California Condo & HOA Law

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April 27, 2010

What is an Audit and Who Needs It?

Below are a bunch of questions about HOA audits that I think will resonate with readers. (Thanks to a loyal blog reader...)

First Comment/Question: "Our current Restated CC&Rs spell out that we are required to have a yearly audit of our financials. Our old Bylaws stated that a review is required (the current Restated Bylaws are silent on financials).I have brought this up each year for 2 years. Now our condo lawyer says that ‘’audit’’ is just a general term and all that is necessary is a review. I just don’t buy that."

Answer: I think what the lawyer was getting at is that in contract terms, if there is a general provision on a subject and a more specific and definitive provision on the same subject, and the two provisions conflict, the more specific provision controls. In this case, saying the requirement for a 'Review" is the more specific requirement is disjointed as the two items (audit and review) are each very specific procedures defined in accounting terms. An Audit is more comprehensive than a Review. The point is that the documents conflict and this should be resolved by proposing an amendment to one section or the other. Otherwise, there remains the possibility of a legal dispute that may cost the association money to resolve. The minimum standard required by California law is a "Review" if the gross income from assessments is $75,000 or more, but that is not a lot of help (except perhaps via an analogy argument that the Review is more consistent with existing law). One should check and see if there is a clause iin either the bylaws or CC&Rs that settles the question of which document controls when there is a conflict. There often is such a defining clause, and if there is one it usually sets the CC&Rs as control ling over the bylaws if there is a conflict. In this case, since the new bylaws do not address the requirement of an audit or review, there is no longer a conflict and so it appears that unless the board proposes an amendment to the CC&Rs and it passes, an audit is required.

Second Question: "We have a line item in our operating account for an independent audit. Doesn’t the board have to follow our CC&Rs?"

Answer: Boards are supposed to follow the law. A line item in a budget is not necessarily binding, but this budget allocation along with a requirement in the CC&Rs for an audit indicates an obligation that should be satisfied.

Question: "Can homeowners demand that an audit be done?"

Answer: Owners would have a right to "demand" if there is a documentary obligation. They have a right to "ask" in any event. It is not that uncommon for owners or a board to ask for an audit when HOAs change management - especially when one company has been in place a long time. If a board says "no", there is not a lot of recourse other than to seek a court order for an audit (not cheap).

Question: "I have obtained general, ballpark figures from 2 CPAs specializing in HOAs, the CEO of a large Management Company, and the guidelines from California DRE, 2007 edition. Prices from these sources ranged from $3000 to $4500. for an audit. Our new president states that a certified audit will cost $30,000 to $40,000. The President says that our association is a big business and this is not out of line. What do you think?

Answer: I don't know enough to make any kind of "educated" guess. The range from the lowest estimates to those presented by the President is extreme. Any reader want to take a shot at this question? I am sure the real estimate depends on the size of the budget and nature of any complications in it. I do not know what other factors matter since I do not perform audits.

Posted by Beth Grimm at 10:10 PM

April 20, 2010

Should the Agenda Law for HOAs and Condos Be Manipulated?

Here is a straighforward question ... and a straightforward answer:

"Hi there, our board just began putting the following on the top of each Agenda they send out, “Items may be added to the agenda prior to the meeting called to order. This seems to conflict with the new agenda law – yes – no?"

Yes, this seems to conflict with the California law requiring HOA and Condo Association Boards to provide owners notice of the Agenda before each board meeting, and to limit actions to what is on the agenda, with exceptions for handling emergencies. Maybe this is the Board's way of preparing for emergencies, but it has the appearance of a misunderstanding of the Agenda law.

Posted by Beth Grimm at 10:09 PM

April 16, 2010

How Big Should The Meeting Room for An HOA or Condo Meeting Be?

An owner has a question about meeting room size. It seems this reader might have known that a number of owners were coming to a board meeting and wanted to make sure there was enough room for those attending. Perhaps he or she was an instigator in revving up other owners about a pending association hotbutton issue.

Email note to me: "I asked for a larger meeting room for tonight and got the following response from [the management company] - the company that our Association pays $_______ a year to."

