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Ask the HOA Expert
Q&A |
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Board in the Loop Question: Our collection policy states that if an owner is 30 days past due, the management company sends a pre-lien notice letter. Several board members think the board members should be notified when these letters are sent. Answer: When a collection process is implemented, the board should be kept apprised of the progress. It is easily and cheaply done by email to all board members. It is standard procedure for the management company to keep the client informed of significant events like this. BACK Poor Financial Reporting Question: We are having a difficult time with our management company providing accurate, complete and timely financial statements. Month after month, the same problems. We’ve written them letters and met with them in person yet no improvement. We’ve had it and want to terminate the contract but fear they won’t release us. Answer: Providing accurate and timely financial reports is an HOA management company’s highest priority since money is an essential component of the HOA's operation. An occasional error is to be expected but ongoing errors is another matter. Either the management company is doing it correctly or not. Management contracts cut both ways. If one party is not living up to its end of the bargain, it has no right to continue. The board or HOA's attorney should advise the management company of the specific breaches that are the basis for termination. If the facts are true, there should be no argument. BACK
Board Mistrusts Manager 1) Board members shall be on signature
cards of all bank accounts. Answer: Clearly the board has many issues with the current management company which need to be resolved, and soon. Observations based on your numbered resolutions: 1. Both the President and Treasurer are
usually signers on the HOA's bank accounts. This should be done as soon as
possible. If the management company interferes, get a new management company. Reserve Study Mandated? Question: Do board members have a legal responsibility to follow the reserve study recommendations? Answer: The board should be careful about deviating from reserve study recommendations. Most reserve studies recommend a funding plan that steers the HOA away from special assessments. If the board decides to fund reserves less, the risk of special assessment grows. If a special assessment is called for due to under funding, a case could be made that the board did not fulfill its fiduciary duty and be held personally liable. And just as importantly, past owners who have sold will not have paid their fair share. Unless there is a compelling reason to deviate, the board should follow the recommendations. BACK
Barkdust Application Answer: In cooler, wetter climates, barkmulch application to planting beds is highly advisable. Besides consistency in look and curb appeal, it has several practical functions of reducing weeds and reducing irrigation water needs. But it's better to apply barkdust during the rainy months to avoid the dust problem. Because windows are generally closed, the smell is less likely to bother anyone and the smell largely dissipates after a couple of weeks. Of course, the contractor should clean up and unbury anything that should not be covered. Someone should quality check the work and have the contractor return if it isn't done right. BACK Commandeering Common Area Question: Our HOA has a natural area with tall trees, natural ground cover and a small wood chip covered pathway. An adjoining homeowner has appropriated a portion of it by permanently leaving lawn chairs and a table in this area. Can we require them to remove their possessions? Answer: No homeowner has exclusive rights to the general common area. Ask them to remove their furniture or move it for them. BACK Collecting Delinquencies Question: We have a homeowner who hasn’t paid dues since closing on the property. We have sent out notices and they all come back Unable to Forward – No Address. We are limited to a 1% late fee. Since our dues are only $100, the late fee is hardly a deterrent. What can we do? Answer: If you don’t already have one, the Board should adopt a formal Collection Policy which details the procedures and penalties. The policy must conform to any specific requirements found in your governing documents. If the governing documents state a 1% late fee, the members need to vote to change it or eliminate it and allow the Board to use its discretion (usually the best option). Finally, it’s generally advisable to use a either a knowledgeable attorney or professional collection service if your letters don’t solve the problem. They have ways of tracking down missing owners and getting them to pay. BACK Pest Control Question: We have an issue with termites and mice. Do HOAs typically take care of insect and rodent infestations? Answer: Yes, if the HOA has common wall construction. Since pests move from unit to unit, the only practical way to eliminate them is to treat a whole building and the HOA is the logical one to do it. BACK Spending Reserves for Operating Question: Can the board spend reserve funds for day to day operating expenses. I realize this is not a smart thing to do but is it prohibited by federal or state law? Answer: There is no federal statute that deals with HOA reserves. Some state HOA statutes have provisions about how reserves are spent like California, Oregon and a few others. However, if the HOA’s governing documents don't forbid it, the board can spend reserves for operating expenses. As you say, it is not a smart thing to do unless the reserve money is only being borrowed for an emergency or unanticipated shortfall. If the board is regularly under budgeting and using the reserves to make up for it, things must change. Reserves are intended for specific and future renovation, not the board's poor budget planning. BACK
