Journal_07_10

October 2007

A Journal for Community Association Leaders

echo-ca.org

Is Your Reserve Budget Just an Illusion?

ALSO INSIDE THIS ISSUE:

• Advantages of Incorporation • It’s Not Easy Being Little • HOA Generates Power

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Contents Advantages of Incorporation on page 14

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Is Your Reserve Budget Just an Illusion?

Law firms have seen an increase in claims for defective budgets in recent years as associations find that what they thought was a solid budget turns out to be an illusion. This article delves into the budget process to give readers a look at the procedures and issues that accompany reserve budget preparation.

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Advantages of Incorporation

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Executive Council of Homeowners, Inc.

Office Hours: Monday–Friday 9:00 a.m. to 5:00 p.m.

HOA Generates Its Own Electricity A high-rise condominium in San Francisco is helping the environment by utilizing natural gas at very high efficiency, self-generating its own hot water and taking a significant electrical load off of California’s stressed power grid.

28 Calendar of Events 29 Directory Updates 34 ECHO Bookstore 36 News from ECHO 38 ECHO Volunteers 38 About ECHO 41 ECHO Marketplace 41 Advertiser Index

On the Cover Reserve Budgets Page 6

October 2007 | ECHO Journal

The ECHO membership list is never released to any outside individual or organization.

It’s Not Easy Being Little

19 2007 Legislation at a Glimpse

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Copyright 2007 Executive Council of Homeowners, Inc. All rights reserved.

Reproduction, except by written permission of ECHO, is prohibited.

1602 The Alameda, Suite 101 San Jose, CA 95126 408-297-3246 Fax: 408-297-3517 www.echo-ca.org info@echo-ca.org

Departments

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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.

Many homeowners associations are unincorporated.

This article outlines the very real benefits of incorporation and discusses some of the practical aspects of incorporating an unincorporated association.

Members of large associations might sometimes wish they lived in smaller communities. But small associations must deal with unique issues and difficulties that are equally challenging.

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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.

Board of Directors and Officers President David Hughes Vice President Karl Lofthouse Treasurer David Levy Secretary Dorothy Kopczynski Directors Paul Atkins John Garvic Robert Rosenberg Richard Tippett Steven Weil

Jerry L. Bowles Robert Hood Diane Rossi Wanden Treanor

Executive Director Oliver Burford Communications Coordinator Tyler Coffin Legislative Consultant Government Strategies, Inc. Design and Production George O’Hanlon ECHO Mission Statement The mission of ECHO is to advance the concept, interests and needs of homeowner associations through education and related services to board members, homeowner members, government officials and the professionals in the industry.

ECHO Online

Are You Receiving the ECHO eNewsletter?

You Should Be! A

fter six months, the popularity of the ECHO eNewsletter is increasing. Last month the eNewsletter featured an important legislative alert: ECHO requested concerned homeowners to write letters to their State representatives opposing AB 952, before this bill came up for final votes.

Response to our appeal has been encouraging.

Many recipients wrote excellent letters to their representatives. Because of this kind of help, Assemblyman Mullin has withdrawn the bill and made it into a two-year bill. Thank you to everyone who participated in this important effort!

In addition to reporting current legislative developments, recent issues of the ECHO eNewsletter have announced the newly proposed DavisStirling Act Revision and featured important articles from the ECHO Journal. The eNewsletter continues to be a great resource for the latest information about common interest development news, industry changes, events and legislation.

The eNewsletter is available to any interested party who signs up; membership in ECHO is not required. If you believe that information in the eNewsletter will be interesting or helpful to others, sign them up to receive the next issue.

Easy Sign-up: Signing up for the eNewsletter is simple. Visit the ECHO Web site and enter your email address in the box at the bottom right corner of the home page.

Sign up to begin receiving the ECHO eNewsletter at echo-ca.org

ECHO Journal | October 2007

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By Tyler P. Berding, Esq.

Is Your Reserve Budget Just an Illusion?

Adequate Reserve Funding Requires Diligence, Not Magic!

L

aw firms have seen an increase in claims for defective budgets in recent years. These claims arise when associations find out that what they thought was a solid budget turns out to be an illusion. The financial protection they expected has vanished upon closer inspection. Budget issues most often arise in conjunction with condominium conversions, but we have also seen them associated with newly built projects.

Because the damage that a community association can sustain from a budget that has not been adequately prepared can be significant, we have delved into the budget process to give our readers a look at the procedures and issues that accompany reserve budget preparation.

How many of you can say that your community association’s reserve budget is adequate?

Think about that for a moment. Now, a show of hands. Ok, everyone who raised his or her hand, tell me this: how do you know? Have you reviewed those accounts yourself? Could you pre-

pare one if you wanted to? What criteria would you use? Where would you get the numbers? Do you know if the figures used in that budget are based on solid facts, or did someone just wave a magic wand over them and hope for the best?

We’ve written a lot on these pages about how many reserve budgets lack necessary funding to meet their stated goals, but here’s a new one: what if your budget is fully funded but the goals have been underestimated?

To know the answers to those questions, and unless you are a CPA or a reserve study professional, you probably need to know a lot more about what goes into the preparation of an association reserve budget than you do now. For starters, you should know what the State of California requires. You should also know how a professional goes about creating a budget—what is typically done, and what is not done. Finally, you should consider how often the budget should be revised.

ECHO Journal | October 2007

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But first, why would a manager, board member, or member of the association need to know this stuff? Isn’t that what we hire professionals for? Yes, but budget preparation requires a broad array of skills and experience—accounting, construction, cost estimating, property management, and maybe even a little law thrown in—and few individual professionals possess every one of those skills.

Someone has to be sure that all the bases are covered, and that responsibility often falls to managers or board members. If you are among that group, then having a basic understanding of reserve budget preparation, and the pitfalls associated with it, is a good idea. A little time spent now in gaining an understanding of the critical issues in reserve budget preparation might make a big difference a few years down the road.

To gather material for this article, I discussed reserve issues with John D. Beatty, owner of John D. Beatty & Company, professional reserve analysts and construction managers. I also spoke with Tim Nerby, who for 17 years was an Appraiser with the California Department of Real Estate in the Subdivision Department. Among other things, Mr. Nerby’s job at the Department of Real Estate was to review the submittals by developers to determine whether they met the DRE standards. He now works with John Beatty doing budget analysis and preparation for community associations.1 Department of Real Estate Budget Guidelines—Solid Standards or Magic Wand?

Most association reserve budgets start life with the California Department of Real Estate. Developers of new construction and condominium converters cannot sell their properties to the public without approval from the DRE. To get that approval, the developer has to submit an annual budget for the future association that meets the standards of the Department; that includes the reserve budget. The DRE guidelines for reserve budget preparation are found in the Operating Cost Manual and Reserves Worksheet published by the Department.

That document provides the criteria by which the department will evaluate the devel-

1 Our thanks to John D. Beatty and Tim Nerby for the generous contribution of their time in assisting this writer to understand some of the nuances and pitfalls to be encountered in reserve budget preparation and the policies of the California Department of Real Estate.

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October 2007 | ECHO Journal

oper’s proposed budget. If the submitted budget meets the criteria, the budget will be approved and eventually a Final Public Report will be issued, allowing the developer to market the property. This first budget is then provided by the developer to the new association.

Missing Components. This would all be fine if the DRE criteria were adequate in the first place. For various reasons they may not be. The first problem is the failure to include some components with an obvious service life. The Operating Cost Manual for Homeowner Associations lists those components that it recommends for inclusion in a reserve budget. One of the most problematic building components on any condominium or planned development project is exterior wood. This can be found in siding, balconies, entry structures, and trim. On some common interest developments, the entire exterior is wood. We all know that wood deteriorates quicker than say, stucco; so, it is very important that the association maintain all of that wood properly. Proper maintenance includes periodic painting, but also repair and eventual replacement. But that takes money, and the funds for caring for all of that wood should be found in the reserve budget. So let’s look at how the California Department of Real Estate prepares an association for wood maintenance and replacement.

