California Condo & HOA Law

July 17, 2010

SHORT SALES IN HOAs, STRAIGHT THINKING

There has been much commentary about short sales in homeowner associations lately. What happens to the delinquent assessments in a short sale? Some commentators suggest they never get paid or that the debt is extinguished in the short sale. Not so. Some suggest that the association must have a lien on the property to collect or if the sale goes through without payment of the assessments and there is a lien, that the lien is extinguished. Not so.

The best result of course is that the bank/seller do things properly and an escrow demand comes to an association asking how much is owed, and the delinquent amount is considered as part of what must be settled in the sale. Whether the bank, the seller or the buyer pay the delinquencies is of no particular consequence, if someone agrees and they are paid to assist the sale. I have heard of buyers ante'ing up more $$ when the bank appraisal came in too high to do the deal. The buyer might be willing to throw in some money toward the debt to get the good deal.

When they are not paid, or when the HOA is being asked to negotiate down what is due, it is important to consider what is happening and whether it makes sense. Here are some considerations:

1. The debt is that of the SELLER and if the debt is not paid, the association still can go after the seller for the accrued debt. But is it worth it? If the seller is a family that lost its home because the owner lost his or her job or suffered grave financial circumstances, probably not. If the seller is an investor who appears to be dumping property to cut losses, maybe so.

2. If the assessment debt is not paid and the property transfers, it would be my contention that the HOA could still consider putting a lien on the property or moving forward on an existing lien to foreclosure (assuming the governing documents provide for it) as the assessment debt still remains on the property and it has not been "extinguished" by law. If a senior mortgage holder forecloses for its debt and the HOA has a lien, that lien would normally be extinguised as a matter of law. This is not the case in a voluntary sale to your brother, uncle, or kid, or in a short sale. You cannot pursue a buyer specifically, but the property may be up for grabs. Thus, all parties (lender, seller and buyer) should take heed in settling on a short sale without inquiring about HOA debt. It is risky business. All might end up in litigation against each other.

3. If the HOA is being asked to negotiate down the debt, keep in mind that "a bird in the hand is worth 2 in the bush." In case that is not clear, 50 cents on the dollar in hand might be the best deal in town. Getting the unit transferred to a new owner without waiting for the bank to foreclose (many are stalling foreclosures) might be worth nothing on the dollar. Entering into an agreement with the buyer to make payments might be the way to go - assuming they are solvent or moving in that direction.

In other words, HOAs and Condo Boards - being ignorant of the rights remaining or being belligerent in your demands might hurt you. Consult with legal counsel to be sure you are knowledgeable about your rights (don't consider a blog to be legal advice - attorneys do tend to argue about things).

As many have said, is doubly important in this economy to have a strict assessment collection policy that allows for recording a lien at the earliest possibility because let's face it, HOAs and Condo contacts are hard for the lenders and title officers to find. If sellers don't ante up the information about their debt to the association, a lien will. And, a lien offers a point of contact, and additional protections in the event of bankruptcy. Yes, the costs to the owner who is already strugging go up considerably when a lien is recorded, but if that owner has not stepped up and entered into a payment plan that is being honored, there are oh-so-many-protections that the Association needs.

Posted by Beth Grimm at 1:02 PM

July 13, 2010

RENT SKIMMING - HOA Foreclosure - Desperate Situations

A few months ago I did an E-Newsletter on the rent skimming law in California. For those who do not know what that is, it is when someone buys properties at a foreclosure sale held by a junior lienholder or HOA, rents them out, takes the rents and does not pay any money to the senior mortgage holder whose debt is still viable. This person is "skimming" the rents and often continues to do so until the senior mortgage holder forecloses. There are legal penalties for doing that and there is more on this in the E-News Archives on my website. And HOAs that take properties back at foreclosure sales when the owners do not pay the assessments are at risk if they rent the place out, and "skim" the rents.

However, the HOAs are often in a very difficult position, today more than ever before in my history as an HOA attorney (more than 25 years). The economy and rising number of people who simply cannot pay, or simply "walk away", is hurting the HOAs. The inclination of many banks today to stall foreclosures lest they become owners of HOA properties and be held responsible for the upkeep of the property and assessments is very troubling. It is understandable, given that they are in "business" and have their own set of problems and criteria, but it is hurting HOAs!

I have received the calls from Boards that are desperately trying to find some means of collecting assessment money, or collecting the debt from unpaid assessments, about homeowners and investors who have either committed suicide, skipped town or simply crawled within themselves because of their financial plights. So pushing those parties for reimbursement can be like pushing a dead horse.

If an HOA is considering going through with a foreclosure sale and (assuming the property is upside down or unmarketable for any reason) "skimming rent", I suggest first exhausting all possible options (considering all circumstances) with the owner. I suggest contacting the lender to see what the plan is with regard to foreclosure (although many lenders will not communicate with the association until it owns the property).

If these things lead to a dead end, then the HOA may be left with the difficult (but probably reasonable under this scenario) position of taking the property back at its own scheduled sale and collecting rent from the current occupant, or legally evicting them and getting a rent-paying tenant in there.

Once the HOA becomes the owner of the property, then I would suggest communicating with the bank and encouraging it to move forward with foreclosure if the debt is in arrears (which it most certainly would be), or to consider looking at a short sale. If the HOA has exhausted all avenues considering pursuing the owner, and notified the bank encouraging them to move on the property, it seems really that any party that might pursue the HOA under the rent skimming law would have a lot of explaining to do, and difficulty characterizing themselves as any kind of "victim" of the HOA's action.

These measures are suggested as a way to potentially minimize the possible ramifications under the statute that was designed to punish people who take advantage of the downtrodden and then skim the rents instead of taking proper ownership responsibilities with regard to the property. There are no guarantees of course.

The law was not designed to punish HOAs that have fallen victim of owners who no longer take responsibility and banks that are unreasonably delaying foreclosures to protect themselves and hopefully, if any HOA is pursued under this law, the judge would take into consideration the lack of willful or malicious intent. I know of no cases where the HOA has been pursued and know that attorneys have presented this as an option to consider when all else fails.

Posted by Beth Grimm at 10:52 AM

May 17, 2010

Variable Assessments in HOAs - What's Right?

Variable assessments cause a lot of consternation for associations, especially those that do not have professionals to guide them. There are all sorts of questions that arise. Here is one example:

"HI Beth, I think your articles dealing with hoa's are wonderful! so thank you for that. I had one topic that I didn't see discussed, We are a small hoa that started 10 years ago, and initally, we just broke down the hoa dues of 3 units into total bills / 3 (this worked for years, but now our insurance has skyrocketed, and the hoa dues are now way skewed. So here is the break down of the units 1850 sq ft , 1950 sq ft, and 1200 st ft. so initally it was established that even though there are different sq footages we each use the same amount of garbage typically. But in the last couple years our insurance went from $1200 - $4000 and the larger units are of course getting much more coverage then the smaller units. The reply from the hoa was that well as far as liability its all shared equal, but the fire covereage should be divided by sq footage only.

Here is my question - is there a general breakdown of how hoa dues should be or are required to be split with ca hoa's? Im in the smallest unit so I feel that Im paying more then my share for the other units benefits, and in a 3 condo vote, the 2 large units seem to always out vote me. "

It is unfortunate in associations where the majority has the power to make decisions that force the minority to pay more than their fair share. However it is important to note that it is more likely that the governing documents of the association dictate the proper legal allocation of assessments than any vote of a board, meaning look in the CC&Rs to see how the assessments are allocated. When square footage ratios come into play, there still often are some expenses that are shared equally. Often, things like garbage, management, and general operating costs are shared equally while painting, roofs, siding, insurance and other expenses related to the maintenance of the buildings is shared pro rata. It becomes complicated when an association has to collect equal assessments for operating costs and recreational facilities like pools and clubhouses, and then have to have a separate allocation for reserves for the building improvements housing the units.

Still, difficult or not, unless a proper amendment is passed changing the allocation (which sometimes requires a high percentage of member approval AND lender approval), the allocation in the governing documents is the legal allocation.

And if persons get together and set up a condo ownership situation without legal advice as to how to set it up properly and in a manner that protects fairness, opting instead for the informal process that requires a member vote on important decisions, and that leaves one party at a disadvantage, I don't know what to say other than I guess you get what you pay for.

Posted by Beth Grimm at 10:12 PM

May 4, 2010

Public Flogging - What is the Worst That Can Happen?

I receive a lot of emails from all over the country about goings on. I know that people get seriously angry when things happen that they think are unfair. Many come to lawyers wanting to sue. Some, when they find out the cost of a lawsuit (which seems to be a mentality that is hard to shake), turn to things they CAN DO cheaply. But choosing the easier path doesn't always turn out to be the cheapest form of blowing off steam.

Here is one story that you won't want to ignore, which is taken from a Press Release issued by the owner of the property.

"PRESS RELEASE - FOR IMMEDIATE RELEASE

Gatlinburg, Tennessee Home Owners Association Files $1 Million Lawsuit
Against Blog Author and Property Owner

A Tennessee Home Owners Association has filed a $1 million lawsuit against one of its property owners for defamation, libel, slander, and false light invasion of privacy. The property owner, Robert Goodman, has operated a blog that has heavily criticized the actions of the HOA’s general manager and board of directors for alleged violations of both its own HOA controlling documents and Tennessee state law. The HOA board has filed the lawsuit in an attempt to force virtually all content to be removed from the blog and prevent any new entries."

The blog is at www.DeerRidgeOwners.com. I provide this information and not because I have any specific information take on which side is right or wrong, but merely as straight up information of a possible "worst case scenario" to consider illustrating what can happen when an owner speaks out in a derogatory way publicly about his or her association or board, especially in a way that can reach millions of people. Use of the internet communication systems as a mean of lambasting any party can escalate any differences and damages in any lawsuit that might occur.

I have not visited the blog, but it seems it might serve as a model of what-not-to-do if you don't want to get sued. This type of situation could happen in the reverse as well if a board defames an owner (the only defense to defamation is the truth but as you can imagine, there are other potential issues like violating rights of privacy, etc, when negative information about a party is sent distributed publicly). And, even when there is a viable defense, litigation is painful and costly in many ways.

In California there are many ways for an unhappy owner to approach your board or for the board to approach owners about association issues short of public flogging (by either side).

Posted by Beth Grimm at 10:38 AM

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 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

March 24, 2010

Rent Skimming - A Warning to HOAs and Condo Associations

Here is a common scenario in California (and likely throughout the US):

A manager or board member calls with several questions related to the recent acquisition of a unit through the HOA's foreclosure. There may or may not be a person currently residing in the unit so what do you do with them? The HOA may be interested in renting the unit. The unpaid assessment debt may be huge and of course the HOA is interested in recouping those costs. The senior lender(s) may also be in the process of foreclosure (and there may be extremely long delays in their processes).

So what do you do? You get legal advice. See the prior post on the business judgment rule. And hopefully it is good advice.

There are risks with renting in California. California Civil Code Section 890 is a "rent skimming law" enacted to prevent people from buying at foreclosure sales and "skimming the rents off" until the lender forecloses. It also has components for civil actions and criminal actions (for those who do this multiple times, and who "squat" in foreclosure properties and then rent them out to unsuspecting people, take the money and run). There are some protections for individual owners who use the money to pay certain costs. There are no specific protections for homeowners associations, even though they were surely not the "target" in mind when the statute was enacted.

There are hurdles to selling the property as well. Title companies tend to shy away from insuring HOA foreclosed properties - at least in the short term after foreclosure.

Associations are really suffering in these situations when the banks delay their foreclosures. It can take weeks, months or even more than a year before a bank follows through with its foreclosure. So what is an association to do? Especially if someone is living in the unit.

There are things that can be done to try and avoid legal liability. One possibility might be to "escrow" rents collected for a period of time in order to have some money available unless there is a claim. But you have to understand the risks of the statute and make sure that all bases are "covered" to the best possible extent if you are going to take the risks involved.

I cannot stress enough that it is important to understand the law in this area. So get thee to a good lawyer before you get thee into court on a surprise charge of rent skimming!

Posted by Beth Grimm at 3:27 PM

March 15, 2010

How Far Back Can An Association Go To Collect Assessments?

Here is a question I received about assessments:

"My condo association is threatening to come after me for assessments dating back 3 years. I left 3 years ago. The lender still has not done anything. Can they come after me?

The answer would be yes, if they are entitled to the assessments. The HOA or Condo Association can go back 4 years. Beyond that it would run into a statute of limitations problem (in California) as the SOL on contract breaches is 4 years, and the CC&Rs are considered a contract.

If you want to know what happens if an owner "walks away" from a condo or townhouse association, see www.condolawguru.com.

Posted by Beth Grimm at 10:17 PM

February 26, 2010

FHA Certification for Condos is Harder Now - More Expense, More Time - Is It Worth It?

At the end of this blog are excerpts from two recent news stories published on CNN's website. One article suggests that there may be more federal funds pumped into the effort of saving owners from foreclosure and stemming the increases in foreclosed homes. And one says that Fannie Mae (FNMA) needs funds. (See excerpt below.) And the HUD website explains that the FHA funds may run out by mid 2011.

Not to be critical of doling out money to help homeowners, but the question eventually has to be: how much more money can be pumped into the system before the faucet runs dry? And, how much longer can the owners hang on who are paying their mortgage as the home prices are driven down by short sales, bank owned property auctions, and the failing economy?

This is especially pertinent to condo associations because FHA has made some changes to the certifiability of condo units for FHA funded loans. FHA has done away with spot certifications and is requiring project certification for Condo units to qualify for consideration (note that certification does not guarantee a loan but does allow applications on projects that are certified). If the FHA loans dry up for condo associations for lack of available funding (or other properties, for that matter), certification will no longer be meaningful.

For the summary of changes and questions the recent FHA changes raise, visit the E-News archives at www.californiacondoguru.com and read the latest E-News.

To see what is happening in detail with the FHA certification and also with the issues related to future funding, visit www.HUD.gov.

Here is just an excerpt from the article touting the possibility of more funding to be offered to assist owners with regard to currently-owned property:

"Housing help for unemployed, underwater borrowers
http://money.cnn.com/2010/02/19/real_estate/housing_help_unemployed/index.htm

By Tami Luhby, senior writerFebruary 19, 2010: 7:36 AM ET

NEW YORK (CNNMoney.com) -- Under pressure to do more for troubled homeowners, President Obama is expected to announce on Friday a $1.5 billion program to help borrowers in the five states hit hardest by the housing crisis.

The initiative calls for pumping money into state housing agencies in California, Arizona, Nevada, Florida and Michigan to fund programs to prevent foreclosure for people who are unemployed or who owe more than their homes are worth.

Also, the agencies can assist homeowners having trouble securing loan modifications because of second liens, as well as promote affordable housing opportunities.

Obama is scheduled to unveil the initiative, which will be funded with money from the TARP bank bailout, at events in Nevada, which has the highest number of underwater homeowners at 65% and the nation's second-highest unemployment rate at 13%.

The president will be joined by Senate Majority Leader Harry Reid, D-Nev., who is facing a tough relection campaign.

The funds will be allocated based on a formula that takes into account home price declines and unemployment. The agencies' programs must be approved by the Treasury Department.

The move is the administration's latest attempt to fix its signature foreclosure-prevention effort, the Home Affordable Modification Program, which has been widely panned for not doing enough.

The year-old initiative, which lowers qualified borrowers' monthly payments to no more than 31% of pre-tax income, has placed more than one million people in trial modifications. But it has given lasting help to only 116,000 homeowners, mainly by lowering their interest rates.

..."

*********
And this article appears on the site and is pertinent as well:

"Fannie to U.S.: We need another $15.3 billion
By Tami Luhby, senior writer February 26, 2010: 6:35 PM ET

NEW YORK (CNNMoney.com) -- Battered by the housing crisis, mortgage finance company Fannie Mae said Friday that it needs another $15.3 billion in bailout money from the federal government.

Fannie Mae (FNM, Fortune 500), which is controlled by the government, reported a fourth-quarter loss of $16.3 billion, including $1.2 billion in dividend payments to the Treasury Department. This is down from $25.2 billion a year earlier and $19.8 billion in the third quarter.

..."

Perhaps you can see where this is going. Is the cost of seeking project certification in Condo associations justifiable?

There are those that say: "Without Question." And those that "Question."

Posted by Beth Grimm at 10:44 PM

February 11, 2010

Late Fees - Collection Costs - How Much Is Too Much?

In these days of tough economic times, every dollar matters. Thus, owners who get behind on their assessment payments often get very unpleasant surprises. The costs of collecting delinquent homeowner assessments is high. So is the liability if a mistake is made. One technical mistake can unravel an HOA or Condo Association collection matter and require a "do over" at the association's expense. The processes are statute driven and paper intensive and there is a charge made for every step of the way.

Some owners shove the HOA or Condo assessments to the bottom of the hopeless heap of unpaid bills, figuring the late fees are not that big of a deal and they will catch up later. Others figure, like their mortgage, that if they let the property go to foreclosure they will walk away without further obligation once the foreclosure occurs and so they just stop paying. Because of the difficult financial plight of many HOAs and Condo Associations caused by the high number of defaults on property in California, many Associations are tightening up in their collections processes and moving things along more quickly than ever before. And sometimes that means that the intense collection costs attach earlier than they used to.

