Looming Crisis? When Caulk, Paint and Patches No Longer Work

Condominiums first appeared in the late 1960s when owner-occupied cooperatives and common interest communities took hold across the country. Throughout the 1970s, condominiums emerged as an important form of home ownership. HUD estimates that over 4.8 million condominiums were constructed in the 1970s and 80s.

At some point, even well built buildings require major rehabilitation. The number of years an association can function before performing a major rehab is based on a multitude of factors, including the quality of construction, type of cladding and windows, exposure to the elements and of course: maintenance. Many communities choose to defer maintenance or common element repairs and replacement by kicking the can down the street for the next board or group of homeowners to confront. Though a precise timetable for replacing roofs, windows, HVAC, exterior cladding or other major systems may vary widely, the one certainty is that delay will result in increased costs. This fact is particularly true in the Pacific Northwest, where long rainy winters punish buildings year after year.

Now is the perfect time for an association to address its long-standing repair and replacement issues for the following reasons:

• Bank loans are viable. Interest rates remain at historic levels--the cost of borrowing money has never been this low--but will not remain at this rate indefinitely. Plus, due to the competitiveness in the lending industry, banks are loosening underwriting requirements.
 

• Construction costs remain low. Due to the overall economic malaise in our country, the cost of materials and labor remains highly competitive, but like bank interest rates, construction costs will not remain low forever. As the economy continues to improve, labor and material rates will certainly rise.
 

• Insurance coverage is at peril. Condominium insurers are rejecting new coverage and failing to renew policies on older condominiums that have failed to upgrade plumbing, electrical and other major systems. Older associations who have failed to perform this work are finding themselves without insurance and at significant risk.
 

• Delay results in higher costs. Delaying required repair and maintenance will result in a disproportionate rise in repair costs. Water damage to buildings is not linear. Rot, deterioration and other damage accelerate over time and mirror a hockey stick and not a straight line. At some point, the damage reaches the extent where mold and structural integrity cannot be ignored.

If you manage or govern an associations older than 20 years that has not actively addressed the condition of the complex, don’t become part of the looming crisis. Act now to take advantage of the favorable conditions to get this work done.

Here are some recommendations for dealing with underfunded capital improvements or major repairs:

1. Assemble a team of professionals, including an attorney, lender, architect or engineer and manager, to work closely with the board of directors in formulating and executing a comprehensive plan, from initial identification of the scope of the repairs through funding and completion of the work.
 

2. Rely on the advice of these professionals, who have guided hundreds of Oregon and Washington associations through proven and successful game plans and track records.
 

3. Do not succumb to “paralysis by analysis.” Details are important, but fear of the process should not override reasonable and necessary action.
 

4. Do not get bullied by adversarial homeowners. No one “wants” to pay a special assessment, but when presented with objective facts and data, reasonable owners should realize the need to take action. This is where your professional team can be especially effective in communicating and supporting the plan.
 

5. Be transparent and communicate often. Don’t wait for the special assessment meeting to communicate with the association about the need for repair/replacement of common elements.
 

6. Involve homeowners in the process. Committees or tasks forces can be especially helpful, but make sure the roles are clearly defined. Committee work should generally be in an advisory capacity with clear demarcation of roles and responsibilities.

A large number of older condominiums can no longer get by with caulk, paint and patchwork fixes. They face pressing and important decisions on how to proceed. The first step in making those decisions is becoming better informed. To assist that first step we have teamed with a lender and insurer to provide a 60-minute webinar to help inform homeowners and managers on how best to confront this predicament. For more information on the webinar and to sign up click here.
 

Update on National Class Action Plumbing Settlement

Many of you have been keeping up to date on the continuing issues with plumbing system defects
and so we wanted to notify you of a recent class action settlement that will affect many homeowners
and associations in Oregon and Washington that have PEX plumbing systems with yellow brass
fittings.

The settlement class includes anyone who owns a structure containing an RTI Plumb-PEX
Plumbing System containing ASTM F1807 brass insert fittings and stainless steel clamps sold by
RTI or Uponor and installed on or after May 15, 1999. Below are photos of some of the
components included in the settlement.

Claim eligibility depends on whether an owner has experienced a leak or whether an owner can
demonstrate reduced water flow. For multi-unit projects, a project that has experienced leaks in
30% or more of the units may be eligible for a replumb and replacement of the F1807 system. In
order to determine an association’s claim eligibility, the association will have to undertake some
investigation of its plumbing system.


Please contact us if you have questions about how this class action settlement affects your
associations or how to submit a claim. It can take several weeks or longer to complete the
investigation you need to develop the claim, and the time to file a claim is limited.

The Disappearing Declarant

More and more associations these days are experiencing the “disappearing declarant” phenomenon: The original developer suffers such financial difficulties that their unsold units are abandoned or foreclosed upon – or the declarant itself files bankruptcy or goes into receivership. Sometimes the construction stops mid-stream, leaving partially developed lots unfinished and buildings unoccupied. Clearly these associations are experiencing some down times at the very early stages of their existence. But associations should know that even under these circumstances, down is not out. Associations can take advantage of the shared goals of its members to preserve and increase their property values through the various situations discussed below.

     Association Paralyzation

A declarant who disappears prior to turnover of the association to the homeowners affects the Association’s very ability to govern. For example, if three of the five board members are to be appointed by the declarant and only two elected, it is unlike that the board can meet its 50% quorum requirement if declarant board members have not been appointed or do not attend board meetings. Without a quorum, the board cannot act on behalf of the association. Once those units are sold or taken over by the bank, however, the Association should be able to elect all board members.      

If the declarant has truly disappeared as opposed to just being inactive, the remedy in this situation is to initiate a lawsuit similar to those brought by shareholders of other corporations to ask a court to ask to have a receiver appointed to run the association. In that situation, the receiver has the power to govern the association in the best interest of the association and is not necessarily bound by all terms of the governing documents. 

     Units in Limbo

 

If the declarant’s units have been foreclosed by the bank, the bank is responsible for assessments just as any owner would be. However, the more common situation is where the bank has the right to foreclose (the declarant is in default of the loan obligation), but the bank does NOT foreclose, knowing that it then becomes responsible for paying assessments. In this case, where there are a substantial number of units in that situation and where the units are delinquent in paying assessments, the association may want to pursue foreclosure of the units.

 

Initiating foreclosure is not without its expense and pitfalls, however. While it is possible that the bank will step in and . . .

Continue Reading...

Watch Out for Neighborhood Watch Programs

Last month in our post on community associations and squatters, one of the recommendations I listed was for an associate to initiate a neighborhood watch program. Coincidentally, a few days later, I read that the homeowners association where Trayvon Martin was tragically killed by a neighborhood watch captain is facing a likely lawsuit from the family of the 13 year-old gunned down on a street in the association.

The controversial and tragic death of the Florida teen is a stark reminder of the care a community association should take in implementing a neighborhood watch program. To eliminate tragedy, reduce legal liability and ensure a successful program, a community association may wish to take the following steps:

  1. Contact the local police department and ask their community support officer to meet with the association. In addition to providing general tips on establishing neighborhood watch programs, the police representative may give community-specific information and insights. While speaking, the officer may also provide anti-crime tips to assist individual homeowners.
  2. Establish written guidelines for the program. Work with the association's attorney in coming up with these procedures. Among other items, the guidelines should emphasize minimizing conflict and confrontation.
  3. Ensure program participants are not armed with weapons. A cell phone and camera ordinarily are the only equipment needed for protection.
  4. Criminal background checks should be conducted on all program participants. Local police departments or state agencies offer inexpensive background options.
  5. Contact the association's insurance company to verify insurance coverage for the program. Many community association insurers have risk management departments that offer helpful information on establishing neighborhood watch programs.
  6. The association's board of directors or professional manager should review the program at set intervals to ensure it is being conducted in compliance with the written guidelines.

A community association must understand the purpose of neighborhood watch programs. Volunteer homeowners are not intended to stop crime--that job is for the police. Watch programs are most successful in deterring crime by providing a watchful eye and vigilant documenting of suspicious behavior. If a crime is being observed, the watch members should dial 9-1-1 and avoid confrontation.

Residential communitites often have the best intentions in adopting neighborhood watch programs. An association should ensure effective safeguards are in place to eliminate unnecessary liability and potential tragedy.

Foreclosed Homes, Squatters and HOAs

A recent article in the Seattle Times, "Empty Foreclosed Houses Burden Cities, Neighborhoods", highlights a severe problem affecting community associations throughout the Pacific Northwest, and nation. In addition to losing out on receiving monthly and other assessments from homeowners going through the foreclosure process, homeowner associations are now facing squatters taking over many of these properties and turning them in flophouses.

Overwhelmed by a massive inventory of foreclosed homes, banks lack the resources to ensure the properties are maintained and secured properly. As a result, squatters have besieged many of these homes. The squatters often engage in drug activity, theft, vandalism and other highly disruptive criminal behavior which adversely affects neighbors and entire communities.

Community associations should take the following steps in an attempt to avoid or minimize such threats:

  • If a bank fails to foreclose on the property, the association should commence foreclosure proceedings. At a minimum, the action may jump-start the bank to take action. The goal is to get a new responsible homeowner in the home as soon as possible.
  • If foreclosure has occurred and the property is vacant, the association should implement a “community watch” type program. The volunteers could keep a watchful eye on the property and call police at the first sign of trouble. The sooner squatters can be interrupted, the more likely the community will be in keeping them out.
  • Meet with the local police and obtain a helpful contact person. It may not be effective to constantly call 9-1-1 for “routine” problems such as loud parties, trespassing, etc. However, if the association can forge a relationship with a community support officer, or other police representative, a collaborative, long-term solution can be created.

Though it may seem at times as though an association lacks the power or tools to rid squatters within its community, proactive, comprehensive steps often result in eviction and success. 

Annual Meetings: The Time To Shine [Part II]

The following is part two of a two-part article recently published in the January 2012 edition of WSCAI Washington Communities'Journal:

 

Recruit Prospective Board Members Early

Many community associations have difficulty filling officer and director positions. There are multiple reasons for this apathy; however, as with many volunteer positions, serving as a community association officer or director can be a highly rewarding experience.

 

Generally, voting for board positions occurs at the annual meeting. Boards who simply ask for nominations at the meeting do a disservice to themselves and their communities. Recruitment of board members is one of the common traits of successful common interest communities. A board member should begin thinking about his or her replacement almost from the time they first step onto the board. Identification of charismatic or effective leaders and managers within a community may take up to a year, or more. Persuading, convincing or even cajoling a neighbor to run as a board member may take even longer!

 

Nominations of directors should be requested well in advance of the annual meeting. A brief bio or “platform statement” of each candidate may be included with the meeting notice and agenda. Voting for director positions must comply with the provisions of the association’s governing documents, most likely found in the bylaws. Most associations allow each candidate a few minutes to speak to the membership prior to the vote. Once the directors are voted in and assume their positions, often their first order of business is to agree upon officer positions. This action ordinarily occurs immediately following the annual meeting.

 

Overcoming Potential Pitfalls

Though reaching quorum is often stated by associations as a hurdle in achieving a successful annual meeting, following the steps described above in planning and running an effective combined business meeting and social event should result in higher attendance and an ability to reach quorum without difficulty.

 

Under the Washington Condominium Act (“WCA”), unless the bylaws specify a larger percentage, a quorum is present throughout any meeting of the association if the owners of units to which 25% of the votes of the association are allocated are present in person or by proxy at the beginning of the meeting.[1] Under the Washington Homeowner Association Act (“HOA Act”), unless “the governing documents” specify a different percentage, a quorum is present if the owners to which 34% of the votes of the association are allocated are present in person or by proxy at the beginning of the meeting.[2]

 

Proxies also allow associations to reach quorum even if many homeowners do not personally attend the meeting. Under the WCA, votes allocated to a unit may be cast pursuant to a proxy duly executed by a unit owner.[3] A unit owner may not revoke a proxy except by actual notice of revocation to the person presiding over a meeting of the association. A proxy is void if it is not dated or purports to be revocable without notice. Unless stated otherwise in the proxy, a proxy terminates eleven months after its date of issuance.[4] Though the HOA Act is silent regarding proxies, general corporations law essentially tracks the WCA on this issue.

 

Some associations have experienced legal challenges to business conducted at an annual meeting simply because they failed to follow procedural hurdles. Common interest communities in Washington must follow strict notice requirements to ensure a legally binding annual meeting. Under the HOA Act, not less than 14 nor more than 60 days in advance of any meeting, the secretary or other officers specified in the bylaws shall cause notice to be hand-delivered or sent prepaid by first-class United States mail to the mailing address of each owner or to any other mailing address designated in writing by the owner.[5] The notice of any meeting shall state the time and place of the meeting and the business to be placed on the agenda by the board of directors for a vote by the owners.[6] The rules are the same for condominiums in Washington under the WCA, except the minimum notice period is shortened from 14 to not less than 10 days.[7]

 

Success!

A community association who conducts comprehensive event planning, combines the business meeting with a social activity, includes community members and takes into account renters and families with children, can transform dread into success--turning the annual meeting event into an opportunity for the board and association to shine.

 

[1] RCW 64.34.336.

[2] RCW 64.38.040.

[3] RCW 64.34.340(2).

[4] Id.

[5] RCW 64.38.035(1).

[6] Id.

[7] RCW 64.34.332.

Annual Meetings: The Time to Shine [Part I]

The following is part one of a two-part article recently published in the January 2012 edition of WSCAI Washington Communities' Journal:

There are two words that often instill pangs of fear in the bellies of many condominium and homeowner association board members: annual meeting. Just mention of the event conjures doubts of reaching quorum, fears of homeowners running amok, and failings at filling open board positions. Yet, instead of dreading the annual meeting, through proper planning and a few “tricks of the trade,” every community association can coordinate and run a highly successful and effective annual meeting.

