COMPANY OWNED UNITS

COMPANY OWNED UNITS

QUESTION: I serve on the board of a townhome association. We have a potential buyer of a unit that is a limited liability company. If the LLC becomes an owner and the LLC has 50 members, will all 50 members have rights to use the common area facilities?

ANSWER: Good question. Because of the uncertainty and to avoid potential litigation over the issue, we address it when we restate CC&Rs and bylaws for our clients. We define who does and does not hold voting and common area usage rights for (i) those who merely hold a security interest in the property, (ii) tenants, (iii) trusts, (iv) corporations, (v) partnerships, and (vi) other ownership entities. Doing so eliminates the problem. Your association should consider doing the same. If you have questions, contact us. 

NOTICE OF RULE CHANGE

QUESTION: We are changing several rules. May we send only the rules that are changing to homeowners? Our manager says we must send out all the rules for the 30-day homeowner comment period, not just the ones being changed or added. I do not read Civil Code 1357.130 that way. Who is correct?

ANSWER: You're correct. The statute only speaks to proposed changes not the entire package.

The board of directors shall provide written notice of a proposed rule change to the members at least 30 days before making the rule change. The notice shall include the text of the proposed rule change and a description of the purpose and effect of the proposed rule change. (Civ. Code 1357.130(a).)

Once the rule change has been approved by the board, notice of the approval must be given to the membership before the change can take effect. Ideally, changes are incorporated into the rule book and a full set is mailed or delivered to the membership. For some associations that can be quite costly. An alternative is to mail the changes to the membership and post a full set of revised rules on the association's website.

HOARDERS

HOARDERS

QUESTION: We live in a condo complex. One of our members has his unit filled to the ceiling with all kinds of debris, mostly combustible. According to our management company the HOA can do nothing to get him to clean up his unit and put it in a safe condition. Only after something happens in the unit, such as a fire, can anything be done. Is this correct?

ANSWER: No, you don't have to wait for a fire. Addressing the issue, however, will be difficult and may require litigation depending on whether the person is a hoarder or merely a poor housekeeper.Poor Housekeeping. The courts have already decided that associations cannot expect judicial relief if someone is merely a poor housekeeper. One association inspected an owner's unit and found it in disarray. The board demanded that he cease using his downstairs bathroom for storage, clear his bed of all paper and books, remove boxes and papers stored in his unit, and remove all clothing he had not worn in the past five years. Books that were considered "standard reading material" could, however, remain in place. The matter ended up in court. 

Although the association claimed the clutter was a fire hazard, the fire department disagreed and so did the court. The judge scolded the association for its "high-handed attempt to micromanage" the owner's personal housekeeping. "Particularly galling" to the court was "the presumptuous attempt to lecture Cunningham about getting rid of his old clothes, the way he kept his own bedroom, and the kind of reading material he could have." (Fountain Valley Chateau Blanc v. Dept. of V.A.) The lesson from the case is that the clutter in a unit must represent a true health and safety issue before an association can take action. Such is the case with hoarders.

Hoarders. Hoarding is a mental illness sometimes referred to as "Collyer Syndrome" after two brothers who lived in Harlem in the early 1900s. They were compulsive pack rats who collected junk for decades. Both were found dead in their 4-story brownstone surrounded by 140 tons of junk and debris. (See Wikipedia article.) As it was with the Collyer brothers, hoarding can be life-threatening not only to the hoarder but to other residents in a condominium development.

The debris in a hoarder's unit will attract and breed roaches, ants, silverfish and rodents that then spread to the common areas and other units. In addition, the damp, unsanitary conditions become a breeding ground for mold and bacteria that migrate into common area walls and HVAC ducts. Finally, the mountains of debris in a hoarder's unit become a fire hazard. If the association becomes aware of the problem and does nothing, it can be liable for damage to surrounding units and health injuries to other residents.

Inspecting the Unit. A board might learn of a hoarder's presence when tracking down a water leak, looking for the source of insects or from complaints of foul odors. When such problems are traced to a particular unit, the association has a duty to investigate. All condominium CC&Rs have (or should have) an inspection provision allowing the association to enter a unit to inspect and repair the common areas surrounding a unit.

If the suspected hoarder grants access, the person making the inspection should be accompanied by a witness to guard against claims by the hoarder of harassment, theft, damage to property, etc. The witness can also help document (and testify to) the condition of the unit.

