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FEBRUARY 2007

A Journal for Community Association Leaders

echo-ca.org

HOA Financial Analysis

ALSO INSIDE THIS ISSUE:

• When Going to Court is Good • Earthquake Insurance • Rain Gutter Screens

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HOA FINANCIAL ANALYSIS—PART I . . .

CONTENTS

CPA Michael Gartzke summarizes in this article financial information for the past year from the homeowner association financial statements for the 60 associations that he currently reviews. The goal of the compilation was to develop a range of data, minimum, maximum and median (half above and half-below), so that a particular association’s data could be compared with all the data in the sample set. While developed for Santa Barbara Country associations, the information is informative for any association.

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WHEN GOING TO COURT IS GOOD . .

A key challenge facing any board is membership apathy or high voting approval requirements in an association’s governing documents. This article addresses the effort it takes to develop and present governing document amendments to the members and an infrequently used but terrific judicial tool that permits a Court to authorize amendments and other “corporate” approvals even where the voting requirements of the governing documents cannot be met.

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THE ANNUAL DILEMMA . . . . . . . . . . .

Many community associations have been considering whether they should buy earthquake insurance, now that costs for this coverage have often become exorbitant. In this article, Attorney Beth Grimm discusses the ramifications of buying or not buying this coverage and explains her recommendation that associations should purchase earthquake insurance if they can get it, even if the price is high.

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TAX REPORTING AND DEADLINES . . .

The start of a new year is here and that means it’s tax time again. This article provides a summary of the tax reporting and filing requirements for community associations. Failure to file these reports can result in penalties and suspension of an association’s corporate status.

The ECHO Journal is published monthly by the Executive Council of Homeowners. The views of authors expressed in the articles herein do not necessarily reflect the views of ECHO. We assume no responsibility for the statements and opinions advanced by the contributors to the magazine. It is released with the understanding that the publisher is not engaged in rendering legal, accounting or other professional service. If legal advice or other expert assistance is required, the services of a competent person should be sought. Acceptance of advertising does not constitute any endorsement or recommendation, expressed or implied, of the advertiser or any goods or services offered. We reserve the right to reject any advertising copy. Copyright 2007 Executive Council of Homeowners, Inc. All rights reserved. Reproduction, except by written permission of ECHO, is prohibited. The ECHO membership list is never released to any outside individual or organization.

EXECUTIVE COUNCIL OF HOMEOWNERS, INC. 1602 The Alameda, Suite 101 San Jose, CA 95126 408-297-3246 Fax: 408-297-3517 www.echo-ca.org info@echo-ca.org Office Hours: Monday–Friday 9:00 a.m. to 5:00 p.m.

BOARD OF DIRECTORS AND OFFICERS President David Hughes Vice President Karl Lofthouse Treasurer David Levy Secretary Dorothy Kopczynski Directors Paul Atkins Jerry L. Bowles John Garvic Robert Hood Robert Rosenberg Diane Rossi Richard Tippett Wanden Treanor Steven Weil Executive Director Oliver Burford Legislative Consultant Government Strategies, Inc.

FEATURES Calendar of Events . . . . . . . . . . . . . . . .26 Realities of Rain Gutter Screens . . . . . . .28 Regaining Architectural Control . . . . . .29 Business/Professional Directory . . . . . . .30 ECHO Bookstore . . . . . . . . . . . . . . . . . .32 FEBRUARY 2007

Publication Design and Production George O’Hanlon

News from ECHO . . . . . . . . . . . . . . . . .34 ECHO Volunteer Honor Roll . . . . . . . . .38 About ECHO . . . . . . . . . . . . . . . . . . . . .38 ECHO Marketplace . . . . . . . . . . . . . . . .41 Advertisers Index . . . . . . . . . . . . . . . . . .41 4

ECHO MISSION STATEMENT The mission of ECHO is to advance the concept, interests and needs of homeowner associations through education of and related services to board members, homeowner members, government officials and the professionals in the industry. ECHO JOURNAL


Tyler P. Berding, Esq.

COMMON

SENSE

Thoughts for New Association Board Members

Y

ou’ve just been elected to the board of directors of your community association! Congratulations? Condolences? Which of those do you deserve? Perhaps the answer depends on just how you plan to approach the duties of your office. Board members, like any other representative, come in all shapes and sizes, and of course, all frames of mind. Were you tricked into accepting the nomination by your (former) best friend? If so, you might be asking yourself, “What am I doing here?” Did you run for the board because you didn’t have anything better to do, and now you’re asking “When does the fun begin?” Did you actively seek the responsibilities of a board member because you did not like the bums in charge and were determined to do something about it? Or, were you like most board members and felt that it was your turn to give some time to the community? Whatever the reason or circumstance that got you into the job, all of you have one thing in common; your service to the community will depend upon whether you have a desire to just do the job, or to do the job right! The responsibilities of board members are a serious and major undertaking. The physical plant of the association alone could be worth millions of dollars. Add the cost of insurance, management, utilities, reserve contributions and all of the many other items of the budget, and your association could easily be a multi-million dollar corporation— and you are one of the directors of that corporation! Want to quit now? Don’t. Your friends and fellow homeowners are depending on you. They are depending on you to be the trustee of the corporate assets—their homes. So what have you decided? Are you ready to be an effective board member? If you’re ECHO JOURNAL

Education of board members, new and old, is what ECHO is all about.

still reading, I assume the answer is “Yes”— and that’s fine because you are the ones I want to talk to anyway. What does it take to be a responsible and effective board member? Experience, certainly. Managing the affairs of a community association requires many of the same skills you acquired running your home or business—a basic understanding of finance and budgets; reasonable management and “people” skills; a knowledge of what makes property valuable, and what makes it lose value; and garden-variety common sense. This knowledge and these skills are useful, but they are secondary to the most important trait of a good board member—a willingness to listen and learn. As a board member of a community association, you do not need to be expert in any field. There are many good professionals 5

available to help you, starting with your manager. In fact, the most effective board members usually do not undertake to provide the association with any specific expertise directly, but rather use their skills to evaluate the recommendations of the professionals and contractors that work for them, listening and learning. If you spend more time listening to the recommendations of experienced professionals and vendors, you will spend more time learning the basics of good community association management. You will then be very well equipped to make the decisions upon which your neighbors are depending. Education of board members, new and old, is what ECHO is all about. For 35 years, ECHO has provided the directors of its member associations with quality seminars and publications. The ECHO Annual Seminar coming up this June (and the many regional and mini-seminars held around the Bay area throughout the year) are wonderful opportunities to expand your knowledge and increase your effectiveness as a board member. For new board members, the Basic Training track presented at the Annual Seminar each year is an absolute must. Those of you with greater experience will be able to choose from a long list of relevant topics. You as a community association board member hold a position of considerable authority over the lives and property of the members of your association. You enjoy their trust. These privileges carry with them a measure of responsibility—the responsibility to listen and learn!

Tyler Berding is a founding partner of Berding & Weil, a construction defect and homeowner association law firm and is a former member and the immediate past president of the ECHO board of directors. FEBRUARY 2007


HOMEOWNER ASSOCIATION FINANCIAL ANALYSIS Part I—One-Year Data Comparisons Michael J. Gartzke, CPA

n the fall of 2005, my “staff” (two teenage sons) and I developed a spreadsheet containing financial information from all the homeowner association financial statements that I currently review, now totaling 60 associations. Professional standards for CPAs have been recently amended to emphasize more “analytical review” procedures by the CPA when performing a financial statement review and developing the financial statements that are required annually by California law when associations have more than $75,000 in combined assessment and other revenues. One of the analytical review procedures available is to compare the entity’s financial information with comparable information from other entities in the same industry, but not a lot of that

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FEBRUARY 2007

kind of data exists for homeowners associations. I had several goals in mind when I prepared the initial spreadsheet: • Develop data specifically for the Santa Barbara geographic region. In the study, 57 of the associations are in South Santa Barbara County and three are in North Santa Barbara County. • Establish baseline amounts that could be updated continually as financial reviews were prepared for 2005 and fiscal 2006 and examine the changes in the amounts over a one-year period. • Create an ongoing project that can be reviewed in the future to determine longer-term trends. • Develop a range of data, minimum, maximum and median (half above and half-below), to 6

compare a particular association’s data set with all the data in the sample. • Provide a schedule to each association in the sample to compare its own data to the total sample data. The initial schedules to the associations in the sample went out in November 2005. These schedules were sent to my association clients who use the calendar year as their reporting year. An updated schedule is also provided at the conclusion of the review engagement. These schedules have been the source of much discussion among board members, association managers and me. We know that homeowner associations are not a homogeneous group. We have new associations and mature ones. We ECHO JOURNAL


Table 1 Homeowner Association Financial Comparisons And Analysis Fall 2005 To Fall 2006 Financial Data Categories (Median) (per member per month) Monthly Assessment

Fall 2005

Fall 2006

Dollar Change

Percent Change

$285.00

$318.45

$33.45

11.74%

214.40

234.32

19.92

9.29%

72.22

73.60

1.38

1.91%

Rate of Return— Investments

0.92%

1.75%

0.83%

90.22%

Utilities Expense

$60.75

$64.39

$3.64

5.99%

Common Area Maintenance

90.93

94.61

3.68

4.05%

Insurance

43.62

54.22

10.60

24.30%

Administrative Expense

23.26

26.04

2.78

11.95%

Reserve Expense Paid Out

44.24

57.29

13.05

29.50%

2663.00

3093.00

430.00

16.15%

16.44

14.11

-2.33

-14.17%

Operating Assessment Reserve Assessment

Cash & Investments (per member) Delinquent Assessments (per member) Consumer Price Index