Plan the Event.

The first step in the process is proper planning. The annual meeting should not be perceived as merely a business meeting, but also as a social event and opportunity for every homeowner in the association to attend, socialize and get to know one another. Sandi MacCalla, CMCA and Director of Master Planned Communities for CDC Management Services in Seattle, stresses the importance of advanced and comprehensive planning. She recommends the meeting be well organized and even scripted. It is not uncommon to start the planning several months in advance. The meeting should be efficient, concise and informative. First and foremost, it is a business meeting. But just because the core of the meeting is all business, it should not limit an association from having fun. The association can incorporate a social event, such as a barbecue, potluck, chili cook-off or other friendly community competition to immediately precede or follow the meeting. Some associations have had success sponsoring community arts and crafts, wine tasting, sports (e.g., indoor volleyball) or other activities such as Bingo. The age, demographics and general make-up of the community will dictate the type of social event most likely to succeed in increasing homeowner participation and attendance.

 

Since most annual meetings occur in the first quarter of the calendar year, proper planning must take into account the inclement weather Washington State community associations are likely to encounter in January, February or March. Finding a proper indoor venue is vital.

Ms. MacCalla suggests that another component of successful event planning includes accommodation of families with children. Rather than expect parents to arrange childcare independently, an association can arrange community childcare. This effort can be accomplished at no additional cost through solicitation of older sibling sitters or other adult childcare providers who may live within the community. Local daycare centers also can provide sitters, exchanging free childcare services in exchange for promotion or advertising within the association.  Childcare can be co-located at the site of the meeting, either in an adjacent meeting room or nearby facility.

 

Integrate the Broader Community

Though an association annual meeting should be limited to governance and business of the association, the broader event can include the wider community beyond the walls of the development. Inviting a local political figure or business leader to speak either before or after the annual meeting may create a “buzz” for the event and increase homeowner attendance.

Associations may choose to invite local businesses to attend and offer promotional specials to the homeowners. Including businesses emphasizes inclusiveness and support not only to the association development or condominium, but also to the broader community to which the association is located. As with inviting a political or business leader, local businesses can create a “buzz” or incentive for homeowners to attend the annual meeting.

Lastly, a board should consider inviting renters to the event. Renters are important members of a common interest community. Except in rare circumstances, renters ordinarily do not vote as part of the business meeting; however, they uniformly can participate in the social aspect of the event and often add to the fun. 

 

Stay tuned for Part II of this article to be posted in a few days.  Happy New Year!

If you are a new board member of a community association in Oregon or Washington and have a legal question about annual meetings or any other board function, feel free to contact Barker Martin, P.S. by selecting the "Contact" tab at the top of this blog page.

Pacific Northwest Community Association Survey

Are you a Washington or Oregon condominium or homeowner association member who sometimes feels like you are on an island? Do you want to know how other associations are managing and governing their associations? Then participate in Barker Martin's Community Association Survey and we will provide you with a free report.

Time is of the essence, as the deadline for taking the 5 minute survey is March 15th!

Have you ever wondered what other communities are utilizing for their management practices and protocols? Whether your community is self-managed or run by a professional manager and/or management company, this survey will gather the opinions of Pacific Northwest homeowners and residents of condominium associations, homeowner associations and other common interest communities.

The online survey is anonymous and completely confidential. Rest assured that Barker Martin will not collect, record, or disseminate personal information about the survey participants or data from their computers. Responses to Barker Martin’s Management Survey will be held in the strictest confidence and only aggregate statistics and comments will be compiled and made available in a final summary report produced by Barker Martin.

To access the survey, click here.

2011 New Year's Resolutions for Community Associations

New Year’s resolutions don’t have to be limited to just individuals. In the spirit of ushering out the old and welcoming in the new year, I suggest community associations consider adopting New Year’s resolutions for 2011. The timing of these resolutions also coincides with the time that many shared ownership communities conduct their annual meetings and board elections, the first quarter of the calendar year. What better opportunity to adopt and implement a platform of New Year’s resolutions than when an association Board turns over or reconvenes for the year?

A Board may consider one or more of the following resolutions (in no particular order):

1. Adopt and follow strict collections policies. Due to the continued downturn in the economy, most every community association in the United States has experienced some level of foreclosures or owners who are past due on their assessment accounts. In less critical times, Boards may have relaxed their collections policies and allowed their “neighbors” time to catch up. But such leniency is no longer feasible in today’s economic climate. Instead, Boards must adopt and uniformly follow strict collections policies, or risk heightened delinquencies and claims of selective enforcement.

2. Review governing documents. Board members should be intimately familiar with their governing documents (i.e., Articles of Incorporation, Declaration, Bylaws and House Rules and Resolutions). Boards should resolve to review their documents at the start of each year, at a minimum, to ensure familiarity and compliance. Though sometimes containing "legalese," even non-attorney Board members should understand the provisions of each governing document. If not, a Board should have an attorney or other professional explain any confusing or technical portions of the documents.

3. Amend governing documents, if necessary. Along with reviewing and fully understanding their governing documents, a Board should resolve to amend any conflicting, vague or obsolete governing document. To avoid unnecessary conflict and cost, a Board should be forward-leaning and move to amend outdated documents before a conflict or a problem arises--it will be much cheaper in the long run.

4. Adopt communications policy. One of the most common problems experienced by community associations relates to inefficient or ineffective communication. A Board should resolve to adopt a communications policy governing intra-Board communication, as well as communication with association members, managers and third-party consultants or companies. If an association does not have a communications policy, even the most basic problem or issue can be blown out of proportion, resulting in increased conflict, cost and adverse consequences.

5. Reduce email. Electronic mail has certainly revolutionized American business. Unfortunately, the proliferation of email has also resulted in inundation of written communication which sometimes can be overwhelming and all consuming (e.g., iPhones, Droids and "Crackberries"). Email can also be far less effective than simply picking up the phone or speaking with someone directly. As part of a comprehensive communications policy, a Board may wish to define specific email protocols, including establishing limitations on subject criteria and response times. A Board should also establish association email accounts, such as GardenPointSec@yahoo.com or VillaCourtPres@gmail.com, etc., to eliminate the use of personal, company and government servers for association business.

6. Establish reasonable working protocols and expectations. Along with reducing reliance upon email, a Board may wish to set expectations as to when association business is to be conducted (preferably at Board meetings). Too often, Board members conduct business 24/7 via email or when confronted by an owner or other Board member in a parking lot or when getting their mail at the community mail kiosk. Everyone is busy juggling family, work, activities and Board service, but not every association related issue is urgent or must be dealt with by the Board. A Board that sets reasonable working protocols and expectations for itself as well as when dealing with homeowners and managers, is much more effective and productive.

7. Facilitate better communication and relations with management. All too often association Boards complain that their professional manager or management company is deficient in one or more areas. However, when asked if they have addressed the issue or issues directly with the manager, they often offer an excuse of one type or another. It may seem that the grass is greener at the adjacent community, or community manager, but it is surprising how much turnover there is among managers and management companies that could be avoided if communication was increased and expectations mutually agreed upon. Tying performance metrics to contract terms also is a must. Rather than dump its current manager in hopes of finding a better match, it may be more effective to work on the current business relationship to improve communication, relations and expectations.

8. Run efficient meetings. Almost every Board president or chair could strive to increase efficiency and productivity of Board and association meetings. An efficient meeting starts with proper notice and a well planned agenda. Thought should be given as to physical set up of the room, including location of the Board seats and table in relation to where the association members sit. Time limits should be set for each category of business and presentation, including any owner input, assuming the Board allows an owner forum as part of its meeting (versus hearing from owners before or after the official Board meeting is conducted). Lastly, meeting minutes should be concise and bulleted facts, with minimal narration. Minutes are not a substitution for attendance.

The start of 2011 is as good a time as any for a community association Board to consider adopting one or more of the preceding "New Year's resolutions."

Using Bad Debt Line Items in Association Budgets (Part II)

In Part I of this blog post, I reviewed generally how a condominium or homeowner association may utilize a "bad debt" line item in its annual budget. I defined "bad debt" and also described specific situations on how an association could practically utilize the budgeting tool. In this follow-on post, I'll highlight the differences between cash and accrual accounting in the "bad debt" context.

The cash method and the accrual method (sometimes called cash basis and accrual basis) are the two principal methods of keeping track of an association's income and expenses. The cash method is the more commonly used method of accounting for associations. Under the cash method, income is not counted until cash (or a check) is actually received, and expenses are not counted until they are actually paid. Under the accrual method, transactions are counted when the order is made, the item is delivered, or the services occur, regardless of when the money for them (receivables) is actually received or paid. In other words, income is counted when the sale occurs, and expenses are counted when you receive the goods or services.  

With respect to my Linked-In inquiry on utilizing a "bad debt" budget line item, Arizona CPA Howard Simon commented:

The initial question asked if the budget should include a line item for bad debts. As a CPA providing financial statement and tax services to HOAs, I encourage HOA boards to include a line item for uncollected or uncollectable assessments.

On the cash basis, the budget line for assessment income should be the fully billed assessments for the year (by month), offset by the line item for bad debts, which on a cash basis should be the expectation (estimate) of assessments that will NOT be received in the period (month or year). Also to be noted, because prepaid assessments are accounted for as assessments received, I encourage HOAs to account for prepaids as a separate line item in the cash basis financial statements, thereby emphasizing this important figure and providing a more accurate picture of assessments actually received versus budget.

On an accrual basis, using the allowance method (described previously) should provide an accurate picture of earned revenues each period. Because the budget is a management tool, it is important to be realistic (and perhaps conservative) about the funds available during the year.

Whether cash or accrual, the industry insiders who responded to the Linked-In inquiry universally agreed that in today's turbulent economic climate, a condominium or homeowner association should include a bad debt line item in their annual budget.

Using Bad Debt Line Items in Association Budgets

[The downside to being a full-time attorney and part-time blogger is the periods when case loads increase and trials commence. Now that we're back to the usual level of insanity at Barker Martin, P.S., we'll do our best to keep this blog updated more frequently. Thank you for your understanding and continued readership.]

In advance of the upcoming community association budget season, I posted on one of the Linked-In groups to which I subscribe a query on whether associations utilize a bad debt line item in their annual budgets. Numerous industry experts, from managers to CPAs, provided insightful and valuable responses, some of which I'd like to share here. 

The respondents universally agreed that in today's turbulent economic climate, a condominium or homeowner association should include a bad debt line item in their annual budget.  Mitch Drimmer pointed out that before an association can put in a number for bad debt, "bad debt" must be defined. "There is debt that is absolutely collectible and there is debt that is possibly collectible and then there is stone cold bad debt. How do you define and how do you calculate it?"

CPA Heather Clark responded to Mitch's question by stating the following:

There are two aspects of bad debt from an accounting perspective. There is the allowance for doubtful accounts and there is bad debt expense which is the charge that adjusts the allowance for doubtful accounts:

1. What is an allowance for doubtful accounts?
a. An allowance for doubtful accounts is an estimate of the amount in your receivables that will not be collected.
b. The receivable account is an asset account and the allowance for doubtful accounts is a contra asset account i.e. an account that reduces the balance of the receivable account. So if the receivable balance is $100,000 and the allowance is $25,000 the net receivables on the books is $75,000.

2. What is bad debt expense?
a. Bad debt expense is the expense charge for increasing the allowance account which reduces net income (revenues less expenses).
b. So using the example above, if at December 31, 2009 the allowance for doubtful accounts is $100,000 and it is determined that at July 31, 2010 the allowance needs to be $130,000, then assuming no other adjustment to the allowance in the year 2010, the bad debt expense to be booked in July would be $30,000 (increase to $130,000 from $100,000).

Heather continued:

Having an allowance for doubtful accounts does not mean all the accounts reserved for are uncollectible. Some may be fully collectible while others are partially collectible and others may not be collectible at all. Determining the amount needed in an allowance for doubtful account is an estimate which requires judgment. It is important determining the adequacy of the allowance for doubtful accounts that collection practices and legal action being taken be considered. If no legal action is taken accounts that are collectible may become uncollectible while legal action may result in accounts being wholly or partially collectible.

Continue Reading...

Down Economy Exacerbates Strife Within Community Associations

It is said that conflict increases in good times and in bad, when there is more to quibble over or when resources are scarce.  As the economy continues to sputter with unemployment and foreclosure rates remaining at record levels, this phenomenon appears to be playing out within common interest developments throughout the nation. Though not yet an epidemic, my unscientifically-supported analysis from personal experience and anecdotal empirical evidence reveals a recent spike in conflict between condo and HOA homeowners and boards of directors.

There are studies and theories that support the hypothesis that when people feel oppressed, downtrodden or powerless against the true cause of their despair, rather than face the adversity head-on, they attack each other. Without attempting to validate or challenge the soundness of my oversimplified description of this phenomenon, it appears to be playing out within condo and homeowner associations as neighbors lash out at one another.

This conflict plays out in many ways, including owners who flagrantly disregard covenants, conditions and restrictions (CC&Rs), association board members who fight amongst themselves and both owners and boards who take untenable or irrational stances against one another. Many of these seemingly minor clashes turn into major and protracted battles that often result in heightened emotions, personal animosity and large legal fees.

Associations are facing unprecedented foreclosures and owners with past-due accounts--many owners simply walking away from their homes. For new communities, there are stories of developers who went bankrupt mid-project and abandoned the project, leaving the few owners who bought straddled with the full cost of managing and operating an underfunded development. 