More often than not an inspection request will be denied. The person either knows he has an illness and wants to hide it or, worse, the sickness has reached a level where he is paranoid the association will steal his treasured possessions. If access is denied, a disciplinary hearing should be held and daily fines levied to encourage cooperation by the hoarder. If the hoarder continues to block access, a court order may be needed.

Public Agencies. If the inspection reveals health and safety hazards, the condition of the unit will need to be thoroughly documented (preferably with photographs). Demands can then be made to clean the unit. A hoarder's sickness will often prevent him from complying with the demand. At that point, city/county health services and the fire department should be contacted. Public agency documentation of the conditions in the unit will be useful if subsequent litigation is warranted.

Case Law. A hoarding case in Tennessee is instructive. The grossly unsanitary conditions and extremely offensive odors in a unit in the Windsor Tower Condominiums created a nuisance and posed a threat to the health and safety of other owners. One witness who had been allowed in the unit testified that "the odor was so strong and offensive that he had to cover his mouth and nose because it caused him to gag." There was testimony of "rotten food on floors and furniture, cabinets covered in rotting food, and a bathroom with a buildup of scum and urine." In addition, mold was growing on windows, walls and curtains.

The association became concerned about the airborne bacteria and mold circulating from the hoarder's unit into the building's shared HVAC system. After protracted unsuccessful attempts to resolve the problem, the association filed suit. The CC&Rs had a provision that allowed the association to take possession of the unit and sell it. Accordingly, the board sought judicial sale of the condominium.

The court ruled for the association. It held that a forced sale of the unit was appropriate because of "Ms. Harris’s continual denial that any odor existed, the Association’s repeated and generous efforts over more than a year to help remedy the problem, Ms. Harris’s continuing failure to remedy the situation, and the gravity of the nuisance created by Ms. Harris and its impact on the other residents." (4215 Harding Road HOA v. Harris.)

RECOMMENDATION: Because hoarding is an illness, associations cannot expect a quick, inexpensive solution when it discovers a hoarder in their midst. Accordingly, they should budget for extra legal expenses since court intervention will likely be needed to force resolution.

 
Adrian J. Adams, Esq. 

An Environmentally Responsible Move-Out List

Televisions—Just a few weeks ago, Best Buy announced that it’s dropping the $10 fee for recycling old TVs. Televisions and other electronic waste can’t be tossed in landfills, but not all e-waste recycling is actually environmentally safe. Some e-waste is shipped to developing countries where impoverished people break down and sort it without any environmental or personal safeguards, so I was very relieved to learn what happens to electronics after you drop them off at Best Buy.You’re not the only one making wish lists this time of year. Here’s one for your residents to check twice to make sure their next move-out is environmentally responsible. Or, should a tenant leave you with a move-out mess, this handy list will help you navigate the detritus responsibly. Thank goodness for security deposits.

1. Tires—Televisions, tires and mattresses all seem to be commonly dumped items in parks, alleys and on curbs. It’s no wonder: No matter where you live, these items usually cost a few bucks to properly dispose of them. The upside is that used tires can still be very useful. They may lose their treads, but they are nothing if not durable, which makes them excellent candidates for reuse in basketball courts, shoes and even as new tires.
2. Toxic household chemicals—Most homes contain something that the state or federal government considers toxic. These items – for obvious reasons – can’t be thrown away in the normal trash or flushed down the drain. Check local regulations to see which items are considered toxic in your area. Your state or local municipality web site can direct you to recycling locations.
3. Mattresses—Despite the fact that thousands of old mattresses get dumped in landfills every year, there are still very few recycling facilities available for this ubiquitous behemoth. If you have an unwanted mattress, first research local regulations about donations or disposal. Research 1800recycling or earth911 to find out if you are lucky enough to have a recycling option near you.
4. Household goods—From silverware and bedding to books and clothing, used household goods that are still in good working condition can go on to live another lifetime with someone else. Box up reusable items and deliver to a local charity. Or, if you have larger items like a dresser, table or sofa, request a pickup. These types of donations are often tax deductible, so be sure to ask for a receipt.

I used to think that placing unwanted household items on the curb with a “for free” sign was a resourceful way to keep things moving, but I’ve seen my fair share of soggy sofas left on the street. Unless you live in an area without rain, mist, fog, snow, floods or dogs who enjoy marking while on a walk, put your reusable household furniture to better use by connecting directly with a non-profit.

