ECHO Journal - February 2008

February 2008

A Journal for Community Association Leaders

echo-ca.org

Who Pays For What?

ALSO INSIDE THIS ISSUE:

• FCC Ruling Voids Exclusivity • Allow for Bad Debt in Your Budget • Association Board Primer

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Contents New Ban on Exclusive Cable Agreements on page 12

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Who Pays For What?

Owner or the Association? This is one of the most frequently asked questions that has no easy answers and generates heated emotions. Attorney Ann Rankin provides board members and owners some general principles that help sort out the answer.

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New FCC Ruling Bans Cable Exclusivity Community associations will no longer be able to play favorites, at least when it comes to the selection of companies providing cable services. A new ruling prohibits contracts giving cable companies the exclusive right to provide services to multi-unit properties.

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Allow for “Bad Debt” In Your Budget!

Foreclosures have quadrupled during the last 12 months, making it likely that California community associations will suffer financial loss resulting from owners who lose their property through foreclosure.

The authors recommend directors to seriously consider allocating bad debt in their budget.

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A Primer for Association Boards New board members want a primer that states what are their duties and by what authority they operate. In this article, the author explains exactly what a board is supposed to do and how it should do it, making an ideal primer for new board members.

Departments 23 Ask the Maintenance Panel 28 Calendar of Events 34 ECHO Bookstore 38 ECHO Volunteers

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38 About ECHO 41 ECHO Marketplace 41 Advertiser Index

On the Cover Who Pays For What?

Association or Homeowner Page 6

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February 2008 | ECHO Journal

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 2008 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 Lori Burger Robert Rosenberg Richard Tippett Steven Weil

Jerry L. Bowles John Garvic 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.

CommonSense

By Tyler P. Berding, Esq.

When Market Value Slips Out the Back Door W

e have written a lot on these pages about the damage that reserve underfunding can do to a community association. For ten years we have tried to focus attention on the long-term effects of failing to save adequately for the inevitable reconstruction or replacement of major building components. Nevertheless, we still see every day examples of what happens when a board fails to budget to meet these needs. Associations with less than half of the funds needed for a major reconstruction project are common. Associations with no funds at all are less common, but becoming more so all the time. Other authors have also discussed this topic over the last few years; it’s not just our imagination!

With the evidence of underfunding so widespread, what I have not been able to understand fully is why more owners have not raised this issue with their boards. Why hasn’t the subject of failing to fund proper maintenance and repair been raised at election time as a reason for turning out the board? After all, a properly funded budget adds real value to all of the units in the project.

The answer is simple. No one likes to spend money, no one likes higher monthly assessments, and the condition of the reserve fund is often too esoteric of an issue to be understood fully by either boards or owners. Also, the pressure to keep assessments low easily outweighs any concern that might exist over the condition of the building until it gets so bad that no one can hope to sell their unit at anything close to market value.

I recently ran across the following quote in a memo from the Department of Real Estate: “All condominium associations face the problem of high and ever increasing costs to maintain a condominium project, including reserves. To compound the problem, a number of condominium boards cannot, or will not, make ‘hard and unpop-

ular’ decisions of raising maintenance fees to meet this problem and facing any criticism.

“The law requires condominium association boards to study the project’s particular maintenance and replacement needs of the common elements and to collect and establish reserves so that funds will be on hand when repairs and replacements are needed as well as emergencies. The law was enacted to provide relief for the vast majority of condominium associations, although a good number of well-managed condominium associations were already providing for reserves. If the reserves are properly calculated, each owner’s share should only be what the owner ought to be putting aside each month for the true cost for repairs and replacements. The law tries to prevent owners from taking value out of a condominium property by underfunding reserves, selling out, and leaving subsequent purchasers to pay for the underfunding…

“Any delay in confronting and controlling reserve situations will not change the condominium association’s need for repair or replacement or the common elements nor the need for funds.

The Commission’s research reflects that those condominium associations deciding on 50% funding of reserves and/or are substantially underfunded, especially if they face major common area repairs and replacements in the near future, will have to dramatically increase maintenance fees, make special assessments and/or take out a loan.”

Pretty timely stuff, right?

Nope. That memo was written twelve years ago, in 1995, by the Hawaii Real Estate Commission.

The problem has obviously been around for a long time, and not just in California. Two statements from that memo stand out. Those associations that have decided to only fund their reserves at 50% or Continued on page 40 ECHO Journal | February 2008

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By Ann Rankin, Esq.

Who Pays For What and How to Figure It Out Owner or the Association?

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his is one of the most frequently asked questions involving common interest developments. It can come up at 2 a.m. after a dishwasher flood has damaged four units; when an association is re-roofing a building and wants to demolish people’s decks to gain roof access; when an owner’s uninsured contractor makes a hole in a pipe and causes a flood; or when mold is found as a result of leaks in common areas and owners’ failure to ventilate units properly.

The question has no easy answers and usually generates heated emotions. Here are some general principles that may help you sort out the answer.

What Do the Governing Documents Provide?

The first place to look is in the association’s Declaration of Covenants, Conditions and Restrictions (CC&Rs). The most helpful provisions will usually be the following: Definitions. Is the area in question Common Area, Exclusive Use Common Area or a Separate Interest? (In a condominium, the Separate Interest is a Unit. In a planned development, it’s the Lot and the Residence.)

Division of Property: This section often explains who owns and maintains various areas of the development.

Powers and Duties of the Association. See what the CC&Rs say about the association’s maintenance responsibilities.

Owner Maintenance Responsibilities. See what it says about the owner’s maintenance responsibilities.

Reviewing these provisions will answer a high percentage of questions about who must pay for various items. If your CC&Rs are unclear about specific areas, this should be addressed when you revise your governing documents. The attorneys who prepare the revisions usually don’t know nearly as much about your building as you do; so be sure to bring any ambiguities about this subject to the attention of the attorneys who are preparing the revisions.

If That Doesn’t Work, Try Looking at Civil Code 1364(a) and at Civil Code 1351 After you have looked at your governing documents, the next step is to check Civil Code 1364(a). That code section is part of the Davis-Stirling Act, and it states: “Unless otherwise provided in the declaration of a common interest development, the association is responsible for repairing, replacing, or maintaining the common areas, other than exclusive use common areas, and the owner of each separate interest is responsible for maintaining that separate interest and any exclusive use common area appurtenant to the separate interest.”

This is one of the few provisions of the Davis-Stirling Act that does not prevail over contradictory provisions of the CC&Rs. But if the CC&Rs don’t “otherwise provide,” then CC 1364(a) controls, except as discussed later in this article.

CC 1364(a) goes on to state that in a planned development, unless the documents say something different, each owner of a separate interest is responsible for damage caused by wood-destroying pests or organisms.

