December 2008
A Journal for California Community Association Leaders
echo-ca.org
The Disclosure Trap
ALSO INSIDE THIS ISSUE:
• When Condos Become Obsolete • Collections in an Economic Crisis • 2008 Article Index
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Contents
When Condos Become Obsolete page 14
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The Disclosure Trap Are you a member of an association board that has not done the property inspections required by DavisStirling and made the required disclosures to your membership? This article relates the consequences to one association and its board for following such a path. As a board member, you may not be willing to underwrite such a liability so that the members can underfund their association.
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When Condominiums Become Obsolete Evidence suggests that the political will of its members and their financial condition have a far greater impact on the useful life of a common interest development than any other factor. Anyone who has an investment in a common interest development needs be aware of this fact.
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Assessment Collection in an Economic Crisis California law affecting non-judicial and judicial foreclosure of assessment liens can be complex. Recent legislation illustrates a governmental policy favoring the resolution of many assessment disputes in Small Claims Court. This, coupled with reduction of property values and equity brought on by the current economic crisis, can make Small Claims Court an efficient way to collect assessments.
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2008 Article Index
Departments 23 News from ECHO 28 Directory Updates 34 ECHO Bookstore
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36 Calendar of Events 38 ECHO Volunteers 38 About ECHO 41 ECHO Marketplace 41 Advertiser Index
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Executive Council of Homeowners, Inc. 1602 The Alameda, Suite 101 San Jose, CA 95126 408-297-3246 Fax: 408-297-3517 www.echo-ca.org info@echo-ca.org Office Hours: Monday–Friday 9:00 a.m. to 5:00 p.m.
Board of Directors and Officers President David Hughes Vice President Karl Lofthouse Treasurer David Levy Secretary Dorothy Kopczynski Directors Paul Atkins John Garvic Diane Rossi Richard Tippett Steven Weil
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On the Cover The Disclosure Trap 4
December 2008 | ECHO Journal
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.
Don’t be left in the dark.
One of the major sources of unnecessary litigation is ignorance of the law. 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 educational material, events and advice. 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 email 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. Make Prudent 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. Spend a Little for 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 monthly 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 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 lose.
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December 2008 | ECHO Journal
By David West
The Disclosure Trap mood of the members is somber as the Ttheheboard meeting gets started. Four months ago board finally decided to investigate complaints of leaks around the sliding glass doors and loose balcony railings. The engineers’ report calls for removal of the stucco, replacement of windows and balconies. Management reported a preliminary estimate of $3,000,000. The reserve balance is $240,000. The board is in shock, and tempers are short. Sally, the manager for the last five years, starts her report. Mr. Smith, the board president, interrupts, wanting to know who is responsible.
Without waiting for an answer, he asks Sally why she didn’t discover this problem, concluding with “After all, you are the professional.” Sally takes a deep breath, expecting this reaction. Trying to remain calm, she recalls an article she’d read in the ECHO Journal and reminds the president that her management contract did not obligate her to conduct the level of professional investigation to discover the conditions now facing the association.1 1 “The Duty to Inspect,” by David West, ECHO Journal, June 2008.
ECHO Journal | December 2008
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454 So. Airport Blvd. South San Francisco CA 94080
After the five-minute eruption, Mr. Smith regains both his composure and control of the meeting. “OK, what can we do? Will our insurance cover this?” Without waiting for an answer, he continues by noting that the defective conditions didn’t just occur; “Can we sue the past boards?” he asks. Quietly Sally responds: “Insurance is a not a bank account; the policy will not fund reserves or pay for ordinary wear and tear. It is for catastrophic or unforeseen events, such as storm damage to property. In addition, the liability policy won’t cover the claim because no suit has been filed by the association and because the damage is to property owned or maintained by the association. The board could authorize the association to sue past directors but their defense would probably not be covered by the directors and officers insurance, which has exclusions for property damage and requires the insurer be put on notice of claims when first made. And, if the lawsuit wasn’t covered by insurance, the prior directors would, if they acted in good faith, be entitled to indemnifications from the association; so it would be like the association suing itself.2 Unfortunately, this is our problem.” The meeting adjourns amid some turmoil and the abiding resignation that the board will have to raise the $3,000,000 either by special assessment, loan or a combination of the two. Sally has been assigned the task or researching the loan option. During the following week, Sally talks to representatives of banks that lend to associations. She learns that a usual underwriting requirement is that associations have a strong accounts receivable; this will be a problem for the association. Of its 50 members, two are in foreclosure and four others are seriously in arrears. Sally learns that a loan might be available for half of the needed $3,000,000 assuming at least half of the delinquencies are cured and the members approve the special assessment necessary to repay the loan. It may be tricky, but Sally thinks she can craft a solution to funding the construction. The big question is whether the members will authorize the special assessment. OK, we are fast-forwarding six months. Sally and the board cobbled together a deal 2 Under a recent case, Ritter v. Churchill, cited as C.D.O.S. 11192 (2008), the California Court of Appeals muddies the extent of indemnity to which a director is entitled (directors were responsible for their own legal fees).
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with a bank for $1,500,000 and convinced the members to approve an initial 23 percent increase in regular assessments and special assessments totaling the other $1,500,000. The special assessment was due two months ago, and the increase in regular assessments will start in three months.
