FINES ON UNPAID FINES

FINES ON UNPAID FINES

QUESTION: Is it legal to fine someone twice on the same violation if they refuse to pay the first fine and have remedied what the fine was for in the first place?

ANSWER: The imposition of monetary penalties requires due process, which must be done in accordance with the association's published fine policy. I've never seen language in any governing document that allows a board to levy fines on unpaid fines or two fines on a single violation. If your board had a written, published policy that allowed for fines on fines, I suspect a court would find it unreasonable.

Board Options. If an owner refuses to pay a fine, boards have twooptions. The first is to take the person to small claims court for a judgment in the amount of the fine. This approach is not always successful--small claims judges are a bit unpredictable. The secondoption is to hold a hearing and find the person "not in good standing" and suspend their privileges and voting rights until the fines are paid.

RECOMMENDATION: Boards should have their association's legal counsel review their governing documents and advise them on how best to levy and pursue monetary penalties.

RESIGNATIONS
AND APPOINTMENTS

QUESTION: Our board president resigned because he sold his home and moved. He had more than one year remaining on his term. Our treasurer, who is up for election this year, resigned his seat and was appointed by fellow directors to fill the seat vacated by the president and assume the remaining year of his term. Is this allowed?

ANSWER: Yes, it's allowed. The Corporations Code and most bylaws authorize the appointment of replacement directors whenever there is a vacancy on the board. There is nothing illegal or improper when a board appoints an existing director to fill the longer term of a resigning director. Term limits might preclude the appointment depending on how the restriction is worded.

FEEDBACK

Borrowed Reserves #1. Can a board use reserve funds designated for a particular line item in the reserve study for another reserve item if it needs attention immediately? If so, do funds have to be paid back?-Linda D.

RESPONSE: Monies can shift between line items in a reserve account. It is normal to make adjustments from year to year to reallocate funds to cover items that fail prematurely or cost less to repair than was anticipated. For example, if a boiler fails in year eight instead year ten as projected by the reserve study, funds can be shifted from other line items to cover the unexpected early expense. Or, if a pool heater replacement ends up costing half the projected cost, the left-over funds can be assigned to other reserve line items. Such reallocations are not unusual. 

Major Expense. In the example I gave last week, the reserves were wiped out by a large unexpected, unreserved for item. The $400,000 expense I gave was not a minor adjustment--it was a complete depletion of the reserves. The unexpected and unreserved major expense is better addressed through an emergency special assessment. Or, in the alternative, "borrowing" from the reserves and using a combination of regular and special assessments to accelerate replenishment of the funds.

Consequences. An unplanned emptying of the reserve account will clearly have consequences. Per statute, the association will have published a reserve summary that showed $400,000 allocated for plumbing, painting and paving expenses--those expenses do not go away just because a roof emergency intervened. They will hit at some point with no monies to pay for them. Accordingly, the prudent course of action is to replenish the reserve funds. Some reserve specialists have weighed-in on this topic. See their responses below.

Borrowed Reserves #2. We keep track of the major repair and replacement components at the individual component level as part of estimating the overall obligation. But the investment portfolio is handled as a pool of money. There is no “roof” money or “painting” money. It would be like having a bank account for every line item of revenue and expense. What is really going on here is that associations levy assessments sufficient to perform its duties. The annual assessment level is designed to handle the year’s estimated routine operating expenses and to charge current owners a sufficient amount that covers the “annual wearing out cost” of common area major components that the association is contractually (CC&Rs) and legally (California law) obligated to maintain at an known and ascertainable standard. Acquiring and managing the investments is a mutually exclusive process from estimating what money you need to meet current and future cash flow requirements and deciding who pays for what when. It is a more technical conversation, but that is the essence of the matter. -Donald Haney, CPA, MBA, MS(Tax).