How do you figure out what is common area, what is exclusive use common area and what is a separate interest? First, look at your documents. If that doesn’t help, review Civil Code 1351.

Civil Code 1351(l) provides that a “separate interest” in a condominium is a “unit” as defined in CC 1351(f). In a planned development, a “separate interest” means “a separately owned lot, parcel, area or space.”

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February 2008 | ECHO Journal

Civil Code 1351(l) goes on to say, “Unless the declaration or condominium plan, if any exists, otherwise provides, if walls, floors or ceilings are designated as boundaries of a separate interest, the interior surfaces of the perimeter walls, floors, ceilings, windows, doors, and outlets located within the separate interest are part of the separate interest and any other portions of the walls, floors, or ceilings are part of the common area.”

Thus the surfaces of walls, floors, etc., are separate interest but, unless the documents say something else, the sheetrock, subfloor, etc., are common area.

Another very helpful provision is found in Civil Code 1351(i), which defines “Exclusive use common area” as follows: “Exclusive use common area means a portion of the common areas designated by the declaration for the exclusive use of one or more, but fewer than all, of the owners of the separate interests and which is or will be appurtenant to the separate interest or interests. (1) Unless the declaration otherwise provides, any shutters, awnings, window boxes, doorsteps, stoops, porches, balconies, patios, exterior doors, door frames, and hardware incident thereto, screens and windows or other fixtures designed to serve a single separate interest, but located outside the boundaries of the separate interest, are exclusive use common areas allocated exclusively to that separate interest.”

The bottom line is that unless the CC&Rs say something else, the owners are responsible to maintain “Exclusive Use Common Area,” and unless the CC&Rs say something different, the items listed in CC 1351(i)(1) are all Exclusive Use Common Areas.

The Rule May Be Different If There is Damage Caused by Someone’s Fault The above principles are modified by the common law of negligence and, sometimes, by other CC&R provisions. Under the common law, everyone has a “duty” to act reasonably to avoid foreseeable risk of harm to other people. The failure to do this is negligence. If someone’s negligence causes property damage, wrongful death, bodily injury, etc., the negligent person is responsible for the consequences.

Thus, even though the separate interest is usually supposed to be maintained by an owner, the rule is usually different if the association was supposed to maintain the roof, a common area, but did so negligently; and, as a result, the roof leaked and damaged the separate interest. In that case, it’s up to the

association to fix the damage to the owner’s separate interest and personal property.

This rule doesn’t always help, though.

What if an owner’s dishwasher leaks and causes a flood? Can you prove the owner was negligent? Or did the dishwasher leak all of a sudden, with no warning, in which case maybe the owner wasn’t negligent, after all?

Fortunately, such damage is often covered by insurance!

Insurance Considerations The CC&Rs usually require an association to purchase insurance for the common areas.

The association will purchase “property insurance,” which covers the common areas if they are damaged by an insured peril, such as a fire or windstorm. The association will also purchase “liability insurance,” which will cover damage caused by the association’s negligence. Many times, damage to the com-

Associations should have a written policy, or a CC&R provision, setting forth who pays the insurance deductible in various circumstances mon area will be covered by one or both of these policies. Most policies define “Common Area” in the same way it is defined in the CC&Rs. However, associations should have a written policy, or a CC&R provision, setting forth who pays the deductible in various circumstances. Usually, if the association was negligent, or if no one was negligent, the association pays the deductible. If the damage originated in an owner’s unit, then often, the owner is asked to pay the deductible, whether or not the owner was negligent.

Insurance does not cover all possible damage, however. What happens if an owner does not have liability insurance; he hires an uninsured contractor to do work in his unit; the contractor whacks a common area water pipe and causes a flood, and the flood damages the separate interests? The association’s property policy won’t cover the separate interests. The association’s liability policy

won’t cover it either—the association did nothing negligent! The owner who hired the contractor is liable, but if the damage is hundreds of thousands of dollars—which can happen, neither he nor the uninsured contractor can afford to pay. Sometimes the individuals whose separate interests are damaged are underinsured. This can result in owners, who are innocent victims being displaced for months, having all their property destroyed, with no good source of obtaining payment!

For this reason, although it’s hard to enforce, many associations amend their CC&Rs to require all owners to purchase liability insurance! Others at least strongly “urge” owners to do so.

Association Conduct Similar to Eminent Domain?

Sometimes CC&Rs don’t address the issues that are presented when an association must destroy or damage individually owned property for the common good. For example, perhaps there are exclusive use decks that prevent the association from accessing the roof membrane. When it’s time to re-roof the building, the association has to demolish the decks. Who pays?

The association may take the position that, because the CC&Rs and Civil Code 1364 say that the owner of the separate interest must maintain the exclusive use common area decks, the owner must pay.

The owner will say there was nothing wrong with the deck; it had to be demolished to re-roof the building, and the cost is part of the association’s cost of maintaining common area.

Many courts have made analogies between associations and mini-governments. Under this analysis, we can conclude that the association, in demolishing the decks, is doing something like what a government does when it takes privately owned property for a public purpose. The association, like the government, must compensate the property owner for the taking. However, if the deck was nearly worn out, the association should pay only for the deck’s remaining useful life, not for a brand-new deck.

What About Changing the CC&Rs to Alter Who Pays for What?

Sometimes, associations change the allocation of responsibilities by amending the CC&Rs. This may or may not be a good idea.

Continued on page 11 ECHO Journal | February 2008

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Who Pays for What?

Continued from page 9

Sometimes, the original CC&Rs required owners to maintain particular components. If some owners don’t do this in a timely manner, it can damage other people’s property values. Sometimes, the association can achieve economies of scale by replacing all decks at the same time; it would cost a lot more if each owner replaced only one deck.

It may be particularly appropriate for an association to assume maintenance responsibilities when it’s impractical for individual owners to maintain a component. How reasonable is it to expect individual owners to maintain, repair and replace windows on a multi-story building? Each owner has to scaffold the building in order to replace one window! That makes no sense. If an association is going to assume maintenance of components, be sure to reserve for the new component.

When an area is inaccessible, it’s often easier to have the owner maintain it. But sometimes, associations with financial problems try to solve them by shifting responsibility for components to individuals. This isn’t always wise; it can lower property values because not all owners have pride of ownership, and fixing each component individually loses all ability to get economies of scale.

Conclusion Sometimes, figuring out who pays for what in a common interest development is a big headache, and the answer makes everyone unhappy. The best ways to avoid these problems are the following: • Amend your CC&Rs to make the solutions to these problems as clear as possible.

• Require or encourage each owner to obtain his/her own liability insurance and adequate levels of property insurance.

• Adopt clear policies about who pays the insurance deductible.

• Act fairly and use common sense.

These steps will help you cope with these thorny issues.

This article is a summary only and is not a substitute for legal advice. If you are facing a particular legal issue, contact qualified counsel.

