Making Effective HOA Board Decisions

September 19, 2011

Is your board being pulled in many different directions by competing needs and demands?  They key is determining where the board’s focus is most needed and deserved.  A nine-step process was developed by two community managers to help condo and HOA boards make effective decisions.  It can be found in this article (link) and it is a great process from a practical point of view, but since this is a legal blog, I’ll go ahead and give a legal take on the first step of the process.

The first step is to determine whether the immediate issue is really a problem that the association needs to be involved with in the first place.  The board will need to examine the issue and the facts, make inquiries if necessary, review their authority (remember, a homeowners association only has the authority to act given by law or its governing documents) and review their obligations (remember your fiduciary duties and the obligations imposed by the law and the governing documents).

There are many instances where deciding to do nothing at all is a valid, and sometimes the best, decision because of any of a variety of reasons.  While a board has a duty to use ordinary care to manage the property and financial affairs of the community, if a board conducts a reasonable inquiry, considers the relevant factors, and makes an informed decision in what they believe to be the best interests of the association, then even deciding to take no action at all can be a proper decision.

Let’s look at two hypothetical instances where a board failed to act:

1.     The governing documents of the Oceanview Condominium Association provide that the association and any unit owner may enforce the covenants.  Owner A complains to the board that Owner B constantly plays his music too loud, yet other adjacent unit owners are questioned and none of them have noticed such a problem, and when talking with Owner A and Owner B, it is clear there is a long history between the two.  The board decides to take no further action.

Alleged violations are often brought to a board’s attention through a complaining resident effectively seeking to have the board intercede in what is, in realty, a personal dispute between the complainer and another resident.  In such cases, a board, rather than becoming a tool of the disgruntled resident, should refrain from involving the HOA in the issue.

2.  Five members of the Oceanview Condominium Association fail to pay assessments for common expenses.  The board does not take action to enforce their obligation to pay assessments.

In the absence of other facts or circumstances, the conclusion would be justified that the board has breached its duty to use ordinary care and prudence in managing the financial affairs of the association.

The decision not to take any action is still a decision nonetheless and as such it should be noted in the minutes of a board meeting.  I recommend also including a brief statement of the inquiry, factors and/or analysis undertaken by the board in reaching its decision.  Such a step can help the board in the future in ways too numerous to explain here.

The range of power a board holds over its community’s well being and the range of decisions a board is called on to make can be significant.  Every board should have a process for making effective, well-considered and well-documented decisions.

Curtis G. Kimble

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Citizen’s Arrest and HOA Rules?

September 8, 2011

Crazy celebrity antics crack me up, but there’s nothing funny about the possible consequences of carrying out a “citizen’s arrest.”

In this story (link), Farmer Ted from Sixteen Candles was being a real nuisance, pounding on doors, tearing up plants and annoying his condominium unit neighbors to the point that one of them put him under “citizen’s arrest” and the police were called.

Utah authorizes a private person to arrest someone for public offenses committed in his or her presence:

Utah Code § 77-7-3.   By private persons.
A private person may arrest another:
(1) For a public offense committed or attempted in his presence; or
(2) When a felony has been committed and he has reasonable cause to believe the person arrested has committed it.

While Utah law specifically allows for citizen’s arrest, I don’t think many law enforcement officers, and certainly no attorneys, would recommend it.  There is a huge potential for such a situation to go all too wrong.  Besides the obvious risks to personal safety, a person exercising citizen’s arrest would open themselves up to claims of false imprisonment, assault, battery, slander, and on and on.

I hardly need to say it, but if a resident is violating the nuisance prohibitions of the CC&Rs in a manner that is also against the law, I do not recommend that HOA boards and property managers add citizen’s arrest to their list of enforcement options.

Curtis G. Kimble

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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

 

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Posted by Curtis G. Kimble

Answers to the Quiz and Announcement of Experts

August 19, 2011

The results are in.  I purposely designed this quiz to be difficult with subtleties that almost amounted to trick questions, and sure enough, it was a difficult quiz.  But, a few experts emerged from the results (if you haven’t taken the quiz yet, go here (link), and take the quiz and then come back and review the answers below).

