Management Articles
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Slicing the Amenity Pie
While the goal of most developers is to provide equal access to amenities, that isn’t always the case due to land considerations. Some homeowner association owned amenities like storage and parking may be available in limited quantities so not one for every owner. This limitation can be a source of conflict if not handled proactively. The Board should enact a resolution for sharing these limited assets while maximizing rental income for the association.

The board should never allow exclusive use of a limited amenity without payment of rent to the association. If the association is fortunate enough to have income generating property, the Board should rent it out based on local commercial storage and parking rates. Renting below market rate may fill the spaces but loses valuable income that could reduce monthly assessments for everyone. This is particularly critical when demand is high. The association can justify charging market rate because of the convenient location.

While rental terms can be month to month, the usually small rent and greater likelihood of vacancies makes it more practical to require a one year lease. This is particularly true of RV parking where renters would only pay part of the year if they could, leaving an unpaid vacancy while they travel. Renting a year at a time ensures a steady income stream for the association. And if the monthly rent is small, it’s wise to collect for the full year to reduce monthly bookkeeping tasks.

When supply exceeds demand, some owners may be allowed to rent more than one space. However, when demand exceeds supply, the Board has the right to terminate the multiple space renters on their anniversary date to allow other owners to rent. Reapportioning limited amenities when demand exceeds supply is only fair. No owner should have a greater right than another.

Finally, under most circumstances, association amenities should not be rented to non-owners. If an owner defaults on the rent payment or causes damage, money can be recouped by liening the owner’s association property if necessary. The association has no such rights with non-owners.

Slicing the amenity pie can be problematic when demand is high. Rather than waiting for the kids to fight over the last piece, draft a resolution outlining the procedure, circulate it to the owners for review, revise as needed, formally adopt it at a board meeting and distribute it to all owners.   BACK

Board Wake Up Call
The Board of a homeowner association (HOA) has various and sundry tasks. To understand what those tasks should be, it’s critical that the Board understand what the HOA "thing" really is. And often it’s not what most think it is. Here are some of the myths:

Monthly fees should be kept low. The Board is elected to maintain the association assets properly. There is a big difference between being a good steward and a tightwad. Tightwads skip routine and necessary maintenance services which erode the value of the homes. It takes money to do it right and the Board should spend the money necessary to accomplish the tasks.

Volunteer boards aren’t held to the same standards as professional managers. Volunteers maybe, but charged with running HOA business in an informed and business like manner. This means taking care of things in a timely manner, planning ahead to anticipate problems, getting and acting on good advice.

The association is small and so are the needs. The smaller the HOA, the more important planning is since the cost per owner goes up the smaller the association is.

We’re too small for professional management. In areas like financial management and rules enforcement, all associations should have outside professionals. Collecting money from neighbors and controlling their antisocial behavior is bound to cause problems for the person doing it. It’s even worse when you live next to the offender. There are management professionals that do these tasks 24/7.

The board is elected to be the manager. The board is elected to hire and supervise competent service providers. If properly organized, the board’s job should usually take only a few hours a month.

The board is entrusted with the most valuable asset most people own. The responsibilities of an HOA board are not unlike those of any Fortune 500 company board. In both cases, there are physical and human assets entrusted to the board. Careful planning and effective communication to the stockholders (owners) is needed.

Is your board asleep to the true scope of the job? Is so, heed this wake up call.   BACK

Directors & Officers 101
All homeowner associations have the rights, powers and duties of a corporation. Corporations are operated by their directors and officers. In associations, the directors do even more by performing all of the association functions, although they may delegate specific tasks to others. Association members are like shareholders. They have an interest in the corporation but don’t run the association. Three or more owners are elected to the board to do so.

Fiduciary duties imposed upon board members include two components, undivided loyalty and reasonable business judgment. Undivided loyalty means that each board member must act in the best interest of the association. For example, a board member should vote for a needed increase in assessment or for greater reserves even though the board member personally can’t afford it. Similarly, a board member should vote for matters that are necessary or appropriate even though some owners do not agree.

Reasonable business judgment in conducting the affairs of the association is the second requirement of director fiduciary duty. Each director must understand the association business, actively participate, determine what is required for the association to operate, and then vote prudently. For example, securing three proposals on a project is not mandated by law. However, it is a reasonable method to determine a fair price to pay for work.

It’s also reasonable to get competent advice in areas that require expertise. Engineering, architecture, law and reserve planning are all areas that require a high level of training to do well. The board is not elected to guess at highly complex issues but to use prudent judgment based on competent input. While that input may cost money, the consequences of uninformed decisions are usually much more costly.

