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December 2010

A Journal for California Community Association Leaders

echo-ca.org

Fighting Fraud

ALSO INSIDE THIS ISSUE:

• Building Ordinance Coverage • Why Do Boards Hide? • Accrual Basis Accounting

Change Service Requested ECHO 1602 The Alameda STE 101 San Jose, CA 95126

PRSRT STD U.S. Postage PAID Sundance Press 85719


Learn how to handle the toughest issues facing your homeowner association Seminar Agenda 8:00 a.m.

Registration and Continental Breakfast

8:45 a.m.

Welcome

9:00 a.m.

Legislative Update David F. Feingold, Esq. While Sacramento was relatively quiet this year, you will get a preview of things to come, and hear about all of the disputes that ended up in front of a judge in 2010—and pick up valuable tips to help keep your community out of court!

9:45 a.m.

Oliver Burford

The Glass is Half Full Glenn H. Youngling, Esq. Tired of depressing stories of underfunded and underwater communities? See the positives, and pick up tips on how to navigate the rocky shores of collection, special assessments, foreclosures, short sales, and running the community in today’s reality!

Marin County Seminar Saturday, February 5, 8:00 a.m. to 1:00 p.m. Embassy Suites, 101 McInnis Pkwy., San Rafael Member Online Registration before January 28: $45 Online Registration after January 28: $50

Yes, reserve _____ spaces @$50 each for the Marin Seminar. Amount enclosed: $__________ (attach additional names) Name: ______________________________________________________ HOA or Firm: ________________________________________________

10:30 a.m.

Break

10:50 a.m.

Conflict Resolution for Directors Wanden P. Treanor, Esq. Learn valuable tips on resolving conflicts in your community in this entertaining session, while you lose 20 pounds and become a better person too!

Address: ____________________________________________________

Trends, Tips and Tricks Q&A Session All Speakers From audience input in the morning, our speakers will cover what is most important to you. From email and insurance to enforcement issues, this dynamic session will hit your hot topics and more.

Visa/Mastercard No. _____________________ Exp. Date: ________

11:30 a.m.

12:30 p.m. 1:00 p.m.

Drawings for Door Prizes Adjourn

City: __________________________ State: _____ Zip: ____________ Phone: ______________________________________________________

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


Contents Accrual Accounting—page 24 6

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Fighting Fraud We all say it won’t happen to us; but cases of theft and fraud happen to associations all the time. This article has some suggestions to help minimize the chances of fraud at your association.

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Why Do Boards Hide? Why do California laws require openness in conducting HOA business? It is because of horror stories presented to legislators about “bad boards.” While most boards are not “bad,” many are secretive by meeting without notice, conducting business by email, refusing legally-required access to records, and keeping negative information close to the vest. Learn to avoid this common trap.

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A Primer on Accrual Basis Accounting Many associations are interested in converting to and then maintaining their records on the accrual basis of accounting. Why? It is because the accrual basis gives a fuller picture of the association’s financial status. Accountant Joelyn Carr-Fingerle discusses how to convert and maintain financials on an accrual basis.

Departments 30 News from ECHO 31 Legislation at a Glimpse

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32 Directory Updates 36 ECHO Bookstore 38 Events Calendar 40 ECHO Volunteers 41 ECHO Marketplace

On the Cover Fighting Fraud —page 6 December 2010 | ECHO Journal

Copyright 2010 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 Diane Rossi Secretary Dorothy Kopczynski Directors Paul Atkins John Garvic Robert Rosenberg Richard Tippett Steven Weil

Jerry L. Bowles David Levy Kurtis Shenefiel Wanden Treanor

Executive Director Oliver Burford Communications Coordinator Tyler Coffin Legislative Consultant Government Strategies, Inc. Design and Production George O’Hanlon ECHO Mission Statement

41 Advertiser Index

4

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.

Building Ordinance Coverage Are the buildings at your association older or subject to significant code changes if the project were to be rebuilt? This article explains the importance of building ordinance insurance coverage and how it can help protect your property.

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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.

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.


PRESENTING 2011 ECHO Seminars

February 5

March 5

March 19

April 16

June 17 & 18

Marin County Seminar

Half-Day Seminar

Embassy Suites 101 McInnis Pkwy., San Rafael, CA

8:00 a.m. to 1:00 p.m.

Central Coast Winter Seminar

Half-Day Seminar

Hilton Santa Cruz, Scotts Valley 6001 La Madrona Dr., Santa Cruz, CA

8:00 a.m. to 1:00 p.m.

North Counties Seminar

Half-Day Seminar

Sally Tomatoes 1100 Valley House Dr., Rohnert Park, CA

8:00 a.m. to 1:00 p.m.

South Bay Seminar

Half-Day Seminar

Campbell Community Center 1 W Campbell Ave., Campbell, CA

8:00 a.m. to 1:00 p.m.

ECHO Annual Seminar

Two-Day Seminar

Santa Clara Convention Center Santa Clara, CA

September 24

Central Coast Fall Seminar

Half-Day Seminar

Hilton Santa Cruz, Scotts Valley 6001 La Madrona Dr., Santa Cruz, CA

8:00 a.m. to 1:00 p.m.


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December 2010 | ECHO Journal


By Geri Kennedy, CCAM

Fighting Fraud e all say that it won’t happen to us; but as we know, fraud, identity theft and other methods of taking someone else’s money continue to happen daily. There are cases of theft and fraud happening to homeowner associations all the time. When the board members discover the loss, the most commonly heard statement is, “I don’t believe it; she/he was such a nice person.”

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During my years as an association manager, I saw falsified bank statements; falsified balance sheets; payments made to vendors that didn’t exist; exorbitant “consulting” fees paid to people who either did not exist or had no credentials to consult on anything other than the fraud plan; payments for more patio furniture than would ever fit

at the pool; and much more. In one case, even the year-end review was forged! One of the earlier, large fraud schemes took place in the early 1980s in Southern California—the so-called “CAMS scandal.” Employees of a very large management company absconded with several million dollars from a number of associations. This disaster was one of the main factors leading to the writing and passage of the DavisStirling Act, with which we are all familiar (or should be!). Quick Facts on Fraud • The average fraud scheme lasts 18 months before it is detected. Generally, a quick hit and run for associations does not result in much money for the thief.

ECHO Journal | December 2010

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December 2010 | ECHO Journal

Smallish amounts are taken over a long period of time. • The most common method for detecting fraud in the workplace is through tips from employees, customers, vendors and anonymous sources. The second most common method of discovery is by accident. • The typical fraud perpetrator is a first-time offender. Only 7 percent of fraudsters in a recent survey had prior fraud convictions. (Of course, that is the folks that were caught!) You may be asking, “Why should we worry?” If our management company steals from us, we’ll just sue them to recover the funds; insurance will cover everything. This may be true but, depending on the circumstances, it may take years to recover your funds. In the meantime, the association must determine how to continue to pay the bills and complete the projects that were to be paid with the missing reserve funds. Owners will be upset about special assessments to bridge the gap, and banks may not be too encouraged to lend you funds. Some funds may never be covered. Your fidelity insurance may have been insufficient; the management company may have folded and is nowhere to be found; the bookkeeper responsible hasn’t been seen for several months. The bank may return your principle, but the interest that would have been earned is lost. Full recovery is not always a certainty. How Associations Can Protect Themselves Unfortunately, in many of the cases where funds were taken from association accounts, members of the board had become too trusting or complacent about reviewing their financial statements. They may have left this up to one or two members of the board, their bookkeeper or their management company personnel. While it is true that serving on the board is a volunteer position and many of the board members have full-time employment and family responsibilities, once you have made the commitment to serve as a board member, you also have taken on certain fiduciary responsibilities. Board members must take measures to safeguard association funds and property. This article has some suggestions to help minimize the chances of fraud at your association. Fidelity-Employee Dishonesty Bonds/Insurance The association board and/or manager should have a serious conversation with the


