Bills That Passed This Legislative Session and How to Comply

March 26, 2013

By Curtis G. Kimble.

The 2013 Utah General Legislative Session has ended and the bills that passed have been finalized in their enrolled form to await signature by the Governor. Which bills passed and which ones didn’t?

Only three of the six bills I discussed in my last post ended up passing the House and the Senate.  They all affect condo and non-condo HOAs in more or less the same way.

SB 64 Homeowner Association Reserve Account Amendments

As I noted before, this law will give the decision back to the board of whether and how to fund a reserve (as most CC&Rs require, and where the decision makers will be subject to fiduciary duties).  Specifically, the law:

  • Specifies that a reserve analysis must include certain things, such as a list of the maintenance items that will require reserve funds,  their remaining useful life, and their cost to repair or replace; an estimate of the contribution to a reserve fund necessary to meet the cost to repair or replace each component; and a reserve funding plan that recommends how the association may fund the annual contribution.
  • Requires an association to provide a summary each year of the reserve analysis to each owner (not just to those at the annual meeting) and a complete copy of the reserve analysis, including any updates, to an owner upon request.
  • Requires the board to include a reserve fund line item in the annual budget in the amount the board determines based on the reserve analysis and based on what “the board determines is prudent under the circumstances” (there is no requirement that the amount be higher than 1$ or even 0$ – not that I recommend that).  This is important because it is almost inevitable that the association will not agree with the amounts recommended by a professional reserve study.  Almost every association feels that their reserve professional has recommended that they set aside more than they really need.  This law allows flexibility so the board can fund reserves in the amount they deem is prudent with all things considered.   However, if the CC&Rs requires a certain level of reserve funding, the CC&Rs will control; this law does not authorize a board to fund reserves lower than what their governing documents might require.
  • Allows the homeowners to veto the reserve fund contribution if they don’t like it (whether too low or too high) by a 51% vote of the owners at a special meeting called within 45 days of when the annual budget is adopted.

Additionally, the law provides for specific enforcement procedures if the association fails to comply with certain of its provisions.  An owner can sue for a court order compelling the association to comply, for $500 or the owner’s actual damages, whichever is greater, other available remedies, and costs and attorney fees.

HB 101 Homeowners Association Amendments

This revision to the statute requiring all HOAs to register as an HOA with the state of Utah merely restates what it said before in a little different way. There is no change in the law’s requirements or implications.

SB 90 Condominium and Community Association Amendments

  • With this new law, an association cannot charge a fee for review and approval of plans for construction or improvement of a unit or lot that exceeds the actual cost of reviewing and approving the plans.
  • The law clarifies what happens when there’s a loss to a unit that initially doesn’t look like it will exceed the association’s deductible but then the loss ends up costing more than the amount of the deductible.  The law says that if the board determines that a covered loss is likely not to exceed the deductible, and until it becomes apparent the loss exceeds the deductible and a claim is submitted to the association’s insurer, the unit owner’s policy is the primary policy for coverage.  So, the unit owner’s policy is primary, but only until it becomes clear that the damage will cost more to repair than the deductible.
  • For commercial condominium projects ( projects with no residential units), the insurance requirements of Utah Code 57-8-43 no longer apply for insurance policies issued or renewed after July 1, 2013.  For mixed-use projects (projects with both commercial and residential units), a commercial unit, including any fixture, improvement or betterment therein and including appurtenant limited common area, does not have to be insured by the association, unless the CC&Rs require it.
  • The Community Association Act is now applicable to any association with at least one residential lot (not just associations made up entirely of residential lots).  So, it will generally apply to mixed-use (commercial/residential) projects (except the insurance provisions were amended to not be applicable to commercial lots, the same as with condominium projects).

