Connect Magazine: Issue 4—2019

LE R R AB DA VE CH EN CO TA AL K DE 20 C BAC E 20 SID IN ON

connect A PUBLICATION OF THE GREATER INLAND EMPIRE CHAPTER OF CAI

ISSUE FOUR 2019

DIRECTOR QUALIFICATIONS SB 323 UPDATE

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connect TABLE OF CONTENTS

A PUBLICATION OF THE GREATER INLAND EMPIRE CHAPTER OF CAI

www.cai-grie.org

OFFICERS Adam Armit.....................................................President Landsystems/HortTech Jackie Fromdahl................................... President-Elect Painting Unlimited, Inc. Bob Harvey, CMCA, AMS, PCAM........ Vice President Associa-PCM, AAMC Eric Zarr, CMCA, AMS................................... Secretary FirstService Residential, AAMC Lana Hamadej, PCAM.................................... Treasurer Avalon Management Group, Inc., AAMC Robert Serdoz........................................Past-President Elite Pest Management, Inc.

BOARD DIRECTORS George Gallanes, CMCA....... Sunnymead Ranch PCA Brian Henry........................................... Park West, Inc. Valerie Hernandez............... Villa Park Landscape, Inc. Pat King............................... Solera Oak Valley Greens Robert Riddick, CMCA.......... Sunnymead Ranch PCA

EXECUTIVE DIRECTOR AJ Keefe

DIRECTOR OF MARKETING Sean Floody

ADMINISTRATIVE ASSISTANT Elda Pfitzinger-Thomas

EDITOR IN CHIEF A.J. Jahanian, Esq..........................Beaumont Tashjian

PUBLICATIONS COMMITTEE Terri McFarland........ Broadband Agreements by MFC Gina Roldan.......................... ProTec Building Services

DESIGN & PRODUCTION Sean Floody All articles and paid advertising represent the opinions of authors and advertisers and not necessarily the opinion of either Connect or the Community Associations Institute–Greater Inland Empire Chapter. Information contained within should not be construed as a recommendation for any course of action regarding financial, legal, accounting or other professional services and should not be relied upon without the consultation of your accountant or attorney.

Connect is an official quarterly publication of Greater Inland Empire Chapter of the Community Associations Institute (CAI–GRIE). The CAI–GRIE Chapter encourages submission of news and articles subject to space limitation and editing. Signed letters to the editor are welcome. All articles submitted for publication become the property of the CAI–GRIE Chapter. Reproduction of articles or columns published permitted with the following acknowledgment: “Reprinted with permission from Connect Magazine, a publication of the Greater Inland Empire Chapter of the Community Associations Institute.”

5 Presidents Message Adam Armit

6 2015 TOPS AWARD WINNER: Working Together to Ensure Assessments are Paid

15 2017 TOPS AWARD WINNER: Six Ways to Minimize your Reserve Contributions

By Kevin Leonard, RS

18 What’s Your (Corporate) Status?

By Erin A. Maloney, Esq.

9 Editors Link

By Terri Guest

20 Accessory Dwelling Units

A.J. Jahanian, Esq.

11 Homeowner Leader Education By: Kimberly Lilley, CIRMS, CMCA

12 COVER STORY: Director Qualifications Under SB 323

By Jeffrey A. Beaumont, Esq., CCAL and Tawnza Sofranko, Esq.

22 2020 Monte Carlo Night Photos 23 2020 Events Calendar

EVENTS: QUARTER 1

By Sandra L. Gottlieb, Esq., CCAL

| 28 | 30 | 6 | 22 | 5 | 17 | 24 | 30–31 | 15–18 JAN

JAN

JAN

FEB

FEB

MAR

MAR

MAR

MAR

National Law Seminar Las Vegas, NV

CAI-GRIE Board Meeting CAI-GRIE Offices—Riverside, CA

Axe Throwing SOCAL Axe Throwing—Temecula, CA

Educational Expo Experience Riverside Convention Center—Riverside, CA

Education Class CAI-GRIE Offices—Riverside, CA

Food Trucks and Cornhole Tourney Bel Vino Winery—Temecula, CA

New Member Mixer TBD

CAI-GRIE Board Meeting CAI-GRIE Offices—Riverside, CA

CA Legislative Day California State Capitol—Sacramento, CA

Copyright © 1998–2019 CAI-Greater Inland Empire Chapter.

Advertising, articles or correspondence should be sent to: CAI-GRIE Chapter 5029 La Mart, Suite A • Riverside, CA 92507-5978 (951) 784-8613 / info@cai-grie.org

For a complete list of upcoming CAI events in the Greater Inland Empire, visit cai-grie.org

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CONNECT MAGAZINE • ISSUE FOUR 2019

Brendan Concannon VP, Regional Account Executive 619-261-6643 866-800-4656 ext.7480 brendan.concannon@mutualofomahabank.com

Member FDIC Equal Housing Lender

The CAI–Greater Inland Empire (GRIE) Chapter of hosts educational, business and social events that provide the Chapter’s Business Partners various opportunities to promote their companies’ products and services to Community Association owners and managers serving the Community Association Industry. It is expected that all participants in Chapter events – whether they be educational, business or social – will conduct themselves in a professional manner representative of their business or service organization so as not to detract from the experience of others seeking to benefit from their membership in the Chapter.