insurance agent, reviewing all of the association’s activities to assure complete coverage under the fidelity insurance. Here are a few points to cover: Who should be included on the association’s policy? Employees—especially those with access to any type of funds. This also includes those who have authority to purchase equipment and/or supplies for the association. Managers/Management—your management company should be endorsed onto the association’s bond. The management company’s bond generally covers funds owned by the management company and sometimes funds they are holding for others. Their bond amounts are usually much smaller than the totals in the association’s reserve accounts, especially if they have a large number of clients. Bookkeepers—if you use a bookkeeper, whether a volunteer living at the association or contracted, that person should be endorsed onto the policy. Board Members—because the board members are volunteers, they may not qualify under the strict definitions of the policy as “employees.” Be sure your policy includes an endorsement for volunteer directors. Committee Chairs—especially important for any committees that may have access to equipment or supplies. Fidelity coverage is often specific about what type of loss will be covered, including how the funds were taken. Ask your agent if the following scenarios would be covered: • Theft by employees—the major purpose of the bond. • Computer theft—although the physical equipment may be covered under your property insurance, theft of files from the computer or other uses of the computer to gain access to the bank accounts may not be covered. • Theft by outside parties—this could include physical burglary or robbery. How much money is kept in the association office? Are assessment payment checks allowed to accumulate in a desk drawer? Who takes the money to the bank, and what happens if that person is robbed on the way? • Forgery—while the bank may reimburse for an obvious forgery, remember the earlier statement that most fraud takes place over a long period of time. Banks may only be “on the hook” for a limited amount of time—think of those notes on

your bank statements indicating that you must bring up any problems or concerns within 30 to 60 days of the statement. And who is reviewing those statements? Possibly the thief! While it may seem obvious, be sure that your fidelity bond is sufficient. The amount should cover your total reserve funds, plus operating funds. One recommended formula is total reserve funds plus three times your monthly operating income. Be sure that you have taken into account the additions to the reserves that will take place after the bond has been placed for the year. If you settle a large lawsuit or otherwise have a major change in total cash assets, remember to increase your fidelity coverage.

Some funds may never be covered. Your fidelity insurance may be insufficient; the management company may have folded and is nowhere to be found; and the bookkeeper hasn’t been seen for several months. Consider inviting your insurance agent to a board meeting to review these issues. Let the agent know your questions in advance so that he or she has time to put together information about your policies and explain any recommendations. Banking Signature Cards—consider requiring two signatures on all checks—not just the reserves (which Davis-Stirling requires). Although this may be a pain, it assures that at least two people are reviewing the payments. If your management company or bookkeeper signs checks for regular bills, arrangements should be made to have a discreet list of those items they are authorized to approve. Especially if there is a great deal of money involved, you may want to consider a specific account for payments made by manECHO Journal | December 2010

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agement with all other accounts limited to board member-only signatures. Be sure that your signature cards are updated whenever there is a change in officers or management. Signature cards for longer-term investments are sometimes overlooked. You may have funds that were deposited some time ago with a local bank. Now, the original signers don’t even live in the complex and the bank will require many hoops to withdraw or change the terms of those funds. Sometimes, the account will roll for another period of time while you are trying to work this out and the funds needed for a large repair project may not be available. A worst case is if the original signer decided to go in and close out the account just before that trip to Burkina Faso (yes, this is a real country!). Investment Coordination—who can transfer funds to and from accounts within the bank?

Rather than keeping large (and possibly uninsured by FDIC) amounts of money in one or two accounts, consider laddering your funds to match your cash flow needs. The board should establish a policy for investment of funds that is reflected in the minutes. Management may be authorized to provide instructions to the bank with regard to transfers and investments, but this should be in accordance with the board’s decisions. Investments must be monitored. The balance sheet should include detailed listing of all accounts, including the name of the depository and, if applicable, the maturity date and interest rate. If your funds are placed outside your main bank through a CD investment program, the coordinating institution should be named as well. Rather than keeping large (possibly uninsured by FDIC) amounts of money in one or two accounts, consider laddering your funds to match your cash flow needs. Investment terms can range from one month to multiple

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December 2010 | ECHO Journal


years. It is much more difficult to gain access to funds that are in a number of time certificates with varying maturity dates. Many banks and brokerage firms have special programs for these investments that will assure the safety of your funds so that the board does not have to do all of the research into the best rates, etc. Bank Statements—all association accounts should receive, at a minimum, a quarterly bank statement. Minutes of the board meetings should reflect the fact that the board has reviewed these statements at least quarterly to comply with civil code 1365.5. If a depository institution does not provide at least quarterly statements, the association should think twice about depositing funds. At a minimum, the treasurer should receive a copy of all bank statements for operating and reserve funds. It doesn’t hurt for all board members to receive a copy along with the financial statements prepared by management or your accountant. Many banks will send a duplicate original to a designated board member. This is a duplicate of the statement sent to your management company or accounting folks. If there is any difference in the monthending balance between the balance sheet and the actual bank statement, there should be a reconciliation form to explain the differences, generally due to deposits or withdrawals in transit. Any unexplained differences should be promptly investigated. Assessment Payments—consider using a bank lockbox service for payment of your assessments. The homeowner payments are then mailed directly to the bank and deposited right away into your bank account. Checks are not sitting in the accountant’s office waiting for a deposit slip to be prepared, waiting for the weekly bank trip or waiting to be picked up by the local delivery person. This is a good idea for all associations, regardless of their size. Outgoing Funds—A system should be adopted to assure that all invoices are reviewed: • Are they in the association’s name? • Was the work authorized and completed satisfactorily? • Is the amount reasonable? • Is this a duplicate billing or payment? Consider marking the original invoice either with a Paid stamp or writing the check number used for payment directly on the invoice. The invoice number being paid should appear on the check. Better

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bookkeeping programs include a safeguard against payment of duplicate invoice numbers. Is your accountant using this feature? Year-End Audit or Review While this is not a guarantee that fraudulent activity will be discovered, at a minimum the CPA will ask questions to assure that you have appropriate safeguards and internal controls in place, that the beginning and ending balances make sense, etc. Even if your annual gross income is below $75,000 and Civil Code does not strictly require a review, the board should consider having one done periodically, especially if there has been a change in management or bookkeeping services. Some Final Comments Don’t be afraid to ask questions! An honest manager, accountant or bookkeeper should not be offended or otherwise have a problem with questions asked by board members. Sometimes your questions will point out an honest mistake. Watch for suspicious behavior. Employees who make $15 an hour and suddenly start wearing fur coats or driving luxury cars may be an obvious tip-off. Be particularly suspicious of employees who avoid vacations. An 12

December 2010 | ECHO Journal


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employee involved in an embezzling scheme will often hide checks and replace one set of payments with another. These schemes grow so complicated, consultants say, that the employee fears leaving the office. Change officers periodically. Has the treasurer been in office for the past 10 years? Perhaps it is time for that person to take a different position on the board. Use your common sense, intuition or whatever you want to call it when you notice something that seems strange and follow up on the feeling. Don’t rely on assumptions, such as “that is the treasurer’s job,� “the manager/bookkeeper is watching out for problems,� or “we are all honest here.� Remember that the “buck� stops with the board of directors. If funds are missing or stolen, simply saying that management or someone else took the funds and you are sorry may not be sufficient for your membership.

Geri Kennedy is a vice president with First Bank Association Services. Previously she was a principal at two association management firms. She is co-chair of the South Bay Resource Panel, a member of the ECHO Legislative Committee and a former member of the ECHO board of directors.

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By Timothy Cline

Building Ordinance Coverage The Older the Building, the More Important the Coverage re the buildings at your association older or subject to significant code changes if the project were to be rebuilt? This article explains how building ordinance coverage can help protect your property. All insurance policies have been written based on the concept of “indemnity.” Indemnity means “protection or security against damage or loss.” In this vein, fire

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December 2010 | ECHO Journal

insurance policies were never designed to put a person in a better position than he or she was prior to a loss; otherwise the existence of insurance might inadvertently create an incentive to have a loss. To say that insurance companies are a little uncomfortable with the idea of someone profiting from having a loss would be a gross understatement. To prevent a policyholder from unfair compensation whenever


ECHO Journal | December 2010

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a covered loss occurs, most insurance contracts are written in such a way that the carrier’s only responsibility is to return the building to the condition it was in prior to the loss. This is true even if an older building is damaged and substantial changes in the building codes have occurred, requiring considerable updating or improvements. Such consequential losses that occur as a result of the enforcement of the building code will not be covered under the standard fire insurance policy.