In addition to these fiduciary standards, the board is responsible to:

• Provide for the operation, care and improvement of the common elements.
• Prepare, adopt, and distribute the annual budget.
• Levy, collect and spend assessments according to the approved budget.
• Hire and fire personnel necessary for the maintenance and operation of the property.
• Obtain adequate and appropriate kinds of insurance.
• Adopt rules and regulations regarding the use of the common area.
• Keep detailed and accurate financial records of the property operation.
• Enforce provisions of the governing documents, rules and regulations

Board officers are usually appointed by the directors themselves. The directors vote on all contracts and policies while officers execute specific duties authorized by the governing documents and the directors. Each association should have at least a President, Secretary and Treasurer.

President. Conducts board and annual meetings; handles the day to day activities of the association (deals with management, vendors); signs contracts approved by the board;

Secretary. (Unless performed by management). Maintains the association business records (corporate papers, contracts, correspondence, communications, insurance, owner files); records meeting minutes; responsible for producing newsletters.

Treasurer. (Unless performed by management). Maintains all of the financial records and documents of the association; May or may not be signatory on financial accounts of the association; Responsible for all financial accounts (checking, savings, CDs, etc); Reports income and expenses to the board.

Ideally, the directors and officers provide the leadership to adequately protect and enhance the association’s and owners’ property through prudent administration. This requires careful planning and regular communication.   BACK

Avoiding Conflict of Interest
The headlines read yet again, "Politician Denies Conflict of Interest Allegations". You may wonder what exactly is "conflict of interest" and what you how you can avoid one. All good and relevant questions for directors of a homeowner association board.

A conflict of interest is "a situation in which a person such as a public official, employee or board member has a personal interest sufficient to influence the objective exercise of official duties." There are three key elements in this definition:

Personal Interest. Often this means a financial interest, but it could mean providing a special advantage to a spouse or child. Taken alone, there is nothing wrong with pursuing personal interests like changing jobs for more pay or helping your daughter improve her golf game. The problem comes when this personal interest comes into conflict with the second feature of the definition:

Official Duty. By stepping up to a directorship, you acquire obligations to the association and the other owners. These obligations are supposed to trump personal interests.

Influences Objectivity. Conflicts of interest interfere with objective judgment. A major reasons people value professionals is that they expect them to be objective. Personal interest that interferes with that objectivity is a matter of legitimate concern. So it is also extremely important to avoid "apparent" and "potential" as well as "actual" conflicts of interests. An "apparent" conflict of interest is one which objectivity is likely to be compromised. A "potential" conflict of interest may develop into an actual conflict of interest.

With this in mind, consider five types of conflicts of interest identified by political scientists Ken Kernaghan and John Langford (using homeowner association examples):

1. Self-Dealing. As Board President, you arrange to have your unit painted first even though others need it more or you hire your son to do association landscaping work.

2. Accepting Benefits. You accept an all expense paid trip to Cancun from the association’s painting contractor. Money kick backs qualify as well.

3. Influence Peddling. A board member solicits benefits in exchange for using influence to get a particular vendor’s contract approved.

4. Using Association Property for Personal Use. Usually called "stealing"...taking office supplies and postage or using association equipment for a personal project.

5. Using Confidential Information. A board member discovers a structural dry rot problem that will cost many thousands of dollars per owner to repair. Instead of disclosing the problem, the director quietly resigns and puts his unit up for sale.

How do you determine if you are in a conflict of interest situation? The proof is whether the situation is likely to interfere with your independent judgment as a director. Try the "Trust Test". Ask "Would the owners trust my judgment if they knew I was in this situation?" Trust is at the ethical heart of this issue. Conflicts of interest involve the abuse of trust.

The Trust Test suggests a way of dealing with a conflict of interest called "disclosure". If we disclose what might influence our judgment, others are informed and can be on guard. But disclosure is not enough. Board members are expected to avoid conflicts of interests. So in the case of potential self-dealing, the smart director abstains from participating in the discussion or voting.

Since conflict of interest can cloud objectivity, it’s often easier to see it in others rather than in one’s self. As a precaution, it’s wise to speak to a friend or colleague when in doubt.

"Situational ethics" arise when loyalty is split or there are moral concerns that muddle the decision. "Whistle blowing" is an example of when a director must choose between loyalty to a director (and personal friend) who is embezzling.

Conflicts of interest can rear their ugly head at any time. Be vigilant and prepared to respond quickly and appropriately. 

Excerpts from an article by Dr. Michael McDonald of the Centre for Applied Ethics.  BACK

Top Ten Mistakes
Enforcing rules and covenants in a homeowner association may be one of the least enjoyable aspects of serving on the board of directors. However, well-reasoned and consistent enforcement is imperative to keeping harmony. The following list catalogues the top ten mistakes that HOA boards make when enforcing rules.