For more information, visit cai-grie.org

PRESIDENT’S MESSAGE Adam Armit, Landsystems/HortTech

W

ell folks, 2019 has come and (is almost) gone. In my first Presidents message I stated, “the outlook for CAI-GRIE has never been brighter”, and after a year of service I honestly believe that still holds true. The changes our Board made in 2019 have made CAI-GRIE stronger and more capable of meeting the demands of our ever-changing industry. Soon, President-elect Jackie Fromdahl will take the reins and I’m certain you will all love the coming changes for 2020!

THROWING JANUARY 30 TEMECULA, CA

SO CAL AXE THR OWING

As I reflect on the wonderful experiences working with, and serving alongside many of our members, one word comes to mind; JOY. It was pure joy to serve with all of you. We are an organization built on strong bonds and a willingness to help one another however it doesn’t stop there. There is a real joy you feel when seeing an old colleague at an event, or when we donate to a good cause and the joy of accomplishing the tasks, we plan all year long.

It was also with great joy that I was able to reflect on the decade of service our beloved DJ offered our chapter. She worked tirelessly to build us from a very small organization to what it is today. Sacrificing her time, she stayed on several months longer than she had wanted while we searched for her replacement.

This type of dedication from her and others is what makes CAI-GRIE such a wonderful organization. She will continue in our industry as a business partner in the printing and marketing field and we are happy to welcome her to the next chapter of her career.

Joy comes to mind when thinking about AJ, our new Executive Director, and the wonderful changes he has already made. We have a new website launching in January, are working to revamp our office space to be more useful to members, have increased our social media presence, Brought on new staff, and have come up with a whole list of new and exciting events in 2020.

With that I want to say “THANK YOU” to everyone who helped the chapter (and me as well) in 2019. Thank you to the volunteers who lent their creativity, time, effort and hard work to make our events the envy of other Chapters. Thank you to those past presidents that I had called and asked advice from, and those that gave it unsolicited. Thank you all for being you, and for helping CAI-GRIE be the best it can be. 2019 has brought me great joy, and I hope it has done the same for you. It was an absolute honor to SERVE you all as the Chapter President. Cheers!

A Special Thanks

TO MY FELLOW 2019 BOARD MEMBERS MS. JACKIE FROMDAHL | MR. GEORGE GALLANES

REGISTER AT CAI-GRIE.ORG

M S . L A N A H A M A D E J | M R . B O B H A RV E Y | M R . B R I A N H E N RY M S . VA L E R I E H E R N A N D E Z | M S . PAT K I N G M R . R O B E RT R I D D I C K | M R . R O B E RT S E R D O Z | M R . E R I C Z A R R

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Working Together to Ensure Assessments are Paid:

Collection Efforts Associations Can Take Before Referring a Matter to Collection

By Erin A. Maloney, Esq. Fiore, Racobs & Powers

A

2015 AWARD WINNER

ssociations rely upon payment of assessments by all of their members to meet the financial obligations imposed upon them by their governing documents, and by California law. Unfortunately, many association members do not understand that they are harming their entire community by failing to pay their assessments, and often see their homeowners association assessments as one of the first bills to stop paying when they encounter financial difficulties. Many owners place a much higher priority on keeping their premium cable channels than they do on paying their assessments.

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CONNECT MAGAZINE • ISSUE FOUR 2019

Most community association professionals and volunteer directors see assessment collection as a necessary, but unpleasant task. They meet their duties regarding collection efforts, with their primary focus usually being on deciding the remedy to be utilized -- judicial foreclosure, nonjudicial foreclosure and small claims being the most commonly used options. Attention is then usually turned to which provider will assist the association in its collection efforts, and on sending the matter off to that provider.

Often, directors have overlooked their opportunities to take an active role in collection efforts to assist their association before referring a collection matter out.

Perhaps, associations may benefit from redirecting their focus in the early stages of delinquencies. By employing preliminary techniques before referring a matter to a collection professional, associations may reduce their overall delinquency rates, and costs associated with collection efforts. Four important steps are frequently given inadequate attention that every association should consider.

The first step that every association should take in the collection process is to actively communicate with its members regarding the importance of paying assessments, and the consequences if assessments are not paid. Far too many owners are unclear on what assessments are. Some owners believe that they are paying “dues� to use the pool, and that they need not pay if they do not swim. Others think assessments are a tax included in the impounds paid

for the members to enable them to resolve a delinquency by including procedures for requesting a meeting with the association’s directors to discuss the delinquency and/or for requesting a payment plan.

A clear, concise collection policy, which sets forth the specific procedures which the association employs will provide clear notice to the members of what they should expect if a delinquency occurs. If a policy contains boilerplate language which simply repeats the language of the Civil Code, then the members will usually overlook the policy altogether. It is more effective to notify the members they will face a lien and legal action to enforce the lien if they do not pay assessments than to provide a list of possible alternatives that may happen.

