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

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. 

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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.

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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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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.

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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.

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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.

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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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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.

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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.

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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.

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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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Engrossed Second Substitute House Bill 1393 (ESSB 1393) is currently under consideration by the House Ways & Means Committee.  The Bill is drafted to address real property construction improvements through "consumer education, warranty protections, contractor registration requirements, and worker certification standards."

• One-year warranty against defects in workmanship and materials;
• Two-year warranty against defects in the wiring, piping and ductwork in the electrical, plumbing, heating, cooling, ventilating, and mechanical systems;
• Four-year warranty against damage to basement slabs; and
• 10-year warranty for structural defects.

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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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In 2006, the Washington legislature established a committee to study the problems facing owners in non-condo HOAs and to come up with recommendations on revisions to the Homeowners’ Associations Act. The Homeowners Act Committee was charged with reviewing the Act, the Uniform Common Interest Ownership Act and considering specific problems faced by Washington HOAs such as disclosures to buyers in an HOA, alternative dispute resolution for HOA/owner disputes and methods for amending CC&Rs, among other issues. 

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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.

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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.

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