Civil Code section 1365(a)(3)(A) provides that the board will disclose any repairs that are unfunded. The board meeting begins and the directors are again in a somber mood. Sally’s management report includes a letter from Mr. Brown, the attorney for Mr. Jones. The attorney’s letter states that Mr. Jones would not pay his special assessment or that part of the increase regular in his assessment occasioned by the bank loan/construction problem. Sally begins with the very difficult task of explaining Mr. Jones’ position and what this means to the board. “Mr. Jones contends that the board breached its duty. Mr. Jones purchased his unit 14 months ago. In all the documents presented for his review, including the budget summary, there was no mention of the need for money required to fix our project. The letter cites Civil Code section 1365(a)(3)(A), which provides that the board will disclose any repairs that are unfunded or for which there is no plan to do the work. The letter states that the purpose of section 1365(a)(3) was to protect buyers and owners alike and requires complete documentation of the financial liability of the members.” Sally pauses and looks around. Finally, one board member asks the question. “But we are all in this together. One person cannot just opt out. If one person doesn’t have to pay, then no one will pay.” Sally slowly begins to recount her conversation with the association legal counsel as she distributes his letter. “Basically, section 1365(a)(3) created both a new standard and a new problem. The concept of the law (effective January 2007) is to require the association to disclose to buyers and members both known liability as reflectECHO Journal | December 2008
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ed in the pro forma budget and major components the board decided to defer or not repair or replace. The buyer may consider all aspects of the investment prior to purchase. Because the association failed to investigate the condition of the buildings and the assessments result from that failure, Mr. Jones argues that he is indemnified from the consequence of the board’s failure (the assessments). He may have a point. Our lawyer estimates $2,500 to do the research and render an opinion. The research required would be to review all prior disclosures, confer with the association’s reserve study preparer, review minutes of prior board and membership meetings and look into other documents.” Sally continues by reporting that there are four other members who purchased units since the law took effect and who might make the same argument. What a story! This is a real cliffhanger. Will Sally and the board make it out alive after the members find out about this? We can worry about that later. Let’s first look at this problem.
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In a previous article (see footnote 1), we argued that the association, and thus the board, has the primary responsibility to investigate the condition of the building even if they contract away that duty. And even if the board contracts with management or an outside service, the association still has the disclosure responsibility. However, if the board relied on professionals to conduct studies and prepare reports and those professionals fail to identify defects, then those parties will bear some, if not most, of the liability. Sally’s board did not contract for these professional services, not even through the management contract. The association has the full liability. And now Mr. Jones’ argument. Pretty wild, right? He is saying that because the disclosure was deficient, he is not responsible for payment to correct the undisclosed liability.
That liability is his share of the cost of replacing the balconies, sliding glass doors and stucco (plus, of course, any damaged framing or other components). Mr. Jones’ portion of that liability is estimated at $60,000, and there are three other members with ostensibly the same right. That means that the other 46 members must pay this $240,000. That works out to $5,200 each for these 46 owners. Doesn’t sound fair, right? Well, let’s look again at Civil Code section 1365(a)(3), enacted to protect the buying public and help members get information about their investment. With the budget, the board will also produce the Assessment and Reserve Funding Disclosure Summary, a disclosure required by the Civil Code. This document reasonably requires a detailed disclosure of the association’s financial liabilities and the funding plan for the next five years. It was the intent of this section that purchasers and homeowners would be able to evaluate the financial condition of the association easily and quickly. In 2006, the Legislature added the section that requires statements of four conditions, the most important for our consideration being subsection (A): “Whether the board of directors of the association has determined to defer or not undertake repairs or replacement of any major component with a remaining life of 30 years or less, including a justification for the deferral or decision not to undertake the repairs or replacement.” The other three ask whether the board anticipates a special assessment (B), the method of funding reserves and a loan disclosure. Quite clearly, Mr. Jones has focused on this section. No one told him of the deferred maintenance. It is apparent that the association did not reserve for replacing the balconies, sliding glass doors or siding—there were no such reserve line items and thus no plan to fund for these replacements. Looks like Mr. Jones has a point. He also doesn’t have many options. Unlike rental property, Mr. Jones has no legal basis to withhold his assessment. He could ask for Alternative Dispute Resolution, but the board could not forgive payment of his assessment. The association’s attorney noted that under Park Place Homeowner’s Association v. Naber (1994) 29 Cal. App. 4th 427 assessments are independent of any counterclaims: there is no right of offset. A member may seek damages through ADR or a court action, but the board cannot waive any assessment. For that the member must file a separate action. ECHO Journal | December 2008
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So back to the board meeting. With what is painfully becoming second nature, Sally takes a deep breath and outlines the problem in greater detail. Since Mr. Jones has not paid the special assessment (due two months ago) and has only put forward his argument, the association has no choice but to follow the Delinquent Assessment Collection Policy. Management already issued the pre-lien letter. Lawyer Brown, the attorney for Mr. Jones, recognized in his letter that the board cannot forgive a member’s obligation to pay an assessment; the purpose of the letter is to give the board the opportunity of finding a solution. He will file the lawsuit when the lien is filed next month.
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A tense month passes. Lawyer Brown filed and served the lawsuit on Mr. Jones’ behalf, seeking relief from the debt. The board has again gathered in executive session with the attorney and insurance broker (wow, they are spending a lot of time and paying management and others big bucks for their extra time). Over the months, the mood has gone from somber to gloomy. One board member quit, and two others plan to announce their resignation tonight. No one else wants to serve. Sally’s concern is that when the lawsuit is announced the other members will seek to either join Mr. Jones or file their own lawsuit. This could be a huge catastrophe for the association and for the board. No wonder board members want to quit. Sally announces her plan: file the claim with the association’s D&O carrier. She briefly talked to the insurance broker who thought there might be an outside chance of coverage but noted that CID carriers normally do not cover assessments. Steve, the association’s attorney, recapped the association’s position. There was simply no way the board could forgive either the assessment or the filing of a collection action. Now that Mr. Jones filed a lawsuit, the board
has no option other than defend. ADR is an option open to Mr. Jones; the board cannot demand ADR. Jack, the association insurance broker, outlined the insurance options. There are essentially three scenarios: board versus board, which we already considered (no coverage if the current board sues a previous board); owner versus board; and board versus owner. In the event that an owner sues the board or the association, there is almost always coverage based on a duty to defend. This ‘duty to defend’ means that the insurance company will hire an attorney to defend the board or association but may reserve the insurance company’s right to reimbursement if the board or association clearly breached their duty to the owner. The present situation, Jack continued, will be more likely construed as board-initiated, the third scenario, under which the company will probably ultimately deny coverage. After all, the board initiated the collection action.3 Steve discussed the nature of Mr. Jones’ claim and the underlying law, concluding 3 Ibid
that, more than likely, the insurance company will deny coverage because the board and the association breached its disclosure obligation. Once that breach occurred, there is no recovery. The only defense may be to try to prove that these buyers should have known of the condition as mitigation. “Based on what Jack said, it is doubtful that the insurance company will tender a defense, and if they do, it is likely they will find that the board breached its duty and no coverage is owed. Additionally, if the insurance company initially provides coverage they will choose the attorney.” The board directed Steve and Jack to meet with the insurance company and their underwriter, which they did. At the end of the meeting, all were clear that the insurance company would eventually deny coverage. Wow, what a story. The insurance company concluded that the board failed to exercise reasonable care and thus breached their duty to the association. We are not going to get into whether the directors have personal liability (outside the safe harbors of Civil Code section 1365.7 and Corp. Code section 7231), but this is an interesting discussion.