The third step associations should take is to improve its policies and procedures for payment plans. Payment plans are beneficial to both the delinquent members, who can resolve their delinquency over time, and to the association because partial payments will be received to somewhat improve the association’s cash flow. However, associations must be mindful that payment plans must be carefully crafted to be of a benefit to both parties.

with their mortgage, so they erroneously assume that they are being paid. Associations should communicate to their members what the assessments are used for: maintenance and repair of common areas, operation of the association, insurance, etc. Members may not know that the assessments keeps their property value at the highest possible level, and that if they do not pay, their entire community may suffer.

Associations can include a statement with a welcome packet provided to new members that describes how the association operates, and that assessments fund that operation. Newsletters can periodically remind members of the benefits of living in the project, and the obligations associated therewith. If a member becomes delinquent, the association may consider including in its late notice statements describing the importance of assessment payments and procedures for requesting a payment plan.

A second step that every association should take is to review its collection policy to ensure that it best suits the association’s needs regarding assessment collection. Civil Code section 5310(a)(7) requires associations to include in their Annual Policy Statement “a statement describing the association’s policies and practices in enforcing lien rights or other legal remedies for default in the payment of assessments.”

Many associations have an outdated policy, or a policy not specifically tailored for that association’s needs and practices.

Every association should carefully draft its policy so it notifies its members when collection efforts will commence, what actions will be taken, and what some costs are. The policy should be a means to discourage members from becoming delinquent in the first place, lest they suffer charges, a lien, legal action, etc. The policy can also be a resource

Every payment plan must be in writing. Payment plans are contracts: they are an agreement between the parties on how a delinquency will be resolved. The plan must provide the repayment terms, and the consequences of a default. The terms of payment plans must be such that they provide for full repayment of the debt within a reasonable period of time. Have the payment plan carefully drafted by the association’s attorney.

In negotiating a payment plan, often directors focus only on what the member says he or she can pay per month, without considering what will be best for the association. That methodology may cause a plan which is far too long to benefit the association. Costs are associated with administering a payment plan which also must be accounted for in the agreement. If a member cannot afford a reasonable payment plan, it is often best to require the member to arrange for payment, such as a loan from an institutional lender.

Entering a payment plan with a delinquent member is akin to extending credit to that member, to allow them to pay a debt. Just as no bank would extend a loan to a borrower without first confirming their ability to repay the loan, associations should not enter a payment plan without first ensuring the debtor’s ability to make the proposed payments. Associations should require any member requesting a payment plan to provide financial statements, copies of bank statements and/or pay stubs to confirm that the debtor has sufficient resources to make the proposed payments, and that they are committing to pay the most that they can afford. Having the bank and employment information on file will also assist the association in future collection efforts if the owner defaults on his or her payment plan.

Associations should evaluate the debtor’s reason for nonpayment. If a member became delinquent because she refused to pay as retaliation for an unrelated dispute, that member may not be a good candidate for a payment plan unless that underlying dispute is resolved. If the member asserts a hardship, the board should consider the nature of that hardship. If it is ongoing, the member may not be in a position to make any promised payments. If a member asserts hardship, but CONTINUED ON PAGE 8

ISSUE FOUR 2019 • CONNECT MAGAZINE

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WORKING TOGETHER TO ENSURE ASSESSMENTS ARE PAID CONTINUED FROM PAGE 7

and provide a means for the member to explain the reason for her delinquency and her proposal for resolving it.

his bank statements reflect that he took a recent cruise to Hawaii and frequently goes on shopping sprees, then it may be appropriate to deny a request for an extended payment plan. Associations should be mindful that no member has a “right” to a payment plan; it is a privilege which should be employed only when appropriate, and when both parties will benefit from the plan.

For IDR to be effective, the board should provide settlement authority to the participating director in advance. That ensures that an agreement can be reached at the IDR, avoiding unnecessary delay. The terms of any payment plan must follow the association’s published standards therefor. If any amount will be waived, that amount should never include delinquent assessments, but associations can consider waiving soft costs such as interest in appropriate cases. As with any other payment plan, any agreement reached at IDR must be in writing.

The final technique that associations can employ before hiring a professional to initiate collection efforts for an account is internal dispute resolution (“IDR”). The Civil Code requires associations to offer IDR at several stages in the collection process, so associations are used to including the offer in pre-lien demands, and prior to initiating foreclosure. However, the offer is often buried in a letter and not considered a tool for resolving a dispute.

IDR is a procedure whereby a member can meet with one or more directors to resolve a dispute. Making an offer to participate in IDR early in the process may cause resolving the delinquency without cost to the association.

An association can make an offer to participate in IDR at any time; it need not wait until it sends a pre-lien demand. Making an IDR offer when the owner is only one or two months behind may resolve the matter. IDR can be a way to communicate to the delinquent member the importance of payment to the association,

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CONNECT MAGAZINE • ISSUE FOUR 2019

By focusing on early collection efforts such as those discussed above, an association will increase its effectiveness in collecting assessments. Once a delinquency becomes so large that an owner cannot readily arrange to pay it off, then it becomes much more difficult to collect. Providing opportunities to the members to amicably resolve their delinquency at an early stage will benefit the association and its cash flow.

