Tag Archives: Collections

What do Board Members do anyway?


Some people might wonder what Board Members do. Hopefully, this will shed some light on their duties and responsibilities for your community.

Homeowners Association Board

Board Members have a set number of responsibilities when they volunteer for your community.  Remember, they volunteer! So make sure you thank them for what they do.

Board Members are challenged typically on a daily basis with different aspects from personalities and duties and responsibilities within the community.  They have a definite purpose and specific duties to fulfill for your community.

 

The role of the Board is to set policy, standards, budgets and procedures for the association.

Probably the most important duty is the fiduciary obligations to the association.  This can be characterized into two parts; the duty of loyalty and the duty of care.  The duty of loyalty is requires the Board Member to act in good faith always in the interest of the community.  Never acting in their own interest or in the interest of another person. The duty of care requires the Board Member to act in a reasonable, informed manner when participating on the Board and making decisions for the day to day community’s care.

Board Members are able to delegate the duties of the association, but not the responsibility of their positions. It is the Board that is ultimately responsible for the association even if the Board hires a management company.  They can direct actions on behalf of the association, but the Board is completely responsible to the community. 

The governing documents as well as state and federal statues outline the Board responsibility within the community.  Areas of responsibility typically include:

  • ·         Care, maintenance and enhancement of common areas including facilities and physical property.
  • ·         Management of community finances and any reserve funds.
  • ·         Community harmony.
  • ·         Any employment the association has and the human resources of the community.
  • ·         Interpretation, creation, enforcement of the rules and regulations of the community.
  • ·         Community insurance needs and making sure guidelines for such are followed in the declaration.

This is in no way a full compilation of everything your board members do, just an overview of some of their duties.

Source: http://www.hoamanagementdirectory.com/blog.html?action=more&id=79

CONDOMINIUM INSURANCE – WHO COVERS WHAT?


Most condominium association‘s “Declaration of the Condominium” (hereinafter referred to as declaration) follow the wording of Chapter 47C of the North Carolina Condominium Act with regard to the definitions of “common elements” and “units”.  The Declaration specifies what insurance is to be provided by the association and what insurance is to be provided by the unit owners.In the statute, 47C-2-102, Unit boundaries it says: “Except as provided by the declaration:

(1)   If walls, floors or ceilings are designated as boundaries of a unit, then all lath, furring, wallboard, plasterboard, plaster, paneling, tiles, wallpaper, paint, finishes flooring and any other materials constituting any part of the finished surfaces thereof are a part of the unit; and all other portions of such walls, floors, or ceilings are a part of the common elements.

(2)   If any chute, flue, duct, wire, conduit, bearing wall, bearing column, or any other fixture lies partially within and partially outside the designated boundaries of a unit, any portion thereof serving only that unit is a limited common element allocated exclusively to that unit, and any portion thereof serving more than one unit or any portion of the common elements in a part of the common elements.

(3)   Subject to the provisions of paragraph (2), all spaces, interior partitions, and other fixtures and improvements within the boundaries of a unit are a part of the unit.

(4)   Any shutters, awnings, window boxes, doorsteps, stoops, decks, porches, balconies, patios, and all exterior doors and windows or other fixtures designed to serve a single unit but located outside the unit’s boundaries are limited common elements allocated exclusively to that unit (1985 (Reg. Sess., 1986), c.877, s.1.)”

The Declaration of most associations specify that the association shall provide coverage for “common elements” and each unit owner must insure his “unit”.  This would suggest that a unit owner would need to include Coverage A Building under the standard condominium unit owners HO6 to cover the elements of the unit that are actually part of the building (contrasted to “contents” such as clothing, TV‘s, etc.).  The parts of the “unit” which cause concern are building type items such as floor covering, wall covering, built in cabinets and appliances, and interior non-load bearing walls and partitions.

Under 47C-3-113, Insurance (a), “Commencing not later than the time of the first conveyance of a unit to a person other than a declarant, the association shall maintain, to the extent available:

(1)   Property insurance on the common elements insuring against all risks of direct physical loss commonly insured against including fire and extended coverage perils.

47C-3-113 (b) “In the case of a building containing units having horizontal boundaries (multi-story buildings) described in the declaration, the insurance maintained under subdivision (a)(1), to the extent reasonably available, shall include the units, but need not include improvements and betterments installed by unit owners.  This seems to imply that the master policy should include all that comes with the unit at the time of purchase (with standard) allowances.  The unit owner would need to insure the value of any upgrades under the Coverage A Building part of his HO6.

An attorney who has much experience in preparing Declarations has responded to an inquiry as follows: “In response to your memo, please note that, per section 47C-1-104(a) of the Condominium Act “Except as specifically provided in specific section of this chapter, the provisions of this chapter may not be varied by the declaration or the by-laws.”  Section 47C-3-113 (the insurance provision to which your memo refers) states that it may be varied or waived “in the case of a condominium all of whose units are restricted to nonresidential use.”  Accordingly, regardless of what the declaration or by-laws say, unless the insurance is not “reasonably available”, if the condominium contains residential units with horizontal boundaries, the insurance must include the units (but need not include improvements or betterments installed by the unit owners.)

Therefore, we conclude that the Association master policy must cover these described items and the amount of insurance selected should reflect these values.

Another issue is the association policy deductible which can be as much as $10,000.  Perhaps the individual unit owner is uncomfortable with such a large deductible.  A solution would be to purchase an amount of Coverage A Building under the HO6 equal to the cost of his upgrades plus $10,000.  The association policy is primary but it does not cover “upgrades” nor anything under $10,000, so the solution suggested will work.  Also, the HO6 building coverage is not subject to a coinsurance clause.