188.50

196.50

8.00

4.24%

Figure 1 Operating Expense Allocation

Administrative Insurance Common Area Maintenance Utilities

FEBRUARY 2007

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have town-home style condominium associations where the association has a lot of common area maintenance responsibility. We have planned developments where the association has limited common area. Some associations pay for a lot of the members’ utilities. Other associations pay none. Many associations are responsible for building insurance including earthquake and flood. Others are only responsible for limited common area elements and insurance coverages for the board of directors. An unexpected result (at least to me) was that board members and managers have been able to cite data in the reports to back positions for the need to increase assessments and to confront all-too-common peer pressure to not raise monthly assessments. Comments such as “We already have the highest monthly assessment in town” or “If we go over $300 per month, we won’t be able to sell our units” are common. These reports have thus been used to support facts and debunk myths. Table 1 compares data from Fall 2005 to Fall 2006. The data is historical. The Fall 2006 data includes calendar year 2005 plus some associations whose fiscal years ended during 2006. Commentary follows. HOMEOWNER ASSO CIATIO N F I NANC I AL CO MPARISO NS AND ANALY SIS F ALL 200 5 TO FALL 2 0 0 6

Monthly Assessment: The median monthly assessment increased from $285 to $318.45 in the past twelve months, an increase of 11.74%. This increase is substantially higher than the 4.24% inflation rate for Southern California measured by the Bureau of Labor Statistics. Operating Assessment: The median operating assessment posted a nearly $20 per month increase or 9.3%. Reserve Assessment and Expenses: The median monthly reserve assessment increased only $1.38 or 1.9%. The total monthly assessment increase of $33.45 exceeds the sum of the operating and reserve increase of $21.30 due to the independent computation of the operating and reserve assessments’ median amount. Reserve expenses paid out (median) were $57.29 per member per month—$16 less than the $73.60 collected for reserves. Rate of Return: During 2004, interest rates hit historic lows. The Federal Reserve Bank’s “11th District Cost of Funds” index hit a low of 1.71% in May 2004. Since then, the ECHO JOURNAL


banks’ cost of funds has steadily increased to 4.38% as of September 2006. Those who have adjustable rate mortgages (ARM) are familiar with this index. A borrower who has an ARM at the index plus 2.6% has seen his interest rate increase from 4.3% to 7% during this period. Short-term CD rates that were below 2% three years ago are now up to 5–5.25%. Association return on investments tends to lag these indices. Cash in checking accounts may earn no interest or funds in some savings and money market accounts earn less than 1%. Returns have increased from the Fall 2005 median of 0.92% to the Fall 2006 figure of 1.75%. Because CD rates have been in the 5% range for most of 2006, I expect that the rate of return amount will continue to increase during 2007. Utility Expense: The median association utility costs increased $3.64 per month to $64.39 per month, an increase of 6%. For the median association, utilities comprise nearly 24% of the operating assessment. Natural gas prices increased substantially after Katrina (August 2005) while electric costs increased early in 2006. Many water and trash rates increased 4–5% and some, like Carpinteria Water, had double digit rate increases. Common Area Maintenance: The median association showed a 4% increase in costs from 2005 to 2006. At $94.61 per month, the median association allocates 42.6% of its operating assessment to common area maintenance. Labor costs for landscape and other maintenance services tend to be tied to the Consumer Price Index. Note that the minimum wage increased 11% on January 1, 2007 from $6.75 per hour to $7.50 per hour, and this will indeed have a palpable effect on common area maintenance budgets for 2007 and beyond. Insurance: Insurance costs increased by over 24% for the median association from 2005 to 2006 or $10.60 per member per month. This increase is computed before the latest round of insurance premium increases. The median association was spending $54.22 per month per member on insurance. On a percentage basis, the median association is spending nearly 1/4 of its operating assessment on this one item. Board members and managers have been frustrated by the current insurance markets. Late cancellation notices, skyrocketing premiums (double/ triple), and the lack of choices in coverage have drained association resources from other obligations. These costs have gotten so ECHO JOURNAL

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FEBRUARY 2007


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ANALYSIS

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high that a bank is offering to make a loan to finance premiums at rates lower than insurance companies. Administrative Costs: These costs represent about 12% of the median association’s operating costs and include expenses such as management, accounting, legal, office supplies and income taxes. The increase for the median association was $2.78 per month. Some of the increase can be attributable to increased income taxes on increased investment income from 2004 to 2005. Figure 1 shows the relative size of each of the four major components of an association operating budget. This chart only covers operating items, not reserve funding nor reserve expenses. Administrative costs are approximately half of insurance and utility costs while common area maintenance is just over 40% of total operating costs. Delinquent Assessments: The median amount of delinquent assessments per member actually declined to $14.11 per member per month. An inordinate amount of legislative initiative has been spent on restrictions in collecting assessments. For many, but not all associations, collections are a non-issue. Yet, the increase in mortgage and home equity loan interest rates noted earlier is causing a higher percentage of owners to become delinquent or default on their mortgages. Managers of associations with affordable units are noting an increase in delinquent assessments because of the current interest rate environment. It is possible that a highly leveraged unit could be foreclosed upon by the lender resulting in lost assessments to the association because associations are last in line behind loan lenders. Cash and Investments: In the face of rising costs and pressure to hold the line on assessments, the median association still managed to increase its cash balances by $430 per member during the year to $3,093, a 16% increase. While this may sound to some people like a lot of money, it really isn’t when you consider that costs of major repairs have also increased. There is a substantial range between the minimum and maximum values in each category. For example, a couple of associations have master-metered electricity, which means that the association is paying for each unit’s electric bill. Insurance costs can fluctuate if the association does not carry earthquake insurance or is not responsible for building insurance at all. Some associations have major landscaping responsibility, others ECHO JOURNAL


none at all. Some associations operate a full onsite management office and handle vacation and short-term rentals for their members. And finally, some associations are responsible for many common area components, others very few. This wide range of values is why I have used medians throughout this analysis rather than averages. The “median” of a sample of data is the midpoint of the group and is considered less susceptible to skewing of the results by unusual data than the “average” of that same group of data. For example, the association in our local sample data that has a monthly assessment of $2,164 (yes, that is not a typo) would increase the average monthly assessment for the total sample of 60 associations by $35 by itself. Using the median treats each association the same. The total number of dwellings in the sample is nearly 4,400, a significant portion of our region’s housing inventory. Table 2 shows how wide the range of costs can be. The first column is the minimum amount (would be the lowest rank—60th). The second column is the 25th percentile. One-fourth of the data would be below this number while 3/4 would be above it (rank— 45th). The median amount is where half the amounts are above and half are below. The 75 percentile is where three quarters of the data are below the amount while 1/4 is above. And finally, the maximum is the highest amount reported—rank equal to one. ECHO member associations that are not in the 60-association database can develop their own information from the annual financial statements prepared by their CPAs, property managers, bookkeepers or treasurers and make comparisons with the results in this article. Editor’s Note: Part II of this article that looks at 10-year cost comparisons will appear in the March issue of the Journal. Watch for those interesting results.

Michael Gartzke, an ECHO member, is a Certified Public Accountant with a large homeowner association practice in the Santa Barbara area. He is also the coordinator of the South Bay Homeowners Group with a membership of about 120 associations. ECHO JOURNAL

Table 2 Homeowner Association Financial Comparisons Range of Assessments and Expenses Fall 2005 To Fall 2006 Per member (unless otherwise noted)

25th percentile

Minimum

Monthly Assessment

75th percentile

Median

Maximum

$100

$238

$318

$405

$2,164

80

177

234

313

2,164

0

50

74

104

226

Rate of Return— Investments

0.00%

1.28%

1.75%

2.32%

5.75%

Utilities Expense

$9

$38

$64

$91

$155

Common Area Maintenance

37

66

95

151

1,367

Insurance

5

39

54

79

434

Administrative Expense

2

20

26

39

188

Reserve Expense Paid Out

0

21

57

139

728

555

2,125

3,093

5,291

32,573

0

0

14

44

544

Operating Assessment Reserve Assessment

Cash & Investments Delinquent Assessments 11

FEBRUARY 2007


WHEN GOING TO COURT IS GOOD Getting Those Amendments and Corporate Resolutions Approved Steven S. Weil, Esq.

document amendments to the members and the infrequently used but terrific judicial tool that permits a Court to authorize amendments and other “corporate” approvals even where the voting requirements of the governing documents cannot be met.

here are many reasons a board of directors might consider amendments to the CC&Rs, Bylaws and Articles of Incorporation. These might include a wish to update the documents or conform them to new legislation (like 2006’s election rule laws) or to eliminate ambiguities or address problems that have become evident as a development ages. Likewise, there are times when membership consent is needed to obtain loans, buy or sell property, construct capital improvements, authorize annexations and in other situations.