I received an email from a person upset about collection costs. See what he had to say:

"My son’s HOA collection agency added $225 to the HOA dues balance of $500 for a notice of intent to lien, plus a management cost. This is on top of late fees, interest and other costs. He missed one monthly assessment payment. ... My question: Is there a standard for reasonable collection costs? The quoted amounts seem excessive and redundant. He clearly made a mistake. We want to remedy this matter but want to be treated squarely (fair and reasonable). We have a meet and confer meeting coming up. Any suggestions or advice on a settlement amount? Also I presume the HOA board has the authority to resolve the balance owed to it plus whatever the collection agency purports that it is owed, right? Thanks in advance for any help."

All I can say is that I am not surprised, nor do I have any comment as to whether these fees are right or wrong, justified or not. I have been apprised in other situations of similar charges ($225 for a notice of intent to lien). If there is a management company involved there is often a charge made by management for the work in sending the account information to the collections agent. I have seen fees for this around $50 or $75. And II have seen fees for the letter stating the intent to lien around $150 to $200. The next step is the lien (30 days later, usually), and the charges for preparation and recordation of the lien are generally between $150 to $300, sometimes more. The costs get exponentially worse as the process continues. The association has to gather the correct information for the lien through obtaining a property profile and has to procure a trustee sale guarantee at some point - and the cost alone of a guarantee was around $400-$500 10 years ago (when I was working in a law firm that did collections). Thus, at the stage where a Notice of Default is recorded, the costs can jump as much as $1000 or more. Yes ... very expensive, but in line with what HOAs and Condo Associations commonly charge.

If this situation arises for you, it is best to clear up the debt and go forward at the earliest opportunity. Boards can forgive collection costs and may be so inclined when someone makes a mistake and misses just one payment, or runs into trouble and wants to catch up. However, it is important to understand that once "hard costs" are incurred - such as fees that have to be paid to management or collection agents for the work they have done on a collection matter, boards are reluctant to forgive these. When they absorb these costs, it means that all other owners suffer to a degree the failure of the individual owner. It is easier to get some leniency on the "soft costs" such as late fees and interest.

Posted by Beth Grimm at 9:12 PM

December 29, 2009

What Constitutes a Good Reserve Study? Who Should Prepare?

Here are some questions from a loyal blog follower about reserve studies:

"I have searched all over the net and can't find any information about reserve studies. How does an HOA find a qualified company, how does an association know if there reserve study is any good, etc. My nephew has a property management company and he only uses engineering companies ...."

To find these qualified individuals, there are resources. APRA is (Association of Professional Reserve Analysts) can be found at WWW.APRA-USA.COM. You can sign up there for a free E-Newsletter with news and articles about reserve studies. In California, CAI (Community Associations Institute) has 9 geographically located Chapters with directories listing vendors that provide studies (www.caionline.org is the national website to find the local chapters). If you attend expos and seminars put on by APRA, CAI and other industry groups like ECHO (Executive Council of Homeowners) at www.echo-ca.org you can talk to the vendors in person.

A good reserve study has a good component list (those components the Association is obligated to maintain) and a good funding plan that outlines the anticipated life and how the association will raise the money for anticipated repairs and replacement (using reserve funds, special assessments, loans, and otherwise). Contractors, engineers, and financial vendors such as CPAs can be very helpful. It's hard to know if a reserve study is a good one unless you are well versed in HOA finance and building maintenance. But using the right kind of professionals (people who know California law, can assess buildings as to condition, can do financial planning, and the like) for assistance is helpful.

In California, the pertinent laws are found at Civil Code Section 1365-1365.1 and you can get access on my webpage (www.californiacondoguru.com) to The Davis Stirling Act where these laws are found. You can also purchase low cost Primers on the subject of what should be set aside and why, and what investments are proper for reserves. And there is a series on Assessments too, such as how to collect assessments and how to get a large special assessment to pass when needed for repairs.

Just visit the Publications page and look for the Reserves and Assessment Primers.

Posted by Beth Grimm at 11:50 AM

September 28, 2009

Online Banking - Some Protections for HOAs That Want It

There are some HOAs and Condo Boards that use and very much like online banking. It provides considerable convenience, but should not be used for reserve fund accounts, especially in Caliornia where there is a requirement in the law for two signatures on reserve account drafts, checks, or withdrawals.

Here is a response I received to the blog on online banking.

" I'm glad online banking is not illegal since we have used it since we became self managed many years ago. We only use it for our operating account and pay all operating account bills online. The bank where we have our reserve account does not allow for 2 signatures. I hold the checkbook for that account, but I am not an authorized signer. That works from an internal control standpoint. Additional controls that we have put in place include sending full monthly financial statements and also sending the check register which shows all bills that have been paid from both the operating account and the reserve account. We typically only pay one or two bills annually from our reserves."

This association has found a way to "cope". One thing I will mention about what I have heard about the banks. Some board members get the idea that a bank does not allow 2 signatures when they are told that the bank does not "check" signatures to make sure there are 2 on the checks. Sometimes this simply means that they don't have the means to check all signatures on checks; however it does not necessarily mean that the bank will not "make good" on a check deducted upon an incorrect number of signatures or a signer not on the signature card if there is a complaint the money should not have been paid. I have heard some stories where the bank corrected the error and some where the bank stood behind the shield of non-responsibility. It likely depends on the facts and circumstances about the check in question, who wrote and signed it. What the money was used for. What occurred that was inappropriate? Etc.

Posted by Beth Grimm at 9:54 PM

September 14, 2009

Online Banking for HOAs and Condos - Is it Legal?

Many HOA and Condo boards want to know about online banking. Is it legal? Is it wise? Is it the wave of the future?

Here is a recent question:

"My question is, our newest director, who is also new to our building, is the treasurer. She has the purse right now, and is insisting that we amend our CC&Rs so that she can pay our bills online. We use two signature checks to pay bills and always have. I fear mis-spending can occur when one person alone has the power of the purse without checks and balances - what do you think? Can you advise us of the law in this area please?"

In California, I have not seen a case that indicates to me that a CC&R amendment is required to use online banking. Quite a few years back, HOAs and Condos started using "lockbox" systems for collecting assessments and in the beginning, there was some concern about systems that flowed assessments into holding accounts for numerous associations, and there was some legislation about that which prohibited commingling funds except for some "grandfathered" situations. So, there may be some issues raised about online banking, expecially if it results in losses to associations. But for now, I do not see a legal barrier other than concerns related to breach of fidicuary duty.

As for that, I agree with the writer that there is reason for concern about one-person-one-click spending. There are few checks and balances. A board can most likely set up an online system where there is the ability to void or stop payment on checks which might be especially helpful for checks exceeding a certain level. There is usually some ability to find out about these large expenditures before the checks reach their destination - through email notices as provided to one or more board members. Online banking does generally allow for alerts to be sent out when checks above a certain amount are authorized.

However, a problem can arise depending on who is authorized to make changes in the alerts. If there is only one person, that person can create havoc. if there are two or more, one still can wreak havoc.

One example: There are two board members set up to receive notices of payments from the online account; both have administrative control as well. However, one of the board members makes changes removing the emails of the others who usually received alerts of withdrawals that have been set up. Then that board member made some unauthorized payments from the HOA account.

That said, there are plenty of associations that allow one signer, some even allow the manager to sign checks on operating accounts, so there is also the possibility in that situation of foul play if there are no controls or there is not a close watch on banking activity.

But is online banking illegal? I do not believe so. In California, there is also a legal requirement that there must be 2 signatures on withdrawals from reserve accounts. While I think this protection should be preserved, I am advised that many financial institutions allow transfers through faxed authorizations that do not contain two signatures.

So go figure. Practicalities and progress sometimes trump the most conservative practices. But when things go wrong, the legal claims start to fly, and whether losses could be recovered by any owner or a board would depend on just how careless the actions were that lead to the losses. There might be a balancing of risk vs. convenience vs. exactly what controls were available and which utilized ... or ignored.

Posted by Beth Grimm at 8:13 PM

September 10, 2009

COLLECTING ASSESSMENTS, FUNDING BIG PROJECTS

Many associations are having a difficult time trying to fund large projects because of delinquencies. This is not just indicative of California, but is happening in other states as well. Check out the recent posts at blogpost@condoassociation.com. An association wrote in that had 47% delinquencies. Granted, that would make it difficult to fund a large project either through up front assessments or in trying to get a loan.

Here is the answer I gave to the question:

In California, if the HOA has a lien and is pursuing foreclosure and the first mortgage holder forecloses, it generally does wipe out the association's lien (however, note that the lender's interest and recorded docs would have to be reviewed to confirm). HOAs in this state have found some success in things like (1) more assertive collections policies and practices (staying on top of the collections earlier rather than later), (2) pursuing owners without equity in the home, but with jobs, and assets, through personal debt actions including small claims, (3) choosing judicial foreclosure over nonjudicial, (4) and offering more payment plans to help people catch up. Many are budgeting for losses, and also assessing losses and writing some debt off to resolve the issue of the percentage of outstanding delinquencies. It sounds like you could use some professional help to "reposition" efforts.

There are many things an HOA or Condo Association can and should do when the deliquency rate goes that high. Solutions are elusive, but without action, they are not going to happen.

Check out the Assessment Primers available on the Condoguru website- there are Primers on Assessment Collections in Difficult Times (A-5) and on What to Do When Facing A Large Special Assessment (A-4). There is a Forms Assessment Primer as well to assist with policies and practices.

And get to work!

Posted by Beth Grimm at 11:01 AM

August 31, 2009

How Do You Negotiate A Payment Plan For Your HOA Debt?

The topic of the day for HOAs and Condo Associations is assessments, imposition, payment and collection and I may as well say distrust, frustration, anger, hopelessness, financial devastation, and eventual polarization of the parties.

People in California are trying to walk away from the delinquencies, and getting the surprise of their lives when they find out the HOA or Condo Association is coming after them personally for the debt. I have written about this before, many times. And the collection costs attached to the debt by this time can be quite staggering.

And so many times, the parties get polarized.

But before that happens, if I have reached you in time, I can point you to a good blog about negotiating resolution of the debt - written by a long time pal who has been a community association manager for many years, someone I used to teach management classes with, years ago (before industry organizations got busy and started offering education to managers).

Check it out, visit the blogsite of Gayle Hasley.

If I did not reach you in time, and since I like the really hard questions, here is an all-to-common scenario: the owner realizes that the debt will not go away (sometimes this happens in the midst of a short sale situation) and responds (not always in a congenial frame of mind).

After months of ignoring the association communications, the owner contacts the association and says they cannot pay or they ask to meet with the Board and/or commonly asks for the Board to forgive all or part of the debt.

Owners do have the right to ask for a meeting about a payment plan, if the association offers payment plans (many do) but there are timing limits in the law - within 15 days after the lien notice. And Boards are loathe to (and in jeopardy of being accused of breach of their duty to collect assessments) write down the debt. As for the meetings, some boards waive the timelines and are willing to meet with the owners. However, often the arguments and fights ensue over :

The Board's resistance to payment plans the owner thinks are reasonable.
The Board's policy of appointing fewer than all of the board members to handle the meetings.
The seeming battle over convenience of time for meeting.
The unwillingness of Boards to even discuss writing down the debt.
The owner's arguments that the costs are unreasonable.
AND
Games, power battles, misunderstandings, egos, and frustrations over the economic stressors on both sides, sometimes health issues, and the seeming unresolvable issue of mounting collection costs. If an owner hires an attorney, the HOA or CONDO Association often also hires and attorney and .... well. ... talk about mounting costs! ... Once the attorneys get to arguing ... need I say more?

If the assessments are legally imposed, and the owner's attorney does not understand the rights of the HOA, it becomes a nightmare ... for both sides.

So how do you get it back? .... the ability to negotiate I mean after the stressful and damaging interchange? After the true facts and realities are understood, and something has to give? How can the parties save face (usually it is the owner that needs to do the face saving unless the Board has made some big gaff)?

The obvious answer is "eat crow". Acknowledge the frustrations, the misunderstandings, and the realities, and ... apologize. And as for offering up a payment plan, there is strategy involved -the best course is to propose some lump sum good faith payment, along with a payment plan geared to paydown the delinquency, and keep up the ongoing regular assessments. As a rule of thumb, years ago when I did collections, my guidelines were that for a small delinquency - in the neighborhood of $1000 or $2000 somewhere, a payment plan geared to payoff the delinquency and costs within 6 months (counting the "down" money) would be considered. For a larger delinquency, catching up or paying off the delinquency within a year would usually be considered.

Today, many associations are hurting just like owners in them are hurting, and Boards have to be more careful because in many cases the delinquency rates are higher and the money is slower to come in to cover the bills. So Boards in the various associations have their own standards and requirements if payment plans are offered ... but know this: a bird in the hand is welcome in many cases and so a proposed payment plan coupled with the offer of a portion of the debt to be paid up front (I would suggest at least 10% or more), can be a big carrot.

Posted by Beth Grimm at 9:22 PM

August 29, 2009

To Foreclose or Not to Foreclose an HOA Property - That is the Question

To foreclose or not to foreclose, that is the burning question these days for HOA and Condo Association boards. Moving in the direction of foreclosure used to be the way to get owners to pay delinquent assessments. I say "used to be" because people used to have equity in their homes, and the threat of foreclosure was a real threat.

To pay or not to pay the delinquent assessment is the burning question these days for owners. It used to be a no-brainer. If the HOA or Condo Association could foreclose and force the sale of your home, or take it back for unpaid assessments, the best answer of course was to make arrangements to pay the assessments, whether in a lump sum or on a payment plan (assuming the HOA or Condo board allowed a payment plan).

It used to be - should I say in the "olden days" - pre "recession", that boards could accept payment plans because a small percentage of the owners were delinquent.

It used to be that boards would move toward foreclosure in all but a few situations to collect assessments. That was "pre-recession". Now many HOA and Condo boards are looking at ways to pursue the debt of delinquent assessments against the individual owner(s) during whose ownership the delinquency accrued (yes, that is usually an option available to HOAs, but many, many people do not know that!).

Boy, the "olden days" are gone. The "steel hammer" in the threat of an HOA foreclosure is all but turned to a weak rubber mallet. The desire to stay current with delinquent assessments has all but turned into the sands of time, slipping through the grasp of the average American. Owners who think they are "in the clear" for a delinquency when the bank forecloses are getting unwelcome surprises when served with a subpena for a personal debt action. Short sales are falling apart at the last minute because the parties (seller, buyer and lender) are ignoring the HOA and the accrued assessment debt until it can no longer be ignored - which is the case when a valid HOA lien shows up on the title search.

The collection of delinquent assessments has become an elusive effort in futility in many cases. And for that reason, many HOA and Condo Association boards have stopped offering payment plans. The reality is that the association bills need to be paid ... and in many cases, the income from assessments has dropped dramatically. Associations that used to run with 1% or less in deliqencies are in many cases running with 10% or more today!

What is the answer?

Pray for better times and an economic upturn.
Pray for an improvement in the housing market to where it makes sense to keep one's property.
Pray for help in balancing a precarious budget.
Pray for the well-being of everyone .. And I do mean everyone ... The better off everyone is, the more likely the economy is to start a serious upturn.

And if you are not a religious person, then GET EDUCATED about the facts, options and solutions.

You can find many answers and get help in working out solutions in the various 5 Assessment Primers that are available on my website. Since each is about 20 pages long, and detailed to the max about the specific subject matter, it would be absurd to try and summarize the information in one blog or one article. The information is there for the taking, for a very small price ($25 each). Get educated and whether you are on an association board, in hot water over your own finances, or trying to help out a relative, it pays to have the information needed to make wise decisions. Here are the topics: (California law incorporated)

Basic Assessments A-1 - How To Determine How Much Should be Charged
Assessments A-2 - All About HOA Foreclosure
Assessments A-3 - All About Bankruptcy in HOAs
Assessments A-4 - Coping With the Big Special Assessment
Assessments A-5 - Collections in Hard Times
Assessments A-F - Forms Used in Collections and Satisfaction of Disclosure Requirements

Visit the CaliforniaCondoGuru - See the Publications Page and the Webstore

Posted by Beth Grimm at 3:29 PM

July 27, 2009

ATTORNEY FEES IN AN HOA OR CONDO DISPUTE - WHO GETS THE $$?

Here are two unusual questions about financing a lawsuit - and who is suing whom?

Question 1: "I'm not sure what to do about my Board of Directors. In our Budget we have attorney fees listed in a column and should be accumulating and we do have a management company. Can my Board of Directors utilize the Budgeted attorney fees to obtain an attorney, if I decide to file a lawsuit against the Board of Directors for not performing their Fiduciary duties? If not, how can I stop the Board of Directors from taking the money from the Budget for attorney fees?"

Answer: Yes, the board can use money budgeted for attorneys fees for attorneys fees incurred to defend the association or any board member(s).