Borrowed Reserves #3. Assuming monies are set aside for the items you mentioned, however, for some reason, the roof is not included in the reserve study, and therefore no monies had been set aside for their replacement, the monies in the reserve fund can still be used for replacement of the roof. It’s all one bucket of money and it can be used to replace components the association is obligated to repair, replace, maintain or restore. My rational is: 

1.  Is the component the responsibility of the association?
2.  Is the component in need of replacement? 

Assuming yes to each, why would an HOA have to borrow its own money to replace a component it is responsible to replace? The fact that the component was excluded from the reserve study [error by the preparer or believed to be 30+ remaining life] is irrelevant to the responsibility and needs of the association. The monies are set aside to maintain the facility, the reserve study is simply a tool to help identify and estimate the costs to do so. There will inevitably be costs to maintain a facility that are unforeseen, limiting the HOA’s available resources to the items specifically identified in a reserve study seems imprudent. -Scott Clements, RS, PRA, CMI, Reserve Studies, Inc..

Borrowed Reserves #4. On the subject of reserves and borrowing, we define an appropriate reserve project as meeting the National Reserve Study Standards four-part test, meaning the component/project is:

1.  A common area maintenance responsibility,
2.  Life limited (expected to realistically occur in the future),
3.  Predictable (not randomly occurring), and
4.  Above a minimum threshold cost (often in the .5% to 1% of annual budget range).

There are three primary reasons why an association may be in a situation to overspend from reserves: the expense is higher than expected, the expense is earlier than expected, or the expense wasn't anticipated. All three demonstrate the need to update the reserve study regularly, learning from experience to make the reserve component list better and more accurate each year, and helping board/management know the reserve contribution needs of the association.

Realistically, those reserve contribution needs of the association will likely increase the year after reserves have been overspent as the reserve strength of the association needs to be rebuilt! In those cases I believe a special assessment may be necessary due to cash flow issues, but I don't believe a special assessment or "repay within 12 months" is automatically triggered. -Robert Nordlund, PE, RS, Association Reserves, Inc.

Alligators #1. How far do you go with the visual blight that an excess of signage creates? Do you warn against all wild mammals that could carry rabies - squirrels, raccoons, feral cats, bobcats, mountain lions, coyotes, etc? Do you warn of stray dogs that might be off lead? How about black widows, brown recluse, and bedbugs? This list goes on ad infinitum and ad nauseam. Someone needs to come up with a sign at the gate that says, "WARNING: There are things in life that can hurt you." -Jim S.

RESPONSE: Don't forget to include rabid lawyers.

Alligators #2. Regarding the article about the unfortunate episode of the alligator eating a human and a subsequent lawsuit: We don't have any alligators but we have members of our HOA who have engaged in 2 verbal assaults and one physical assault on other members. Do we need to let the membership know about this pattern of behavior, both for the protection of individuals and the protection of the board? -Lolly S.

RESPONSE: Human alligators? Warnings should be plastered all over the common areas. But you better check with legal counsel on this one, he/she might not agree. (Problem residents are particularly difficult to deal with and your options are limited. You should get your association's attorney involved. Personally, I would rather deal with real alligators than the two-legged kind--it's a lot easier.)

Commercial Signage #1. Your November 18Newsletter stated, "A homeowners association is not a governmental entity--it is a private organization with private restrictions, which means the First Amendment does not apply." I thought federal law would always apply, even within the confines of a private organization. -Richard A.

RESPONSE: Not so. The First Amendment states that "Congress shall make no law...." Accordingly, the Bill of Rights protects citizens fromgovernmental restrictions, not private ones. Thus, businesses and owners of private property can restrict the activities of others in their employ or on their property. That's why an employer can fire someone for giving political speeches or handing out fliers in the workplace or posting racist or homophobic slurs on Facebook. When it comes to homeowners associations, they can adopt restrictions on signage in their developments and restrict speech in their meetings.
Commercial Signage #3 Our association of 647 detached homes does not allow any commercial signage except for real estate sale signs which are controlled. Our rules also state that "commercial vehicles" owned by residents or their guests may not be parked overnight in private driveways or in guest parking spots. -Tom M.

Adrian J. Adams, Esq. Adams Kessler PLC

ASSIGNING VALUE TO TRASH

Assigning Value to Trash

Occasionally I catch people browsing my recycling bins on the curb in search of aluminum cans. One such individual dressed in a business suit drove up to my recycling bins – and others on the block – to harvest cans. This seems like quite a lot of work, not to mention a colossal waste of fuel for just a few pennies. How are these people breaking even?