Suffice to say that this unrivaled level of economic despair has resulted in exceptional rates of conflict in shared interest communities across the country. Though I can't do anything to reduce the economic difficulty that associations are facing, the following tips may help avoid unnecessary conflict within a community of homeowners:

  1. Exercise common sense.
  2. Ensure that the association’s governing documents are clear, unambiguous and consistent with applicable laws.
  3. Uniformly interpret and apply all CC&Rs; avoid selective enforcement. If a variance or permit is provided by the board, document the grounds in committee or meeting minutes.
  4. Be willing to revise outdated or obsolete rules and policies that no longer work for the community.
  5. Enhance communication between the Board and homeowners.
  6. Run concise and efficient Board and membership meetings.
  7. Provide ample notice of meetings to homeowners and provide for some level of homeowner input.
  8. For issues that are expected to be contentious, plan ahead and formulate a game plan to tackle the issue – from identification all the way through resolution.
  9. Avoid Board Member conflict of interest. 
  10. Act rationally and reasonably.

Lastly, it is usually beneficial to think before acting. Is it the owner or board member who deserves the wrath, or is the root of the problem something larger?  Whatever the cause, face it head on reasonably and proportionately.  And don't forget to use and rely upon professionals well suited to provide assistance, including professional managers, mediators, facilitators and, if needed, legal counsel.

If your association needs assistance in resolving a conflict, feel free to contact Barker Martin, P.S. by selecting the "Contact" tab at the top of this blog page.  We promise, we won't just march into court.

How to Deal With a "Crazy" Board of Directors

One of the most popular blog posts we have published to date was our January 10th: "Dealing With 'the Crazies' Within a Homeowners Community."   Though we received ample comments supporting the article, we also received several emails from readers wondering why we didn't write a similar article about "crazy" or irrational homeowner association boards of directors.  Therefore, as requested...

In our experience, the number of irrational or unreasonable owners greatly outweighs the number of irrational boards.  That said, there are instances where boards or individual board members act outside their authority, act irrationally, or simply ignore legitimate complaints or calls for action by homeowners.

One reader asked what to do when his board and the association's manager failed to enforce the governing documents fairly and consistently?  What if a board or manager refuse an owner's request to review HOA documents?  Or denies an owner's request for a hearing?  In each of the foregoing circumstances, the owner should be able to point to particular provisions of the governing documents which require explicit action and compliance by the board.

If a homeowner believes their board is failing to respond appropriately or acting irrationally, they should:

  1. Articulate the issue(s) as succinctly as possible;
  2. Gather all relevant written documentation;
  3. Review the association's governing documents (Articles of Incorporation; Declaration, Bylaws, Rules & Regulations) and identify which provisions control over the issue(s); and 
  4. Identify all relevant persons who are witnesses, parties or have other persons with knowledge of the facts and circumstances giving rise to the issue. 

The owner should then draft a concise written letter or request to the board that embodies the four factors described above.  If the association is professionally managed, then a copy of the letter should be sent to the manager.

The association's governing documents should have a process already in place to resolve the dispute.  If so, the owner should identify the process and insist on board compliance.  If not, and if the board does not respond adequately to the owner's letter, then the owner can request a meeting with the board.  

If the board continues to dismiss or ignore the owner, and if the professional manager is ineffective in helping to resolve the dispute, then the owner should seek legal counsel.  Keep in mind that many association governing documents require mediation or similar dispute resolution process be conducted prior to a lawsuit being filed.

If an owner does not wish to seek legal assistance, and if they feel the board is failing to follow its governing documents and otherwise acting irresponsibly or irrationally, then the owner may wish to try to unseat the board through a special election and vote of the association.  An association's governing documents ordinarily outline the process for removing a board member or entire board.

Just as I wrote in my earlier post, the key to reducing and resolving disputes between the "crazies" (whether homeowners or boards) is to rely strictly upon an association's governing documents.  A modicum of common sense and reasonableness also go a long way to solving the problem.  If all else fails and the board cannot be removed via special election, then mediation or court interaction may be required.  If so, in claims arising from enforcement or other CC&R disputes, many governing documents allow the prevailing party to recover their reasonable attorney's fees and costs.

Pitfalls of Special Assessment Webinar

On Wedesday, April 21, 2010, myself and Rebekah Baze, Vice President with Columbia Bank, will be presenting a free webinar on "The Pitfalls of Special Assessments." 

Rebekah and I will discuss issues related to homeowner association special assessments from the legal and banking perspectives.  We will highlight the processes and pitfalls.  The webinar is designed for association members, board members, managers and any other community association industry member who has an interest in the topic.

I invite you to join us by registering here.

Lenders and Squatters Accessing Homes Prior to Foreclosure

There have been several recent reports in the media and Blogosphere of lenders and squatters gaining access to Northwest homes vacated through the foreclosure process: AG's Office Investigating Squatters; The Lafayette Report - Legal Alert; Bend Foreclosures on the Rise.

The justification provided by lenders may be that they received a report that the property was vacant and unsecured and that they were simply securing the property by changing the locks, winterizing and safeguarding the home from property damage, vandalism and theft.  Squatters are merely seizing upon the misfortune of others.

As stated by attorney Brian McLean from Leahy, P.S. in a LinkedIn discussion on the topic, "Common language in deeds of trust permit the lender (within reason) to enter and suspect property secured by a deed of trust. The lender may also change locks where the owner has failed to perform as covenanted (for example, keep payments up-to-date). Such an approach seems reasonable when the property 'appears' abandoned.

Regardless of who or why persons other than deed holders are entering, altering or residing in homes, the issue should be on the radar screen of homeowner associations.  Since the owner has vacated the premises and likely has no further contact with the home, the homeowner association board or manager may be the only person or entity with knowledge of the activity.  If a manager or board notices activity at a vacant home under foreclosure, they should make immediate inquiry.  The association's actions are not entirely altruistic, as they could result in better preservation of the property and a quicker conveyance--both resulting in higher income to the association via payment of monthly assessments. 

DELRAP vs HRAP for FHA Condominium Certification

The last unanswered question I had regarding the new FHA guidelines involved the difference between the Direct Endorsed Lender Review Approval Process (DELRAP) and the HUD Review Approval Process (HRAP).  In reviewing and analyzing the provisions promulgated in HUD Mortgagee Letter 2009-46B, the guidelines explained in detail the DELRAP process, but did not describe the precise submission process for HRAP.  The attachments to the letter, including the “Lender Certification,” only referenced DELRAP, so, my colleagues and I were unsure exactly who could submit a HRAP package. Under the old “spot approval” process, essentially anyone acting on behalf of an association or owner could.

When we first raised the question with the regional supervisor in Southern California, he stated they were still interpreting the proposed guidelines and were waiting on further information from DC. But now that the guidelines are in effect, and having spoken directly with the regional manager, we have our answer.

Similar to the former guidelines, there is no specific limitation as to who can file a HRAP package. The HRAP submission no longer requires an attorney opinion letter, but must comply with the strict guidelines contained within Mortgagee Letter 2009-46B.

We still recommend an attorney or other person with expertise in the FHA condominium certification process handle HRAP packages. If you have any questions on the process or would like an attorney from Barker Martin, PS to spearhead a package for your Oregon or Washington condominium association, select the “Contact” tab at the top of this blog page.

FHA Announces Important Underwriting Policy Changes

Because I have received so many inquiries and questions regarding my recent posts on the new HUD/FHA Condominium Guidelines, I thought I would keep our readers apprised on the latest developments over at FHA.

A number of important changes were announced yesterday by the FHA to reduce risk and improve its finances:

  • The upfront mortgage insurance premium (MIP) will be raised from 1.75 percent to 2.25 percent.
  • The minimum down payment will climb from 3.5% to 10% for applicants whose Fico score is below 580.
  • Allowable seller concessions will be reduced from 6% to 3%.
  • The FHA also plans to request legislative authority to increase the maximum annual mortgage insurance premium so it can reduce upfront costs for prospective home buyers.

The complete FHA announcement can be found here.

The proposed changes, which apply to all FHA loans, are expected to go into effect in either spring or summer 2010.

Additionally, the agency will continue to increase enforcement on FHA-approved lenders, and will publicly report lender performance rankings to improve transparency and accountability.

Lastly, based on anecdotal information provided by industry persons, I have reported that up to 40-50% of single-family residence loans will be FHA insured in the near future.  I read this week in several blogs (but have not been able to confirm through the FHA) that in 2009, 30% of mortgages and 20% of refinances were FHA backed.  So my initial estimates may not be too far off. 

 

Dealing With "the Crazies" Within a Homeowner Association

Yesterday, I was co-presenting at a Washington Community Association Institute (CAI) seminar on community building and annual meetings.  When discussing owner engagement in association matters, an attendee asked how a board should respond to "the crazies," and went on to describe a protracted dispute between several renegade homeowners and her board of directors.

As soon as the board member finished asking her question, several other attendees' hands shot up, wanting to share similar experiences within their homeowner communities.  The co-presenter and I ended up discussing the issue for several minutes before getting back to the main points of the presentation.

When I was driving home, I realized how often I have heard similar complaints from board members and association managers, with specific mention of "the crazies" within a community.  As I thought further, I came up with the following suggestions:

If you are a board member or manager, keep in mind:

  • Not every complaint needs to be addressed.
  • Not every issue must be resolved by the board or manager.
  • Not every email needs an immediate reply.
  • Not every phone call or in-person exchange at the mail kiosk or elevator requires an "official" response.

Just because a homeowner raises a community issue, it does not mean action has to be taken by the board or manager.  There are some issues that simply do not rise to the level of formal association action, no matter how strongly a homeowner protests, cajoles or threatens.

If a legitimate question or issue is raised by a homeowner during a chance meeting onsite or via email or phone call, a board member or association manager can respond by stating the issue will be discussed at the next board meeting.  When you get down to it, very few issues are truly emergencies requiring immediate action.  In reality, how much is ordinary business that can or should be conducted during formal association activity (i.e., board meeting)?  Think how refreshing it would be to let go of a significant percentage of email traffic by simply printing off the email, placing the issue raised on the agenda for the next board meeting, and discussing it then.  

If you are an "association crazy" or potential "crazy," keep in mind:

  • Board members live within the same community (or own units/homes there) and pay the same assessments as you.
  • Board members are volunteer (unpaid) lay persons without formal education or training in association and corporate governance.
  • Board members are subject to the same governing documents as every other homeowner.
  • Contrary to claims by some, board members are not out to rule the world or get kick-backs from each contractor and the management company.
  • Threats to sue the board and association are usually counter-productive and result in added legal expenses and assessments to the association, to which you are a member. 

The key to reducing disputes between the "crazies" (and also rationale) homeowners and boards and managers is to rely strictly upon governing documents, set reasonable expectations and pursue enforcement actions consistently and uniformly.  If at the end of the day the homeowner(s) are still acting irrational, try following the suggestions described in an earlier post entitled "Dealing With Problematic Homeowners." 

Good luck within your own communities and let me know if you have additional suggestions I can add to my toolbox.

Enforcing CC&Rs Through Electronic Surveillance

Homeowner association boards often struggle with enforcing certain rules, such as improper parking, failing to pick up after pets, littering and similar conduct.  It is not that the violations are unimportant or do not affect the character of the community; rather, the cost and effort  required to catch violators often exceeds the resources available to non-profit homeowner associations.

However, there is a relatively inexpensive, yet highly effective, tool available to associations to combat this behavior:  electronic surveillance.  As shown in this KOMONEWS.com video story, one apartment tenant using a camcorder and YouTube is deterring illegal activity near his apartment complex.

Some associations may not wish to post on the Internet video of illegal conduct within or adjacent to their neighborhood, for fear of stigmatizing their community and possibly adversely effecting sales.  However, an association can still record the activity and forward it to the police.  To deter Covenants, Conditions and Restrictions (CC&R) violations, an association can record a common area where pet owners routinely fail to pick up after their dogs, or visitor parking spaces where unit owners park, or other locations of common violations.

An association can obtain a wireless web camera for well under $100.  The camera can be installed inside a common area (such as a clubhouse, office or other enclosed area) or even within an owner's unit.  A day's worth of digitized video can be reviewed by a board member or committee member in fast-forward time in only a few minutes.  If conduct that violates a rule or covenant is found on the video, then the board has compelling evidence to pursue an enforcement action.

Electronic surveillance can be a highly effective and cost-efficient tool for homeowner associations to use in enforcing their CC&Rs.

Changes to Revised FHA Condo Guidelines Announced

On November 6th, the Federal Housing Administration (FHA) finally issued major changes to its revised guidelines on mortgage insurance requirements for condominium associations.  The original guideline revisions were first proposed back in June (under Mortgagee Letter 2009-19).  The new guidelines go into effect on December 7, 2009; however, some of the requirements are phased in through January 31, 2010.

If you have been a reader of this Blog over the past couple of months, you are aware of the controversy and uncertainty involving HUD/FHA's proposed requirements for obtaining FHA mortgage insurance for condominiums.  The newest guideline revisions are in response to the strong reaction from condo owners and industry representatives who saw many of the FHA requirements as counter-productive and burdensome to condominium associations and owners.

The latest guidelines are described in two separate HUD/FHA documents:  (i) Mortgagee Letter 2009-46B (the revised guidelines for FHA approval of residential condominium projects); and (ii) Mortgagee Letter 2009-46A (temporary guidance for condominium approvals).

In short, Mortgagee Letter 2009-46B replaces Letter 2009-19.  The temporary guidance (Letter 46B) acts as a buffer to ease transition from the old to the new regs.