Needless to say, by their failure to inspect (or have others inspect) the property they agreed to care take, these well-intended board members have not only disgraced themselves but also put themselves and the association in harm’s way. This is a terrible story. Is it possible, you ask? Check the references, think about the situation, ask your attorney and then decide. It would be far better to recognize that this story is avoidable: hire a professional to inspect your property thoroughly at least once a year. Be clear on just whose money you are saving. In the lawsuit, each board member could be responsible for not only his or hers legal defense but also the underfunded assessments. If you are a board member, are you willing to underwrite this liability just so that the members can underfund the association? Maybe not.
David West is the managing shareholder in West Management Company, Inc., an ECHO member. He has been in the CID industry for 22 years and real estate 33 years. He holds a law degree from JFK University and is also a shareholder in West Construction and Maintenance Company, Inc. ECHO Journal | December 2008
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By Tyler P. Berding, Esq.
When Condominiums Become Obsolete What Determines the Lifespan of a Common Interest Development?
“O
bsolescence” is the process by which something loses its value and relevancy, usually due to being supplanted by a better product or changes in its environment. Several times we have written about our concerns for the impact of that process on common interest developments.1 1 Berding, “The Uncertain Future of Community Associations” 2005; Berding, “Predicting the Future of Community Associations,” 2008.
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First, let’s realize that the obsolescence of most common interest developments, as with other man-made structures, is inevitable. It can’t be stopped; it’s simply a matter of time. If you doubt that, ask yourself how many residential buildings that you know have lasted, say 100 hundred years or more. Look around and you’ll see only a few buildings that have survived the century mark—public monuments, and buildings that have historic worth
or intrinsic value due to their unique location or architectural style. Most others have been replaced with newer structures. A building reaches the end of its service life when it is no longer economically viable in its present condition. Examples are: an apartment house so run down that the rents it can obtain from tenants will no longer sustain the maintenance necessary to keep it safe and habitable; a commercial structure in
a neighborhood that has too much crime to allow business to be conducted normally; and, single-family homes in a deteriorating neighborhood that cannot sustain their value and are not a desirable place to live. Another example, and one we have discussed before, is a low-density, multi-family complex with enough land to accommodate higher densities, where the value of the land alone begins to approach the value of all of the interests of
the existing development—values depressed, perhaps, because the complex is reaching the end of its economic service life.
tain market value as a single-family home, or where their value as rental property justifies their continued use.
Delaying the Inevitable
In cities where that was not the case, they have been removed and replaced with larger, multi-family, or commercial structures. In the city of Alameda, for example, there are many beautiful old Victorian homes. But there were many more 40 years ago. Developers began buying these old homes, situated on
Location and style can preserve a home that has otherwise outlived its economic usefulness. Look at the many Victorian homes in the San Francisco Bay area. Those buildings, all built in the late 1800s, survive today because they are located where they can sus-
ECHO Journal | December 2008
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large lots, in the 1960s and replacing them with apartments. Several hundred were lost in this process until the voters halted the destruction. But this was political, not economic, intervention. Left to market forces alone, most would have been replaced with multi-family structures by now. Other structures survive because they have public importance, like our government complexes, or buildings that have been preserved because of their historical value. But again, these structures have been saved through government or political intervention. Economics alone would not justify their survival.
Historical preservation usually favors singlefamily homes, or unique commercial or public buildings.
