve with bad motives or without a conscience. And

Sometimes, people do things out of desperation they would not do under different circumstances.

And today, when people are desperate for money, where will the bad people turn? To a pile of money that is not being watched over carefully enough.

There have been a number of instances where Board members or managers have absconded with HOA or Condo Association funds. Sometimes its even been the "soccer mom" who always brought cookies to the board meetings - the person you would least likely suspect of having the capability to pilfer funds belonging to others.

And like the matter of wondering whether to make the swimming pool safe (triggered by the Virginia Graeme Baker Pool Act), it only takes one bad incident to bankrupt an association.

I know HOAs and Condo Associations are very pressed for funds these days, but the problem would be much worse if there were no funds at all.

Posted by Beth Grimm at 10:22 AM

March 16, 2009

TURNOVER OF RECORDS AND MANAGEMENT

Questions about management turnover come up all the time. HOA boards get frustrated with HOA or condo management in various ways.

Sometimes the board of the HOA or condo association created the merciless swirling and scary "eddy" and everyone goes down together.

Sometimes the manager has become a real problem. (Sometimes they do not know what they are doing - imagine that!)

Managers come in different "flavors" when it comes to transitioning:

Some cling with claw like tenacity, even when the blood begins to seep from the wounds.

Some conveniently "lose" records or turn over a disarray of "stuff" relishing the difficulties the board will have in straightening out the bookkeeping and materials.

Some cut out early on the contract termination clauses and do nothing during their "lame duck" (just an analogy) period "in office" (again, just an analogy), leaving the Board in a lurch. Don't get me wrong, some boards pull out early and do not understand that the manager has certain things they need to do to "wrap up".

On the other hand,

Some managers work with boards in a professional and business-like way, even when relations have broken down, just to keep things reasonable and copacetic, and to make the transition more smooth for all (sometimes to "be the better 'person').

It is good to remember that sometimes relations break down over very little and can later be repaired, and sometimes managers are asked back by a new or changed board. And it is always good to strive for a good reputation for being reasonable under any circumstances.

Now, all that said, here is a common question:

"Our condominium’s property management company has been the keeper of all and complete financial and legal documents ... what is the recourse of an HOA when it changes to another property management company to have the previous company turn over all documents to the new company?"

Right off the bat, the manager generally does keep all the records unless the contract with management says otherwise. (A "contract" duh you might say - what a concept!)

So first look to the contract for the termination provisions/requirements, and, hopefully, some guidance and requirements related to turnover of records.

If there are guiding provisions, and either party does not do what is required, there is recourse in the form of a "breach of contract" cause of action, allowing for recovery of commonly anticipated losses for such a "breach".

However, EVEN IF THERE IS NO GUIDANCE IN THE CONTRACT, that is not an excuse to be sloppy, mean, spiteful, lackadaisical (word?) or careless about record turnover. And it does not mean there is no remedy for losses. Managers would be expected, as a general rule, to keep the records of the HOA and most contracts specify what type of records must be kept. Thus, there would be a reasonable expectation that the common HOA records would be turned over at time of transition in some form that is business-like. Managers do not always turn over their reports, confidential or otherwise, believing them to be their work product; however I believe that in most cases a board would be entitled to have them as part of the historical record. There is commonly a lot of "meat" in those reports.

Sometimes people get upset because management wants to turn over electronic files and boards want paper. Sometimes managers refuse to allow boards to utilize the same programs for continuation of the recordkeeping that management used, citing trade secret or lack of "license" for certain use of programs types of arguments which make sense. However, if the information that is turned over in electronic form is incomprehensible because the underlying program access is denied, that could cause losses that a board might recover. In fact, if the records that are turned over are a mess, a board might be able to recover some or all of the costs of paying someone to go through and pull out what the board needs for its financial and other records.

But then, if there is no contract defining what records must be kept and who keeps them, or general confusion arose during the working relationship over who was keeping what records and no one did anything about it for a period of time, and/or there is little to no guidance as to who had what duties, there is little chance of making a good enough argument to recover losses for trying to restore some semblance of records.

There is one common way that this happens. No one is appointed as the "gate keeper" of records or communications, the one that receives and disseminates communications to all proper parties. When there is no "gatekeeper", boards and management tend to send out all kinds of communications and emails that cross, do not reach all pertinent parties, or are lost in the process. When board members email each other or the manager directly for example, but not all emails are sent to all board members or the manager, things start to get out of hand. I have adopted a policy where I will accept only one person from any HOA (manager or board member) as my point of contact with the understanding that that person is responsible to

Transmit what I send to all the board members and the record keeper for the HOA or Condo Association records.