In order for this solution to work, the association Declaration must follow 47-C-113 (b) of the statute.  The alternative method is to say in the Declaration that the associations will provide coverage on the “common elements” only and each unit owner will have to cover all parts of the unit (including walls, floor coverings, built-ins, etc.)  This method calls for the developer/builder to inform each unit owner as to what the replacement cost of such items is so that the proper amount of Coverage A Building coverage can be obtained by each owner.  Not only is this a cumbersome method, but it appears to be contrary to what is dictated by the statute.

On the Fence


Fences provide privacy, boost safety and security and can add just the right aesthetic touch to the landscape.  But they also require maintenance, repair and replacement.

Fencing can be an ongoing problem for all associations, especially as communities and their features begin to age. Associations must budget for the care of these integral structures. Deciding when and how to repair your fencing, replace worn down or rotting parts or hire someone to handle maintenance can mean the difference between meeting or exceeding your annual budget. Fence

When faced with aging fencing and the high costs of replacement, community associations have to form a strategic plan of action to ensure a cost effective use of operating funds, while at the same time employing an effective use of reserve funds. The case study that follows demonstrates how investigation into a current maintenance process can result in better service for residents, cost savings, improved budget forecasting and an increase in reserve funding levels.

FINDING A FIX

A community of approximately 700 single-family homes located in North San Diego, Calif, was recently faced with the challenge of developing a long-term strategy for managing its fences. Like many communities, this association had been allocating resources for fencing only through reserve funds, and solely on the basis of major component replacement and repair.  The existing wrought iron fence was installed in 1990, and originally was painted with two-part epoxy paint that lasted about nine years. Subsequently, the fence was painted in 1999 with Frazee Am-Plate paint, which did not last as long and is currently deteriorating.

In reviewing its procedures, the association sought to find a long-term, sustainable process for managing its fence maintenance and repair budget. With the assistance of its management company, the association conducted a study and analysis to review the fencing asset and refurbishing project.

The association had been using a deferred maintenance-only approach for the community’s 28,000 linear feet of fencing, which comprises approximately 2,600 four-by-four wooden posts and nearly 3,200 iron panels. The fence was being repaired only when there was noticeable damage or paint erosion, which is often costly and inefficient.

Under the deferred maintenance and replacement approach, which was dictated by a previous reserve study, fencing was broken into four categories: phases one, two and three and pool fencing.  All fencing components had a remaining life of two to seven years with a total replacement cost of more than $1.6 million. All the wrought iron fencing was slated for painting costs of $180,000 every five years using reserve funds. Until recently, the association did not incorporate into the operating budget a proactive annual maintenance component to coincide with strategic designations of reserve capital.

There’s a better way to maintain fences. You wouldn’t repair your car only once every seven years; you perform ongoing maintenance. The same logic can be applied to repairing and maintaining the association’s fencing.

The other issue for the association had been response time. Previously, when a homeowner submitted a request for fence repairs near or around his or her home, the process from initial review of the request to completion usually took two months or more. To begin to resolve the inherent problems in that approach, the association needed to investigate the costs related to a broader scope offence overhaul and repairs.

The association collected three bids to bring the fence to like-new condition using reserve capital and then funds from the operating account for ongoing maintenance. The association’s reserve study analysts deemed the funding strategy acceptable upon the premise that the maintenance program would be reviewed on an annual basis.

PROBLEM SOLVED

Beginning this year, the association started using an immediate portion of reserve funding-approximately 25 percent of the $1.6 million estimated for complete replacement-to update its fences. The association allocated enough reserve funds to add a buffer to all of the contractor bids, which were substantially below the allotted amount. It wanted to allow enough room in case there were rising costs. In addition to the earmarked funds to replace the fencing, all of the bids included quotes to maintain the fencing in a like-new condition for an indefinite period of time. The maintenance includes 40 hours per month, allocating $1,600 in labor costs and $600 per month for materials. This monthly maintenance strategy allows the association to implement ongoing, proactive fence maintenance rather than the reactive, deferred maintenance-replacement approach that was so problematic.

In addition, the association allotted $100,000 every eight years in reserve funds as a strategic designation of capital that allows for catastrophic fence failure or other needs. In total, the association will designate approximately $1.6 million for fence repairs over the next 30 years. This new program shares the cost between reserve funds and the operating budget. It’s the most cost effective and desirable way to maintain the fence for the life of the homeowners association. The association will put out a secondary bidding process in the future to account for up-to-date considerations and cost changes.

The new fence maintenance program addresses several major issues that the association had been facing. First, the program allows for improved service to residents by greatly reducing the need for delayed emergency repairs. Next, the program will save the association more than $500,000 in maintenance costs over 30 years. Finally, by allocating fence repair and maintenance costs to both operating and reserve funds, rather than the previous reserve funded-only “major component and repair” line item, this approach has raised the association’s reserve funding level more than 30 percent.

“Grandfathered” Rules


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OK, your HOA’s changing some rules. But the gall of some owners! They want to be exempt from your new rules, or “grandfathered in.” Should you grant their request?

Here, we discuss the pros and cons of creating exceptions for rules, give four examples of when it’s smart and not smart to grandfather residents in, and provide tips to ensure the grandfathered rules don’t last forever and are enforceable.

When to Grandfather? It Depends

“I think it’s a great question,” says David Mercer, a partner at MercerTrigiani in Alexandria, Va., who represents more than 500 associations in Virginia and Washington, D.C. “The answer depends on the specifics of what you’re trying to accomplish. It depends on how serious the problem you’re addressing is and how difficult it’s going to be for residents to change their behavior to comply. Each factual situation you confront brings different issues to the grandfathering clause.”

