Northwest Condo & HOA Law Blog : Washington & Oregon Construction Defect Lawyer & Attorney : Barker Martin Law Firm : Homeowner Associations, Condos : Seattle, Portland

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 To avoid unnecessary conflict and cost, a Board should be forward-leaning and move to amend outdated documents before a conflict or a problem arises--it will be much cheaper in the long run.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."

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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.

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[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.

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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. 

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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. 

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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.

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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.
   

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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.

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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.

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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.

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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. 

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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.  

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