Receive all communications that are for me and digest or piece them together in such a way that I am answer one set of questions or hearing one cogent set of facts and not hearing from 5 different board members what is up.

In essence ... a "gatekeeper".

No matter how ugly it gets, the party (or parties) that remain(s) above-board, business-like and professional in the transition process is/are winner(s) in my book, and quite possibly (in case my opinion does not matter) in the eyes of any hearing officer or court.

Posted by Beth Grimm at 5:53 PM

March 11, 2009

For Every Problem, There is a Solution

What do you do when you discover a problem in an HOA or Condo Association? It could a conflict in the documents or an inconsistency in HOA or Condo Association practices, it could be a law that was broken that a board knew about or did not; it could be just about anything. Problems arise every day. The way a board or an owner or group of owners approaches them is very important. Different approaches can complicate getting to resolution of the "problem".

I can tell you what not to do:

Do not start pointing fingers.
Do not start finding fault with each other.
Do not look for someone to blame.
Do not start making assumptions.
Do not jump to conclusions.
Do not shut out the people who might have important knowledge.

Now, I will make some suggestions as to what to do.

Fully investigate any situation before acting.

When Boards are in disagreement over an issue or hooked on making a point (right or wrong), they sometimes do or say things that are self serving, but not true. Sometimes they have made assumptions, or imagined things based on their perception. So be careful about accepting statements at face value.

Fact check statements and information whenever possible to assure that the board is moving forward with as much and proper information as possible.

Go to the right sources to help identify as many solutions or courses of action as possible to resolve any problem, which would include those with knowledge that will help.

If people clearly strongly disagree with each other, or have what looks like obvious bias', handle negative statements about each other with care and a balanced attitude.

Do not shut out persons you think are at fault or who make convenient targets. Give people a chance to explain themselves, whether a board member, managing agent, homeowner or association vendor.

Deal with things up front, and not in whispers, rumor or ill-conceived intention. Don't sweep potential problems under the rug.

Look at every problem as a challenge......

For there is a solution. And things become a lot easier to deal with when you are on course and looking for a solution as opposed to muddling around in the problem. (It's the idea of being "in control" again.)

Posted by Beth Grimm at 9:24 PM

March 10, 2009

How Do You Diffuse the Power of A Director Who is Misusing it?

I have seen documents called a "Code of Conduct" or "Code of Ethics" for HOA and Condo Association directors and I have crafted my own, from those ideas and through my own experiences.

I want to share my document and believe if more HOAs and Condo Associations used it, more board members would have a sense of what is expected of them. It is posted on my website at www.bgcondolaw.com in the "forms" link. There is also a Primer available that discusses what is expected of Boards (Board Basics I Primer in the webstore).

And if the form I suggest which is more or less an "agreement" and "acknowledgement" of obligations and conduct was utilized to its full extent, it could serve other purposes as well, such as serving as a basis for disciplinary action if needed.

Failure to honor it might serve as a basis for taking action to form an executive committee of the board to deal with board member confidence breaches. If a board member is doing things that are detrimental to the association and cannot be removed by the Board, there are ways to diffuse their powers and abilities or keep them out of meetings where confidential information that might be improperly disclosed is discussed.

One way is properly seating an "executive committee" of all "disinterested" board members that can meet in executive session - the purpose which would be to be able to discuss matters that if disclosed to the actual problem board member, could result in detriment to the HOA or Condo Association.

It is not meant for board members to come up with a way to "disinclude" certain board members with opposing views from discussions, or as a substitute for a preliminary meeting where all board members are invited to come and discuss their concerns with each other and with the board member dubbed the "problem" board member.

Posted by Beth Grimm at 12:11 PM

March 5, 2009

HOA DELINQUENCIES - ONE FOR THE REALTORS

My readers supply me with such great questions that make me think, now why is that????? And thinking about a problem, taking what I know, and visualizing (or actually writing down) how to answer the questions is the only way to get your arms around it.

Here are some questions asked by a realtor (MC in Southern California):

QUESTION ONE: "Do you have any gems I can pass along to REALTORS??? CAR sent an article out stating that Fannie Mae may start considering delinquency rate before issuing loan - can't be more than 15%. Is that true?"