Look at any aging association with exterior wood and it will be clear that wood products decay and will eventually need to be replaced. We have never talked to a single architect or contractor who believes that wood siding or balcony rails or staircases will last forever, even with periodic painting.

And, if you look at the typical condominium conversion that is 20–30 years old when it’s converted, the wood on the building will definitely show its age and it is obvious that most, if not all, of the exterior wood is in sight of the end of its service life.

Knowing this, you would expect that the Department of Real Estate would include the replacement of exterior wood components within the scope of its Operating Cost Manual and the Reserves Worksheet. Right?

Wrong. The only reference to exterior wood is in Section 301—“Painting.” The cost for exterior painting is shown as $1.12 per square foot and if what is being painted is wood (whether siding, balconies, stairways, etc) you are to add an additional $0.20 per square foot. That’s it. There is no suggested reserve for repair or replacement. In other

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words, the California Department of Real Estate believes that exterior wood will never have to be replaced if it’s painted at certain intervals. There is nothing in the DRE’s guidelines for the eventual replacement of any exterior wood component. Now, wood fences are given a 10-year useful life and a reserve for eventual replacement. But not wood siding or any other exterior wood component on the building.

Cost Estimates. The budget may properly include a component, but strictly following DRE guidelines may lead to underfunding in other ways. The estimated replacement costs, for example. The Operating Cost Manual

identifies the cost to replace a composition shingle roof at a recently revised $2.60 per square foot in 2007. Prior to that, the number was $1.80 per square foot. Mr. Nerby advises that the actual cost of removing and replacing a composition shingle roof is closer to $4.38 per square foot, which does not include any periodic repair or maintenance costs if required by the age or condition of the roof.2 If so, an association that strictly followed the DRE guidelines would start life with a roof reserve that, unless modified, would never accumulate enough to replace the roof.

2 Mr. Nerby offers the following information applicable to conversions: “It should be pointed out that the reserve factors in both of these operating cost manuals ‘are based upon new building components and equipment.’ Both manuals go on to say: ‘Therefore, these reserve factors need to be adjusted if they are to be used for an existing development or for the conversion of an existing structure. For existing structures you would normally divide the cost of replacing the component by its remaining useful life.’”

The Department does include some cautionary notes in the manual, for example: “The reserve section of this manual only includes components or costs for items most frequently found in common-interest subdivisions. Reserve items for your budget may not be limited to those found in this manual. Your budget should be tailored to fit your project and include necessary reserves for all appropriate items.”3 There is apparently not, however, any enforcement or oversight of these concerns by the Department, and if the

3 California Department of Real Estate, Operating Cost Manual for Homeowner’s Associations, Revised April, 2007.

Continued on page 11 ECHO Journal | October 2007

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Reserve Budgets Continued from page 8

developer chooses to stay within the Department’s minimum standards, its budget will be approved.

The Department also states: “It is recommended that associations consider verification and, if necessary, correction of their major component inventory after project start-up.”4 Even more interesting, another Department of Real Estate publication states: Many an association has found that, despite its existence, an item such as a sidewalk or set of balconies has not been mentioned in either the CC&Rs or the developer budget. A site analysis by knowledgeable persons should result in a comprehensive list of reserve items for which the association is, or might be, responsible.5 That publication also devotes a great deal of space to other cautionary notes such as why an association should consult with multiple cost manuals or other contractors to be sure that such things as cost estimates and quantities are accurate. The publication, Reserve Study Guidelines for Homeowner Association Budgets, is available online at: www.dre.cahwnet.gov/pdf_docs/re25.pdf.

This, of course, is all well and good, but by the time a new board member has a chance to read any of these publications or cautionary notes, the budget has long been in concrete, the homes are sold, and the homeowners have purchased on the strength of the costs included in the original budget and represented to them at the time of sale. If you read “The Reserve Study Guidelines,” you will see page after page of recommendations that go far beyond the minimal requirements employed in the project approval process. It is truly amazing that the DRE can devote an entire publication to what an association should do to avoid reserve budget pitfalls, while its own budget review process ignores most of those recommendations and leaves major budget decisions up to the developer promoting the project! There’s something wrong with that picture.

There is little reason for a prospective homebuyer to challenge a financial plan that appears to be blessed by the State of California. This renders moot any cautionary notes issued by the DRE and leaves any underfunding to be dealt with by the association board.

4 Ibid.

5 California Department of Real Estate, Reserve Study Guidelines for Homeowner Association Budgets, April 2004

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In other words, by the time owners read the provisions of the Operating Cost Manual or Reserve Study Guidelines, the developer is usually long gone, and it is too late to correct the developer’s initial mistakes or intentional underfunding. What these various publications do tell us, however, is that the Department of Real Estate is now well aware of many of the concerns we have long been discussing. Perhaps one day it will implement enforcement.

Which Wizard Prepared Your Budget?

The accuracy of your budget will often depend upon who prepared it. A developer or converter does not want high monthly assessments as compared to comparable properties in the neighborhood. Higher assessments may make that product less marketable and fewer buyers will qualify to buy those homes. So a developer will likely push back on initial reserve calculations if they result in an assessment that is too high for the market. There are numerous ways to influence this, as we have seen. Leave out components, lower unit costs, lean toward repair rather than replace, and lengthen useful lives. Unfortunately, it is the future buyer, and not the developer, who will have to deal with any underfunding that results from these maneuvers.

The association board members, while always under pressure from owners to keep assessments from rising too fast, nevertheless are also owners of the property and will eventually want to sell their interests. Buyers are becoming increasingly more sophisticated in the financial and physical health of condominium and planned development projects, and will want to know not only the condition of the buildings but that of the budget as well. So, a gamble on reserve funding may not be the smart move in the end, and boards of directors, working with their budget professionals, have the best opportunity to correct the developer’s mistakes. This is especially true early in a project’s life, and the reserve study done after the developer’s departure is a good place to start.

In the end, there are many things an association can do to offset the problems presented by an original budget that fails to adequately prepare the association to maintain and repair its common area. The lack of oversight by the DRE or the mistakes of a developer can be overcome with diligence and attention to better guidelines and state statutes. All associations, old and young, can get the budget back on track if they get realis12

October 2007 | ECHO Journal

tic estimates and are ready to tackle the difficult political issues that come with raising assessments.

Looking Beyond the Crystal Ball— The Anatomy of a Reserve Study As you can see, an association that continued to follow the DRE guidelines would most likely never accumulate sufficient reserves.

That’s not surprising since the DRE admits that its guidelines are minimal.6 Unfortunately, too many developers have been all too happy to adopt this minimalist approach.

The Legislature, however, has seen to it that if the original budget is deficient, there are ways to correct it. California Civil Code Section 1365 requires that a board state its budget annually, including any deficiencies in the reserve funding, and distribute copies to the members.

But more important, California Civil Code Section 1365.5 requires: “At least once every three years, the board of directors shall cause to be conducted a reasonably competent and diligent visual inspection of the accessible areas of the major components that the association is obligated to repair, replace, restore, or maintain as part of a study of the reserve account requirements of the common interest development… The study required by this subdivision shall at a minimum include… identification of major components that, as of the date of the study, have a useful life of less than 30 years.” This is what is commonly known as a “reserve study,” which is a legal requirement for all associations. The reserve study also includes an estimate of the cost of repair and the amount necessary to be contributed annually to insure adequate funding.

What’s Behind the Budget? Good budget professionals will modify or augment the initial DRE budget in several ways. First, they will likely add more components to those in the original budget. Second, cost estimates are utilized that reflect true market prices.