Building Ordinance Coverage protects the association against loss resulting from the enforcement of laws or ordinances that do not permit restoring a building to its condition prior to loss. The building codes can pose a threat even if there is a partial loss. Unfortunately, most municipalities require that, if 50 percent or more of a building is damaged, the entire structure (damaged and undamaged portions) must be brought up to current building codes. If there has been a change in the building codes since original construction, the cost for those additional improvements must be paid solely by the Insured. Changes in building codes can be “slight”—the building code requires the installation of hard wired smoke detectors, to “moderate”—the building code now requires that the building must be retrofitted for fire sprinklers, to “severe”—when the building code now requires residential fire sprinklers (cost: $15,000 per unit or more). If your building was converted from an apartment project or is more than fifteen years old, the building code changes might be substantial. It’s best to consult with your community’s Department of Building and Safety to determine what changes might be necessary if your building must be brought up to current building codes. 16

December 2010 | ECHO Journal


An optional insurance coverage called Building O rdinance is available. This coverage protects the association against consequent loss resulting from the enforcement of laws or ordinances that do not permit restoring a building to its condition prior to loss. Such coverage is required by many Covenants, Conditions and Restrictions; yet only a few condominium associations currently maintain this coverage. The coverage is specifically designed to protect the association against losses sustained as a result of the enforcement of building codes or ordinances. Building Ordinance coverage is comprised of three separate parts or coverages: • Demolition Coverage: Since the undamaged portion might need to be demolished in order to rebuild a structure to conform to current building code, Demolition Coverage covers the cost of demolition of the undamaged portions of the building in order for the entire building to be replaced with one conforming to present building codes. • Loss of Value: Because the undamaged portion was not technically “damaged,” the regular fire policy would not cover the “loss” of the undamaged portion of the structure. This coverage picks up the Loss Of Value of an undamaged portion of the building (this portion of the policy is designed to cover the costs to rebuild the undamaged portion). • Increased Cost of Construction: This covers the increased expenses incurred in replacing the building with one conforming to laws or ordinances or to repair the damaged building so that it meets current building laws or ordinances. In our example, it would cover both the cost to bring the damaged and the undamaged portion up to current building code. In order to receive a quote from your insurance agent or broker for this very important coverage, you’ll need to address two items: 1. How much demolition coverage would be necessary to demolish the undamaged portions of the project (generally demolition costs are approximately $2.00 per square foot)? 2. How much Increased Costs Coverage the association will need (i.e., how much will it cost to bring the entire building up to current building codes)? One pitfall—some condominium projects are located in areas where down zoning has occurred. An example of down zoning is when a 30 unit condominium project is built ECHO Journal | December 2010

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December 2010 | ECHO Journal

on a piece of land that, since construction, has been designated by the local Land Use Planning and Zoning Department to only hold 20 units. If a loss occurs that affects more than 50 percent of the structure, the association may only be able to rebuild twenty units, not the original thirty units. In this case, the “loss� was not resulting from the enforcement of laws or ordinances pertaining to the building, but rather pertaining to the land. It is the land that has sustained the loss (i.e., any real estate developer knows that a piece of land that supports 30 units is substantially more valuable than a piece of land that only supports 20 units); thus, the down zoning is not insurable. If your project is on a piece of land that has been down zoned, it’s important that the board not only disclose this to the current owners but also to any prospective owner that may show an interest in the association. However it is worth noting that the munici-


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palities involved “overlooked” a down-zoning situation on one of the condominium associations that were devastated by the San Francisco earthquake of October 17, 1989, and the Northridge Earthquake of January 17, 1994. In each case, the Department of Building and Safety permitted all of the units to be rebuilt—even though the site had been down-zoned. This is not to say that every community will overlook their zoning ordinances when a loss of this type occurs, but it is encouraging nonetheless.

Tim Cline, CIRMS, is president of Timothy Cline Insurance Agency, Inc. in Santa Monica. He is a past President of the greater Los Angeles chapter of Community Associations Institute and has served on the board of directors of the Los Angeles chapter of the Insurance Brokers and Agents Association of the West. The company is a member of ECHO.

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By Beth A. Grimm, Esq.

Why Do Boards Hide? Transparency Doesn’t Bite! Why Are There So Many Laws Requiring HOA Boards to Conduct Business in the Open? ow do you think that we have ended up with laws in California that require open meetings, liberal records review rights, homeowner forums and internal dispute resolution, and liberal annual disclosure of financial information, reserves, savings for repairs and replacement of major components, insurance policies, pending/ proposed litigation against developers, summaries of alternative and internal dispute resolution procedures and laws and architectural control processes?

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It is because of “horror stories” presented to the legislators about “bad boards.” The majority of HOA boards are not “bad,” but many are secretive and do “hide” by meeting without notice to owners, conducting business by email, refusing legally required access to association records, keeping negative information close to the vest, and the like. When Boards Hide, What Happens? Directors are fiduciaries, meaning they are entrusted to protect the assets of the

association members and be accountable to them; keeping secrets from the members can lead to legal and political ramifications. If any director is found to be intentionally hiding secrets or defrauding owners, that individual can lose the legal protection offered by Civil Code Section 1365.7 and Corporations Code Section 7231 to protect volunteer directors that act in good faith. Directors could also conceivably be held personally liable for the $500 per inciContinued on page 22


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Why Boards Hide Continued from page 20

dent penalties that can be imposed for failure to honor the open meetings requirements of Civil Code Section 1363.05 or records inspection rights granted to owners in Civil Code Section 1365.2. These fines can be imposed by a small claims court judge, and an owner does not need an attorney to pursue a cause. An owner can seek awards of up to $7500 in small claims court. This amount is considerable exposure. And a lot more can happen when boards become secretive—owners get restless, demanding, accusatory, angry, resentful, frustrated and distrustful. And the more this happens, the more some boards want to do everything in secret to avoid confrontation. It is a vicious circle. Why Do Boards Hide?

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December 2010 | ECHO Journal

Abusive Owners When board meetings turn into a circus or boxing ring, some board members resign and boards tend to go into hiding to make decisions, having closed meetings or taking action by email. But there are ways to deal with abusive owners. Here are a few things to try. There are no guarantees any of these will work, but a good faith effort should be made before choosing the most drastic ones (listed in priority from least to most). A dopt a Meet ings Policy : A good meeting can help promote organization and order. It’s harder to argue with a piece of paper than the president of the board. Use Sergeant - A t - A rms/ Robert ’s Rules for Eject ions: I might even recommend having two burley (but friendly) male owners stand by the door or a security officer present for difficult meetings for the sake of appearance, but I am not in favor of any physical contact. Use Video or A udio Equipment as a Det errent t o Embarrassing Behavior: I have recommended that a board set up a video camera and announce to the members the board will be taping a meeting if difficulty is expected. The best policy, however, is to erase the tape after the meeting unless it is needed for evidence. Close a Board Meet ing and Revert t o an Emergency Meet ing: This is a desperate remedy that might be justifiable in the worst circumstances. And, there is always the alternative of calling a board meeting to have the association’s legal counsel present to discuss

legal remedies and how to get the business done that needs attention. Law suit Seeking Injunct ion: Some boards have had to resort to seeking a court injunction barring certain individuals. This would be a last resort. It is costly and sometimes a board has trouble with proof. Some judges assume that a board ought to be able to handle a difficult owner with the right structure to meetings. Fear Of Letting Owners Know The Truth Fear is perhaps the most common reason boards decide to conduct business in a secretive way. A potentially explosive problem is discovered and boards do not know how to approach it rationally. They have no training for this. They do not want to trigger a lot of questions for which they have no answers. Sometimes the directors think they can solve the problem without telling members. Maybe they don’t want to spark panic or a recall petition. Maybe they want to “get out of Dodge” before all heck breaks loose (bad news for everyone).

Fear is perhaps the most common reason boards decide to conduct business in a secretive way. One of the biggest mysteries is why boards choose to bear the entire burden of a problem by keeping all the concern to themselves and then hitting the owners over the head with a hammer when the board can no longer hide the bad news. Trickling out bad news little by little while at the same time providing assurance the board is seeking solutions would surely soften the blow. I can understand fear of being blamed for any mistake and fear of sharing very bad news with the members. When such discoveries are made, there is nothing wrong with delaying announcement to consult with the right kinds of experts who have the knowledge to help sort out the facts and offer the right kinds of resolutions and help with the disclosures. But waiting too long and purposely masking bad news can lead to dire consequences, not only for the board but all of the members, too.