T

T HE AMEND MENT P R OC ES S

The process usually begins when the board or manager recognizes that the governing documents are out of date or fail to address basic operational problems adequately. Documents become out of date mostly because of changes to the Corporations Code (for example, sections permitting electronic communications) or the Davis-Stirling Common Interest Development Act (“Act”). Problems that can be solved by amendments include disputes over maintenance

A key challenge facing any board is the problem of membership apathy or high voting approval requirements contained in an association’s governing documents (Articles, Bylaws, CC&Rs and Rules). This article addresses the effort it takes to develop and present governing

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or architectural requirements or the authority of the board or committees, to name a few. Once the decision to amend has been made, next steps include getting the participation of key directors, committee or association members to assist in the process, selecting counsel and reviewing legal input as to the many amendment options available. Experienced counsel will have templates based on years of experience and analysis but these forms will always require modification, sometimes a great deal, depending on the needs, interests and wishes of the board or committee. Membership input can be key to a successful amendment project. “Q&A” letters, informational meetings and other forms of communication can elicit from the members issues that are very important, unimportant or, significantly, those that galvanize opposition threatening the entire process. Knowing what types of changes in the documents will or won’t aid in adoption of amendments can help the board and counsel frame the issues properly before submitting an amendment package to the members. The amount of time the pre-voting process will take varies with each community and the issues it faces. The board should anticipate several months for the preparation and voting process. Some projects can be done faster, others will take longer; the difference is mostly in the type and amount of pre-voting input to the basic changes recommended by counsel that may occur on any given project. G ET T I NG O UT THE V O TE

Amending most governing documents requires “supermajority” approval, that is, the approval of 60%, two-thirds or 75% of the membership. This high bar can be difficult to achieve. Techniques to increase the chance of obtaining the required approval include providing the members with clear explanations for changes and statutory requirements, a forum for discussion, flexibility in the “final product” and extending the voting deadlines. Even so, these efforts are not always enough to assure passage of the amendment. In some of these cases, a court may be willing to step in and validate the amendments even without the approvals required by the documents. The same considerations apply to resolutions submitted to the members for approval. For example, many governing documents prohibit, without the approval of 75% of the members, expensive capital improvements, FEBRUARY 2007

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ECHO JOURNAL


loans, easements or the sale and purchase of property. In those cases, a great deal of preparation and communication is needed to garner that approval. When the approval levels cannot be obtained, judicial relief may be available. T H E FOU R K EYS TO JU D ICIA L R E L IE F

Generally, courts are reluctant to intervene in the “governance” of a homeowners association. However, the legislature has carved out exceptions that permit judicial intervention to authorize complete or “spot” amendments to the CC&Rs (Civil Code §1356) or corporate action, including amendments to the Articles of Incorporation and Bylaws and other types of proposed resolutions (Corporations Code §7515). In effect, these laws permit a Court to lower the voting requirements necessary to implement amendments or loans, sales, easements or other types of corporate activities. This article focuses first on the rules relating to CC&R amendments under §1356. Procedures concerning corporate approvals and amendments to the Articles and Bylaws are discussed towards the end of the article. Obtaining judicial relief is a four step process: a Petition must be filed that sets forth the governing document voting requirements and the steps taken and documents used to comply with those requirements; a hearing on the granting of the Petition must be set and written notice must be provided all members; the association must persuade the Court that granting the Petition and approving the amendments is reasonable; and, if approved, the Order granting the Petition must be filed, recorded and, with the amendments, distributed to all members. Generally, this process is very fast and should normally take 45 to 90 days. It will usually be far less expensive than “litigation.” Step 1: Getting in the Door The association’s Petition must describe the effort made to solicit membership approval of the amendment as required by the governing documents, the number of votes cast in favor and against the amendment and the number of affirmative votes required to approve it. The association must also file copies of the governing documents, the amendment, the notice and voting solicitation materials and a short explanation of the reason for the amendment. Other information and documentation the association believes relevant to the issues may also be filed. Typically, this will include legal arguECHO JOURNAL

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FEBRUARY 2007


ment as to why the Petition should be granted. Step 2: Setting the Hearing At the time of the filing of the Petition, the association may apply for a hearing date. Unlike traditional lawsuits, the “trial” of the Petition will occur at a one day hearing in which the Court will hear arguments from counsel and anyone else (owners included) who wish to support or oppose the Petition. Notice of the hearing must be provided all owners, and typically notice by first class mail is acceptable. The Notice usually will be accompanied by a copy of the Petition, the Order setting the hearing and a letter from counsel explaining the procedure and advising owners of their right to attend the hearing, write the Court and to obtain copies of all papers filed by the association in support of the Petition. At least 15 days notice of the hearing must be given; typically, the hearing is held within 45 to 90 days of the date the Notice is mailed to owners. Step 3: Objections Before and at the Hearing Opponents of the Petition may send written objections to the Court. These can be informal letters or formal briefs. Also, opponents (or their counsel) may attend the hearFEBRUARY 2007

S T R ATEGIC ISSUES

Even if all the requirements for judicial relief are met, the Court is not required to grant the Petition. ing and ask the Judge to permit oral argument. The association’s attorney will likewise attend to address the Judge’s concerns and to respond to objections. Depending on the issues, the hearing will usually take between 15 and 45 minutes. Step 4: After the Hearing If the Court grants the Petition, association counsel will obtain a certified Court Order and cause it, related documents and the amendments to be filed with the County Recorder. Once filed the amendments become effective as if approved by the members. The amendments must thereafter be distributed to all members. 16

Even if all the requirements for judicial relief are met, the Court is not required to grant the Petition. It will be denied if the amendments take away the rights of voting classes (unless the amendment is approved by at least half the class), eliminate special developer rights or impact the security interests of lenders. And, importantly, the Petition can be denied if the Court does not think the amendment is “reasonable.” Whether an amendment is “reasonable” will depend on many factors but unfortunately, there are no cases that specifically define how the Court should determine reasonableness. The legislative history to Section 1356 suggests that judicial relief should be used to address “important” amendments or those that failed because of membership apathy, but these requirements are not contained in the law itself. Other considerations might include whether the board extended the voting deadline to permit greater membership participation; if the amendment concerns the revision of maintenance responsibilities as a way of saving the association money or to avoid future responsibility for claims; the extent to which the amendment might ECHO JOURNAL


impact one group of owners at the expense of others; the manner in which the amendment might change existing expectations of the members; and other considerations. J UD ICIAL A P P R O VA L OF C ORP ORA T E A C TION ( A MEN DMEN T S A ND OT H E R VO TI N G R EQ UIRE M E NT S )

Section 1356 of the Civil Code deals with the problem of amending what is a “deed restriction,” a document affecting the use of real property. By contrast, Corporations Code Section 7515 is much broader: it permits a Court to authorize corporate action if “for any reason it is impractical or unduly difficult” for that consent to be obtained by the board or members as provided in the Articles of Incorporation or the Bylaws. The procedural requirements of a hearing and membership notice are similar (but looser) than those mandated by the CC&R Petition procedure discussed above. While a Section 7515 Petition can be used to obtain judicial approval of amendments to the Articles and Bylaws (A Petition for approval of Article and Bylaw amendments can be filed in conjunction with a Petition to reduce the voting requirements for CC&R amendments.), it can also be a powerful tool to achieve political goals that, owing to apathy or other reasons, cannot otherwise be accomplished. Thus, a Court could reduce the quorum needed to conduct elections or the number of membership approvals needed to authorize secured loans, the purchase or sale of property, easements, annexations, capital improvements and special assessments and even the IRS rollover. BE S MA R T A N D FO R W A RD T H INKING

Before embarking on a governing document amendment or any major project that requires membership support, the board and counsel should “look ahead” to situations in which judicial approval might be needed or could be used. Planning in advance how, when and what type of votes are submitted to the members can increase the chance that, “at the back end,” the judicial Petition tools created by the legislature can be used to achieve goals that promote the best interests of the association.

Steven Weil is a founding partner at the law firm of Berding & Weil in Alamo. His practice focuses on legal issues affecting community associations. He is a member of the ECHO board of directors and a frequent speaker at ECHO events. ECHO JOURNAL

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FEBRUARY 2007


M

any community associations have been considering whether they should buy earthquake insurance, now that costs for this coverage have often become exorbitant. After networking with attorneys all over the state of California that have dealt with the problems involving reconstruction, collection of special assessments, and disputes with insurance companies in the aftermath of the Loma Prieta and Northridge quakes, I have concluded that associations should purchase earthquake insurance if they can get it, even if the price is high. The reason: associations that did not have coverage at the time of these two events experienced severely exacerbated problems. Translated into plain language—associations that did not have coverage had a much harder time recovering. Many have still not recovered, even years later. The homeowners who wish to rebuild FEBRUARY 2007

and keep their homes are the biggest losers when there is no insurance and the special assessment to rebuild is out of reach of the average owner. I have spoken to many associations about the considerations behind the decision to buy or not to buy and have shared the floor with insurance representatives who are able to find earthquake insurance, some even with a 10% deductible, a “per building” deductible (which is more desirable than a “per development” deductible) for a sum of money that is sufficiently affordable. By the way, my rule of thumb in 1996–2001 was that I considered an affordable master policy to be somewhere in the range of $400–$600 per year per unit for homes priced in the neighborhood of $200,000. With rising real estate values and a median statewide market value of a home at $500,000–$1,000,000 and with 18

recent rising insurance costs, I would consider protection in the range of $1,000–$1,500 per home per year to be affordable and worthwhile for earthquake coverage. A board must take into consideration the interests of the community and not make decisions based on individual interests. Many boards, when they face the increases needed for earthquake insurance and the cuts in coverage, immediately react with negativity, and their objectivity is lost because the high costs seem unfair. Maybe it is unfair, but life is not always fair. But it is extremely important to consider the risks involved in saying “No” to earthquake insurance, particularly if such coverage has been in place for a time. Those risks are: • If there is an earthquake, the board members and association could be sued and ECHO JOURNAL