[The answer] "The hotel does not have a bigger room. We can get 20 folks in seats if needed
and any other will need to stand. If needed, we will check to assure they are homeowners and not renters etc. Budget approval is a board process and NOT a open session or free for all. We will go through the budget line items and modify or approve. Then we will vote to approve the budget as an entire package. It is not up for debate with homeowners and board member will not solicit comments from the homeowners. We have 11 line items on the budget that really have limited flexibility on possible changes and really only one for any lengthy discussion, bad debt. We have all had sufficient time to digest this so tonight will be discussion, adjustments as needed and approved and motions to approve overall budget."

First I will say that apathy is a common problem for HOAs and Condo Associations. So, it is not surprising when a board opts on the small side in obtaining a room for the board meetings. Owners do not characteristically attend "en masse." And it is not illegal to use too small a room and stick with the usual plan. And it is hard to change locations sometimes. And board members are volunteers and do not really like to be challenged or confronted, as a rule.

That said, if a board knows that more owners than usual plan to attend a board meeting and it is possible to get a larger, more comfortable room there are good reasons to do so. First, when the "natives" are restless about something that is going on, or an expenditure, special assessment, or something involving money (which tends to bring them out in larger numbers), discomfort and inconvenience only exacerbate the situation. And any suppression of any of the owners' rights to "address the board" at an open board meeting (which should occur when the budget is being discussed) can lead to more trouble, and could be illegal if it falls outside what Boards can do. Boards have a right to limit the time owners can talk (meaning duration of remarks or time the homeowner forum is to occur). This meeting sounds like a disaster waiting to happen.

And as for mentioning what is paid to management per year, I am not sure what if anything that has to do with it (other than purposes of venting maybe?).

Posted by Beth Grimm at 9:22 PM

April 3, 2010

Pay and Stay - Why it Works for Everyone, Except the Banks that Delay Foreclosures.

I recently wrote a blog on my condolawguru blog which focuses on owner issues. Read that blog and this one for the most information on this subject.

The shortage of money for associations is a big one. Many owners are walking away from common interest development properties they cannot afford, assuming that neither the lender nor the association will come after them for accrued debt after the lender foreclosure goes through. This is a misconception, and they commonly do not find out until the HOA comes calling for the personal debt of assessments . Yes, most assessment debt in California can be pursued either through an HOA or condo foreclosure, or as a personal debt action against an owner for all assessments that accrued during the term of their ownership. That owner's debt is not wiped out by a foreclosure sale held by the first/senior mortagee (lender) and neither the lender nor the purchaser at the sale assume responsibility for that "pre-sale" debt.

It really hurts HOAs and Condo associations (and the guilty and non-guilty owners) when people walk away from their condos or townhomes or homes in communities that share some of the expenses. That is because in most cases the association still has to provide services, administration, insurance and the like. So it's hard to have sympathy for those who cause the losses. (Note, I will let the lenders cry their own river, partially which "sprang" from their own actions of initiating such creative financing that they ended up eating alot of their own debt assets.)

But there is redemption for those who go into default with the lenders - they can still be good to their associations and themselves just by being smart.

Delays in lender foreclosures and in scheduled sale dates are common these days. We are talking weeks and months and in many cases more than a year. If owners who cannot pay the mortgage would just stay put and continue to pay the assessments until their property is actually sold(what a concept), they would be better off because they could avoid the accrual of the association debt plus all the collection costs which often later bite them in the "pettuti." (An Iowa word for ">>tt".)

Yes people, you are only hurting yourselves when you move out and go somewhere else and pay rent, only to find out you could have stayed in your "diggs" several months or another year for a lot less "rent" (namely the cost of the assessments). I just had a call from someone who had received a sale date notice from the lender. He paid his assessments to that date, wanting to do the right thing for his association, and left. Later he received a bill for over $10,000 for assessments and collection costs. Lenders are postponing foreclosures and sales for longer and longer periods (for their own reasons) and it hurts associations and the owners in them. So maybe it is just better to stay put and pay the assessments until someone with a trustees deed or Certificateof sale comes knocking - it's usually cheaper than rent, and you can avoid the collection costs, which can be substantial. And even then, it often happens that the party that buys (or the lender that assumes ownership of) the property at the lender sale might be looking for a renter.

Think about it.

Posted by Beth Grimm at 1:23 PM