Question 2: "Is there a California Civil Code that I can reference the management company for them to review before they release the money to the Board of Directors? I feel the money for attorney fees should be given to the person who prevails in the lawsuit."

Answer: No, there is no Civil Code that supports your position of withholding funds, and in addition, the management company releases funds at the Board's direction, and would not generally have the right to withhold funds, as the manager is acting as agent for the Association and has no decision making power other than that granted by the Board.

When an owner sues the association, it is in essence suing itself as well as all other members, as the Association is it's members. In most cases, the Association documents provide the directors with protection (called indemnity) by containing a clause that says the Association will pay for the defense of board members if sued. And Boards that are savvy and wise will make sure that the Directors and Officers Liability Insurance is kept up to date for their own benefit and the benefit of the entire membership. The members would not want to pay for defense of a lawsuit or damages resulting from a lawsuit.

Such protections generally apply to acts and decisions of board members made in good faith and within their capacity of their role as a board member. So there is in most cases little hope of successfully pursuing any lawsuit against a board member, unless their conduct is really eggregious.

There is a statute that says in an HOA or Condo lawsuit relating to enforcement of the documents the prevailing party would be entitled to recover attorney fees; however, the "award" would come after the "prevailing" part, which can only be determined at the end of the lawsuit.

As for more particulars, this does not constitute legal advice - an attorney would have to know a lot more about what is occurring to determine if the conduct gives rise to the possiblity of an individual judgment or an attorneys fee award.

Posted by Beth Grimm at 9:30 PM

July 24, 2009

Good Standing - Board Members - Dialogue Continued - for HOAs and Condos

I did a blog essentially similar to this in October 2007 and republished it just before this blog. As I said in that text, there is quite a bit of misunderstanding about these terms ("good standing"), and when they can be asserted to prevent someone from serving on the board, and when they can be used to prevent an owner from participating in association elections. And of course, there is today's world (and economy) some things have changed since I wrote the blog in October of 2007.

A new question arises - if an owner/board resolve an assessment delinquency or other CC&R violation via a written settlement agreement, does that resolve the violation itself, such that the owner would then be in good standing?

I would say, that "depends".

As for an example, if the settlement agreement is that the late fees and interest are to be deducted if the owner pays by "XXX" date, and the owner does pay by that date, they would be in good standing on the date they pay (assuming the docs say that they have to be "current" in their assessment payments to be in "good standing"). If the agreement involves a payment plan, the good standing issue would be resolved wwhen the payment plan was fulfilled. Thus, the agreement itself in either case would not settle the question of good standing.

Any other violation could bring in all sorts of discussions. If an owner has an unapproved pet that violates the governing documents but agreement is reached that the pet is legally/properly "grandfathered" (allowed to stay until it dies or moves away), then violation is resolved.

But if someone has erected a deck that is ordered to be removed within 30 days, that would be considered a violation until it is resolved.

So, the question of when the violation is resolved and good standing is resumed is a question of fact, depending on the situation, the type of violation, and how it is to be resolved.

Confused yet?
That is why you get help! Hopefully, the right kind of help.

Posted by Beth Grimm at 11:13 AM

May 29, 2009

Does an HOA or Condo Owner Have To Pay Assessments Even If Their Home is Foreclosed?

I get this question at least two or three times a week.

Question: I'm not sure if I need an attorney. My condo was recently foreclosed. Now I have received a complaint from my HOA for dues that I did not pay before my condo was foreclosed. I thought they would take the money that I owed through the foreclosure, but I guess they never opted to get their money through the foreclosure proceedings. Now am I personally obligated to pay them?

Answer: I am going to assume this foreclosure was by the bank, and not the HOA. If the HOA foreclosed and went to sale, it would get a Trustees Deed to the property and that would settle the debt with the HOA.

An HOA or Condo Association can pursue a debt through foreclosure (so long as the documents allow it) or by personal judgment. When a lender forecloses, the association does not “opt” to get money or not. If there is leftover money from any sale of a home through a bank (or any other lienholder for that matter) foreclosure, those first in line (meaning their secured interest is first in priority) get paid first and the trustees have a list. If there is enough money to pay the existing lien, the association should receive it. If not, in these days of the recession economy, more and more HOAs and Condo Associations are going after the owners who defaulted to collect the association debt personnally, because there is no equity in many of the homes.

If you want to know all about HOA or Condo foreclosures, or all about HOA or Condo bankruptcies and what the effect is on HOAs and Condo Associations in California, visit the Californiacondoguru and go to the Webstore. There are several Primers there for you, 5 on assessments alone, including Foreclosures, Bankruptcies and Collections.

Posted by Beth Grimm at 1:13 PM

April 23, 2009

What Are Some Options for Struggling Boards and Homeowners?

In my last blog I had to pass on some discouraging information about the options HOAs and Condo Associations have with regard to collection of assessments. It's discouraging for the owners of course because owners tend to think they may be able to just "walk away" from the assessment obligations. It is common to assume that the collections processes for mortgages and for assessments are the same, but they are not. Assessments can be pursued either through foreclosure (if the documents allow it, which most do) or through personal debt actions and there are different parameters for mortgages (and I am not here to advise you on either, just to pass on information).

And times are difficult for boards too, because they often have to pursue debt collection or authorize it to be taken against neighbors and people they know are struggling, for the benefit of the membership.

So what are some things that can be done? Owners can try to work out a payment plan with regard to the delinquent assessments by communicating with the Board. California law gives owners the option of asking for a meeting with the Board to discuss a payment plan. Of course, this assumes that they will be able to pay the continuing assessments as they fall due and a reasonable amount toward the debt. Remember, associations have obligations to meet also. Some are simply unwilling or unable to offer payment plans, it is true; however, those that can would do well to open up their minds to the realities of "incentives" that come with a payment plan for an owner who is able to pay with one. Do not operate in a box such that important opportunities for "workouts" are ignored.

And associations, in difficult cases, you need to consider whether payments toward delinquencies are better than receiving no money at all and try to find a way to allow those who fall behind a reasonable way out of the hole they have dug, often completely unaware of what the ramifications of missing assessment payments is.

For years Boards have been advised to put assertive ongoing collection "policies" in place - with the idea of pursuing the assessment obligations quickly and diligently ... because the further behind an owner gets, the more difficult it is for them to fix the situation. The short timelines are still important, staying on top of the delinquencies are still important. The difference is that in these tough economic times, people are more inclined to throw their hands in the air let someone else tell them what a good plan is. Lots of people are having a hard time thinking straight. So you may be able to help persons who are open to considering, or come willingly to seek a plan.

Payment plans can be drafted with protective measures such that late fees and interest are waived either on the total due or on the continuing debt so long as payments are made on time. These costs are often referred to as "soft costs" unless they become "hard costs" because of charges made by management" . Or, a plan could put collection costs or soft costs "on hold" or "in abeyance" during the term of the payment plan with a provision they will be waived if payments are made on time, and will be added back in if the payment plan is violated, or some creative language that allows all the parties to take the best advantage of a difficult situation. All payment plans should be in writing, and should clearly specifiy when money is due, how it will be allocated, and what causes termination of the agreement, so there will be no confusion about how it works, what the "benefits" are (in legal terms, "consideration", for example the waiver of costs, the Board's agreement not to proceed with foreclosure, etc.) I think it best to also address the right to put and keep a lien on the property until the debt is satisfied, but there may be a reason to consider otherwise.

And one more thing. It is best not to "assume" that owners or boards have a personal vendetta or disregard for each other over these issues. That only adds a highly stressful emotional component to an already difficult "business" or "personal" financial issue. And adding that component often clouds one's judgment in making rational decisions.

Posted by Beth Grimm at 10:35 AM

April 14, 2009

What If I Can't Afford To Pay My Assessments? What Can Happen?

This is a question I am hearing way too often these days. These are truly desperate times. On the HOA and Condo side, and on the individual owner's side.

Question: I am strapped with expenses and can barely manage my mortgage, what will happen if I don’t have monies to pay my HOA dues?
Answer: The likely answer (as always, it depends on what the HOA or Condo documents say of course), is that the Board can probably initiate foreclosure (judicial or nonjudicial), or sue the owner responsible for the assessments personally - for the unpaid assessments and collection costs which will be substantial if the collection matter is protracted.

The CC&Rs for the association should clarify the rights and the remedies and the association should also have circulated a collections policy that defines the rights and remedies for the association, and the rights for owners.

If you stop paying, expect collection costs to be added to the debt. It is not a good situation. Wish I had a better answer, for both sides. When one owner does not pay, the others end up paying more.

Posted by Beth Grimm at 8:51 PM

April 8, 2009

What Happens When Members Vote Down A Proposed Special Assessment?

Here is a question an owner in an HOA sent recently. The Board of the HOA proposed a special assessment, and the owners did not approve it. The owner wanted to know what happens now.

Read on...

"I just found your website today and it is great. I was just wondering if you know of any articles related to what happens when an HOA votes down a special assessment that is needed to pay off debts and reserves are unable to pay due to bankruptcy shortages and other shortfalls. My association is in a current state of depleted reserves while having large debts due. We put out a ballot for a special assessment, but it appears that most owners will be voting against the assessment against the advice of the Board and the HOA lawyer. So what happens next?

I think some articles on similar situations could help the owners realize that this is a dire situation."

I am working on a Primer on the subject of the large special assessment called - To Assess or Not To Assess - That is the Question."

The short answer for owners is that if an important special assessment is proposed by the Board for necessary repairs or association debts that cannot be avoided, and the owners vote it down, there will be ramifications. They might include any or all of the following:

***Failing, depreciating and deteriorating buildings, landscaping or infrastructure (including roads, amenities, etc.)
***Loss of important and/or necessary services
***Loss of amenities
***The possibility of a lawsuit
***Bad credit
***Vendors refusal to offer services
***The necessity of imposing an "emergency" assessment under Civil Code Section 1366
***An exodus of board members

I will write more on this subject. In fact, there is already an article on the website at http://www.californiacondoguru.com called "What Happens When You Pinch A Penny Too Tightly."

Posted by Beth Grimm at 8:07 PM

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

February 10, 2009

Collections in HOAs - What is Working?

I was recently at the National CAI Law Conference in Palm Springs where hundreds of HOA attorneys from across the country attended classes and brainstormed about HOA problems. Guess what the prevailing issues were for everyone - how to keep the HOAs, the members, the vendors and selves afloat during these tough times. HOAs are struggling and that brings a cloud over all that serve them. There was even a class on bankruptcy and how the bankrupt and foreclosed owners are suffering, and how that is causing a domino effect on their HOAs and others in them.

The following week I attended the CACM Northern California conference in Oakland where over 500 managers came together to attend classes, talk to vendors, etc. Guess what the prevailing concerns are among the managers - yes.... collection of delinquencies, and HOA payment of HOA bills.

Out of these conferences a couple of things came to mind that you don't hear a lot about, but they may help if integrated into the HOA practices or management duties.

ONE: Some boards and management companies are having some luck getting owners on payment plans before the matters get to collections and trigger the attachment of collection costs that in some cases equal or exceed the delinquent amount that is outstanding. Once an owner realizes (1) they can work it out when they get behind, (2) they can avoid exhorbitant fees, and (3) they can be held personally liable for all delinquencies if their lender forecloses, they may be more willing to work with the board or manager to work out a solution.

TWO: In November last year I sent out an E-newsletter outlining a new law that allows HOAs to record a "Request for Notice" of a Trustee Sale. The problem was that HOAs were having a very difficult time identifying buyers or lender take backs from foreclosure sales because the sales sometimes were postponed several times and the buyers were hard to locate when the sales did take place. If the HOA records the request (see the November 2008 E-Newsletter in the Archives at my website at http://www.californiacondoguru.com to find the form), then the question that some managers asked me over the weekend at the CACM show was: "What teeth does the new law have? What can you do if the Trustees do not notify the HOAs as they are supposed to do? Who enforces this law?" (Frankly, this sounds a lot like the questions owners ask about itinerant board members, but ...)

My suggestion was this: Put a form letter together demanding that the Trustee follow the law and cite the law in SB 1511 (discussed in the E-News article). And then everytime you get a Notice of Default in the office for an HOA property (the lenders have to send proper notices or they cannot get the junior liens extinguished when they hold their own foreclosure sales), shoot out a letter to the Trustee listed in the Notice of Default. Say something like: "We trust you are aware of the law and the requirement to send us notice of the purchaser at the Trustee Sale on this property when it occurs. If you fail to do so you could be responsible for any losses that we incur for failure to have this information in a timely fashion. Our Request for Notice is recorded at .... blah blah blah."

A written demand tends to engender more accountability than a lick and a prayer. (Well, not always, but in this business, ... maybe ....)

Think outside the box! Stay one step ahead in the process of following the money. Be diligent in collecting and do not let people get so far behind it becomes hopeless for them. These measures will not necessarily solve all crises, but could help in many situations.

Posted by Beth Grimm at 4:06 PM

February 5, 2009

Assessment Increases - Aggregate Limits

The question of the day, this day, is:

"Is there a clear basis for applying the '20%' increase-limit (stipulated in CC 1366[b]) to the Association's budget (assessment income) as a WHOLE, rather than to any INDIVIDUAL's assessment?"

In other words, is the 20% limit on increases a limit on the total assessment for everyone, or each individual assessment.

Civil Code Section 1366 says

"(b) Notwithstanding more restrictive limitations placed on the board by the governing documents, the board of directors may not impose a regular assessment that is more than 20 percent greater than the regular assessment for the association's preceding fiscal year or impose special assessments which in the aggregate exceed 5 percent of the budgeted gross expenses of the association for that fiscal year, without the approval of owners, constituting a quorum, casting a majority of the votes at a meeting or election (by written mail ballot). For the purposes of this section, quorum means more than 50 percent of the owners of an association."

I have highlighted and italicized the key words and it sounds like it is stated in terms of the assessment of "the association" so that could be interpreted to mean the regular assessment for the collective body. However, the statute is not clear enough to avoid varied interpretations as it refers to "a regular assessment". What a surprise. Besides being written in the double negative, it does not really clarify whether it is talking about the regular assessment in the aggregate or for each individual.

Thus, it is possible that in California (where these laws apply) any owner who receives a regular assessment increase of more than 20% without any membership vote - unless there is some error being corrected - may have a case for a challenge to the increase.

I have to say though, that attorneys may disagree with each other on this. The statute is not very clear. So, the obvious conservative approach would be to seek the collective owner approval of any increase when it affects any owner by increasing the regular assessment more than 20%. It only takes a majority of a quorum for the approval. This means if more than half of the owners vote and more than half of those approve the increase, it will pass (assuming the election is done properly).

Posted by Beth Grimm at 9:22 PM

January 27, 2009

HOA Disclosure of Delinquent Accounts - Is It A Breach Of Privacy?

I got a phone call in the office the other day. The person on the other end just said (no hello, how are ya, I am, or I have a question): "Is it a breach of privacy to disclose a homeowner's debt?" I was on my way out to a meeting so I said, "It can be, I'm on my way out to a meeting, sorry, you can call back tomorrow if you want a consultation," and hung up.

(Brevity and lack of manners lends itself to brevity and lack of manners I guess, my apologies if you are out there.) If I had thought it through I would have made it clear that disclosure of private information about the debtor's particular situation is probably a breach of privacy. It is certainly a no no.

Anyway, some Boards want to disclose the names of homeowners who are delinquent; they want to post it on the mailboxes, in the common area, publish it in the newsletter, announce it on a loudspeaker from the back of a pickup truck while driving through the development, things like that. They see it as a way to "make them pay", either from embarrassment or humiliation. But it they can't pay, I think some Board members just consider that a fair trade ... a way to extract a pound of flesh. Not very humane in my opinion. But I cannot come down too hard, I have seen plenty of owners who thumb their nose at the HOA.

Anyway, California law requires HOA Boards to consider recording of liens and moving into foreclosure processes in open meetings. There was a lot of screaming when this legislation was proposed, some of it not so publicly loud - from the angle that Boards would now actually have to consider each delinquency situation in the open, rather leaving the undesirable processes to their collections agent or manager, to conduct behind closed doors. But the other screaming came from issues about privacy. Boards and owners were concerned about public disclosure of debt situations. So, the lawmakers put in some parameters - consider the actions to lien or file a Notice of Default not by name or address, but by APN #. Of course anyone could call the local assessors office and find who is behind in assessments with a parcel number. But at least they would have to work for the information.

Thus, while I do not believe it is patently illegal to post the names of delinquent owners (although you had better be right or the HOA is in for a defamation claim), I do believe the practice should be discouraged. I could see the possibility at some point, of some owner who is embarrassed and humiliated, intentionally on the Board's part, getting some kind of relief in court for breach of privacy. One might use the California statutory mandate to consider properties by parcel number rather than name or address as support for the position that it is not right to humiliate people because they are in debt. And that is consistent with the Fair Debt Collection Practices Act. Maybe there is a pertinent case already from that angle that could be cited as persuasive.

The statute I am referring to is California Civil Code Section 1367.1 which contains the processes for nonjudicial foreclosure.