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Not Wanting To Be Bothered Some directors are plagued by ego and assume they know what is best for everyone, while others might have developed attitude, having given service for 20 years during which no one ever showed any interest. Directors often assume that no one cares and use evidence of apathetic behavior as an excuse that communicating with owners is an exercise in futility. Some directors simply want to avoid controversy or discourage nosy owners. Penny Pinching There are directors who ran on a campaign promise to “lower dues” or hold down costs. This is difficult when the economy is failing, and lawmakers keep adding requirements like detailed disclosures and more service-driven costs. And in these economic times, budgets are affected by hefty losses of income caused by owners “walking away” and bank foreclosures. As a result of all of this, some directors are loath to share the negative financial records. The Vicious Circle Grows When a board makes decisions in secret meetings or via email and avoids notifying

owners of any problems until they have escalated, the result is often that the board’s problems also escalate. It is hard enough for a board to deal with big problems such as the need for a large special assessment because of the discovery of serious problems caused by deferred maintenance, or a lawsuit that has been kept a secret, or some other tough issue. Add to that the burdens that pile up as owners get more and more angry or distrust abounds and these things happen: • threats of lawsuits by current owners or recent purchasers for mismanagement or failure to disclose attorney demand letters or threats written on behalf of angry owners, • collections efforts complicated by withholding of assessments and frustrated “walk aways,” • recall petitions, • escalated and comprehensive demands for records inspections, • small claims actions for meeting or records inspection violations, • having to deal with disruptive and angry owners at meetings. Failure to cushion the blow of bad news by initiating discussions with members of the

problems early on to let them know that the board is properly handling the difficult issues can exacerbate problems exponentially. Conclusions While excuses like those set forth above for being secretive may seem justifiable in the worst circumstances, the law says that HOA boards must: (1) open up meetings, (2) open up the books and records, (3) tell people when there is a big special assessment coming and (4) let the owners in on the overall financial plan. It is important to keep in mind that the laws will get more demanding if boards hide bad news. It only takes a few horror stories to a legislator to trigger a proposal for new and more onerous accountability requirements.

Beth A. Grimm is an attorney with a private law practice in Pleasant Hill, who serves homeowner associations and homeowners throughout the State of California. Her practice is largely web based and telephone consultations are available. She is a frequent contributor to the ECHO Journal and other similar publications in the State of California and on a national level. A wealth of information is available on her web site at www.CaliforniaCondoGuru. ECHO Journal | December 2010

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By Joelyn K. Carr-Fingerle, CPA

A Primer on Converting to and Maintaining Accrual Basis Accounting iven all the legislation relating to association financial information, many associations are more interested in converting to the accrual basis of accounting from the cash basis and then maintaining their records on the accrual basis. Why? It is because the accrual basis gives a fuller picture of the health and financial status of the association than the cash basis. It also pro-

G

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December 2010 | ECHO Journal

vides a better matching of revenues and expenses for the period they are earned, not just as received. The cash basis tells the cash status but not what is owed to the association or what the association owes. These can make a major difference in how the association is viewed.

Continued on page 26


ECHO Journal | December 2010

25


Accrual Basis Continued from page 24

For instance, there are two 25 lot associations with $100 per month assessments; one has $50,000 in the bank, only $500 is owed to it in receivables, and accrued expenses due are $1,000; the other association has $100,000 in the bank with $7,500 in receivables, but there is an outstanding painting bill for $50,000 in addition to the usual accrued expenses of $3,000. Which one would you rather live in? Assuming that longterm reserves are not an issue in either case, the second association may have more cash, but why is there such large assessments outstanding and all the debt? If only looking at the cash balance, Association 2 seemed wealthier, but that did not give the whole story. The offset to receivables is revenue. Accrual basis revenue for association assessments is straightforward: monthly assessment x number of units = monthly revenue Cash basis revenue is the amount actually received, not what was due/owed or paid in advance. Accrual basis not only shows what is due but also when association members pay in advance because revenue is not recognized as being earned by the association until it is due. If the association member paid March assessments in advance the revenues are supposed to be for March, not January when they were received. Likewise, if the association accepts advertising for its newsletter (published quarterly), the revenue is earned when the newsletter is published and distributed. Before that time the revenue is deferred. If the newsletter were never published, the revenue would have to be refunded because it would not have been earned. The costs of the newsletter are also expensed and due when it is published. The expenses are accrued, even if the bill is not yet received by month end because the newsletter was published and the expense was incurred that month. Anything paid in advance of the publication is a prepaid expense, which should not be expensed to the income statement until it is earned at publication. In these slower economic times with higher unemployment and mounting personal debt, associations need to look to controlling their own finances by following up on monies owed to them and not waiting unduly long to pay their own expenses. Owners will be pay26

December 2010 | ECHO Journal


ing slower and vendors billing faster to cover their cash flow, so the association needs to watch its own cash flow. Having an integrated accrual basis statement gives a fuller picture and assists with cash flow projections. Cash basis statements make it much more difficult to project cash needs. Cash basis advocates will tell you they can accomplish the same goal by having the cash basis statements with listings of receivables, which they have tracked elsewhere, and a listing of bills due to be paid. Maybe they can, but the separate listing does not show how the accrual items (receivables and payables) relate to the income and expense accounts, or show what the cash flow is like.

California Civil Code requires that associations prepare their budgets on an accrual basis of accounting so that all the year’s income and expenses are reflected in the year budgeted. The second association referred to above appeared to be missing the billing of three months of expenses, or maybe it was some owner(s) who hadn’t paid for a long time, or perhaps a special assessment due. The painting bill is greater than the total regular assessments for the year. Perhaps there was a special assessment previously for it, or perhaps it was planned to be paid from the accumulated earnings. We do not really know, but with the comparable (budget to actual) accrual statements we should be able to tell. California Civil Code requires that associations prepare their budgets on an accrual basis of accounting so that all the year’s income and expenses are reflected in the year budgeted. That way the owners know what to expect in full assessments. They also should become aware of the effect of the non-paying owners because the paying owners will have to cover the bad debts of the non-payers. After all, the association still has to pay the landscaper, manager, water and

utility bills even if some owners are not paying their share. If the budget is on the accrual basis the only truly comparable basis for the actual results is on the accrual basis too. The cash basis leaves out critical information and those lists of receivables and payables does not tell you the period owed for or even the accounts to be charged for the accumulation, which makes it very hard to compare to budget as required by law. Further, the payables listing is usually only for the bills actually received, not for those that need to be accrued like the first month of the bimonthly water bill. How to Convert to Accrual Basis Accounting To setup the initial conversion those lists of receivables and payables are needed. The uncollected revenues need to be recorded for the prior periods due, and the expenses need to be setup for the payables due or accrued. This is most easily done at year-end or the beginning of a new fiscal year because the equity accounts will need to be adjusted as well for the receivables and payables at the beginning of the year. This is a one-time adjustment, usually coordinated by your bookkeeper or CPA. If you have been filing your taxes with the IRS on the cash basis, you may still do so, or you can apply to the IRS for permission to change to the accrual basis of accounting for your tax reporting as well. Generally for associations there is no tax difference and it is an automatic approval, but a one-time form needs to be prepared and filed. Your CPA or tax preparer usually prepares this application. Maintaining the Accrual Basis Financial Statements The ongoing maintenance of the records should not be significantly more than your cash basis statements with separate lists. In fact the integration of the information should give more confidence in the integrity of the financial records. Cash continues to be reconciled between the bank and the general ledger, and now the agings of receivables and payables must reconcile between the detail and the general ledger as well. The agings are seldom reconciled in a stand-alone system (off of the general ledger system) so that unapproved adjustments and write-offs can be made without board notice and approval. The monthly assessments and other revenues billed needs to be posted to the general ledger, but this was already being maintained off line in order to give you the ECHO Journal | December 2010

27


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list of receivables due so the additional time to post it to the ledger is insignificant. The recording of cash received is the same as before. The posting of the payables and accruals takes a little more time than just listing them, but the payment clears the accrual so that only the new payables need be listed each month. It actually makes it easier to track and budget for items that are not paid monthly, like water which is often billed every other month. Let’s say water for February and March is probably $600. So, in February an accrual of $300 is made because the water was used even if not yet billed. Then in March the actual bill is received for $598 so March is only charged $298 of expense and the payment brings the payable/accrual back to $0. Sometimes the revenue recognition gets tricky when it is more than assessments, late fees, and the earning of interest. Laundry receipts should be anticipated and accrued monthly, even if the monies are only received periodically. Advertising revenues and newsletter expenses need to fall in the same period as the newsletter issue. Investment revenue recognition can be an issue but is best left to be worked out with your CPA. 28

December 2010 | ECHO Journal

Suffice it to say here that associations generally track their investments at their cost basis, not their market value unless they are “available for sale” trading securities. Certificates of deposit, treasury bills and bonds to be held to maturity are simply recorded at their cost and not adjusted for market conditions since the investment will mature and the association will receive its principal and interest. The interest is recognized and recorded as it is earned on the accrual basis of accounting regardless of when it is received. The cash basis only records it when received. How the association invests its funds is another article altogether and is best discussed with your CPA, attorney and investment advisor. If you have questions or need further explanation, please feel free to contact your CPA or any of the members of the ECHO Accountant’s Panel.

Joelyn Carr-Fingerle is an accountant in Fremont, CA, with a large CID practice. She is a member of the Accountants Resource Panel and the ECHO Legislative Committee and is a former member of the ECHO Board of Directors.


