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