Under the Temporary Guidance:

  • The "Spot Loan" approval process will continue through January 31, 2010; and
  • The 30-percent cap on FHA loans per condo project will be expanded to 50 percent temporarily (Letter 46A does not state the termination date of this extension), with concentrations increased to 100 percent if certain additional conditions are met (as enumerated in the Letter).

I believe the most noteworthy changes to the New Guidelines are as follows:

  • Condominium project approval is not required for condominiums that are comprised of single-family totally detached dwellings (no shared garages or any other attached buildings).
  • Reserve funding:  From the previous requirement of at least 60% of the fully funded reserves to a new requirement consisting of at least 10% of the association's annual budget (see next bullet below).
  • Budget review:  The review must determine that the budget is adequate and: (i) includes allocations/line items to ensure sufficient funds are available to maintain and preserve all amenities and features unique to the condominium project; (ii) provides for the funding of replacement reserves for capital expenditures and deferred maintenance in an account representing at least 10% of the budget; and (iii) provides adequate funding for insurance coverage and deductibles.
  • The 1-year waiting period for conversion condominiums is eliminated.

Transition Strategy:

  • FHA will move all currently approved condominium projects to the new approval list and FHA Connection database.
  • Projects that received approval prior to October 1, 2008, will require recertification on or before December 7, 2009.
  • Projects that received approval between October 1, 2008 and December 7, 2009, will be "grandfathered" and will have to follow the new guidelines' recertification process (recertification required every two years).

Summary:

Because the Administration is extending the "Spot Approval" process through January 31, 2009, we highly recommend any association that was contemplating obtaining FHA certification to act without delay before the comprehensive certification process is enacted.  Any Oregon or Washington condominium association that desires assistance in this endeavor can contact one of our attorneys by selecting the "Contact" tab at the top-right of this page.

Barker Martin will offer a Webinar on this topic in the near future (we will post on our website homepage the date/time of the upcoming seminar).

 

Reserve Funding

In the past several weeks as I have been speaking on the new HUD/FHA guidelines, many persons have asked me whether HUD/FHA will require the "straight line," "cash flow" or some other methodology for determining percentage of reserve funding.  The short answer is, "we do not know."

What we do know is that in order to obtain FHA certification for a condominium project, reserve funding must be at 60% for established projects, and 100% for new projects.  Also, a reserve study must have been conducted within the past 12 months.  [To review our previous postings on the new proposed HUD/FHA guidelines, type in FHA in the search window]

In attempting to answer the question on funding methodology, I first spoke with the HUD regional office in Santa Ana, California.  The regional manager stated he did not know how the new guidelines would be interpreted regarding this issue.  I then spoke with Reserve Study consultant Jim Talaga from Association Reserves, Inc., who referred me to an article his partner recently wrote on the subject.

To read an informative article on the difference between "straight line" and "cash flow" reserve funding analysis written by Robert Nordland from Association Reserves, click here.

We'll find out in time whether HUD/FHA will mandate a particular type of reserve funding.  In the interim, as the experts at Association Reserves suggest, the use of a particular funding method does not dictate a particular result.  What's most important is funding results.  Thus “cash flow" or straight line?” is the wrong question to ask. It is much more informative to ask if the association is pursuing a conservative ““Fully Funded” objective, an aggressive “Baseline Funded” objective, or a “Threshold Funding” level somewhere in-between.  Whatever methodology is used, HUD/FHA will insist on either a 60% or 100% funded number to qualify for FHA certification.

FHA Condominium Certification Changes Pushed to December

FHA/HUD's revised condominium certification regulations originally slated to take effect on October 1, 2009 and pushed back to November 2nd, are now scheduled to be implemented on December 7, 2009.  The onerous new regs, as described in HUD's Mortgagee Letter 2009-19 (published on June 12, 2009), were met with controversy due to the potentially chilling impact on the ability of a condominium project to obtain FHA certification.

As a result of public outrage, in mid-September, FHA/HUD announced postponement of implementation of the new regs.  On October 21st, FHA stated in an email:

Implementation of FHA’s new policy guidance for condominium project approval and condo unit financing will be delayed until December 7th  2009.  The new guidance, to be issued within the next two weeks, will:  1) offer additional leniencies to address the difficult market conditions and 2) augment some portions of FHA Mortgagee Letter 2009-19, providing additional information and clarification.

 

Until the new guidance takes effect on December 7th, 2009 lenders may continue to use the Spot Loan Approval guidance issued in Mortgagee Letter 1996-41.  Further, the site condo and manufactured housing condo project changes that have already been implemented are not affected by this delay.

Looks like FHA/HUD took notice of the public's comments (led in great part by lobbying from Community Association Institute (CAI), National Home Builders Association, National Association of Realtors and the Mortgage Bankers Association). 

 

We should know within a couple weeks how the final regs will play out.  Stay tuned for further information on this important topic. 

Major HUD / FHA Condo Lending Changes Effective October 1st

Under revised guidelines effective October 1, 2009, the FHA is implementing a new approval process for condominiums to be eligible for FHA / HUD financing. Under the new guidelines, the spot approval process will no longer be available, and approvals expire every two years.  Click here to see a copy of the HUD Notice.

 - Historically, to utilize HUD / FHA financing, a condominium could, under certain circumstances, receive “spot approval” for lending with HUD / FHA, or the association was required prepare and submit a comprehensive package of materials for consideration for “permanent” approval. 

 

 - Under the October 1, 2009 guidelines, FHA will allow lenders to determine project eligibility, review project documentation, and certify compliance with the National Housing Act requirements. We expect lenders will approach association boards and managers, asking for certain information, certifications, and even legal opinions regarding compliance with certain legal requirements.

 

 - If a condominium is not on the FHA-approved list, or has lost its approval because it underwent repairs or litigation, or for some other reason, the board of directors may wish to consider applying for approval (or re-approval).  

 

The attorneys and staff at Barker Martin, P.S. are ready to help your association adjust to these changes.  Just select the “Contact” tab at the top of this blog page to reach one of our attorneys.

Rental Caps and Hardship Exceptions

With the economic crisis continuing and foreclosure rates still increasing, I have heard a lot of talk recently regarding rental cap hardship exceptions.  Many condominium and homeowner association boards of directors whose associations have rental ceilings are feeling the pinch between following their CC&Rs and facing unprecedented levels of claims of hardship.

A typical rental ceiling Hardship Exception leaves much discretion to the board:

Hardship Exception. Where, on written application from a homeowner, the Board determines that a hardship exists whereby, due to circumstances beyond the control of the owner, that owner would suffer serious harm by virtue of the limitation on renting contained in this Section 4.6, and where the Board further determines that a variance from the policies contained therein would not detrimentally affect the other homeowners or secondary mortgage market financing, lender approval or VA or FHA approval, the Board may, in its discretion, grant an owner a waiver of the Rental Ceiling for a temporary period not to exceed twelve (12) months.

So what can/should a board do in these trying economic trying times when balancing an individual owner's financial difficulty with the interests of the remaining homeowners?  Although each association should be considered on a case-by-case basis, I would not be averse to recommending boards exercise a bit more leeway by exercising a fairly liberal approach to granting rental cap hardship exceptions.

Perhaps granting a six-month lease, in lieu of a full year, may be the most appropriate compromise for boards whose associations have reached their rental caps, yet have owners who are experiencing severe financial strain.

If a board decides to grant a hardship exception, it should ensure it documents the basis with specific grounds, to make sure it does not open itself to claims by other homeowners of selective enforcement.

For more details on rental restrictions, rental caps or hardship exceptions, do not hesitate to contact Barker Martin, P.S. by selecting the “Contact” tab at the top of this blog page. 

  

Continue Reading...

Update on FHA Approved Condominiums

[Associate David Silver conducted research and assisted me with this post--thanks, Dave!.]

In recent months, I have posted several articles discussing various aspects of condominium and HOA mortgage lending in the wake of the present housing and financial crisis. In early April, I blogged about Congress’ attempts to pass a mortgage modification bill, and, later that month, discussed the effect Fannie Mae’s rules regarding pre-sale of condominium units have had on local markets. Lately, we have received a number of questions on a related topic: condominium projects and FHA-approved status.     

Although only a hunch, we attribute this heightened interest in FHA-approved status to the fact that until mid- to late-2008, there were a wide variety of non-FHA, non-conforming mortgage alternatives available (e.g. Alt-A, Non-Income Verified, No-Doc, 100% purchase-money second loans, etc.) to condominium unit buyers. Plus, following the evaporation of those creative mortgage products, the housing market has been generally slow. Consequently, when there were a slew of other mortgage options, potential purchasers did not have to rely so heavily on mortgages underwritten and approved by FHA. Now, however, with most of the “portfolio,” or “non-conforming” mortgage programs discontinued (and transactions picking up, if ever so slightly), FHA underwritten financing has become increasingly attractive—and may be a purchaser’s only option.

 

If a condominium is not on the FHA-approved list, or has lost its approval because it underwent repairs or litigation, or for some other reason, the board of directors should consider applying for approval (or re-approval, whatever the case may be). You can look to see whether a condominium is approved on the HUD Homes & Communities website located here.

 

Keep in mind that in some situations, limited “spot-approval” may be obtained by certain buyers for condominiums not otherwise approved.

 

Currently, HUD is backlogged a month or more in reviewing submitted applications. Thus, should your condominium need to be submitted for approval, keep in mind the process may take some time. Moreover, the work to compile and complete the application package itself can take weeks, and require the board, its manager, and legal counsel to gather data, documents, and expert opinions required for FHA approval. The package of materials that must be submitted can vary from condominium to condominium, and often requires an updated reserve study and certain legal opinions. 

 

For further information on FHA approval requirements, or other issues related to condominium associations, feel free to contact Barker Martin, P.S. by selecting the “Contact” tab at the top of this blog page.

H.R. 1106 Dies in the Senate

Earlier this year, I wrote Blog postings on proposed federal legislation that could adversely impact the ability of homeowner associations to recover past-due assessments.  Specifically, H.R. 1106: "Helping Families Save Their Homes Act of 2009,"  would have given bankruptcy judges the ability to ‘cram down’ the principal balance and monthly payments, wiping out tens or even hundreds of thousands of dollars of money owed.  In addition to allowing courts to rewrite private mortgages, the proposed law also would have allowed the courts to bypass state assessment lien and priority lien statutes, thereby eliminating the already limited ability for a community association to collect past due assessments from these properties.

On April 30, 2009, the United States Senate voted 45 to 51 on a rewritten version of the House Bill, thus effectively killing the Bill.  I believe the proposed law was defeated in large part due to the high number of homeowners who contacted their Congressmen and women in voicing their concerns over the Bill.

As housing and foreclosure issues are likely to linger until a sustained economic recovery takes place, the attorneys at Barker Martin, P.S., will continue to monitor prospective legislation affecting homeowners and homeowner associations.

Due Diligence When Buying a Condo or HOA home

Kevin Lisota wrote an informative posting Friday (5/1) on the Smart Real Estate Blog Site regarding due diligence a prospective condominium purchaser should conduct prior to purchasing a unit.  Click here to view the article. 

Lisota lists the following steps:

  • Conduct a visual inspection;
  • Review meeting minutes;
  • Review the operating budget;
  • Review the current reserve study;
  • Review the association's rules and regulations;
  • Review the association's insurance policy.

I have provided similar suggestions in seminars and presentations.  First, though, I'd like to add a couple of comments to the foregoing list.  It is not enough to 'review" the operating budget.  I recommend scrutinizing each line item of the current budget, and comparing it with the previous two years' budgets to identify trends and accuracy.  With respect to reserve study, if you do not have any construction or building maintenance experience, pass the report to a friend or family member who may have knowledge and can provide valuable assessment.  Also, make sure to review the reserve account, in addition to the actual reserve study.  Regarding rules and regulations, I would also highly recommend reviewing the association's declaration and bylaws.  You do not have to be a lawyer to identify gaps and potential problems.  When reviewing insurance, make sure to look at policy limits, deductibles, Directors and Officers coverage and endorsements specific to multi-family residences, such as sewer back-up, code compliance and demolition coverage, to name just a few.  There is no substitute for review by a professional insurance agent or consultant.

I would also add the following to the due diligence list:

  • When conducting the visual inspection, stop and speak with a few homeowners and ask them the strengths and weaknesses of the community.  You may be surprised at what you uncover, both positively and adversely.
  • Call the association manager and ask them the same question.  They do not get paid for such calls, but may provide you with a quick summary of the community.
  • In these times of economic crisis, make sure to scrutinize not only the operating budget, but also the bad debt and collections/foreclosure rates. 

Lastly, I believe the foregoing steps are not limited to condominiums; rather, apply to Planned Unit Developments ("PUDs"), as well.

Buying a condo can be more complex than buying a single-family home.  For a successful purchase, make sure to perform your proper due diligence.

   

 

Fannie Mae Rules Push Out Condo Buyers

There was an article in last week's Stranger reporting that new Fannie Mae regulations established in March have blocked condominium developers from closing unit sales if the developer has sold fewer than 70 percent of the units in a building.  Many of the large condo towers currently being built in Seattle and Portland are below the 70-percent threshold; consequently, hundreds of buyers who've already put down deposits may have to live elsewhere even after the buildings are completed.  These circumstances are a direct result of the economic crisis and real estate market slow down.

As Dominic Holden writes in the Stranger article:

If developers can't presell 70 percent of a building's condos before opening—a steep expectation even in a strong market—market forces may push developers to convert their buildings into apartments or drastically reduce prices.

As prices on unsold condos drop, some buyers may choose to walk away from earnest money deposits rather than hang on to units that have lost much of their original value.  In an ever spiraling situation, as more buyers walk away--increasing the gap between actual sales and the 70 percent required under the new Fannie Mae regulations--developers may have to decrease unit prices even further.