Professional reserve analyst John Beatty says that new associations should seriously consider having an initial reserve study done, not at the three-year point, but rather in the first year after the developer turns over the project to the association.

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6 Mr. Nerby states that during his tenure with the DRE, the department considered all budget numbers in the Operating Manual to be the minimum required and looked to developers and their budget preparers for any modifications that might be necessary.

Continued on page 30 ECHO Journal | October 2007

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By Jeffrey A. Barnett, Esq.

Advantages of Incorporation M

any homeowners associations are unincorporated. The directors of these unincorporated associations must evaluate whether incorporation is actually to the advantage of their homeowners association. The purpose of this article is to outline the very real benefits of incorporation and to discuss some of the practical aspects of incorporating an unincorporated homeowner association.

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October 2007 | ECHO Journal

The Davis-Stirling Act recognizes that homeowner associations may be incorporated or unincorporated. Civil Code Section 1351 defines “association� as a nonprofit corporation or unincorporated association created for the purpose of managing a common interest development.

Civil Code Section 1363 provides in part: (a) A common interest development shall be managed by an association, which may be incorporated or

unincorporated. The association may be referred to as a community association. (b) An association, whether incorporated or unincorporated, shall prepare a budget pursuant to Section 1365 and disclose information, if requested, in accordance with Section 1368. (c) Unless the governing documents provide otherwise, and regardless of whether the association is incorporated or unincorporated, the association may exercise the powers granted to a nonprofit mutual benefit corpo-

ration, as enumerated in Section 7140 of the Corporations Code, except that an unincorporated association may not adopt or use a corporate seal or issue membership certificates in accordance with Section 7313 of the Corporations Code.

The association, whether incorporated or unincorporated, may exercise the powers granted to an association

Continued on page 17

ECHO Journal | October 2007

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October 2007 | ECHO Journal

Incorporation Continued from page 14

by Section 383 of the Code of Civil Procedure and the powers granted to the association in this title.

Although the Davis-Stirling Act allows the homeowners association to be unincorporated, there are significant advantages to incorporating the association.

Clarity of Operating Rules An unincorporated association is recognized in California law as a legal entity. For example, it can sue and be sued.

Incorporated homeowners associations likewise are recognized as legal “persons” with the power to take legal action, such as entering into contracts and bringing lawsuits.

Here the similarity ends. Unincorporated associations have vague and undefined operating rules. Only the bylaws of the association establish the procedures for governance.

In contrast, a homeowner association incorporated under the California nonprofit mutual benefit law is subject to detailed statutes that specify how it operates and delineate the rights and obligations of members. For example, members of an incorporated association have the right to call a special meeting of the members based upon a petition of five percent or more of the members presented to the association president.

The meeting must be called within 35–90 days after receipt of the written request. [See California Corporations Code Section 7510(e), 7511(c)]. The right of a member of an unincorporated association to call a special meeting of the members is unclear, absent a specific provision in the association’s bylaws.

Centralized Management and Director Protection Unincorporated associations may encounter difficulties in entering into contracts because the authority of an individual to act on behalf of the unincorporated association must derive from the association’s governing instruments. The contract may need to be executed by all members of the association. Officers and directors of incorporated homeowners associations, acting within the scope of their apparent authority, may obligate the association with respect to necessary contracts. This obviously makes business more practical and predictable.

The Corporations Code empowers the board of directors to manage and operate the affairs of a corporation. [See CorporaECHO Journal | October 2007

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tions Code Section 7210]. The Code further authorizes the membership to vote, in person or by proxy, for the directors who will run the corporation by vote. [See Corporations Code Sections 7220, 7613]. Members of an unincorporated association may or may not be able to use proxies in director elections.

The power of the directors of an unincorporated association, deriving as it does solely from the bylaws or other governing instruments, may be ambiguous or overly restrictive.

It is noteworthy that the California Corporations Code authorizes the board of directors of a corporation to indemnify an officer or director for expenses incurred in his defense in litigation. [See California Corporations Code Section 7237]. Indemnification of a director of an unincorporated association may require the consent of the entire association membership.

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Tort Liabilities Corporations Code §18620 addresses the tort liability exposure of members, officers and directors of unincorporated associations.

It provides: (a) A member, director, officer, or agent of a nonprofit association shall be liable for injury, damage, or harm caused by an act or omission of the association or an act or omission of a director, officer, or agent of the association, if any of the following conditions is satisfied: (1) The member, director, officer, or agent expressly assumes liability for injury, damage, or harm caused by particular conduct and that conduct causes the injury, damage, or harm.

(2) The member, director, officer, or agent engages in tortious conduct that causes the injury, damage, or harm.

(3) The member, director, officer, or agent is otherwise liable under any other statute. (b) This section provides a nonexclusive list of existing grounds for liability, and does not foreclose any common law grounds for liability.

This statute appears to protect officers, directors and owners in an unincorporated association who do not cause injury or damage through their conduct or do not engage in wrongful activity causing injury. However, subsection (b) of the law states that the statute does not preclude common law grounds for liability. Therefore, there is a risk in an unincorporated association that officers, directors and members may be liable for wrongful conduct of another member of Continued on page 26

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October 2007 | ECHO Journal

2007 Legislation at a Glimpse As of September 7, 2007 Bill No.

Author

Subject

Status

Position

Summary

AB 567

Saldana

Common Interest Development Bureau

Hearing cancelled in Assembly House Committee; Two-year bill

Oppose Unless Amended

This bill would, until January 1, 2013, establish in the Department of Consumer Affairs the Common Interest Development Bureau. The Bureau would, among other things, provide board member education and training resources, investigate and impose fines for Davis-Stirling Act violations, and compel associations to disclose those violations.

SB 948

Harman

Mandatory Board Member Training

Moved to Senate Inactive File

by Author

Oppose

As of January 1, 2009, would require every member of the board of directors of an association to complete at least one course during his or her first full term of office, and at least one course every three calendar years after becoming a member of the board, relating to decisional and statutory law regarding common interest developments. Approved courses may not be offered at a cost higher than $25 and association reimbursement may not exceed $25.

AB 691

Silva

Certified Common Interest Development Managers

Passed by the Support legislature; To governor for signature

Existing law requires a person to meet certain requirements in order to be called a “certified common interest development manager” and imposes other requirements with regard to common interest development managers. Under existing law, the provisions regulating certified common interest development managers become inoperative and are repealed on January 1, 2008. This bill would extend the operation of these provisions to January 1, 2012. The bill would modify the requirements in order to be called a “certified common interest development manager.” The bill would also revise various definitions.

AB 952

Mullin

BMR Owner Assessment Restrictions

To Senate Inactive File; Two-year bill

In associations that contain below market rate (BMR) units, would prohibit the board of directors from imposing a special assessment, or an increase in the regular assessment of more than 20%, without majority approval of both the owners of market rate units and owners of BMR units.

SB 528

Aanestad

Topic Passed by the Support Restrictions in legislature; To Board Meetings governor for signature

Would require notices of board meetings to include an agenda for the meeting. Would prohibit the board of directors from considering any item at a meeting unless the item was placed on the agenda when the meeting was announced (emergency meetings are excluded). Permits unannounced discussion of certain topics similar to provisions of the Brown Act.

SB 127

Kuehl

CID Sale Disclosure Deadlines

Passed Support Senate; Amended in Assembly and awaiting floor vote

This bill would impose disclosure deadlines for the seller of a unit in a common interest development. It would require that all disclosures be made no later than 20 calendar days after the execution of a purchase agreement or the opening of escrow, whichever is later. An association must continue to provide documents to the seller within 10 days. This bill affects both mobilehomes and CIDs.