Robert Galvin, a partner at Davis, Malm & D’Agostine PC in Boston who specializes in representing condos and co-ops, has one absolute. “Never grandfather specific units or people,” he says. “Also, grandfathering isn’t something you do very broadly. Usually, if a rule is a good idea, nobody should be grandfathered. But there are instances where it’s appropriate.”

Here are a few examples:

1. Rental Restrictions

A change of use is a good barometer of when to grandfather, says Kristen L. Rosenbeck, a partner at the Mulcahy Law Firm PC in Phoenix, which represents associations. “I typically want to recommend grandfathering if we’re changing a use,” she says. “Let’s say it’s a rental restriction. That’s a large issue and a change in use. So let’s grandfather owners already renting out their unit and make the rule apply to future owners from this point forward. Some clients want to have the rule take effect when current renters leave. We have case law that says that’s sufficient. But because that change is controversial, I’d recommend clients say the rental would continue until ownership changes.”

2. Color Scheme

Rosenbeck doesn’t think the same reasoning applies to a change in a neighborhood’s color scheme. “We can change the scheme, and that’s not tied to ownership,” she says. “So we could grandfather the current scheme and have it be acceptable until you have to paint your house again.”

3. Pet Rules

“Assume your association is a pet community, so when a condo owner bought, he could have pets,” explains Mercer. “He recognized the condo rule could be changed if, say, 66 and two-thirds of his neighbors voted to change it. Now they’ve voted to change into a no-pet community. The board should want voluntary compliance, but it’s very unrealistic to expect people with pets to move or get rid of their pets to be in compliance. But it’s reasonable to expect that if you grandfather pets in and say, ‘For starters, you need to register your pets. Only those pets will be allowed to stay, and they can’t be replaced when they die.’ Now you’re working toward total, voluntary compliance in several years without the disruption, adversarial approach, and disenfranchisement of people.”

4. Smoking Bans

“There should be no grandfathering when there are safety concerns,” says Rosenbeck. Example? “If you take a health issue like smoking, and you want to ban smoking in the entire property, that gets a little more traction if you say, ‘Except in your unit, we’re banning smoking in all areas,'” adds Mercer. “Still, you might want to consider an area in the common elements that would be restricted as a smoking area rather than going cold turkey on all areas.”

“Every time I’ve been involved in a change that alters the fiber of a community, the association has provided grandfathering,” says Mercer. “It’s difficult enough to get an amendment that you risk it not being passed without grandfathering. The analogy I make is that of a local government authority that wants to change zoning and prohibit a light industrial use in a particular zone. The government can’t just say to someone, ‘And by the way you can’t run your business anymore. But it can say, ‘You can’t sell or change your business use, and once you end the business, it’s done.'”

Source:  http://www.communityassociationmanagement.com/rules/violations-and-enforcement/2461-qgrandfatheredq-rules.html

Keeping Children Safe at Play


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What would be more delightful or heartwarming than the sights and sounds of laughing and playing in your community?

 

Every effort should be made to ensure that the joys of childhood continue in associations, especially with the importance of putting community back into community associations.  From a child‘s perspective, “kid friendly” means fewer rules and restrictions. From the adult’s perspective, it means only implementing and enforcing those rules that are absolutely necessary to protect themselves, the children and association property.

 

The existence and enforcement of reasonable rules can protect an association from liability, but liabilities remain, especially when the association doesn’t or can’t enforce those rules all the time. Just as an owner might sue an association based on the board’s failure to enforce a nuisance rule, an owner also could sue if the association failed to enforce a rule that prohibits children from climbing common element trees or playing in common element parking areas. Theoretically, the association passed the rule because of the inherent danger associated with the activity, thus the association had a duty to enforce its rule to prevent the danger. Would such a theory hold up in court? Much stranger things have happened.

 

Summer Fun at the Homeowners Associaition Pool

Associations should pass only rules that are essential to the health, safety and welfare of their residents–and ones that they can and will enforce. But what rules are essential? Each association must answer that question based on the circumstances and needs of the community. However, let’s take a look at the tree-climbing and parking-lot rules mentioned earlier.

 

A rule against children climbing trees on common elements could recognize both that children occasionally fall out of the trees they climb and that the trees can be damaged. Often the tree is too small for the size of the climber or the climber has tried smaller and weaker branches. In both cases, the damage to the tree may be accompanied by injury to the child. These certainly are legitimate interests, but do they warrant a rule? The association should ask first whether it needs the rule as a warning. In my opinion, most courts will recognize that children are naturally interested in climbing trees and may be injured by doing so. The courts also will recognize that it would be difficult, at best, to keep children out of a good climbing tree. Moreover, every child and parent already knows that if a climber falls from a tree, he or she likely will be injured. Thus, the rule is probably not necessary as a warning

 

The association should explore next whether it needs the rule as a deterrent-preventing climbing through fear of consequence. If the fear of falling is not a natural deterrent, I suspect that the fear of a fine or sanction (which mom or dad would have to pay) is not likely to do the trick–at least from the child’s perspective. Nor will it have a deterrent effect on parents. Those parents who would keep their children out of trees even if no rule existed don’t need the rule. Similarly, those who feel it is OK for their child to climb trees probably would find the rule silly and would not be deterred.

 

Then, does the association need the rule to protect association or owner property, or limit association liability? As for the property issue, trees lose limbs and branches naturally, so the loss of a few to climbers probably isn’t a big deal. If damage occurs to a tree on a lot, the owner probably has the right to make a claim against the master policy as well as his or her homeowners insurance policy.

The liability issue is more problematic. The mere existence of the rule may invite liability because the association will not be able to monitor all trees all the time. In actuality, most associations will not watch their trees unless a board member or manager just happens along and sees a climber.

 

Although it might seem ludicrous, a litigant certainly could claim that he or she relied upon the association’s rule to keep his or her child out of trees, and thus out of harm’s way.