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29


News from ECHO

Building Ordinance Insurance If the buildings at your association are older or subject to significant code changes if the project were to be rebuilt, an optional insurance coverage called Building Ordinance is available to help protect your property. Fire insurance policies are not designed to put a person in a better position than he or she was prior to a loss. To prevent a policyholder from unfair compensation whenever a covered loss occurs, most insurance contracts are written in such a way that the carrier’s only responsibility is to return the building to the condition it was in prior to the loss. This is true even if an older building is damaged and substantial changes in the building codes have occurred, requiring considerable updating or improvements. Such consequential losses will not be covered under the standard fire insurance policy. The building codes can pose a threat even if there is only a partial loss. Most municipalities require that, if 50 percent or more of a building is damaged, the entire structure (both damaged and undamaged portions) 30

December 2010 | ECHO Journal

must be brought up to current building codes. If there has been a change in the building codes since original construction, the cost for those additional improvements must be paid solely by the insured party. Building Ordinance insurance coverage protects the association against consequent loss resulting from the enforcement of laws or ordinances that do not permit restoring a building to its condition prior to loss. The coverage is specifically designed to protect the association against losses sustained as a result of the enforcement of building codes or ordinances. Building Ordinance coverage is comprised of three separate parts or coverages: • Demolition Coverage: covers the cost of demolition of undamaged portions of the building in order for the entire building to be replaced with one conforming to present building codes. • Loss of Value: picks up the Loss Of Value of an undamaged portion of the building to cover the costs to rebuild an undamaged portion. • Increased Cost of Construction: covers the increased expenses incurred in replacing the building with one conforming to laws or ordinances or to repair a damaged building so that it meets current building laws or ordinances. Fighting Fraud We all say that it won’t happen to us; but as we know, fraud, identity theft and other methods of taking someone else’s money continue to happen daily. There

are cases of theft and fraud happening to homeowner associations all the time. When the board members discover the loss, the most commonly heard statement is, “I don’t believe it; she/he was such a nice person.” Here are a few quick facts on fraud: • The average fraud scheme lasts 18 months before it is detected. • The most common method for detecting fraud in the workplace is through tips from employees, customers, vendors and anonymous sources. • The typical fraud perpetrator is a first-time offender.

Why Do Boards Hide? How do you think that we have ended up with laws in California that require open meetings, liberal records review rights, homeowner forums and internal dispute resolution, and liberal annual disclosure of financial information, reserves, savings for repairs and replacement of major components, insurance policies, pending/proposed litigation against developers, summaries of dispute resolution procedures and laws and architectural control processes? It is because of horror stories presented to the legislators about

“bad boards.” The majority of HOA boards are not “bad,” but many are secretive and do “hide” by meeting without notice to owners, conducting business by email, refusing legally required access to association records, keeping negative information close to the vest, and the like. Directors are fiduciaries, meaning they are entrusted to protect the assets of the association members and be accountable to them; keeping secrets from the members can lead to legal and political ramifications. If any director is found to be intentionally hiding secrets or defrauding owners, that individual can lose the “legal protection” offered by Civil Code Section 1365.7 and Corporations Code Section 7231 to protect volunteer directors that act in good faith. Directors could also conceivably be held personally liable for the $500 per incident penalties that can be imposed for failure to honor the open meetings requirements of Civil Code Section 1363.05 or records inspection rights granted to owners in Civil Code Section 1365.2. Important ECHO Events Thursday, January 20 San Francisco Luncheon 11:45 a.m. to 2:00 p.m. St. Francis Yacht Club, San Francisco Saturday, February 5 Marin County Seminar Embassy Suites, 101 McInnis Pkwy., San Rafael Saturday, March 5 Central Coast Winter Seminar Hilton Santa Cruz 6001 La Madrona Dr., Santa Cruz


2010 Legislation at a Glimpse Final Results Bill No.

Author

Subject

Status

Position

Summary

AB 1726

Swanson

Voting Quorums Vetoed by Governor.

Oppose

In the event that there is not a quorum for a member meeting or an election of directors, would automatically reduce the quorum requirement for the next meeting to 40 percent, and then to 33 percent of the association’s voting power. Exempts associations whose documents establish a lower quorum requirement.

AB 1793

SaldaĂąa

Synthetic Grass Vetoed by Governor.

Oppose

Voids provisions in governing documents that prohibit the use of artificial turf or any other synthetic surface that resembles grass. Allows associations to adopt rules that establish design and quality standards.

AB 1927

Knight

Rental Rights

Vetoed by Governor.

Oppose

For governing documents initially recorded on or after January 1, 2011, requires that a majority of all owners vote to approve rental or lease restrictions. Requires owners to disclose rental restrictions prior to transfer of title.

AB 1975

Fong

Submetering

Failed passage.

Oppose unless amended

Requires a water purveyor to either adopt a general policy to require the installation of either a water meter, or a submeter, to measure water supplied to each individual dwelling unit, or to inform, on an individual basis, an applicant for new water service as to whether a water meter or submeter is required to be installed for each individual dwelling unit.

AB 2016

Torres

Deed Requests

Signed by the Governor. Chapter 131.

Support

Clarifies that a request by an association for notification of a trustee’s deed of sale does not constitute a request for a document that either effects or evidences a transfer or encumbrance, or that releases or terminates any interest, right or encumbrance, of an interest in real property.

AB 2120

Silva

Mobilehome Law Disclosure

Signed by the Governor. Chapter 90.

Neutral

Each year, would require that the management provide a copy of the Mobilehome Residency Law to each resident, or send a notice when a significant change is made and inform residents that they can obtain a copy by submitting a request.

AB 2502

Brownley

Delinquency Collection

Failed passage.

Oppose

Regulates third parties performing collection services for HOAs, as well as the formation of payment plans between associations and delinquent members. Allows members to have counsel present when discussing a payment plan, provided they give 48 hours notice to the association.

SB 995

Strickland

Conversion Plans

Failed passage.

Watch

Provides that a stock cooperative or community apartment project for senior citizens established before the DavisStirling Act, that is converting to a condominium, shall not be required to file a condominium plan to the Department of Real Estate.

SB 1427

Price

Default Notices

Signed by the Governor. Chapter 27.

Support

When a property is purchased at a foreclosure sale and is not being maintained, requires a governmental entity to provide notice of violations to the property owner before imposing fines for nuisance abatement.

ECHO Journal | December 2010

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Directory UPDATES Updates for listings in the 2008 ECHO Directory of Businesses and Professionals.

New Member Listings

6 6(59,1*&20081,7,(67+528*+2871257+(51&$/,)251,$672&.721 +4 ‡)5(0217 (59,1*&20081,7,(67+528*+2871257+(51&$/,)251,$672&.721 +4 ‡)5(0217 PLE PLEASANTON‡&233(5232/,6‡02'(672‡6$17$&/$5$ ASANTON‡&233(5232/,6‡02'(672‡6$17$&/$5$

M & C Association Management Services provides community association management and developer services to Fremont, Pleasanton, Santa Clara, Stockton, Modesto, Copperopolis and the surrounding foothills. Since 1990, our sole focus has been to deliver performance that enriches communities and enhances the lives of the people we serve. M & C is proud to be an Accredited Association Management CompanyŽ (AAMCŽ), which is the Community Associations Institute’s highestGHVLJQDWLRQDZDUGHGWRPDQDJHPHQWÀUPV

3 3OHDVDQWRQ‡)UHPRQW‡6DQWD&ODUD OHDVDQWRQ‡)UHPRQW‡6DQWD&ODUD  S Stockton tockton 209.644.4900 209.644.4900 ‡ ‡0RGHVWR‡&RSSHURSROLV 0RGHVWR‡&RSSHURSROLV For management proposal information, please visit www w.mccommunities.com or email inffo@mccommunities.com 32

December 2010 | ECHO Journal

Aquatech Consultancy, Inc. 1 Commercial Blvd, Ste. 201 Novato, CA 94949 Contact: Paul Goetz Tel: 415-884-2121 Fax: 415-884-2443 Email: goetz@noleak.com Providing our clients with effective construction defect analysis, building envelope design and repair recommendations. From basement to roofs and everything in between, Aquatech Consultancy, Inc., provides building diagnostics and recommendations for maintenance, restoration and repair. State Farm Insurance 564 Park Street Alameda, CA 94501-6233 Contact: Kelly E. Lux Tel: 510-521-1222 Fax: 510-521-1656 www.kellylux.com Email: kelly@kellylux.com A premiere insurance agency specializing in HOAs, unit owners, apartments and office buildings. We have over 95 years of experience.