AB 1173

Keene

Mandatory Submeter Installations

In Assembly

This bill, with a certain exception, would require every water purveyor who furnishes water service to any person residing in a multiunit residential structure for which a construction permit has been issued on or after January 1, 2008, to require the installation of submeters as a condition of new water service to that person. The bill would authorize the owner or operator of a multiunit residential structure without water submeters to charge tenants separately for water service as determined by a prescribed allocation formula.

Appropriations

Committee Suspense File

Oppose

Watch

For updates about these bills, please visit the ECHO web site regularly (echo-ca.org).

ECHO Journal | October 2007

19

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October 2007 | ECHO Journal

By Gregory W. Marler, Esq.

It’s Not Easy Being Little

Editors Note: Some minor edits, approved by the author, have been made to this article to account for differences between California and Florida law. This article is republished with permission from Community Update, a publication prepared by the Becker & Poliakoff Law Firm.

Issues Affecting Small Associations

M

embers of large associations with 300 or more members might sometimes wish they lived in smaller, simpler communities where the budgets are not enormous, the volunteer board members do not find themselves performing the equivalent of a parttime job or more, and the members do not sometimes feel as though their association is out of touch with their needs. But small associations of 50 members or fewer must deal with unique issues and difficulties that are equally challenging, often much more acute, and not at all easy to overcome.

Three challenges facing small associations can be generally categorized as administration issues, financial issues and social issues.

The administration issues arise from the fact that there is a smaller pool of members to draw from to serve on the board and there are fewer management professionals willing to work with small associations. The financial issues are created due to the obvious fact that fewer members must bear the burden of association expenses, including some fixed expenses that are not always reduced just because the association is small. And the social issues con-

cern the reality that interaction between all of the members in small associations tends to be much more frequent, personal, and therefore critical to the smooth administration and success of the community. To add to these challenges for small associations, the issues and their solutions are often interrelated.

Administration Issues A condominium or deed restricted community is operated, most often, by a not-forprofit corporation: the association. The association is administered by an elected board of directors. It is not unusual in many communities, large and small, to find that there are not enough members willing to serve on the board. But the fact is that every association realistically needs at least five directors to serve on the board. This is because a board meeting occurs anytime a quorum of the board, most often defined as a majority, meets in person or over the telephone and discusses association business. While boards should always conduct important business in open meetings, as a practical matter, it is necessary for board members to communicate and interact outside of duly noticed board meetings. An odd number of directors is preferable in order to avoid deadlock, and while three directors can certainly legally administer an association, important provisions of the Davis-Stirling Act require most board meetings to be open to members.

Therefore, anytime two members of a three member board meet and discuss association business, a board meeting is taking place, which must be noticed and open to mem-

bers. This is cumbersome and impractical.

On a five-member board, two board members can meet outside of open board meetings and conduct necessary association business, as two board members do not constitute a quorum of such a board.

Because a five-member board is critical to the effective administration of any association, in small associations of 50 units or less, this requires at least 10% of the members to be willing to serve on the board. In an association of 20 or fewer members, at least 25% of the members must be willing to serve on the board. Such levels of interest in board service are rare, and it can be difficult for small associations to get a sufficient number of volunteers.

One obvious solution to the reluctance of members to serve on a board is to hire a wellqualified community association manager to assist with the administration of the association. Delegating many of the board responsibilities to a good manager can greatly reduce the required time commitment of board members. But community association management contracts are typically priced based on the number of units in a community. It is not unusual to find that some community association managers are not interested in managing small associations because many of the duties of a manager, such as attending meetings, obtaining bids on service contracts, and preparing budgets and financial statements, are equally demanding and time consuming whether being performed for a small or large association. One solution to this problem for small associations may be to entice managers to manage the association ECHO Journal | October 2007

21

by paying them a premium over and above the typical rate structure. But the increased cost may unreasonably increase the financial burden of the members.

Financial Issues It almost goes without saying that the most difficult issue for small associations to overcome stems from the fact that there are simply fewer members to pay the costs of operating the community. Fortunately, the amenities that are operated by a small association are usually small, if they exist at all. In many cases, the small association may be part of a larger community, which owns and operates substantial facilities such as a clubhouse, pool, tennis courts and golf course. But there are some fixed costs and financial requirements that can create an unusually heavy burden on small associations.

One such cost is unanticipated damages or repair costs. In certain circumstances, especially involving condominiums, damage from an earthquake or other casualty event, or unexpected repair costs, can be a common expense of the association charged to all members for which insurance proceeds are not payable. In many of these situations, 22

October 2007 | ECHO Journal

often involving water leaks, the damaged property is in a localized area of the community affecting only a few members. In large associations, the common expense of such an event can be spread over hundreds of members and is not likely to be a burden, but in a small association, each member’s pro rata share of the common expense is usually significant and must be addressed with a special assessment over and above the regular annual assessment.

Another critical financial issue for small associations arises when a member or two fails to pay assessments in a timely manner.

Mathematically, it is easy to see that two nonpaying members in a 20-member community represent the loss of 10% of the community’s revenue. In a community of 300 members, even 10 nonpaying members barely registers and can be easily absorbed by the association, at least in the short term. The problem for small associations is compounded because legal action is often necessary to collect the unpaid assessments. While the costs and reasonable attorneys’ fees spent by the association in collecting the assessments are generally recoverable from the non-paying

member, the association must fund the collection effort initially, and that can create immediate cash flow problems for many small associations. Both this issue of non-payment, and the possibility of significant unanticipated expenses, highlight the need for small associations to maintain adequate surplus or reserve funds, and of course those funds come from the members.

In addition, certain insurance costs are essentially fixed costs that do not fluctuate precisely in accordance with the size of the association. Likewise, total legal and accounting costs are similar for large and small associations, or at the very least are not reduced for small associations in exact proportion to the size of the association. In the event litigation is necessary to enforce the covenants against a member or to address some defect in the property, the litigation process and costs incurred are the same regardless of the size of the association. Similarly, the costs of maintaining ledgers, financial statements and preparing audits are not reduced in direct correlation to the size of an association.

To be sure, persons who purchase homes in small associations must be aware, hopeful-

ly in advance of purchasing their home, that their pro rata share of the financial requirements of the association is almost always going to exceed the burden on members in similar homes in larger communities.

Social Issues Another critical fact that members of a small association must recognize is that the ability to get along and function well with other members, and the need to fulfill their responsibilities, are absolute requirements to maintain a well-run association.

To address the administration issues, members must be willing to serve the association. It is much easier for substantial numbers of members in a large association to “lie low� and not affect the association’s operation. Member apathy in a small association can be devastating, either because of the absence of volunteers to diligently administer the association or because only one or two members may dominate the board, which, in some cases, can be to the detriment of the association.

Moreover, because of the financial effects of a member failing to pay assessments in a timely manner, or failing to follow the covenants and restrictions, which leads to enforcement action and litigation, members of small associations must value and respect their association and their neighbors; and they must meet their responsibilities to the community to a greater degree than members of a large association.

Conclusion Small community associations may appear to be less complex and more manageable than large associations, but small associations have their own unique issues that are no less difficult to overcome. In the end, the best solution to meet the challenges of any community association, large or small, is for members to recognize their indispensable roles in serving the community, meeting their obligations and respecting the structure and objectives of the community that they chose to make their home.

Greg Marler is an attorney in the Community Association and Real Estate groups at the law firm Becker & Poliakoff, a Florida firm with a very large practice with homeowner associations. He represents homeowner associations, handling issues such as corporate governance, vendor contracts and the enforcement of association covenants, rules and bylaws.

ECHO Journal | October 2007

23

Association Affairs

By John Stevens

San Francisco Association Generates Its Own Electricity and Hot Water

T

he Pacific Heights Towers Association is a 127unit condominium in a 20-story high-rise in San Francisco. After the association experienced a 40% increase in its electrical costs during California’s deregulation fiasco in 2001, the association got serious about the cogeneration system that they had been considering for years. About the same time as the electricity cost increase, along came a new cogeneration technology called a “MicroTurbine” that promised to be quieter and more maintenance free than some earlier cogeneration system designs.