 

The real problem, of course, is that this rule is not kid friendly. And, if the association passes such a rule without one or more of the elements mentioned earlier being of primary concern to the welfare of the association, the rule is not likely to have a positive effect.

 

Similarly, a rule prohibiting children from playing in common element parking lots appears to be a no brainer because it benefits all. However, looks are deceiving. In this case, both children and parents should know that playing in the parking lot is inherently dangerous. Parents also know that smaller children must be watched because a passing motorist may not be able to avoid a child darting between parked cars. Motorists also know to drive cautiously in a residential parking lot. Accordingly, a rule against playing in the parking lots is superfluous for warning purposes.

This rule won’t deter children from playing in the parking lots. Presumably, smaller children will be kept from these areas by parents or older siblings. Older children probably will play there whether the rule is known to them or not. Kids have been playing ball and skating in streets and parking lots as long as there have been streets and parking lots.

 

Finally, the existence of this rule is likely to have little positive effect on the association’s liability in the event of a tragedy. Let’s say that a child is injured by a vehicle in the parking lot. The association’s liability for such an incident, if any, will probably concern the lighting level in the parking lot or perhaps poorly placed plantings that impeded the driver’s view. If these circumstances contribute to the likelihood of the injury, having a rule against playing in the parking lots will not protect the association from liability. And, as in the previous example, a grieving parent could claim that, had the association enforced its rule, the child would not have been injured or killed.

 

So what appear at first impression to be two reasonable rules really have no redeeming value; they are not kid friendly. They are difficult or impossible to enforce. If anything, they might add to an association’s potential for liability. In short, they’re unnecessary.

 

The only kid-centric rules associations must have are those related to the swimming pool. Some associations also have rules related to the minimum age for use of tennis courts. Associations with a workout facility may need to have rules about equipment use as well. Otherwise, the best rules for children are the ones imposed by their parents.  After all, the parents will be held responsible for damage done by children that is not covered by insurance.

 

Source: http://www.communityassociationmanagement.com/rules/violations-and-enforcement/2473-children-at-play.html

Avoiding the Special Assessment Trap


Don’t think owners won’t notice an extra charge from the association.  Prepare for a fight and plan ahead to avoid special assessments altogether.

Special Assesments for Necessary Repairs

Many community associations turn to special assessments when confronted by unanticipated repairs, but boards need to avoid making hasty decisions to fund these surprise expenses.

Special assessments should be the last resort – not the first step -in funding an expensive repair; they’re unwelcome surprises and can cause financial hardship.  Moreover, they are inherently inequitable because they fall on the people who happen to own at the time payment is due, without regard to length of ownership – a measure of how much an owner “consumed” the component being repaired.  Given these dynamics, it should not be surprising that some owners will search every nook and cranny of a special assessment decision and may emerge with troublesome defenses.

Owners may dispute a special assessment for many underlying reasons.  The challenges come from the disgruntled owner who simply doesn’t like the board or from the guy who disputes the wisdom of the project, timing, cost or the specifications.

The owner’s personal agenda doesn’t matter because he refuses to pay, but he will not stop there; misery loves company.  He will organize his neighbors, start a petition, appear at your next board meeting with a circle of supporters and wag his finger or wave his fist in your face.

Worse, he will encourage others not to pay.  Then the board may realize it doesn’t have enough support for the project.  Further, the board may be faced with difficult collection actions, lawsuits that cost money and create tension, and may need to delay the very work that the special assessment was intended to cover.

LITIGATION LEADER

In the experience of my law firm in collection work for community associations, special assessments are one of the leading sources of litigation.

Just when you think you have done everything correctly, you may find yourself embroiled in a legal dispute.  There will be a clever attorney on the other side, skillfully probing every step in your decision-making process.  Believing his claim has great merit, he will cloud the issues with distracting defenses, bury you under an avalanche of paper discovery, file an endless stream of meddlesome motions and posture for his client who sits by his side cheering him into battle.   It won’t be fun.

THE NEED FOR A PLAN

Hopefully, a special assessment will never will be necessary.  If a board plans properly and builds up its reserves, it may not be.

Unfortunately, some boards want to keep general assessments low, believing that owners consider only the monthly fee when determining how much they pay the association.  This is fiction; you can’t play hide-the-ball with a history of special assessments.

The association needs to engage in strategic planning to avoid the necessity of a special assessment; the adverse impacts of financial surprise and inequity are often too much to overcome.  Many managers are particularly good at initiating strategic planning because of their professional knowledge and experience, but even self-managed communities can map out a well-developed plan.

Strategic planning calls for an objective look into the future to minimize surprise.  What components and systems will need major repair or replacement in the future?  How much will they cost?  How will these needs be funded?

The board is responsible for preparing the annual budget, including reserves.  When asked how they determine reserves, some of my boards say they have been to Disney World, using the Magic Kingdom Formula of 5 percent.  Others simply contribute “whatever is left at the end of the year.”  Both approaches are arbitrary and subjective.

Many state laws and governing documents call for reasonable reserves for repair and replacement.  The key word is “reasonable.”  Since every community is different in terms of construction, quality of materials, level of maintenance, climate and other factors, each must be examined on its own.

The basis for determining what’s reasonable for your particular community should be a reserve study by an independent expert – one who does not stand to obtain the repair work, who has professional qualifications in this field and is designated by CAI as a Reserve Specialist (RS).  Couple the study with an energy audit to buffer rising energy costs.

If your association does not have a financial plan for reserves, is this a failure to plan or a plan to fail?  And what if the association has some reserves, but they are either inadequate or the board doesn’t want to spend the entire fund on one project?  If that happens, the next best approach is to borrow funds from an institutional lender, using an assignment of assessments as collateral.  Many lenders now offer such loans for community associations.