Click here for a listing of several Fannie Mae regulations affecting condominium lending requirements.

For further information on Fannie Mae lending requirements, or other issues related to condominium associations, feel free to contact Barker Martin, P.S. by selecting the "Contact" tab at the top of this blog page.

 

 

Legislative Update

We've been writing about several Bills on this Blog lately because there is a lot of prospective legislation (both locally and nationally) affecting homeowner associations and individual homeowners.  The level of legislative activity in this area appears to have increased probably in part as fallout from the economic crisis. 

As an update, H.R. 1106 "Helping Families Save Their Homes Act of 2009" remains stalled in the U.S. Senate, with no scheduled date for a vote (click here to keep track of the Bill).  In Washington, ESSB 1393, "Addressing residential real property construction improvements through consumer education, warranty protections, contractor registration requirements, and worker certification standards," is similarly stalled in the state Senate.  An earlier version of the Bill passed in the House, but is undergoing major rewrites in the Senate.  One of the latest versions, Striker 1393-S2.E AMS WM S2889.2, can be found here.  I believe the Striker version is wholly impractical and inefficient.  For example, the Striker establishes  a 7-person "Home Construction Board" to resolve construction disputes.  The Board would be comprised of four construction professionals of varying experience, a governmental building inspector and two members "of the general public."  The board members would be appointed by the governor and meet at least four times per year.  Doesn't sound to me like an effective or efficient way to resolve hundreds, if not thousands, of construction disputes filed in our state each year.  To keep track of ESSB 1393, click here.

The Oregon legislature is also debating several Bills that affect homeowners and homeowner associations, including SB 811 and SB 963.  SB 811 modifies provisions relating to enforcement of liens for association assessments in planned communities and condominiums, including establishment of a "super lien priority" for associations.  SB 963 includes several technical changes regarding governance for planned communities and condominiums in Oregon.  For specific information on the Bills and to track their progress, click here.  

Several Barker Martin, P.S. attorneys remain highly active in the Washington and Oregon legislative process, including serving on legislative committees for homeowner association industry groups.  On occasion, we also are asked to review and help draft prospective legislation.  Keep checking this Blog to obtain the latest legislative developments affecting homeowners.
   

Mortgage Modification Bill Stalls in the Senate

In early March, we posted a couple of blogs relating to proposed federal legislation that would significantly impact a homeowner association's ability to collect past-due assessments from a homeowner undergoing foreclosure.  Within days of my post calling for homeowners to contact their Congresspersons, I was contacted by an aid to a Tennessee Congressman wondering what all the fuss was with the H.R. 1106 ("Helping Families Save their Home Act of 2009" ).  After several emails and a lengthy telephone conversation, I explained the adverse impact of the bill.  Today, having passed in the U.S. House of Representatives, the bill is stalled in the Senate.

The following is an update from the Community Association Institute's ("CAI") website:

President Obama’s mortgage modification bill, H.R. 1106 passed the House of Representatives on March 5, 2009 by a vote of 234 to 191 with 7 members of congress not voting. The legislation is currently before the U.S. Senate for consideration where passage is far from certain. H.R. 1106 and its Senate companion bill S. 61 will need 60 votes to pass the Senate in order to avoid the filibuster promised by the bill’s opponents. The bill has not yet been scheduled for a vote as sponsors continue to seek enough votes for passage. Right now, a vote is not expected before Easter.

Click here for the bill's status.

Part of the President’s plan to stabilize the housing markets, H.R. 1106 would allow federal courts to reform mortgages in cases where a homeowner’s property is worth less than their principle mortgage balance. It would give bankruptcy judges the ability to ‘cram down’ the principal balance and monthly payments, wiping out tens or even hundreds of thousands of dollars of money owed in an effort to keep more people in their homes and to stabilize the housing market. CAI’s concern continues to be to protect associations’ ability to collect for past due assessments and to make sure that this legislation does not inadvertently bypass state assessment lien or priority lien statutes.

CAI was able to start a constructive dialogue with key House and Senate leaders on the potential impact of mortgage modification on associations ability to collect past due assessments. Thanks to the many persons who contacted their legislators, we believe that positive progress is being made in crafting a bill that provides support to those who need it and doesn’t create the risk of harming additional homeowners or their associations. Specifically, H.R. 1106 was amended in an attempt to clarify what costs need to be included in the post bankruptcy payment. This formula now specifically includes association assessments. House and Senate leaders are listening to our concerns regarding protecting associations and by extension homeowners.

Barker Martin, P.S. will continue to monitor the status of the bill, and other federal and state legislation affecting homeowners and homeowner associations.

HR 1106 Passed by House

On March 5, 2009, HR 1106: "Helping Families Save Their Homes Act of 2009" was approved (234 to 191) by the U.S. House of Represetnatives and is now off to the Senate for debate and vote.  There is a companion bill in the Senate that is concurrently being debated.

If you have concerns related to the possible adverse impact of the bill upon condominium and homeowner associations, contact your Senator.  For further details, see my March 5th Blog post below.

 

Legislative Alert: Contact Your Congressperson Today!

This week, Congress is scheduled to vote on H.R. 1106: "Helping Families Save their Home Act of 2009."  I urge all owners who live in homeowner associations to call  or email their Congressperson and tell them to oppose this legislation as it is currently written.

Part of President Obama’s plan to stabilize the housing markets, H.R. 1106 would allow federal courts to reform mortgages in cases where a homeowner’s property is worth less than their principle mortgage balance. It would give bankruptcy judges the ability to ‘cram down’ the principal balance and monthly payments, wiping out tens or even hundreds of thousands of dollars of money owed. In addition to allowing courts to rewrite private mortgages, the legislation as written could also allow the courts to bypass state assessment lien and priority lien statutes, thereby eliminating the already limited ability for a community association to collect past due assessments from these properties.

Each year, residents of community associations assess themselves close to $80 billion dollars to pay for the maintenance, improvements and amenities in their communities. These assessments help preserve property values and provide infrastructure that would otherwise become the responsibility of state or local governments. When buying into a community association, home buyers agree to pay their share of the community operating costs.

If passed as written, H.R. 1106 could:

  • Impact an association’s ability to recover delinquent homeowners’ assessments and, potentially, affect future assessment obligations to the community.
  • Bypass state statutes that provide a priority lien or assessment lien for past due association assessments.
  • Cause additional strain on the housing market by forcing non-foreclosed homeowners to pay higher fees to cover mandatory operating expenses, pushing more homeowners into financial distress.
  • Cut funds available to maintain common areas of the community, resulting in a spiral of deteriorating infrastructure, lower property values and, ultimately, higher financial burdens on state and local governments.
  • Undermine, if not unravel, the benefits of common ownership communities by exempting some homeowners from the obligation to pay their fair share to support common elements of the community, potentially leading to the bankruptcy of the communities themselves.

The critical nature of requiring all owners to pay their fair share of association assessments is recognized in the current bankruptcy code under 11 U.S.C. 523(a) (16) and various state-imposed assessment lien regimes. To protect the vast majority of responsible homeowners, legislation addressing mortgage modification must explicitly protect an association’s right to recover funds owed to the community by a delinquent homeowner.

If passed as written, this legislation would have a direct detrimental impact on the responsible residents of community associations. Please take action today by contacting your Congressman or Congresswoman.

 

Easing Board Transition

This month the Washington Community Associations Journal includes an article I wrote entitled "Changing of the Guard--A Survival Guide for New Board Members."  Feel free to view the article here.

Enhance Association Communication with Web 2.0

Attorney and blogger Chris Jaglowitz from The Ontario Condo Law Blog makes some excellent points in his recent posting on the use of Social Networking sites to increase homeowner association communication.  Check out his post here.

I agree with Mr. Jaglowitz that  Social Networking concepts and sites will become increasingly popular among condominium and homeowner residents as a medium to:

  • Share news, documents and ideas;
  • Organize activities and events;
  • Enhance owner participation, communication and feedback;
  • Gauge the pulse and public opinion of the community;
  • Improve delivery of services; and
  • Strengthen the bonds of their communities.

Unlike websites that are updated weekly or monthly--at best--Social Networking sites offer up-to-the-second information; thus, increasing exponentially the level of interaction and information exchange between homeowners.  I believe the most popular sites are: Linkedin, Facebook and Twitter.

There is an explosion in the use of Social Networking concepts and sites for buisness and personal use.  It's only a matter of time before these tools are used by homeowner associations.  Be on the forefront of this technological wave by jumping in today and creating association-specific groups on one or more of these sites to enhance communication and community.      

 

Continue Reading...

Service Comfort Animals: Not Just for the Cats and Dogs

This Blog posting from HOA Legi-Slate was just too good not to pass along...just when you think you've heard it all...

According to this NY Times Article, the use of guide horses, monkeys, goats, parrots, pigs, ferrets and even iguanas as service or comfort animals are growing in number. But, as a result, the OMB (Office of Management and Budget) is considering proposed regulations for the ADA which may limit certain types of comfort and service animals. The proposed final ADA regulations were accepted by the OMB on December 3 after soliciting over 5000 comments. Given the change in administration, the regulations may be quickly adopted or languish for months.

Here's a photo from the Times article:

Ann Edie and her guide miniature horse, Panda, checking out at Staples.

An HOA or condominium association should proceed very carefully if an owner requests an accommodation for a service or comfort animal and seek advice of counsel before denying any such request.  For further information, feel free to contact Barker Martin, P.S. by selecting the "Contact" tab at the top of this blog page.
 

 

 

Email Accounts for HOA Board Members

I believe the vast majority of HOA and condominium board members utilize email in some capacity in their role as board members.  Remember, however, that any formal board action should not be conducted via email, as board action must occur during a regular board meeting (for more information on this topic, see my 2/24/08 blog posting "Email and HOA Board Action").

I have found less than 10 percent of board members utilize discrete email accounts, such as riverplazapres@yahoo.com or gardensquareHOAtreasurer@gmail.com.  I strongly suggest that HOA and condominium board members set up these discrete email accounts (use whatever email server you desire; there are many free services available: yahoo, gmail, msn, etc.).  Using these separate email accounts is beneficial for the following reasons:

   1.  In the event of litigation involving the HOA, the board member will not have to undergo the embarrassment and adverse consequences of having to explain to his or her boss why the company was served with a subpoena regarding a non-work related lawsuit and has to allow unfettered access to its email servers.

   2.  Setting up discrete email accounts helps a board member manage his or her time more effectively.  Rather than feeling obligated to immediately respond to each and every HOA email that comes in during the work day via the work email address, the board member can set up a defined time of the day, evening or week to respond to HOA-related email.  Such action could also decrease the amount of time a board member spends on HOA business during the work day using the employer's email.

   3.  By using a discrete HOA email account, a board member can more easily track time spent on HOA duties.

   4.  Board member turnover is streamlined, simplified and much more comprehensive.  The outgoing board secretary (or president, vice president, treasurer, etc.) merely gives the user name and password to the incoming board member.  All historic emails are already consolidated in a single email account.  The new board member simply changes the password.

   5.  Setting up a discrete email account with a generalized email address allows for transparent transfer from one board member to another.  Boards do not have to update email addresses with homeowners, association managers, vendors, bankers, etc., each time a board member leaves and is replaced.

   6.  The email accounts are accessible anywhere in the world 24/7--assuming one has Internet access.

   7.  Setting up these accounts only takes a few minutes.  Also, these accounts are free. 

I cannot think of a single downside for an HOA or condominium board to set up discrete email accounts.  As shown above, there are multiple advantages of using these accounts. 

 

New Fannie Mae Condominium Lending Guidelines

Last August I blogged that Fannie Mae was altering its lending practices in response to the sub-prime lending crisis. As the crisis deepened, the adverse impact upon the US economy and Fannie Mae only worsened. Since the government's restructuring of Fannie Mae last fall, we have been awaiting revised lending guidelines for condominium properties. Those guidelines were just released in late December under Announcement 08-34.  The guidelines include the following revisions:

  • The 15% delinquency cap requires that no more than 15% of the total units may be more than 30 days delinquent;
  • There must be fidelity insurance if there are more than 20 units in the project;
  • Borrowers must obtain a “walls-in” coverage policy (commonly known as an HO-6 policy) unless the lender can document that the master policy of the Association provides the same interior unit coverage;
  • Master insurance policies covering multiple unrelated condominiums are no longer acceptable (if they ever were); and
  • The owner occupancy ratio of 51% includes REO owned units for sale as owner occupied units.

All of these changes take effect on March 1, 2009, except for the insurance provisions, which take effect immediately.

 

HOAs Experiencing Underfunded Finances

An article in Sunday's Arizona Republic highlights an issue we also have seen in the Pacific Northwest, especially in the Oregon real estate marketplace.  As reporter Craig Anderson writes:   

Developer abandonment is likely to become a serious issue in the coming year for as many as 200 of the more than 10,000 Arizona communities under HOA control, both opponents and supporters of Arizona's HOA policies say. Partially completed subdivisions and newer communities more prone to home foreclosures are the ones most likely to suffer, experts say. . .  Homeowners in neighborhoods with underfunded HOAs have seen their association fees increase at the same time amenities and services are being reduced or eliminated.

Anderson also reported that homeowners in other communities have been unable to wrestle control of their association from developers, who usually are among the HOA's principal debtors.  The complete article can be found here.

As I wrote in an October 26th post:

I have heard of several instances recently where a community (condominium or single-family home) has not been completed or sold out, is under Declarant control, and the Declarant files bankruptcy, leaving the association without sufficient funds to meet its normal operating budget. 