Ms. Maloney has practiced community association law for over 23 years, and is a shareholder of Fiore, Racobs & Powers, a professional law corporation. She manages the f irm’s Assessment Collection Department, and works out of its Riverside off ice.

EDITOR’S LINK CAI-GRIE WEBSITE COMING JANUARY

A.J. Jahanian, Esq. Beaumont Tashjian

I

n a year that has seen much change, what has remained constant is that our communities in the Greater Inland Empire continue to find unique ways to innovate and solve conflict. This shines through, as we take a look at some of the last year’s creative and helpful articles, written by our esteemed Connect magazine contributors, in this final issue of 2019.

As always, this issue of Connect will provide boards, community managers and residents alike, with insights from authors that have previously contributed to Connect, on community association issues that continue to rear their heads, year after year. With these contributions, we, as a team are able to collaborate and combat many challenges that will likely persist through 2020 and beyond. This issue will also help provide you with some guidance to navigating Senate Bill 323’s new (and confusing) procedures and requirements for association elections, beginning in 2020.

It has been my sincere pleasure to serve as your Editor of Connect magazine for the year 2019. Your thoughtful engagement is a persistent reminder that no challenge is insurmountable for our community, and we will continue to thrive here in the Greater Inland Empire.

A.J. Jahanian, Esq. is an associate attorney with Beaumont Tashjian who devotes his career to serving common interest developments. He can be reached at ajahanian@HOAattorneys.com

2020 EDUCATIONAL EXPO EXPERIENCE FEBRUARY 6, 2020 | RIVERSIDE, CA RIVERSIDE CONVENTION CENTER Join us for CAI–Greater Inland Empire Chapters’ first Educational Expo Experience of 2020. One class will be centering on the duty to inspect held by boards of directorsand the second, concurrent class will be a CMCA study session for those who have already completed the M-100 and would like to prepare for taking the CMCA exam.

REGISTER TODAY AT CAI-GRIE.ORG

ISSUE FOUR 2019 • CONNECT MAGAZINE

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CONNECT MAGAZINE • ISSUE FOUR 2019

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CAI-GRIE HOMEOWNER LEADER EDUCATION

By CAI-GRIE Education Committee

I

f you are a Homeowner Leader with CAI Greater Inland Empire Chapter, you would probably love to know what education would most benefit YOU. Well, hopefully the following information can help.

The mission of this CAI Chapter is to advance the community association industry through positive image, professionalism, advocacy, education, and networking. Education is one of the cornerstones of our organization, and the goal of the Education Committee is to bring you education that serves to advance not only the community association industry as a whole, but your community and your experience within your community.

Here is a glimpse into what is coming up in early 2020: Thursday, February 6, 2020 Educational EXPO Experience: Riverside Convention Center We will hold education from 10:00 a.m.–12:00 p.m. with one class centering on the duty to inspect held by boards of directors, including playground inspections and inspections related to fire safety. The second, concurrent class will be a CMCA study session for those who have already completed the M-100 and would like to prepare for taking the CMCA exam.

Saturday, February 22, 2020 7-hour Essentials Class This class includes the following information: Part I: Common Interest Development Overview, Board Composition & Responsibilities/Fiduciary Duty; Rule Enforcement Part II: Financial Control (Financial statements, accounting practices, state law, etc.); Reserve Funding Part III: Insurance – Property; General Liability; Fidelity Bond; Directors’ & Officers Liability; Umbrella; Earthquake; Flood; Regulations and Law; Best Practices Part IV: Problem Solving; Maintenance; Board Meetings Monday, March 30–Tuesday, March 31, 2020 Legislative Day(s) at the California State Capitol Join the state-wide march on the Capitol as stakeholders in community association life go to Sacramento to make their voices heard. Not only do attendees have the opportunity to learn about the legislative process and specific bills being negotiated, but they have an opportunity to meet with and educate legislators about the real-life impact of laws on community associations in California. [Check caiclac.com for more information and registration.]

If you want a say in the kind of education being presented for Homeowner Leaders, and you don’t mind putting in a little elbow grease, we would be thrilled to have you join us for our monthly meetings. Just contact the chapter office at info@ cai-grie.org to get more information. However you are able to participate, we look forward to seeing you in 2020!

ISSUE FOUR 2019 • CONNECT MAGAZINE

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DIRECTOR QUALIFICATIONS UNDER SB 323

By Sandra L. Gottlieb, Esq., CCAL SwedelsonGottlieb

12 | | CONNECT CONNECTMAGAZINE MAGAZINE•

ISSUE • ISSUE FOUR FOUR 2019 2019

S

Since the adoption of SB 323, there have been many questions about the vast implications of this bill and the numerous changes to a number of Sections of the Civil Code effective January 1, 2020. Here, we will only be discussing director qualifications and the procedure or process for removing directors.

First,SB 323 requires that associations disqualify nonmembers from board nominations. For associations that have allowed non-members, such as tenants, to sit on the board, they will no longer be allowed to nominate them for the board moving forward. Effective January 1, 2020, non-member directors may remain seated on the board until their term is up.