Non-Resident Board Members Answer: There are two issues. The board is composed of directors, some who are officers. As directors, they are entitled to remain on the board although doing so may not be practical or fair to those members that voted them in. Not living at or in close proximity to the HOA clearly compromises a director’s ability to attend meetings and be directly informed of the physical condition of the property. A director that also serves as an officer has even a higher responsibility to those that elected them since the officers direct the day to day business of the HOA. Having a local President, in particular, is extremely important. However, officers are selected by the board itself so this can be changed when circumstances dictate. If the two top officers are no longer local, I recommend that other directors assume these duties. It makes sense that the non-local directors tender their resignations if they are no longer able to attend the board meetings. That said, the board has no authority to remove directors, even for just cause. They were elected by the members and can only be removed from the board by the members. BACK Number of Board Meetings Question: Our new board is preparing our Annual Calendar. How many board meetings a year should we hold? Answer: The answer is directly related to whether your HOA is professionally managed or not and the extent of the common elements. HOAs that are professionally managed can usually operate with four board meetings a year. The manager is given authority by the board to execute normal HOA business within the parameters of the approved budget. If a situation falls outside these boundaries, the Board President has the authority to approve the additional work. If the Board President feels the situation dictates a board decision, she can call a special board meeting. If the HOA is self-managed, the board usually meets at least every two months or even monthly if the common elements are extensive. Keep in mind that board meetings are for the benefit of the general membership as well who have the right to attend and petition the board. Board meetings should be scheduled a year in advance in a location that is guest friendly. Scheduling months in advance ensures that there will be no scheduling conflicts. BACK Neighborwood Watch Question: Our board has been advised to steer clear of Neighborhood Watch type programs due to potential liability. Your opinion? Answer: While an HOA needs to be careful not to boast of being "secure", the board needs to take reasonable precautions to make sure the common area is not attractive to criminals. This includes making sure there is adequate night light, landscaping and trees are trimmed to allow light to disperse and not conceal criminal activity. If there is entry access control (gates, doors), they should be maintained in good repair. Participating in a criminal watch program not only makes sense, every HOA should encourage it. It does not mean iron clad security, only improved vigilance by the HOA members. Participation in such programs should be broadcast to members and criminals alike by notices and signs. Each year, a special meeting should be held to reacquaint the members with the program and renew heightened awareness. BACK
Grandfathering Violations Answer: There is no "one answer fits all". There is never any automatic "grandfathering". The board needs to weigh each violation and its importance. The big ones may be worth fighting for while minor ones are not. The board can compromise when it’s in the best interest of the HOA and too expensive to litigate. BACK
Owner Maintained Landscaping Answer: Having professional landscape maintenance of landscaping installed by owners simply won't work. For the contractor to maintain the new area would require replacing the custom landscaping with a standardized maintenance plan. One fundamental principle that will help guide your board in the future: The Board has no authority to grant exclusive use of the general common area to any owner for any reason. This always must be approved by an appropriate vote of the members which could be 100% depending on how your governing documents read. BACK Special Assessment Notice Question: I am a real estate agent who represents condo buyers. As part of an offer, we negotiated with a seller to pay an outstanding special assessment to repair the decks. After my client closed the deal and moved in she was told the repair was only for the penthouse decks and not for her unit. Should I have gotten a copy of the special assessment notice? What can be done now? Answer: Yes, you should have gotten a copy of the actual special assessment notice. It's not uncommon for special assessments to be used for selected areas of a building like you describe. It is a lesson in condominium ownership which is, while you may buy a unit in terrific condition, you also are buying a share of the entire condominium, some of which may be in terrible condition. However, the bigger concern is why there was a special assessment at all. Special assessments are usually the product of poor planning. Most major repairs and replacements the HOA does are predictable. A reserve study done by a knowledgeable professional identifies all of common components that have a 2 to 30 year useful life, measures each, assesses each for condition, estimates the remaining useful life and the current cost for performing the repair or replacement of each when that useful life is used up. Further, the reserve study provides a Funding Plan which, if followed, systematically collects money (usually monthly) from all owners so that special assessments will never be needed. So, does this homeowner association have such a reserve study? If so, is adequate money being collected to pay for future reserve expenses? If not, your client is in for a series of special assessments that will fall at unpredictable times. Welcome to the world of mismanaged homeowner associations. For more on this topic, see the Reserve Planning section of www.Regenesis.net BACK
Divulging Complainers Name Answer: No, it's not necessary and need not be included unless it's relevant to the issue. For example, a noise complaint requires details like when, where and who heard it. BACK
Suspending Quorum Answer: Quorum requirements are dictated by the governing documents. Only an amendment to those documents by an appropriate vote of owner can change them. This amendment cannot be done "on the fly" at a meeting to circumvent the requirement. More on this topic is available to Gold Subscribers of www.Regenesis.net in the Meetings section. BACK