The following changes will not take effect until July 1, 2014:

  • The law will now authorize not only condos, but non-condo HOAs as well to access a unit or lot as necessary for maintenance, repair or replacement of common areas or for making an emergency repair, provided that 24 hours’ notice is given, or reasonable notice is given (or attempted) in an emergency.  The association is liable to repair damage it causes to the common areas or to a lot or unit the association uses to access common areas, and it must repair that damage within a reasonable time, except in developer-controlled community associations (where many of the laws in the Community Association Act don’t apply, thanks to legislators favoring developers much more than homeowners (contact your legislator and let them know favoring developers over homeowners isn’t acceptable!)).
  • The law authorizes a unit or lot owner to remove or alter a wall between two units or lots if the owner owns both units/lots, even if the wall is common area, unless restricted by the CC&Rs (most condo CC&Rs do, in fact, restrict this) and unless it would impair the structural integrity, mechanical systems or support of the building, the common areas, or a unit/lot.  The board may require the owner to submit, at the owner’s expense, an engineer’s or architect’s opinion stating that a proposed change will not impair the structural integrity or mechanical systems of the building or either lot, reduce the support or integrity of common areas, or compromise structural components.  The board may require the owner to pay all of the association’s legal and other expenses related to the proposed alteration, as well.  The removal or alteration of the wall does not change the assessment or voting right attributable to either of the units/lots (unless the CC&Rs say so).
  • The law also contains a procedure for the unlikely event that two or more associations want to consolidate or merge together into one association.

While these bills are not actually law until signed by the Governor, there is little chance that the Governor will veto any of them (I will, of course, let you know if he does).   (UPDATE: Each of these bills were signed by the Governor and are now law.)   The laws take effect May 14, 2013, except the ones mentioned above that don’t take effect until July 1, 2014.

As always, please note that none of the above is legal advice and should not be relied on as statements of the requirements of the law applicable to any particular scenario or circumstance.  The statutes themselves should be referred to for their exact and full contents and an attorney consulted with for application of any relevant law to a particular set of facts.

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Utah LAC Issues Statement on SB 64 (Reserves)

February 22, 2013

By Curtis G. Kimble.

As many of you may know, the 2013 General Session of the Utah Legislature is in full swing on Capitol Hill.  A few bills enacting or amending HOA laws are in the works and I’ll be summarizing and commenting on those over the next couple of weeks.

As to one such bill, SB 64, CAI’s Utah Legislative Action Committee issued a position statement today coming down quite aggressively against it.  SB 64 amends the reserve funding requirements of Utah Code Sections 57-8-7.5 and 57-8a-211 and, if passed, will require an association to begin funding the reserve fund in the manner and amount determined by the vote of the owners within 90 days after the vote, and to file a certificate of compliance with the Department of Commerce within 30 days of starting to fund a reserve fund.  It also requires that if an association does not file a certificate of compliance within the required 30 days, the association may not levy a special assessment until it files a certificate of compliance.  View SB 64 here.  View the position statement here (I am not a member of ULAC and their position is not necessarily mine, nor mine theirs).

UPDATE March 1: view the substitute bill SB 64 here and a comparison of the changes to the original SB 64 here.

The original requirement of this law requiring the decision of whether to fund a reserve account to be made by a majority of those owners who happen to show up at the annual meeting, is one that I’ve always been opposed to for various reasons, not the least of which is that it unconstitutionally interferes with the obligation contained almost universally in preexisting HOA contracts (CC&Rs) that the board establish a reasonable reserve.  For reasons similar to those contained in the ULAC position statement, I am opposed to SB 64, as well.

If you have an opinion one way or the other on pending legislation, don’t be afraid to voice it to your representatives in the Legislature.  Follow this link to identify who they are and contact them: Utah State District Maps


Exposing Common Myths in HOA Operations

October 25, 2012

By Curtis G. Kimble.

We frequently hear about and see associations acting on myths that seem to persist despite being clearly incorrect. Here are some of those myths and misunderstandings and the truth behind them:

1. An association can deny a request of a members to view the records of the association.

False.  An association member is generally entitled to view and inspect the records of the association upon making a proper request (with limited exceptions, such as for confidential or privileged records).  An association must either maintain its records in written form or in another form capable of conversion into written form within a reasonable time.  Every association should have a records retention policy to ensure the association keeps records for the proper period of time, to provide for the proper disposal of records, and to assist in making and complying with records requests.

2.  An association can require pre-approval for, or prohibit, small satellite dishes installed on owners’ porches, balconies and patios.