Yes, it's frustrating for Boards and many are having serious issues finding money to pay the bills, because of delinquencies, but public shame is not on my list of suggestions for successful collections.

Posted by Beth Grimm at 10:22 AM

January 2, 2009

FORECLOSURE, BANKRUPTCY, HOW DO WE COLLECT HOA FEES??

It's 2009, and I am still ready to answer the hard questions. To be sure, HOAs had a hard time this past year collecting assessments with so many economic woes, foreclosures and bankruptcies (and its likely to continue). I have written on the subject of assessments time and again and done all that I can think of to help the HOAs figure out the best way to proceed in these though times. I see a lot of folks that can pay their debts frustrated in their HOAs by those who cannot.

I have recently blogged, and written free E-newsletters on the subject of assessments. (See my website, http://www.californiacondoguru.com, namely the E-News Archives, Articles, and Beth's Blog.) In addition, I offer Primers on the subject of Assessments, All About Foreclosure (these two are finished) and I am working on one related to bankruptcies in HOAs and how to collect through that process (when there is blood in the turnip - if you know what I mean). The Primers are only $25.00 and what you will get is the chance to "pick my brain" so-to-speak on the subject. Nothing is held back in any of the Primers. They are a great source of information at affordable prices.

That said, I received this followup from a reader to the recent bankruptcy blog:

"Great web site. I learned a lot.

I've always had a misunderstanding about HOA fees in California. I thought that they were payable by the property owner, similar to property taxes, and could not get wiped out by bankruptcy, and would remain attached to the property after a bankruptcy. From your web site I see that these fees are treated like any other unsecured debt, and are "unrelated" to the property.

My question involves what happens in a foreclosure (in California).

1. Specifically, if the HOA does record a lien for unpaid fees, and if there is a subsequent Trustee's Sale by a senior lien (first mortgage), does that HOA fee lien follow the borrower as is the case with a recorded judgment lien? Ie. the borrower remains liable for the fees?

2. Conversely, if the HOA does not record a lien for unpaid fees, and if there is a Trustee's Sale by the 1st mortgagee, do those unpaid HOA fees just evaporate forever and become a permanent loss to the HOA?

3. Will the buyer at the trustee's sale (or the lender in the case where the property reverts back to the lender), become liable for all new HOA fees as of the date of the trustee's sale? Will the new owner (on the Trustee's Deed) ever have to pay HOAs that became due prior to the trustee's sale?"

I am glad to know readers follow, think and respond. I can deal with generic questions here. As to the questions asked by this reader, I will offer some feedback; however, to get more, you will have to resort to the Primers. They each contain more than 15 pages of information!

Q1: Does that HOA fee lien follow the borrower as is the case with a recorded judgment lien? Ie. the borrower remains liable for the fees?

Answer: The HOA can proceed against the owner for unpaid fees in court, small claims or superior, and if a judgment is obtained, can initiate collection of it, even if the bank forecloses and extinguishes the lien.

Q2: If the HOA does not record a lien for unpaid fees, and if there is a Trustee's Sale by the 1st mortgagee, do those unpaid HOA fees just evaporate forever and become a permanent loss to the HOA?

Answer: No, again, the HOA can proceed against the owner. If they file bankruptcy however, then the bankruptcy "rules" kick in.

Q3: Will the buyer at the trustee's sale (or the lender in the case where the property reverts back to the lender), become liable for all new HOA fees as of the date of the trustee's sale?

Answer: Yes. And I have written extensively about the new law that allows HOAs to register to receive copies of the trustee sale when it occurs.

Q4: Will the new owner (on the Trustee's Deed) ever have to pay HOAs that became due prior to the trustee's sale?

Answer: That depends ............... It's complicated, and the Primer (A-2 Assessments on Foreclosure) should answer this for you.

Happy New Year!

Posted by Beth Grimm at 8:36 PM

December 26, 2008

THE MOST IMPORTANT THINGS YOU NEED TO KNOW ABOUT BANKRUPTCY

I am in the process of working on a Primer that tells readers what to expect when a homeowner account goes into bankruptcy and the HOA is trying (hoping, pleading, whining, threatening, etc.) to collect the outstanding assessments. But I told a reader who is anxious for some information right away (because she is on a board and a homeowner account went to bankruptcy) I would write a brief blog on what is critical.

1. The HOA needs to have a good enough collection policy in place that a lien goes on a property with delinquent assessments at the earliest possible time. I realize that Boards do not like to authorize liens on their friends and neighbors; however, if a homeowner goes into bankruptcy and there is no lien, there is no secured place in line to collect money. Unsecured creditors generally get zip. Secured creditors generally get paid something, sometimes all, sometimes only a percentage of what is owed, but usually more than zip.

2. Once an owner files bankruptcy, there are two classes of assessments, those called "Pre-Petition", that are wrapped into and disposed of within the bankruptcy process and those that are "Post Petition" (those that are not disposed of within the bankruptcy process). The definitive date is the date the BR petition is filed.

3. Once a bankruptcy is filed, things are generally locked in - meaning the delinquencies outstanding become part of the Pre-petition assessments and costs that are considered in the bankruptcy. If an owner files a Chapter 7 bankruptcy, that is generally known as a "no asset" bankruptcy and creditors can expect nothing on the dollar. If the owner files a Chapter 13 bankruptcy, there is a plan to pay all or a part of the debt (usually only a part - meaning usually only the secured creditors - leaving the unsecured creditors at great risk) as that type of bankruptcy is a reorganization of debt.

4. If an HOA gets a notice of a bankruptcy, then the HOA needs to respond and file a Proof of Claim. The HOA should receive this form if the bankruptcy court is allowing claims, such as in a Chapter 13. It is important to note the security interest (the lien) if one is recorded so that the HOA makes the secured debt group. A lien cannot be recorded AFTER the Petition for Bankruptcy. That would be a violation of the "stay". The "stay" is something imposed on creditors that prohibits them from actively pursuing collection against a debtor when the bankruptcy has been filed. It protects the debtor.

5. The HOA debtor should be paying post petition assessments to the HOA but if he or she does not, the HOA is still limited in what it can do to collect and should consult an attorney about options. If it actively pursues an assessment that is imposed after the bankruptcy is filed, it might find itself in contempt of court.

There is much, much more to say about bankruptcies and how to get involved, weigh in on any payment plan, seek a lift of the stay so certain actions can be taken, followup with the court, stay on top of plan payments, etc. Watch for the Primer coming soon. (Check out the other Primers too in the Webstore at http://www.californiacondoguru.com.)

Posted by Beth Grimm at 2:06 PM

December 14, 2008

MAY AN HOA BOARD OPEN A CREDIT CARD ... WHAT IF THEY TAKE THE STUFF?

Lots of HOAs have credit cards - and they use them to allow board members, maintenance personnel and landscape people, etc to purchase things for the HOA. Some HOAs purchase or pay for cell phone minutes so that Board members can communicate, in HOAs where the Board members do not live on site. A reader recently asked:

"Is it legal for an association to open a business credit card with Home Depot and not disclose it to the homeowners nor get board approval to do it? I just found out that historical data shows credit card receipts for thousands of dollars spent on equipment that the previous board did not hand down to the new board including the information that the credit card existed. Beyond closing the account how do we get all the materials back? There are things that may have been used for HOA business and for work around the complex. We are talking many items that I believe the former board members have in their houses. What can we do about it?

First of all, Boards can open credit cards or purchase phone cards or cell phone minutes for Board members so they can communicate with each other and management, if it is not convenient to meet on site because the board members are scattered. Purchasing a phone card for minutes is a way of controlling expenditures, and requiring disclosure of the phone calling records is sufficient for members to verify calls were made to each other. I do not know to what extent the phone cards or disposable phones allow records of numbers called, but if anyone does, let me know. Certainly, board members who have cell phone service can produce records to verify their calls.

And as for credit cards, there certainly should be a limit on the card. I would say for a small association $1000 or less would seem justified. For a large association, the limit could be higher. If the board reviews the statements each month, it can see where abuse might occur before it gets out of hand.

The same kind of or more controls should exist for the checkbook. There is probably more room for misuse or abuse in having check signing authority, even if limited by Board resolution. Many managers are not given check signing authority; many do not even want it. It would not be that difficult for a manager or board member planning to move to Mexico to write a check that exceeds authority, get it cashed and head out. The banks do not all flag large expenditures, nor do they verify every signature. Collecting from someone in Mexico is harder than someone down the street.

Now, for getting back items purchased "for the association". One option of course is for the board to send someone over to the homes to collect items purchased for HOA (Guido????). If board members say they do not have it, ask for a sworn statement to that effect (perjury is a crime and actionable offense). If they are not willing to sign such a statement, include their name in a complaint (small claims will probably work) to collect "lost" items. Filing a small claims complaint for the amount of damage suffered because of "disappearing HOA items" is one manner of recourse. You can spend more and seek attorney advice, but why do so if the amount is under $5000 (which is the limit for an HOA) or $7500 (which is the limit for an owner)?

[And I was not serious about "Guido" ... I do not want to see any broken knee-caps] ... It is, however, okay to send a party over to the former board members houses to "beg back the equipment" nicely. And it is okay to suggest that if it is not turned over voluntarily, that there might be need to file a small claim against the Board members for the losses. I believe such a claim could be brought by either an owner or the new board.

Posted by Beth Grimm at 11:19 AM

November 17, 2008

Raiding Reserves - Capital Improvements - What's What?

Here is a recent, and not unusual, question about spending reserve monies:

"This year the new board approved $________ for [several] projects considered "additional work" and maintaining the [______] of the property. There were no hearings on any and in most cases, done without member knowledge of our expense. Our documents require a written majority vote for additional work (above normal and routine maintenance.)
When questioned the President said a vote was not necessary because the funds were taken from the "Reserve" account and not from the budgeted "operating costs".

This defies corporate ownership! Your professional advice?"

First and foremost, do not consider what appears in this column to be legal advice. Second of all, I do not believe the issues "defy corporate ownership" (whatever that means). I believe from what is presented that there is simply some misunderstanding of appropriate expenditures.

There always is the possibility that there are more facts than those presented to me and I do not profess to give legal advice or opinions about whether some act is right or wrong in a "blind" (or for free).

That said, a board does have the right to approve works or projects that relate to components that appear in the reserve study that the HOA is required to maintain, repair and replace, without going to the members, assuming there is sufficient money available in the reserves for the projects that were approved, or funds in the operating accounts if the work involves maintenance and using operating funds for the maintenance work does not cause a shortage in other areas of the budget. The members are supposed to receive the reserve study each year and can see what components are listed, and what projects are coming up. If the Board is not adhering at all to the reserve study funding and component plans, then certainly there may be some legally improper issue to complain about. Boards are expected to utilize, and review and adjust the reserve study each year, and have a new one performed every three years, as needs are reassessed or conditions change relating to the HOA infrastructure (buildings, streets, etc.)

If, however, the Board is asking for a special assessment from the members to pay for maintainence, or to repair or replace reserve items, and that special assessment exceeds what the Board can legally impose without membership approval (more than 5% of the budgeted gross expenses for the fiscal year), a vote of the members must be taken, and approval obtained, unless of course some emergency exists and the money is needed to repair hazards or other issues that require immediacy. (All the requirements and limitations on assessments are found in Civil Code Section 1366, accessible through my website at http://www.californiacondoguru.com, on the Resources page.)

In case you are confused about what constitutes a "reserve" item and what constitutes a "capital improvement" (new item), you may want to refer back to my blog on September 15 titled: "May A Board Decide To Add A Capital Improvement Without Seeking Owner Approval?"

Posted by Beth Grimm at 7:07 PM

November 4, 2008

Volunteer Board Members -Should They Receive Compensation?

A recent common question:

"What specific information can you provide on the topic of Volunteer Board Members serving [HOAs], namely compensation for well defined work NOT related to their duties as a Board Member?"

Most HOA docs in California prohibit compensating Board members, allowing only for reimbursement for expenses incurred in serving the HOA.

The language may be broad enough to prevent any compensation for anything; but it may be narrow enough to allow compensation for services that are not within what would be expected of a volunteer board member. I know there are HOAs that compensate Board members for tasks like construction management, assessment collection, budget preparation and tax reporting, etc. There are risks.

HOA members unhappy with this practice might be able to assert a viable claim against the individual board members for this compensation paid, and may be able to recover from the money paid for services. (As yet, I know of no specific cases on this.)

If the practice is not disclosed to members, a viable claim for conflict of interest might exist.

The "volunteer" board members accepting compensation lose valuable protections that exist in the law for [bona fide] volunteer board members. They are no longer "volunteers". These protections insulate board members from personal liability - and the compensation is often not worth the loss of that protection.

Members often become suspicious (justified or not) when "volunteer" board members compensate themselves and it can cause political pressure and strife.

If compensation is to be paid for any services, those services should be well-defined in writing, by a contract, for services that are not what one would commonly expect of a volunteer (such as payment for specific expertise and skills), and for specified compensation. There should be a distinction in what is expected, so a determination can be made as to whether the compensation is for justifiable services.

I do not generally recommend that an HOA compensate board members for services the board should be providing; however, I certainly understand why some HOAs do it. It often results in (1) a savings over hiring outside services, and (2) having someone to do the work who has a personal interest in the HOA.

However, it often also has some negative effects. In some cases it results in paying for services that require specialized knowledge or training, without getting the benefit of specialized knowledge or training.

No board member should receive compensation simply for serving on the HOA Board when the governing documents say that board members shall not receive compensation.

Posted by Beth Grimm at 8:46 PM

October 28, 2008

Assessment Collection in Today's Economy

"Question posed recently - we seem to have a lot of trouble collecting assessments these days. What can we do to protect ourselves as an HOA?"

Tighten Up ...... Tighten Your Belt

Tighten Up on Collections Processes - Make sure you have good policies in place - legal and tight (meaning timelines) so that you can get a lien on a delinquent property at the earliest possible moment. The recording of a lien protects the membership if an owner claims bankruptcy (gives a secured position in the BR) or tries to sell on a short sale (gives notice to parties of the outstanding debt) or is foreclosed by the bank (gives a position in front of other debtors with later recorded debts.

Tighten Up on Information Gathering - If an owner goes into default, or even if not, you might start gathering information, such as car license numbers, phone numbers, bank account information off of checks tendered for assessments (I would stick to delinquent accounts with this one). It is my understanding that even if you use a lock box payment situation, you can get a copy of a check sent in - check with your bank. Naturally, its easier if you receive the payments directly. If an owner is in delinquency and still lives on site, it's not that hard usually to get the auto descriptions and license plates, or (maybe) even find out where they work, etc. If you are trying to locate someone, the more you can give the PI or whomever is doing the skip trace, the more likely they are to find out where the person is so you can pursue them for payment.

Tighten Up on Knowledge Base and Education of Owners - learn about small claims as a means of seeking a judgment. These days, most properties that go into foreclosure are upside down on the loan side and therefore not likely to provide a return on assessments if a sale goes through. And owners in general do not seem to understand that the assessments are a personal debt, payable even if their bank forecloses. Let them know this, and pursue the debt in small claims before it reaches the limit - to get the owner's attention early on. (Limit for HOAs is $5000 for first 2 claims in a year, $2500 after that.) Sometimes owners pay the mortgage but stop paying assessments, thinking the HOA is not going to do anything drastic.

Tighten up on spending - Take greater care in budgetting, cut out the extra spending whereever possible, plan for losses each year due to delinquencies when preparing the budget so the "hit" does not come as an unexpected surprise.

The tide has turned from depending on the threat of foreclosure to collect assessments. This calls for some new approaches to the problem. Others have asked if the HOA can gather from every owner personal information such as SS #s, credit card and banking information, etc. My feeling on that: (1) Owners concerned with identity theft would resist giving it and then the Board/management would be left to try and get it, expending time and energy and (2) Some Boards and management careless with records might let the information be discovered by others, which might lead to identity theft and claims against the Association.

Frankly, I would not want to give this information out to any Board. If I was in delinquency, I could understand a demand for it, and if an HOA had a judgment against me, they would have a legal right to ask. Otherwise, I would want to keep my personal information "close to the vest." So naturally, I would resist. Given what I do, some might criticize that position; however, I do not believe I stand alone in my concerns about strangers having personal information about me. And we have to be real about the "remedies" and solutions that are likely to be available.

Posted by Beth Grimm at 11:02 AM

August 8, 2008

At What Point Does the HOA Board Start Assessing Members for Foreclosure Losses?

Professionals in this industry are bouncing around ideas as to how to deal with the issues related to foreclosures. This is just one of those issues. When a percentage of members of any HOA, whether 1% or 10%, lose their homes to foreclosure or "walk away, it leaves the rest of the homeowners "holding the bag". In other words, there is a budget for the year based on a certain anticipated income which consists of assessments collected from owners. When the Board estimates the income, it is based on the premise that all homeowners will be paying their assessments. Of course, when there is a foreclosure, or multiple foreclosures by the banks or lenders, most if not all of the assessments that fell due during the foreclosure process remain unpaid. Hence, a shortfall in the budget arises. There are various schools of thought about how to best deal with this. Here are some possibilities:

1. Plan ahead - and over or conservatively estimate costs so as to have extra cushion in the budget for possible losses;
2. Include an account for estimated "bad debt" losses;
3. Impose a special assessment or increase in the regular assessment mid-year to make up the extra income that is needed.