Ann Rankin is the principal at the Law Offices of Ann Rankin, in Oakland, CA. The firm specializes in representing common interest development associations and has been in business for 21 years.

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February 2008 | ECHO Journal

By Stephen Marcus, Esq.

New FCC Exclusive Service Ban Will Void Existing Cable Agreements C

ommunity associations will no longer be able to play favorites, at least when it comes to the selection of companies providing cable services.

In a decision that has infuriated cable companies and unsettled common interest ownership communities, the Federal Communications Commission (FCC) has decided to prohibit contracts giving large cable companies the exclusive right to provide services to multi-unit properties. The order, published in November and approved unanimously by the five-member commission, applies to apartments, condominiums and cooperatives, as well as to “gated communities,” mobile home parks, garden apartments and “other centrally managed residential real estate developments.” In addition to prohibiting future

exclusivity agreements, the order also nullifies the exclusivity provisions in existing contracts—a controversial exercise of the commission’s authority, encouraged by the telecommunications companies (primarily Verizon and AT&T) that sought the change in FCC policy, but almost certain to be challenged by the cable operators.

The FCC considered the exclusive contract question eight years ago but concluded then that the agency lacked the authority to bar these agreements. When the issue came up again in 2003, the commission decided that while it had the authority to prohibit exclusive service agreements, it was unclear whether the benefits outweighed the disadvantages for consumers, or vice versa. This time, the commission concluded that the primary beneficiaries of exclusive service ECHO Journal | February 2008

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agreements are the cable companies themselves. According to the FCC order, the agreements “inhibit competition” and discourage the entry of new service providers, depriving consumers of “the benefits of increased competition, including lower prices and the availability of more channels with diverse content, as well as access to alternative providers of broadband facilities.”

A number of real estate industry trade associations, including the National Apartment Association, the Building Owners and Managers Association, the Institute of Real Estate Management and CAI, had argued that exclusive contracts give building owners leverage they would not otherwise have to negotiate favorable terms with cable providers. Absent these agreements, the trade groups contended, providers would be less inclined to incur the cost of installing wiring and upgrading the installations, especially for smaller buildings and properties in rural communities.

That Was Then The FCC disagreed. Those arguments may have been valid in the past, the commission notes, when cable operators were “the only game in town.” But since the FCC last considered the issue, many other providers have entered the video service business on a large scale. As a result, exclusive service agreements that once may have benefited consumers are now “denying [them] the recognized benefits generated by competition.”

For that reason, the commission said, “we conclude that the harms significantly outweigh the benefits in ways they did not” several years ago.

The agreements harm building owners as well as residents, the FCC said, because they discourage the competition that would force providers to expand broadband capacity and otherwise upgrade systems in ways necessary to provide the multiple programming options that residents are increasingly demanding.

The FCC also specifically rejected CAI’s argument that community associations “are democratically governed organizations capable of making their own judgments about the benefits provided by exclusivity agreements.”

In some cases, the commission noted, the existing agreements were signed by builders or managers “whose interests do not coincide with those of the residents, especially after [the passage] of several years.” Moreover, the commission noted in its order, “there is no evidence in the record, other than generali-

ties and anecdotes” that exclusivity agreements lead providers to make investments they would not make otherwise.

The most controversial aspect of the FCC order is its ban on existing exclusive service agreements as well as those that might be negotiated in the future. Aware of that concern, the commission considered but rejected suggestions to make the order prospective only, concluding, “A rule that left exclusivity clauses in effect would allow the vast majority of the harms caused by such clauses to continue for years.” Both existing and prospective agreements “have the same competitionand broadband-deterring effect that harms consumers,” the FCC said.

Litigation Guaranteed Although the vote on the order was unanimous, at least one commissioner warned that banning existing contract provisions would guarantee a legal challenge. “To flash cut to a new regulatory regime without a sensible transition period only begs for an appeal that could result in a court throwing out all of our order, the good with the bad,” this commissioner warned.

That is clearly the outcome cable providers hope to achieve. A Comcast official has said the interference with existing agreements “will likely guarantee years of litigation.” The National Cable and Telecommunications Association (NCTA) has similarly termed the termination of existing exclusive service arrangements “unprecedented” and “legally suspect.” Signaling the arguments the industry’s attorneys will no doubt use in court and its lobbyists will use in Congress to challenge the order, the NCTA has warned that the exclusive service ban “could harm consumers and jeopardize the delivery of advanced services to low-income neighborhoods, where other providers have chosen not to offer service.”

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What Community Associations Should Know While the legal battle lines are forming, the FCC’s order has taken effect. Community associations, therefore, should be aware of these key points: The order applies only to larger cable companies operating under state or local government franchises granting them rights of way.

The order does not require community associations to grant access to all service Continued on page 17 ECHO Journal | February 2008

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February 2008 | ECHO Journal

New FCC Ruling Continued from page 15

providers who request it. Building owners (including the governing boards of common interest ownership communities) “still retain the rights [they have] under relevant state law to deny a particular provider the right to provide services to its property. We merely prohibit the enforcement of existing exclusivity clauses and the execution of new ones,” the FCC order says.

The order applies only to exclusive service agreements; it does not bar the bulk payment arrangements or the exclusive marketing agreements that many associations have negotiated with their cable providers. However, the FCC is eyeing both areas. The commission has issued a “further notice of proposed rulemaking” seeking comment on whether the order should prohibit exclusive marketing and bulk billing arrangements, and on whether it should apply not just to large operators but also to “private” operators and to “other multi-channel video programming distributors.”

Because the order currently applies only to cable operators, it does not bar exclusive service agreements with providers of satellite or Internet services. If cable programming is part of a combination package that includes other services, the exclusive service ban would apply only to the cable component.

The provider could enforce other provisions of the contract, but only if it contains a “severability clause.” Absent such a provision, termination of the exclusive service requirement could have the effect of terminating the contract as a whole.

Association boards should have their attorneys review their contracts with cable providers to determine what impact the FCC order will have on their communities.

Steven Marcus is a partner at the law firm of Marcus, Errico, Emmer & Brooks, P.C., in Braintree MA. He practices in the fields of community association law and zoning law. He was instrumental in various changes to the Massachusetts Condominium Act, contributed significantly to the amendment of the U.S. Bankruptcy Code protecting condominium common area fees and was an advisor to the FCC on the Telecommunications Act of 1996 and its effect on condominium associations.

ECHO Journal | February 2008

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By David C. Swedelson, Esq. and Sandra L. Gottlieb, Esq.

Allow For “Bad Debt” In Your Budget!

B

uilders, who couldn’t build homes fast enough a year ago, are now offering substantial discounts and/or incentives such as swimming pools and upgraded amenities, even cars, to sell new homes.

