Jan 30

I received a lot of inquires about last week’s feedback concerning Bank of America’s refusal to lend money to buyers of units in the reader’s association. The BofA representative told him the bank would only lend in HOAs with reserves that were 100% funded. The rep also said that 25% of HOAs were 100% funded.

To find out if BofA’s numbers were accurate I turned to Robert Nordlund, President of Association Reserves, Inc., for information about reserve funding in the industry. His company compiled data from over 7,000 recently completed reserve studies to create a profile of HOA reserve funding strength. He found that no matter how he sliced the data (large vs small, urban vs suburban, highrise vs townhome, new vs old), the results came out the same as depicted in the graph below.

It turns out that BofA’s estimate that 25% of HOAs are fully funded is close to accurate. Although only 5% of HOAs fell into the 90-100% funding range, another ~17% were funded in ranges up to 200%.

News reports about home loans make it clear that the Federal Housing Administration and many banks are still wandering in the desert. The pendulum has swung from completely irresponsible lending practices that brought on the housing crash to practices that are now hampering the recovery by being overly restrictive.

RECOMMENDATION: It should be no surprise that healthy reserves increase property values and improve sales. To comply with the Davis-Stirling Act, boards need to have a reserve study done every three years with annual updates in between. Associations should use experienced companies to prepare their studies, including a reserve funding plan. To improve marketability in their HOAs, boards should then make every effort to raise their reserve funding levels as quickly as possible. In addition, they should fully disclose the condition of their reserves.

Thank you to Robert Nordlund of Association Reserves, Inc. for the above information and use of his graph.

DISSOLVING AN HOA


QUESTION: In four years our association will vote to either keep it or dissolve. The community is split so it will certainly be heated. The board says it is impossible to dissolve it. Answers are hard to come by.

ANSWER: Most homeowners associations are incorporated as Nonprofit Mutual Benefit Corporations under California’s Corporations Code. To find out what type of corporation your association is, check your Articles of Incorporation. As provided for in Corporations Code §8724, any owners association for a planned development, condominium, stock cooperative or community apartment project of five or more units that is responsible for managing, maintaining, preserving or controlling any lot, unit or other area cannot be dissolved unless 100% of the members consent.

Your association’s articles, bylaws and CC&Rs may also establish limits and procedures on dissolution. The Corporations Code establishes additional procedures for dissolving all corporations, such as electing to wind up and dissolve, adopting a plan of dissolution, and filing a certificate of dissolution with the California Secretary of State. Final federal and state tax returns must also be filed.

As a practical matter, it may be impossible to dissolve an association if no entity can be found to take over the association’s maintenance responsibilities. Any association considering dissolution or reorganization should do so with the advice of legal counsel and tax counsel.

Many thanks to Helene Fransz, our subdivision law specialist, for the answer to this question. Helene works with developers to create associations and, from time to time, is called upon to merge associations, divide associations, and dissolve them. -Adrian Adams

FEEDBACK


New CC&Rs. Our association, after much hard work, was able to get passed new and updated CC&Rs and Bylaws. We had two “town hall” meetings, a phone tree to answer questions and to get out the vote, mailings, newsletter articles, and a long list of former board members who endorsed the new governing documents. We were able to say goodbye to our 1970 era documents. -Kathy P.

Adrian J. Adams, Esq.

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Jan 23

QUESTION: Following the removal of 60 trees from the common areas a committee was formed to select an arborist who then reviewed our development’s trees and submitted a report. None of the homeowners who served on the committee have seen the report; only the board has access to it. Can homeowners inspect the arborist’s report?

ANSWER: In my opinion, homeowners can review and copy the report. Even though such reports are not specifically mentioned by the various statutes governing the inspection of records, the report is a record of the association and is not subject to the privacy concerns raised by Civil Code §1365.2(d). If the board rather than legal counsel contracted with the arborist, the report does not have attorney work-product protection. Even if the board included a confidentiality provision in the contract, members’ inspection rights cannot be limited by contract. Corp. Code §8313. The issue of tree removal is of interest to the community and there is no reason to withhold the information. Even though the membership has an interest in the trees, the board retains the authority to make decisions about maintenance of the common areas, including the pruning and removal of trees.

IMPOSSIBLE TO AMEND


QUESTION: To amend our 1960s-era CC&Rs we need the approval of 3/4 of the membership. It is impossible to get a 75% of the membership to vote, let alone 75% to approve. Does current law allow amending CC&Rs with a simple majority?

ANSWER: Because of the difficulty (sometimes impossibility) of getting a super-majority to amend CC&Rs, the legislature enacted Civil Code §1356 to alleviate the problem. If an association makes a good faith effort to obtain membership approval and can get at least 50% of the membership to approve the amendment or restatement, the association can petition the courts to approve it. The petition must contain the following:

  1. The reasons for the amendment.
  2. The number of votes required to amend.
  3. The number of affirmative and negative votes actually received.
  4. The association’s effort to solicit membership approval.
  5. A copy of the governing documents, text of the amendment, and the notice and solicitation materials used.

Court Approval. The court may (but is not required to) grant the petition if it finds:

  1. The membership was given at least 15 days written notice of the court hearing.
  2. Balloting on the amendment was conducted in accordance with the governing documents.
  3. A reasonably diligent effort was made to permit all eligible members to vote on the amendment.
  4. More than 50% of the membership voted in favor of the amendment.
  5. The amendment is reasonable.
  6. Granting the petition is not improper for any reason stated in Civil Code §1356(e).