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December 2008 | ECHO Journal
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Most community associations can lay no claim to such importance, either historically or because the neighborhoods in which they are built are not unique. Also, historical preservation usually favors single-family homes, or unique commercial or public buildings. Apartment buildings have no such government or public support, and neither will common interest developments. So again, obsolescence is inevitable for most community associations. The only question is how long will it take? The normal economic “service life” of a building depends on several independent factors—the materials used in construction, the quality of maintenance, neighborhood conditions, and its fitness for the use for which it was intended in the neighborhood, to name a few. Obsolescence Usually Leads to Redevelopment There used to be single-family homes in the financial district of San Francisco—125 years ago—but the neighborhood changed dramatically to commercial uses and the onefamily home became obsolete because that same plot of land could be used for an office building, a multi-family residential building, or could be combined with other plots to
build a manufacturing plant, or as it turned out, high-rise office buildings—all with greater economic rewards to their owners. Without government intervention for political reasons, properties left to the open market will develop into what’s known to city planners as the “highest and best use” and that usually means replacing smaller buildings with larger ones or residential buildings with commercial structures. We have seen redevelopment go in reverse—where a former industrial site is redeveloped into a residential development, but that usually includes various mixed uses to go along with the homes—retail, offices, public structures like schools—so that the economic value of the replacement exceeds that of the old structures. But mostly, smaller, lower density residential structures will be replaced with “higher and better” uses. The Variables that Influence Service Life What influences the service life of a common interest development? Many of the same factors as with other buildings—quality of construction, the adequacy of maintenance, a changing neighborhood; or newer buildings built nearby. But in the short term, the condition of the buildings is the primary factor—the result of construction quality and maintenance—which is in turn impacted by the owners’ willingness to invest the resources necessary to maintain it properly. An independent variable—the status of the neighborhood—is probably beyond the control of the typical community association. But the primary dependent variable, funding for maintenance, is squarely within the power of the owners to influence, and the ability of the association to maintain the project adequately is heavily influenced by that. If a complex is maintained properly, it might influence the neighborhood around it. And if the need for housing in that neighborhood remains unchanged for many years, and if values stay high, the community association may co-exist and thrive for a long time. But our research has shown that this can be undermined by the gradual underfunding of adequate maintenance and repair resulting from the unwillingness of the owners to tax themselves to pay for it.2 The Funding Problem The board can only do so much. If it brings the need to raise additional funds to the membership and it is defeated, the direc-
tors can ask themselves if they adequately explained the problem or if they sufficiently researched the costs and the projected need for additional funding. But in the end, it is up to the members unless the board is willing to antagonize them by raising the assessments 20 percent over the prior year without a vote or imposing a 5 percent special assessment whenever it is needed. The board of directors can do this,3 but the adverse political consequences may, and often do, dissuade them.
When a common interest development deteriorates to the point that basic safety and habitability are called into question, the local government authority must act either to force the owners to repair it or, failing that, to close it down. We have seen such instances in complexes that were only a few decades old so we know that it can happen, and easily within our lifetimes. Also, once that deterioration spiral starts, it can increase with exponential speed as the condition begins to reflect poorly on the market value of the individual interests such that units will become impossible to sell and the owner’s interest in providing additional economic support will wane accordingly.
Also, the economy can have a grave impact on funding. When the instances of foreclosure rise, so does the rate of assessment delinquencies, further exacerbating the funding problem. Association politics and the economy are therefore critical issues that directly influence the fiscal health of an association and its probable life expectancy. If we use funding adequacy to assess the probable service life of a common interest development then, we can clearly see that many will fail for lack of adequate financial support in the coming years. Whether that will be 50, 75 or 100 years depends almost entirely on the will and economic wherewithal of the owners. There are many associations approaching 40 years old and beyond today and that pop-
3 California Civil Code Section 1366 2 Berding, “The Board’s Dilemma,” 2008
ulation has increased dramatically with the recent addition of hundreds of condominiums converted from older apartment buildings. Further, the assessment delinquency rate is higher now than at any time in many years. The California Civil Code requires that an association’s replacement reserve budget must include any component that has a service life of 30 years or less.4 Can a forty yearold building last another 30 years? In some cases yes, but how many developments can be expected to last a total of 70 years? At what point does the entire development become a reserve component?
4 California Civil Code Section 1365.5
All of this suggests that the political will of the members and their individual financial condition will have a far greater impact on the useful life of a common interest development than any other factor. If they are not convinced that funding the association for future costs is worthwhile, the board’s ability to respond to the factors promoting obsolescence will be cut off. Perhaps this is just good economic theory in action. But if so, then many of our community associations will eventually be recycled into something with greater utility. Anyone who has an investment in a common interest development must be aware of this, because the profit earned through redevelopment is, at least in part, the value lost by prior owners.
Tyler Berding is a founding partner of Berding & Weil, LLC, a community association law firm located in Alamo, CA. He has taught real estate and community association law at California State University East Bay and is the immediate past president of ECHO. He is a frequent contributor to the ECHO Journal. Questions or comments can be directed to him at www.berding-weil.com or www.condoissues.com. ECHO Journal | December 2008
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December 2008 | ECHO Journal
By Paul W. Windust, Esq.
Assessment Collection in an Economic Crisis alifornia law affecting non-judicial and judicial foreclosure of assessment C liens can be complex. Recent legislation illustrates a governmental policy favoring the resolution of many assessment disputes in Small Claims Court. This, coupled with reduction of property values and equity brought on by the current economic crisis and real estate meltdown, can make collection in Small Claims Court an efficient (if not the most efficient) way to collect assessments. Statutory Assessment Collection The standard method of assessment collection employed by community associations follows the procedure set forth in the Davis-Stirling Act (Civil Code §§1350 et seq), concluding with a non-judicial foreclosure sale. Under this method, a community association writes to the delinquent owner and ECHO Journal | December 2008
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requests payment of past due assessments. If the informal letter is unsuccessful, the association typically engages a collection agency to pursue collection of the account. The collection agency prepares and mails via certified mail the statutorily required pre-lien notice, which usually includes an offer to “meet and confer.” At least thirty days later, if the account remains unresolved, the board of directors will meet and decide whether to authorize the agency to record an assessment lien against the delinquent owner’s property (a “unit” in a condominium project or a “lot” in a planned development).