Not only is there a substantial inventory of new homes on the market, resales of existing properties are on the rise, in addition to hundreds of homes and condominium units that have been foreclosed on by banks and associations, which are now being offered for sale.

Hardly a day goes by without some news report addressing the rising number of foreclosures. According to DataQuick Information Systems, Californians lost their homes to foreclosure in record numbers. They report over 24,000 foreclosures in the second quarter of 2007, “besting the previous 18

February 2008 | ECHO Journal

record by 39%.” Default notices— the first step toward foreclosure— rose to 72,571 for the first three quarters ended September 30, breaking a record set in 1996.

The Associated Press recently reported that foreclosure filings across the United States nearly doubled in September 2007 compared with September 2006 “as substantially strapped homeowners already

ECHO Journal | February 2008

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behind on mortgage payments defaulted on the loans or came closer to losing their homes to foreclosure.”

RealtyTrac, a service that lists foreclosed properties for sale, reports that across the country, there were 223,538 foreclosure filings in September 2007, up from 112,210 in the same month a year before.

Foreclosures are a major problem throughout the country, particularly in certain states, including California, where its foreclosure rate was one filing per 253 households. California reported the most foreclosure filings of any single state with 51,259 in September 2007 alone, a fourfold increase from September 2006. The U.S. housing market has seen sales decline and home prices fall or remain flat, making it harder for homeowners who can’t afford to make their mortgage payments or pay their association assessments to sell their homes or seek refinancing. Many of these troubled homeowners were among those who took on adjustable rate mortgages that are now adjusting to higher interest rates, translating into payments they can no longer afford to pay. Many of these homeowners were first time buyers of condominiums.

The rising number of delinquencies and foreclosures has led the mortgage industry to tighten money standards, further limiting options for homeowners struggling to pay their mortgage. The effects of the “subprime crisis” are trickling down to community associations. In your budget for 2008, you need to have a line item for an allowance of perhaps as much as 10% of the association’s total budget to address the possibility that some homeowners will lose their homes to foreclosure, wiping out any association lien and with it the ability of the association to recover any unpaid assessments. Chasing down these homeowners in small claims court may result in a judgment but not result in a recovery—if homeowners can’t pay their mortgages or association assessments, they probably don’t have the money to pay their debt to the association.

We realize that boards of directors for many associations may not have considered how the subprime loan crisis was going to affect their association’s bottom line. The fact is that we are entering a real estate market recession. If you owned property back in the early 90s (the last time we saw a serious decline in property values), you will remember a time when many properties were “upside down,” meaning that the owner 20

February 2008 | ECHO Journal

owed more to the bank than the value of the home and had no equity. Today, this situation is also known as “negative equity.”

For about the past twelve years, community associations have not needed to worry much about the effect of delinquent assessments on cash flow. As home prices increased, homeowners had equity they wanted to protect; so foreclosures, especially by associations for unpaid assessments, were a rare circumstance. This is evident by the fact that the number of foreclosures has quadrupled during the last twelve months alone. There is no question that many, if not most, California community associations will suffer some financial loss resulting from homeowners

Many California community associations will suffer some financial loss resulting from homeowners who lose their property through foreclosure. who lose their property through foreclosure.

Most businesses budget for “bad debt;” and, because associations are mostly small businesses, we are recommending that for 2008 you seriously consider allocating a bad debt allowance in your association’s budget.

This situation means that boards of directors will have to pay more attention to the association’s delinquencies. Each month, boards must carefully review the delinquency list and strictly comply with the association’s delinquent assessment policy. Associations can no longer afford delaying action if they want to protect their ability to collect assessments. And, despite what you may have heard, California community associations do not have to wait for the owner to owe $1,800 (or be one year delinquent) before beginning the collection process, including the recording of the all-important lien to secure the obligation.

David C. Swedelson, Esq. and Sandra L. Gottlieb, Esq. are partners in the community association law firm of Swedelson & Gottlieb and are principals of Association Lien Services, with offices throughout Northern and Southern California.

ECHO Journal | February 2008

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Ask The Maintenance Panel

By Dick Tippett

What to Do With Widely Differing Bids for Reroofing uestion: “We asked for bids from roofing contractors to reroof our complex and got seven bids back. The bidders are offering us four different roof systems. The highest bid is more than three times the lowest bid. Three bids are fairly close in amount; the rest are all different.

“What should we do?”

Q

Our answer this month comes from Dick Tippett of ERTECH, Inc. The fact that you received seven bids means that roofing contractors are actively seeking work.

Some, naturally, are hungrier for work than others. Your lowest bidder may have made a mistake in figuring his bid; your highest bidder may also have made one.

You didn’t say who your bidders are or whether or not you pre-qualified them before you asked them to bid. This makes it difficult to judge the quality and accuracy of the low bid.

You say that the bidders offered you four different roof systems. This indicates that you probably didn’t specify the kind of roof that you wanted them to bid on supplying. Different roof systems have different prices, based on the life expectancy of the roof and the amount of labor that the system takes to install.

A good rule of thumb to follow in a situation like this is to “throw out” or ignore both the highest and lowest bids. Focus on the three bids that are fairly close in amount. The fact that the three bidders are close to each other in amount probably indicates that they are offering roof systems that are similar in value. If the systems are similar in value, the closeness of the bids also can indicate that each of the three bidders sees roughly the same amount of work required and the same degree of difficulty to do the job.

The board should do two things: Investigate the roof systems being offered by the three bidders. What is the warranty? Where have the contractors installed the same roofs? How are the roofs performing? Has the roof system been in use for longer than five years? Is the appearance satisfactory?

Investigate the three roofing contractors. Have they been in business for at least five years? Do they have a line of credit with their suppliers? Do they have at least one million dollars general liability insurance that includes coverage for work on condominiums? Do their references check out?

Can they offer extended roof manufacturers’ guarantees? Can they meet your scheduling requirements? Will they protect your lawns and landscaping?

One or more of the three contractors will provide satisfactory answers to all of the questions. You can then choose one of those contractors to do your work, with reasonable certainty that the work will be professionally done.

Be sure to have your attorney draw up the contract between your association and the contractor.

Hold back 10% of each payment until the work is completed. Be certain to get lien releases from the contractor’s subcontractors and suppliers each time you pay him, to be certain he is paying his bills. Get final unconditional lien releases from all of them before you release the retained funds.

Good Luck!

Each month this column addresses a specific maintenance concern that every association faces. Our panel of experts is here to help answer questions you might have.

We hope that you will find this page to be informative and please Ask The Panel!

Please use this information as a guide. It is recommended that you seek advice from your professional association manager or affiliated service provider. Should you have a question for the ECHO Maintenance Panel, please contact ECHO via email at info@echo-ca.org, or fax the panel at 408-297-3517.

ECHO Journal | February 2008

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24

February 2008 | ECHO Journal

By Jeffrey A. Goldberg, Esq.