False, except  an owner (or installer) cannot drill through an exterior wall to install the dish.

The FCC has adopted a rule applicable to “Over-the-Air-Reception Devices” (“OTARD”).  OTARD prohibits HOA restrictions that impair the installation, maintenance or use of small satellite dishes in areas that are within the exclusive use or control of the dish user (such as limited common area).

The rule prohibits restrictions as to such areas that:  (1) unreasonably delay or prevent installation, maintenance or use;  (2) unreasonably increase the cost of installation, maintenance or use; or (3) preclude reception of an acceptable quality signal.

The rule does not apply to common areas (such as the roofs and exterior walls of a condominium building).  It only applies to areas within the exclusive use or control of the dish user.  So, an association can certainly restrict or prohibit satellite dishes from being installed on common area roofs and walls.  Additionally, the association can regulate dishes on limited common area to some degree.

Contact us for assistance adopting a satellite dish and antenna installation policy if you don’t already have one in place.

3. A director must abstain from voting on matters that the director has a conflict of interest in.

False.  As long as the underlying transaction being voted on is fair to the association, a director can have a conflict and still vote.  (Utah Code Sec. 16-6a-825).  However, it is highly discouraged that the director vote for several reasons, not the least of which is the difficulty in establishing that a transaction is fair and defining exactly what fair is.  If the conflicted director simply abstains from voting after fully disclosing to the board the material facts as to the conflicting interest transaction, then most conflict of interest problems will be cured.

4.  The association president has authority to make decisions and take actions on behalf of the association.

False, except to the extent the president is authorized by the board or by the bylaws to make decisions and take actions.  All powers of an association must be exercised by or under the authority of the the board and the business and affairs of the association must be managed under the direction of the board.  (Utah Code Sec. 16-6a-801).  The president has no independent authority to exercise the powers of the association or manage the business and affairs of the association.

The bylaws may authorize a person to exercise some or all of the powers that would otherwise be exercised by the board.  (Utah Code Sec. 16-6a-801).  And, the board can delegate certain authority of the board to a person (including the president).  (Utah Code Sec. 16-6a-819).  But, otherwise, the president and any other officer have no more authority than any member of the association.  It’s very important a board clearly authorize a president to perform the actions and make the decisions they expect him or her to carry out.  This authorization should be in a board resolution or reflected in the minutes of a board meeting.

5.  A board can adopt a rule about any issue they deem necessary.

False.  The board must have authority to restrict or regulate the specific subject of the rule.  This authority usually comes from the law or from the CC&Rs.  A general provision in the CC&Rs granting the right to adopt rules does not give a board the unfettered authority to restrict rights of individual owners, especially as to units or lots.  On the other hand, a board will usually have authority to adopt reasonable rules to govern use of the common property, to govern the use of individually owned property to protect the common property, and to protect the members’ use and enjoyment of their own property and the common property from interference caused by use of other individually owned lots or units.

An association should have a qualified attorney review a proposed rule before it is adopted, and have the attorney review existing rules periodically to ensure the rules are authorized under the governing documents and the law and that they don’t open the association to discrimination claims or present other problems.

6. The law regarding rental restrictions in the Condo Act applies to all condo projects, or the  law regarding rental restrictions in the Community Association Act applies to all community associations.

False.   Those laws don’t apply to the vast majority of associations out there.  Each of those laws only apply to associations where the original declaration is recorded after May 12, 2009.  So, if the community is older than 2009 (if the original CC&Rs were recorded before May 12, 2009), the rental restriction requirements in those two statutes do not apply to that association.

UPDATE 2015:  The two referenced laws (Utah Code 57-8-10.1 for condos, and 57-8a-209 for non-condos) apply to all HOAs who, on or after May 12, 2015, (1) adopt a rental restriction or prohibition, or (2) amend an existing rental restriction or prohibition.

7. The Utah reserve analysis law requires an association to have reserves.

False.  There is no state or federal law requiring a Utah homeowners association to have a reserve fund.  In fact, the law specifically requires an association to provide an opportunity for homeowners to vote on whether to fund a reserve fund.  Of course, many lenders, as well as FHA, require reserves.