This last option may be authorized in your governing documents. The documents may be silent on the possibility. In California - Civil Code Section 1366 sets limits. The Board may not raise the regular assessments more than 20% in any fiscal year without approval of the members (requiring a majority of a 51% quorum). It may not impose a special assessment that exceeds 5% of the budgetted gross operating expenses without approval (same percentage requirement).

These figures are "aggregate" figures meaning if there is more than one increase or special assessment, they cannot add up to more than the limits. Many people assume that Boards can impose an assessment increase only once in a year, or only at budget time, and that is it. Not me. I believe Boards may, if and as needed, if shortfalls are discovered for whatever reason mid year, have more than one increase or more than one special assessment (within the limits prescribed).

However, I have to add a cavaet. The governing documents matter. They should be checked. If there is a provision that says regular assessments are determined only at budget time, it is possible that some would interpret that to mean just what it says, and that the Board either has to propose a document amendment to the owners for approval changing that, or get approval of the members for any subsequent assessment.

There are practitioners that believe documents should be amended to mandate that Boards impose mid year assessments to make up shortfalls due to foreclosure, or impose an assessment to cover the loss at each foreclosure, or that state clearly that when there is a foreclosure, all owners including the foreclosing lender must pay a fair share for the loss (to assure that lenders understand their participation in this contribution).

While this would memorialize the right to do it, I am not one of those that feel that a specific mandate in the documents would be particularly helpful or is necessary. What Boards need to do is pay attention, know what is happening, and understand how foreclosure works, what losses might ensue in any particular situation, stay on top of collections to try and minimize the losses when/if their is a foreclosure, and .... revisit the budget to determine the best way to deal with the losses.

Posted by Beth Grimm at 1:25 PM

August 1, 2008

Uninsured HOA Funds - Who Pays For the Losses?

An interesting question came up at a legal resource panel this morning. Hopefully most everyone knows that many D&O policies for Boards of HOAs carry an exclusion of coverage for failure to insure, meaning, for example, that if an HOA fails to carry earthquake insurance and the Board or HOA is sued by someone who bears a loss because of that failure, the D&O Insurance would likely decline to provide a defense for the Board or HOA, or coverage for damages.

So, the question is "Does that play out the same way in the case where a Board invests the HOA money in an uninsured account, or the deposits exceed the FDIC insurance limits of $100,000 for the corporation, the bank goes bust, and the HOA loses part of its investment?

I would say "you betcha."

With the cavaet - the facts may have bearing one way or the other. What comes into play are factors like: does the policy language specifically identify types of insurance contemplated, or identify generally coverages such that the uninsured accounts fall into the category? Are there cases in the jurisdiction that play out this scenario to rely on? (I know of none in California but remain to be enlightened.) Was the decision not to get the insurance within the hands of the Board or was it determined by a shortage of available coverage in the marketplace, or was it simply a voluntary termination of or failure to get coverage based on the cost?

As we know, FDIC insurance does not cost money outright; it is there for every FDIC insured investment product. I believe that makes it even more eggregious to ignore the value of it (but maybe that is just me). Granted, the accounts may not be the highest interest bearing accounts .... but

The answer is an unequivocal yes - anticipating the next question to be - does the Board have a duty to protect the association funds?

And the next question I would anticipate is: "So who pays for those losses?"

The answer is the members of the association most likely, because most documents have what are called "indemnification clauses" that assure board members will be protected from claims for negligence, etc. However, there is a "good faith" element to the protection in many cases which means, if there is, that the board members might be liable for losses if they did not act in good faith. The burden of proof would be on the owner to prove the lack of "good faith" which may be a difficult burden, but not necessarily an impossible one.

Boards, for your members, do everything possible to protect the funds of the HOA. Your "job" (volunteer as it is) is not to make money with the association funds, but to seek the best return while protecting the principal so that the funds will be available when needed.

Posted by Beth Grimm at 1:07 PM

July 9, 2008

BANK OWNED OR ABANDONED HOA PROPERTY FALLS INTO DISREPAIR - WHAT TO DO?

Because of the economy, the mortgage crisis, and other negative factors for HOAs today, HOA boards and neighbors are having to deal with more and more properties that are being foreclosed and abandoned (owners simply walking away). I am receiving many questions from HOAs and managers asking what to do when the lawn falls into disrepair or dries up and creates an eyesore in the neighborhood. Here is a recent email:

"I have a quick question. Can an HOA maintain/replace a front lawn that is dead or dying on an empty REO (bank owned property), put a lean [sic] on the property for the maint. fee, and collect the maint. fee when the foreclosed property is sold?"

Wish I had a "quick" answer. There are about 16 topics that would need to be discussed to answer this question. I plan to do my next free E-newsletter on this very subject so go to the website at http://www.californiacondoguru.com right away and sign up. If you prefer not to do that, watch the E-newsletter Archives after the end of July to see the newsletter.

What are all the questions that need to be considered to give an answer to the above "simple" question?

Is the Owner responsible for the lawn maintenance, or is the problem that the Owner was providing the irrigation and the water was turned off for lack of payment. This happens in many associations where the HOA maintains the front areas but the Owner is responsible for the irrigation, and when they abandon, the irrigation system breaks down, stops working, or the water is turned off.

What do the documents say about collecting money for something that is an owner obligation? Are there provisions for assessing a reimbursement assessment? Can it be done with, or without, a hearing (because of California law, in California a hearing will likely be required)? Is it necessary to seek a judgment to collect per the documents? Is the assessment subject to the lien (per the documents)? Or Not?

Does the HOA have the money to maintain lawns for abandoned or Bank Owned property in its coffers (these days, it could be expensive if there are several properties in the same boat).

How long would the HOA intend to maintain? Does it give potential purchasers a false sense of security to buy in the development without being aware there are bank owned or abandoned properties in the development? Is that actionable misrepresentation to hide the fact through maintaining the property for an absentee owner?

Do you know if the property is really bank owned or simply in the lien/foreclosure process (in which case it could be many months before the bank assumes any responsibility for the costs)?

As to the above question sent in by the website visitor, generally, HOA documents have some sort of recourse in them for the HOA to collect the costs of performing maintenance what the owner fails to maintain. So if a property is really bank owned, eventually the HOA may be able to recover the costs from the first day the bank took ownership, if the HOA follows the HOA document requirements to make the charges, and if the HOA can locate the right person at the bank to respond.

As for the rest of the questions and answers, watch for the upcoming "E-News" called "What's New In HOA Land" on the subject.

Posted by Beth Grimm at 10:28 PM

April 13, 2008

Damned If You Do - Damned If You Don't - Foreclose That Is.

Did you have those kind of parents that taught you about balance, using frustrating phrases like: "Well its six of one and half dozen of the other." Or "Do You want the glass half full, or half empty?" Or "Looks like you let yourself get caught between a rock and a hard place."

HOAs in California (and I am hearing elsewhere in the country as well) are damned if they do, and damned if they don't - vigorously collect delinquent assessments, that is. I hate to swear, but this is an issue serious enough to warrant extraordinary expletives.

I was at a resource panel meeting in Walnut Creek, California, the other day of industry professionals, vendors and board members. We were discussing collections, foreclosures, and the crises that HOAs in California are facing because of the pervading loan issues, the subprime mortgage crisis, and the economy, and what HOAs can or need to do about it. One accountant stated that the associations he works with all give an owner 90 days in delinquency before referring accounts out for collection. Well, almost everyone in the room was on him right away saying that that process was inviting disaster. The comments were like this:

**"If you let people get too far behind in this day and age, they can't catch up." And

**"If you let accounts go out 90 days, and then send them out, under California law it takes another 30-60 days just to get to the lien process, and more than 60 more days to get to the ultimate "hammer" which is starting foreclosure, which then takes another 4 months at least to push the sale of a unit whose owner is not pulling its weight in the Association.That is too much time wasted on a deadbeat." And

**"That might have worked a year or two ago, when HOAs were not in crisis, but now, pushing the processes quickly through when so many people are simply walking away from their mortgages is the only way to get a title change to a "hopefully" responsible party."

This makes sense from a financial perspective for the protection of the HOAs, many of which are experiencing problems paying the bills because of serious increases in the delinquencies in the Association. These people were all people that are looking for solutions for the HOAs. The accountant said: "But when you send accounts out for collection, owners get hit with a big bill for costs, right away, when they missed only one or two payments."

"That is what gets their attention," the others at the meeting chimed in, including me. "The key to accountability is getting their attention."

Accountant: "But the credit card companies don't take drastic measures when someone is late to pay."

Me: "That is exactly the point. If Owners treat the HOA assessment debt like a credit card debt, something needs to happen to get their attention. The first 'pre-lien' letter is geared to do exactly that."

The trouble is that the law is so complicated that HOAs do not often do their own "pre-lien" letters anymore. If a step is missed or a technicality happens (misstep in the process), the whole collection matter can unravel before the HOA Board's very eyes. So they don't risk it. They defer to the collection company's processes that are practiced and experienced, and yes, the collection companies are in the business for profit, not fun, and yes, there are charges that immediately attach when an account is referred out for collections.

Then, that very same day when I returned to my office I had a couple of phone calls and emails from owners in HOAs being threatened with foreclosure, wanting to know what they could do to fight it. Two of them were very pissed off that their Boards sent their accounts to collections after only ONE LATE PAYMENT! They were livid that fees were tacked on so quickly that exceeded the very assessment payment that was late! They wanted to pay for consultations on how they could get out of paying the extra fees. Frankly, I did not really want to charge them for a consultation when I knew they were probably s _ _ t out of luck, especially since they were dealing with HOAs that were "in the choir" - assuming you know what I mean when I say, "preaching to the choir" does little good, its those outside the loop that need to hear this."

"How can the Board do that?" they asked. Well, I knew that if the HOA and management had dotted all the "i"s and crossed the "t"s - they could do that.

Issues may arise if a Board violates its own governing documents and/or California law and you can check out the statutes that apply (if you like reading really dry and confusing statutes). Just go to my website (http://www.californiacondoguru.com), the resource page, and click into the right section of the Davis Stirling Act. The pertinent statutes relating to collections and collections policies are found at Civil Code Section 1365.1, 1366 and the 1367 series. It would be up to you to review your own governing documents and especially the collections policies to determine what they say. If the Board did everything right, the advice I often given is pay up and stop the bleeding! if an owner thinks they have a claim that the Board did something specifically wrong, they can "test their theory" in small claims court, but in order to ask for a remedy in small claims court, one has to have a loss - hence the need to pay off all amounts that are due.

Stalling by putting assessments into escrow or causing delays while you have an attorney write a letter just results in more fees and costs, so anyone challenging an assessment and the collection costs of it had better be right on with their legal theories about "wrongdoing" before delaying the inevitable., or suffer severe consequences.

The law says that if a Board is wrong about a lien and foreclosure, it has to release the recorded foreclosure documents at its own expense and make things right with the owner. But if the owner is wrong, it is easy to throw "good money" after bad.

Maybe I got off point here - which is: while it is easy to have great sympathy for people who are struggling with their mortgage and assessment payments, it is equally easy to have sympathy for those innocent neighbors that are punished by having to cover the debt of their delinquent neighbors, even when they (the paying, struggling owners) are tapped to the max too. It is true that HOAs are "damned if they do (get aggressive with collections) and damned if they don't (get aggressive with collections.

P.S. This just had to be said. Unforetunately for those who are struggling, Boards need to be more diligent than ever about collecting delinquent assessments to protect the innocent parties.

These are difficult times ... I ask that you please don't shoot the messenger!

Posted by Beth Grimm at 4:08 PM

February 9, 2008

HOA Owners Are Continually Confused By Assessment Limitations

About assessments ... sometimes when I write about assessments, I get questions back that I do not really understand, meaning I do not comprehend what is going through the minds of readers. So then I think it is time to try and explain.
Here are some such recent questions that were asked me by a reader:

"My questions to you are as follows:
Doesn't the quorum requirement stated in 1366 (b) below have to do with the HOA's ability to conduct the Special Meeting to discuss the Special Assessment, rather than the percentage of Membership approval?"

My answer to this is: The quorum requirement in 1366 clearly defines what percentage of owner approval is needed to approve an assessment that exceeds the legal limits as stated. It has does not dictate meeting requirements.

The statute says:

"(a) Except as provided in this section, the association shall levy regular and special assessments sufficient to perform its obligations under the governing documents and this title. However, annual increases in regular assessments for any fiscal year, as authorized by subdivision (b), shall not be imposed unless the board has complied with subdivision (a) of Section 1365 with respect to that fiscal year, or has obtained the approval of owners, constituting a quorum, casting a majority of the votes at a meeting or election of the association conducted in accordance with Chapter 5 (commencing with Section 7510) of Part 3 of Division 2 of Title 1 of the Corporations Code and Section 7613 of the Corporations Code. For the purposes of this section, "quorum" means more than 50 percent of the owners of an association.
(b) Notwithstanding more restrictive limitations placed on the board by the governing documents, the board of directors may not impose a regular assessment that is more than 20 percent greater than the regular assessment for the association's preceding fiscal year or impose special assessments which in the aggregate exceed 5 percent of the budgeted gross expenses of the association for that fiscal year without the approval of owners, constituting a quorum, casting a majority of the votes at a meeting or election of the association conducted in accordance with Chapter 5 (commencing with Section 7510) of Part 3 of Division 2 of Title 1 of the Corporations Code and Section 7613 of the Corporations Code. For the purposes of this section, quorum means more than 50 percent of the owners of an association. This section does not limit assessment increases necessary for emergency situations. ...[ctd.]"

... And in anticipation of your questions, yes, the language of the statute is confusing.

Next question asked: "If not, why do HOAs need to have governing documents which contains different Membership percentage approval requirements, example 67% for Special Assessments? What about Corporations Code which permits higher percentages of Membership approval? How do those affect HOA governing rules and Civil Code?

Confusing question, yes? The answer I would offer is the Corporations Code does not govern assessment increases, the Civil Code does. And there are still many governing documents in existence that do not reflect what the law says accurately. In those cases, attorneys have to determine which controls, and I have already stated my interpretation of CC 1366 is that it controls.

And here is the last question posed to me: "Maybe I'm not understanding the statute (like you stated in the article...ha!)...Is, as in the aforementioned example, 67% considered more than 50 percent of the Owners of the Association?"

A 67% approval requirement is more than 50%. A majority requirement is more than a majority of a quorum. People often confuse quorum and voting requirements, and that is really understandable. For assessment increases that are put to a vote because they exceed 20% of the regular assessment or a special assessment that exceeds 5% of the budgeted gross operating expenses for the fiscal year, according to CC 1366, which I believe controls, more than half of the members need to vote, and of those that vote, more than half need to approve the assessment, for it to be valid.

I hope this helps.

One last word - the elections for assessment increases that need to be voted must be conducted using the elections procedures under Civil Code Section 1363.03. That form of voting requires distribution of a double envelope balloting packet and at least 30 days between sending out the ballot and counting them, so while the ballots may be counted at a meeting, according to California law, the vote may not specifically be "taken at a meeting".

Posted by Beth Grimm at 10:11 PM

SPECIAL ASSESSMENTS IN TRYING TIMES

WOW, I cannot remember more difficult times for talking to boards and members about big but necessary special assessments. The meetings these days are becoming more and more challenging when a board has to face the membership to talk about how to raise multi-thousand dollar per unit assessments for repair work, it is not fun. But truth be told, if the Board does not tell the membership about a looming big problem, it will probably snowball down the hill into a much bigger problem ... so don't shoot the messenger.

Walking up to the front of a room filled with people who just cannot believe the rumor mill or the newsletters that have been circulated lately that suggest everyone may have to come up with $5,000, $10,000, $20,000 or more takes a brave soul. There are always a few in the audience who are ready to pounce. You can feel it, you can see it, and you can believe it will happen in every single meeting. It can take a board entirely by surprise as the board members often have a hard time fathoming that their neighbors could so easily turn on them, like a mad dog. One of the sorriest things in any association that has serious building deficiency issues requiring a special assessment that can happen is the Board tries to move the process on its own, and stumbles through the communications process, messes up the voting process, wonders why it is hit hard in the collecting process, and suffers the aftermath of all things done wrong.

I attend these meetings periodically, as do many professionals, including attorneys, bankers, CPAs, and the contractors. All of the people the Board uses to assist with getting through the process of passing a very large special assessment need to be experienced in dealing with these issues, and thick skinned, because the only way to get the necessary message through to owners is to be able to remain calm, strong, and smart.

My mantra: For every problem, there is a solution. Sometimes it becomes a chant inside my head, just so I remember.