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If the account remains unpaid 30 days after recording of the assessment lien, the association is free to enforce the lien in any manner permitted by law, including sale by the court (by bringing a lawsuit for judicial foreclosure), or sale by the trustee designated in the notice of delinquent assessment (without going to court via a non-judicial foreclosure). In the non-judicial context, the sale is handled pursuant to the statutory procedure for non-judicial sale of a mortgage or deed of trust (i.e. the process used by banks foreclosing on delinquent mortgage payments). Under this procedure, the trustee records a Notice of Default that triggers a ninety-day period before which a Notice of Trustee’s Sale can be recorded. If the account remains unresolved after ninety days, the trustee can then record a Notice of Trustee’s sale setting forth the time and place of the sale. If the sale occurs, and no one outbids the association, the trustee executes a Certificate of Sale putting title of the property in the name of the association. Completion of the sale commences a 90-day right of redemption period under which the (now former) owner has the right to regain title to the unit provided he or she pays the association the delinquent assessments and foreclosure charges owed. If the owner fails to redeem, the association receives a Trustee’s Deed to the property. Importantly, the association’s ownership is subject to existing debt secured against the property, including the first mortgage and deed of trust. Under this process, the goal of the association is to have the owner pay the delinquent assessment or risk losing the unit, including its equity. Equity is calculated by taking the fair market value of the unit and subtracting Continued on page 22
20
December 2008 | ECHO Journal
Assessment Collection Continued from page 22
all recorded and outstanding liens recorded against the unit. For example: Unit fair market value First Mortgage to ABC Bank Second Mortgage to XYZ Bank Assessment Lien and costs Equity
$350,000 ($200,000) ($50,000) ($5,000) $95,000
The prospect of losing $95,000 in equity is the driving force that motivates the owner to pay the delinquent assessment before the non-judicial sale occurs. This is the association’s desired result. Further, the opportunity to obtain a property, and its equity, for a relatively nominal amount (the unpaid assessment and the association’s foreclosure costs) provides an incentive for third parties to attend the sale and bid at the non-judicial foreclosure sale, thereby completing collection of the delinquent assessment. The right of redemption reduces somewhat the marketability of a property because a third party bidder takes the property subject to the owner’s right to regain title. However, to 22
December 2008 | ECHO Journal
redeem the unit, the foreclosed owner would need to pay the third party bidder the amount paid at the sale to acquire the unit. During the right of redemption period, neither the association nor the successful bidder may evict the (now) former owner.
The prospect of losing equity is the driving force that motivates the owner to pay the delinquent assessment. A successful bidder at a non-judicial foreclosure sale, be it the association or a third party, acquires the unit subject to all senior liens. This means that the successful bidder will need to either assume the loans relating to the senior liens, or pay them off. If the obligations owed to the senior lien holders
go into default, through non-payment or otherwise, the party that acquired the unit at the non-judicial foreclosure sale faces the same fate as the delinquent assessment owner. Assessment Collection in the Current Environment In the scenario described above, the association’s leverage lies in the fact that the property has equity and it is that equity that is the “target” of the foreclosure. This leverage is lost, however, if the property has little or no equity. This is the issue faced by many associations in today’s economic climate and falling property values. The statutory method of assessment collection is no longer an attractive option to resolve delinquent assessments. Many times, an owner will stop paying maintenance assessments but continue to service the mortgage debt on the property. Nonjudicial foreclosure of an assessment lien will not motivate this owner to pay the delinquent assessments because he has no equity to protect. Here, an association is saddled with an owner that refuses to pay his assessments with only the unattractive option of Continued on page 24
News from ECHO
What Determines the Lifespan of a Common Interest Development? “Obsolescence” is the process by which something loses its value and relevancy, usually due to being supplanted by a better product or changes in its environment. The obsolescence of most common interest developments, as with other man-made structures, is inevitable. It can’t be stopped; it’s simply a matter of time. If you doubt that, ask yourself how many residential buildings that you know have lasted, say 100 hundred years or more. Look around and you’ll see only a few buildings that have survived the century mark—public monuments, and buildings that have historic worth or intrinsic value due to their unique location or architectural style. Most others have been replaced with newer structures. Most community associations can lay no claim to such importance, either historically or because the neighborhoods in which they are built are not unique. Apartment buildings have no such government or public support and neither will common interest developments. A building reaches the end of its service life when it is no
longer economically viable in its present condition. Examples are: an apartment house so run down that the rents it can obtain will no longer sustain the maintenance necessary to make keep it safe and habitable, or single-family homes in a deteriorating neighborhood that cannot sustain their value and are not a desirable place to live. Another example is a low-density, multifamily complex with enough land to accommodate higher densities, where the value of the land alone begins to approach the value of all of the interests of the existing development—values depressed, perhaps, because the complex is reaching the end of its economic service life. All of this suggests that the political will of the members and their individual financial condition, will have a far greater impact on the useful life of a common interest development than any other factor. If its owners are not convinced that funding the association for future costs is worthwhile, the board’s ability to respond to the factors promoting obsolescence will be cut off.
Assessment Collection in an Economic Crisis California law affecting nonjudicial and judicial foreclosure
of assessment liens can be complex. Recent legislation illustrates a governmental policy favoring the resolution of many assessment disputes in Small Claims Court. This, coupled with reduction of property values and equity brought on by the current economic crisis and real estate meltdown, can make assessment collection in Small Claims Court an efficient (if not the most efficient) way to collect assessments. Instead of the more usual non-judicial foreclosure procedure for assessment collection, a better approach in the current market might look like the following: 1. The association discovers that a particular unit has failed to pay assessments and issues its informal demand that the assessment account be brought current. 2. Following the association’s collection policy, the association refers the account to its collection agency for preparation of a statutory pre-lien notice letter. 3. After 30 days, the collection agency reports that the account remains unpaid; the board of directors resolves at a regularly noticed meeting to record a Notice of Delinquent Assessment—an assessment lien. The association now has a lien on title and is secured to the extent the unit has any equity. (As an alternative to numbers 2 and 3, the association’s management company or its counsel may be authorized to send the demand letter and record the lien.) 4. The board then obtains information to determine if the
property has equity. If not, foreclosure is not pursued. Instead, the association files an action in Small Claims Court (less than $5,000) or Superior Court (greater than $5,000) to obtain a money judgment for the unpaid amount. The Court enters a judgment against the owner for the amount owed as of the date the judgment is entered. 5. The association may enforce the money judgment against assets of the owner by garnishing wages, attaching bank accounts, or any other legal method. 6. In the event the owner is foreclosed on by his or her lender, the assessment lien is extinguished. However, the assessment debt remains enforceable and the association may file a civil lawsuit against the now former owner.