Borrowing has many of the equitable features of reserves because the debt service is paid in modest amounts over a period of years.  The obligation transfers from one owner to the next as sales occur, thus spreading the costs and benefits in the same manner as reserves.

Of equal importance is that the association would have all the funds up front to complete the project, and would be able to enter into contracts without worrying about whether all owners will pay a special assessment in full, on time and without the delay and cost of chasing delinquent owners.

Without a financial plan, how do you know where your community is going?  John Irving wrote in Hotel New Hampshire, “If you don’t know where you’re going, you don’t belong where you are.”  The challenge for associations – volunteer leaders, homeowners and managers – is to find out where they’re going by engaging in strategic planning, starting with an objective reserve study and an energy audit, followed by setting a realistic level of funding.  This is the best way to minimize the need for a special assessment.

If your homeowners or condominium association doesn’t have a financial plan, it also may fall out of favor with the Federal Housing Administration.  The agency frowns on special assessments, and it requires that the budget contain a line item of at least 10 percent for reserves.  Since Feb. 1, 2010, condominium associations need to get on FHA’s approved project list before it supports any mortgages in the communities.  Failure to be on FHA’s approved project list will discourage real estate listings, leading to reduced marketability and resale values.

DUE DILIGENCE

Sometimes, not even fully funded reserves can prevent a special assessment.  When it’s unavoidable, the board must exercise due diligence before imposing the additional fee.  Due diligence can be tedious and time consuming.  To cover everything, use the following 10-point checklist and document each step:

1.     Ask your attorney to review your plans, applicable statutes and governing documents.  Get suggestions for improving them to foster success.

2.     Follow all applicable procedures in the governing documents for approving the budget.

3.     Make sure you have a full board that is properly elected.

4.     Be sure all voters are qualified.

5.     Make sure you comply with provisions in statutes and governing documents for adopting a special assessment.  Some states have special approval procedures.  Virginia, for example, authorizes members to rescind or reduce a proposed special assessment by majority vote at a meeting.

6.     Be diligent in identifying and evaluating options.  Prepare a comparative analysis.  Be objective.  For example, if you are replacing the siding because it would cost less than continued repairs, collect reliable data to support this finding.

7.     Keep the owners informed throughout the process.  Remember your obligation to disclose information about the special assessment on resale certificates.  Better to include it, even if it is merely under consideration, than to surprise a new owner.

8.     Use competitive bidding to find the lowest and best proposal.  Three are usually enough; any more will just drive you and your manager nuts.  In selecting a contractor, remember lowest cost is not always best value.  Many of us have learned the hard way that the lowest bidder is usually lowest in quality and reliability, but highest in terms of contract management.

9.     Make sure the components and systems to be repaired or replaced are within the association’s authority.  For example, if you want to replace all the windows in the condominium, make sure the windows are common elements, not part of the units.

10.  Get an opinion letter from your attorney to make sure that you have satisfied all substantive and procedural requirements of your state statute and governing documents.

The old carpenter’s adage, “measure twice, cut once” is good advice for board members because it’s essentially encouraging due diligence.  If successfully accomplished, the tasks on your checklist will not only create the foundation for a successful project, but also will minimize the possibility of litigation by contrarian homeowners.

After your due diligence is complete, engage the owners in the process.  Avoid top-down implementation or the appearance that the project is entirely driven by the board.  Appoint a committee of homeowners to take ownership of the project and be responsible for presenting it to the members.  Even if you do everything properly, you will not succeed without broad owner support and acceptance.

Indeed, there is nothing special about special assessments.  They present lots of moving parts and traps for the unwary.  They can lead to litigation involving issues far more complex than the problems they are intended to resolve.  The better approach is to build reserves based on an objective reserve study and to augment funding through a loan.  If you have absolutely no alternative to a special assessment, exercise due diligence in your preparation.  And remember that old carpenter’s adage.

By Marvin J. Nodiff, esq.

Keeping the Peace Among the Neighborhood and Condo Associations


Body Language

Clubhouse Meeting

As the Treasurer of the board, you’re at a homeowners meeting explaining why fees need to be increased.  “I’m confident that this is the right thing to do and I’m open to your comments,” you say.  A homeowner in the audience is staring at you with arms crossed, lips pursed and fists closed.  Should you be concerned?

People’s gestures often give away their true feelings.  Holding eye contact can signal an impending challenge; tight lips may spell defiance; the position of the arms and fists often indicates a closed an hostile attitude.

Most of us miss body language cues- and miss the chance to communicate effectively.  You may not even realize what your non-verbal messages tell others, but they’re important.

Body language accounts for more than half of your message, while words and tone make up the rest, according to experts.  If your words say, “I’m confident,” but your body says otherwise, people are more likely to believe what your body is communicating.

Here’s how you can use body language to enhance your face-to-face communications.

Make sure your verbal and non-verbal messages are in sync.  As the board treasurer in the example; you need to convey confidence by walking tall, sitting upright, and standing straight when speaking.  You’ll gain credibility if you make eye contact with people you’re talking to- but don’t hold their gaze too long or you’ll create discomfort.  Keep your palms visible and open to show you’re receptive.

Harmony

Keep your facial expression neutral.  It will show that you’re unbiased.  If you cultivate a neutral attitude-by admitting that you have an opinion and consciously setting it aside – then a neutral expression will follow.  Avoid silent feedback, like nodding your head in agreement or disagreement, when you’re listening to a residents comments or a contractor’s pitch.  The last thing you want to do is give the impression that you’ll take a position and then later vote to do the opposite.

Be aware of your own body language.  Learn how your feelings affect your gestures.  What do you do when you’re anxious, angry or elated?