Cogeneration is the simultaneous production of energy from one fuel source. In this case, natural gas is ignited in a small turbine engine, which generates electricity as it rotates while its exhaust is used to heat hot water at the same time. This gives the cogeneration technology a high 80% efficiency. This is much better efficiency than typical central natural gas power plants that do not utilize the waste heat they generate, and they operate at efficiencies in the low 30–40% range.

The association’s Energy Committee members flew to Southern California to see a Capstone MicroTurbine for themselves. They visited two operational Capstone installations with which they were very impressed.

24

October 2007 | ECHO Journal

Another factor in their decision to install cogeneration was a $60,000 incentive program, called the Self-Generation Incentive Program, developed by the California Public Utilities Commission and administered by PG&E. The association received its $60,000 check for the cogeneration system, which began operation in March 2005. The project is expected to have a six-year simple payback.

Hot water from the cogeneration unit heats both the domestic hot water and the building’s hydronic heating water (hydronic heating is the heating of a building by radiation from panels containing hot water). The electricity from the unit provides light and power to the building’s common areas such as the corridors, lobby, and garages. The cogeneration unit is located in the building’s rooftop boiler room. The Capstone unit, about the size of two refrigerators, sits next to the hot water storage tank and hot water boilers.

In a PG&E power failure, the MicroTurbine continues to power critical electrical circuits such as lighting in the corridors and garages and power to garage doors.

Pacific Heights Towers is helping the environment by utilizing natural gas at very high efficiency, self-generating its own hot water, and taking a significant electrical load off California’s stressed power grid.

This sort of electrical “distributed generation” will play an increasing role in supplying California’s electrical needs. It provides high-efficiency generating power at the location where the electricity is utilized and thus takes a load off the power grid for the benefit of all Californians on power-short summer days.

Brian Hines of North Coast Solar Resources in Santa Rosa, who has served as energy consultant to Pacific Heights Towers for 15 years, was the Project Manager for the cogeneration project.

John Stevens is a resident at Pacific Heights Tower Owners Association, an ECHO member association in San Francisco.

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October 2007 | ECHO Journal

Continued from page 18

the association under common law grounds of liability, such as agency.

Civil Code §1365.9 gives condominium owners in both incorporated and unincorporated associations limited immunity from liability for torts arising from the owner’s status as a tenant in common owner of the common area. However, this statute does not extend immunity to owners of homes in unincorporated associations from joint enterprise liability.

Contract Liabilities Three sections of the Corporations Code address the liability of members, directors and agents of the association with respect to contractual obligations of the unincorporated association. They are Corporations Code §§ 18605, 18610 and 18615, which provide: 18605. A member, director, or agent of a nonprofit association is not liable for a debt, obligation, or liability of the association solely by reason of being a member, director, officer, or agent.

18610. A member of a nonprofit association is not liable for a contractual obligation of the associ-

ation unless one of the following conditions is satisfied: (a) The member expressly assumes personal responsibility for the obligation in a signed writing that specifically identifies the obligation assumed. (b) The member expressly authorizes or ratifies the specific contract, as evidenced by a writing.

This subdivision does not apply if the member authorizes or ratifies a contract solely in the member’s capacity as a director, officer, or agent of the association. (c) With notice of the contract, the member receives a benefit under the contract. Liability under this subdivision is limited to the value of the benefit received. (d) The member executes the contract without disclosing that the member is acting on behalf of the association. (e) The member executes the contract without authority to execute the contract.

18615. A director, officer, or agent of a nonprofit association is not liable for a contractual obligation of the association unless one of the following conditions is satisfied: (a) The director, officer, or agent expressly assumes responsibility for the obligation in a

signed writing that specifically identifies the obligation assumed. (b) The director, officer, or agent executes the contract without disclosing that the director, officer, or agent is acting on behalf of the association. (c) The director, officer, or agent executes the contract without authority to execute the contract.

...members of incorporated homeowner associations enjoy advantages over members of unincorporated associations...

These statutes do not immunize members of an unincorporated homeowners association from liability for the contracts of the association. For example, if the association

fails to pay a contractor, such as a roofer, the members of the unincorporated association can be sued directly, to the extent of the value of the labor and materials furnished by the contractor to that member.

Therefore, the members of an incorporated homeowners association enjoy an advantage over the members of unincorporated homeowners associations in that they cannot be directly sued by creditors of the corporation. The creditors of an unincorporated homeowners association can sue individual members, to the extent of the benefit incurred on the member, if such members knew about the contract and received a benefit under it.

However, if an association, incorporated or unincorporated, becomes liable for breach of contract, the judgment creditor may obtain a court order compelling a special assessment to be levied against the members under Civil Code §1366. [James F. O’Toole Co., Inc. v. Los Angeles Kingsbury Court Owners Assn., 126 Cal.App. 4th 547 (2005)].

Continued on page 31 ECHO Journal | October 2007

27

Calendar of Events

Attend the Peninsula Fall Seminar Wednesday, October 3 Maintenance Resource Panel 12:00 Noon ECHO Office 1602 The Alameda, Ste. 101, San Jose

Friday, October 19 ECHO Annual Meeting 10:00 a.m.

ECHO Office 1602 The Alameda, Ste. 101, San Jose

Friday, October 5 East Bay Resource Panel 9:30 a.m.

Angius & Terry 1990 N. California Blvd., Suite 950, Walnut Creek

Saturday, October 27 Peninsula Fall Seminar 8:00 a.m. to 1:00 p.m.

Hyatt Regency SF Airport 1333 Bayshore Hwy Burlingame, CA 94010

Wednesday, October 10 Legal Resource Panel 6:00 p.m.

Call Mark Wleklinski 925-691-1191

Thursday, November 1 North Bay Resource Panel 9:30 a.m.

Contempo Marin Clubhouse 400 Yosemite Rd., San Rafael

Wednesday, October 17 Wine Country Resource Panel 11:45 a.m.

Lanahan & Reilley 600 Bicentennial Way Suite 300, Santa Rosa

Friday, November 2 East Bay Resource Panel 9:30 a.m.

Angius & Terry 1990 N. California Blvd., Suite 950, Walnut Creek

Monday, November 12 Accountants Resource Panel 6:00 p.m.

Francesco’s Restaurant, Oakland Tuesday, November 13 Central Coast Resource Panel 12:00 Noon Pasatiempo Inn, Santa Cruz Wednesday, November 14 South Bay Resource Panel 12:00 Noon Il Fornaio 302 Market St., San Jose Wednesday, November 21 Wine Country Resource Panel 11:45 a.m.

Lanahan & Reilley 600 Bicentennial Way, Suite 300, Santa Rosa Wednesday, December 5 Maintenance Resource Panel 12:00 Noon ECHO Office 1602 The Alameda, Ste. 101, San Jose

Friday, December 7 East Bay Resource Panel 9:30 a.m.

Angius & Terry 1990 N. California Blvd., Suite 950, Walnut Creek Wednesday, December 19 Wine Country Resource Panel 11:45 a.m.

Lanahan & Reilley 600 Bicentennial Way, Suite 300, Santa Rosa Thursday, January 3, 2008 North Bay Resource Panel 9:30 a.m.

Contempo Marin Clubhouse 400 Yosemite Rd., San Rafael Friday, January 4 East Bay Resource Panel 9:30 a.m.