Important Upcoming Events Thursday, January 15 San Francisco Luncheon 11:45 a.m. St. Francis Yacht Club, San Francisco Saturday, January 31 Marin County Seminar 7:30 a.m. to 1:30 p.m. Embassy Suites Hotel, San Rafael ECHO Journal | December 2008
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Assessment Collection Continued from page 22
non-judicial foreclosure. The owner remains in the unit or lot, using his or her share of common area amenities and benefitting by association purchased services (including management and insurance), but failing to contribute his or her assessment dollars for these amenities and benefits. Consider the following example: Unit value at purchase: Unit current fair market value First Mortgage to ABC Bank Second Mortgage to XYZ Bank Assessment Lien and costs Equity
$350,000 $250,000 ($200,000) ($50,000) ($5,000) ($5,000)
Here, the association’s lien attaches to nothing because there is no equity in the unit to secure it; the association is an unsecured creditor. Essentially, the association has not improved its position vis-a-vis the delinquent owner by recording the assessment lien. If the association completes a nonjudicial foreclosure sale, it will obtain title to a unit worth $250,000 but encumbered with 24
December 2008 | ECHO Journal
senior liens for $250,000; the association obtains nothing. Likewise, because there is no equity in the unit, third parties have no incentive to bid at the sale. Further, now the association will have to incur the expense of insuring the unit and evicting the occupant.
Because there is no equity in the unit, parties have no incentive to bid at the sale. Worse, if the association does not service the senior mortgages, it will foreclose, leaving the association with nothing other than an obligation to pay collection and foreclosure charges. In other common situations, the owner cannot pay his mortgage lender, which forces
the lender to foreclose to protect its own equity position. If the association recorded an assessment lien, it is likely junior to the mortgage lien and will be wiped out when the senior lender forecloses. In this situation, the property is no longer available to collect the assessment. Many times, associations assume that once their assessment lien is wiped out, they can no longer collect the delinquent assessment and so will write off the debt.1 This assumption is in error. Under California law, the obligation to pay assessments is the debt of the owner and it is personal to him or her. The ability to lien and foreclose is merely an enforcement 1 The term “write off” is an accounting term used to describe the accounting function of recognizing that an account receivable can no longer be considered an asset of the corporation. To accurately report the association’s financial condition on a balance sheet, the association must write off the delinquent assessment and recognize it as uncollectible. That does not mean, however, that the association is prevented from legally enforcing the debt.
Continued on page 26
Assessment Collection Continued from page 24
technique. If an owner is foreclosed by his or her lender, wiping out the association’s assessment lien, the now displaced owner still owes the association the amount of the delinquent assessment. Even though the unit is no longer available for collection, the owner may have other assets (a job, a bank account, brokerage accounts, a car) that the association may look to for collection. Assessment Collection Emphasizing Collection against Owner’s Other Assets An owner’s other assets can be made available for assessment collection by filing a civil lawsuit, either in Small Claims Court or in Superior Court. The object of such a lawsuit 26
December 2008 | ECHO Journal
is obtaining a civil money judgment for the amount of the delinquent assessment, late charges, interest, collection costs, and attorneys’ fees. These judgments are relatively easy to obtain and are enforceable for ten years. Further, they can be renewed for another ten years if unsatisfied. Of particular note, judgments can be recorded with the county recorder to create a judgment lien. This lien can attach to after-acquired property. In other words, the association can obtain a lien on real property that the delinquent owner may own in the future. Assigning Judgments for Money based on Non-Payment of Assessments Under California law, judgments are tantamount to a judicial contract between the
plaintiff and defendant and are freely assignable. In other words, an association can sell the judgment (usually at a discount) to an investor or collection agency that may be willing to track down the debtor-owner to collect the judgment amount. Hypothetically, an association can obtain a small claims judgment against a delinquent owner for $5,000. It can then sell that judgment to an investor for $0.20 on the dollar—recovering $1,000 to meet its current operating needs. For large associations, the ability to bundle up many judgments for sale may be an untapped source of revenue needed to fund operations. Significantly, assessment liens are very different from other types of real property liens. Under Civil Code §1367.1(g) an association
may not “voluntarily assign or pledge the association’s right to collect payments or assessments, or to enforce or foreclose a lien to a third party...” There is an exception to this rule when the association assigns or pledges the right to collect or foreclose to a financial institution or lender as security for a loan obtained by the association. Another exception permits the association to assign any unpaid obligation of a former member to a third party for collection. In other words, once a delinquent owner is foreclosed and no longer a member, the association is free to sell or assign the obligation to a third party. What about a situation where the association obtains a small claims judgment against an owner that is still an association member? Can it still sell or assign the judgment? There is no California case that analyzes this situation. An aggressive reading of Civil Code §1367.1(g) suggests that it can. Subparagraph (g) prohibits assignment of assessment liens, not judgment liens. An assessment lien is created by an association board of directors without judicial oversight. A judgment lien, on the other hand, arises from a judgment entered by a court with jurisdiction over the parties and after review of the evidence presented. Therefore, an argument can be made that subparagraph (g) does not prohibit assignment or sale of a judgment lien arising from a money judgment for unpaid assessments. Another unique feature of assessment obligations is that they are exempt from California’s “one action” rule. Under this rule, the recovery of a debt or the enforcement of any right secured by real property must occur by a judicial foreclosure action. In other words, the one action rule compels a creditor to seek judicial foreclosure of a debt secured by real property. Enforcement of an assessment lien is exempt from this rule. This means that an association may record an assessment lien, and then proceed to civil court and obtain a money judgment for the delinquent assessments. This is an important right because it allows the association to make its claim for the delinquent assessment on the property itself, thereby ensuring payment in the event the unit is sold or re-financed. To the extent the unit has any equity, the association is secured. However, if the association determines that the unit does not have sufficient equity to
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2008 2:35:17 27 ECHO Journal | December 4/23/08 PM
Directory
UPDATES Updates for listings in the 2008 ECHO Directory of Businesses and Professionals.