Adjust your body language in response to the signals others give you. For example, when you’re standing chatting with a resident, start by standing at a distance that works for you.  If the other person moves back, don’t step forward again.  This will make your neighbor feel comfortable because you’re not invading their personal territory.

Be Natural.  When you believe what you say and feel, your body language will support your message and you’ll appear genuine.  If you try to adopt mannerisms that don’t support your true feelings, you’ll seem phony.

Dress for success.  As a rule of thumb, it’s a good idea to dress slightly more professionally than the person you are meeting.  It shows respect because you’ve taken the time to present well.

But back to the meeting – how should you respond to your neighbor who seems disgruntled, not just cold?

Tell yourself that you will not lose your cool, and your body language will show that you remain confident and in control.  Be conscious of what you do when you’re threatened or angry and curb those behaviors.  Don’t look menacing in return by mirroring the offending body cues.  If all else fails, take a break.  Then you can all come back refreshed and ready to start communicating again.

Read from the source at http://www.communityassociationmanagement.com/dispute-resolution/preventing-disputes/193-body-talk-.html

No reserves. No Insurance. What’s Left if a Natural Disaster Destroys a Community Association?


Disaster!

Condo and HOA

by Tyler P. Berding, Esq. and Steven S. Weil, Esq.

We have recently seen horrific earthquake disasters in New Zealand and Japan. There has been widespread loss of life and destruction of infrastructure and buildings. California has a history of devastating earthquakes as well—the San Francisco, San Fernando, Northridge, and Loma Prieta earthquakes, among others. Heavy rains have created landslides, mudslides and shoreline erosion all over California, damaging homes and property, some of it in community associations. Wildfires in the past decade have destroyed hundreds of homes. Rising sea levels are threatening to flood low-lying developments, including many common interest developments.

What does a community association board of directors do if a natural disaster wipes out all or a portion of their association? Is this a problem to worry about? When and where is it likely to happen? Is there a plan for dealing with it?

Worry about it. A disaster can strike at any time, and most community associations and special districts1 are ill prepared for the consequences. Disaster insurance is usually inadequate or even non-existent and there is little reserve funding that can be tapped to rebuild. Here are a few examples of how existing and future developments could be paralyzed by a natural disaster.

The Threats

Bethel Island lies in the Sacramento Delta between Sacramento and Stockton, California. Its home to about 2500 residents. The interior is 7-15 feet below sea level. There are 11.5 miles of levees that serve as a dam to keep the waters of the surrounding sloughs from inundating the island.

Property taxes collected from the residents of the island fund a special district, the Bethel Island Municipal Improvement District (BIMID) which is responsible for the maintenance and repair of the levees and functions like a municipality or a large community association.2

Bethel Island is 12 miles from the Greenville Fault and is considered to have strong shaking potential in a potential earthquake. Shaking can create landslides in the levee which could breach anywhere around the island. The levee also has a high probability of liquefaction in a quake.3

A study by BIMID on the potential for loss or damage states: “The conclusion is that flooding (levee failure and drainage disruption) and wildfire (an underground peat fire) pose a significant risk for potential loss.”4

Association Insurance

But the district is broke. The BIMID board of directors asked the residents of the island to approve a parcel tax in November of 2010 to fund badly needed improvements to the levee—it was soundly defeated. The district board then had to fire their General Manager and another employee. They hope to propose the parcel tax again—but without it, the levees will continue to deteriorate. The levees don’t comply with federal standards. “Additionally, the levees are eroding and suffering damage by beavers and rodents.”5

The Cargill Corporation is proposing to build 12,000 homes on reclaimed salt ponds in Redwood City. The homes will be surrounded by a levee. The new homes will be below sea level with only the levee keeping out San Francisco Bay. The source of funding for maintenance of the levee hasn’t been fully disclosed, but Cargill has already said it would not be Redwood City taxpayers, and it’s a sure bet that it won’t be the State of California. It’s very likely therefore that the proposed levee will be maintained by a special district like the one on Bethel Island, or a homeowners association, either of which, in turn, will be reliant on assessments or taxes from the homeowners within the development for its long-term funding.6

A news story: “From Antioch to North Richmond to Redwood City, a slowly rising Bay could endanger the properties of as many as 270,000 Bay Area residents and cause some $56.5 billion in damage by the end of the century unless measures are taken to protect them, scientists warn. But surprisingly, few cities are taking action”.7

The bay city of Benicia recently announced on its website: “In the event of projected flooding sandbags are available at the Benicia Corporation Yard. Some assistance may be available but residents should bring shovels and plan to fill and load the bags themselves.” A bayside community association in Benicia recently settled a lawsuit against the developer of the project recovering nearly fifteen million dollars so it could re-level buildings that were sinking into the bay mud as well as to install common area drainage to protect it against rising sea levels and the flooding that occurs during major storms.

BerdingWeil partner, Allison Andersen, one of the attorneys instrumental in bringing about the recovery, states: “No one, not the City of Benicia, the state of California, nor the federal government would assist the owners of these homes. It was merely fortuitous that the damage began to occur soon enough after construction to permit a claim to be submitted to the developer, before the statute of limitations ran out.”

Ocean Harbor House is a condominium project in Monterey, California, one of very few properties in the area with Pacific Ocean frontage. Erosion of its beachfront threatened the stability of the buildings at the time it was converted from apartments to condominiums. The developer had failed to address these foundation stability issues adequately.  It took a lawsuit and over ten million dollars to build an adequate seawall.

BerdingWeil partner Randolph Paul obtained the recovery for the association. He states:  “The residents of Ocean Harbor House faced the prospect of ocean waves wiping out the stability of the seaward buildings.  Only a proper seawall would provide the protection they needed; not only was it costly, but they had to deal with the California Coastal Commission approval process, which is daunting under the best of circumstances.  Only a lawsuit and the prospect of a trial enabled the Association to recover funds to assist in funding the seawall to provide the essential fifty year protection.”