There is an exception for this disqualification for developer appointed representatives. For director appointed representatives, associations must still look to their governing documents for qualifications and conditions under which the developer can retain seats on the board.

Second, SB 323 allows for non-natural person members, such as trusts, LLCs, corporations, and/or business entities to designate a natural person to act as the member. As such, the entity could have their tenant act as the member. There is no specific requirement for when the designation is made, only that it is made by the governing body of the entity. Therefore, the designation could be made at the same time as the nomination. In order to verify the correct party has made the designation, associations need to review documents from the entity describing the governing body, minutes from corporations where directors have been elected or appointed to the board, etc. It is recommended that associations develop a procedure for entities to designate persons to act on their/its behalf including preparing documents that the entities will be required to be submitted along with the designation and inform entities of same in the election rules.

Associations are now provided additional limited options for director qualifications. For these, it will be up to the association to adopt them into the association election rules, or not.

One such option is to require nominees to be current in assessments, which does not include fines, interest, late charges, collection costs or charges from third parties. However, if amounts were paid under protest or are included in a payment plan, then an association may not disqualify the nominee. This qualification requires that seated directors also remain current in their assessments to remain on the board. Associations that select this option will then be required to enforce the qualification by removing any director that is not

current in their assessments. In order to do this, associations must decide how many days past due a director can be before starting the removal process.

Boards should consider if one missed payment (or part thereof ) is enough to disqualify or if it prefers a different threshold. Whatever the board decides, the same requirement must be applied to nominees/ candidates and directors. While SB 323 does not address the removal process for a director, California Corporations Code 7221(b) provides that a board can remove a director by majority vote of qualified directors, provided that the qualification was included in the bylaws or articles of incorporation at the beginning of the disqualified director’s term.

Since SB 323 supersedes the Corporations Code, SwedelsonGottlieb recommends removal at the time the director becomes disqualified due to the delinquency even if the qualification is not included in the bylaws or articles of incorporation or it was not in effect at the start of the director’s term.

Third, an association may disqualify a nominee when a co-owner of the same separate interest is already nominated or seated on the board.

Fourth, an association may disqualify a nominee who has not been a member, as in an owner of their separate interest, for at least one year. We recommend that associations use one year from the date of ownership of the separate interest which is then tied to the date of the board election, so the nominee would be qualified to sit, as of that date, when elected. One could also read into the law that the year should be fixed to the nomination deadline, to be qualified to be nominated however this would be problematic if an association’s election rules allowed for nominations from the floor.

Fifth, an association may disqualify a nominee with a felony background that would cause the association to lose or not be able to acquire a fidelity bond. In order to determine what would constitute or trigger this uninsurable candidate, an association’s board will need to consult with the association’s insurance broker or carrier. Not all felonies will have an impact on fidelity insurance and the age of the felony record may also affect the insurance carrier’s decision. Associations will want to have written opinions from their broker or carrier about the nominee’s specific circumstances in order to disqualify the nominee.

For any of the above required or optional disqualifications, the association must provide the nominee an opportunity to participate in internal dispute resolution before the association can disqualify the nominee. Due to this requirement, we CONTINUED ON PAGE 14

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DIRECTOR QUALIFICATIONS UNDER SB 323 CONTINUED FROM PAGE 13

DIRECTOR’S MESSAGE

recommend that associations build in enough time to go through this process in its election calendar.

All other director qualifications that may exist in your bylaws are now invalid. This includes residency restrictions, term limits, conflict of interest provisions, etc. For nominees that would have been disqualified under these provisions in an association bylaws, they will no longer be controlling.

While SB 323 does not require amendment of bylaws to comply with the law, for clarity for members, it is recommended that the election rules address any discrepancies and/or inconsistencies between the election rules and the bylaws and advise that the election rules will be controlling.

Sandra L. Gottlieb is one of California’s leading community association attorneys. She is a founding partner of the law f irm of SwedelsonGottlieb

A.J. Keefe CAI-Greater Inland Empire Chapter

B

ring on 2020! With such a milestone year upon us, we thought it would be of use to provide you with a calendar to cut out on the inside of the back cover of this issue.We are in the fortunate situation to begin our first full year with a solid foundation created by your hard work and the diligence of our former Executive Director, DJ Conlon. These efforts have cleared the path for us to take advantage of another privilege of calling the Inland Empire our home. I say “we” because we have brought on a new staff member in Sean Floody to be our Director of Marketing. With his expertise and your input we will have our new website going live next month, not to mention the in-house design of the directory, Connect Magazine and collateral for all of our upcoming events.

According to the University of California, Riverside School of Business Center for Economic Forecasting and Development, the total number of business in the Inland Empire was 11.6% which exceeded the growth rate of the state by 2.5% from 2011-2016. Growth is the key word, and we plan to capitalize on this forward momentum within our chapter. If you have had the chance to look over the 2020 Marketing Plan you will see new events, new locations and new opportunities all focused on both engaging current membership as well as trying to entice a new audience. The best news is that we have a huge pond to fish from with more than 4.5 million people calling the Inland Empire home.