Angius & Terry 1990 N. California Blvd., Suite 950, Walnut Creek

Regularly Scheduled Resource Panel Meetings Resource Panel Maintenance North Bay East Bay Accountants Central Coast South Bay Wine Country Legal 28

October 2007 | ECHO Journal

Meeting

Location

First Wednesday, Even Months First Thursday, Odd Months First Friday, Monthly Second Monday, Odd Months Second Tuesday, Odd Months Second Wednesday, Odd Months Third Wednesday, Monthly Quarterly

ECHO Office, San Jose Contempo Marin Clubhouse, San Rafael Angius & Terry, Walnut Creek Francesco’s Restaurant, Oakland Pasatiempo Inn, Santa Cruz Il Fornaio Restaurant, San Jose Lanahan & Reilley, Santa Rosa Varies

Directory

UPDATES Updates for listings in the 2005 ECHO Directory of Businesses and Professionals.

Changes Aune & Associates 505 Sansome St., 6th Floor San Francisco, CA 94104 Email: raune@auneassociates.com Tel. & Fax remain the same Christison Company Main Office 3090 Independence Dr., #100 Livermore CA 94551 Tel: 925-371-5700 Fax: 925-371-5799 Oakland Office 176 Caldecott Ln. Oakland, CA 94618 Tel: 510-647-3642 Fax: 510-981-0303 Modesto Office 132 Maynell Ave. Modesto, CA 95354 Tel: 209-578-2743 Fax: 209-578-2743 Napa Office窶年o Change Hanna & Van Atta 525 University Ave., #600 Palo Alto, CA 94301 Tel. & Fax remain the same Independent Planning Management 43 Quail Ct., Suite 205 Walnut Creek, CA 94596 Tel. & Fax remain the same ECHO Journal | October 2007

29

Reserve Budgets Continued from page 13

What else will the expert budget wizard do to assist your association in conducting a reserve study and preparing the budget? It won’t be done with smoke and mirrors. Good professionals will insure that the physical inspection of the project is adequate to confirm or reject the assumptions passed on to the association by the developer. They will use that information to add to the list of building components that have an identified service life of less than 30 years.

What’s Not? Inspections performed as part of a reserve study will typically not include inaccessible portions of a building such as wall cavities, attic spaces, and closed foundation areas, especially where portions of the building may have to be removed for access.

Where a surface inspection indicates that there may have been leaks through exterior walls, the roof, or moisture accumulation under buildings, a more intrusive inspection may be necessary to determine if any of this moisture may have led to rot or other deterioration in these inaccessible areas. This is especially true for older buildings. Also, reserve inspections may not include plumbing lines that may require replacement during the life of the building.7 If your association is more than, say, twenty-five years old, or if there has been evidence of leaks, ask

7 It should be noted that the Department of Real Estate believes that plumbing will never need a reserve.

30

October 2007 | ECHO Journal

your reserve study professional if a more intrusive inspection into certain areas would be recommended.

The Calculations. After inspection, the reserve professional will calculate a funding plan that sets appropriate and realistic goals based on true market costs. And unlike the developer, who tries to make the budget fit a pre-conceived assessment in order to qualify buyers and sell units, the good budget professional will make the funding plan fit the association’s real repair and replacement needs to give the board a true picture of its funding requirements. The board can then decide whether to raise assessments or not. But only with an accurate picture of its financial needs can a board of directors make informed fund-raising decisions.

Making Your Own Magic You can improve your association’s chances of surviving a reserve funding crisis by checking the following factors: 1. Double Check the List of Components.

The Department of Real Estate Reserve Checklist includes 30 major components that it suggests should be included in a reserve budget. Beatty’s list contains 81 components, indicating that the more modern view is to be over-inclusive to avoid surprises later on.

2. Confirm Unit Costs. Roofing is measured in square feet, or sometimes “squares” (100 square feet) and a cost to repair assigned to that unit of measurement. As we stated above, the Department of Real Estate cost manual appears to offer unit costs that in some instances are substantially below market. It is important that the cost that is

applied to each unit of measurement is an accurate reflection of the true cost of repair and is periodically updated to reflect inflation.

3. Question Estimated Useful Lives.

Another factor that can throw off a reserve budget is an over-estimate (or under-estimate) of the useful life of a building component. If the life of a roof is estimated at 25 years but it only lasts 15, the association will be faced with a big roofing replacement cost long before it has saved enough cash to do the work. This is not as much of a problem for new projects as it is for conversions. With new construction not only does the association have many years to correct any deficiencies, but the expected life of a new roof, or new paint, or new asphalt is reasonably predictable based on industry standards and averages. Furthermore, the Department of Real Estate lists suggested useful lives for many major building components (not wood siding, however, as mentioned above). But the remaining useful life of a 15- or 20-yearold roof, for example, on a 35- or 40-year-old converted apartment house may be difficult to estimate accurately. This is one reason why a reserve study at developer turnover and every three years after that is so important. If nothing else, it serves as a log of the condition of the building so that previous assumptions can be evaluated and corrected if later history proves them wrong.

4. Check Quantities. How do you know that the number of square feet of roofing Continued on page 33

Incorporation Continued from page 27

Disadvantages of Incorporation Although incorporated associations have the benefits of an established body of corporate law governing the rights and liabilities of the association and its members, limited liability of members from contract and tort obligations, centralized management, and clearer authority to hold title to real property and enter into contracts, there are, nevertheless, disadvantages to incorporation. For example, the unincorporated association may allow the members more control over management of the association by its directors. The unincorporated association may also be simpler and less expensive to manage and maintain. The expenses of the incorporation process also are a consideration.

However, except in the smallest of associations, there probably are no particular advantages to unincorporated status because the budget, accounting and financial disclosure requirements are identical for incorporated and unincorporated associations under the Davis-Stirling Act. And, the advantages of incorporation greatly outweigh the expenses of establishing and operating the corporation.

of a fiscal year and designation of a corporate bank account and signatories. A deed should be executed by the directors to transfer title to any real property owned by the association (common area) to the incorporated entity.

Insurance policies must be amended to change the name of the insured.

Conclusion Incorporation is advantageous for a host of reasons, including clarity of operating rules, limited liability of members, centralized management, and contractual power.

The cost of incorporation and inconve-

niences of corporate operation are greatly outweighed by the numerous benefits of incorporation. Associations contemplating incorporation should obtain advice and counsel from their attorney and their accountant.

Jeffrey A. Barnett is an association attorney with legal offices in San Jose. He is a past member of ECHO’s Board of Directors and a current member the Legal Resource Panel, the Legislative Committee and several regional resource panels.

The Incorporation Process An unincorporated association contemplating incorporation should reserve its desired corporate name with the Secretary of State. The directors of the unincorporated association should submit to the members for approval articles of incorporation, bylaws and amended CC&Rs that will make changes necessary and appropriate to an incorporated entity. The secret ballot process in Section 1363.03 of the Civil Code applies to this vote.

The respective amendment clauses in the articles of association, bylaws (if any) and CC&Rs must be followed.

Upon approval of the governing instruments by the members, the directors may execute the articles of incorporation and a statement of incorporators acknowledging the approval of incorporation by the members. The articles of incorporation are then filed with the Secretary of State. The CC&Rs (and, if desired, bylaws) may then be recorded in the appropriate county.

To complete the incorporation process, the board of directors will hold a first meeting of directors of the association and conduct certain formalities, such as the selection ECHO Journal | October 2007

31

Major Repairs at Your Association ECHO 2007 Peninsula Fall Seminar October 27, 2007 Hyatt Regency, Burlingame Seminar Agenda 8:00 Registration and Sponsor Tables 8:45 Welcome & Introductions 9:00 Identifying the Need for Repairs: Reserve Studies and Special Investigations 9:30 Funding the Project: Special Assessments and Loans 10:00 Starting the Process: Bidding and Contract Issues 10:30 Break 10:50 Construction Issues—Inter-Disciplinary Panel: Communications, Payment Control, Mechanics Liens, Change Orders, Phasing, Supervision, Relocation 11:50 Construction Issues: The Contractor’s Perspective 12:20 Questions and Answers 12:50 Drawings for Sponsor Prizes 1:00 Adjourn Yes, reserve _____ spaces for the ECHO Peninsula Fall Seminar.