I plan to do more blogs on this subject because it is so critical a time to get it right. In this one, I want to use something written by a colleague of mine who, like me, puts out free information that helps many in California understand the intricacies of how the California laws affect the day to day operations of homeowners associations in the state. I have permission from Adrian Adams to reprint the article below that appears in quotations. Adrian is a Southern California attorney whose firm hosts the Davis-Stirling.com website and E-newsletter (suggest you sign up for his - by visiting Davis-Stirling.com ... and mine at www.californiacondoguru.com to stay informed).

As a lead in, I will say that this article succinctly describes the process I see take place at every single HOA meeting I attend where the board and management are presenting to members the full scope of the bad news about the building deficiencies that have been discovered, and the large special assessment that is going to be needed to pay for it.

"SPECIAL ASSESSMENTS, DEATH AND DYING

QUESTION: The board recently informed everyone that we are facing a large special assessment to reroof and waterproof our buildings. I don't believe them. What can I do to stop the assessment?

ANSWER: In her 1969 book, On Death and Dying, Swiss-born psychiatrist Elizabeth Kubler-Ross outlined the five stages of grief of someone who is dying. Over the years I've witnessed owners going through the same stages when they face large special assessments. Following are the stages:

Denial. "They don't know what they're talking about." "The contractor is just looking for work." "The repairs are not necessary." "The board must be getting a kickback." "Let's recall the board."

Anger. "Who can we sue for this disaster?" "Management was incompetent." "Let's recall the board and sue somebody."

Bargaining. "Can we defer the repairs?" "Can't we just patch the roof (until I sell my unit)?" "Are there cheaper alternatives?" "Will insurance pay for the repairs?" "The board is being unreasonable; let's circulate a recall petition."

Depression. "I can't bear the costs." "This will force me to sell my unit." "I can't put my family through this." "How do we recall the board?"

Acceptance. "I'm ready, I don't want to struggle anymore."

Recalls. Unfortunately, some associations don't make it to "Acceptance." Instead, a small group of owners will lead a charge to recall the board and stop the repairs. Sitting directors will often throw up their hands and resign or be recalled. The new board then shuts down all work and fires everyone in sight. This usually leads to litigation from owners who are suffering from water intrusion and mold. Finally, after costly litigation, the association is forced to make the repairs originally proposed; only now they have legal fees and the repairs are more expensive.

Recommendation: Make the repairs. It's cheaper in the long run."

In a later blog, I will cover the difficult issue of how to move forward in a manner that encourages all owners to participate in the solution as opposed to only those who can come up with the special assessment without help. This is a critical part of the solution. Otherwise, imagine the backlash on the fiscally stable owners when the special assessments that have to be written off due to foreclosures or walk aways come back in tidal wave fashion on those who thought they were home free. If you want to know what I mean by this, watch for future blogs, and I hope soon to make a publication available on my website called "The Enigma of a Special Assessment".

Posted by Beth Grimm at 8:58 PM

January 16, 2008

FORECLOSURE IS NOT THE END OF THE ROAD FOR MANY.

These are difficult times. Homeowners who get into the purchase of property on creative loans or who have lost their means and are at risk of losing their homes have to make decisions about things that involve their financial future. Knowledge is the key to making the best decisions. The options may not all be desirable, but there may be some less desirable than others.

One of these pieces of information that is important to understand is what happens if you own a home in a California HOA and the bank or the association forecloses, what are the odds that either (the lender or the HOA) will pursue you for the losses they experience when the mortgage or assessments are not paid?

This specific question was asked recently:

"We recently had our condo foreclosed by the bank. At that time it had a lien on the property by the homeowners association. Now they are suing us for the assessment fees the lien was for, even though the property has been sold. Are we still liable and can they win by law?"

I would not want anyone reading this blog to consider the contents as legal advice because there are many factors that could affect the lender's, the HOA's, or the debtor's rights in a debt owed situation. The information is just that, information and ideas as to what can be done, or what might happen in any given situation. If you own property in a common interest development in California, and foreclosure is a possibility, either by the bank or the HOA, letting your home go back to the lender or be sold at an HOA sale may not be the least painful option for you. If you have a chance a short sale at a loss may be "less problematic." And there is a difference whether the foreclosure sale is conducted by the lender or the HOA. If there is a chance of a payment plan or workout with both entities, then even if it is a stretch or you have to give up something else, it will probably be much better than suffering a foreclosure. Maybe bankruptcy is the best option. Why would you want to do what you can to avoid a foreclosure? Aside from possible tax ramifications for debt that is "forgiven", there are other considerations. And why is it fair that HOAs should have this extra option of pursuing the debt personally against an owner when an HOA property is foreclosed?

While most lenders in California, at least as to first purchase money mortgages (not talking about refinancing), do not have the right (because of the loan provisions) to seek losses from homeowners whose homes are foreclosed, HOAs are not so limited. An HOA hasthe right to seek unpaid assessments and all of the reasonable costs that accrue with regard to the collection matter from the individuals who owned the property during the period of unpaid assessments when it was foreclosed by the lender. In fact, an HOA is entitled to pursue more than one avenue of recovery (such as foreclosure and a personal debt recovery action) until the debt is paid. If a home is foreclosed by the HOA, and sold at a sale arranged by the HOA, then the debt is would be considered satisfied, but if the bank forecloses and there is not enough money to pay the outstanding HOA debt, the HOA may take measures to recover the losses from the owner who suffered the foreclosure.

People may ask: why is this so? In simple terms, loans are governed by a deed of trust (contractual agreement) and laws that govern lenders and protect homebuyers.

Consider these differences:

If a lender does their due diligence with regard to examining financial capability, and requires a certain down payment, the risk on the loan they make can be minimized, even if they end up having to take the property back. An HOA does not have the luxury of examining the financial capability of a buyer or of asking for some collateral. What the HOA does have is a set of CC&Rs that require owners to pay assessments, and provide remedies if the assessments are not paid, one of which is often foreclosure.

If a loan goes bad, the lender is the only party that is hurt by that (except of course in the case where investors are counting on good lending decisions). When a homeowner does not pay their HOa assessments, everyone else who owns property in the association pays the price for that.

The lender has no obligation to maintain the property it takes back in foreclosure. If it carries a big inventory, this tends to be problematic for the neighbors. In an HOA, the Board must continue to maintain all properties to a certain standard, or take action to attempt to get the owner to do that. That includes the property of the delinquent owner. If that property is allowed to bring the values down of surrounding property, that hurts the other owners. They (through the Board) can be faced with the difficult decision of whether to let the foreclosed property be, or collect extra money to fix it up and then try to recover that money from the Owner (which may be the person that owned before the foreclosure, and/or the lender that took the property back).

It's hard to feel bad for the lenders - they are the ones with the most choices. It's not hard to feel bad for the owners who got in over their heads for whatever reason - which could include a complete lack of understanding of an ARM loan, or for the HOAs (and other homeowners in them) that suffer when the individual loses their home or "walks away".

Posted by Beth Grimm at 8:33 PM

December 24, 2007

What if You Find Out That Assessments Are Not Being Allocated Correctly?

If an HOA is notified that it is not allocating assessments correctly, what should it do?

Some HOAs assess all owners equally and some allocate assessments on a pro rata basis based on exterior surface size or square footage of a unit. Some allocate operating expenses equally but assess insurance costs, water costs, painting or other costs on a pro rata basis based on square footage.

First and foremost, a Board should check the governing documents for the HOA to make sure it is allocating assessments properly. Improper assessment allocation can continue from year to year, from board to board, and from management to management incorrectly, and then someone comes along and says "Oops". And then what.

If an HOA is allocating assessments improperly according to the governing documents (usually the allocations appear in the CC&Rs, in the assessment, insurance and/or damage and destruction sections) and it is brought to light, a decision needs to be made about what to do. How far back do you go to try and correct a situation? Do you have to go back at all?

I believe these things matter, in California anyway:

The governing documents control on the allocation of assessments. CHECK ALL SECTIONS IN THE GOVERNING DOCUMENTS. If they are clear, they rule! If the allocation is not specified, then it probably should be equal (but this is not legal advice, only information, so consult with an attorney if you think your governing documents are silent on the subject).

A Board of Directors does not have authority to change the allocation without proposing a document amendment to the members and getting membership approval. Boards are not the almightly. They may have assessment authority to raise assessments or impose special assessments, within the statutory authority (Civil Code Section 1366), but they do not have authority to change the allocation, at least not without member approval or a court order. Thus, if the change occurred somewhere along the way and the allocation differs from what the governing documents say, legal advice is important (good legal advice from a knowledgeable HOA attorney).

Reliance of Owners (in paying an assessment contrary to what is required) is not a basis for continuing with improperly allocated assessments. Arguing that owners relied on the assessment allocation for years as a defense to misallocating the assessments and ignoring the governing document requirements or prescribed assessments probably won't fly, but again, get legal advice on this if you think it will. This is just my belief.

Recovering more than 4 years of misallocated assessments from any party may be an unrealistic expectation. 4 years is the outside statute of limitations on enforcing many debt types of contracts in California, and this time frame has been used to cut off recovery going back more than 4 years in assessment cases. So don't get your expectations up on this one, consult a knowledgeable attorney. If you base a collection process, and including lien and foreclosure, you may see it unravel before your very eyes, at considerable cost.

If you have been misallocating assessments for years and are called on it, or you do not believe you are misallocating, but have been accused of it, get help now! It is a situation that will probably fester into a much bigger problem if left unattended or ignored. Think about it. Say that an owner raises the question and at the time you have a special assessment that is being voted on by members that is misallocated according to the governing documents. You sign contracts. You move forward. You try to collect the improper assessment, and one or more owners resist. You could find yourself in a whole heap of a mess.

I know of at least one case where an arbitration that went against an association (a small one) resulted in a loss of attorneys fees of over $60,000 (for the other side), not to mention their own costs in defending a claim of misallocated assessments.

Get thee help!

Posted by Beth Grimm at 10:00 PM

October 3, 2007

Who is Responsible for the Big Assessment?

Here are 2 emails I received recently:

"Hello, Our HOA has just informed us there will be a special assessment to shore up our reserves. The shortfall in reserves is caused by a $100,000 UNDER BUDGETING of utility costs in 2006. I bought in in 2007. Am I liable for my part of these fees?"

"I hope you can help me. I have lived in my condo 12 years and the assessments have remained the same. Now, all of a sudden the Board says that we have a shortfall of about $21,000 per unit because the decks are falling apart and need to be fixed? How could that happen? Who is watching the store? I had nothing to do with this mess. Do I have to pay? What are my rights?"

Many associatons are facing large assessments. There are many reasons. Many new owners new and oldtimers alike are surprised as they had no idea that the association was a "ticking time bomb". There is nothing in the disclosure documents that indicates serious trouble ahead. Or is there?

One common reason for needing a large assessment is reconstruction. The problem often is not visible, but manifests at the time or after a contractor has commenced painting, residing, refoofing, etc. The Association finds that the reserves were seriously underfunded, costs have gone out of sight, conditions were not discovered until the siding was ripped off or the roof covering was raised.

But that is not the only reason and this blog is not about trying to figure out all the reasons for all of the possible large assessments that might occur.It is about who is responsible.

There are many possible answers to this.

The initial answer is that all owners in the development are generally responsible to share in payment of the expense that is driving the special assessment. And the fact is that if the owners do not pay, or try to withhold and fight the assessment, it likely will result in extra costs and a downward spiral of serious ramifications. "Owners" means those that own at the time the special assessment is "imposed". If the assessment requires approval of members, then the owners responsible would be those who own at the time the special assessment is approved, because it cannot be "imposed" until that time. There may be a few exceptions, but this is the general premise.

Owners responsible may have recourse against any or all of the following:

The seller, if the seller failed to make disclosures about pending assessments - but do not think this is a given. Sometimes the disclosures are there, but the unsophisticated buyer does not reognize the signs.

The Board, or the Association, if the Board failed in its duty in some way and the facts are supported by evidence. Simply assuming the Board should pay because the Board made a mistake is not sufficient to make a case. Sometimes the actions of others caused the problem, and the Board gets blamed. Sometimes the board members who are responsible for the shortfall are long gone - having sold and moved on without disclosing a festering problem. And as for suing for nondisclosure, be cautious here; a buyer cannot likely successfully pursue a claim against the Association, as there is no legal relationship and the Board owes no duty to the buyer. However, the Board does owe a duty to the owners and the seller is an owner, so if a buyer goes after the seller, and the seller can prove the board did not disclose what it should have, the seller may have a case against the association.

Experts or vendors, if the experts or vendors fail in their duty to the owners, buyers, or the Board or the Association. An expert or vendor could include a manager, whomever does the budgets, a reserve study preparer, an accountant, a realtor, a lawyer, or anyone who holds themselves out to be in an expert - who tells you something that is false or misrepresents the facts, or misleads you. Again, be cautious however, because it is easy to point fingers but not so easy to prove a breach of duty. Someone doing their job may make a mistake on their own steam, or may make a mistake based on malfeasance or mistakes on the part of others, or from receiving inoorrect information.

The common first reaction of owners when a large assessment is raised is to blame someone and resist responsibility. However, often the facts, as they unfold, turn out merely to be a lack of education and understanding of how to run a complicated business, as a volunteer lacking specific expertise. Should a volunteer be sued and held responsible for making mistakes, especially honest mistakes? Should current boards or owners that have stepped up to serve and overcome mistakes of past boards be blamed for the failures of their predecessors?

The best one can do to avoid a special assessment is purchase a single family home. But that does not mean you will avoid large, unanticipated expenses. And the truth is that the common interest housing developments often have more to offer in the way of amenities than single family housing.

So, if you are hit with a large special assessment, gather all of the facts you can before you embark on a course of frustrating resistance and end up paying even more costs! And if you believe someone else caused your losses, seek out more facts and get some good a realistic advice from someone knowledgable with HOA law. There are probably lots of attorneys out there that will take your hard earned money and start writing letters pointing fingers. But you are better off from day 1 talking to a legal counselor that will consider all angles, honestly assess your situation and chances of collecting from others, and who will determine all possible courses of action, and honestly discuss the best and worst possible scenarios given the facts and evidence available if you want to try your luck at suing someone.

Posted by Beth Grimm at 9:11 PM

September 18, 2007

HOA Loans - Are They A Good Thing To Fund Reconstruction or Fund Reserves?

You serve on the board. You find that your association has some pretty serious problems, shortages in the reserves, rampant termite issues, siding failure, major dry rot under the roof, and on and on and on ... . What do you do?

Get busy as a board finding the right experts to help assess the problem, find a solution, and determine what funding methods should be considered. This blog is about loans.

Some Boards and some owners take a rather negative view toward loans. There are loan fees, qualifying processes, paperwork, etc. Some assume that the special assessment process to fund the shortfall is going to be the way to go. There are some valid reasons supporting the truth that if owners can pay the special assessment up front, or borrow the money on an equity line-of-credit or with an equity loan, there are benefits to that, for the owner. But what about the owners who cannot come up with the money, or cannot borrow money? Who is going to help them?

Perhaps you do not know this, but the percentage of owner votes needed to approve a loan is often higher (often 2/3 approval or even 75% approval) than that needed for approval of a special assessment (a majority of a quorum - a quorum for these purposes being more than half of the owners). Thus, it is harder to get approval of a loan than to get approval of the special assessment. This can complicate things for Boards that are trying to combine the two.

So back to the problem. If the Board and owners who can afford to pay any necessary special assessment on their own steam have their say, the loan option is often criticized.

But think about this. If an association needs serious funding for a project or beefing up the reserves, and any owner is unable to fund the special assessment needed to do so, that person is at risk of

(1) Declaring bankruptcy to save their home OR
(2) Walking away from the unit, letting it go into foreclosure

Neither of these options are desirable for any owner, but forcing owners into an untenable situation by forcing collection of a special assessment "up front" can force an owner into having to make one of these two difficult decisions.

And what happens then? If an owner declares bankruptcy, it is extremely likely that the association will not be paid off for years, if at all. If an owner lets their unit go into foreclosure, the association may well not get payment for the outstanding assessment.

So where does this leave the other owners? Someone has to make up the shortfall. Guess who?

The important thing in dealing with any difficult association funding issue is to consider all options, and think about how best to serve everyone in the development - because if those who can afford the assessment or can find funding themselves do not support the association loan process for those who cannot, they (those who can get the money together) may end up having to pay for the others who could have survived the long term payments but cannot survive the "up front" payment requirement.

Posted by Beth Grimm at 9:45 PM

August 19, 2007

Assessment Allocation - Is it Equal or Based on Square Footage Or What Mother Thinks It Should Be?

I receive a lot of emails with questions about assessments. This is one area that can always use a refresher. The question:

"I have recently purchased my first condo and am not sure how to research an HOA's Dues concern. I live in a 20 unit building and the HOA dues are the same for everyone (1, 2 or 3 bedroom). The CC&R's state that the dues and assessments are to be shared equally by the owners (1/20th each). The HOA is looking to implement an Emergency Assessment to repipe the plumbing in our building and is imposing a large assessment for each unit. At first I thought to go along with it until my mom asked how much is my portion since I own a 1 bedroom condo. "After all", she said, "you use less of the plumbing than a 3 bedroom condo". In further research, I found out that generally the dues and assessments in condos are not assessed equally, but rather proportion to their unit size. So here I go....the trouble maker, looking to amend the CC&R's that have been in place for over 20 years. Do I have any recourse, mainly with this Emergency Assessment? And where could I get more information on this."