1. Drafting and Enforcing Unclear, Ambiguous Rules. A board cannot expect members to comply with rules or covenants that fail to provide clear-cut boundaries of what is allowed and what is prohibited. When making rules, be sure to clarify what exactly the rule covers. For example, a rule prohibiting nuisances must define what constitutes a nuisance. A rule prohibiting commercial vehicles must define what is considered a commercial vehicle. By clarifying rules, an HOA avoid confusion, unintentional violations, and the excuse of "I didn’t know it wasn’t allowed."

2. Approving Incomplete Architectural Design Applications. The board should have all the pertinent details of the project like the style of architecture planned, materials will be used, and what color the final product will be painted. Without such specifics the board may inadvertently approve materials or a design that is not allowed.

3. Giving Verbal Approval. When granting an approval, it should always be done in writing. If the board verbally adds additional steps, those steps will be difficult to enforce if the homeowner doesn’t do them.

4. Not Following Governing Documents and Procedures. To avoid challenges of selective enforcement and losing a case on a procedural technicality, a board should always follow established guidelines and provide for an appeals procedure. Architectural requests should be evaluated under the same criteria. When a board fails to follow its procedures consistently, its decisions are difficult to defend in court. Compliance can be simplified by developing checklist forms.

5. Failing to Keep a Paper Trail. Written documents provide an objective basis for proving what decisions or actions have been carried out. In court, the production of written documents will often cut short the debate of who said what. Require all architectural applications to be granted in writing by the board or architectural committee. If the board makes the decision not to pursue a particular covenant violation, document the reasons in writing. This documentation will provide a defense to a claim of waiver if one is to arise further down the road.

Excerpts from an article by www.HindmanSanchez.com  BACK

Committees 101
While the board has the authority to control homeowner association business, enlisting the help of other volunteers is a great way to spread the work around. Committees are a structured way to organize volunteers for long and short term projects. A committee can be defined as "an organized group that researches specific issues and then provides recommendations to the board of directors."

There are three types of committees: mandatory, standing and ad hoc.

Mandatory committees are "mandated" in the HOA’s governing documents which means if they state that "there shall be a Nominating Committee", the board must appoint a Nominating Committee that complies with the functions detailed in the governing documents.

Standing committees exist indefinitely or until the board decides their purpose is no longer needed. Standing committees have ongoing and often repetitive tasks to accomplish. These committees may be mandated in the governing documents but typically are created by the board to fulfill a continuing need, such as a landscape or maintenance committee.

Ad Hoc committees are established and appointed by the board of directors for a specific purpose or a project. These committees are usually dissolved after the task is accomplished.

Standing committees and ad hoc committees are formed by board resolution which states the committee’s powers and responsibilities. The powers of a committee are generally advisory only and limited to research, investigation, obtaining proposals and submitting recommendations to the board. An exception to this rule is the Architectural Review Committee (ARC) which is often authorized to make decisions on behalf of the HOA concerning architectural and design requests.

The board is not obligated to accept a committee’s recommendations or decisions (in the case of the ARC) although should consider carefully before rejecting recommendations or overturning a decision (in the case of the ARC). Rejecting or overriding a committee can have a demoralizing effect if not handled with tact.

No matter which type of committee is developed, it is important for the board to establish guidelines (also known as a committee charter) which describe each committee’s marching orders which include:

• Structure: how many members, who they are and who is the chair

• Tasks and responsibilities

• Goals and objectives

• Reporting schedule

• Meeting schedule

• Budget, if applicable

Some examples of committees and (type) are:

Governing Document Review (ad hoc). If the documents are old and conflict with federal or state statute, this committee can work with the HOA’s attorney to bring them into compliance. If there is a proposal, say, to add rental restrictions, this committee can research the issue, poll the members and present recommendations to the board.

Architectural Review Committee (mandatory or standing). This committee is often created because of a mandate in the governing documents to review and control new construction or renovation projects to ensure compliance with HOA design and material standards. The responsibilities can be substantial and complex.

Education (standing). This committee is charged with educating the members about HOA functions, responsibilities, rules and regulations. It could arrange programs or communicate by way of the HOA’s website and newsletters.

Research & Development (ad hoc). Researches a specific project assigned by the board.

Maintenance (standing). Screens maintenance requests from owners before authorizing the work to be done; quality checks work by contractors.

Financial/Budget (ad hoc). Formed annually to review and recommend the coming year’s budget.

Social (standing). Often given a budget to execute a number of events each year which draw members together.

Communication (standing). Creates or oversees the newsletter, website and informational flyers to keep the members informed.

Landscape (standing). Quality checks the landscape contractor; makes recommendations concern landscape improvements, tree pruning/removals.

Welcoming (standing). Contacts new residents and provides need-to-know HOA information.

Rules & Regulations (standing). Recommends rules for better control or enforcement; issues rules citations.

Nominating (mandatory or ad hoc). Reviews and recommends board candidates for elections.

Neighborhood Watch (standing). Educates and organizes residents for improved security.

Pool/Clubhouse (standing). Supervises use or rental of facilities; sometimes does maintenance and cleaning.