Amount enclosed: $__________ (attach additional names) Name:

Ticket Price: $35

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

Reserve Budgets Continued from page 30

shown in your reserve budget is an accurate calculation? Architects or engineers can calculate such things using the drawings for the project, assuming the drawings are an “asbuilt” set. Be sure that someone has spotchecked the quantities shown in the initial budget to be sure they are right. If the roofing or siding quantity shown in the budget is less than actually exists on the project, your funding plan will not work.

5. Repair vs. Replace. Even when a component is included in a reserve budget, different budget preparers have different views on what to do with that component. Virtually all reserve budget professionals and most contractors agree that at the end of a roof’s useful life it should be completely replaced.

Now, there may be instances where a partial replacement is adequate, but that’s rare.

However, some experts might disagree about whether you should tear off the old roof first, but most budgets you will find will call for complete replacement of a roof at the end of its useful life. Not so with other components.

Take exterior wood, for example. Some experts will call for complete replacement of wood siding at the end of its estimated useful life, while others will provide only for periodic repair of a small percentage of the wood— say 5% to 25% over a 10- to 20-year period.

The “repair” approach assumes that a substantial portion of the siding will never need replacement, since if you repair only 5% every 10 years you are never going to get to all of it.

With components like wood siding or other exterior wood, a decision to simply repair a small percentage every ten years, rather than to provide for complete replacement, say, 30 years into the future, will result in the association suffering a major shortfall should replacement become necessary. On the other hand, augmenting a paint budget with additional funds for “miscellaneous carpentry” every five years will allow an association to do periodic repairs in conjunction with repainting, and on some projects that might be good enough, and clearly better than what is suggested by the DRE. Budgeting for full replacement is conservative—but costs more. Providing for repair only is a gamble but can result in lower assessments.

Continued on page 37 ECHO Journal | October 2007

33

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, email addresses, and a short description are included. This directory is an invaluable tool for locating service providers that work with homeowner association.

Condominium Bluebook 2007 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.

This is a valuable guide to all aspects of community association living designed as a practical problem solving guide. Written by two long-time 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.

Home and Condo Defects— A Consumer Guide to Faulty $10.00 Construction

Finding the Key to Your Castle—Revised 2005 $12.50

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.

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.

Dispute Resolution in Homeowner Associations $20.00 This publication has been completely 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.

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Board Member’s Guide for Management Interviews $20.00 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

Advantages of Incorporation The directors and members of unincorporated homeowner associations must evaluate whether incorporation is actually to the advantage of their associations. However there are some very real benefits of incorporation that should be carefully considered.

An unincorporated association is recognized as a legal entity. For example, it can sue and be sued. Incorporated homeowners associations likewise are recognized as legal “persons” with the power to take legal action, such as entering into contracts and bringing lawsuits. Here the similarity ends. Unincorporated associations have vague and undefined operating rules, and only the bylaws of the association establish the procedures for governance. In contrast, an association incorporated under the California nonprofit mutual benefit law is subject to detailed statutes that specify how it operates and delineate the rights and obligations of members.

Unincorporated associations may encounter difficulties in entering into contracts, and contracts may need to be executed 36

October 2007 | ECHO Journal

by all members of the association. Officers and directors of incorporated homeowners associations may obligate the association with respect to necessary contracts, which makes business more practical and predictable.

The Corporations Code clearly empowers the board of directors to manage and operate the affairs of a corporation. The power of the directors of unincorporated associations, deriving as it does solely from the bylaws or other governing instruments, may be ambiguous or overly restrictive. The Corporations Code also authorizes the board of directors of a corporation to indemnify an officer or director for expenses incurred in his defense in litigation.

Indemnification of a director of an unincorporated association may require the consent of the entire association membership.

The members of an incorporated homeowner association enjoy an advantage over the members of unincorporated associations in that they cannot be directly sued by creditors of the corporation while creditors of an unincorporated association can sue individual members, to the extent of the benefit incurred on the member, if such members knew about the contract and received a benefit under it.

The cost of incorporation and the inconveniences of corporate operation are greatly outweighed by the numerous benefits of incorporation. Associations contemplating incorporation should obtain advice and counsel from their attorney and their accountant.

Is Your Reserve Budget Just an Illusion?

An increase in claims for defective budgets has been seen in recent years. Such claims arise when associations find out that what they thought was a solid budget turns out to be an illusion. The financial protection they expected has vanished upon closer inspection. The damage that a community association can sustain from a budget that has not been adequately prepared can be significant.

How many of you can say that your community association’s reserve budget is adequate? How do you know? Have you reviewed those accounts yourself? Do you know if the figures used in that budget are based on solid facts, or did someone wave a magic wand over them and hope for the best? Much has been written in the ECHO Journal about how many reserve budgets lack necessary funding to meet their stated goals, but here’s a new one: what if your budget is fully funded but the goals have been underestimated?

First, associations should not rely on most developer-prepared budgets. The developer’s shortterm need to sell units does not necessarily square with an association’s long-term budget goals. A second is that a reserve study, conducted in the first full year of an association’s operation, will help to adjust deficiencies early and allow the board the maximum amount of time to add any necessary funding. A third is to hire good professionals and make sure they rely on independently derived data in calculating your reserve requirements.

Following good guidelines with diligence will insure that you don’t have to rely on magic when it’s time to replace a major component.

Upcoming ECHO Programs Saturday, October 27 Peninsula Fall Seminar 8:00 to 1:00 p.m.

Hyatt Regency Hotel, Burlingame

Reserve Budgets Continued from page 33

Our opinion is to take the conservative route.

In the unlikely event that you find you have too much money in reserves, you can always give some back!

6. Straight Line vs. Cash Flow. This refers to two different accounting methods used to prepare a funding plan for a reserve budget.

I will not pretend to understand the nuances of these two systems, but suffice to say that the advocates of each are not hesitant to defend them. The differences between them and their respective philosophy would offer enough material for an article on this issue alone. But let me try to explain why each might be important to an association. The “straight line” method assigns a funding goal to each component in the reserve budget without regard to the accumulation of funds for other components. It’s like having an individual reserve “account” for each component—roofs, paint, asphalt, etc. The balance in one component “account” is not considered available to satisfy the funding requirements of another component. The cash in each of these separate “accounts” is compared to the funding requirements of each when determining the adequacy of the association’s funding, according to David Levy, CPA. The “cash flow” method focuses instead on the total cash available to address pending repair issues at any one moment in time.

Nerby states, “…part of creating an acceptable cash flow method is to anticipate the expected expenses for many years to come (usually at least 30 years) and to annually fund enough money in reserves to cover all the annual expenses no matter in what year they occur. In addition to the annually needed reserve funds to cover expenditures, there should also be a “cushion” established that will define the lower limit (of the reserve account).” In other words, if there is sufficient cash on hand to deal with whatever obligations are maturing in the present fiscal year along with the expense projections and necessary cushion for future years, the amount in the reserve account is considered adequate.