THE ANNUAL DILEMMA To Buy or Not To Buy Earthquake Insurance Beth A. Grimm, Esq.

the directors and officers liability carrier may deny coverage for “failure to insure adequately.” Such “failure” is an excluded item on most directors and officers liability coverage policies. Even though there does not yet seem to be a binding precedent, many insurance companies are publicly claiming that they could assert this exclusion as a basis to deny a claim if an association or board were sued for failure to purchase earthquake insurance. • If the association has no coverage, and there is an earthquake, only those owners with substantial equity in their property will be inclined to stay and weather the special assessments needed to reconstruct. In many cases, we could easily be talking about the difference in a $25,000 to $50,000 assessment in an association ECHO JOURNAL

that has master earthquake coverage as opposed to a $250,000 to $500,000 assessment in an association that is not covered (based on discussion about homes that average $500,000 in cost, perhaps a scarcity in California today). An owner who cannot withstand the payments on an SBA loan (the most chosen loan of choice after Northridge) and walks away from the property leaves other owners to pick up the difference. Thus, in favor of earthquake insurance, even if some owners can withstand the cost, that does not help other owners who live “on the fringe.” • “Stand alone” coverage, which is purportedly being offered for individual homeowners whose associations are uninsured, is not a very practical solution, considering how difficult it would be to rebuild one single unit in a multi-unit building. 19

Besides, reportedly, the quotes given to owners are astronomical. Some policies sold purportedly as “stand-alone” products will only pay if there is underlying coverage, and this kind of coverage may not even be offered as the threat of earthquakes is assessed and reassessed and the other insurance market conditions change. If your CC&Rs require that the board purchase earthquake insurance coverage, then it is my opinion that it must be purchased unless the CC&Rs are amended. If it is not, then there is a problem by virtue of ignoring the governing documents. For any association that is having difficulty getting earthquake insurance or that is having difficulty justifying the cost and is considering just saying “No”, the following [minimal] steps should be taken in order to enable FEBRUARY 2007


Specialized Banking Services

for community associations and management professionals

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the board to claim the decision was a “prudent business decision” and protect the association. The board of directors should investigate as follows: • Obtain risk analysis for type of development and geological location; • Procure multiple bids from insurance companies for earthquake insurance, or from an insurance broker who has access to several different companies; • Survey homeowners to see where they stand on the issue after providing them with meaningful facts and information the board has gathered; • Determine whether the costs involved would require homeowner approval, i.e., are they in excess of legal limits for increases in regular assessments or imposing a special assessment; and • Make a prudent decision after gathering and considering the information as described above. If the association wants to purchase earthquake insurance and the costs exceed allowable limits for increases, then the association must go to the membership to get approval of a majority of a quorum of the homeowners for the special assessment or the increase in regular assessments to cover the insurance costs. Because some governing documents may require majority approval for the purchase, be sure to get legal advice on this. Any associations waiting for a state bail-out program can stop waiting; the California Earthquake Authority, and any other state program selling residential insurance policies, will not provide coverage for associations because associations must purchase commercial insurance. Community associations are considered a business by the insurance world. Owners can purchase coverage on an individual basis from the state, but master association policies are not offered. And the availability of insurance to homeowners, even with the California Earthquake Authority, may in many cases be conditioned upon an association’s providing master coverage. Some associations are considering using the money that would otherwise be used to purchase earthquake insurance for retrofitting. If your buildings could benefit greatly from retrofitting, this might be an option. However, the considerations given in this article still apply. If an association must pay

*CD Inte up

Continued on page 39 FEBRUARY 2007

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ECHO JOURNAL


North Counties Seminar Saturday, March 17 8:00 a.m. to 1:00 p.m.

Community Center 5401 Snyder Ln., Rohnert Park

Yes, reserve _____ spaces for the ECHO North Counties Seminar. Amount enclosed: $__________ (attach additional names) Name: HOA or Firm: Address: City:

State:

Zip:

Phone: Visa/Mastercard No.

Exp. Date:

Signature: Return with payment to: ECHO, 1602 The Alameda, Ste 101, San Jose, CA 95126 Orders will not be processed without payment in full. Fees for cancelled registrations will not be refunded. Telephone: 408-297-3246; Fax: 408-297-3517


QUESTIONS TO ASK YOUR BANKER Geri Kennedy, CCAM

Shomeowners’ association is just as imporelection of a banking relationship for a

tant as the choice of any other vendor and should be given careful consideration. Interest rates, charges and fees vary widely and can have a serious impact on the association’s bottom line. Choosing the local bank or a board member’s favorite broker may not be the best path. Common interest developments (CIDs) are unique in their banking needs. The association has multiple deposits throughout the month, usually has dual signature requirements and often has a volunteer keeping FEBRUARY 2007

track of the funds. Although a CID is a nonprofit organization, it is still considered a commercial account by bankers and brokers and thus does not qualify for many of the “special deals” advertised, as these are generally limited to personal accounts. Officers and/or signers on the account may change at least once a year, and it can be quite time consuming to keep up with multiple signature cards if your funds are scattered in several banks. When interest rates were so low just a short time ago, it was hardly worth the effort to shop around to improve the rate of return 22

on your funds. That is, however, no longer the case. Reserve and excess operating funds should be working hard for the association. In most cases, an association’s reserve study assumes a minimum rate of return; so it is important for the board to assure that the accounts are earning at least that minimum to avoid falling behind on its funding plan. The following list of questions will be helpful in choosing the right place for your association funds: 1. Does the bank have personnel or a specialized department familiar with the homeowner association industry? This can make ECHO JOURNAL


2.

3.

4.

5.

6.

a huge difference in the frustration and efficiency levels for your treasurer or bookkeeper. Are all accounts insured by FDIC insurance? a. Remember that this insurance is limited to $100,000 per institution, per taxpayer identification number. If an association has three $75,000 accounts in one bank, only $100,000 of that $225,000 is insured. b. Many association documents require that funds be deposited into FDIC insured accounts (as opposed to the SIPC insurance associated with most brokerage accounts.) What are the terms and fees for the account in question? a. How many checks can be written per month without charge? b. How many deposits can be made per month without charge? c. Will the operating and reserve checking accounts earn interest? d. Is on-line banking offered and if so, are there charges? e. What are the charges for returned items, stop payments, wire transfers (in and out of the account)? How are signature cards handled? a. What personal information for board members is required? b. Do board members have to go into the bank in person? c. Can the management company be authorized to make transfers within the bank without being an actual signer on the account? d. How difficult is it to update the signature card when a change in directors or officers takes place? (Do the outgoing officers have to sign off for these changes?) Will the bank provide a “duplicate original;” that is, mail a second copy of the bank statement directly to the association’s treasurer in addition to the manager/bookkeeper? If so, is there a fee? Does the bank provide lockbox services for assessment payments? (This program allows members to mail assessments payments directly to the bank for immediate deposit into the association’s account.) a. What are the charges?

Continued on page 25 ECHO JOURNAL

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FEBRUARY 2007


Questions to Ask Your Banker Continued from page 23

b. Is there automatic payment deduction (ACH) available for homeowners; if so, are there any fees for that service? c. What is the method for reporting financial information back to the association? Can it be made compatible with the association’s accounting program? 7. Does the bank provide a debit card for petty cash expenses? a. What limitations can be placed on the card for security purposes? b. What fees may apply? 8. Does the bank provide any CD placement service for excess funds? a. How does the service work? b. What is the procedure for placing or withdrawing funds? c. How often are statements provided? d. Are statements in summary form or individual reports on each placement? e. Is there a fee for coordinating the placement? f. How are renewal reminder notices provided? g. What controls are established to determine where the funds are deposited? h. What controls are established to assure that the CD placements are not “doubled up;� i.e., two or more deposits placed into one outside bank, thereby exceeding the FDIC limits? 9. Does the bank provide a loan program for associations? a. What amounts and terms are available? b. What documentation is required? c. What fees are involved? d. What is the turn-around time for approval and funds availability? With the information gained from answers to these questions available, an association is prepared to make a good business judgment regarding the investment of association funds.