The litigation was hotly contested and the case only settled after a jury was empaneled to decide the case.  A team of consultants and experts shepherded the Association through the Coastal Commission and construction process, allowing the seawall to be completed on time.  The force of recent storm events underscores the significance of these efforts.

A few years ago a Solano County community association had to sue its developer to recover the nearly six million dollars necessary to repair eleven separate landslides that threatened homes adjacent to common area hillsides as a result of heavy winter storms. They were lucky; the jury found in favor of the association even though some of the slides were dormant and had not yet caused damage. A round of new landslides in northern California has followed recent heavy rains and has damaged homes and infrastructure in numerous locations.

The 1971 San Fernando, the 1989 Loma Prieta, and the 1994 Northridge earthquakes extensively damaged many condominiums. Much of the damage was due to garages constructed on the ground floor with the condos above creating large unsupported openings that collapsed in the quake.8The headline after the next major Bay Area earthquake may be: ‘Housing Losses Staggering Due to Failure to Retrofit Apartments and Condos with Known Earthquake Risk.’ Of the 160,000 housing units ABAG forecasts will be uninhabitable in a major earthquake; most will be the result of the collapse of apartment buildings with parking or commercial space on all or part of the first floor. The collapse of the parking areas in all types of apartments and condos occurred in the 1971 San Fernando earthquake, the 1989 Loma Prieta earthquake, and the 1994 Northridge earthquake.”9

The common thread. What’s common to all of these examples? They all involve small communities or community associations that had to deal with the effects of natural disasters. They are completely reliant on their individual homeowners for the necessary funding. Public agency funding was and is not available. They also involve disasters which, in most cases, insurance is either excluded (flood and landslide insurance) or extremely costly and with large deductibles that make its purchase a questionable investment (earthquake insurance.) They also involve communities for which reserve funding for natural disasters was and is non-existent.

The lucky ones, those that discovered landslide, structural, flood, or erosion threats while there was still time left on the statute of limitations, were able to bring claims that produced enough cash to retrofit the buildings or fix the damage. Others, like Bethel Island or any development more than ten years old, have no such recourse.

We’ve previously discussed various threats posed by landslides to community associations;10 the earthquake danger to certain types of multi-family construction;11 and the potential impact on homeowners from rising sea levels.12 In most cases, community associations do not have the resources to address damages caused by natural disasters. They do not have reserves and usually do not carry insurance for earthquakes, flooding due to levee breaks, beach erosion, or landslides.

How to Prepare?

Here’s what boards of directors should do to prepare for a disaster:

1. Investigate Your Exposure. Retain experts to investigate the vulnerability of the project to potential natural disasters. Hillside common areas, proximity to the bay or ocean, construction on fill or bay mud can expose an association to serious damage from storms, rising sea levels, or earthquakes.

For example, older construction should be analyzed for issues such as the soft story problem and similar construction-related failures. Appropriate experts, structural and civil engineers, contractors and architects can conduct the necessary inspections and provide the board of directors with reports outlining any concerns and proposals for repair.

2. Review Your Insurance. Boards should review their existing insurance program and any additional available insurance coverage to be sure that they are as insured as currently available policies and their budget allow. Most property policies insure an association against losses by fire, but few include earthquake or landslide protection and may expressly exclude such perils.

Earthquake insurance is offered, but it is very expensive and high deductibles would require a cash reserve beyond the capability of most community associations. A southern California insurance broker who specializes in insurance for community associations has published a comprehensive outline of earthquake insurance questions and answers on its website.13

But should a board invest in earthquake insurance notwithstanding the cost? BerdingWeil partner, Steven Weil, has explored the dilemma a board faces when the pressure mounts, usually after another earthquake disaster, to buy earthquake insurance for the association:

“If the governing documents require a board to obtain earthquake coverage but none can be obtained, a record of that fact should be maintained and communicated to the membership. The board should then seek an amendment to the governing documents to eliminate the provision requiring the board to obtain the coverage. California law permits the board to petition the Superior Court to clarify the Association’s responsibilities relative to coverage where the members refuse to approve or finance its cost.

If the governing documents allow the board to obtain earthquake insurance “as deemed prudent,” the board should determine whether it is, in fact, reasonable to obtain and pay for the coverage. If the premium can be paid without an increase in assessments (or without an increase beyond 20 percent of the existing budget), no membership vote is required. The board should, however, advise the membership of its decision and the reasons therefore.”14

The Federal Emergency Management Act (FEMA) offers flood insurance for community associations in certain qualified areas. Their booklet states:

“Condominium associations may purchase insurance coverage on a residential building, including all units, and it’s commonly owned contents under the Residential Condominium Building Association Policy (RCBAP). The unit owner may separately insure personal contents as well as obtain additional building coverage under the Dwelling Form as long as the unit owner’s share of the RCBAP and his/her added coverage do not exceed the statutory limits for a single-family dwelling.”15

3. Retrofit Your Buildings. Multi-family buildings with “soft stories” should be considered for retrofit before another earthquake. There are several ways of retrofitting a building with weak support for the upper floors. Buildings with large openings at the ground floor should be closed or framed to prevent failure in an earthquake. Retrofitting may be cheaper in the long run than purchasing earthquake insurance according to at least one source.16 Known landslide hazards should be mitigated and suspected areas of potential earth movement investigated. Drainage and seawalls near the bay and ocean should be inspected and upgraded as necessary to remove erosion and flood risks.

Structural components such as balconies, stairways, and catwalks that have deteriorated or have sustained wood rot should be braced or rebuilt. Common areas may need retaining walls or new drainage systems to cope with rising sea levels.