Advocates of the straight-line method say that projecting future cash requirements for each component separately results in a more Continued on page 39 ECHO Journal | October 2007

37

Honor Roll

About

ECHO Honors Volunteers 2007 Volunteer of the Year Jeffrey Barnett ECHO Resource Panels Accountant Panel William Erlanger, CPA, 415-981-9350 Central Coast Panel Darrel Louis, 831-212-0300 East Bay Panel Scott Burke, 408-536-0420 Legal Panel Mark Wleklinski, Esq., 925-691-1191 Maintenance Panel Mike Muilenburg, 408-996-3897 North Bay Panel Diane Kay, CCAM, 415-846-7579 Stephany Charles, CCAM 415-458-3537 San Francisco Panel Jeff Saarman, 415-749-2700 South Bay Panel Ann Philipp, 408-536-0420 Wine Country Panel Ron Hamann, 707-584-4788

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. 38

October 2007 | ECHO Journal

2007 Annual Seminar Speakers Adrian Adams, Esq. John Allanson Dan Angius, Esq. Frank Arms Jeffrey Barnett, Esq. Tyler Berding, Esq. Sandra Bonato, Esq. Timothy Cline Karen Conlon, CCAM Burt Dean Bill Erlanger, CPA Tom Fier, Esq. John Gachina Michael Gartzke, CPA John Garvic, Esq. Beth Grimm, Esq. Geri Kennedy, CCAM Karl Lofthouse Kerry Mazzoni Hermann Novak Dan Rottinghaus, Esq. Steven Weil, Esq.

SF Luncheon Speakers John Allanson Tyler P. Berding, Esq. Ronald Block, PhD. Doug Christison Karen Conlon, CCAM Rolf Crocker Ross Feinberg, Esq. David Feingold, Esq. Tom Fier, Esq. Kevin Frederick, Esq. John Garvic, Esq. Beth Grimm, Esq. Brian Hebert, Esq. Roy Helsing Julia Lave Johnston Garth Leone

Nico March Larry Russell, Esq. Steve Saarman Nathaniel Sterling, Esq. Glenn Youngling, Esq.

Recent ECHO Journal Contributing Authors May 2007 Julie Adamen Tyler P. Berding, Esq. Graham Oliver Dick Tippett June 2007 Adrian Adams, Esq. Tyler P. Berding, Esq. Tom Douma Beth A. Grimm, Esq. David L. Hughes July 2007 Joelyn Carr-Fingerle, CPA Robert L. Castle, CPA Jeffrey A. Goldberg, Esq. Thomas Hill Robert Rosenberg, CCAM August 2007 ArLyne Diamond, Ph.D. Patti Jo Lewis, PCAM Marilyn Lincoln Graham Oliver Garth M. Stanton September 2007 Adrian Adams, Esq Tyler P. Berding, Esq. Beth A. Grimm, Esq. Bill Leys Larry Mesplé

ECHO

What is ECHO? ECHO (Executive Council of Homeowners) is a California non-profit 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 $125 Businesses & Professionals

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 or visit the ECHO web site (echo-ca.org) to obtain an application form and for more information.

Reserve Budgets Continued from page 37

accurate funding plan when the budget is viewed as a whole—a more conservative approach that carries less risk of future underfunding for the association. Advocates of the cash flow method claim that straight line fails to project accurately the timing of the cash requirements of an association, resulting in cash accumulations that might not be used, which in turn would result in greater expense to the members of the association.8

...do not rely on most developer prepared budgets.

As we have said many times, our own view is that associations should adopt whichever method is less likely to result in a funding crisis down the road. That usually means saving more money, not less; so whichever method results in more total cash being accumulated over time would be the one we would choose.

Final Comments One obvious conclusion is that an association should not rely on most developer-prepared budgets. The developer’s short-term need to sell units does not necessarily square with an association’s long-term budget goals.

A second is that a reserve study, conducted in the first full year of an association’s operation, will help to adjust deficiencies early and allow the board the maximum amount of time to add any necessary funding. A third is to hire good professionals and make sure they rely on independently derived data in calculating your reserve requirements.

Finally, you can never have too much money in reserves. Following these guidelines with diligence will insure that you don’t have to rely on magic when its time to replace a major component.

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

8 Our thanks to David Levy of Levy, Erlanger & Co, CPAs, for his valuable time and assistance in helping us understand straight-line accounting.

ECHO Journal | October 2007

39

ECHO Directors

2007 Annual Meeting of Members to Convene on October 19

T

John Garvic

David Levy

Karl Lofthouse

Wanden Treanor 40

October 2007 | ECHO Journal

he 2007 Annual Meeting of Members will be held Friday, October 19, 2007, beginning at 10:00 a.m., at the ECHO Office, Suite 101, 1602 The Alameda, San Jose. The only business on the agenda is the election of four persons to serve three-year terms on the Board of Directors. The official Notice of Meeting, along with an agenda, a proxy form, a postage-prepaid return envelope and directions to the meeting, were mailed to all association presidents in September.

Association presidents are urgently requested to sign and return a proxy to the ECHO Office as soon as it is received. We need your proxy to ensure a quorum for the meeting; we must receive a large number of proxies to convene the meeting.

The Nominating Committee, chaired by board member Jerry Bowles, has nominated the following four candidates, who have been endorsed by the ECHO Board of Directors, for board positions: John Garvic—incumbent, Attorney, CID resident owner (3-year term) David Levy—incumbent, Accountant, CID resident owner (3-year term) Karl Lofthouse—incumbent, Banker, CID resident owner (3-year term) Wanden Treanor—incumbent, Attorney (3 year term) Board members Diane Rossi, Bob Hood and David Hughes also served on this year’s nominating committee.

Brief biographies of the four nominees for terms ending in 2010 are below: John D. Garvic, Esq., began the practice of law in 1973 after receiving his law degree from George Washington University in 1972. As a member of both the California and Virginia bars, he initially served as a deputy district of attorney for San Mateo County. In 1977, he entered private practice in the field of homeowner association law. He currently resides in a large planned development in San Mateo. His 30 years of private practice have focused on representing homeowner associations in day-to-day counsel and litigation activities involving issues in all facets of HOA law. Garvic has been a member of ECHO since 1976, joined its board of directors in 1978 and has served several terms as

board president. He is current chair of the ECHO Legislative Committee and a member of the Legal Resource Panel.

David H. Levy, CPA, is a partner at an accounting firm in San Francisco and represents several hundred association clients. He has been a member of the ECHO board of directors since 1998 and has served as board treasurer for 4 years. He holds BS and MBA degrees in business administration. From 1975 to 1986, when he started his own firm, he was an accountant and manager at several Bay Area accounting firms. In addition he currently serves as the president of his own homeowners association. He has been active in ECHO and CAI. He is experienced in organizing, marketing and conducting large and small education seminars for board members and association managers.

Karl Lofthouse is a senior vice president at First Bank. He was honored as ECHO’s Volunteer of the Year in 1999. He was the founding chair of the ECHO San Francisco Panel. Karl attended Wichita State University, majoring in Business. He has served as a board member and board president of an 800 unit condominium association in Walnut Creek, where he resides. He has also been a speaker on banking topics at numerous ECHO events, has contributed articles for the ECHO Journal, and most recently has authored a banking guidebook for board members.

Wanden P. Treanor, Esq., is an attorney providing comprehensive legal services to common interest developments for 22 years. Ms. Treanor has also served as a court appointed Receiver for CIDs requiring such services. During the past ten years, she has been a member of the ECHO North Bay Resource Panel, the ECHO Legislative Committee and a frequent speaker at ECHO seminars. Her principal office is in Marin County. In addition to being a member of numerous boards of community organizations, she is a past president of the Marin County Bar Association and the Marin County Women Lawyers. She also serves as an elected member and president of the Board of Trustees of the College of Marin.

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ECHO Journal | October 2007

41

ECHO Annual Seminar

Benefactors of the 2007 ECHO Seminar ECHO Thanks Its Benefactors Platinum Benefactors Angius & Terry, LLP

Silver Benefactors Accountants Resource Panel

First Bank

Arborwell Bayridge Group, Inc.

Gold Benefactors American Management Services, Inc.

Community Management Services, Inc. Legal Resource Panel

Berding & Weil, LLP

Merit Property Management, Inc.

Community Association Banc/CondoCerts

Wanden Treanor, Esq.

Cool Pool, Inc. Draeger

Patrons Aragon Commercial Landscaping

Hughes & Gill, PC

Cagwin & Dorward

Massingham & Associates

County Bank

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