Geri Kennedy is an Association Banking Officer with First Bank. Previously she was a principal at two association management firms. She is a former member of the ECHO board of directors. ECHO JOURNAL

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FEBRUARY 2007


CALENDAR OF EVENTS WEDNESDAY, FEBRUARY 7 Maintenance Resource Panel 12:00 Noon ECHO Office 1602 The Alameda, Suite 101, San Jose WEDNESDAY, FEBRUARY 21 Wine Country Resource Panel 11:45 a.m. Lanahan & Reilley 600 Bicentennial Way, Suite 300, Santa Rosa SATURDAY, FEBRUARY 24 Central Coast Winter Seminar 8:00 a.m. to 1:00 p.m. Seacliff Inn, Aptos THURSDAY, MARCH 1 North Bay Resource Panel 9:30 a.m. Contempo Marin Clubhouse 400 Yosemite Rd., San Rafael FRIDAY, MARCH 2 East Bay Resource Panel 9:30 a.m. Angius & Terry 1990 N. California Blvd., Suite 950, Walnut Creek

TUESDAY, MARCH 13 Central Coast Resource Panel 12:00 Noon Pasatiempo Inn, Santa Cruz WEDNESDAY, MARCH 14 South Bay Resource Panel 12:00 Noon Il Fornaio 302 South Market St., San Jose SATURDAY, MARCH 17 North Counties Seminar 8:00 a.m. to 1:00 p.m. Community Center 5401 Snyder Ln., Rohnert Park WEDNESDAY, MARCH 21 Wine Country Resource Panel 11:45 a.m. Lanahan & Reilley 600 Bicentennial Way Suite 300, Santa Rosa

SATURDAY, MARCH 31 San Francisco Spring Seminar 8:00 a.m. to 1:00 p.m. Fort Mason Center San Francisco

THURSDAY, MAY 3 North Bay Resource Panel 9:30 a.m. Contempo Marin Clubhouses 400 Yosemite Rd., San Rafael

WEDNESDAY, APRIL 4 Maintenance Resource Panel 12:00 Noon ECHO Office 1602 The Alameda, Ste. 101, San Jose

FRIDAY, MAY 4 East Bay Resource Panel 9:30 a.m. Angius & Terry 1990 N. California Blvd., Suite 950, Walnut Creek

FRIDAY, APRIL 6 East Bay Resource Panel 9:30 a.m. Angius & Terry 1990 N. California Blvd., Suite 950, Walnut Creek

TUESDAY, MAY 8 Central Coast Resource Panel 12:00 Noon Pasatiempo Inn, Santa Cruz

WEDNESDAY, APRIL 18 Wine Country Resource Panel 11:45 a.m. Lanahan & Reilley 600 Bicentennial Way, Suite 300, Santa Rosa

THURSDAY, MARCH 22 San Francisco Luncheon 11:45 a.m. St. Francis Yacht Club San Francisco

WEDNESDAY, MAY 9 South Bay Resource Panel 12:00 Noon Il Fornaio 302 South Market St., San Jose SATURDAY, MAY 12 Marin County Spring Seminar 8:00 a.m. to 1:00 p.m. Embassy Suites 101 McInnis Parkway, San Rafael

REGULARLY SCHEDULED RESOURCE PANEL MEETINGS PANEL

MEETING

LOCATION

Maintenance

First Wednesday, Even Months

ECHO Office, San Jose

North Bay

First Thursday, Odd Months

Contempo Marin Clubhouse, San Rafael

East Bay

First Friday, Monthly

Angius & Terry, Walnut Creek

Accountants

Second Monday, Odd Months

Francesco’s Restaurant, Oakland

Central Coast

Second Tuesday, Odd Months

Pasatiempo Inn, Santa Cruz

South Bay

Second Wednesday, Odd Months

Il Fornaio Restaurant, San Jose

Wine Country

Third Wednesday, Monthly

Lanahan & Reilley, Santa Rosa

Legal

March, May, August, October

Varies

FEBRUARY 2007

26

ECHO JOURNAL


UPDATES CHANGES Asyst Data Group, Inc. 18009 Sky Park Cir, Ste. J Irvine, CA 92614 Tel. & Fax remain the same Edward W. Riback,CPA New email address: edwardriback@comcast.net

Address, tel. & fax remain the same From: Golden Pacific Management To: Massingham & Associates, Inc.— Napa 2160 Jefferson, Ste. 220 Napa, CA 94559 Tel: 707-258-9233 Fax: 707-258-8244

ECHO JOURNAL

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FEBRUARY 2007


Realities of Rain Gutter Screens Gene Simpson

R

ain gutter screens offer the hope of reduced maintenance. But our experience from installing and removing gutter screens for over forty years indicates that sometimes they actually do reduce gutter system maintenance but usually they do not. Installation of these screens often costs more than the resultant saving in maintenance expense. Gutter cleaning when screens are present costs more than cleaning of unscreened gutters, and screens are usually damaged at least a little with every cleaning. The only reliable gutter screening is very rigid and strong. For installations we fabricate screens on-site, cut from long lengths of welded wire mesh available at most hardware stores. This mesh comes in one-eighth inch, one-quarter inch or one-half inch mesh size. You simply cut the mesh into strips about five or six feet long by about seven inches wide. Insert these strips up under the lowest course of shingles but not under the roof tar paper and then screw the front edge of the strips to the front edge of the rain gutters. This is a very difficult task and is not recommended for inexperienced workers. Gaps are left in the screening at gutter corners and at gutter outlets for cleaning. While gutter screens reduce the amount of cleaning required, they do not eliminate all cleaning. FEBRUARY 2007

An alternative installation method is to use strips of twelve or fourteen inches in width and insert the strips up under the second course of shingles and fasten to the gutters in the same method. This can give more pitch to the screens. For gutters over two stories high, or for medium high gutters where few trees are present, a good and low cost alternative is to install “light bulb” shaped outlet screens, sometimes called “downspout screens.” These work well if very few leaves fall in the gutters; they will block up easily from leaves, but they are also easily unblocked. Beware of outlet screens made of mesh. Bulb-shaped screens sold at some hardware stores are made of mesh. These will block up very easily and usually cause more maintenance than they reduce. Good outlet screens are made of strong vertical strands shaped into light bulb configuration with a small solid patch on top to hold the strands together. The good outlet screens look similar to the protective covers on “trouble lights.” There is no mesh or net-like configuration used in good outlet screens. Look around and you will find these correct bulb shapes. Some stores stock both types. Flexible screening is never recommended. Flexible screening can often last only one or two years before squirrels, raccoons or the 28

like wriggle it out of position. Usually the weight of wet leaves will cave flexible screening into the gutter itself. Remember that if the screening bends in your hands, it will bend in the gutters. Gutter awnings, gutter deflectors, patented gutter covers and similar “gadgets” are interesting but impractical for commercial usage. We have seen some deflector-type awnings repel leaves nicely, but the gutters filled up over time with “small stuff” that is not deflected. Squirrels mess up the awnings’ workings as they bury their nuts in the gutter debris. Eventually the awnings are discarded during a gutter cleaning. Balance your costs. Gutter cleaning may cost fifty cents per foot per year. Cheap flexible gutter screening may cost one dollar per foot and only last one or two years. Strong, well-installed screening may cost three dollars per foot and reduce the cleaning requirements from annual cleaning down to cleaning every three or four years. Few, if any, gutter screens seem to last over ten years.

Gene Simpson is a principal at SimpCo in Palo Alto, an ECHO-member firm founded in 1956 that does property maintenance and repair and waterproofing for many homeowner associations. ECHO JOURNAL


Regaining Architectural Control Dana S. Marron, Esq.

O

nce upon a time a beautiful association was born. It had rows of houses with gleaming white trim, siding as blue as the sky, sliding doors on the western walls, and picket fences lining the yards—but that was seventeen years ago. Today, that association looks more... lived-in. Some houses are still blue, or at least bluish. Others are gray, green, yellow, peach, brown, or indeterminate combinations. The sliding doors have been replaced with French doors on many, but not all, of the lots. Some of the picket fences have fallen down and have not been picked up. Others were replaced with wrought iron fences. Past boards let architectural control slip, adopting flimsy guidelines, granting many variances and ignoring violations. Homeowners, including those who recently joined the community, have started to object to haphazard enforcement and the less-than-uniform look of the development. A new board,

ECHO JOURNAL

sharing and responsive to these concerns, was just elected. Its New Year’s resolution— regain architectural control. Here’s how: Step 1: Notify Your Members/Seek Their Input. While the board is busy planning how to regain architectural control, the members are busy planning home improvement projects for the spring. Now is a good time to communicate the board’s concern about prior enforcement of the rules and its intent to re-evaluate architectural policies and enforcement strategies. The risk in many of these cases is that the member who violates the governing documents will put forth a defense that the board has been lax in enforcing the governing documents and is now singling him or her out. Certainly, such a defense might have merit, if the board were to suddenly decide to start enforcing architectural control, out of the blue, after years of non-enforcement. However, the risk of such a defense succeed29

ing is greatly minimized if the board gives members ample notice that change is on the horizon. From this point forward, remind your members on a regular basis (e.g., in a newsletter) of the need to submit architectural applications before undertaking alterations to the exteriors of their homes. Letting your members know that change is in progress should make it easier to implement new policies as they are adopted and offset any impression that the board has engaged in selective enforcement. The chances of securing compliance will also be enhanced if the board or committee seeks input from the membership before new standards and enforcement techniques are adopted. Step 2: Adopt Written Architectural Standards. The key to architectural control is Continued on next page FEBRUARY 2007


adopting clear rules and enforcing them consistently. If the board or committee does not have written standards, it is much harder to apply the same standards to each application consistently, particularly as boards and managers change. The standards need not be elaborate; in fact, they can be a simple list of acceptable materials and colors for various improvements. Written standards let your members know in advance, before they start shopping and hiring contractors, what is acceptable in your neighborhood. Courts will uphold the association’s standards so long as they are (a) within the scope of your governing documents; and, (b) reasonable as applied to the community as a whole. Therefore, if your governing documents require twenty foot set-backs, the board cannot impose a standard that requires fifty foot set-backs—the standards must be within the scope of the board’s authority as defined by the governing documents. Sometimes, however, the scope of the board’s authority is not so clear under the governing documents. If you have questions, consider having the association’s attorney review the standards before problems arise. Step 3: Sift Out The Old Violations. Walk through your neighborhood and make a list of possible violations. Try to determine whether what now appears to be a violation was actually approved by a prior board; this can be done by reviewing old records or interviewing prior directors or committee members. Where the records are unclear, proving a violation may be difficult and expensive. Where the violations are longstanding, too much time may have elapsed FEBRUARY 2007