Waiving Assessments Answer: Since there is no government bail-out for homeowner associations, the board waiving one member's financial obligation causes the cost to be placed on the other members. This essentially is a reallocation of the expense formula. The board does not have the authority to change how expenses are allocated. It is not unusual for someone to get caught in a financial crunch due to employment, disability, divorce, etc. So the question is the situation a temporary or permanent financial condition? If temporary, the board can establish a repayment plan. If permanent, the member needs to face the facts and divest himself of the property. In other words, if the ship is going down, it's time to abandon ship. The board can make reasonable concessions based on the facts. If this member is going bankrupt or into foreclosure, reasonable concessions are called for. But usually that means, waiving or reducing late fees and interest, not the HOA fees themselves. Any reasonable deal struck should include a written agreement between the HOA and member defining the terms. BACK
Replacing Roofs Too Soon Since the HOA has inadequate reserves, the board tried and failed to get the members to approve a special assessment. Our governing documents require a 2/3 approval by a quorum of the membership. What now? Answer: Your roofing problem comes from the use of improperly installed lightweight shingles. In high wind areas, a 40 or 50 year shingle is recommended due to its increased weight and sturdiness. Using proper roofing fasteners is very important as well. If shingles are installed with staples, they will not hold as well as with nails. Since you don't have the money to replace, I suggest you make needed repairs and establish a reserve fund to replace of all roofs in 9 years. (Hopefully, the roof will last that long.) From the sounds of it, you do not have a proper reserve study. A Reserve Study will identify all the components you should be reserving for, provide a funding plan and a schedule to follow. Additional information is available to Gold Subscribers of www.Regenesis.net in the Reserve Planning section. You need this information to speak intelligently with your members about providing funds. If after providing the Big Picture, they still won't provide the funds the board needs to properly care for the property, you may need to consider whether rearranging the deck chairs on the Titanic is a worthwhile use of your time. BACK
Residents Using Guest Parking Answer: Guest parking is just that. No resident should be allowed to commandeer it nor can the board assign it unless the bylaws are amended to convert it to resident parking. BACK
Filling a Board Vacancy Answer: The board is under no obligation to go on a search if you have a ready, willing and able candidate. That said, if sending a notice is easily done and there is no particular urgency, why not do it? You may discover several volunteers that would be willing to serve on the Grounds Committee or some such. BACK
Doing Annual Audits Answer: CPAs perform several levels of financial records inspection which are designed to test the adequacy of the record keeping and reporting: Audit: The
highest level of service. An audit is a methodical and objective examination of
accounts and items that support the financial statements. When governing documents talk about "audit", it means the highest form of service. Depending on the size and financial complexity of your HOA, this may be overkill. Audits are not cheap. It may make sense to amend the governing documents to add something like "...unless a majority of the owners vote at the Annual Meeting to not have an audit done in that year." This still holds the board and management accountable to an audit unless the members say otherwise. BACK
Financing Special Assessments Answer: The HOA is not responsible for owner personal finances. Most homeowners have financing alternatives beyond home equity loans. While it's possible for the HOA to accept a payment plan for special assessments, collecting multiple payments is time consuming and expensive. Also, there is always a risk that some owners may default on any or several payments. Then, the HOA must engage in lengthy and expensive collection efforts. Ask yourself this: If you owned a single family home and had to pony up big money for urgent repairs, what would you do? One way or another, you'd raise the money even if it meant borrowing from friends or relatives. The HOA should stay out of the banking business. But the bigger question is why is there so much deferred maintenance? Usually it happens due to failure to plan for predictable events. It sounds like your HOA desperately needs a professional Reserve Study so major renovations can be scheduled well in advance and funds collected systematically so special assessments can be avoided altogether. For more on this subject, see Regenesis.net "Reserve Planning". BACK
Investing Reserves in Bonds Answer: While an HOA can purchase bonds that pay interest tax free, it usually isn't advisable for a few reasons: 1. Bonds aren't FDIC (Federal Deposit Insurance Corporation) insured, so there is a risk of losing principal. Also, bonds do go up and down in value based on the market. 2. Some HOA governing documents don't allow bond purchases. Check yours. 3. Taxes usually aren't an issue for an HOA that doesn't offer for profit amenities like a marina or golf course open to the public. Normal HOAs are allowed to charge expenses against interest and dividend income which minimizes or eliminates taxes. 4. The extra administration costs for an HOA to buy and trade bonds usually eliminates any gain. 5. Investing activities can have unintended tax consequences, like requiring the HOA to file a Form 1120, which puts all the association revenue at risk of being taxed. To keep the HOA funds as secure as possible, ladder CD (Certificate of Deposit) maturities to coincide with your reserve study expense needs. By Doug McLain CPA - Currie & McLain P.S. BACK |
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