Primer on Duties and Authority of Association Boards M

any new board members want a primer that states in one place what are their duties and by what authority do they operate. The primer in this article discusses general concepts and law related to the powers and duties of association boards. You should be aware that the law differs among the various states, and therefore a board member should seek legal advice before acting.

Compliance with Governing Documents and Applicable Law Each board member is obligated to know the applicable law and to follow faithfully the governing documents of the association. For condominiums, the state statutes on condominiums must be strictly followed. In addition to the express requirements of law, a board member must be familiar with the declaration or covenants (CC&Rs), the bylaws, or other controlling documents that form a contract between and among the homeowners within the association. Sometimes the governing documents will conflict with the provisions of the applicable statutes. In general, the condominium or association statutes will prevail over conflicting provisions of the declaration or bylaws (except when the statute specifically authorizes the declaration or bylaws to provide otherwise). The declaration or covenants generally rule over conflicting provisions of the bylaws, and the bylaws generally govern over conflicting provisions of

any rules and regulations or house rules adopted by the board. Although at first the concept of following the law and governing documents may appear simple, in practice, this can be a difficult and confusing undertaking, and it may require professional assistance.

Maintenance of Common Areas and Building Exteriors Perhaps the main function of most associations is the repair and maintenance of common areas and building exteriors. The maintenance responsibility for an association is established in the declaration or bylaws. In most associations, those parts of the property that are shared among the homeowners are maintained by the association. Responsibility for those portions of the property over which an owner has an exclusive right to use or possess will fall upon the individual owner.

In almost every association, there are almost unlimited needs and desires among the membership for repair and maintenance work. The difficult task for the board is to prioritize these tasks and decide how and when the various maintenance tasks are to be performed. This means that the board must become familiar with the property and what is needed. Then, the board must carefully consider what are its budgetary restraints.

Finally, the board must develop a plan for meeting its responsibilities. The plan should include periodic inspections of the property, a schedule for performing ECHO Journal | February 2008

25

various repair and maintenance tasks in an orderly and comprehensive manner, and a plan for emergency expenditures. If the board does not plan adequately, what typically occurs is a breakdown of various components and an onslaught of emergency expenditures. For example, if the board delays replacement of a roof, it may find that it is spending an inordinate amount of money patching a deteriorating roof on an emergency basis. Over time, the cost of patching can become more expensive than the re-roofing job would have been in the first place. A great deal of money could be saved by careful planning.

Budgets Related to the duty to maintain the property is the duty to adopt budgets and collect assessments from the homeowners. In a way, an association is merely a conduit for the homeowners to pay for the various expenses of operating the property. The budget process is not one whereby an arbitrary figure is created that will be the monthly assessment and then the board tries to figure out how to best spend the money. The correct process is a reversal of that. The board must 26

February 2008 | ECHO Journal

first determine what are the necessary expenses and costs of operation and administration, plus a reasonable reserve; and then the monthly assessment is determined by dividing the annual budget among and between the unit owners.

Perhaps the main function of most associations is the repair and maintenance of common areas and building exteriors.

The budget process must involve a careful review of past budgets and the actual costs plus a careful examination of anticipated costs and expenses, including obtaining bids and quotes for various services. Of course, in

determining the budget, it is appropriate and necessary for the board to consider the amount of money that can reasonably be collected from the homeowners. The amount of the monthly assessment must not be so high that it would adversely affect the property values in relation to other associations in the area or cause economic hardship to the owners. At the same time, the assessment must not be so low that the association is unable to meet its basic responsibilities for repair and maintenance of the property, to keep the property in good condition, and to have an adequate reserve for emergencies and future repair or replacement.

Reserves The issue of reserves is often neglected by the board. It is not enough for the board to budget for the existing costs and expenses. It also must establish a reserve for three purposes.

1. Emergencies Unless the board has a fund from which to handle emergency or unexpected costs, the association will be vulnerable. The board must assume that some unexpected expenditures will be necessary.

2. Capital Expenditures and Deferred Repair or Replacement The board must find out the estimated useful life of its structural and mechanical components, surfaces of the buildings and common areas, energy systems and equipment, and then determine a reasonable amount for the owners’ monthly contributions to a reserve. Unless this reserve is established, the homeowners who use the property will not be contributing towards the replacement of the property in the future.

Instead future owners will bear the full cost of major repair or restoration (such as roofing, paving, siding, HVAC, and other major components). The most fair way of handling deferred maintenance (and one that keeps the assessments from going too high) is for the board to divide the cost of future repairs between the current owners (through a reserve or through financing whereby the cost of restoration is spread out over time) and to the future owners (through a special assessment levied at the time of the restoration work).

3. Bad Debt An association does not have “deep pockets.” The only money it generally receives is the assessment payments of the owners. If some of the homeowners go into bankruptcy or simply cannot make payment, there will be a budgetary shortfall. Because the budget is determined and then divided amongst the homeowners, bad debt will cause a shortfall.

It is necessary for the board to determine the anticipated shortfall from bad debt and to budget accordingly. The history regarding bad debt can be useful in determining the expected shortfall, but other factors such as the number of cases in collections and the general condition of the economy also may be considered.

Assessment Collection Once one understands that an association budget is nothing more than dividing up the expenses among the homeowners, it becomes readily apparent that the failure of one homeowner to pay his or her fair share of the expenses means that his or her neighbors are the ones paying the delinquent owners’ bills. This is not an acceptable situation.

Therefore, the board has a duty to take every

reasonable action to collect the assessments.

The board may not waive or excuse or otherwise forbear the payment of assessments.

Those homeowners who refuse to pay their assessments should be pursued in court, and every reasonable action should be taken to compel payment. Most associations have lien rights in the unit and can foreclose, take ownership or possession of the property, or garnish the wages or bank accounts of the delinquent owners. Most associations have the ability to recover from the delinquent owner the costs of collection, including attorneys’ fees and legal costs. In addition, because it is unfair for some owners to pay on time, and others to cause the association to incur expense from late payment, it is appropriate for the board to charge a reasonable late charge (in accordance with its governing documents and applicable law).

Business Judgment Board members owe a fiduciary duty to homeowners to manage and operate the association using the care that an ordinarily Continued on page 29 ECHO Journal | February 2008

27

Calendar of Events

Save These Dates in Your Calendar Friday, February 1 East Bay Resource Panel 9:30 a.m.

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

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

Angius & Terry 1900 N. California Blvd., Suite 950, Walnut Creek

Wednesday, February 6 Maintenance Resource Panel 12:00 Noon ECHO Office 1602 The Alameda, Suite 101, San Jose

Tuesday, March 11 Central Coast Resource Panel 12:00 Noon Pasatiempo Inn, Santa Cruz

Wednesday, February 20 Wine Country Resource Panel 11:45 a.m.