Changes to Member Listings Community Association Banc 1534 North Moorpark Rd., # 306 Thousand Oaks, CA 91360 Contact: Lisa Ann Rea Tel: 805-907-8452 Toll free: 866-800-4656, ext. 7500 Fax: 602-636-7145 Email: lrea@cabanc.com MB Homeownersâ&#x20AC;&#x2122; Management, Inc. 1210 Bascom Avenue, Ste. 220 San Jose, CA 95128 Address change only Tel & Fax remain the same Reliable Association Management, Inc. P.O. Box 160223 Sacramento, CA 95816-0223 Address change only Tel. & Fax remain the same
28
December 2008 | ECHO Journal
Assessment Collection Continued from page 27
secure the lien, it can still proceed to court to obtain a money judgment for the assessments owed, keeping its lien in place. On the other hand, it is doubtful that an association can complete the foreclosure process and then seek recovery against the owner for any “shortfall.” Suggested Collection Route A better approach to assessment collection in the current market might look like the following: 1. The association discovers that a particular unit has failed to pay assessments and issues its informal demand that the assessment account be brought current. 2. Following the association’s collection policy, the association refers the account to its collection agency for preparation of a statutory pre-lien notice letter. 3. After 30 days, the collection agency reports that the account remains unpaid; the board of directors resolves at a regularly noticed meeting to record a Notice of Delinquent Assessment—an assessment lien. The association now has a lien on title and is secured to the extent the unit has any equity. If the unit is sold or refinanced, the lien will have to be paid to convey clear title. Alternatively, the association’s management company or its counsel may be authorized to send the demand letter and record the lien (the options may in part turn on how much the agency, manager or attorney will charge simply to do the demand letter and lien). 4. At this point, the board obtains basic property information to determine if it is likely that the property has equity. If not, foreclosure is not pursued. Instead, the association, through the board or its manager, files an action in Small Claims Court (for debts up to $5,000) or Superior Court (for debts over $5,000) to obtain a money judgment in the amount of unpaid assessments, interest, late charges, and attorneys’ fees, if applicable. The Court enters a judgment against the owner for the amount owed as of the date the judgment is entered. The filing fee for small claims court is around $100.00. 5. The association may enforce the money judgment against assets of the owner by
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Continued on page 37 ECHO Journal | December 2008
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Index of 2008 Articles Association Board Affairs Primer on Duties and Authority of Association Boards—Jeffrey A. Goldberg, Esq., February The Legal Documents of the Association— Carole Murphy, PCAM, March
Will the Old Suburbs Become the New Urban Core?—A New Role for Older Community Associations—Tyler P. Berding, Esq., March Options for Converting to Solar Energy— Lise K. Strom, Esq. and Meghan Connolly Haupt, M a y
The Duty to Inspect—David West, June A Comparative Analysis of Traditional Management Practices—Douglas B. Christison, CCAM, PCAM, July
Lender Backlash: Will New Rules Make Condos Harder to Sell?—Tyler P. Berding, Esq., June
Optimizing Committees in Association Governance—Molly A. Foley-Healy, Esq., August
Predicting the Future of Community Associations—Tyler P. Berding, Esq., August
The Controlling Director—Linda Alexander, CMCA, PCAM, September
Learning the Truth about Condo Conversion Budgets—Tyler P. Berding, Esq., September
Resolving Problems with Absentee Owners— Diane Marie Rossi, CCAM, September Custom-Tailored Management Packages for Smaller Homeowner Associations—Paul Collins, PCAM, CCAM, October
Off Their Radar?—Why Are CIDs Not on Party Platforms?—Tyler P. Berding, Esq., October
Consequences of Employee Misclassification—Tina Wang, Esq., June Waiting for Godot?—Mary Filson, Esq., July Adopting and Changing Operating Rules for California CIDs—John Paul Hanna, Esq. and David Van Atta, Esq., October What Does it Mean for a Board Member to Be a Fiduciary?—Jan A. Kopczynski, Esq., October Parking Wars! Association Parking Regulation on Private and Public Streets— Andrea L. O’Toole, Esq., November Court Whacks Directors with a $500,000 Attorney Fee Award!—Steven S. Weil, Esq., November Assessment Collection in an Economic Crisis—Paul W. Windust, Esq., December
Legislative
When Condominiums Become Obsolete— Tyler P. Berding, Esq., December
2007 Statute and Case Law Update—Jeffrey A. Barnett, Esq., March
Insurance
Maintenance
The Disclosure Trap—David West, December
Association and Management Company Found Liable in Workers’ Compensation Case—Garth Leone, M a y
Ask the Maintenance Panel: What to Do with Widely Differing Bids for Reroofing—Dick Tippett, February
Financial (Assessments, Budgets, Reserves and Taxes)
The History of an HO-6 Policy—Monty Hollingsworth, July
Ask the Maintenance Panel: Outside Construction Managers—Dick Tippett, March
Allow for “Bad Debt” in Your Budget!— David C. Swedelson, Esq. and Sandra L. Gottlieb, Esq., February
The Value of Homeowners Insurance— Insurance Information Institute, July
Records Retention—Walt Grady, CPA, April
Legal
Solar Reflective Coatings for Cool Roofs and Cool Walls—Michael Biel, April
Are Water Costs Draining Your Association Dry?—Mary L. Wulf, June
Who Pays for What and How to Figure it Out—Ann Rankin, Esq., February
Roofing Materials Prices Increasing—Brian Seifert, July
New FCC Exclusive Service Ban Will Void Existing Cable Agreements—Stephen Marcus, Esq., February
Proper Property Maintenance—Dick Tippett, August
Rediscovering Community in the CID Environment—Larry J. Pothast, October How One Association Did It Right!—Tom Fier, Esq. and Kerrington Fier, November
Funding for Large Projects—Geri Kennedy, CCAM, August How Well Are Your Association Funds Insured?—Michael J. Gartzke, CPA, September
Open Meeting Act—Tom Fier, Esq., April