and a judge might find that the association has “waived” its rights or is “estopped” from pursuing them. In addition, under California law, in general current owners are not responsible for violations attributable to prior owners. The board should decide which violations are too old to pursue and then consult with the association’s attorney to determine how best to deal with these violations in a way that does not jeopardize the board’s ability to gain control of future violations. Options may include adding a grandfather clause to the new architectural policy, granting variances (sparingly), negotiating an agreement to remove the improvement upon sale of the home, or finding another creative angle to pursue the violation (e.g., failure to maintain). Regaining control over architectural matters usually will require a board to acknowledge that some longstanding violations cannot be effectively pursued. In those cases, the board should simply determine that it will not spend time, energy and money on old violations but instead should focus on current and future violations. While it may be unfair to allow some owners to maintain violations while making others conform to new more aggressive enforcement rules and policies, the unfairness will diminish over time and the benefits of taking an active, fair and clear approach to what is acceptable in the community will ultimately serve the association well. Step 4: Sift Out The Non-Violations. Architectural standards do not apply retroactively. If a prior board or a developer 30

approved an application, then it is approved, regardless of whether it meets the association’s standards today. Step 5: Act On The Current Violations. The board must comply with the association’s own internal procedures for addressing violations, including providing the owner with notice of the violation and the opportunity to have a hearing before punitive action is taken. In addition, generally, it is a good idea to provide the owner with the opportunity to submit an application for retroactive approval of the improvement. In the event that the improvement is approved, there is no need to take further action. Sometimes, however, in the interests of time, you must do away with formality. For example, if a member is in the midst of tearing off his or her old roof and putting on a new roof without architectural approval, the board’s best course of action would be to notify the association’s attorney of the construction immediately. The attorney should be able to advise the board on the costs and benefits of seeking an immediate court order demanding that the member cease construction until architectural approval is obtained (“temporary restraining order”). In addition, the board may wish to have a letter handdelivered to the member demanding that construction cease at once and spelling out the risks of further construction without approval. Acting quickly, before the roof (or other expensive improvement) is installed, will save everyone involved time, effort and money. Step 6: Approval. Before approving an application, think about whether it makes ECHO JOURNAL


sense to condition the approval on the owner’s agreement to maintain the improvement. For example, if the association is responsible for maintaining the patios and the owner is installing a new and different material, should the owner be responsible for maintaining the patio? If your answer is yes, then the approval should be conditioned on a maintenance agreement which perhaps should be recorded to alert future owners. Other issues such as who pays for damage or injury resulting from the installation, who is responsible for removing the improvement when it is time for the association to maintain the roof or siding, should also be considered and addressed before approval is granted. Step 7: Disapproval. When you disapprove of an application, use the letter as an opportunity to document the board’s decision-making process, e.g., “the proposed wire mesh fence does not meet the association’s standards, which require all fences to be made of redwood or wrought iron.” In our experience, judges and arbitrators want to see that the board has adhered to its own procedures and explained to the member why his or her application has been disapproved. Step 8: Avoid Variances. Save variances for those truly unique situations which justify making an exception to the rule. If you feel you must grant a variance, be sure to have recorded all of the facts that support a finding that it is in the association’s best interest to grant the variance. Many boards feel trapped by the precedent established by years of non-enforcement. While it is true that such precedent creates obstacles, it is not true that these obstacles are insurmountable. Failing to enforce architectural provisions exposes directors and their associations to liability based on failure to enforce the governing documents and leaves a legacy apparent to those who visit the neighborhood that will last for years to come. Regaining architectural control is a long-term project—but the boards that take charge to regain architectural control reap immediate rewards in liability protection and long-term rewards by making their neighborhoods more beautiful places to live.

Dana Marron was an attorney at Berding & Weil at the time this article was written. ECHO JOURNAL

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FEBRUARY 2007


Books and DVDs from ECHO

Working With Your HOA $22.00 2005 ECHO Business & Professional Directory $10.00 This directory lists all business and professional members of ECHO as of September 2005. Current addresses, telephone and fax numbers, e-mail addresses, and a short description are included. This directory is an invaluable tool for locating service providers that work with homeowner association.

Condominium Bluebook 2006 Edition $18.00 This well-known compact guide for operation of common interest developments in California now includes a comprehensive index of the book and a chapter containing more than 200 frequently-asked questions about associations, along with succinct answers.

Robert’s Rules of Order $7.50 Homeowners Associations— How-to Guide for Leadership $35.00* This well-known guide and reference is written for officers and directors of homeowner associations who want to learn how to manage and operate the affairs of their associations effectively.

Questions & Answers About Community Associations $18.00 For 12 years, Jan Hickenbottom answered homeowners’ questions in her Los Angeles Times column on community associations. Now collected in one volume, readers can find answers to almost any question about CIDs.

A step-by-step guide to the rules for meetings of your association, the current and official manual adopted by most organizations to govern their meetings. This guide will provide many meeting procedures not covered by the association bylaws or other governing documents.

Home and Condo Defects— A Consumer Guide to Faulty Construction $10.00 This guide is prepared by attorneys Tom Miller and Rachel Miller for anyone having problems with faulty construction on a home or condominium. It explains the various technical aspects of determining who is at fault and who to go after to rectify the situation.

This is a valuable guide to all aspects of community association living designed as a practical problem solving guide. Written by two longtime association residents, it uses easily readable language and provides an insightful overview of community living from the viewpoint of experienced owners.

The Uncertain Future of Community Associations $10.00 For 30 years, attorney Tyler Berding has had a unique vantage point in observing new, aging and “evolving” community associations confront the issues they face. The basic premise is: without clarity, wisdom and “tough love,” community associations are doomed to failure.

Finding the Key to Your Castle—Revised 2005 $12.50* An easy-to-read guide to cooperative living in common interest housing developments, this book covers key points relating to member rights, member responsibilities, association finances, and even to rentals. Answers to many frequently-asked questions about CID operations are included.

Community Association Statute Book—2007 Edition $10.00 This booklet contains the 2007 version of the Davis-Stirling Common Interest Development Act, the Civil Code sections that apply to common interest developments, and selected provisions from the Civil, Corporations, Government and Vehicle Codes important to community associations.

California Building Performance Guidelines for Residential Construction $52.50* This easy-to-read manual is an excellent tool to understand a new home. It contains chapters covering more than 300 conditions that have been sources of disputes between homeowners and builders, offers homeowner maintenance tips, and defines the standards to which a residence should be built.

CID Leadership Two-Disc DVD set

$30.00

Board—An orientation for new board members and a refresher for current members. Meetings—How to conduct effective meetings that stay focused and achieve results. Reserves—How adequately-funded reserves prevent problems in associations. Insurance—Considers insurance to protect multi-million dollar community assets.


Alternate Dispute Resolution in Homeowners Associations Available late Fall 2006. This publication is being revised to reflect new requirements resulting from passage of SB 137.

Publications to answer your questions about common interest developments PUBLICATION ORDER FORM

Board Member’s Guide for Contractor Interviews $20.00 This report is a guide for directors and managers to use for interviews with prospective service contractors. Questions to find out capabilities and willingness of contractors to provide the services being sought are included for most of the contractor skills that associations use.

Executive Council of Homeowners 1602 The Alameda, Suite 101, San Jose, CA 95126 Phone: 408-297-3246 Fax: 408-297-3517 TITLE

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Board Member’s Guide for Management Interviews $10.00 This guide for use by boards for conducting complete and effective interviews with prospective managers takes the guesswork out of the interview process. Over 80 questions covering every management duty and includes answer sheets matched to the questions.

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NEWS FROM ECHO

WH EN GO I N G TO C O U RT IS GOOD

There are many reasons a board of directors may consider amendments to the CC&Rs, Bylaws and Articles of Incorporation. These might include a wish to update the documents or conform them to new legislation (like 2006’s Election Rule laws), to eliminate ambiguities or address problems that have become evident as a development ages. Likewise, there are times when membership consent is needed to obtain loans, buy or sell property, construct capital improvements, authorize annexations and in other situations. A key challenge facing any board is the problem of membership apathy or high voting approval requirements contained in an association’s governing documents. However there is an infrequently used but terrific judicial tool that permits a Court to authorize amendments and other “corporate” approvals even where the voting requirements of the governing documents cannot be met. Generally, courts are reluctant to intervene in the “governance” of a homeowners association. FEBRUARY 2007

However, the legislature has carved out exceptions that permit judicial intervention to authorize complete or “spot” amendments to the CC&Rs (Civil Code §1356) or corporate action, including amendments to the Articles of Incorporation and Bylaws and other types of proposed resolutions (Corporations Code §7515). In effect, these laws permit a Court to lower the voting requirements necessary to implement amendments or loans, sales, easements or other types of corporate activities. Generally, this process is very fast and should normally take 45 to 90 days. It will usually be far less expensive than “litigation.” Section 1356 of the Civil Code deals with the problem of amending what is a “deed restriction,” a document affecting the use of real property. By contrast, Corporations Code Section 7515 is much broader: it permits a Court to authorize corporate action if “for any reason it is impractical or unduly difficult” for that consent to be obtained by the board or members as provided in the Articles of Incorporation or the Bylaws. The procedural requirements of a hearing and membership notice are similar (but looser) than those mandated by the CC&R Petition procedure discussed above.