Congratulations to the following high scorers who have proven that they are not mere layman in the HOA realm:

  • Michael Johnson, FCS Community Management
  • Vernon Rice, Northpoint Homeowners Association
  • Harold Alston, The Cottonwoods Condominium Homes
The fastest submittal with the highest score and the winner of the grand prize $25 Amazon gift card is Michael Johnson (you should receive the gift card emailed to you shortly, contact me if you don’t).

DO NOT READ FURTHER if you haven’t taken the quiz yet!

Here are the answers (in bold):

1. Each board has to present the issue of reserve funding to the association members for discussion and a vote:

  •  √ every year. 
  •  every two years.
  •  never because the board decides reserve funding issues.
  •  never because the law has reserve funding requirements.

2. A board is required to conduct or have conducted a reserve study every _____ years and review and if necessary update it every ______ year(s).

  •  3 … 1
  •  √ 5 … 2 
  •  7 … 3
  •  It depends on the outcome of a vote of the members.

UPDATE:  As of May, 2012, a board is required to conduct or have conducted a reserve study every 6 years and review and if necessary update it every 3 years

3. Every HOA is now required by law to register both as an HOA and as a nonprofit corporation.

  •  True
  •   √ False  (it is not required by law that an HOA be a nonprofit corporation)

4. For claims on the association master insurance policy associated with a particular unit or lot, the association can require that unit owner to pay the deductible if:

  •  the association has set aside an amount equal to the deductible.
  •  it is authorized by a governing document of the association.
  •  the owner is at fault (caused the incident or was negligent).
  •  √ all owners had been notified of the deductible responsibility.

5. Every HOA in the state has to update their HOA registration information with the Department of Commerce:

  •  annually.
  •  within 30 days of a change in the information.
  •  √ within 90 days of a change in the information. 
  •  never because only an initial one-time registration is required.

6. A board can use reserves funds in an emergency for daily maintenance expenses:

  •  only once in a 2 year period.
  •  if authorized by the association governing documents.
  •  √ after receiving approval from a majority of the members. 
  •  Never.

7. During any period that an HOA fails to be properly registered with the state, the HOA:

  •  cannot file a lien against any unit or lot.
  •  cannot enforce a previous lien against a unit or lot.
  •  can seek a judgment against an owner for past due amounts.
  •  √ all of the above.  (The HOA can still pursue a personal judgment against a delinquent owner or past owner, even if it can’t enforce a lien.  Remember, assessments are both a personal obligation of an owner (meaning the HOA can pursue the personal assets of the owner for payment) and a lien on the property (meaning the HOA can pursue the property itself, by foreclosure or by effectively preventing its sale because of a recorded notice of lien)).

Thanks for playing!

Curtis G. Kimble

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Test Your Knowledge of the New Utah HOA Laws (for a Prize!)

August 17, 2011

2011 was a significant year for HOAs in Utah and the laws that govern them.  Many new laws and changes were enacted.  How does your knowledge of these changes stack up?  Take this short quiz and find out!  (Note that the quiz is best taken and submitted on our blog itself, for those that receive this post by email).

A $25 Amazon gift card will be awarded to the person scoring the highest and submitting it the quickest after this post is published.  In a few days, I’ll post the answers, as well as the names of those that scored the highest so they can brag about their expertise to other board members, homeowners, or clients.  To submit your answers, fill in your name, email and association or management company and hit submit below.

1. Each board has to present the issue of reserve funding to the association members for discussion and a vote:
 every year.

 every two years.

 never because the board decides reserve funding issues.

 never because the law has reserve funding requirements.

2. A board is required to conduct or have conducted a reserve study every _____ years and review and if necessary update it every ______ year(s).
 3 … 1

 5 … 2

 7 … 3

 It depends on the outcome of a vote of the members.

3. Every HOA is now required by law to register both as an HOA and as a nonprofit corporation.

 True

 False

4. For claims on the association master insurance policy associated with a particular unit or lot, the association can require that unit owner to pay the deductible if:

 the association has set aside an amount equal to the deductible.

 it is authorized by a governing document of the association.

 the owner is at fault (caused the incident or was negligent).

 all owners had been notified of the deductible responsibility.

5. Every HOA in the state has to update their HOA registration information with the Department of Commerce:

 annually.

 within 30 days of a change in the information.

 within 90 days of a change in the information.

 never because only an initial one-time registration is required.

6. A board can use reserves funds in an emergency for daily maintenance expenses:

 only once in a 2 year period.

 if authorized by the association governing documents.

 after receiving approval from a majority of the members.