I am afraid (or maybe happy to say - if that simplifies things) that the documents that regulate the association (the currently effective Declaration of Covenants, Conditions and Restrictions - commonly called the CC&Rs) are highest source for determining what the assessment allocation is for units in a condominium. Sometimes they are not clear, but if they are, they are generally the final word on the subject. However, since there is always a "depends", if the validity of the CC&Rs or any amendment addressing this issue is in question, my answer would have to be qualified to say - "It depends."

There are generally at least two places to look for assessment allocation in the CC&Rs, and that would be the Article or Section addressing assessment allocation, and another would be the "Damage and Destruction" clause. Why check both places? Some docs have an equal allocation for operating expenses and a different allocation, such as one based on square footage, for rebuilding or reconstruction. Some have different allocations for exterior maintenance even when the everyday costs are on an equal basis. Some have equal shares of obligation for management, administration, insurance and other categories but a square footage or ownership percentage allocation for water.

Certainly, it makes sense that the smaller units would usually use less water, and have less exterior to maintain, fewer pipes to replace, and less square footage to rebuild in a fire or other casualty loss.

But good sense does not dictate the allocation of expenses - the Declaration does. It is prudent to note here, though, that not all Association Boards follow the documents. Sometimes the books have been carried down through the ages without anyone noticing that the regulatory documents have a different allocation than that being practiced. That is not to say that the practice is legal - it is not. And unraveling such a mess is not easy.

To amend documents for a different allocation of assessments, at the least, owner approval is required - per the requirements stated in the CC&Rs. There are some statutory provisions for CC&Rs that answer the question for CC&Rs that do not have amendment provisions. However, changing the responsibility for a share of assessments often triggers a requirement of approval of the lenders in addition to the owners, and sometimes it even requires City or County approval.

It gets complicated. To do what is contemplated legally, [knowledgeable] attorney assistance is certainly needed.

And a parting thought .... listen to your Mother ... Mothers are often givers of sage advice ... but unless she is an HOA lawyer, don't take her advice on this as the final word!

Posted by Beth Grimm at 5:57 PM

July 16, 2007

Assessments - What is Legal?

Basic board education in California is needed so badly. I get several emails every week that tell me about a board that has raised the assessments more than what I have outlined as the legal limits without a vote of the membership.

I cannot give advice on any given situation that is called out in an email to me; however, I will reiterate the law in very simple terms.

**An HOA board may raise regular assessments (in the aggregate) up to 20% in any fiscal
year without a vote of the members.
**An HOA board may impose a special assessment or special assessments (in the aggregate)
of up to 5% of the budgeted gross expenses in any fiscal year.
**The above limits do not apply in the case of an emergency assessment (however, this
requires findings, certain notices of owners, and an expense that came up after the budgeting
process was completed, in other words, an unanticipated expense, and there are specific acceptable categories).

In any case, if the Board is considering an assessment, or assessments in the aggregate that exceed the above limits (yes, including one, two or three percent more than the stated limit), member approval is needed.

The percentage of member approval is this (and it is my belief the statute pre-empts any higher or lower percentage requirement in the governing documents in California) - a majority of a quorum. A quorum for these purposes is more than half of the owners, not what is in the bylaws of the association if different. That means if more than half of the owners vote, and a majority of those voting approve the increase, the measure passes. Conceivably, that could be as little as 26% of the owners because if a mere majority votes, and a mere majority of those vote yes, that would be 26%.

The statute that outlines these limitations (in language that is somewhat difficult to understand), is Civil Code Section 1366.

Basic Board education would clue in boards that are "clueless". Watch for free HOA chats and class offerings at http://www.californiacondoguru.com. Also, you can go there and sign up for my e-newsletter starting soon. Adding your name to the list will assure that you receive the notices of all classes.

Posted by Beth Grimm at 10:45 PM

June 5, 2007

Emergency Assessments - When Are They Justified?

Here is a question from a reader about emergency assessments.

"I purchased a condo 3 years ago and the Board is always [sic] doing special assessments. They are in the process of repairs some parts of the building such as patios, balconies and painting the entire building and they call this an Emergency Special Assessment. They want each owner to pay an assessment that is over $3000 and some of the people dont have this money and pay the regular assessments too. Can they do this?"

There are specific requirements for the imposition of emergency assessments in California. They are:

(b) Notwithstanding more restrictive limitations placed on the board by the governing documents, the board of directors may not impose a regular assessment that is more than 20 percent greater than the regular assessment for the association's preceding fiscal year or impose special assessments which in the aggregate exceed 5 percent of the budgeted gross expenses of the association for that fiscal year, without the approval of owners, constituting a quorum, casting a majority of the votes at a meeting or election (by written mail ballot). For the purposes of this section, quorum means more than 50 percent of the owners of an association. This section does not limit assessment increases necessary for emergency situations. For purposes of this section, an emergency situation is any one of the following:

(1) An extraordinary court-ordered expense;
(2) An extraordinary expense necessary to repair or maintain any part of the CID for which the association is responsible where a threat to personal safety is discovered;
(3) An extraordinary expense necessary to repair or maintain any part of the CID for which the association is responsible which could not have been foreseen by the board in preparing and distributing the pro forma budget under Section 1365 above.

Prior to imposition of this emergency assessment, the board must pass a resolution reflecting written findings about the need for the assessment and why the expense could not reasonably be foreseen. The board must distribute the resolution to the owners with the notice of assessment.

(4) An extraordinary expense in making the first payment of the earthquake insurance surcharge pursuant to Section 5003 of the Insurance Code.

My Comment: The intent of these sections of the assessment statutes is to assure that associations have adequate authority to impose assessments "sufficient to perform the obligations" imposed on the association. The rights and limitations to increases and imposition of assessments without a vote of the membership are the legislature's view of what's reasonable, no matter what appears in the governing documents. The statutory provisions control. As for understanding subsection (b), most HOA attorneys interpret this section (in its poorly worded condition) to mean that an association may increase regular assessments up to 20% of the regular assessment for the preceding year without a vote of the membership, even if the governing documents provide stricter limitations. Likewise, the association may impose a special assessment or special assessments that do not exceed 5% (in the aggregate) of the budgeted gross expenses for that fiscal year without a vote of the membership. If the association needs more money to pay expenses, approval of a majority of a quorum of the membership is required (a quorum being more than 50% of the owners) either at a meeting duly called, or a written ballot sent by mail that satisfies the written ballot requirements.

“Emergency” needs are an exception, as described. However, the emergency assessments need to qualify under the descriptions provided, must be for repair costs not known or anticipated at the time of the budget preparation. So the question is, do the repairs and maintenance that are necessary based on safety, a hazard, or other subject matter embodied in the statute?

Posted by Beth Grimm at 10:06 PM

RESERVES - HOW DO YOU DETERMINE WHAT IS "HEALTHY" FINANCIAL PLANNING?

Your Association's financial strength should be of a number one concern. HOA regulatory documents commonly specify that the purpose of the homeowners association (HOA) is to protect the property values and sometimes even "enhance" property values. Other purposes commonly include maintenance of buildings and grounds, and collecting assessments to carry out the purposes and obligations of the Association.

That said, what exactly does that mean? Some associations can cope with shortfalls rather readily. I am talking about those whose members can withstand sizable assessments without blinking an eye. For the most part, that would require a membership of financially flush owners with the cash, equity or resources needed to step up to the plate and respond to any special assessment that might be imposed in lieu of having savings to pay the expenses and arrange for work to be done as the need arises. Know of any associations like this? I don't.

What I see are associations with financially strapped members, or associations with a variety of members, ranging from the financially flush to the ones who got in with creative financing and have no buffer available for the "surprise" special assessments. Many of these kind of members are first time buyers. These associations need healthy reserves. So what are "healthy" reserves. In California, studies accomplished by industry providers tend to show that the average association is about 60% funded per the current reserve study that was commissioned as required by Civil Code Section 1365. Yours may be more or less. 60% may or may not be considered "healthy" but sometimes average has to do. It is my belief that Boards should have a goal to reach 100% funding at the least. If not there yet, working reasonably with the members to improve the financial strength is better than ignoring or covering up financial woes.

And unfortunately the specific percentage funded shown in the financial statements is not a guarantee that the figure will not change drastically within any fiscal period. A matter of a $25,000 special assessment was recently brought to me by a new buyer who could not understand how the association went from 114% funded reserves to 2% funded with a $25,000 special assessment (from each owner) needed. The course of time between the reserve studies was only two years. I could not understand it either. The documentation provided to the new owner was not comprehensible.

Here are some questions from readers.

1. My association took out a loan a few months ago which was structured as an equity line the first year, that would be converted into a fixed period loan based upon the total amount used in the equity line. When the board makeup turned over in a recent election, we ended up with a new board that was vehemently opposed to the loan concept. This Board is completing rehab of buildings that will completely deplete the reserves, without tapping into the equity line. This board is on a course that will reduce the reserves to zero and then the Board says it will enact special assessments if they are needed. Do we have any recourse to this kind of activity?

Answer: The Board has considerable latitude in determining finances. This sounds like a difficult situation. There should be a plan in mind to assure that as reserves are used, they are replenished. Whether that should be a loan or special assessment or regular assessment increases is determined by the circumstances. The makeup of the membership should be kept in mind and if there is a way to structure the financials that the members can withstand, that is critical. Here are some important considerations in deciding what the best course of action is when the financial strength is seriously threatened:

**Without utilizing the loan in a scenario like this, are the members able to bear the special assessments needed to fund the remaining costs of the reconstruction, and bear the expenses in the future when they arise? If a loan would ease the pressure on members and help keep the reserves funded to a reasonable level even during a major construction project, it makes sense to utilize that option. Strapping the members beyond their means when there is another option will not be a win-win situation.

**An association with seriously depleted or underfunded reserves will be less enticing in the marketplace than a comparable association that shows stronger in financial strength. In past years this did not always make a difference as few could read and comprehend the financials and reserve studies and so few even tried. People tended to purchase based on what they saw when driving down the street, and entering through the front door. However, the California legislature, at the urging of the California Association of Realtors (one of the strongest lobby groups in the state) has over the past 5-6 years pushed for clarity and substance in the reserve disclosures and this has improved, in many cases, the ability to determine whether there are any "surprises" lurking in the background.

In trying to combat financial decisions made by your board, your best recourse is to run for the board, and try to get into the inner circle where the decisions are made. If that does not work for you, attending meetings, paying attention to financials, and communicating concerns to other owners might help. Some boards respond to membership pressure. Others do not. If you still are not satisfied and feel that you have losses caused by the action of the board, you can pursue legal action, either in small claims court (the upper limit for individual personal claims is now $7500.00) or superior court. Get legal advice first, though, because disagreeing with the Board, even strongly, is not cause for a lawsuit. One has to be able to prove that the Board members had a certain duty that was breached, and the losses which are identifiable were attributable to (caused by) that breach.

All this being said, there are still serious problems with some boards remaining "in denial" about what the law requires. See question 2.

2. My Board of Directors finally agreed to have our first reserve study prepared. They did not want one prepared because they knew that it would result in having to admit our association is severely underfunded. (As above) the board's mind set sseems to be "pay for it when it is absolutely necessary". We only pay for things via special assessment. We are not even covering our operating expenses. We will be bankrupt at the end of another 12 months if we do not raise the monthly dues.We have not had a contribution to funding the reserves for several years. What can I do as a homeowner to get not only the Board, but the other general members to vote for increases that will pay for normal operations as well as fund our reserves? Do I have legal recourse to threaten them with?

Answer: The answer is essentially the same as above. Getting your board to get the required reserve study done is easier than getting the board to adopt a realistic budget and the reserve study and funding it. Sometimes a board will simply refuse to adopt a reserve study prepared by an industry vendor versed in preparing such studies. They tend to be suspicious of anyone who puts in writing that the association is seriously underfunded. However, the reserve study preparers are finding in all too many situations that this is the case. Many studies contain a "recommended" level of funding (with a goal to get closer to 100% funded) and a "lowest threshhold" for funding and some boards do not even follow through with the threshhold level. However, if this is the case, at least there is an objective standard to be looked at if the Board is challenged on its decisions.

Getting the owners to approve assessments is the Board's job. It is the job of the Owners to run for the board and serve. And if Owners are not willing to get involved, but still want to challenge the Board's practices, proof of a duty, breach, causation and a loss would be necessary to prevail in a claim.

Here is another question.

3. After many years I finally purchased a condo. Before the purchase, I reviewed the CC&Rs as well as the total budget including reserves. My question what is the lowest acceptable reserve funding level for a condo complex? I am currently reviewing our condo's recent reserve study and we are at 62% and that seems unnecessary. Where do most CA condos place regarding reserve funding?

Answer: Here is a member who thinks 62% percent is too high. Go figure. It's average, and the question is, is average good enough? It's better than 50% but not as good as 75%. Wish I had a bettern answer. In the event any legal complaint is made that such a level is too high or too low, many factors would have to be considered. So, I have to give a lawyer opinion on these questions that ask if there is recourse for what are considered bad board decisions.

"It depends!"

Posted by Beth Grimm at 8:36 PM

May 16, 2007

ASSESSMENT COLLECTIONS - HOW MUCH CLOUT IS FAIR GAME?

There are two sides to every issue. On the one hand, there are the owners who are against assessment increases, and against the serious remedies for non-payment of assessments. And many, many people on both sides of the issue are afraid that the foreclosure rates will seriously increase in the coming months. It is crisis time. It is hard to support the tough remedies. Few people want to see a family lose their home.

So what's the other side? Try this: what about those people that can afford to carry their own fair share of the burden, but fail under the burden of trying to cover the debts of others?

Here is a question sent by a reader:

"I am on the board of directors of the HOA at my condominium. We have several owners that are behind on their monthly fees ranging from a few months to a year and a half. These add up to tens of thousands of dollars that we desperately need for repairs and reserves. We have jumped through all of the usual legal hoops; letters, fines, liens, etc. with no results except the animosity of the offending owner. Unfortunately, these people usually wind up declaring bankruptcy and we are the last ones to belly up to the money trough and end up with nothing. In the meantime, we have provided these people free water, sewer, hot water and trash service for the entire time they have refused to pay, leaving the other owners to subsidize them.

If this were an individually metered complex and the owner stopped paying for a utility, it would eventually be shut off. Since a large part of the monthly HOA fee pays for common utilities like these, we are in effect the utility provider. As such, do we have the ability to stop delivering these services based upon nonpayment? I put this question to our property manager, and their legal people said we do not. All we could do is take away their common area privileges like the spa, etc. What are our options?"

So, how would you like to be sitting in this person's chair? It's a tough place to be.

As for shutting off utilities, some associations do have such a right written into their governing documents and do threaten to shut off the utilities, and do shut them off when the bill is not paid. But as to whether this legal or not, or a good idea or not, it is something that should be left to the Association's individual legal counsel to discuss with the association. It's a serious remedy. Still, it is not as drastic as taking someone's home away by foreclosing, so it would seem to be a more palatable option than selling the home on the auction block.

In any case, as I said, there are two sides to every controversy. It is helpful to understand that in setting policy and choosing courses of action.

Posted by Beth Grimm at 9:07 PM

April 30, 2007

Assessment Increases - Are There Limits?

A common question comes to me at least a few times a month:

"Is there a California rule or law that regulates the amount an HOA can raise monthly fees? The fees when I purchased my condo were $162.00 a month. They went up to $189.00 in 2005. As of January 1, 2007 the fees went up to $310.00 a month.That calculates to an approximate 16% increase then a 64% increase. I realize they were low to begin with but isn’t that excessive?"

I cannot say whether the increases are excessive or not because I do not know what the expenses of the association are. However, California law does have some limits on the amount that the board can raise the assessments without a vote of the members. Regular assessments cannot be increased more than 20% in a fiscal year without approval of a majority of a quorum of owners. A quorum is more than half of the members, so if more than half vote, and more than half of those approve, the increase would be valid. The Board would also have the right to impose a special assessment that does not exceed 5% of the budgeted gross expenses for the fiscal year, without approval of the members and sometimes special assessments are imposed and made payable monthly over a specified period of time.

There are situations, however, where the limits may be exceeded without a vote - and that would be in an emergency situation, which is defined by the statute (Civil Code Section 1366).

Posted by Beth Grimm at 9:22 PM

March 20, 2007

Overpayment of Assessments - Can I get a Refund?

Here is a very unusual question that I received:

A reader discovered that she had been overbilled/overpaying on her monthly homeowners fees for 4 years or more. When she reported it to the Board of Directors, it took several communications and attendance at a face to face meeting to get the board to finally acknowledge the overpayment. The ultimate decision was to repay 8 mos of the fees which covered the period of time from the date the concern was raised through the acknowledgement date. The question is whether this is a fair resolution.