Don’t Forget to Conduct a Reserve Analysis by July 1!

June 12, 2012

By Curtis G. Kimble.

The deadline for all HOA and condominium boards in Utah to conduct a “reserve analysis” is fast approaching.  By July 1, every  board (except developer-controlled boards) needs to obtain or perform a reserve analysis if no reserve analysis has been conducted since March 1, 2008.

A reserve analysis is an analysis to determine:

(a)     the need for a reserve fund to accumulate money to cover the cost of repairing, replacing, and restoring common areas and facilities that have a useful life of three years or more, but excluding any cost that can reasonably be funded from the general budget or other funds of the association; and

(b)     the appropriate amount of any reserve fund.

So, each board must:

  1. determine which improvements have a useful life of 3 years or more, then
  2. determine what the cost is for maintaining those improvements over the next several years, and then
  3. determine what they think the appropriate amount of the reserve fund should be.

There are no requirements in the law as to who has to perform the reserve analysis.  So, a board can perform the analysis or it can engage a professional to perform it.  There are several competent reserve study professionals serving the state of Utah.  There are also websites that will create your reserve study for you based on your input, and some will allow users to run “what if” scenarios with their components and funding plans.  A simple Google search will lead to those sites (I cannot vouch for the quality or value of such online services since I’ve never personally used them or analyzed their results).

There are many options when it comes to fulfilling the requirements of this law.  Each association should find the option that works best for them.

Don’t forget the law also requires each board to, annually, present the reserve study to the homeowners at the annual homeowner meeting or at a special meeting of the homeowners, and provide an opportunity for homeowners to discuss reserves and to vote on whether to fund a reserve fund and, if so, how to fund it and in what amount.  The association must also prepare and keep minutes of the meeting and indicate in the minutes any decision relating to funding a reserve fund.


The Results Are In: The 2012 Utah Legislative Session

March 8, 2012

By Curtis G. Kimble.

The 2012 general session of the Utah Legislature ends tonight at midnight and only one small change to a current law and no new laws affecting condominiums and homeowners associations were passed this year.  This is probably welcome news to the many boards and management committees that were likely more than a little overwhelmed by last year’s many changes.

The only change this year is to the law regarding reserve studies.  A board is required to conduct a reserve study every five years and to review and update it every two years.  But, when S.B. 56 goes into effect on May 8 of this year (assuming it’s signed by the Governor), a board will only have to conduct a reserve study every six years and review and update it every three years.  While industry professionals generally agree that a reserve study should be updated more frequently than that, even annually, and many states require an annual review and update of a reserve study, this change to the law will take some pressure off boards.

No other new laws or changes affecting condos and HOAs will go into effect this year.  Next year, expect to see more significant changes proposed that haven’t been seen yet.  I have a feeling we can also expect to see that Ombudsman bill (H.B. 56) that I explained here proposed yet again.


Reserves: An Option, a Tool or a Necessity?

August 31, 2011

Any good leader of a major corporation (which most HOAs are) knows to utilize and rely on the input of professionals.  To that end, I recently came across some comments regarding reserves from different HOA industry professionals that I didn’t really expect to hear, so I wanted to share them.

The first wasn’t unexpected, but made some good points (be sure to check out the full article):

From an article by an HOA reserve specialist:

“We are in a situation where too many well-intentioned board members and managers are feeling pressure to have a strong reserve fund (more than 70 percent funded) or low reserve contributions at their associations. They want the association to look good to buyers and lenders. But at what cost?

“Reserve planning is based on estimating future costs and repairs. It’s natural to feel optimistic about the future, but board members and managers shouldn’t hide the facts. If you think “a new roof surely won’t cost that much” or “the paint will easily last another five years,” too much optimism can come back to bite you when there isn’t enough money in the reserve fund to cover expenses.

“A community association’s reserve balance doesn’t care about the board’s good intentions, and the building’s components don’t care about the board’s optimism. The reserve balance is what it is, and components will fail whether you have the money saved or not. Facilities are surprisingly expensive to maintain.”