Eugene Burger Management Co. 6600 Hunter Drive, Rohnert Park

Wednesday, March 12 South Bay Resource Panel 12:00 Noon Il Fornaio 302 Market St., San Jose

Saturday, February 23 Central Coast Winter Seminar 8:00 a.m. to 1:00 p.m.

Best Western Seacliff Inn, Aptos

Saturday, March 15 North Counties Winter Seminar 8:00 a.m. to 1:00 p.m.

Community Center 5401 Snyder Ave., Rohnert Park

Thursday, March 6 North Bay Resource Panel 9:30 a.m.

Contempo Marin Clubhouse 400 Yosemite Rd., San Rafael

Wednesday, March 19 Wine Country Resource Panel 11:45 a.m.

Eugene Burger Management Co. 6600 Hunter Drive, Rohnert Park

Thursday, March 20 San Francisco Luncheon 11:45 a.m. to 2:00 p.m.

St. Francis Yacht Club Wednesday; April 2 Maintenance Resource Panel 12:00 Noon ECHO Office 1602 The Alameda, Ste. 101, San Jose

Saturday, April 19 South Bay Spring Smeinar 8:00 a.m. to 1:00 p.m.

Campbell Community Center 1 W Campbell Ave., Campbell Thursday, May 1 North Bay Resource Panel 9:30 a.m.

Contempo Marin Clubhouse 400 Yosemite Rd., San Rafael

Friday, April 4 East Bay Resource Panel 9:30 a.m.

Angius & Terry 1900 N. California Blvd., Suite 950, Walnut Creek

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

Angius & Terry 1900 N. California Blvd., Suite 950, Walnut Creek

Saturday, April 5 San Francisco Spring Seminar 8:00 a.m. to 1:00 p.m.

The Firehouse, Fort Mason Center San Francisco

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

Francesco’s Restaurant, Oakland

Wednesday, April 16 Wine Country Resource Panel 11:45 a.m.

Eugene Burger Management Co. 6600 Hunter Drive, Rohnert Park

Tuesday, May 13 Central Coast Resource Panel 12:00 Noon Pasatiempo Inn, Santa Cruz

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

February 2008 | 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 March, May, August, October

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 Eugene Burger Management Co., Rohnert Park Varies

Primer for Association Boards Continued from page 27

prudent person would use under the same or similar circumstances. This means that the board must exercise business judgment in making decisions while operating or managing the association. Business judgment involves making rational, informed decisions in good faith. The board must strictly follow the law and its governing documents and apply and enforce them in a fair and uniform manner. The board must obtain and consider all of the relevant facts and circumstances, identify the various options available to the board, and carefully weigh which course of action would be in the best interests of the association and its membership as a whole.

Board members cannot act out of passion or prejudice, personal self-interest or gain, or through revenge or other negative motivations. The rational basis for all decisions must be the best interests of the association consistent with its purposes. This fiduciary duty owed by each board member to the homeowners is the same one that directors of publicly traded corporations owe to their shareholders. Of course, the directors of major corporations are sophisticated and experienced business persons and they have professional executives, accountants, and attorneys to assist them at every step. Although the extent and scope of activity of an association board is much more limited than the activities of a major corporate board, it still behooves the board to engage professionals to some extent before making major decisions. Most associations retain professional managing agents to operate the day-to-day affairs of the association and to guide and assist the board in setting policy and establishing procedures to meet its responsibilities. In addition, every association should have an accountant and an attorney, and consult them when appropriate. In addition, tax and financial advisors are necessary with respect to the handling and investment of funds.

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Adoption and Enforcement of Rules The board has a duty to uniformly enforce the governing documents against the owners and other residents of the property. A board does not have the authority to waive or excuse compliance with the requirements of Continued on page 30 ECHO Journal | February 2008

29

Primer for Association Boards Continued from page 29

the covenants. Of course, it is not always clear whether specific actions violate the covenants. It is up to the board to reasonably interpret its governing documents, and to adopt rules and regulations to supplement, explain and administer the enforcement of the basic rules of the association.

In deciding how to enforce the governing documents, the board must carefully consider the nature and scope of an infraction and try to address the situation in a manner that is reasonably related to the severity of the violation. In general, the board should first try informal approaches to obtain compliance 30

February 2008 | ECHO Journal

and then increase the severity of the consequences to an owner who continues to violate the rules. The purpose of all enforcement activity is not to punish the violator but only to encourage and obtain full and permanent compliance. Where the violation threatens the safety of person or property, or when there is a flagrant violation, the board may have no choice except to take the violator to court and seek a court order requiring compliance.

Annual Elections, Politics, Board Meetings and Appointment of Officers One of the most important aspects of association membership is the need for the homeowners to organize politically and to elect their representatives to the board. It is

the duty of the board to ensure a fair and free board election on an annual basis. The board must establish procedures necessary to be sure that there are qualified candidates and that each homeowner has the opportunity to vote and participate in the political process. The board should share with the homeowners all of the information and facts of the problems and issues that face the association, and patiently explain the rationale and reasoning behind board decisions. The homeowners are entitled to be fully informed about the conduct of the board, and to exercise oversight through the political process.

Continued on page 32

Central Coast Winter Seminar Full-Page Ad

Primer for Association Boards

Free Copy of the 2008 Community Association Statute Book is Coming to You Contains the 2008 version of the DavisStirling 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.

g in n i m Co ruary Feb

Continued from page 30

Most associations allow the homeowners to address the board at the regular meetings of the board and at the annual meeting.

These meetings are a great opportunity for the board to communicate with the homeowners and to obtain input and advice from the members. Another duty of the board is to appoint board officers, such as the president, secretary or treasurer of the association. It is important for the board to exercise careful oversight of the actions of the officers between meetings of the board. The officers should account to the board for any decisions or actions taken on behalf of the association. It is necessary for the board to hold regular meetings in sufficient frequency to properly and efficiently handle the affairs of the association. Most boards meet monthly or quarterly.

Representation of Homeowners/ Insurance/Property Rights The purpose of the board is to represent the interests of the unit owners as a whole, as these interests relate to the property. Therefore, the board is the appropriate entity to pursue claims and rights of the unit owners with respect to the entire property (such as claims against the developer for defects, tax relief, and dealing with third parties related to real property rights). In general, any matter that affects the collective interests of the unit owners (as opposed to the individual rights of an owner) is appropriately handled by the board.

All amendments to the governing documents, easements, concessions, licenses, and dedication of the property must be handled by the board (although the approval of the owners may be necessary). In addition, the board must ensure that all tax obligations of the property as a whole have been met, and that the property has the necessary and required insurance. The requirements for insurance will be set forth in the declaration and applicable statutes. On behalf of the association and its members, the board should insure the property against casualty and loss and should obtain liability coverage including directors and officers’ liability insurance, and bonding. In addition, the board should hold the proceeds of insurance in trust on behalf of the owners to ensure the proper restoration of damaged property.

