New Challenges Face HOA Boards as Seniors “Age in Place”

October 12, 2011

HOA boards will be forced to confront a new set of challenges as Utah’s 65-and-over population is projected to grow by more than 155% from 2000 to 2030 – namely sorting through legal questions created by the “aging in place” of the massive baby boom generation. Utah has the sixth fastest growth rate in the nation for people age 65 and older.

More and more elderly residents are staying put rather than moving into institutional settings such as retirement or assisted-living communities, reports Virginia attorney Megan McDonald Scanlon. “This trend toward “aging in place” makes it inevitable that a higher proportion of residents in a given community will face challenges such as loss of strength, coordination and mental acuity over time, or will be diagnosed with a catastrophic illness. Unfortunately, this can create significant legal and safety questions for homeowners associations.

“The chronic neglect of house and yard often is the first sign that older residents are declining physically, mentally or sometimes both. But in the most severe cases, elderly residents could actually pose a danger to themselves and others, with potential legal implications for the association. An elderly person might be incompetent to drive and yet still be motoring through a neighborhood full of kids playing and people walking their dogs. Or a person with Alzheimer’s disease might end up wandering through a condominium complex, completely disoriented and in need of help.”

Fortunately, there are things that associations can do to be proactive about the trend toward aging in place. First, understand your responsibilities under the law. It might not be the association’s legal responsibility to make sure people are competent to drive or that they will not wander into the road. But, in Utah, the law states that any person who has reason to believe that an elder or disabled adult is being abused, neglected (including self-neglect, where a person isn’t able to provide necessary care for oneself, including nutrition, personal care, avoidance of health and safety hazards, etc.) or exploited must immediately report the situation to Adult Protective Services intake or the nearest law enforcement office. All good faith reporters are immune from civil and criminal liability and all information is confidential.

Adult Protective Services assesses the situation and, if needed, provides protection from, or prevention of, further incidents. As the Utah Aging and Adult Services website states, “the purpose of investigations is to provide prevention and/or protection to vulnerable and elder adults from abuse, neglect or exploitation while preserving an individual’s rights with the least restrictive intrusion. Consideration is given toward maintaining the accustomed lifestyle of the adult while ensuring a comprehensive assessment of the adult’s total situation in order to determine intervention strategies.”

Associations should take a close look at the existing and future needs of their older residents, with a view toward connecting them with helpful resources and encouraging awareness from neighbors. Financial exploitation of vulnerable adults is increasing each year and it occurs in various forms. 25% of seniors in Utah have problems with salespersons, according to one report, with aggressive door to door tactics being a chief problem. I just saw a local news report the other night about a lady going knocking on peoples’ doors and asking to use the bathroom, gaining a little trust, then robbing the unknowing resident of anything she could grab without the resident knowing. Problems like these can be helped to a degree by vigilant and helpful neighbors and boards who keep an eye out and spread the word when a problem arises.

Local non-profit organizations and state agencies such as Utah Aging and Adult Services are an important source of information and resources and can help keep older residents apprised of technologies and services that promise to make their lives easier. “Examples include the GPS bracelets that some municipalities now use to help families keep track of elderly people who are at risk,” Scanlon said.

A positive, engaged, service-oriented approach is the key to the issues on the horizon arising as a result of the significant increase in the number of seniors and the fact that most of them will “age in 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

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

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

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

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 

Register Now for Our Seminar on New HOA Laws

June 8, 2011

What is it?  Major changes were made this year to the laws that affect all community associations (HOAs).  We have had numerous requests to present this information to our clients and to property managers in a concise yet detailed manner. We will be providing an informative and educational 2 hour seminar that you must not miss in order to make sure that your actions as a board member comply with Utah law.

When?  Saturday, June 18, 2011, starting promptly at 9:00 am until 11:00 am.

Where?  Our Salt Lake office, 2040 E. Murray Holladay Rd, Suite 106, Holladay, UT 84117 (about 4800 south, just behind the Holladay Bank and Trust). Phone: 801-274-6800.

Cost?  No charge as part of our educational commitment to our clientele.

RSVP Required?  Yes.  Seating is limited to the first 50 people that RSVP.  We kindly ask that no more than 2 people per association attend in order to ensure seating for everyone.  Please RSVP by June 16, 2011, by calling 801-274-6800 or by submitting the following form:

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