 Never.

7. During any period that an HOA fails to be properly registered with the state, the HOA:

 cannot file a lien against any unit or lot.

 cannot enforce a previous lien against a unit or lot.

 can seek a judgment against an owner for past due amounts.

 all of the above.

Update: The quiz is closed, but check out the answers to the quiz by clicking here.   Thanks for playing!

Curtis G. Kimble

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Posted by 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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A Follow Up on Fidelity

August 2, 2011

As a quick follow up to my post on June 28, 2011, regarding embezzlement and fidelity insurance, this complaint underscores the importance of fidelity coverage even more.  Even if you never have an issue with misuse of funds or embezzlement, a lack of fidelity coverage could affect the ability of owners to buy and sell units within your association.

FHA, Fannie Mae and Freddie Mac all require that condominium associations carry some level of fidelity insurance, even if the association has professional management which handles the day to day aspects of collecting assessments.   Even a conventional loan with 20% down is likely to be sold by an initial lender on the secondary lending market and thus the loan must meet Fannie Mae and Freddie Mac standards.

While Wells Fargo didn’t exhibit best practices in the situation described in the link above, it’s always the best practice for an HOA to carry fidelity insurance coverage.

Curtis G. Kimble

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Don’t be a Hater! Or Your Peeps Will Accuse the Board of Selective Enforcement

July 22, 2011

As illustrated in this comical but true story: “Chris Brown on Condo Complaints: I’m Being Setup by Haters!” it’s vitally important that an association’s governing documents are in order and that they clearly outline the rights of each owner, including rights to parking spaces.  If parking spaces must be used as handicap spaces at some point due to a Fair Housing request, ensure that the whole process is done legally and properly under the governing documents and the law.  Consult professionals as needed, especially an attorney in the case of a Fair Housing request for reasonable accommodation.

The story in that link above also brings to mind the importance of clear and specific enforcement provisions in the governing documents.  If someone scratches their initials in the elevator, can you fine them?  What about excessive noise or other vandalism?

Perhaps most importantly, this story shows the importance of treating members equally and fairly.  In HOAs, the stakes are high.  Financially, the home is a major investment.  Psychologically, it may be even more important as a safe haven and source of security.  On the other hand, living in an HOA requires some sacrifices of individual freedom for the communal good.  The sacrifices must be fairly shared, however.  Unequal treatment of members who are similarly situated will lead to issues more serious than being called a hater.  The number one problem we see is when personality issues are the impetus behind an enforcement issue, rather than the goal of equal, consistent and uniform enforcement.  Contact us for guidance in any enforcement situation where determining what is fair is causing or may cause difficulty.

Curtis G. Kimble

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Are Automatically Renewing Service Contracts Valid in Utah?

July 12, 2011

This entry deals with contracts within your HOA that “automatically renew” for periods of time beyond that which was originally contracted for.  Many contracts that an HOA Board signs with a  vendor such as a landscaper, pool company, property manager, etc., are intended to “renew” after the inital period expires, unless you, the HOA, give notice of cancellation.  Strictly speaking, there is nothing wrong which such renewal provisions but both your vendors and the HOA needs to know what must, by statute, be contained in such a contract in order for the auto-renewal provision to be valid.  If the statutory language is NOT contained in the contract, then the auto-rewnewal provision is null and void per public policy.    For purposes of this blog entry, I am referring to Utah Code 15-10-101 et seq.

Here are the basics.  As always, before your HOA takes drastic measures to terminate a contract for failure to comply with the Act, please contact us to make sure your actions are proper.   Otherwise you could be alleged to have breache your contract with a particular vendor.  This blog entry is for information purposes only.  Note that the discussion below is for contracts entered into after July 1, 2011, the effective date of the amendments to the existing Act.  However, if you have a contract that was signed before July 1, 2011 and it contains an auto-renewal clause, the prior version of the Act applies.  Again, please contact us if you want to discuss an existing contract.

First, both condominium and PUD association’s are deemed “consumers” under the Act.  “Seller” means any person or entity providing service, maintenance or repair under a service contract.  “Service Contract” means a contract for service, maintenance or repair in connection with real property; or that provide a benefit to the real property.