They should join me on a daily walk around the neighborhood sometime. That’s where the real cache of recyclables can be found. Strewn along sidewalk, gutter and sometimes street, I easily find plastic soda bottles, aluminum cans, newspapers, the occasional milk jug, and if I’m really lucky, still-intact glass bottles. These I gingerly pick up like a trophy: An unbroken glass bottle means that I, or other neighbors, don’t have to swing by later with a broom and dustbin. You probably don’t litter. I fail to even imagine myself littering. But there are lots of people who do.

I do, however, have a very difficult time ignoring recyclables – actually trash of any sort – while out and about. My instinct, as my family is painfully aware, is to reach down, pick it up and stow it in a pocket, bag or looped around whatever digit is still available. I have picked up countless jagged shards of glass with bare hands when a broom was too far away and time was of the essence. Note to self: I really should use gloves. Fortunately, if I forget to bring along a garbage bag on a walk, it’s very likely that a bag (or large box, as recently happened) can be procured along the way to help tote the plastics and glass and cans and paper home.

Even after all the garbage I’ve scooped, carried and sorted, I’m still amazed that people litter. I’ve personally observed adults toss entire bags of fast food out of moving cars. I’ve seen kids walking down the street with a treat in hand, unwrapping as they walk and tossing the packaging to the ground in one fluid movement. I’ve witnessed teenagers taking great pleasure in smashing empty glass bottles in the street. And I’ve experienced the aftermath of large-scale dumping of unwanted personal belongings like mattresses and TVs in local parks and residential alleys.

We all experience something similar – or live alongside the result – on a daily basis. And it seems to me that our personal value systems may be a tad out of alignment. One of my neighbors, a retired teacher, frequently accompanies me on walks. His solution to help curb wanton littering is to assign monetary value to more recyclable packaging. I happen to agree. I also think that a deposit on certain items like plastic or glass bottles would greatly increase their recycling or reuse.

My grandmother kept few store-bought snacks in her house, but she did keep 7-Up on hand for the occasional upset stomach or special treat for a grandchild. For either use, an inch was all that was administered. Eventually those stately green glass bottles would empty and get returned to the corner market for reimbursement. Each one carried a 10-cent deposit. And you can bet that each one got returned.

Assigning value to trash is a difficult concept for some. It requires a great deal more big-picture thinking than the short-term gratification of consuming something and not being bothered with the waste produced by the product. What’s valuable beyond that? Well, how about diverting a recyclable item away from a landfill? Or reducing energy use? Or respecting shared space by properly disposing of trash? Or choosing to consume items that require less (or no) packaging whatsoever, like an apple.

The big picture is not that complicated: Understanding our personal impact on our environment, choosing wisely what we consume and taking responsibility for all of it — even the waste. This isn’t a new concept at all. In fact, it sounds a lot like plain, old common sense. Thanks, grandma, for the valuable early education.

TERMITE TENTING
A CAPITAL IMPROVEMENT?

QUESTION: The board wants to tent our entire building for termites. Is this a capital improvement that requires the entire association's vote? If the cost is under 5% of the annual budget, is membership approval required since this is common area?

ANSWER: Termite tenting is not a capital improvement. It is a maintenance/pest control issue. The form of treatment, spot or tenting, is a business decision for the board to make, not the membership or the courts. Lamden v. La Jolla Shores. Regardless of whether the repairs are related to the common areas, the board can approve a special assessment on its own authority for up to 5% of the current year's budgeted gross expenses. Civil Code §1366(b). If the cost is more than 5%, the board can impose a special assessment if the termite treatment is an emergency.

RESERVES FOR
HOA OWNED UNIT?

QUESTION: Our association has done a reserve study and now is taking the necessary steps to increase the reserves. The association owns one of the units free and clear and rents it out. The unit is worth over $500,000. Shouldn’t this count toward the reserve account?

ANSWER: The $500,000 estimated value of the unit can be included in the HOA’s balance sheet but not in its reserve funding calculations. Assuming the unit is a condominium, there is very little that needs to be reserved for inside the unit--carpet, cabinets and maybe painting. Depending on the size of your budget, most items in the unit will be addressed through routine annual maintenance.
Property Taxes & Insurance. Non-reserve items that are sometimes overlooked are the need to insure the unit and pay property taxes.