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Register today for this one-of-a-kind event for a unique learning opportunity to discuss emerging trends and legislative issues important to the practice of community association law, as well as excellent opportunities for professional networking!

Register to attend today at CAIonline.org/2020LawSeminar 14 |

CONNECT MAGAZINE • ISSUE FOUR 2019

SIX WAYS TO MINIMIZE YOUR RESERVE CONTRIBUTIONS

By Kevin Leonard, RS, Association Reserves, Inc.

W

hy put more money into your reserve fund than necessary? I can’t think of a good reason!

You don’t want to make reserve contributions that err on the side of being too little, that may lead your association toward a special assessment, borrowing, or the even higher costs that come with deferred maintenance. But you shouldn’t put away too much either. Let me give you six ideas how to responsibly minimize your reserve contributions. #1. Perform timely ongoing maintenance

#2. Review your actual replacement needs

A touchup paint project, paid for through the operating budget on the high-exposure surfaces that get the most weathering, may allow you to extend the useful life of a repainting project from five years to six years. Look at it this way: Suppose a repainting project has a useful life of five years and costs $20,000. The value of its deterioration is $4000/yr.

If the association can pay for a $500 paint touchup to extend the useful life to six years, the deterioration is reduced to about $3500/yr. You just saved $500/yr on an ongoing basis! This same principle can be applied to other components, including roof maintenance, gutter cleaning, carpet cleaning, asphalt cleaning and sealing.

Don’t execute a reserve project just because your reserve study indicates it has a remaining useful life of zero years. If a fence is still standing and strong, don’t replace it prematurely. If that pool heater is still serving well, don’t replace it prematurely. This is another way to “extend” the useful life of your reserve components, stretching the replacement cost over a larger number of years. It’s a also a good reason to update your reserve study every year because extending the useful life of your reserve components generally translates to a lower reserve contribution. Caution! Know the difference between extending the useful life of a component and deferring maintenance!

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SIX WAYS TO MINIMIZE YOUR RESERVE CONTRIBUTIONS CONTINUED FROM PAGE 15

#3. Allow an outside organization to pay part of your contributions How is this done? It’s called reserve interest, and you get it from the institution that holds your reserve funds. Even with today’s low interest rates, outside money helps, and it adds up to a surprisingly significant amount over the years as it gradually compounds. Too many associations aren’t getting any interest, or aren’t making timely deposits (or insufficient deposits) because they don’t think that .5% or 1% interest is worth earning. That kind of thinking is just plain wrong. Maximize your reserve interest earnings. Then stand back and watch it compound, slowly and steadily, over the years. Every dollar earned in interest is one less dollar contributed by the homeowners. #4. One of the best ways to minimize reserve contributions is to make sure your reserve study provider uses the “cash flow” method of calculating your recommended reserve contribution.

The alternative “straight line” calculation method points your association towards full (100%) funding in a relatively short number of years. But there’s no reason to be that aggressive. You can still achieve a fully funded objective (a good idea, by the way) using the “cash flow” calculation method. Your association will get to full (100%) funding, but more smoothly, and over a few more years. Distributing the reserve income burden over many years is the most responsible reserve funding approach. This can make a big difference in lowering your calculated reserve contributions along the way. #5. Review your operating budget to verify that you are not “double-budgeting” Double-budgeting happens when a reserve project is funded both in operating and reserves. If you are successfully repainting 1/5 of the buildings every year in the operating budget, you don’t need to include a repainting component in your reserve study!

Look closely to find if this is true with tree trimming, pool furniture, smaller mechanical components, etc. You only need one replacement budget for a component, not two.

2017 AWARD WINNER 16 |

CONNECT MAGAZINE • ISSUE FOUR 2019

#6. Avoid these three common mistakes that will make reserve expenses higher A. Deferring projects. Avoiding a repair or replacement project “just because” is a bad idea. Deferring the expense doesn’t just postpone the expense. Deferred projects tend get more expensive due to deterioration of underlying materials. This is especially true of asphalt, painting, and roofing. There is a difference between extending the useful life of a pool heater and deferring a critical seal/repair project for your streets. By deferring, you’re doing the association a financial disservice.

B. Thinking 50% funded means making 50% of your full funding contributions. Funding reserve projects is expensive. Even a baseline funding objective (where your contributions are designed to just keep the reserve fund barely positive) requires a lot of money. For this reason, baseline funding contributions average only 13% less than full funding contributions. Thinking you can cut your full funding contributions in half typically leads to running out of reserve funds in just a few years.

C. Head in the Sand. Thinking that the asphalt will “essentially never” need resurfacing, or that a roof or elevator is a “lifetime component” are both critical mistakes. Calculating reserve contributions without those influential components is irresponsible.

Asphalt, roofing, and major mechanical components are destined to deteriorate and will inevitably fail. Ignoring that reality will only commit your association and future homeowners to an unstable financial future that includes special assessments or borrowing.