attorneys all over the state of California that have dealt with the problems involving reconstruction, collection of special assessments, and disputes with insurance companies in the aftermath of the Loma Prieta and Northridge quakes, Attorney Beth Grimm has concluded that associations should purchase earthquake insurance if they can get it, even if the price is high. The reason: associations that did not have coverage at the time of these two events experienced severely exacerbated problems. Translated into plain language— associations that did not have coverage had a much harder time recovering. Many have still not recovered, even years later. The homeowners who wish to rebuild and keep their homes are the biggest losers when there is no insurance and the special assessment to rebuild is out of reach of the average owner. Grimm has spoken to many associations about the considerations behind the decision to buy or not to buy and has shared the floor with insurance representatives who are able to find earthquake insurance, some even with a 10% deductible, a “per build-

T O B U Y OR NOT T O B U Y A S S OC I AT I ON E A R T H QU A K E INS U R ANC E

Many community associations have been considering whether they should buy earthquake insurance, now that costs for this coverage have often become exorbitant. After networking with 34

ing” deductible (which is more desirable than a “per development” deductible) for a sum of money that is sufficiently affordable. Her rule of thumb in 1996–2001 was that an affordable master policy was to be somewhere in the range of $400–$600 per year per unit for homes priced in the neighborhood of $200,000. With rising real estate values and a median statewide market value of a home at $500,000–$1,000,000 and with recent rising insurance costs, she now considers protection in the range of $1,000–$1,500 per home per year affordable for earthquake coverage. Association boards and managers need to consult with their legal counsels to discuss seriously the legal ramifications, and with a knowledgeable insurance agent to find out the insurance options available, before they turn their backs on the question of purchasing of earthquake insurance. UPCO MING EV ENTS Saturday, February 24 Central Coast Winter Seminar 8:00 a.m. to 1:00 p.m.

Seacliff Inn, Aptos Saturday, March 17 North Counties Winter Seminar 8:00 a.m. to 1:00 p.m.

Community Center, Rohnert Park Thursday, March 22 San Francisco Luncheon 11:45 a.m.

St. Francis Yacht Club, San Francisco Saturday, March 31 San Francisco Winter Seminar 8:00 a.m. to 1:00 p.m.

Fort Mason Center, San Francisco ECHO JOURNAL


Our AMEND!速 Program team assists association boards in modifying outdated governing documents. Should the CC&Rs or Bylaws require changes, amendment or restating, we use a cost-effective and streamlined process which helps satisfy those requirements. Call or visit our web site for more information.

Bay Area (800) 372-2207 LawForHOAs.com

ECHO JOURNAL

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FEBRUARY 2007


Michael Gartzke, CPA

T

he start of a new year is here and that means it’s tax time again. Here is a brief summary of the tax reporting and filing requirements for your association. For further information, contact your association’s CPA or accounting professional. 1099s: Associations, like all other businesses, are required to file 1099 forms by January 31 for payments made during the previous calendar year. This is true even if the association has a fiscal year end other than December 31. If you pay $600 or more during the calendar year to a “noncorporate service provider,” then you are required to issue a 1099-MISC to that service provider. Common service providers to associations include attorneys, managers, accountants, contractors, gardeners, pool service and handymen. Corporate service providers are FEBRUARY 2007

exempted from receiving 1099s. How can you tell? If the business has the words “inc.” or “corp.” in its name, then it is a corporation. The word “co” (for company) does not specify a corporation. The 1099 form must show the service provider’s name, address, and tax identification number (either social security or employer ID number) along with the amount paid during the calendar year. Copies should have been submitted to all service providers by January 31 and are due to the IRS by February 28 (the delay is to allow for corrections that may arise). Independent Contractor Reporting: Six years ago, California law was changed to require businesses that use individual independent contractors to report “within 20 days of the earlier of first making payments that in the aggregate equal or exceed $600 in any 36

year to a service-provider, or entering into a contract or contracts with a service provider providing for payments that in the aggregate equal or exceed $600 in any year” to the California Employment Development Department (EDD). This law is intended to locate “deadbeat” parents who are receiving payments other than wages to be able to garnish them quickly to meet child support obligations. You use many of your contractors on a continuous basis; so, January is a good time to report them to the EDD. Reporting is done on form DE-542 (available at www.edd.ca.gov) and can be mailed or faxed to the EDD. What is troublesome about this law (yes, there are penalties for failure to file) is that reporting can be required at any time during the year, not just once a year or quarterly. For examECHO JOURNAL


ple, you hire a painter on May 15 and sign a contract for a $5,000 job. Reporting would be required by June 4, even if no payments had yet been made. The reporting deadline is 20 days after signing the contract. Employment Tax Returns: For those associations that hire employees, Federal form 941 and California form De-6 are due 30 days after the end of each calendar quarter. Tax payments are due semi-weekly, monthly or at the filing date, depending upon the amount owed. Annual tax reports (Federal W2, 940; California DE-7) were due January 31. Federal Income Tax Returns: All associations, no matter how small, must file a Federal income tax return 2-1/2 months after the end of its fiscal year. For calendar year associations, the due date is March 15, although it can be extended for 6 months by filing an extension form. Associations may elect to file Form 1120H or the standard corporate form 1120. California Income Tax Returns: California Form 100 is also due the same time as the Federal returns. While most associations have “tax-exempt” status with the State of California, nonmembership income such as interest is taxable. If the association has more than $100 in nonmembership income, then a return is required. Failure to file Form 100 when required can result in significant penalties and interest if tax is owed and can result in the suspension of the corporation by the state. California Exempt Organization Return: Form 199 is required of all tax-exempt associations that receive $25,000 or more in revenue from any source (assessments, etc.) It is due 4-1/2 months after year-end but that date can also be extended. A $10 filing fee is required annually. Failure to file this form when required can result in an additional $55 in penalties plus interest. Corporate powers can also be suspended for failure to file this form. Estimated Tax Payments: If an association pays income taxes on its nonmember income, then it may be required to pay estimated taxes quarterly to avoid an estimated tax penalty. For Federal, estimates are required if taxes are $500 or more. The state has no minimum. With increasing interest rates, many associations will be paying more this year in income taxes than in the last 2 or 3 years. Federal tax deposits are made to your bank using a Federal Tax Deposit coupon, while state taxes are paid by check and mailed using form 100-ES. Payments for calECHO JOURNAL

Construction Project Management and Architecture for Home Owners Associations Construction administrative services including bidding process Pre-construction consulting & coaching Over 25 years experience in architecture, construction and engineering environments

GE BAYRID GROUP INC

1777 Borel Place Suite # 314 San Mateo, CA 94402

Phone: (650) 345-2744 Fax: (650) 292-4926 www.bayridgegroupinc.com

endar year associations are due April 15, June 15, September 15 and December 15. Secretary of State Biennial Filings: The Nonprofit Corporation Statement of Information (SI-100) and the Statement of Common Interest Development (SI-CID) are required to be filed with the Secretary of State every two years. These are not tax forms, but failure to file them with the Secretary of State can result in the suspension of corporate status. Filing fees are $20 for the SI-100 and $15 for the SI-CID. Since the forms are required only every two years, the due date is tied to the association’s incorporation month, not its fiscal year; and since 37

they are not tax forms, it is common for this filing to be overlooked if the association’s mailing address has changed. Although it is seldom done, the state also allows updated forms to be filed without the payment of an additional filing fee. Fill-in forms are available on line at www.ss.ca.gov. Michael Gartzke, an ECHO member, is a Certified Public Accountant with a large homeowner association practice in the Santa Barbara area. He is also the coordinator of the South Bay Homeowners Group with a membership of about 120 associations. FEBRUARY 2007


ECHO VOLUNTEER HONOR ROLL 2006 Volunteer of the Year Jerry L. Bowles Central Coast Winter Seminar Speakers

SF Luncheon Speakers John Allanson Tyler Berding, Esq. Doug Christison Karen Conlon, CCAM Rolf Crocker Ross Feinberg, Esq. David Feingold, Esq. Tom Fier, Esq. Kevin Frederick, Esq. John Garvic, Esq. Brian Hebert, Esq. Roy Helsing Julia Lave Johnston Garth Leone Nico March Steve Saarman Nathaniel Sterling, Esq. Glenn Youngling, Esq.

John Allanson Sandra Bonato, Esq. James Harmon Stephanie Hayes, Esq. Mike Muilenburg Maintenance Fall Seminar Speakers ECHO Resource Panels ACCOUNTANTS PANEL Edward Riback, CPA, 510-865-5865

Bob Booty Rick Hanson David Hughes Mike Muilenburg Brian Seifert Wayne Scott

CENTRAL COAST PANEL Darrel Louis, 831-212-0300 EAST BAY PANEL Nikki Affinito, 800-660-4053 LEGAL PANEL Mark Wleklinski, Esq., 925-943-1191 MAINTENANCE PANEL

ECHO Journal Authors

Legislative Committee Paul Atkins Jeffrey Barnett, Esq. Sandra Bonato, Esq. Jerry L. Bowles Joelyn Carr-Fingerle, CPA John Garvic, Esq., Chair Geri Kennedy, CCAM Wanden Treanor, Esq.

November 2006 Tyler Berding, Esq. Sandra Bonato, Esq. Michael Gartzke, CPA Susan Green Ann Krilanovich David Levy, CPA December 2006 Adrian Adams, Esq. Jeffrey Barnett, Esq. Tyler Berding, Esq. Gerald Bowden, Esq. Beth Grimm, Esq. Pete Sacco Glenn Youngling, Esq.