From HOA insurance and risk management specialist, Joel Meskin, Esq., CIRMS:

“Having insured over 75,000 community associations nationwide, I have taken the position that a properly done and funded reserve study is one of the best and most effective risk management tools available to community associations. By having an effective reserve study, many claims that we see daily would never be made against associations.”

And finally, from a post by HOA lending specialist Alan Seilhammer:

“A community association must always first keep in mind that the correct step to take in paying for capital maintenance improvements is to build adequate reserves based on a professionally prepared reserve study that is updated periodically. If the association has not taken that basic step, what is left are only painful and more costly options:  special assessments and long term financing. I have yet to hear a valid argument as to why building a proper level of reserves over time is not the least cost option or the fairest option spread across all unit owners that enjoy use of the building common elements for varying periods of time.

“Needless to say, building appropriate levels of reserves has been the exception versus the rule. Enter the financiers. A very important lesson to appreciate in obtaining a loan for a capital maintenance project is that the loan is not to fund the project. The loan is in reality replacing the lack of reserves that should have been in place so the association could self fund the project.”

A healthy reserve fund doesn’t just help the value of homes and their ability to be bought and sold, it’s an important risk management tool. Nor are reserves an option or alternative to a special assessment or a bank loan.  As a lender very frankly and non self-servingly stated, a loan (or a special assessment) really just replaces the lack of reserves that should have been there in the first place.

Curtis G. Kimble

 


When the Taxman Cometh, Will You be Prepared?

August 5, 2011

Today, a couple of great presenters spoke to those of us at the HOA Luncheon which is put on by the Utah Chapter of Community Associations Institute each month at the Cottonwood Country Club (these are not exclusive events, all are invited).  Chuck Balacy of Mutual of Omaha Bank / Community Association Banc, and TD Croshaw of Huber, Erickson & Bowman (HEB) presented some good information.  Chuck talked about reserve investment options, maximizing interest rates and HOA loans.  TD talked about HOA tax filing options and options to lower HOA taxes.

The high points were:

Reserve Investment Options and HOA Loans:  1.  Bank loans are a good option for obtaining funding for an association in certain circumstances and the bank doesn’t even lien the property; the bank’s security is the future assessment payments received from the owners.  2.  However, always use a bank specializing in HOA loans, as it is a unique area of lending.  3.  A good bank with an HOA focus will have a representative (such as Chuck Balacy) come out to a board meeting and discuss investment and banking options at no charge so the board can maximize the return on their investment of reserves with the absolute minimum of risk (we’re not talking about investing in technology company IPOs or even the stock market in general).

Taxes:  1.  HOAs can choose to file under either Section 528 or Section 277 of the tax code, with potentially very different ramifications.

2.  Section 528 was set up specifically for HOAs and Form 1120H is a simple one page form and all income is taxed at a flat 32%.  The HOA must meet the 60% exempt function revenue test, the 90% exempt function expense test, and 85% of the sq footage of all the units must be for residential use.   Taxable income is calculated from “nonexempt function income.”  All “exempt function income” is non-taxable. Under 528, HOAs are not entitled to net operating loss deductions and there is a possibility of more income being taxed compared to electing 277.

3.  Under Section 277, the HOA is taxed like a regular corporation and Form 1120 is more complex and has a tiered tax rate.  Additionally, compliance risks are much higher.  Risks include reserves being taxed, excess member income being taxed, and prepaids are income in the year paid and therefore contribute to the excess member income.  Taxable income is calculated from nonmember income, all member income is considered non-taxable.

4.  Neither method is a “one size fits all” and the best option may change from year to year.  A good HOA specialist tax accountant, like HEB, will compute the taxable income under both options and consider the risks versus the value of filing under each option to ensure the HOA pays the least amount of taxes while avoiding the risk of audit, penalties and back taxes.

5.  Are HOAs audited by the IRS?  Yes.  I don’t have any official figures, but TD Croshaw of HEB has personally seen three HOA audits recently.

(This is not an advertisement or endorsement for HEB or Mutual of Omaha Bank, my only intent is to provide simple, straightforward value to HOA boards, and that includes pointing out specialists in given areas from time to time without bias).

Curtis G. Kimble


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