If you are a member of an association that has not yet turned over and you believe your Declarant is experiencing serious financial distress, do not wait for it to file bankruptcy.  Specific steps may include:

·        Call for a Special Meeting for the purpose of discussing the association's finances.  Insist on straight answers to the hard questions of the solvency of the Declarant and financial resources of the association.

·        Both Oregon and Washington statutes require condominium and homeowner associations to conduct annual audits (with some exceptions). If homeowners have questions on finances during Declarant control, insist on the annual audit.  If professionally managed, work with your association management company in this endeavor.

·        Be prepared to seek legal intervention, if needed, to preserve the assets of the association before the Declarant drains all available funds.   

 If you or your association would like more information on these issues, feel free to contact Barker Martin, P.S. by selecting the "Contact" tab at the top of this blog page.

 

 

 

Uptick in Condo Auctions

In an article in this week's Stranger blog, blogger Dominic Holden reported on a recent auction of new condominium units in downtown Seattle:

This is the new normal,” says Rhett Winchell, president of Beverly Hills-based Kennedy Wilson Auction Group, which was auctioning 15 units of the Capitol Hill Press Condos today. The company held 30 auctions nationwide this year and Winchell expects more in Seattle next year. “Auctions obviously do grow in popularity when the economy slows because builders need a way to sell property quickly,” says the pinstripe-suited Winchell.

December 13, 2008 condo auction on Capitol Hill in Seattle.

Holden reported that another condo auction last month suggests this may be a trend in the Seattle condo market.

For anyone who is considering purchasing a condominium at an auction, I highly recommend that they obtain and thoroughly review a Public Offering Statement (in Washington) or a Condominium Disclosure Statement (in Oregon) ahead of time.  Further due diligence would include review of the entire CC&Rs and detailed scrutiny of the Association's finances.  Inquiry with the management company and even speaking with a board member or homeowner would also go a long way in ferreting out potential problems.  Red flags and the hair on the back of the neck of any potential buyer should arise when contemplating purchasing a condominium unit at auction.

If you have purchased, or are thinking of purchasing, a condominium unit in Oregon or Washington and would like further information on required disclosures from the Declarant, feel free to contact Barker Martin, P.S. by selecting the "Contact" tab at the top of this blog page.
 

Associations and Holiday Decorations

Colorado attorney and blogger Stan Jezierski wrote a recent post entitled Holiday Decorations and the Fair Housing Act.  Although many persons are tired of hearing of controversies over something as seemingly innocuous as holiday decorations, as evidenced by the recent headlines the State of Washington created for its holiday display in the capitol building in Olympia, I thought this was a topical issue to address for our readers, as well.  Here is the edited article:

With the holiday season upon us, many homeowners associations are putting up lights and other decorations on the common areas. While there is nothing wrong with fully celebrating the holiday season, associations should take care to ensure that decorations and holiday displays do not give the impression that the community favors one particular religion over another. Such action could subject the association to discrimination claims under the Fair Housing Act (FHA) and other federal and state fair housing laws.

Religious decorations and displays on the common areas may suggest to residents and guests that the community favors people who are of a particular religious affiliation. For example, extensive holiday decorations consisting of nativity scenes and crucifixes may suggest that Christians are favored in the community, or even that residents and visitors who are not Christian are unwelcome.

The safest course of action is to put up only general holiday decorations on the common areas, such as lights and wreaths. Santa Claus images, candy-striped poles, and decorated trees are most likely acceptable, as are general statements such as happy holidays. If there is mention of Christmas or use of Christian symbols in a display, there should also be equal reference to Hanukkah or other requested religious holidays. An association should take care to give equal treatment to all other religious affiliations.

An equally important point to remember is that FHA restrictions do not apply to religious displays by private homeowners. While common area religious displays should either be avoided or carefully monitored, residents of the community should be allowed, within the association’s rules and regulations, to display personal religious items in their homes and on their property.  However, religious symbols that exceed seasonal display may run afoul of an association's CC&Rs (check out the following Virginia news report).

The overall goal of the FHA is to allow members of community to feel comfortable about their religious affiliation. Common area decorations shouldn’t create a feeling of being left out. Open participation by all members of community is the best way to eliminate complaints and ensure a safe, happy and harmonious holiday season.
 

The Sky is Falling...The Sky is Falling!

Recent turbulent economic news and tumbling Wall Street markets continue to bring much doom and gloom to individual homeowners and homeowner association board members, alike.  Unprecedented foreclosure rates, downward spiraling home sales and ever tightening homeowner and association loan underwriting requirements compund the crisis.  Earlier this year, I wrote a blog entry (Association Dislcosure and Board Action in a Down Market; February 7, 2008) that contained several steps a board should take in a down market.  Now that the American economy has reached an undeniable recessionary period, I have added the following recommendations for boards to take to preserve property values within their communities. 

  • In these trying economic times, boards should strictly enforce their CC&Rs and collections policies.  Although it is human nature to want to assist neighbors and friends in times of trouble, now is not the time to allow homeowners to accrue large past due accounts.  I am not necessarily recommending that boards proceed with foreclosure actions on each homeowner that becomes a month or two past due, but boards should take aggressive and proactive steps to minimize bad debt.  Such action should include adopting strict collection and foreclosure criteria and protocols, and consistently adhering to these protocols.
  • If an association has a rental cap restriction, it is assumed there is a hardship exception provision.  In today's period of economic adversity, boards should be prepared to grant multiple hardship exceptions due to job relocation or termination.  These exceptions should be capped at six or 12 months, which should provide a sufficient buffer to the affected homeowners.
  • I have heard of several instances recently where a community (condominium or single-family home) has not been completed or sold out, is under Declarant control, and the Declarant files bankruptcy, leaving the association without sufficient funds to meet its normal operating budget.  If you are a member of an association that is not completed or turned over and you believe your Declarant is experiencing serious financial distress, do not wait for it to file bankruptcy.  Call for a Special Meeting for the purpose of discussing the association's finances.  Insist on straight answers to the hard questions of the solvency of the Declarant and financial resources of the association.  Be prepared to seek legal intervention, if needed, to preserve the assets of the association before the Declarant drains all available funds.  Work with your association management company in this endeavor. 
  • For units or homes that have been foreclosed upon by a bank and have not sold, ensure that the bank maintains a basic level of care of the residence.  There are numerous reports of adjoining units and common elements being damaged by burst pipes or other faulty appliances due to heat being shut off in the home or other basic lack of maintenance.  Also, foreclosed units or homes that sit vacant for multiple months become targets of vandalism and burglary.  An association's manager or agent should periodically check on the security of these homes.
  • Lastly, be prepared for revenue shortfalls due to homeowners who cannot afford to pay their monthly assessments.  Associations may have to dip into reserve accounts or obtain a loan to cover operational budgets.  If dipping into reserves or obtaining a loan, a board must strictly comply with state law and its CC&Rs, and must have a game plan for paying back these loans.

No, the sky is not falling, but we are experiencing substantial economic turmoil that will be with us for the foreseeable future.  A homeowner association board of directors should take aggressive, proactive steps to protect its members from the fallout from this recessionary economy.

If your association would like more information on any of the items above, feel free to contact Barker Martin, P.S. by selecting the "Contact" tab at the top of this blog page. 

        

Dealing With Problematic Homeowners

One of the biggest challenges a homeowner board faces is irrational conduct by a problematic homeowner.  I've seen this scenario play out in several ways, with all of them sharing the same underlying themes: unnecessary conflict, wasted time and increased management and legal fees.

  • In two similar instances, condominium homeowners whose units were damaged by water intrusion emanating from common elements unreasonably interfered with the association's efforts to repair the units.  After many months of failed negotiations without professional assistance and repeated failed repair attempts which cost the associations unnecessary costs, the associations finally sought legal counsel.  In both instances, the associations were only able to resolve the dispute through court-ordered preliminary injunctions.
  • Another common occurrence is the homeowner who continuously or consistently violates an association's CC&Rs.  Even after multiple violation notices or warnings, and rising fees, penalties and interest, the homeowner still ignores the association.
  • Lastly, I have seen many instances where an individual homeowner takes an untenable position with respect to some action taken by the board.  The homeowner either cites inaccurate laws or unreasonable intepretations of the association's CC&Rs.  The owner often threatens to sue the association, and many times, the board members individually.

In these and other instances, a board of directors' first reaction is to try to work with the owner.  No board wants to immediately involve an attorney; rather, it is human nature to "just try to get along."  Plus, as members of the association themselves, a board often wishes to work amicably with their neighbors.  However, especially in instances of irrational behavior, legal intervention might be the quickest and least expensive means of resolution.

Whether or not a board seeks assistance from an attorney, I recommend the following steps be taken when dealing with an irrational homeowner:

   (1)  Identify early on that the owner is irrational.  Remember, irrational persons do not act rationally and likely will not respond to a rational and reasonable offer of compromise.

   (2)  Document, document, document.  Written documentation of all correspondence and communication is always important in the corporate or business context, but it is especially crucial when dealing with irrational persons who have a distorted perception of reality.

   (3) Try to identify an ally, either a family member or friend of the homeowner, who can help facilitate a resolution of the dispute.  However, beware; in my experience, I have found that a close family member may be too personally involved to provide objective assistance.  In some cases, the friend or family member may blindly support the owner and further exacerbate the conflict.    

   (4) Once the owner rejects a reasonable offer by the association to resolve the dispute, it probably is time to obtain professional assistance.  In my personal experience, an irrational person does not suddenly wake up one day and start to act rationally.

Irrational homeowners present some of the most unique challenges in my representation of homeowner associations.  Although I have learned it the "hard way," sometimes the quickest, and LEAST expensive resolution of a dispute is through immediate court intervention. 

 

View Covenants: How Far Can a HOA Go?

Many homeowner associations have covenants within their CC&Rs that limit a homeowner's right to restrict a neighbor's view.  For a view covenant to be legally enforceable, it must be included within a validly recorded instrument, such as the association's declaration or plat.  The covenants may include structures (e.g., homes, detached garages, sheds, fences, etc.), vegetation (e.g., trees or bushes) or even vehicles.  The view covenants also may be absolute or discretionary.

An example of an absolute view covenant would be a "25-foot height restriction on all structures constructed on the plat."  A discretionary view covenant would be a "restriction on trees or other vegetation that impairs the view from an adjoining owner's property."  Both absolute and discretionary view covenants must be reasonable and applied uniformily.  It should be no surprise that there are many more disputes and litigation involving discretionary view covenants than absolute covenants.

To enforce a view right, a homeowner associaton may seek injunctive relief from a court.  Time ordinarily is of the essence.  For example, if an owner is in the middle of constructing a home that exceeds the view covenant's height restriction, the plaintiff association would want to move without delay.  If the association delays for an unreasonable amount of time in seeking judicial intervention, the offending homeowner may be able to rely upon a laches, acquiescence or waiver defense.  What this means is if the plaintiff had constructive knowledge of the offending party's actions and through his words or conduct represents that he will offer no opposition, then the plaintiff may be barred from stopping the homeowner's conduct, or at least be limited in obtaining the relief sought.

I have found that many boards delay enforcing view restrictions, and often these delays prejudice their abilities to obtain successful outcomes (or at least efficient and timely successful results).  Either these associations think (hope) the offending party will come around, or they do not want to incur legal fees in hiring an attorney. Remember, most CC&Rs contain provisions for the Association to recover its attorneys' fees and costs incurred in enforcing its governing documents.

If your association would like more information on creating or enforcing view covenants, feel free to contact Barker Martin, P.S. by selecting the "Contact" tab at the top of this blog page.
 

  

 

 

New Fannie Mae Condo Lending Rules

In February, I wrote about stiffening mortgage underwriting polices adopted by mortgage lenders on loans for condominium purchasers.  This rule tighten was a direct result of the sub-prime lending crisis plaguing our nation's banks and lending institutions.  These changes included Federal National Loan Association ("Fannie Mae") altering its lending policies on condominiums to include a Full Review Required.

Under the Full Review, lenders are now required to assess the financial strength of condominium owners associations, as well as the credit and assets of the individual prospective condominium purchasers.

The new rules require full project reviews for loans to individuals purchasing units for primary residences or second homes and for loans to investors buying condominium units.  Another significant change is that single loans in existing communities will be allowed only for borrowers who make a miminum down payment of 10%; the former policy allowed "zero-down" loans.

Under the new policy, lenders must verify and warrant to Fannie Mae that:

  • The homeowners association maintains an "adequate" budget;
  • The budget allocates at least 10% of annual revenues to reserves;
  • The homeowners association holds funds equaling the deductible under the master insurance policy; and
  • No more than 15% of the common area fees are delinquent by more than one month.

As I wrote earlier this year, the downturn in the economy and change in lending laws require association boards of directors to pay particularly close attention to:

  • (a) disclosure requirements for condominium resale certificates (in Washington only);
  • (b) managing accounts receivables;
  • (c) overseeing rental restrictions; and
  • (d) following strict collections policies.

These requirements are no less important with the recent lending rule changes adopted by Fannie Mae.  With the large number of foreclosures and owners who are falling behind on paying asessments, it will be especially problematic for associations to stay above the 15% delinquency rate mandated by Fannie Mae.  Furthermore, the budget and reserves funding requirements may exceed those required under both the Washington and Oregon Condominium Acts (thus, a board may be following the law and still run afoul of Fannie Mae lending rules).

If you have specific questions regarding your how your homeowner association can best comply with these requirements, feel free to contact Barker Martin, P.S. by selecting the "Contact" tab at the top of this blog page.  