Changes to Member Listings Walter G. Grady, CPA 2843 Johnson Avenue Alameda, CA 94501 Tel. & Fax remain the same Hutchinson & Bloodgood, LLP Attn: Lee Hanna 570 Auto Center Drive Watsonville, CA 95076 Tel. & Fax remain the same W. Charles Perry & Associates 231 W. 41st Avenue San Mateo, CA 94403 Tel: 650-638-9546 Contact: W. Charles Perry, M.S., P.E. www.wcharlesperry.com Email: charles@wcharlesperry.com

ECHO Journal | December 2010

33


By Gerald Bowden, Esq.

Decisions, ife consists of choices. We make decisions every day. Those decisions reflect our life experience and the way we think. Depending on the circumstances, we make decisions intuitively, rationally and emotionally. If you are on a homeowner association board of directors, however, you do not have an option about the manner in which you make most decisions. Unless your decisions are grounded on authority and persuasive evidence, you are asking for trouble. The purpose of this cautionary tale is to explain the special quality of board decisions and to provide guidelines for making decisions that will withstand formal criticism. Let me begin with a hypothetical example of a typical decision.

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December 2010 | ECHO Journal

Case Study Assume that you are a member of an agerestricted resident-owned mobilehome park (ROP). To maintain the park’s age restricted status, the law requires 80 percent of the residents to be over 55 years old. Your governing documents restrict membership to resident owners but permit rentals “in cases of extreme hardship” if the rental is approved in advance by the board. If rental is permitted, the board must also approve the prospective tenant. Mary is 60 years old and has lived in the park for five years. She has informed the board that her employer has transferred her to the Thailand office for one year. She has

asked for permission to rent her coach to her 40 year old married daughter. The questions posed for the board are whether to: 1) allow Mary to rent her coach, and 2) accept Mary’s daughter as a tenant. At the Board Meeting The board is evenly divided between those who support Mary and those who do not. Members who support Mary’s requests argue that: 1) since the rules do not require the hardship to be health-related or financial, Mary is entitled to rent her coach for any reason she chooses so long as the board approves her tenant, 2) Mary is a good bridge player, 3) the tenancy will only be for


This debate is typical of discussions in every HOA. The outcome of such decisions is usually arbitrary because: 1) arguments are not related to an explicit standard, 2) arguments are based on conclusions rather than reasons, and 3) debate is often diverted by irrelevant arguments. Let us examine these points separately. Argument Should Be Based on Standards The HOA owes its members the right to due process in the application of its rules. Due process presumes simple schoolyard fairness. One element of fairness is rationality of decisions that affect the member and her property rights. Since the right to rent is one of the sticks in the bundle of rights we think of as “property,” the association must act rationally when it impedes this fundamental right. In short, homeowner associations owe their members the right to fair and rational decision making. To be fair, the outcome of a decision should be reasonably predictable. To be predictable, a decision must be guided by explicit written standards. Where there is no standard to apply, or the board ignores the relevant standard, discussion is inevitably deflected to matters unrelated to the decision. The result is bad decisions.

a year, 4) the daughter is out of work and needs a place to stay, 5) Mary’s son-in-law is disabled and they can’t afford to go anywhere else, 6) to deny Mary’s request would be discriminatory since similar requests have all been granted, 7) The park would not be any worse off with the daughter as a tenant than it is with Mary, 8) Mary has a duty to take care of her daughter in her time of need, and 9) the park is well under the 80 percent limit. The faction opposed to allowing Mary to rent her coach to a non-owner contends that granting her requests is a bad idea because: 1) it would set a bad precedent, 2) it may be hard to hold the tenancy to one year if Mary

decides to stay longer in Thailand and the tenant decides not to move out, 3) accepting a tenant who is under 55 could jeopardize the park’s age restricted status, 4) Mary never performed any services to the park, 5) Mary is a Druid and sometimes votes for the wrong political candidates, 6) Mary knew the rules when she bought her coach, 7) Mary does not suffer any special hardship that others in her position would not also suffer, 8) Mary’s daughter may not be able to pay regular assessments, 9) Mary should have asked for permission before she agreed to accept the transfer, and 10) the park would not be any better off with the daughter than it is with Mary.

Base Decisions on Reasons Not Conclusions The second criterion for a sound decision is that it resorts to reasons rather than conclusions. What is the difference? Conclusions are factually unsupported and value-laden assertions. They are usually presented as selfevident and must always be accepted at face value. Reasons, on the other hand, incorporate evidence. Their validity is independent of the proponent’s values and life experiences. In short: reasons persuade; conclusions merely collide in mid-air with other conclusions. Most of the debating points made at the board meeting described above are take-it-or-leave-it conclusions. For examples of the distinction between reasons and conclusions, return to the summary of points made at the board meeting. The point that “since the rules do not require the hardship to be either healthrelated or financial, Mary is entitled to rent her coach for any reason she chooses,” is an example of a reason. The point that “to deny Mary would be discriminatory,” on the other

Continued on page 41 ECHO Journal | December 2010

35


ion Edit le w Ne ailab Av

le ilab 1 a v A 201 Feb

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Condominium Bluebook 2011 Edition $18.00 Non-Member Price: $25.00

Condos, Townhomes and Homeowner Associations $29.00 Non-Member Price: $45.00

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 associations.

This well-known compact guide for operation of common interest develop ments 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.

To make it these a sustainable investment, new buyers, owners and board members need to understand “best practices basics” of how this form of housing works and have more realistic expectations of this form of “carefree, maintenance free” living.

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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.

In this essay, attorney Tyler Berding confronts the growing financial problems for community associations. Mr. Berding addresses board members who are struggling to balance their duty to protect both individual owners and the corporation, and gives answers to associations trying to avoid a funding crisis.

Community Association Statute Book—2011 Edition $15.00 Non-Member Price: $25.00 Contains the 2010 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, Govern ment and Vehicle Codes important to associations.

New e Pric Homeowners Associations— How-to Guide for Leadership New Member Price: $15.00 Non-Member Price: $25.00 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.

California Building Guidelines for Residential Construction $52.50 Non-Member Price: $60.00 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.

Be an HOA Survivor

Questions & Answers About Community Associations $18.00 Non-Member Price: $25.00 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.

Reserve Fund Essentials $18.00 Non-Member Price: $25.00 This book is an easy to read, musthave guide for anyone who wants a clear, thorough explanation of reserve studies and their indispensable role in effective HOA planning. The author gives tips to help board members mold their reserve study into a useful financial tool.

2010 ECHO Annual Seminar Program

The Condo Owner’s Answer Book $15.00 Non-Member Price: $20.00 An excellent guide to understanding the rights and responsibilities of condo ownership and operation of homeowner associations. The question-and-answer format responds to more than 125 commonly-asked questions in an easy to understand style. A great resource for newcomers and veteran owners.

This Program Book is suppor ted through a generous sponsorship from Management Solutions.

2010 ECHO Annual Seminar Program Book $35.00 Non-Member Price: $45.00 This 300+ page reference book contains the presentation outlines, text and handouts from the sessions at the 2010 ECHO Annual Seminar held on June 19, 2010. It also contains vital information for association directors, such as assessment collection policies, internal dispute policies, and much more.


Dispute Resolution in Homeowner Associations $20.00 Non-Member Price: $25.00 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 Now Order Online at echo-ca.org

Bookstore Order Form Board Member’s Guide for Contractor Interviews $20.00 Non-Member Price: $25.00

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

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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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Yes! Place my order for the items above. Board Member’s Guide for Management Interviews $20.00 Non-Member Price: $25.00 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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ECHO Events Calendar

Important events to remember Wednesday, December 8 South Bay Resource Panel 12:00 Noon Il Fornaio 302 S. Market St., San Jose Friday, December 10 East Bay Resource Panel 9:30 a.m. Angius & Terry 1990 N. California Blvd., Suite 950, Walnut Creek

Friday, January 14 East Bay Resource Panel 9:30 a.m. Angius & Terry 1990 N. California Blvd., Suite 950, Walnut Creek

Friday, March 11 East Bay Resource Panel 9:30 a.m. Angius & Terry 1990 N. California Blvd., Suite 950, Walnut Creek

Wednesday, April 6 Maintenance Resource Panel 12:00 Noon ECHO Office 1602 The Alameda, Ste. 101, San Jose

Wednesday, January 19 Wine Country Resource Panel 11:45 a.m. Eugene Burger Mgmt. Co. 6600 Hunter Dr., Rohnert Park

Monday, March 14 Accountants Resource Panel 6:00 p.m. Francesco’s Restaurant Oakland

Wednesday, December 15 Wine Country Resource Panel 11:45 a.m. Eugene Burger Mgmt. Co. 6600 Hunter Dr., Rohnert Park