The Bottom line: The primary responsibility of the board of directors is to maintain the physical assets of the community, many of which will deteriorate on a fairly regular cycle. These assets can be translated into a list of reserve components, each with its own useful life, remaining useful life and replacement cost. There are many wise steps to minimize your reserve contributions necessary to ensure timely repairs and replacements, but it is unrealistic to expect a substantial reduction. Yes, reserve expenses can be very expensive, but they are also predictable. Successful community associations understand that financial stability begins with planning appropriately and responsibly for the significant projects your community will face.

Kevin joined Association Reserves, Inc. in 2013 after graduating from California Lutheran University. His experience includes condominiums and homeowners’ associations ranging from 4 unit condos to 1,000+ unit PUDs. Kevin earned the Community Association Institute’s Reserve Specialist (RS) designation and has the distinction of being RS #294. He enjoys the demands of this job which require him to think critically through situations as well as to communicate clearly with clients, in order to bring clarity to Reserve planning and disclosure.

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18 | | CONNECT CONNECTMAGAZINE MAGAZINE•

ISSUE • ISSUE FOUR FOUR 2019 2019

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Failing to incorporate a CID could lead to liability for all of the individual members...

WHAT’S YOUR (CORPORATE) STATUS?

By Terri Guest Berg Insurance Agency

L

ately, we have seen several associations who have had their corporate status suspended by the California Secretary of State. We reached out to Alex Sohal, Esq. from Adams|Stirling Professional Law Corporation for answers to some questions about corporate status.

1. Is it important for common interest developments to be incorporated?

Yes! It is important for an unincorporated common interest development (CID) to incorporate. Although an unincorporated CID has a legal existence separate from its membership and may exercise all of the powers of incorporated CID as listed in Civil Code 7140, there are some additional benefits to incorporating.

One benefit is being subject to procedural guidelines provided in the Corporations Code and case law. Arguably the most important benefit of incorporating is the protection it offers to members against liability for lawsuits. Failing to incorporate a CID could lead to liability for all of the individual members, whereas incorporating the CID creates a legal entity that is named in the lawsuit and prevents individuals from being held liable in most cases. Furthermore, banks are generally more willing to extend loans and vendors are more willing to open accounts with incorporated CIDs. Of course, the level of formality increases with incorporating a CID, but the benefits should be considered carefully.

2. What are the reasons corporate status can be suspended or revoked?

It is important to point out that a CID’s corporate status may be suspended or revoked, but that by itself does not terminate the CID’s status as a corporation. CIDs can have their corporate status suspended for the following reasons: • Failure to file tax returns • Failure to pay taxes • Failure to file a “Statement of Information” form (Form SI-100) with the Secretary of State • Failure to file a “Statement by Common Interest Development Association” form (Form SI-CID) with the Secretary of State

Some of these requirements are yearly and others are every other year, so a CID should carefully review these requirements to avoid suspension of the CID’s corporate status.

3. What are the repercussions of having your corporate status suspended?

The following is a list of repercussions as a result of corporate status suspension: • The CID could lose its corporate name if the name is reserved by another party during the suspension period.

• The CID would not be able to initiate or defend itself against lawsuits while the corporate status is suspended. If the CID is in litigation while the suspension occurs, it could prove problematic until the corporate status is revived.

• The CID would lose the right to enforce contracts while its corporate status is suspended.

• The CID loses the right to obtain an extension to file tax returns.

• If a CID has a suspended status for at least 48 months, the Secretary of State can administratively dissolve the corporation, which could have a significant impact on the CID. Alex Sohal, Esq. serves as corporate counsel to common interest developments, including, residential, commercial, mixed-use developments and condominiums of all sizes throughout California.

Terri Guest, CIRMS, CMCA is the Northern California Sales & Marketing Representative for Berg Insurance Agency and can be reached at Terri@berginsurance.com.

ISSUE ISSUE FOURFOUR 2019 2019 • CONNECT • CONNECT MAGAZINE MAGAZINE| |

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ACCESSORY DWELLING UNITS: How Association’s Governing Documents are Impacted by AB 670

I

By Jeffrey A. Beaumont, Esq., CCAL and Tawnza Sofranko, Esq. Beaumont Tashjian

n 2017, legislation was passed, making accessory dwelling units legal in California. However, strict permitting regulations previously made accessory dwelling units difficult and expensive to construct. Recently, a number of bills were passed, making the process to construct accessory dwelling units easier and more affordable.

Effective January 1, 2020, an association’s governing documents may not prohibit or unreasonably restrict the construction or use of an accessory dwelling unit. Specifically, Assembly Bill 670 (AB 670) voids any provision of an association’s covenants, conditions and restrictions or rules and regulations that prohibit the construction 20 |

CONNECT MAGAZINE • ISSUE FOUR 2019

of an accessory dwelling unit on a lot zoned for single-family residential use.

The California Legislature passed this bill in response to California’s affordable housing shortage. AB 670 is intended to encourage owners to convert and/or construct additional living spaces within their property by removing the many obstacles that previously hindered the process of building accessory dwelling units. The Legislature did so by reducing permitting fees, minimizing setback and lot size requirements, and eliminating parking requirements.

While associations may not effectively prohibit accessory dwelling units, they are

permitted to adopt “reasonable restrictions”, which is defined to mean restrictions that do not unreasonably increase the cost to construct, effectively prohibit the construction of, or extinguish the ability to otherwise construct, an accessory dwelling unit or junior accessory dwelling unit.