 

Tower Condominiums and Mixed-Use Condominiums

The last few years have brought with them a substantial upturn in development of large tower condominiums and multi-use condominiums in the Pacific Northwest, predominantly Seattle and Portland. Such condominiums often include multi-million dollar units, high-end retail stores and anchor hotel or grocery store chains. Each of these divergent segments is coalesced into a single master condominium association.

However, what is best for a hotel may conflict with the interests of individual homeowners. Public access and marketing efforts for a retail store may offend or intrude upon homeowners and hotel guests. Issues of parking, easements, common areas, pools and pets that involve most standard condominiums take on special significance and impact within tower and multi-use condominiums. Even rudimentary homeowner-to-homeowner disputes, such as excessive noise, are elevated to newfound consequences when multi-million dollar unit owners confront one another.

Recently, several multi-use condominium associations have contacted me regarding some of the exact issues highlighted above. In these instances, the condominium owners associations, with no prior formal legal representation, faced multi-million dollar sub-association entities with large corporate legal departments. If you are a homeowner or board member of a tower or mixed-use condominium association, in order to level the playing field, you'll want to ensure you have highly specialized legal counsel and other association professionals on your team.

When an Oregon "As-is" Condo is not "As-is"

Recently, I have been contacted by several Oregon condominium association board members and individual homeowners whose conversion condominiums are experiencing serious construction defects and substantial repair costs.  Some of these owners and board members have stated they don't believe they have any legal claims because the developer sold the condominium unit "as-is."

Oregon law, as in many states, provides statutory warranties or disclosure requirements for initial condominium purchasers--for both new condos and conversion condos:  

  *  A Declarant of a newly constructed condominium shall expressly warrant against defects in the plumbing, electrical, mechanical, structural, and all other components of the newly constructed units and common elements.  The applicable statute is ORS 100.185.

  *  A Declarant of a conversion condominium must provide a statement of the "present condition of all structural components and major mechanical and utility installations in the condominium, including the approximate date of construction and a reasonable estimate of the remaining useful life of, at a minimum, the roof, siding, plumbing, electrical, HVAC system, asphalt, sidewalks and decks."  The disclosure also must include a statement of whether the assessment of conditions was prepared by a licensed engineer, architect or home inspector.  The applicable statute is ORS 100.655(h).

Thus, there is no such thing as an "as-is" new condominium unit sold in Oregon.  Although Declarants may sell a conversion condominium unit without a warranty, or "as-is," that does not necessarily mean an owner or association foregoes all legal rights in the event construction defects or prior damages exist.  An owner or association may have claims for lack of proper disclosure in the Condominium Disclosure Statement, regardless of whether an "as-is" statement was included in the Condominium Disclosure Statement and/or Purchase and Sale Agreement.

Lastly, although there are no reported Oregon appellate decisions directly on point, courts in other states (including neighboring Washington) have rejected a Declarant's attempts to disclaim warranty and disclosure obligations through a general "as-is" statement.

If you have specific questions regarding your condominium's warranties or disclosures, feel free to contact the Portland or Bend offices of Barker Martin, P.S.  

Record-Breaking Profits for Insurance Companies [Updated 4/11/08]

[The following update includes newly released figures for 2007 and supplements my original entry posted 3/29/08]

I get that lawyer bashing has become a national pasttime and that plaintiff lawyers are as far down on our society’s popularity chart as politicians.   But what I do not understand is how insurance companies--the quintessential example of corporate largess--have rocketed up the chart.

Madison Avenue has done an amazingly effective job transforming large cap insurance companies into friendly, pro-consumer institutions in the eyes of many.

To emphasize my point, think of the three most popular insurance companies?

I bet Geico was one of the first names that came to mind. What image pops up? How about a docile animated gecko that speaks in a British accent? Or what about PEMCO Insurance, you know, the “We’re a lot like you, Greenlake power walker or blue tarp camper guy.” What about arguably the industry leader for this transformation change, the AFLAC duck?

But strip away the cute computer generated geckos and ducks, and the numbers reveal the truth about the insurance industry.

Fact: For the past three years and continuing into 2008, the insurance industry in America has achieved record-breaking profits. This fact is nearly astounding considering Hurricane Katrina occurred in 2005.

The numbers:

  • 2005: $43.0 Billion profit (Source: Insurance information institute [insurance industry trade group])  
  • 2006: $63.7 Billion profit (Source: Insurance Information Institute)
  • 2007: $61.9 Billion profit (Source: Insurance Informaiton Institute
  • 2008 projected: "Analysts expect the industry’s profitability to continue in 2008. . .The ratio of losses and expenses to premiums for 2008 is projected to be 97.3, a deterioration from an estimated 93.8 in 2007. The 93.8 estimate for 2007, if accurate, would represent one of the top 12 best underwriting performances over the 88-year period beginning in 1920." (Source: Insurance Information Institute)

In light of these record-breaking profits, the insurance companies are paying out less and less in claims against builders and developers.  Wthin the past twelve months alone, several of our homeowner association construction defect clients with multi-million dollar claims are facing zero contribution from insurance, as the insurers have included stringent exclusions to policies, including no payment for losses involving “condominium” or “multi-family residential” construction.

Several of the developers and contractors allegedly did not realize they were without insurance on their construction projects.  The developers and contractors obtained CGL policies and paid CGL premiums, but when it came time for the insurance companies to indemnify the insureds for the losses, sued the policy holders in declaratory judgment actions to avoid payment.

As a result , homeowners are left holding the bag on multi-million dollar repairs with no source of recovery because builders have created single-asset LLCs and distributed all income after the project was sold, and less and less insurance is available.  This shift has occurred in the context of insurance companies obtainng record profits.

One possible answer to the current disparity in loss and recovery in Washington is through the Condominium Qualified Warranty program created by the Washington legislature in 2004. RCW 64.35, et seq. 

Under the program, there is a two-year materials and labor warranty, a five-year building envelope warranty and a ten-year structural defects warranty. The program allows an award of reasonable attorneys' fees to the substantially prevailing party, yet in no event may such fees exceed the reasonable hourly value of the attorney's work. This provision should appease the lawyer-bashing critics.  Surprisingly, no insurers have funded the warranty program.  One can only speculate the lack of participation by insurers has everything to do with cutting into their bottom lines. 

Email and HOA Board Action

There are very few volunteer homeowner association boards that do not communicate via electronic mail. Although most board members know not to take any board action via email, the line between casual communication and official board action easily can be blurred. As general counsel for homeowner associations, I routinely advise boards that to the highest degree possible, they should reduce email communication. However, practically speaking, I understand board members are like just about every other member of American business culture who rely upon email as a valued communication tool and timesaving mechanism. The reason email between board members should be reduced or eliminated altogether is because association board action must be conducted in an official meeting and not conducted “off the cuff” outside the presence of association members.

  • Notice: Homeowner association board meetings must be properly noticed and open to all association members (with limited exceptions for emergency and executive sessions) (RCW 24.03.120; ORS 65.214).  Oregon law allows for notice of meetings to be sent electronically, while Washington requires notice via U.S. Mail for condominium associations and as noted in the bylaws (including electronic notice, if prescribed) for PUD homeowner associations.
  • Meetings via Consent (Oregon only): Unless the articles of incorporation or bylaws provide otherwise, action to be taken at an association board meeting may be taken without a meeting if the action is taken by all the members entitled to vote on the action. The action must be evidenced by one or more written consents describing the action taken, signed by all the members entitled to vote on the action, and delivered to the association for inclusion in the minutes or filing with the corporate records. Action taken under this Oregon Nonprofit Corporations Act section (ORS 65.211) is effective when the last member signs the consent, unless the consent specifies an earlier or later effective date.
  • Alternative Meeting Methodology: Except as otherwise restricted by an Association’s articles of incorporation or bylaws, board members may participate in a meeting by conference telephone or similar communications equipment so that all persons participating in the meeting can hear each other at the same time. Participation by this method constitutes presence in person at a meeting.

It isn’t email, but if HOA board members have to conduct board action and they cannot convene together, I recommend that a conference call be conducted with provisions for association members to listen in.

Association Disclosure and Board Action in a Down Market

The sub-prime lending tsunami has rippled across the US economy, even reaching the Pacific Northwest condominium and homeowner association industry. Theoretically, an Association’s obligation to follow statutory and common law disclosure requirements should remain constant irrespective of whether the Dow Jones Industrial Average and housing market are soaring or slumping. However, practically speaking in a rising market when most everyone is making money, disclosures have been known to loosen; whereas, in a down market, disclosure statements are scoured over with heightened scrutiny. Whether the current stock market’s and housing market’s corrections have subsided or will continue indefinitely, mortgage underwriting requirements have tightened substantially for the foreseeable future. This change in the real estate marketplace requires association boards of directors to pay particularly close attention to: (a) disclosure requirements for condominium resale certificates (in Washington); (b) managing accounts receivable; (c) overseeing rental restrictions; and (d) following strict collections policies.

A.        Condominium Resale Certificates

In Washington, under RCW 64.34.425, a condominium unit seller must provide a purchaser with a Resale Certificate that includes eighteen separate written disclosures. Now that the lending industry has shifted its condominium review from a “limited” to a “full” review, association boards must ensure each required item is completed to the greatest extent possible.  Areas of particular concern in the current market environment involve pending litigation, pending or anticipated special assessments, a statement which shall be current to within 45 days of any common expenses or special assessments against any unit in the condominium that are past due over 30 days, a statement which shall be current to within 45 days of any obligation of the association which is past due over 30 days, a balance sheet and revenue/expense statement current to within 120 days, statement of any violations of the health or building codes, and history of any warranty claims made under a qualified warranty (if so provided). Although the number of condominium construction defect lawsuits has diminished over its peak earlier this decade, cases continue. In the limited time since the underwriting requirements stiffened and submission of this article, I have noted a significant rise in requests from lenders for clarification and supplemental information on resale certificates, especially disclosures related to construction defect lawsuits.

The statute is quite clear as to what must be disclosed in a condominium resale certificate. Although unit sales likely will be adversely affected to a degree not seen in recent memory due to construction defect lawsuits, significant special assessments or well underfunded reserves, condominium association boards should be aware of the heightened attention placed on these disclosures and should work closely with their professional manager and possibly legal counsel to provide accurate, thorough and comprehensive information.

B.         Accounts Receivable

If a Planned Unit Development (“PUD”) or condominium homeowner association seeks a loan to fund a capital improvement, major repair project or other large capital expense, banks and other lending institutions will be paying closer attention to the financial statement of the association.  A feature component of the statement is the number of units behind in assessments and aggregate amount of accounts receivable. Prior to the recent tightening of underwriting requirements, an association could get away with several owners whose accounts were past due without much adverse impact. Now, it appears an association may need to ensure it has a nominal balance in overdue accounts receivable, or at a minimum, ensure that foreclosure or collections proceedings have commenced on those accounts that are overdue.

Although an association should manage its finances and accounts receivable proactively and work to minimize overdue accounts regardless of lending requirements or trends in the marketplace, as stated previously, this area of an association’s finances could make the difference between qualifying for an association loan and being rejected.

C.        Rental Restrictions

Many condominium and PUD homeowner associations have imposed rental caps in order to keep the number of non-owner-occupied homes below the percentage required by federal underwriting requirements. This ratio ordinarily hovers between seventy and eighty percent and varies depending upon size of loan, size of down payment and specific lending program (VA, FHA FNMA, etc.). With tighter lending requirements, to help preserve property values, obtain financing and improve overall credit scores, an association may wish to impose rental restrictions in addition to rental caps, including lease approval requirements (e.g., ensuring leases are submitted in compliance with the association’s procedural steps, if a lease renewal, confirm positive track record of the tenant and confirm that the lease adopts all of the association’s CC&R requirements) and tenant screening procedures (including having the owner/leasor conduct a consumer credit report, verification of the applicant’s employment and rental history, and conduct a public records check). A board also may wish to adopt heightened enforcement procedures that provide the association with rights to act directly against tenants who violate the CC&Rs.

D.        Collection and Foreclosure Policies

Foreclosure rates in the Puget Sound region increased forty-two percent in 2007 from the previous year, with more than 1.8 million sub-prime mortgages scheduled to reset to higher interest rates across the country this year and next. With such a large number of foreclosures pending and forecast, many homeowner associations in the region likely will experience in the near term bank foreclosures within their communities. During the upward housing market, many associations were reluctant to commence foreclosure proceedings or money judgment actions against homeowners within their communities who became past due on assessments, at least until the balance grew to a large sum. With the current tightened market, it is recommended that an association adopt strict collection and foreclosure criteria and protocol, and follow those protocols consistently.  

A homeowner association board of directors should take proactive steps and particular action to protect itself and its members from the legal risks associated with a down market. The steps described above may provide the general overview for such protections and help keep an association’s “head above water” in these turbulent times.  

New Towing Laws Affect Oregon HOAs

Homeowner associations often inquire as to their authority to tow vehicles within their communities. The following outline describes general Oregon law regarding homeowners associations’ legal authority and required procedures for towing vehicles. Please note that this posting contains general information and is not legal advice for a specific towing event, which would be unique to the circumstances surrounding that event.

The information below includes amendments to Oregon state law that became effective January 1, 2008. 

First, the board needs to determine if the streets within its community are public or private roads. This information should be contained within the Association’s Declaration and Plat. 

A.  Vehicles on Public Property

  • Only a law enforcement officer or public official having jurisdiction over the property on which the vehicle is located has authority to remove and take custody of a vehicle located on a public right-of-way. A vehicle constituting a traffic hazard can be removed immediately. Otherwise, law enforcement must tag the vehicle and provide at least 24 hours’ notice before impounding it.
  • To have a vehicle removed from a public right-of-way, a homeowner association’s options are limited to notifying the appropriate public agency of the location of the vehicle it wants removed. The public official may then arrange for and authorize the vehicle’s removal after 24 hours. The association may not authorize removing a vehicle from public property.