Thursday, January 20 San Francisco Luncheon 11:45 a.m. to 2:00 p.m. St. Francis Yacht Club, San Francisco

Wednesday, March 16 Wine Country Resource Panel 11:45 a.m. Eugene Burger Mgmt. Co. 6600 Hunter Dr., Rohnert Park

Friday, April 8 East Bay Resource Panel 9:30 a.m. Angius & Terry 1990 N. California Blvd., Suite 950, Walnut Creek

Thursday, January 6, 2011 North Bay Resource Panel 11:45 a.m. Contempo Marin Clubhouse 400 Yosemite Rd., San Rafael

Saturday, February 5 Marin County Seminar 8:00 a.m. to 1:00 p.m. Embassy Suites, 101 McInnis Pkwy., San Rafael

Thursday, March 17 San Francisco Luncheon 11:45 a.m. to 2:00 p.m. St. Francis Yacht Club, San Francisco

Monday, January 10 Accountants Resource Panel 6:00 p.m. Francesco’s Restaurant Oakland

Saturday, March 5 Central Coast Winter Seminar 8:00 a.m. to 1:00 p.m. Hilton Santa Cruz 6001 La Madrona Dr., Santa Cruz

Saturday, March 19 North Counties Winter Seminar 8:00 a.m. to 1:00 p.m. Sally Tomatoes 1100 Valley House Dr., Rohnert Park

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

Tuesday, March 8 Central Coast Resource Panel 12:00 Noon Pasatiempo Inn, Santa Cruz

Wednesday, April 13 South Bay Resource Panel 12:00 Noon Il Fornaio 302 S. Market St., San Jose Saturday, April 16 South Bay Seminar 8:00 a.m. to 1:00 p.m. Campbell Community Center 1 W. Campbell Ave., Campbell Wednesday, April 20 Wine Country Resource Panel 11:45 a.m. Eugene Burger Mgmt. Co. 6600 Hunter Dr., Rohnert Park Friday and Saturday June 17 & 18, 2011 ECHO Annual Seminar Santa Clara Convention Center Santa Clara

Regularly Scheduled ECHO Resource Panel Meetings Resource Panel Maintenance North Bay East Bay Accountants Central Coast South Bay Wine Country Legal 38

December 2010 | ECHO Journal

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

Location ECHO Office, San Jose Contempo Marin Clubhouse, San Rafael Angius & Terry, Walnut Creek Francesco’s Restaurant, Oakland Pasatiempo Inn, Santa Cruz Il Fornaio, San Jose Eugene Burger Management Co., Rohnert Park Varies


New election rules: $500 In today’s economic crisis, there may be some items that associations can cut to reduce costs. ECHO membership is not one. Let’s face it, educated board members are better fiduciaries, which helps them to avoid costly law suits and possibly personal liability. ECHO is the premier resource in California for board member education. ECHO offers new articles each month with practical and easy to understand advice about current California requirements, and what may be on the horizon. ECHO staff is available by phone or E-mail to answer members’ questions about association problems or to recommend competent professional services when necessary. And with discounted member rates at more than a dozen educational events throughout the year, ECHO is simply the best educational resource for California homeowners.

Avoid Litigation Each year, as a member benefit, ECHO sends every board member a copy of the updated Community Association Statute book. Every issue of the ECHO Journal and every seminar examine one or more aspects of compliance with association law, because one of the major causes of expensive litigation is ignorance of the law.

Mailing ballots: $200 Make Better Financial Choices Many associations struggle to understand reserve funding requirements and strategies, the benefits and disadvantages of using special assessments, proper collections practices, and even how to determine what components the association is required to maintain. At a time when wise financial planning is essential, ECHO members have access to a wealth of articles about reserve funding, budgeting, insurance, collections, and much more. Fight Costly Regulation Every year, Sacramento legislators introduce more legislation that confuses the job of California board members and increases the costs of compliance. ECHO is committed to fighting unnecessary regulation in California and promoting the interests and welfare of common interest developments. Hire Competent Professionals ECHO offers a variety of articles and publications to help members evaluate their service providers, including questions to ask prospective management firms and contractors. All ECHO Journal articles are available to members at no cost, and publications are sold to members at a discount.

Avoiding a lawsuit: Priceless. Spend a Little, Get a Lot The cost of ECHO membership is minimal. In a worsening economy, associations are looking to cut big expenses from their budgets. Yet, ECHO membership is as little as 25¢ per unit each month. For that small cost, here’s what every board member receives as part of being a member of ECHO: • A subscription to the ECHO Journal • An annual copy of the current Community Association Statute book • Unlimited access to ECHO’s library of past articles • Telephone consultations with ECHO staff about their problems • Reduced fees for ECHO events • Discounted prices on publications • And much more… In These Tough Economic Times, ECHO Membership is a Necessity As the only California organization devoted exclusively to board member and homeowner education, ECHO is a one-of-a-kind resource that your association can’t afford to lose.


ECHO Honor Roll

About

ECHO Honors Volunteers Diane Kay 2010 Volunteer of the Year ECHO Resource Panels Accountant Panel Richard Schnieder, CPA 707-576-7070 Central Coast Panel John Allanson 831-685-0101 East Bay Panel Scott Burke, 650-543-5619 Beth Grimm, 925-746-7177 Legal Panel Mark Wleklinski, Esq. 925-280-1191 Maintenance Panel Brian Seifert, 831-708-2916 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 Geri Kennedy, CCAM 650-348-2691 ext. 1006 Kimberly Payne, 408-200-8470 Wine Country Panel Maria Birch, CCAM, 707-584-5123

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

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December 2010 | ECHO Journal

SF Luncheon Speakers John Allanson Jeffrey Barnett, Esq. Tyler Berding, Esq. Ronald Block, PhD. Wendy Buller Doug Christison, PCAM, CCAM Karen Conlon, CCAM Rolf Crocker, CCAM Ross Feinberg, Esq. David Feingold, Esq. Tom Fier, Esq. Kevin Frederick, Esq. John Garvic, Esq. Beverly Gordon, CCAM Sandra Gottlieb, Esq. Beth Grimm, Esq. Brian Hebert, Esq. Roy Helsing Stephen Johnson, CFP Julia Lave Johnston Garth Leone Nico March Kerry Mazzoni Thomas Miller, Esq. Larry Pothast Larry Russell, Esq. Steve Saarman Jim Shepherd Nathaniel Sterling, Esq. Debra Warren, PCAM, CCAM Steven Weil, Esq. Mark Wleklinski, Esq. Glenn Youngling, Esq.

Seminar Speakers April 17, 2010 South Bay Spring Seminar Tyler Berding, Esq. Sandra Bonato, Esq. John Garvic, Esq. Robert P. Hall, Esq. Geri Kennedy, CCAM Jan A. Kopczynski, Esq.

Kurtis Shenefiel, PCAM, CCAM Richard Tippett September 25, 2010 Central Coast Fall Seminar John Allanson Beverlee Gordon Stephanie Hayes, Esq. Teresa Powell Brian Seifert Steve Weil, Esq October 23, 2010 Peninsula Fall Seminar Jeffrey A. Barnett, Esq. Tom Fier, Esq. Linnea Juarez, PCAM, CCAM Paul Windust, Esq.

Recent ECHO Journal Contributing Authors September 2010 Tyler P. Berding, Esq. Karen D. Conlon, CCAM Sandra L. Gottlieb, Esq. Beth A. Grimm, Esq. Debra J. Oppenheimer, Esq. Steven Saarman October 2010 Julie Adamen Tyler P. Berding, Esq. Jan A. Kopczynski, Esq. David H. Levy, CPA Gabriel P. Rothman, Esq. John E. Shaffer, Esq. November 2010 Sandra M. Bonato, Esq. Patti Jo Lewis, PCAM Katharine Rosenberry, Esq. Richard Tippett Steven S. Weil, Esq. Paul W. Windust, Esq.

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 1,450 homeowner associations, you can become an associate member and join 350 other firms serving this important membership.

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 Non-members/Homeowners Businesses & Professionals

$50 $75 $125

How Do You Join ECHO? Over 1,800 members benefit each year from their membership in ECHO. Find out what they’ve known for years by joining ECHO today. To apply for membership, call ECHO at 408-2973246 or visit the ECHO web site (echo-ca.org) to obtain an application form and for more information.