An “Accessory Dwelling Unit” (ADU) means an attached or a detached residential dwelling unit that provides complete independent living facilities for one or more persons and is located on a lot with a proposed or existing primary residence.

It also includes permanent provisions for living, sleeping, eating, cooking, and sanitation on the same parcel as the singlefamily or multifamily dwelling is situated.

to expedite the approval process for an ADU. Specifically, the law states that a local agency must act within sixty (60) days from the date the application is received, amending the Government Code from the prior one hundred twenty (120) day requirement.

The following are various other bills the Legislature passed which support and facilitate the construction of ADUs: Assembly Bill 68: Reduces ADU approval requirements Assembly Bill 587: Provides an exemption that would permit nonprofit corporations to sell or convey an ADU separately from the primary residence so long as strict guidelines are followed Assembly Bill 671: Expedites the approval process and provides for financial incentives related to the construction of ADUs Senate Bill 13: Significantly reduces time for processing ADU applications A “Junior Accessory Dwelling Unit” ( JADU) is a unit that is no more than 500 square feet in size and contained entirely within a single-family residence. A JADU can include separate sanitation facilities or may share sanitation facilities with the existing structure.

In addition to AB 670, a number of companion bills were passed to promote the construction of ADUs. Among others, Assembly Bill 881 requires local agencies

As you can see, these new laws will create many significant issues within planned unit developments. As the number of ADUs in a community increase, so will parking problems and the use of amenities within the community. For example, the law provides that if a garage or parking structure is converted to an ADU or JADU, local agencies cannot require those off-street parking spaces to be replaced.

Further, the law allows owners to park in setback locations and in driveways.

Ultimately, this may result in an increased number of vehicles parked on streets and in driveways.

Fortunately, the new law does provide that the local agency shall require the property to be rented for a term longer than 30 days, protecting communities from excess use and the nuisances associated with transient tenancy, i.e., short-term rentals. The unanswered question, however, is whether this requirement applies to accessory dwelling units constructed before January 1, 2020, the date AB 670 starts.

In light of these new laws, and the technicalities imposed by same, associations, through their boards of directors, should consult with legal counsel to consider amending existing architectural guidelines to include reasonable restrictions specifically addressing the construction of accessory dwelling units. Of course, every community has unique differences; therefore, architectural guidelines should be carefully drafted to ensure they address the needs of the community, taking into consideration aesthetics and privacy, and are reasonable and enforceable. Boards should also consult with legal counsel to review the association’s governing documents and determine whether any provisions are rendered unenforceable by the new laws and adopt customized architectural guidelines to govern the construction of accessory dwelling units. Without rules addressing accessory dwelling units, the neighborhood facilities and aesthetics may be significantly impacted.

Jeffrey A. Beaumont, Esq., and Tawnza M. Sofranko, Esq., are attorneys with Beaumont Tashjian with off ices throughout Southern California. They specialize in general counsel, litigation and assessment collection.

ISSUE FOUR 2019 • CONNECT MAGAZINE

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T HAN K YOU FOR A MEMORABLE EV EN I NG!

2020 QUARTER 1

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1-3 PMDP M100; CAI Office 8 Expo; Silver Lakes 12 Columbus Day *office closed* 16 Legal Forum; Orange County 27 Board Meeting 29 Fall Harvest; Crestmore Manor

11 Thanksgiving Cooking Class; Temecula

10 TOPS/Holiday Board Meeting; Pechanga

13 Veterans Day observed *office closed*

16 New Member Mixer

17 Thanksgiving Cooking Class; Claremont

24-31 Holidays *office closed*

F E B R UARY

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1 New Year’s Day *office closed*

6 Expo; Riverside Convention Center

5 Cornhole; Bel Vino Winery

15-18 National Law Seminar; Las Vegas

17 Presidents’ Day *office closed*

17 New Member Mixer

20 MLK Jr. Day *office closed*

22 Education Class; CAI Office

24 Board Meeting; CAI Office

28 Board Meeting

30-31 CA Legislative Day; Sacramento

30 Axe Throwing; SOCAL Axe Throwing

M AY

J U NE

3 Golf Tournament; Dos Lagos Golf Course

1 Country Faire; California Citrus Park

3 Expo; Victoria Gardens

16 Expo; Pechanga Resort Casino

9 Education Class; CAI Office

10-12 CAI National Conf; Ft. Lauderdale

26 Board Meeting; CAI Office

20 Education Class; CAI Office

25 Memorial Day *office closed*

25 Inland Empire Olympics, Ontario

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3 July 4th observed *office closed*

4 Expo; Riverside Convention Center

7 Labor Day *office closed*

15 Axe Throwing, Axe Lair

13 New Member Mixer

19 Monte Carlo; Pechanga

21 Board Meeting; CAI Office

22 Education Class; CAI Office

29 2021 Committee Planning Meeting

31 CLAC Chapter Fundraiser; Longshadow

25 Board Meeting 28 Escape Room; Pins & Pockets

26-27 Thanksgiving *office closed*

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