32

February 2008 | ECHO Journal

Books and Records Although the board is the entity responsible for making the decisions on behalf of the owners, the association still belongs to the homeowners and they have a right to be fully informed about the association. The board must keep detailed and accurate records.

This includes accurate copies of the association’s declaration, articles of incorporation, bylaws, plats of survey, rules and regulations (and all amendments of these), minutes of all board and owner meetings, insurance policies, contracts, leases, and other agreements in effect, a listing of the names and addresses of the members, copies of ballots and proxies for past elections, and including the books and records of account (including an itemized accounting of the budgeted and actual receipts and expenditures of the association with supporting budgetary and financial documents). Homeowners should have reasonable access to these books and records for a proper purpose and consistent with the requirements of applicable law.

Emergencies The board is not the insurer of the property and is not a police force. It need not undertake to protect the owners from criminal conduct or casualty. However, in emergency situations, the association may be in the best position to minimize damage and to correct any problems. Most declarations authorize the board to enter the individual dwelling units for emergency purposes to protect the property or residents from harmful conditions. When acting under emergency authority, the board should limit its actions to only those made necessary by the emergency at hand and defer all other actions. For example, if the plumbing in a unit fails, the board may enter the unit and stop the water incursion and to take action to minimize the water damage to the unit and other property. Beyond what is reasonably necessary to alleviate the emergency at hand, the board should not infringe upon the authority of the individual owner to repair or maintain his or her unit. Emergency actions should be measured responses to the circumstances of a particular crisis, and the board should take care to limit its involvement to only what is necessary.

Human Rights and Accommodations The law requires that housing, and all associated services and facilities, must be Continued on page 37 ECHO Journal | February 2008

33

Books and DVDs from ECHO

Working With Your HOA $22.00 2008 ECHO Business & Professional Directory $20.00 This directory lists all business and professional members of ECHO as of December 2007. 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 2008 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—2008 Edition $10.00 This edition contains the 2008 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.

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

QUANTITY

SUBTOTAL CALIFORNIA SALES TAX (Add 8.25%) TOTAL AMOUNT

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.

Yes! Place my order for the items above. q Check q Visa q Mastercard Credit Card Number Exp. Date

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News from ECHO

New Law Requires Meeting Agendas SB 528, signed into law by the Governor, requires that an association distribute an agenda with a meeting notice and restricts boards from discussing topics not published on the agenda. This bill amends section 1363.05 of the Civil Code. There are a few exceptions: Emergency Meetings—An emergency meeting may be called, without agenda or notice, “if there are circumstances that could not have been reasonably foreseen which require immediate attention and possible action by the board, and which of necessity make it impracticable to provide notice as required.”

Member Communication—At a regular board meeting, the board and management may briefly respond to questions from the membership and give a brief report on its own activities, and give instructions to its staff.

Emergencies—If the majority of the board decides that an emergency exists, they may discuss the problem, provided the emergency arose after the meeting agenda and notice were posted.

Unforeseen Circumstances— If two thirds of the board mem36

February 2008 | ECHO Journal

bers are present, and they recognize the need to discuss an item that is not on the agenda (again provided the need arose after the meeting agenda and notice were posted), then a vote of two thirds of those members present may place the item on the agenda. If fewer that two thirds of the board is present, the board members in attendance must consent unanimously to the addition.

Previous Business—Boards may discuss any item that appeared on a previous meeting agenda, provided the meeting occurred “not more than 30 calendar days” earlier, and that “at the prior meeting, action on the item was continued to the meeting at which the action is taken.”

New FCC Ruling Bans Exclusive Cable Services Agreements Community associations will no longer be able to play favorites, at least when it comes to the selection of companies providing cable services. In a decision that has infuriated cable companies and unsettled common interest ownership communities, the Federal Communications Commission (FCC) has

decided to prohibit contracts giving large cable companies the exclusive right to provide services to multi-unit properties.

The order, published in November 2007 and approved unanimously by the five-member commission, applies to apartments, condominiums and cooperatives, as well as to “gated communities,” mobile home parks, garden apartments and “other centrally managed residential real estate developments.” In addition to prohibiting future exclusivity agreements, the order also nullifies the exclusivity provisions in existing contracts—a controversial exercise of the commission’s authority encouraged by the telecommunications companies (primarily Verizon and AT&T) that sought the change in FCC policy, but almost certain to be challenged by the cable operators.

Because the order currently applies only to cable operators, it does not bar exclusive service agreements with providers of satellite or Internet services. If cable programming is part of a combination package that includes other services, the exclusive service ban would apply only to the cable component.

The provider could enforce other provisions of the contract, but only if it contains a “severability clause.” Absent such a provision, termination of the exclusive service requirement could have the effect of terminating the contract as a whole. Association boards should have their attorneys review their contracts with cable providers to determine what impact the FCC order will have on their communities.

Who Pays For What “Who pays—the owner or the association?” is one of the most frequently asked questions in homeowner associations. It has no easy answers and usually generates heated emotions. Sometimes, figuring out who pays is a big headache, and the answer often makes nearly everyone unhappy. The best ways to avoid and cope with these thorny issues are the following: • Amend your CC&Rs to make the solutions to these problems as clear as possible.

• Require or encourage each owner to obtain his/her own liability insurance and adequate levels of property insurance.

• Adopt clear policies about who pays the insurance deductible.

• Act fairly and use common sense.

Upcoming Events Saturday, February 23 Central Coast Winter Seminar 8:00 a.m. to 1:00 p.m.

Best Western Seacliff Inn, Aptos Saturday, March 15 North Counties Seminar 8:00 a.m. to 1:00 p.m.

Community Center 5401 Snyder Ave., Rohnert Park Thursday, March 20 San Francisco Luncheon 11:45 a.m. to 2:00 p.m.

St. Francis Yacht Club

Primer for Association Boards Continued from page 33

available to persons without discrimination on the basis of race, color, religion, gender, familial status (children under 18), disability or national origin. The board is the entity responsible for making sure that the association operates in a manner that does not unlawfully discriminate. The language of association rules and enforcement must be neutral as to the protected classes. Typical problem areas are rules and facilities that discriminate against children and families, or facilities or rules that fail to reasonably accommodate the needs of disabled persons (in rules, policies, practices, or services to afford a person with a disability equal opportunity to use and enjoy a dwelling).

Other issues that arise are subtle forms of racial and ethnic discrimination as it relates to extended family living in a unit, celebration of holidays, or unequal treatment in making appointments to office, granting of privileges, or enforcement. In addition, depending upon the facts and circumstances, the board may have a duty to address and stop unlawful discrimination committed by the individual owners, residents, or vendors of the association. This area is one ripe for litigation and therefore the board should consult with competent counsel when addressing these issues.