So, a HOA contract with an accountant probably does not fall under this Act but one with a landscaper will  (Tip:  a lot of HOA’s find themselves in contracts that just are not workable, affordable or beneficial over time.  This Act may provide a way out of such situations but be very careful and  please contact us first).

Second, there are strict notice requirements that must be in the contract in order to make the auto-renewal provision valid.  In other words, auto-renewal clauses are permissble but only if the proper notice is contained in the original contract.

Third, keep in mind that the notice requirements for a service contract entered into after July 1, 2011 and which automatically renew after the expiration of the original term, fall into 2 categories:

(a)  Contracts that renew for periods less than 12 months:   The requirements of “b” below all apply except for the provision requiring that “notice be displayed prominently on the first page.”

(b)  Contracts that renew for periods greater than 12 months  (for example, renews for a 24 month period):  The “Seller” must provide written notice of the automatic renewal provision prominently on the first page of the service contract.  In addition, the seller must provide written notice to the HOA (1) personally, (2) by certified mail; or (3) by prominently displaying the notice of the renewal on the first page of a monthly statement.  The Seller must provide the notice (described above) no later than 30 days (but not sooner than 90 days) before the last day on which the HOA may give notice of the HOA’s intention to terminate the contract.

Fourth, the wirtten notice must be in clear and understandable language and printed in an “easy to read” type size and style.

Fifth, if the above requirements are not complied with the automatic renewal provision is void and unconscionable as a matter of public policy and the contract renews on a “month to month” basis.

Obviously, I am not suggesting that you can or should try to “break” every contract that automatically renews.  I do feel, however, that this statute is an important tool for an HOA to understand in order to help you avoid contracts that truly are not in your best interest.

Once again, thanks for reading this entry.  We have a lot more to come!  Best regards, John Richards

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Posted by John Richards, Esq

Embezzlement in an HOA?

June 28, 2011

If there’s one thing you do as a board member (and I mean if it’s literally the only thing you do as a board member because you’re too busy to be involved, or because the president or the property manager does everything), you need to make sure there is current fidelity insurance coverage for the association (protecting against loss of money from  dishonesty, embezzlement, forgery, etc.).

Recently, I’ve had involvement with an association where two of the three board members were simply not involved at all in the operation of the association and the third board member embezzled funds, failed to pay bills, and let the insurance lapse.  Finally, one of the lawsuits that had started to come in because of unpaid bills got served on one of the other board members and that clued him into the fact that something was amiss.   Of course, the embezzling board member had let the insurance coverage lapse long ago so there was no coverage and the association had to levy a large special assessment just to pay the outstanding bills.

Embezzlement, forgery, and other similar things may sound like exotic, foreign things that only happen in big corporations or in the movies, but it happens wherever you are and in HOAs of all sizes.  The HOA I mentioned above had less than 20 members.  No one is immune.  Besides the situation above involving a board member, I’ve had experience with an HOA where an employee of the property management company siphoned HOA funds for his personal use.

Even if you are actively and directly involved as a board member and you even look at monthly bank statements for your HOA, make sure they are the original bank statements, not something generated by a personal computer.  In the HOA in this story:  Police say woman stole from condo group, the treasurer used a computer to generate statements that made it appear that she was spending money on maintenance work that was never done. 

Curtis G. Kimble 

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Utah HOA Registry Now Operational

June 16, 2011

The Utah HOA Registry required by a new Utah law is now up and operational on the website of the Utah Department of Commerce.  As discussed in our blog entry (click here to read it), all HOAs must register with the Department of Commerce by July 1st.   Here’s a link to the registry (note that you do have to create an account to view or register an HOA, but creating an account is free): secure.utah.gov/hoa

It is crucial that you register using the exact same name as the corporate entity of the  HOA, as it is stated in the articles of incorporation and as it is registered with the Division of Corporations & Commercial Code.  For example, if an HOA is a nonprofit corporation with the name “Whiteacre Homeowners Association,” do not register the association in the HOA registry as “White Acre Homeowners Association.”  This is very important because a search on the HOA Registry for White Acre will not bring up Whiteacre.

This concept applies to all business dealings for an HOA.  It must conduct business using its proper corporate name, not the name of the subdivision itself or some other name or variation of the name that isn’t registered as a Utah business entity.  Click here to look up an incorporated HOA to see exactly how it is listed as a corporation:  https://secure.utah.gov/bes/action/index

Curtis G. Kimble

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