Since I am not giving advice on this situation and I have not spoken with the board, I will not say whether I think it is fair or not. It seems to fall short of the mark though. The person asked about statutes of limitations. In California, if the assessment was not paid for more than 4 years, a board could likely only collect up to the last 4 years, because of a statute of limitations on contracts that could be raised. I do not know if this would have bearing on how far back a person could go to ask for overpayments. One could find out, however, by going to small claims court and asking there to have the question resolved. That would be my suggestion. The mere filing of a claim might lead to more discussions on the subject.

The larger question here might be what would happen if everyone was being overcharged, and one or two fought the battle and got a refund or credit of a portion of the overpayment, but the board did not deal with this larger question once discovered. There are ways to address this as well, as a group. However if it were to happen, I assume that if the money was collected and used for valid purposes, the board would not want to start giving refunds or credits piecemeal.

Posted by Beth Grimm at 9:25 PM

February 5, 2007

May a Board Reduce Assessments Mid Year?

It is not that common, but sometimes an Association ends up having overbudgeted - an example would be an association that budgeted to keep up the earthquake insurance coverage and then, after an unanticipated renewal hike, and a member vote, decided not to renew (because of high cost, lowered coverage, etc., you may have faced the scenario of difficult choices). So now, there is a budget item that is no longer applicable.

In most cases, in California, a budget may be revised any time the board realizes that the estimations were short or long, or some item does not any longer apply. It is important to document the reasons for revisitng the budget and explain the basis for the change when any change is made and a new budget or notes on the modifications are sent out to the members. It is important to make sure that the governing documents don't specifically prohibit mid year budget revisions. It would not make sense to me that there would be such a prohibition, however, there may be some clause that raises a question about mid year changes. There would be limitations on the amount an assessment could be increased if a budget item was missed and added later, or a cost increased such that the current assessment needed to be increased more than the Board could increase it without a membership vote. But lowering the budget and the assessment is much less likely to violate a covenant.

However, before lowering the assessments, make sure there are not other expenses that have been underestimated, and also look at whether alternate use of the income makes sense. An example would be if the earthquake insurance was dropped, but there were other things that might benefit the association - such as considering retrofits, self insuring to any degree etc. I am not recommending these things necessarily but I am suggesting that many things need to be considered before decreasing the budget and lowering the assessments. It would be unfortunate to be like the State of California and send out refunds for taxes to all Californians because of a change in the budget or needs of the State and to follow that with announcements that the budget would be insufficient for the coming year and taxes would have to be raised.

Posted by Beth Grimm at 8:32 PM

November 11, 2006

Special Assessments - Is Documentation of Need Required?

Here is a question by a reader about special assessments in California. I have left blanks in the amounts so as not to identify the specific association or sender,

"I live in a ___ unit condo complex and the BOD decided to charge the homeowner's $______ as a special assessment without supplying documentation or getting a vote by the homeowner's. This amount is more than 5% of our operating budget for the year and no explanation was given. I have filed a small claims court complaint. Is this common?"

I do not know how common the small claims complaint thing is but it seems odd to me that a board would not tell the owners what the special assessment is for. I know it happens, but it is not the way to go. If a Board needs to consider a special assessment, it does have the authority to assess one that is less than 5% of the budgeted gross expenses for the Association for the fiscal year without a vote of the members. Before I would expend the energy to file a small claims court action, though, I would make a list of questions for the Board to answer and submit them in writing, ask the Board to address the need at a special membership town-hall type meeting or through a communication to owners or on the websiite or some other way. If the Board did not comply, I would ask for records relating to the special assessment under Civil Code Section 1365.2. Owners have rights and there are punishments for withholding financial records.

On the flip side, many boards will discuss needs for a special assessment ad naseum at board meetings and get frustrated that owners who demand information do not come to board meetings to see what is going on. It is not in the Board or association's bests interests though to minimize information about the need for a special assessment. It is in the best interest to MAXIMIZE communications. People can usually understand need, what they cannot understand is "secrets".

And if the assessment was for more than 5% of the budgeted gross expenses for the fiscal year, it may be illegal and unenforceable. If it is an "emergency assessment" then it may be higher, but there are requirements of notice to members and criteria for what qualifiess as an "emergency assessment."

So ask the questions beforehand, make the effort to get the information, and document your efforts, so you do not end up in small claims court with "egg on your face". If you are going to go to court, you may as well go with two causes of action instead of one: i.e., a claim of illegal assessment and a claim of failure to provide records under the statute. There is a "$500 per" possibility of penalty for each violation of failure to provide records as specified by Civil Code Section 1365.2.

And Boards, do not let this happen!

Posted by Beth Grimm at 1:20 PM

October 27, 2006

Borrowing from Reserves - Not Contributing? What's the Difference?

Maybe this goes on in your association? It apparently happens alot, without too much worry.

Comment from reader: "Our Manager pays everything through the operating funds. We feel he must be borrowing from the reserves, but he says it is not borrowing - he just doesn't put the reserve money into the account because he needs the money for expenses. We've questioned the accountability of this, but again he sidesteps just says this is how it is done."

Is diverting reserve allocations from the reserves the same as borrowing from the reserves? It's understandable that some would distinguish the two simply because there are no funds removed from the accounts. However, the effect is the same. The action leaves the reserves funds short of what is budgeted, and that means short of the expectation of membes based on the annual budget projections.

And I would venture to say that this practice played a large part in the tightening up of the reserves law in California and lead to requirements to notify the members if the Board is considering borrowing from the reserves, before the decision is made.

Since the health of the reserves accounts is of utmost importance to the members, if action is taken by the Board that diverts funds or results in borrowing from the funds, the members should be made aware of this. As of this year, there is legislation that requires information be disclosed to owners on this kind of thing on an annual basis, including disclosure of loans when the payments are made from reserve allocations. Some of the disclosures are not effectively required until January 1, 2009. Still, the disclosure of events leading to a reserve shortage needs to be made in a more timely fashion if the diversion of reserve funds can be equated to borrowing or taking money out of the reserves for a purpose that is not related to budgeted reserve expenditures.

Posted by Beth Grimm at 9:10 PM

September 1, 2006

Method of Assessment Payments - Who Decides?

Who decides how assessments are paid? Here is a question from a reader:

Can an HOA decide how you pay your dues? Can they require that you use automatic bank deductions? Use a certain bank? Accept only money orders?

Basically, the answer is "yes" to the question as to whether the Board of an HOA can generally decide where assessments are to be sent/deposited and it would probably be reasonable of the HOA Board to require that they be made in some form other than cash. And an Association can get advantages and savings sometimes by working with a certain bank. These options make sense. Many Associations require that payments be sent into a bank directly to be deposited by the bank and the accounting for the deposits is then sent to the manager or Board. The reason for these processes is streamlining in collections and recordkeeping of deposits. This should save the Association money over collection by the bookkeeper or manager, and also serves as a check and balance with regard to control over funds coming in. However, I believe that requiring automatic deductions from personal bank accounts is taking things a bit too far. Not everyone wants an HOA to have access to their bank accounts. This method of payment would assist the association and owner in getting assessments paid on time, but unless the association governing documents said that the Board could require automatic deductions, and even then .... well, I would not recommend it. In California, an owner can request the overnight mail address for mailing payments (which requires a street address rather than a PO box for some overnight services), and can request a receipt and I believe these entitlements, although unnecessarily onerous in most cases, indicate that owners have some rights too.

As for requiring payments to be made by money order, I believe that Boards could require payments in some form other than cash, as there is no way efficiently to deal with cash. But requiring a money order over some other form of payment such as a personal check seems again to me to be taking things too far.

Sometimes I am not given all the facts and this seems it could be such a case. I could understand and would believe a reasonable exception to be a case where an association may demand payment in some form that is guaranteed negotiable such as a money order or cashiers check. If an owner was chronically delinquent in his or her assessment payments and the Board was asked to enter into a payment plan with the owner, it is likely in that case that the Board may require negotiable payments or automatic deductions to be set up so that it did not have to continually deal with the chronic late payment of payments under the agreement so you can see that there are two sides to every question. .

Posted by Beth Grimm at 9:28 PM

August 23, 2006

Borrowing from Reserves - Is it Healthy?

There are a lot of complaints coming in about Boards borrowing from or using reserve funds for expenditures other than repairs or maintenance of components for which the funds are collected. In California, the laws are toughening up on reserve planning, borrowing and spending. Look for articles on this coming soon on my website http://www.californiacondoguru.com. I will be printing excerpts from a series of Legal Digests on this subject authored by me a few years ago covering expenditures, planning and investing guidelines. This subject never grows old. And it never resolves itself when a Board ignores inadequate funding.

Borrowing from homeowner association reserve accounts is rather like borrowing from your children's education investment accounts or from your own retirement investment accounts. If you have specific monies set aside for these things in IRAs or other investment accounts, you know there are controls against taking money out - very stringent controls ... more stringent controls than on an associations' reserve accounts. You just should not do it unless: (1) it's absolutely necessary; (2) you follow the legal requirements, and (3) you have a plan to pay it back. If you continue to borrow without regard to these factors, it will likely catch up with you.

The same goes for borrowing from the reserves. Sure, there are things that come up, like double or triple insurance premiums due on a short leash; however, when you as a Board Member find yourself on a "robbing-Peter-to-pay-Paul" syndrome, you can get into trouble both as an owner (who has to pick up the monetary slack) and as a Board Member (who could have personal liability as a fiduciary). Intentional raiding of reserves could expose a Board Member to serious losses. Negligence is accidental and carelessness may be forgivable, but continuing these practices after noting the resulting problems can cause you (if you are in the driver's seat) to cross over into the realm of punitive remedies (meaning a judgment against you that punishes that conduct, and rewards a victim beyond actual losses).

Check out the website and look for what's new in the next few weeks. The issue of reserves is a hot topic and its time to focus on that. For starters, if you are a Board member or owner in a community association (homeowners association) in California, you need to know that there are legal restrictions on borrowing (found in Civil Code Section 1356/1365.5), such as:

"The Board of Directors shall not expend reserve funds for any other purpose than the repair, restoration, replacement and maintenance of major components which are the obligation of the association, or related litigation. ... However, the board may authorize the temporary transfer of moneys from a reserve fund to the association's general operating fund to meet short-term cashflow requirements or other expenses, if the board has provided notice of the intent to consider the transfer in a notice of meeting, which shall be provided as specified in Section 1363.05. The notice shall include the reasons the transfer is needed, some of the options for repayment, and whether a special assessment may be considered. If the board authorizes the transfer, the board shall issue a written finding, recorded in the board's minutes, explaining the reasons that the transfer is needed, and describing when and how the moneys will be repaid to the reserve fund. The transferred funds shall be restored to the reserve fund within one year of the date of the initial transfer, except that the board may, after giving the same notice required for considering a transfer, and, upon making a finding supported by documentation that a temporary delay would be in the best interests of the common interest development, temporarily delay the restoration. The board shall exercise prudent fiscal management in maintaining the integrity of the reserve account, and shall, if necessary, levy a special assessment to recover the full amount of the expended funds within the time limits required by this section. This special assessment is subject to the limitation imposed by Section 1366. The board may, at its discretion, extend the date the payment on the special assessment is due. Any extension shall not prevent the board from pursuing any legal remedy to enforce the collection of an unpaid special assessment."

The intent of these sections is, of course, to establish legal limits on use of reserve monies and prevent borrowing unless the Board provides notice to the owners of the intent to borrow and discusses and takes action at an open meeting. Associations may borrow from the reserves to meet unanticipated operating shortfalls. (If the shortfall was anticipated, it should have been resolved in the budget process.)

Questions as to this statute arise as to what constitutes a legitimate borrowing including disagreements over the words "short-term cash-flow requirement”, and to what extent may funds be used for additional capital improvements (necessary or unnecessary). Professionals sometimes disagree on the exact intent embodied in the "one-year" payback time which changed in 1995 from the previous "three-year" payback deadline. Questions arise as to the effect of borrowing from reserves on the "disclosures" required by Section 1365 and 1365.2.5. Associations contemplating borrowing from reserves should consult knowledgeable professionals. This is an area where legal claims may arise.

Posted by Beth Grimm at 9:53 PM

June 22, 2006

ASSESSMENT INCREASES - What are the Limits?

People write in all the time and ask what the limits are to assessment increases in HOAs in California. I think the best way to explain it is to include an excerpt from my book entitled: "The Davis Stirling Act in Plain English", in which I recite the law and then explain it. The statute is in regular text (paraphrased to some degree because hardly anyone can actually understand the statutory language), and the commentary is in italics:

1366. LEVY OF ASSESSMENTS; LIMITATIONS ON REGULAR ASSESSMENT INCREASES AND IMPOSITION OF SPECIAL ASSESSMENTS; DELINQUENT ASSESSMENTS; LATE FEES AND INTEREST.

(a) Except as to limits specified in (b), an association shall levy regular and special assessments sufficient to perform its obligations under the governing documents and the DS (Davis Stirling) Act. However, “annual increases in regular assessments for any fiscal year”, as authorized by (b), may not be imposed unless the board has sent out the information required by 1365(a) with for that fiscal year, or has obtained the approval of owners, constituting a quorum, casting a majority of the votes at a meeting or election of the association conducted in accordance with Corporations Code 7510 and 7613. For the purposes of this section, "quorum" means more than 50 percent of the owners of an association.

Comment: If the Board does not comply with 1365(a) in the time required (which requires sending out the budget and reserve information), the Board must seek approval of members for any increase in regular assessments for that year, and needs a majority of a quorum of the owners to approve. For this statutory requirement, that could conceivably be as few as 26% of all of the Owners since a "quorum" is more than 50 percent of the owners. Do not confuse the words “majority of a quorum” which is the approval requirement with “quorum” which is the number of votes that must be cast for the election for votes to be counted.

(b) Notwithstanding more restrictive limitations placed on the board by the governing documents, the board of directors may not impose a regular assessment that is more than 20 percent greater than the regular assessment for the association's preceding fiscal year or impose special assessments which in the aggregate exceed 5 percent of the budgeted gross expenses of the association for that fiscal year, without the approval of owners, constituting a quorum, casting a majority of the votes at a meeting or election (by written mail ballot). For the purposes of this section, quorum means more than 50 percent of the owners of an association. This section does not limit assessment increases necessary for emergency situations. For purposes of this section, an emergency situation is any one of the following:

(1) An extraordinary court-ordered expense;
(2) An extraordinary expense necessary to repair or maintain any part of the CID for which the association is responsible where a threat to personal safety is discovered;
(3) An extraordinary expense necessary to repair or maintain any part of the CID for which the association is responsible which could not have been foreseen by the board in preparing and distributing the pro forma budget under Section 1365 above. Prior to imposition of this emergency assessment, the board must pass a resolution reflecting written findings about the need for the assessment and why the expense could not reasonably be foreseen. The board must distribute the resolution to the owners with the notice of assessment.
(4) An extraordinary expense in making the first payment of the earthquake insurance surcharge pursuant to Section 5003 of the Insurance Code. [This is no longer applicable in practice because the insurance fund was repealed and the surcharge dropped.]

Comment: The intent of these sections of the assessment statutes is to assure that associations have adequate authority to impose assessments "sufficient to perform the obligations" imposed on the association. The rights and limitations to increases and imposition of assessments without a vote of the membership are the legislature's view of what's reasonable, no matter what appears in the governing documents. The statutory provisions control. As for understanding subsection (b), most HOA attorneys interpret this section (in its poorly worded condition) to mean that an association may increase regular assessments up to 20% of the regular assessment for the preceding year without a vote of the membership, even if the governing documents provide stricter limitations. Likewise, the association may impose a special assessment or special assessments that do not exceed 5% (in the aggregate) of the budgeted gross expenses for that fiscal year without a vote of the membership. If the association needs more money to pay expenses, approval of a majority of a quorum of the membership is required (a quorum being more than 50% of the owners) either at a meeting duly called, or a written ballot sent by mail that satisfies the written ballot requirements. “Emergency” needs are an exception, as described.

...
(d) The association shall provide notice by first-class mail to the owners of the separate interests of any increase in the regular or special assessments of the association, not less than 30 nor more than 60 days prior to the increased assessment becoming due.

Comment: Most associations send out notices of assessment increases and special assessments with the pro forma budgets, as the time frames coincide. However, there are times when the increases do not coincide with the fiscal year and the intent is to provide owners with sufficient notice to allow them to prepare for the new assessment amount.

...

1366.1. IMPOSITION OR COLLECTION OF ASSESSMENTS OR FEES; LIMIT ON AMOUNTS.

Associations may not impose or collect an assessment or fee that exceeds the amount necessary to defray the costs for which it is levied.

Comment: This often overlooked but simply stated code section is important in consideration of assessments, fees for use of recreational facilities, document preparation and copying fees, transfer fees (although also covered under Section 1368 below). It furthers the persistent legislative intent to allow associations enough authority to collect monies necessary to adequately administer and manage the CID without providing unfettered authority to turn an association into a profitable venture or misuse an unanticipated overage or windfall. Right or wrong, this is commonly referred to as “zero-based” budgeting.

Posted by Beth Grimm at 11:03 AM

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