Separate Interest. If the unit was acquired through foreclosure, it will have a parcel number. In that case, property taxes must be paid and a separate general liability and property insurance policy purchased for the unit.

Common Area Unit. If the unit is part of the common areas, then property taxes are not an issue. That happens most often when a "manager's unit" is created by the developer and included in the common areas. Accordingly, the unit is covered by the association's insurance. However, boards should not assume it's covered--they need to verify it. 

Taxable Income. Rent money collected from the unit is subject to taxation as non-dues income. In addition, when the unit is sold the association will incur transaction costs and pay taxes on any gain on the sale. The gain on this asset sale produces “non exempt function” income, which is taxed at ordinary corporate rates. These rates go up to 35% for federal and 11% for California. There is also a “basis” for gain or loss issue to resolve when the unit is sold. Therefore, the net realizable value may be substantially less than $500,000.
Thank you to Donald Haney, CPA, MBA, MS(Tax) of haneyinc and Scott Clements, RS, PRA, CMI of Reserve Studies, Inc. for their input on this question. 

NO QUORUM
FOR PAST FOUR YEARS

QUESTION: I have been a board member three times. The last four years our annual election was held by mail. We never had a quorum. Do we need a new election or can we count the original ballots at the next meeting?

ANSWER: Sorry, you cannot carry over ballots from year to year until you get enough to hold a meeting. Ballots count for the election for which they were noticed (and any adjournments of that year's meeting). Consequently, you need to issue a new notice and new ballots for each annual election.

ELECTRONIC
CONSENT FORMS

QUESTION: I know that owners must sign a "consent form" before the association can electronically send documents. If we make these documents available on a website and only send owners an email notice that they are available, do we still need a signed consent form?

ANSWER: Documents can and should be posted on your website so owners can download them as-needed. However, whenever documents are required by statute to be distributed to the membership (budgets, year-end disclosures, annual financial statements, etc.) you will need an unrevoked consent on file if you want to either distribute them electronically or post them on the website in lieu of distributing them.

RELEASE OF
ASSOCIATION RECORDS

QUESTION: Our Reserve Study Committee needs to look at old records, especially ones our old management company turned over to the current one some 7 years ago. The current management rep told our board president he can't let those out of the office. Don't HOA records belong to the HOA and doesn't the HOA have the power to say where and when the records are kept?

ANSWER: I'm not sure why you need 7-year old records to prepare a reserve study. What you need is a reserve specialist to (i) visually inspect your development's major components, (ii) establish an estimated remaining useful life for each component the association is required to maintain, (iii) set a replacement cost for each component, (iv) calculate interest and inflationary offsets, (v) sprinkle a little pixie dust on it and produce a reserve study/funding plan that can be used by the board as a guide to properly fund the reserves. (See Reserves Menu.)

Records Oversight. When a managing agent is entrusted with the association's records, industry practice is to NOT allow them out of the management office because they can be lost, damaged, destroyed or altered. Accordingly, neither board members nor committee members have the right to remove records from the management office. Only the board as a whole has the power to authorize the "borrowing" of original records. Even so, letting originals out of the office is a bad practice. The better practice is to allow records to be reviewed in the management office or to make copies. An exception is during litigation when original records need to be sent to the association's legal counsel for review and possible production to opposing counsel.

FEEDBACK

Fines #1. In response to "Fine on Fines," our HOA has wording in the fine schedule that all fines will continue monthly until the member is in compliance. Not another fine on top of a fine, but a way to keep homeowners accountable. -Kaye

RESPONSE: I agree. A daily, weekly or monthly fine imposed for a continuing violation is not a fine on a fine. Ongoing fines can be effective when used in a "carrot and stick" approach to the violation. In other words, fines accumulate daily but will be waived if the violation is cured in an appropriate time period set by the board. If the violation is not timely cured, the fines are not waived and the association then takes legal action to bring the person into compliance.
Conversion Charts. THANK YOU for your and your staff's hard work! The double cross reference to the “new” to “old” Davis-Stirling Act is a godsend. I only hope our association board and property manager appreciate it as much as I. Thank you, again. -Bruce S.

Adrian J. Adams, Esq. Adams Kessler PLC