Mark Greening, 408-536-0420 NORTH BAY PANEL Diane Kay, CCAM, 415-435-3467 Stephany Charles, CCAM 415-458-3537

January 2007 Tyler Berding, Esq. Michael Gartzke, CPA John Paul Hanna, Esq. Paul McLaughlin Lin M. Meyer, Esq. Larry F. Russell, Esq. Mark E. Terman, Esq.

SAN FRANCISCO PANEL Jeff Saarman, 415-749-2700 SOUTH BAY PANEL Ann Philipp, 408-536-0420 WINE COUNTRY PANEL Ron Hamann, 707-584-4788 FEBRUARY 2007

38

ABOUT ECHO What is ECHO? ECHO (Executive Council of Homeowners) is a California nonprofit corporation dedicated to assisting community associations. ECHO is an owners’ organization. Founded in San Jose in 1972 with a nucleus of five owner associations, ECHO membership is now 1,525 association members representing over 150,000 homes and 325 business and professional members.

Who Should Join ECHO? If your association manages condominiums or a planned development, it can become a member of ECHO and receive all of the benefits designated for homeowner associations. If your company wants to reach decision makers at over 1,525 homeowner associations, you can become an associate member and join 325 other firms serving this important membership.

What are the Benefits of ECHO Membership? • Subscription to monthly magazine for every board member • Yearly copy of the Association Statute Book for every board member • Frequent educational seminars • Special prices for CID publications • Legislative advocacy in Sacramento

ECHO Membership Dues HOA Size 2 to 25 units 26 to 50 units 51 to 100 units 101 to 150 units 151 to 200 units 201 or more units Business/Professional

Rate $120 $165 $240 $315 $390 $495 $425

ECHO Journal Subscription Rates Members $50 Non-members/Homeowners $75 Businesses & Professionals $125

How Do You Join ECHO? Over 1,800 members benefit each year from their membership in ECHO. Find out what they’ve known for years by joining ECHO today. To apply for membership, call ECHO at 408-297-3246 to obtain an application form and more information. ECHO JOURNAL


The Dilemma Continued from page 20

exorbitant amounts for layers of insurance to get full protection, perhaps there may be a feasible way to combine purchase of minimal coverage with additional monies being spent on retrofitting. Association boards and managers should consult with their legal counsels to discuss seriously the legal ramifications, and with a knowledgeable insurance agent to discuss the insurance options available before they turn their backs on the question of purchasing of earthquake insurance.

Beth Grimm is an association attorney with offices in Pleasant Hill. She is a member of ECHO and CAI and a member and former chair of the ECHO East Bay Resource Panel. She is the author of the book Finding the Key to Your Castle and other helpful community association publications.

ECHO JOURNAL

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FEBRUARY 2007


San Francisco Luncheon Thursday, March 17 St. Francis Yacht Club

Second Hand Smoke Speaker: Larry F. Russell, Esq. Partner, Russell & Mallett LLP Luncheon Price $55

Yes, reserve _____ spaces for the ECHO San Francisco Luncheon. Amount enclosed: $__________ (attach additional names) Name: HOA or Firm: Address: City:

State:

Zip:

Phone: Visa/Mastercard No.

Exp. Date:

Signature: Return with payment to: ECHO, 1602 The Alameda, Ste 101, San Jose, CA 95126 Orders will not be processed without payment in full. Fees for cancelled registrations will not be refunded. Telephone: 408-297-3246; Fax: 408-297-3517


ECHO MARKETPLACE

ADVERTISERS INDEX All Seasons Roofing . . . . . . . . . . . . . . . . . . . . .15

The Assessment Lien Foreclosure Specialists Bay Area

Alpha Restoration & Waterproofing . . . . . . . . .25 American Management Services . . . . . . . . . . .20 Angius & Terry . . . . . . . . . . . . . . . . . . . . . . . . .3

(800) 838-6370

Applied Reserve Analysis . . . . . . . . . . . . . . . . .27

ALSLien.com

A.S.A.P. Collection Services . . . . . . . . . . . . . . .31 Arborist Onsite . . . . . . . . . . . . . . . . . . . . . . . . .37 Association Reserves . . . . . . . . . . . . . . . . . . . . .39 Bank of Alameda . . . . . . . . . . . . . . . . . . . . . . .17 Bayridge Group . . . . . . . . . . . . . . . . . . . . . . . .37 Berding & Weil . . . . . . . . . . . . . . . . . . . . . . . .15

Reserve Studies and Mold Sampling Foundation and Drainage Analysis

Reach thousands of HOA decision makers with your ad in the ECHO Marketplace

Berding & Weil . . . . . . . . . . . . . . . . . . . . . . . .44 Community Association Banc . . . . . . . . . . . . .27 Community Management Services . . . . . . . . .31 Cool Pool Service . . . . . . . . . . . . . . . . . . . . . . .39 Cornerstone Community Management . . . . . .14

SBI, LLC

Corum Painting . . . . . . . . . . . . . . . . . . . . . . . . .2

800-710-3774 • www.sbiusa.net

Draeger Construction . . . . . . . . . . . . . . . . . . .11 Ekim Painting . . . . . . . . . . . . . . . . . . . . . . . . . .30 First Bank Association Bank Services . . . . . . . . .20 Flores Painting . . . . . . . . . . . . . . . . . . . . . . . . .35 GET Insurance . . . . . . . . . . . . . . . . . . . . . . . . .10

You don’t know what the day will bring. That’s why you need Russell & Mallett, LLP.

Greater Bay Bancorp . . . . . . . . . . . . . . . . . . . .23 Helsing Group . . . . . . . . . . . . . . . . . . . . . . . . .37 M&C Association Services . . . . . . . . . . . . . . . .16 M. L. Nielsen Construction . . . . . . . . . . . . . . .35 Nature First Tree Care . . . . . . . . . . . . . . . . . . . .9 Pelican Management Group . . . . . . . . . . . . . .31

We’re experts in all aspects of community

PML Management Corp. . . . . . . . . . . . . . . . . .27

association law, construction defect litigation and general corporate matters, including

Pollard Unlimited . . . . . . . . . . . . . . . . . . . . . . .30

rewriting governing documents.

Pratt & Associates . . . . . . . . . . . . . . . . . . . . . . .9 R. E. Broocker Co. . . . . . . . . . . . . . . . . . . . . . .14

You’ll find us accessible, resourceful, affordable and very, very effective. Call us today at

Rebello’s Towing Service . . . . . . . . . . . . . . . . .24

925.947.4915 to see how our practical,

REMI Company . . . . . . . . . . . . . . . . . . . . . . . .39

expert advice can work for you.

Russell & Mallett LLP . . . . . . . . . . . . . . . . . . . .41 Saarman Construction . . . . . . . . . . . . . . . . . . .17

Russell & Mallett, LLP 2900 Camino Diablo, Suite 200, Walnut Creek, CA 94596 • 925.947.4915 • Fax 925.947.4920

Statcomm . . . . . . . . . . . . . . . . . . . . . . . . . . . .14 Steve Tingley Painting . . . . . . . . . . . . . . . . . . .24 Steve’s Painting Services . . . . . . . . . . . . . . . . .25

We believe you’re better served when you’re better informed. Call today for your free copy of the Russell & Mallett, LLP Law Library. Everything you need to know about community association law.

Swedelson & Gottlieb . . . . . . . . . . . . . . . . . . .30 Varsity Painting . . . . . . . . . . . . . . . . . . . . . . . .42 W. E. Lyons Construction Co. . . . . . . . . . . . . . .10

ECHO JOURNAL

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FEBRUARY 2007


Peace of Mind Painting. Peace of mind Painting includes: •

A detailed, comprehensive bid outlining all job and product specifications

Color consultation with Dr. Color and Digital Color renderings of your project.

Communication throughout the project outlining weekly progress. We tailor every job to minimize the disruption to you and to maximize the benefit you receive from the Varsity Painting experience.

Our experienced craftsmen painters are uniformed, on time and are respectful of people and property.

A 5 year guarantee ( on 2 coat paint jobs ) that includes our Paintenance program. We come out annually and maintain the beauty of the project.

“I have used Varsity Painting now on 2 large projects in the Oakland area. For me, using Varsity means I don’t have to worry about anything. Our painting project had unique challenges that Varsity addressed. Their painters clearly make the difference.” Tulio Mello, Property Supervisor, Fairmount West Development

Serving Northern California since 1993


Central Coast Winter Seminar Saturday, February 24, 2007 8:00 a.m. to 1:00 p.m. Seacliff Inn, Aptos

CID CHALLENGES IN 2007 Seminar Agenda 8:00 8:45 9:00 9:45 10:30 10:50 11:35

Registration and Sponsor Tables Introduction 2006 Legislative and Case Law Summary Dealing with Major Construction Concerns Break The California Legislature and CIDs Second Hand Smoke—A Real Issue?

Jeffrey Barnett, Esq. Richard Tippett Assemblyman John Laird Larry Russell, Esq. Ronald M. Block, PhD

12:20 Questions and Answers 12:50 Drawings for Sponsor Prizes

Ticket Price $35

Yes, reserve _____ spaces for the ECHO Central Coast Winter Seminar. Amount enclosed: $__________ (attach additional names) Name: HOA or Firm: Address: City:

State:

Zip:

Phone: Visa/Mastercard No.

Exp. Date:

Signature: Return with payment to: ECHO, 1602 The Alameda, Ste 101, San Jose, CA 95126 Orders will not be processed without payment in full. Fees for cancelled registrations will not be refunded. Telephone: 408-297-3246; Fax: 408-297-3517



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