4. Advise Your Members. The board should notify the members of the Association’s disaster preparedness. Once the board has investigated the vulnerability of the project, reviewed and chosen the necessary insurance, and determined whether a repair or retrofit to vulnerable building components is in order, it should advise the members so that they understand the decisions that have been made.

After Disaster Strikes

So what happens if a community association’s property or buildings are destroyed in an earthquake, a landslide, or flooding for which there is little or no insurance and no legal recourse to the developer? Here are a few options and the chance of success of each:

1. Assess the members? Fine for minor damage, but the cost of repairs for major destruction damages is often beyond the statutory authority of the board to assess. The California Civil Code limits boards to special assessments up to 5% of the prior year’s budget without a vote of the members. And will members likely approve an assessment sufficient to rebuild substantial portions of the project? That depends upon the value of the potentially rebuilt project compared to the cost of reconstruction.

It also depends upon the political will of the members since most community associations must seek member approval for any substantial assessment. As the case of Bethel Island illustrates, even where a real threat to survival exists, the members–perhaps having lost faith in the board or simply because new taxes are unpopular–voted “no,” refusing to fund critical repairs to the levee system. Also, in bad economic times like we are presently experiencing, the value of homes may be less than the mortgage, giving owners little incentive to pay additional assessments and collecting from owners who are “underwater” can be a dead end.

2. Take out a bank loan? Many banks are generally willing to lend Associations the funds to perform their repair obligations. These loans are secured by the Association’s authority to collect assessments. As a practical matter, any loan will require membership approval, at least for the special assessment to repay the loan and, in some cases, for the specific loan itself depending on the bank or the Association’s governing documents.

But, if equity is low or repair costs high, the bank may require that the members pay a certain portion of the repair cost “from their own pockets” before the loan will be funded. All this is problematic if owners are considering walking away from the development based on the repair costs or the magnitude of the damage.

Bank loans, while possibly forming an important resource for financing post-disaster repairs, may not be adequate to raise needed cash and won’t be easy to get. Also, since an association has only the right to collect assessments and has no real estate of value that could secure a loan, the bank may want to look to the members individually as the only real security—a fact that may make member approval of a loan no slam dunk.17

3. Sell the project? Yes, it is possible. With a vote of the members, the board of directors or a trustee could sell the project as a single parcel.18 When damage is severe and if the members decide not to rebuild, the California Civil Code allows the entire project to be “partitioned” which means aggregating all of the individual titles and selling the entire project.

Whether the sales price and any existing insurance coverage would be sufficient to pay off all of the existing mortgages is doubtful. It is also not hard to imagine a disaster scenario where the buildings are so badly damaged that the owners have moved away and cannot be found. There is no statutory default in such cases. The standard clause included by BerdingWeil in the CC’Rs that its attorneys prepare provides for alternate repair strategies to be presented to the members. But if none of the alternatives are accepted, the board of directors is given the authority to sell the property without a further vote.

As discussed above, there are several tools available to address a major catastrophe. These include pursuing timely claims against responsible parties, making insurance claims, obtaining bank loans and the imposition of special assessments. In theory, some or all of these tools might save a project. But actually implementing any of these can be a daunting task. Depending on how records are kept, the nature of the catastrophe, how many units, owners or buildings are affected and other factors, including communicating with fellow members, let alone being able to schedule post-disaster meetings or votes, may prove a difficult challenge. And, even if a vote could be taken and quorums achieved, the inherent “glue” that keeps members together may be lost in the disaster: some won’t want to pay to rebuild and those who do won’t be able to do so alone.

4. Condemnation? If all else fails, and the buildings cannot be repaired so that they are once again suitable to live it, the city or county will declare them uninhabitable—“red tagged” if you wish—and condemn them. Condemnation does not mean that the city will buy them—that’s inverse condemnation and only works when the city does something that incidentally deprives the owner of the use of the property. Direct condemnation results when a building is not fit for human habitation and residents are prohibited from occupying it. Fire, earthquake, floods, and landslides have all resulted in buildings being condemned. Condemned property can be sold; it just can’t be occupied by the residents until it is made habitable. A buyer could rebuild the project or demolish what’s left and build something new.

The End of the Road?

The massive loss of equity that owners in common interest developments have suffered in the recent recession coupled with the likelihood that most projects are underinsured for serious disasters, leaves open the very real possibility that most boards would likely throw in the towel and let the lenders take over rather than try to rebuild, leaving the owners with little or nothing of value.

The exceptions to this scenario include the lucky owners whose developments are still within the applicable statute of limitations—assuming the damage was the result of a failure by the developer to adequately anticipate the disaster in the design and execution of the development. The other exceptions are where the damage is not serious, there is adequate insurance, or the property itself is so inherently valuable that a sale would produce proceeds well in excess of the amount of total loans against the property.

Except in cases where the location has great inherent value, more than likely the lenders, and not the owners, would end up with whatever cash is derived from a sale of the project and any insurance proceeds. Depending on the extent of the damage therefore, the owners, especially those with little equity, would have little incentive to do anything but walk away.19

The Japanese and New Zealand earthquakes, the resulting tsunami, the recent spate of damaging landslides in California, the wildfires we’ve seen in the past decade, and the threats posed by rising sea levels and ancient infrastructure, raise serious concerns about how a community association will survive a disaster, and whether the project can be rebuilt. Most associations lack the necessary funding to do even routine repairs, much less totally rebuild substantial portions of the project. We have warned about community associations that have reached the end of their “service life.”20 Given what we know, a natural disaster could hasten that inevitable deadline substantially.

Read the full story at http://www.berding-weil.net/articles/disaster-no-reserves-no-insurance.php

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