B.  Vehicles on Private Property

  • A key issue is whether the vehicle is unlawfully parked at a “parking facility” or on “proscribed property.” A parking facility is any property used for motor vehicle parking. Proscribed property is any part of private property where a reasonable person would conclude that parking is normally not permitted at all or where a land use regulation prohibits parking, or property that is used primarily for parking at a dwelling unit (defined as a single-family residence or duplex). Oregon law prohibits leaving a vehicle on a parking facility if there is a no parking (or restricted parking) sign posted in plain view. In contrast, it is illegal to park on proscribed property without the permission of the owner whether or not a “no parking” sign is posted.
  • Property owners may have illegally parked vehicles towed after notifying the local law enforcement. From a practical standpoint, however, tow companies generally will not tow vehicles from locations without “no parking” signs.
  • Alternatively, property owners may tow abandoned vehicles from private property after: (1) posting a notice on the vehicle stating that it will be towed if not removed within 72 hours; (2) contacting the local law enforcement; and (3) completing a form setting forth the vehicle description, location from which the vehicle will be towed, and a statement that the above outlined requirements have been met. As of January 1, 2008, state law provides civil immunity for individuals or entities that tow the abandoned vehicle. 
  • Additionally, a property owner in lawful possession of a vehicle with an appraised value under $500 may request the local authority to dispose of the vehicle. No certificate of title is required, but the local authority must verify the property owner’s lawful possession. The local authority must also issue certain notifications to the Department of Transportation and the person requesting the disposal. The advantage of this process is that it extinguishes all prior ownership and possessory rights. The property owner, however, may be charged a disposal fee.

C.  Summary

This posting does not provide an exhaustive list of Oregon law regarding towing vehicles and each association should review the local ordinances controlling for their jurisdiction. In general, state law requires that a homeowner association contact a public official, most likely local law enforcement, to have a vehicle removed from public property. An association may remove vehicles located on private property under its control immediately if the property is posted or if it qualifies as residential property. On unposted nonresidential property the vehicle may be towed after it has been abandoned for seventy-two (72) hours.

FCC to Ban Exclusive Contracts

On January 4, 2008, the Federal Communications Commission (FCC) issued notice that it would implement its proposed ban on the use of exclusive contracts for existing video services in community associations and other multi-family housing developments. The ban would prevent cable companies from enforcing exclusivity clauses in video service contracts commencing in March 2008.

Previously, the FCC had issued an order confirming an October announcement that the agency would ban the enforcement of exclusivity clauses in existing video service contracts. An exclusivity clause is a contract term giving a provider, usually a cable company, the exclusive right of access or the exclusive right to provide video service in a community. As written, the order may affect community associations across the country.

The order applies to cable operators, telephone common carriers, and open video system operators. Providers of Direct Broadcast Satellite services and "private cable operators," which are companies that provide video service without using local rights-of-way, are not covered

Several industry groups have challenged the FCC’s authority to implement such a ban and the challenge will most likely delay implementation of the ruling into summer.

If your association has a contract with a video or cable programming distributor, you may want to review its provisions to determine if there is an exclusivity clause, and if so, what the effect on the contract will be once the FCC order goes into effect, assuming industry groups are unsuccessful in blocking the ban.

Hiring Vendors, Contractors and Service Professionals

Every so often I am asked to help pick up the pieces after an association’s repair project went awry because the board utilized a cut-rate contractor. In the July-Aug 2007 edition of the Washington Community Associations Journal, I wrote an article entitled, “The Pitfalls of Hiring Your Brother-in-Law.” This posting summarizes the article, which can be found at: Barker Martin Articles

·        The Business Judgment Rule predicates that an association board should conduct a basic level of due diligence prior to entering into vendor contracts. A board should obtain a referral or reference from its management company (if professionally managed) or from other association boards, and not just pick the contractor from the Yellow Pages or a Google search, or worse, because the contractor is the brother-in-law of a board member.

·        Once a vendor is identified, ensure they are insured, licensed and bonded. But what do these terms mean, and what protections, if any, do these requisites provide?

·        Insured” means that the entity or individual has appropriate insurance to cover the vendor’s negligent acts. Most insurance policies exclude intentional conduct. Also, insurance often does not cover general breaches of contract, unless the breach results in bodily injury or property damage resulting from an unforeseen, sudden event or occurrence. For example, insurance would not cover a painter who only applies one coat of paint instead of the contracted for two coats, or the landscaper who overzealously prunes the association’s favorite rhododendrons. Insurance should, however, cover the cost of repainting a car that was covered with overspray from painting the condominium exterior, or for bodily injuries suffered when a plumber neglects to set the parking brake and his truck rolls over a homeowner’s foot.

·        For major contracts, it is important for the association to insist on an adequate dollar amount of coverage and to be a named insured on the vendor’s policy. It is not enough to simply be identified as an “Additional Insured” on the vendor’s insurance certificate or declaration page. The Association should require the vendor to provide a copy of the “named insured” page of the vendor’s policy. 

·        Licensed” simply means the vendor or service provider is registered to conduct business in the state. For more specialized vendors, such as general contractors and specialty contractors, it is imperative to know that the individual or company has followed the regulatory requirements to conduct its specific type of business. Although not a guarantee of quality or proficiency (because most state licensing requirements are simply a revenue generating process rather than a testing methodology), it is more of a red flag if the vendor is not licensed. Plus, many insurers require the policy holder be licensed in order for coverage to apply.

·        Bonded” is another form of insurance, ordinarily for vendors who have access to client’s personal items or other similar losses. Bonded coverage is ordinarily limited to a nominal dollar amount, such as $5,000 or $10,000, and often covers intentional acts such as theft. This coverage would apply to a painter who has a bond and steals a homeowner’s $3,000 diamond watch. In such a case, the homeowner or association could file a claim directly against the painter’s bonding company. 

·        A “Performance Bond” is another type of bonding insurance. Unlike standard business or commercial general liability policies, performance bonds are designed to provide coverage to the aggrieved association or homeowner who suffers a pecuniary loss resulting from the contractor’s malfeasance, breach of contract or intentional act. As with standard bonds, the dollar value of performance bonds is quite low and may not cover the total value of damages suffered by the association.

·        To avoid employment tax and human resource issues and heightened litigation risks, it is important for the vendor to be an independent contractor, and not an employee of the association. The contract should be clear on its face that the relationship is between a client-vendor, and not between an employer-employee.

·        Lastly, association boards should be cognizant of conflict of interest issues. If a board is contemplating contracting with a family member or close personal friend of a board member, certain precautions should be taken, including recusal of the affected board member from voting to hire the individual or entity.

As with most board decisions, common sense is the most effective tool in the decision making process. Due diligence, prudence and following the foregoing steps should also keep association boards and managers from falling into the brother-in-law vendor trap.

Addressing Association Manager Conflict of Interest

In late 2006, I wrote an article that unintentionally created a minor maelstrom of backlash from several association management companies in Oregon and Washington. Although published in 2006 in the Community Associations Journal and Regenesis Report the topic is as relevant today as it was almost two years ago. Many management companies continue to serve two masters (homeowners and developer/declarants) without taking proactive steps to minimize the perceived, and sometimes actual, conflict of interest as demonstrated below.  

Property management companies retained by developer clients often have to walk a tight-rope as they balance the interests of their two clients: the developer and the homeowner association. In the perfect world, this dichotomy of client interests would not be at issue because the developer and homeowner association would share parallel interests. But practically speaking, inherent conflicts arise between developers and homeowners regularly, which place the property manager squarely in the middle of an undesirable situation. 

A.        Conflict in the Making

            A developer will hire a property manager to take the association through the transition from developer/ declarant control to homeowner control with an intention for the property manager to stay on as the association’s management company. At the time the management company is hired, it is clear the client is the developer. But soon thereafter, the manager has to begin working with the homeowner association members and must consider the interests of the homeowners.

            In large projects or master plan communities, a property management company may be retained many months prior to establishment of a homeowner’s association in order to manage the physical property and assist in creation of the association. As the development sells out and homeowners begin populating the association, additional duties are initiated, including management of operating and reserve financial accounts, coordination of association meetings, administration of vendor contracts, oversight of physical maintenance, et cetera. At the point of formal transition from developer or declarant control to homeowner control, the pendulum shifts and the property manager works almost exclusively for the association.

            But just as during initial retention by the developer, the property manager should begin to consider the interests of the ensuing homeowners, following transition, the manager may find it difficult to ignore the interests of the developer—the party that initially hired him or her. This dual master relationship creates a less than enviable challenge for the property manager. 

B.         Actual Examples of Actual Conflicts

            At or shortly after transition, an association becomes aware of potential construction defects within its condominium. The developer is notified and offers to repair problems. This scenario presents an immediate conflict of interest between the homeowners and the developer. It is in the interest of even the most honest developer to minimize the repair, as once the project is sold and turned over to the homeowners, the project shifts from a profit center to a cash drain. Thus, there are very few developers who would conduct an exhaustive investigation to determine the extent of the problems, choosing instead to effectuate the most minimal repair possible. This interest clashes head-on with the interest of the homeowners, who should conduct an independent, comprehensive investigation to determine the exact nature and scope of the problems or defects. The property manager is placed directly in the cross-hairs between the two competing interests. If the manager sides with the developer and recommends that the association accept the developer’s offer to repair the problem, then it is possible that he or she is compromising the interests of the homeowners. Conversely, if the manager recommends that an independent investigation be conducted, then the manager will surely aggravate the developer.

            Another example of developer-homeowner conflict involves financial accounting. Frequently, at time of transition, there are operating or reserve account questions. Although Washington law requires an audit and Oregon law requires a financial audit be conducted, for a substantial percentage of associations residual financial questions remain, such as whether and how much the developer contributed to homeowner dues during the time they owned units, maintenance costs that might have been attributable to the developer involving expenses related to finishing the project, or other administrative reimbursable expenses. More often than not, these types of questions are not answered, and seldom raised, during an audit or financial review.

Another condominium association was less than a year from transition when it discovered possible construction defects. The association obtained legal representation and was attempting to work with the developer and his attorney to resolve the problems short of litigation. Unbeknownst to the association’s attorney, and done behind counsel’s back, the developer met with the property manager and told her that he had two new properties that were coming on line within the next year and he was looking for a management company. In the same breath, the developer asked if the manager could arrange a meeting with the current association’s board of directors so he could pitch a repair plan “without the need to get the attorneys involved.”  

C.        How to Avoid the Conflict Conundrum

There are certain conflicts of interest that are inherent in the business world. Some professions, such as physicians and business facilitators, handle these conflicts through implementation of strict guidelines and rules. Other professions, such as the legal, accounting and real estate brokerage industries, are heavily regulated by state statutes or administrative codes. There are no such laws or guidelines in the property management industry—yet. Therefore, property management companies might consider self-regulating themselves until such time as more formal rules or policies are enacted. The following guidelines are suggested for those property management companies who are hired by developers or declarants and then continue to serve as the homeowner association management company.

            The most obvious and cleanest way to avoid this conflict is simply to avoid acting as both the developer/declarant manger and ensuing association manager. A property management company could either specialize in pre-transition properties on behalf of a developer/declarant, or post-transition properties on behalf of an association, but not both. Once control of the association shifted to the homeowners, the developer’s management company’s services would be terminated. The obvious drawback to this option is revenue. There are not many management companies that voluntarily choose to work only for developers or only for already established associations.

            The next best alternative would be for the property management company to state up front when hired by the developer that the manager would work for the developer up through time of transition, but once the control of the association shifted to the homeowners, the manager would act solely on behalf of the interests of the homeowners. This arrangement should be clearly defined and articulated in the services agreement with the developer/declarant. A possible drawback to this option is that there may be developers or declarants who would not be amenable to this arrangement, and would not accept the fact that the property manager’s allegiance would shift to the homeowners (even though the developer/declarant would no longer be paying the property manager post-transition). It likely would only take one example of the property manager siding with a homeowner association against the developer post-transition for the developer to abstain from using that property management company for future projects.

            The last option (and apparently most common in today’s industry) would be for the property management company to try to balance the interests of both clients simultaneously throughout the period of management. Although discouraged, when a property management company proceeds in this manner, it is highly suggested that the manager inform both the declarant/developer and homeowner association in writing of such dual representation and potential conflict of interest. It would be further recommended that the manager obtain written consent from both parties.

            If acting for both the developer/declarant and association, the property manager should also make it a practice to rely on independent consultants, rather than try to resolve the dispute or potential conflict internally. This custom would minimize the likelihood of perceived or actual wrong doing or unintentional favoring of one client over the other. For example, if a legal question arises, the manager should recommend that the association seek independent legal advice, and not advice obtained by the property manager and passed on to the association. Or, if construction or defect issues are suspected, then the manager should refer the association to an independent inspector with expertise in the field. If financial questions arise, it would be wise to conduct a review or, under severe circumstances, an audit of the association’s financials by an independent, certified CPA.

D.        Conclusion

Property management companies are placed in difficult situations every time they are hired by developers or declarants and carry on as the association’s manager. A substantial number of management companies’ business plans include such a portfolio of properties. For those companies who do not desire to become entangled in the conflict of interest quagmire, than they should ideally refrain from dual representation. For those companies who pursue such clients, they should take proactive steps to minimize the potential for conflict and to ensure they provide sufficient notice and even receive written consent from their clients. All property managers should refer questions or issues to independent, qualified consultants who should be hired by, and report directly to, the association board of directors, rather than pass information through the manager.