My response: The national HOA and Condo organization CAI (Community Associations Institute) has expressed concern about this to FNMA people and the response from Fannie Mae was that this is "just a guideline", not a line in drawn in the sand (my characterization of the information I received, not an exact quote), but the truth is, its a FNMA guideline that is published to lenders and developers and FNMA must, by all standards, tighten up because of the really bad mortgage situation, so .... I am assuming it will become a consideration for lenders - I think that the lenders who want to sell loans to FNMA and have to certify that their loans are within the guidelines will take it to heart. The "guidelines" on owner occupancy that have been published have become the "standard" for many lenders, those that want to sell to FNMA and those that recognize that a high percentage of rentals tends to lead to problems not experienced by developments with a high percentage of owner occupants.

QUESTION TWO: "Yesterday, I spoke with the escrow department of a large management company and I asked for the delinquency rate and the manager said that for the Buyer to receive that info, they must pay Condo Certs. She also said that I was the first Realtor to ask that question. What do think about this problem?"

My response: The seller is entitled to the information, so I would ask them to get it, or to provide the buyer with written authorization to get the information on his or her behalf. These are part of the HOA or Condo financial records that an owner can see (not the names and addresses, but the total delinquencies or rate, I would say, under Civil Code Section 1365.2) and so if you go through the owner, you should be able to get this information without "paying" another entity for it. HOAs and management agents are not obligated to give realtors, lenders or buyers this kind of information. And most are loathe to create a legal relationship where none otherwise exists (for good reason, I would say, as California is quite a "sue happy" environment).

Condo Certs is a very commendable repository for document exchange and I assume there are warnings on the site about not being responsible for the information and that is probably why people are referred there. I do not know if they ask HOAs and Condos for the delinquency rate but I would not be surprised, as their goal (besides being a commercial enterprise of course) is to facilitate the transfer of information and documents in a sale or transfer of property, and to do that, certain information is needed. They do ask for the owner occupancy ratio, a longstanding bone of contention between HOAs, Condos and managing agents. Statements about anything that carries potential liability for sellers, HOA or Condo Associations or their management agents are harder to get because of the risk of being quoted, misquoted, or sued over it. That is why they tend to disclose only those documents of information that are required by law (Civil Code Section 1368).

AND MORE GENERAL INFORMATION ON THE SUBJECT OF FNMA GUIDELINES:

I did a blog earlier on the subject of the new FNMA Guidelines that was about teaching lenders how to comply with them; however, when it came to having to certify that an HOA or Condo develop was adequately funded a big roadblock popped up, since anything can happen the day the financials go out, or before, and not be reflected in them. And no lender or realtor is likely to get the information about the percentage of delinquencies without having to go through proper channels.

And so, I say, Realtors! Stay informed on the hottest issues! And send me your questions through the website at http://www.californiacondoguru.com.

AND

You may want to sign up for my E-newsletter on the website if you are not already signed up. It's free. And I will be blogging about these things too so you might tell your realtor friends to get on board and follow the blog. I will be discussing these issues in the coming months.

Posted by Beth Grimm at 10:04 AM

March 3, 2009

What's Up? Anyone Stopping Just To Say Thanks?

Boy, it's a tough world today, bad news around every corner, gloom and doom predicted, and I hate to turn on the TV or radio (except for all music stations). Even some of my favorite TV dramas are focused on economic crisis issues. Can't get away from it ...

There are so many people whose lives or lives of their loved ones are being touched (not in a good way) by the negative economics of today. My heart goes out. ...

So what makes a person feel good? Well, having something to believe in, faith, hope and grace. Doing good deeds, even little things like paying the bridge toll for the person behind you. Ever done that? You would be amazed what a pleasure a few bucks can bring. Even if its fleeting, do it. Feel good today.

Other things that bring pleasure: a few moments of stretching, a hot cup of coffee on a cold morning, meditation, and ... saying thanks to someone you appreciate. I got the following email this morning and I am sure it provided double pleasure - to me AND the sender- in the making and in the receiving, and maybe it will remind you that it feels good to say thanks to someone who deserves it ... and it feels good to receive it too.

Here goes:

Did I tell you thank you? You are a GEM! Why didn't I find out about you and all your wonderful information years ago?

I would gladly pay a subscription price just for the service and many free things that you provide. Do you have any idea how much you are needed and appreciated in this economy in California?

OK -- I'll calm down now . . . I will be an avid reader, and if there is anything I can do as a homeowner of a condo in a HOA that only covers the measly 13 units we have - just ask.

I really appreciate what you are doing - and you obviously are doing it very well, and I just thought someone should tell you that YES - someone is paying attention -- and it matters that you are willing to share your expertise.

Thank you again, BL, CHICO.

PS. did I thank you already? just in case . . . thank you very much!

Make someone else's day today, give a shout out ... remind them that you care about them ... send a thank you just for being them!

Posted by Beth Grimm at 12:54 PM