RECOMMENDATION: We have had great success getting court approval of amendments and restatements. Boards should work with legal counsel to petition the courts if circumstances warrant it.

FEEDBACK


Bank of America and FHA. I listed my condo and tried to maximize the number of qualified buyers by having the building FHA approved. The building is owner occupied, no litigation, no delinquent dues, no deferred maintenance, and reserves 50% funded. The building was turned down by Bank of America’s FHA department because, they told me, they only do FHA approvals for buildings in which reserves are 100% funded! I was stunned, asked how many such buildings that came cross their desk were 100% funded and was told about 25%. Somehow, I don’t believe them–I think the number is closer to 5%. B of A suggested we impose a special assessment of about $4,000 on each homeowner to bring the reserves to 100% funding. Who the heck are these people? Luckily, I ended up with four offers, only one of which needed FHA approval. So, the theory of FHA approval is great, the reality different. -A.L.

Property Values and FHA. A reader commented that the board has a duty to maintain property values. I believe this to be arguable. It is the duty of the board of directors to protect the assets–not to “maintain property values.” Many associations will not qualify for FHA loans because of factors outside of their control, such as the number of delinquent owners, the number of off-site owners, and deficiencies in reserve funds inherited from past boards. What a board can and should do is this: respond timely to lender certifications and questionnaires submitted when a unit is in escrow, respond truthfully, and follow the association’s collection policies. -Paige B.

-Adrian J. Adams, Esq.

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Jan 18

QUESTION: There have been issues that residents don’t feel comfortable bringing up at the board meeting (open forum). A resident thought of a town hall meeting to discuss these problems. Can we hold this meeting in the clubhouse? Should we call it a “gathering” rather than a meeting? Is it illegal for us to gather to discuss problems we are having with our association?

ANSWER: Members have the right to use the clubhouse to peaceably assemble and discuss any matter of interest to other members. Wikipedia describes the right to assemble as:

Freedom of assembly, sometimes used interchangeably with the freedom of association, is the individual right to come together and collectively express, promote, pursue and defend common interests. The right to freedom of association is recognized as a human right, a political freedom and a civil liberty.

Advertising for Meeting. You can call it a gathering but there is nothing wrong with “meeting” provided your invitation does not wrongly imply it is an official meeting of the membership. You are also allowed to advertise the meeting through mailings and postings on bulletin boards (provided the bulletin board postings stay within the association’s published rules). What you cannot do is transact business, i.e., amend documents, vote on special assessments, elect or remove directors, etc. For votes on such matters, you must petition the board to call a special meeting of the membership.

SKYLIGHTS

QUESTION: Is the skylight in a condominium considered part of the roof? Is it an association repair or a homeowner repair?

ANSWER: It depends on who installed it and what your governing documents require.

Original Construction. If the skylight is part of the development’s original construction, it is part of the common area roof and is the association’s responsibility to repair and maintain unless your CC&Rs state otherwise. Sometimes CC&Rs specifically assign skylight maintenance to the unit owner.

Owner Addition. If the skylight was installed without association approval, the owner could be forced to remove it. If an owner installed the skylight with association approval, typically the owner agrees to repair and maintain the skylight. Where this becomes a problem is with subsequent owners when it starts leaking. The subsequent owner will argue that he did not install the skylight and will point to the CC&Rs that the association is responsible for maintaining the roofs.

Covenant to Maintain. To avoid disputes related to owner-installed skylights, we record a covenant signed by the owner at the time the skylight is installed. The covenant makes the owner and all subsequent owners responsible for repairing and maintaining the skylight. If the owner refuses to sign the covenant, installation of the skylight is not approved.

FEEDBACK

Public Employee Pensions & State Deficit. A lot of good comments pro and con continue to pour in on this subject. Let’s hope our new governor and legislature resolve California’s massive deficit in a fair and cost-effective manner.

Late Charges
. If I miss payment number one I get a late charge. If payment number two is assessed and I make a single payment, my association applies it toward my first assessment. That leaves the second assessment in arrears and another late charge is levied. So until I get 100% caught up I get a late charge every month. -David A.

RESPONSE: The practice is lawful. The Davis-Stirling Act addresses the priority of payments by delinquent owners as follows:

(a) A regular or special assessment and any late charges, reasonable fees and costs of collection, reasonable attorney’s fees, if any, and interest, if any, as determined in accordance with Section 1366, shall be a debt of the owner of the separate interest at the time the assessment or other sums are levied. . . .

(b) Any payments made by the owner of a separate interest toward the debt set forth, as required in subdivision (a), shall first be applied to the assessments owed, and, only after the assessments owed are paid in full shall the payments be applied to the fees and costs of collection, attorney’s fees, late charges, or interest. . . . (Civil Code §1367.1)

The statute does not prohibit associations from adopting collection policies that apply payments to the oldest outstanding assessments.

Support FHA Loans. Last week’s feedback about FHA financing reflects a short-sighted viewpoint. Every real estate transaction involves both a buyer and a seller, and for HOA properties the seller is a member of the association. The ability to sell to an FHA buyer increases the value of the property being sold by expanding the market for that unit. It is a fiduciary responsibility of the HOA board to attempt to maintain property values for the members. -Vaughn H.

Oppose FHA Loans. I agree with last week’s feedback. Why should I support one buyer so they can put only 3 1/2% down . . . just to walk away from the property in two years? Our HOA is 19 years old and has had only 2 foreclosures because most people put 10%+ down on their property when they moved in. -Maureen C.

-Adrian J. Adams, Esq.

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