We have attempted to explore comprehensively the duties and authority of an association board. It should be realized that the operation of an association is a complex task that requires a great deal of knowledge and information. Being a board member is not a casual undertaking. Although this primer does explore the basic responsibilities of the board, it should be noted that in practice the issues touched upon here are much more complex than they appear. In addition, the laws of your locality and the specific facts and circumstances of your board’s situation will have an impact upon what are the board’s duties and how to meet them. © 2001 Barnett Law Firm, Inc.

Jeffrey A. Goldberg is of counsel to the Illinois firm of Barnett Law Firm, Ltd. Mr. Goldberg has worked in the field of condominium and homeowners association law and real estate litigation since 1985. Barnett Law Firm, Ltd., is an Illinois law firm concentrated in the law of condominiums and homeowners’ associations.

ECHO Journal | February 2008

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

February 2008 | 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. Steven Weil, Esq. Mark Wleklinski, Esq. Glenn Youngling, Esq.

Recent ECHO Journal Contributing Authors 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 October 2007 Jeffrey A. Barnett, Esq. Tyler P. Berding, Esq. Gregory W. Marler, Esq. John Stevens November 2007 Adrian Adams, Esq. Tyler P. Berding, Esq. Justin Bettner, P.E. Tom Fier, Esq. Michael Gartzke, CPA Beth A. Grimm, Esq. December 2007 Daniel E. Angius, Esq. Jeffrey A. Barnett, Esq. Tyler P. Berding, Esq. Michael Biel 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.

Mark Your Calendar June 20–21, 2008 2008 ECHO Annual Seminar and Trade Show Here are some reasons why you should plan to attend: • Advice from experts in law, accounting, association management, insurance and maintenance.

• Information, assistance, product samples and prizes from more than 100 booths in the Trade Show.

• Best practices and proved procedures for associations unveiled in 16 educational sessions.

• The latest news from the State Legislature and Law Revision Commission.

• Checklists and other important reference information in a 300 page Seminar Program Book.

• Practical ideas for handling community association leadership issues effectively.

• Timesaving tips that will help make your leadership experience more worthwhile.

• Exchanges on common concerns by networking with 1000 community association leaders.

• Information about ECHO programs, publications and services that support association leaders.

ECHO Journal | February 2008

39

CommonSense Continued from page 5

less had better start looking for alternate funding. It cannot be put off forever, and underfunding cannot usually be made up by merely increasing monthly assessments alone. It’s too late for that ten years down the road. Special assessments coupled with bank loans (which also require monthly payments) are usually necessary, making the financial hit on the then owners that much greater and make units harder to sell.

But the statement that really had an impact on me was this one: “The law tries to prevent owners from taking value out of a condominium property by underfunding reserves, selling out, and leaving subsequent purchasers to pay for the underfunding…”

That’s exactly what happens when an association bends to political pressure and tolerates an assessment level that is less than what is necessary for predictable maintenance and repair. The board allows current owners to take value out the back door by passing on the liability to future owners. The seller has taken value by failing to pay his share of the maintenance and repair costs.

You could argue that the condition of the building and the budget will be reflected in the sales price. Perhaps it will be, if the seller’s disclosures are adequate and/or the buyer is sophisticated enough to ask the right questions. However, more often than not, none of this is apparent to the average owner who simply assumes everything is as it should be, and no discount on the asking price is demanded. Underfunding should, however, be quite obvious to board members and managers who have a better working knowledge of the true financial health of the association.

Their duty is to present and future owners when determining the proper level to set reserves.

So how do boards discharge this duty? By not permitting owners to walk away with value they didn’t pay for. The way to do that is always the same: raise monthly assessments enough to reflect the true cost of ownership regardless of political pressure. Anything less is the easy way out.

Tyler Berding is the managing principal of Berding & Weil, a construction defect and homeowner association law firm in Alamo. He is a former member and the immediate past president of the ECHO board of directors.

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February 2008 | ECHO Journal

ECHO Marketplace

Advertiser Index

The place to find business and professionals for your association

Your Ad Can Be Here You read this, didn't you? Thousands of officers and directors of homeowner association boards will also read your ad each month in the ECHO Marketplace. Your ad can be here for as little as $60 per month.

Marketplace Ads must run a minimum of six consecutive issues.

To place your ad in the ECHO Marketplace and for more information about other advertising opportunities, please call 408-297-3246 or visit the ECHO web site at echo-ca.org/media_kit.php

Access Association Services . . . . . . . .30 Advance Construction Technology . . .14 All Seasons Roofing . . . . . . . . . . . . . .17 Alpha Restoration and Waterproofing 11 American Management Services . . . .14 Angius & Terry . . . . . . . . . . . . . . . . . . .3 Applied Reserve Analysis . . . . . . . . . .29 A.S.A.P. Collection Services . . . . . . . .33 Association Reserves . . . . . . . . . . . . .39 Bayridge Group . . . . . . . . . . . . . . . . .15 Berding & Weil . . . . . . . . . . . . . . . . . .44 California SubMeters . . . . . . . . . . . . .27 Collins Management . . . . . . . . . . . . .15 Community Association Banc . . . . . . .29 Community Management Services . . .33 Compass Management . . . . . . . . . . .29 Cool Pool Service . . . . . . . . . . . . . . . .39 Cornerstone Community Mgmnt . . . .20 Corum Painting . . . . . . . . . . . . . . . . . .2 County Bank . . . . . . . . . . . . . . . . . . .22 Draeger . . . . . . . . . . . . . . . . . . . . . . .20 Ekim Painting . . . . . . . . . . . . . . . . . . .30 First Bank Association Bank Services . .40 Flores Painting . . . . . . . . . . . . . . . . . .39 Helsing Group . . . . . . . . . . . . . . . . . . .8 Hill & Company. . . . . . . . . . . . . . . . . .43 M&C Association Services . . . . . . . . .16 M. L. Nielsen Construction . . . . . . . . .37 Massingham and Associates . . . . . . .10 Pelican Management Group . . . . . . .33 PML Management Corp. . . . . . . . . . .17 Pollard Unlimited . . . . . . . . . . . . . . . .11 Pratt & Associates . . . . . . . . . . . . . . .15 R. E. Broocker Co. . . . . . . . . . . . . . . .41 Rebello’s Towing Service . . . . . . . . . .16 REMI Company . . . . . . . . . . . . . . . . .37 Saarman Construction . . . . . . . . . . . . .8 Statcomm . . . . . . . . . . . . . . . . . . . . .11 Steve Tingley Painting . . . . . . . . . . . .26 Steve’s Painting Services . . . . . . . . . . .40 Wells Fargo . . . . . . . . . . . . . . . . . . . .21

ECHO Journal | February 2008

41

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