Community Relations (standing). Communicates to media to promote the HOA.

The board’s choice of committee chair is very important. The chair should be organized and have leadership skills to guide the committee toward its stated goals in the time frame allowed.

As volunteers, committee members are covered under the HOA’s Directors & Officers liability insurance. This coverage is most likely needed for the Architectural Review Committee when its decision is legally challenged by a member whose proposal has been denied. Most other committees typically make only recommendations to the board and let the board make final decision.

Besides benefitting the board by assisting in the work load, committees are an excellent training ground for future board members. The structure and goal orientation of a committee is similar to that of the board. Effective committees are run by goal oriented leaders, the kind of folks every board needs. Committees create a structure for those volunteer efforts which benefit the board, manager and community.

Adapted from an article by Joanne L. Willoughby    BACK

8 Components of a Rule
When writing rules, homeowner association boards should use simple concepts and words. If residents understand rules, they’re more likely to comply with them. Some boards members may try to lend authority to their rules by using "legalese". Though rules should have a solid legal basis, those who read them must be able to understand them. Few residents would understand the meaning of "Section 35.641 of the Code of the City Municipality of Pleasantville is hereby incorporated by reference."

The following eight characteristics of good rules will help board members avoid the traps of complexity and misunderstanding.

1. Good rules are transparent. Rules should require people to do what they would have done naturally without the rule, after merely thinking about it. When Dwight Eisenhower was president of Columbia University, there was a great deal of study as to where to place paved paths through the huge quadrangle of grass within the campus. Dwight suggested that they merely pave where the grass was worn. Thus, if rules require what reasonable and decent people would do anyway, then rules only have to be enforced against the few who aren’t reasonable and decent.

2. Good rules are few rules. Good rules are the minimum necessary to provide for the comfort and safety of the residents and the equitable use and enjoyment of facilities.

3. Good rules are easy to obey. Residents must understand the need for the rule and comply with it voluntarily. Neither the board nor the manager is in a position to police the community.

4. Good rules are efficient. Good rules accomplish exactly what the board intended them to accomplish. Unfortunately, some HOAs try to solve a problem by passing rules that are either too harsh or too broad. Such rules may set off a number of chain reactions including situations in which:

-Residents ignore the rule and call the board autocratic or dictatorial.
-Residents ignore other rules.
-The newsletter adopts a scolding tone.
-Residents complain about the board to the manager.
-Residents complain that rules aren’t uniformly enforced.

5. Efficient rules accomplish their goal without undue side effects. Good rules resolve rather than create problems. For example, the board of the ABC HOA is concerned about teenagers damaging lawn areas when they play ball. In an attempt to resolve the problem, the board prohibits groups of three or more people over the age of 10 from playing on the lawn. The teens react by playing on the street or on the lawns of adjacent HOAs, resulting in complaints from motorists and the neighbors. Prevent this type of situation by considering the likely side effects of a rule when drafting it.

6. Good rules are enforceable. Make sure the board has the authority to enforce a rule before drafting it then make the rule specific. Vague statements, such as "Loud and boisterous activity should be avoided" leave unanswered the questions "By whom?" "Where?" "When?" "What does avoid mean?" Both mini-bikes and lawn mowers are loud. Should they both be restricted? Does noise from late Saturday night parties create the same problems as noise from a Sunday afternoon wedding reception or barbecue?

Overly specific rules can also create enforcement problems. For example, the ABC HOA institutes a rule that states: "Between the hours of 10 pm and 7 am no noise shall be permitted in a unit that measures 30 decibels or greater for more than 10 seconds in the nearest adjacent unit or public area." Though specific rules may be easy to enforce in court, the board may find it difficult to obtain voluntary compliance.

To write an effective rule, the board must balance specificity with simplicity and compliance. No rule will meet each criteria equally.

7. Good rules are flexible. Good rules allow flexibility and the use of reasonable judgment and mediation in enforcement.

8. Good rules must be communicated. HOAs don’t always publicize rules as effectively or as often as they need to. The board should distribute the current rules to all purchasers when they first move into the community. Since these documents may get filed away with other settlement papers, and since purchasers may lease to others, redistribute copies of the rules periodically, also consider putting up signs in pool and playground areas, listing rules in the newsletter or putting them on the HOA’s website.     Published by HindmanSanchez PC    BACK

Carrot or Stick Rules
Many rules enacted by homeowner association boards tend to use the Stick Method for rules which assumes folks need to be beaten to comply. The Carrot Method coaxes people into compliance by using guidelines that are reasonable and equitable. Guess which method works better to harmonize an HOA?

Carrotizing the rules takes thought and sensitivity. The "my home is my castle" mind set makes people resistant to picky and overbearing authority of Stick Rules. Some basic concepts in HOA rulemaking include:

For sample rules, see Policy Samples section.   BACK