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Decisions, Decisions, Decisions Continued from page 35

hand, is an example of a conclusion. Test your arguments by asking whether they are based on information/logic (reason), or merely on your personal preference (conclusion). There is nothing inherently wrong with a conclusion. It merely needs to be supported with reasons before it can be of any value in reaching a decision. Facts Should Be Relevant to the Issue It is not enough for decisions to be based on reasoned information. The information must also be reasonably related to the standard being applied. For example, it may be true that Mary is both a good bridge player and a Druid. Those facts, however, have no bearing on the question whether she suffers a hardship that entitles her to rent her coach. Nor does it matter that her daughter or sonin-law suffers their own hardships. The question is whether Mary will suffer a hardship. The relevant inquiry is unrelated to Mary or to her personal qualities, politics, skill at card games, past contributions to the HOA, or her family values. To be defensible, the rental

decision must relate to the hardship standard as it relates to Mary’s circumstance. The Board’s Decision-Making Process To make a defensible decision the board must: 1) define the question to be decided, 2) apply rules to the question, and 3) gather evidence on the question before deciding it. To explain what I mean, let me return to the case study of Mary and her daughter. The first question is: What do the governing documents say? Let us suppose, as is often the case, that the governing documents supply scant guidance in how to make a rental decision. The CC&Rs merely say that the board may allow rentals “in cases of extreme hardship.” There are at least two ways to approach such a rule. One is to parse the sentence in an effort to divine its meaning. What is meant by “hardship?” Must the “hardship” be Mary’s, or can it be her tenant’s? Is an “extreme hardship” different from an ordinary hardship? How do we know an extreme hardship when we see it? Must it have a financial component, or is mere inconvenience

Ace Property Management . . . . . . . .13 American Asphalt . . . . . . . . . . . . . .26 American Management Services . . . .8 Angius & Terry . . . . . . . . . . . . . . . . .3 A.S.A.P. Collection Services . . . . . . .19 Association Reserves . . . . . . . . . . .18 Berding | Weil . . . . . . . . . . . . . . . . .44 Collins Management . . . . . . . . . . . .13 Common Interest Mgmnt Services . . .9 Community Management Services . .10 Compass Management . . . . . . . . . .11 Cool Pool Service . . . . . . . . . . . . . .16 Cornerstone Community Mgmnt . . . .16 Draeger . . . . . . . . . . . . . . . . . . . . .11 Ekim Painting . . . . . . . . . . . . . . . . .33 First Bank Association Bank Srvcs . .18 Flores Painting . . . . . . . . . . . . . . . .32 Focus Business Bank . . . . . . . . . . . .8 Gachina Landscaping . . . . . . . . . . .27 Hill & Company . . . . . . . . . . . . . . . .33 M & C Association Services . . . . . . .32 M. L. Nielsen Construction . . . . . . .26 Massingham and Associates . . . . . .23 Mutual of Omaha Bank . . . . . . . . . .12 Pelican Management Group . . . . . . .16 PML Management Corp. . . . . . . . . .12 Pollard Unlimited . . . . . . . . . . . . . .22 R. E. Broocker Co. . . . . . . . . . . . . .13 Real Estate Property Management . .29 Rebello’s Towing Service . . . . . . . . .29 REMI Company . . . . . . . . . . . . . . . .17 Saarman Construction . . . . . . . . . .19 Scuba Pool Repair . . . . . . . . . . . . .10 Statcomm . . . . . . . . . . . . . . . . . . .29 Steve’s Painting Services . . . . . . . .17 Union Bank . . . . . . . . . . . . . . . . . .28

Continued on page 42 ECHO Journal | December 2010

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Decisions, Decisions, Decisions Continued from page 41

enough? Does it matter, for example, that Mary’s employer will pay her assessments and loan installments while she is in Thailand? Does it matter that in the past five years three vacant coaches have been vandalized? How the Board Could Have Avoided the Problem Facts of this kind are useful in making a decision only if they are relevant to the standard being applied. The standard is “extreme hardship.” One can argue that the risk of vandalism is a hardship. One can also argue that vandalism is only a hardship after it has happened. These debates illustrate that reasonable minds can differ when presented with identical facts. To get beyond those reasonable differences, the association must refine the standards it uses to make decisions. Where the standard is ambiguous, facts are mere chaff in the wind. Where the standard is ambiguous, even opposing facts are of equal relevance. The first step, therefore, is to be sure that the association has adopted rules that are sufficiently explicit to be applied. Let me return to the example to illustrate that point. Instead of delegating to the board the unfettered discretion to allow rentals in cases of “extreme hardship,” its decisions would be easier to make, more predictable and hence more defensible, if they were bounded by a set of criteria to be used in making rental decisions. For example, the governing documents could be amended to say that a coach may be rented only if the owner demonstrates a need to vacate the coach due to the owner’s: • ill health; • inability to pay regular assessments; • family emergency; • need to vacate for major repairs, and • financial needs. These criteria could be further refined, but even these open-ended criteria are more helpful than the ill-defined “extreme hardship” standard. The suggested criteria may even be sufficient to avoid a subsequent charge from Mary that the rental decision was arbitrary since it was devoid of principled standards. Allow General Principles to Guide Specific Decisions Decisions regarding acceptance of proposed tenants could be guided by similar 42

December 2010 | ECHO Journal

standards. For example, the board could be required to consider the following factors prior to reaching a decision. • Financial responsibility for assessments, (credit rating); • Tenant history (probable compliance with rules); • Number of residents in the coach in comparison with its size; • Potential for amplified music or other sources of loud noise; • Number, kind and size of pets; • Number of vehicles in the household; • “Slow and quiet” versus “noisy and active” life styles, and • State and federal laws. These standards are bound to present problems in specific situations. They are, however, better than no standards at all. Keep Your Eye On the Ball The purpose of elaborating objective standards is not merely to adopt more rules. The purpose is to be as explicit as possible about the principles behind the rules you already have. Albert Einstein said “the most common form of stupidity is forgetting what you are doing.” The reason that forgetting our goal is the most common form of stupidity is that we all do it all the time. The only way to remember what your HOA is attempting to achieve is to deliberately examine the reasons behind your rules. The rule requiring residents to be at least 55, for example, is not the product of blind prejudice against young people. It is a recognition that younger people tend to lead a more active life than people over 55. They tend to have larger households, they tend to have more and louder social events, and they often drive larger cars and have more of them per household. These generalizations, like all generalizations, are often wrong. There are young people who fit in an age restricted (over 55) mobilehome park better than some more senior residents. The trick is to have rules that will account for the exceptions. Rather than making the tenant decision only on the basis of age, therefore, it is more logical to make it on the basis of the factors that promoted the age restriction in the first place. The list of criteria enumerated above may start to achieve that objective. If not, similar standards should be refined into a set of established criteria that could be used to guide the board in reaching decisions to accept or reject prospective tenants. I recognize that my ordered approach to decision making is contrary to human

nature. I also realize that thinking through the reasons behind a generalized rule is difficult. It is far easier to simply bar residents under age 55. The difficulty with such a simplistic approach to association governance is that people dislike absolute and unprincipled rules even more than they dislike analyzing the reasons behind the rules they agree with. It is important to remember, however, that the decision-making process is often as important as its outcome. Process Versus Outcome People are more likely to respect the outcome of a process in which they feel fairly treated. That principle is true even if the decision goes against the person subject to the rules. One way to make someone feel fairly treated is to hear that person’s point of view and then explain the basis for the decision in an orderly way. One way to make the applicant feel that the decision was made fairly is to break complex decisions into their constituent parts and demonstrate how the evidence presented relates to the standard being applied. Conclusion Since your HOA, like every human institution, depends on voluntary compliance with its internal rules, losing the respect of your members breeds discredit not only for the rules, but also for the institution that made them. People are more likely to respect rules that are grounded in principle and policy. It is essential, therefore, to articulate the reasons behind each rule and the goals sought to be achieved by it. When decision makers lose sight of the reasons behind their rules, the result is often unpredictable. Decisions that can not be foreseen in advance tend to be viewed as being capricious. Capricious decisions are unfair. To avoid the appearance of capricious decisions, examine your rules to be sure they afford enough guidance to be applied predictably. When faced with a decision that is governed by a rule, take care to base the decision on information that is relevant to the objectives the rule was intended to achieve. In making such decisions, ignore any arguments directed at the person affected by the rule, and limit your deliberation to arguments related to the action or conduct from which the decision originated.

Gerry Bowden is a partner in the law firm of Dawson, Passafuime & Bowden in Scotts Valley.


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

Receivership Standing in the Shoes of the Board Wanden P. Treanor, Esq.

Luncheon Price: $75 Non-Members: $90 Advance reservations are required for this event. Reservations after January 15 must add $15. Cell phone use is not permitted inside the St. Francis Yacht Club. Yes, reserve _____ spaces for the ECHO San Francisco Luncheon. Amount enclosed: $__________ (attach additional names) Name: HOA or Firm: Address: City:

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



ECHO Journal - December 2010