Finally, after the move, tenants can break down those moving boxes and put them out for the next recycling pickup. Or, if the boxes are still in good shape, they can be offered on craigslist.org to save a stranger the trouble of collecting their own.

What’s the oddest thing a tenant ever left behind?

SQUATTER'S RIGHTS
TO KEYS?

QUESTION: A longtime owner in her 80s recently died. Her son, a now and again resident and ne’er-do-well, is living in the unit. No maintenance fees have been paid since her death almost 6 months ago. The son is not on the deed and no probate has been filed. We are about to re-key the building. We will be giving keys to each owner of record. Our manager said we must give this squatter a key even though he has provided us with no documentation whatsoever because he is a “resident.” Do we have to give him a key?

ANSWER: Your manager is right. Both under the Davis-Stirling Act and landlord-tenant laws, an association cannot block access to the unit. As provided in the Davis-Stirling Act:

Except as otherwise provided in law, an order of the court..., an association may not deny an owner or occupant physical access to his or her separate interest, either by restricting access through the common areas to the owner's separate interest, or by restricting access solely to the owner's separate interest.(Civ. Code §1361.5.)

Landlord-Tenant. A similar provision can be found in landlord-tenant laws (Civ. Code 789.3(b)(1)) which includes penalties up to $100 per day if a landlord locks out a tenant. Even though your association does not own the unit, California courts have analogized associations to landlords and held them to the same standards. (Frances T v. Village Green.) If you re-key the building and refuse to provide a key to the ne'er-do-well, you would be locking him out of his mother's unit. Whether or not he has a legal right to occupy the s unit is something for the courts to decide, not the board of directors.

Police & Courts. Calling the police to escort the son off the property is not an option since it is a civil matter not criminal and the police will refuse to get involved. Going to court to evict the son via an "unlawful detainer" action will also fail since the association is not the owner of the unit. In short, your HOA has all the liabilities of a landlord but none of the rights.

RECOMMENDATION: Your best bet is to lien the unit for delinquent assessments and foreclose. However, giving proper notice to the mother will be problematic (unless you know where she is buried). You will need to work with legal counsel to pursue the foreclosure.

NO DOGS ALLOWED!

QUESTION: Can the board make a rule not allowing dogs on common area grass?

ANSWER: I suppose they could but that would likely provoke a recall petition the next day. If someone were to challenge the rule in court, the board will have the burden to convince a judge the rule is reasonable. I would not bet the farm on that one. If the board is concerned about dogs relieving themselves on the grass, there are better ways to deal with the problem--fines, suspending privileges and tasers come to mind.

COST OF HOA
REMODEL PROJECTS

QUESTION: Are members of an association entitled to know the costs of a remodeling project or is this confidential? 

ANSWER: If you mean your neighbor's remodel project, no. If you mean the common areas, you have a right to review (i) contracts approved by the board for the remodel project, (ii) monthly financial statements that would reflect HOA expenditures, and (iii) financial records such as invoices and checks. (Civ. Code §1365.2(a)(2))

WHO CAN 
CHANGE THE RULES?

QUESTION: Some owners insist that if we do not enact a rule they want, they will force the board to send a ballot to the membership for a vote. Can they force the board to place a rule change on a ballot or does it stop at the board level?

ANSWER: It stops at the board level. Only the board has the authority to adopt and amend rules. (Civ. Code §1357.130.) Members can, however, veto a rule if they follow the steps described in Civil Code §1357.140 but that is the extent of membership authority (unless the governing documents state otherwise). Although members can petition for a special meeting for any lawful purpose (Corp. Code §7510(e)), forcing a ballot to add or change rules is not within their authority. Indirectly, members can change the rules by electing board members who agree with their position.

MEMBERSHIP MEETING
MOTIONS

QUESTION: A ballot requesting a bylaw amendment is mailed to the membership prior to the annual meeting. At the annual meeting, ballots are counted and it is announced that the proposal failed. Can an amendment to the original proposal be offered at that time if a quorum is present?

ANSWER: If you mean revise the failed amendment and put it to a vote on the spot? No. The only thing you can do is have a show of hands on a recommendation to the board to send a revised amendment to the membership. If the board agrees, they can mail out a new amendment together with a ballot for approval. The reason the failed amendment cannot be revised and approved on the spot is that voting must be by secret ballot with a minimum 30-day voting period. (Civ. Code §1363.03(b)&(e))
 

Adrian J. Adams, Esq. Adams Kessler PLC

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