Avoiding Reserve Planning Mistakes—Derek Eckert, November
The Fine Points of Fining—Michael Hardy, Esq., April
General
New Guidance on “Reasonable Modifications” Under the Fair Housing Act— ECHO, M a y
Common Sense: When Market Value Slips Out the Back Door—Tyler P. Berding, Esq., February 30
December 2008 | ECHO Journal
Member in Good Standing: Issues in HOA Elections—Beth A. Grimm, Esq., M a y
Maintenance, A Team Effort—Frank Arms, April
Perspectives from a Building Inspector— Hermann Novak, August Proactive Roof Drainage: Tips That Won’t Send You Down the Gutter—Chris Seeger, September A Trick of the Trades: Saving Money OffSeason—Mike Muilenburg, November
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Learn how recently passed laws affect your homeowner association Don’t leave your association to fate. Learn how today’s laws affect you and your association by attending the Marin County Seminar. Seminar Agenda 8:00 a.m. Registration and Breakfast 8:45 a.m. Welcome 9:00 a.m. Legislative and Case Law Update David Feingold, Esq. What you don’t know can hurt you. Learn all about the new legislation and case law that affect your association. 9:45 a.m. Solar: It’s Hot! Wanden Treanor, Esq. 2009 is the year of the sun. Slather on the sunscreen and join us as we jump into this red hot topic. 10:30 a.m. Break 10:50 a.m. Board Hearings: A Valuable Tool Glenn Youngling, Esq. From discipline to collections, from community building to dispute resolution, the Board Hearing can be a valuable tool. The “Marin County Players” will reenact common scenarios and you will learn valuable and useful tricks to take back to your community. 11:45 a.m. Questions and Answers 12:15 p.m. Drawings for Door Prizes
2009 Marin County Seminar Saturday, January 31, 2009 8:00 a.m. to 12:30 p.m. Embassy Suites, 101 McGinnis Ave., San Rafael Registration Fee: $40 ($50 Non-Members)
Yes, reserve _____ spaces for the Marin County Seminar. Amount enclosed: $__________ (attach additional names) Name: ______________________________________________________ HOA or Firm: ________________________________________________ Address: ____________________________________________________ City: __________________________ State: _____ Zip: ____________ Phone: ______________________________________________________ Visa/Mastercard No. _____________________ Exp. Date: ________ 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
2008 Legislation at a Glimpse Final Session Summary Bill No.
Author
Subject
Status
Position
Summary
AB 567
Saldana
Common Interest Development Bureau
Amended. Passed by Legislature. Vetoed
Support
Until January 1, 2014, would establish in the Department of Consumer Affairs the Common Interest Development Bureau. The Bureau would, among other things, provide board member education and training resources, and would be paid for by a biennial fee on associations. Authority to enforce CID law has been removed.
AB 952
Mullin
Mandatory Payment Plans
Amended. Passed by Legislature. Vetoed
Oppose
Would compel associations to provide payment plans to any owner who can provide documentation of a need for such a plan. The plan must be granted within 45 days of the request, provided the need is justified. An association must suspend lien enforcement proceedings against the delinquent owner, and may not impose a fee for the administration of the payment plan.
AB 1892
Smyth
Solar Energy Equipment Restrictions
Signed
Neutral
This bill would render void and unenforceable any restriction in the governing documents of an association that effectively prohibits or restricts the installation or use of a solar energy system.
AB 1921
Saldana
Statutory Revision of CID Law
Withdrawn for further study. To be introduced later.
Watch
This bill would renumber, consolidate, make minor changes to, and remove discrepancies in those sections of California law that govern common interest developments. If passed, the bill would replace the existing Davis-Stirling Act.
AB 2180
Lieu
Solar Equipment Approvals
Amended. Passed by Legislature. Signed
Support
This bill would compel associations to provide written approval or denial of an application to install a solar energy system. The approval or denial must be given within 60 days of the receipt of the application, or the application is deemed approved, unless the delay is the result of a reasonable request for additional information.
AB 2259
Mullin
Rental Restrictions
Amended. Passed by Legislature. Vetoed
Oppose
This bill would prevent common interest developments from imposing rental or lease restrictions upon an owner, unless that owner expressly consents to the impairment of that right. Would require owners to provide to the association verification of the date that the title was acquired.
AB 2806
Karnette
Board Member Education
Amended. Passed by Legislature. Vetoed
Support
Will require every member of the board serving at least 12 consecutive months, and each candidate for the board, to provide a statement indicating whether or not they have completed an educational course on the law of common interest developments. This information must be included in the ballot material for a board member election.
AB 2846
Feuer
Dispute Resolution Procedures
Amended. Passed by Legislature. Signed
Support
This bill would permit homeowners who are involved in a dispute over assessments with their association to pay under protest and commence an action in small claims court, provided the amount of the dispute does not exceed the courtâ&#x20AC;&#x2122;s jurisdiction.
SB 127
Kuehl
CID Sale Disclosure Deadlines
Amended. Passed by Legislature. Vetoed
Support
This bill would impose disclosure deadlines for the seller of a unit in a common interest development. Unless the parties agree otherwise in writing, it would require that all disclosures be made no later than 20 calendar days after the execution of a purchase agreement or the opening of escrow, whichever is later. An association must continue to provide documents to the seller within 10 days. The bill affects both mobile home and CID owners.
SB 1511
Ducheny
Super Liens
Amended. Passed by Legislature. Signed
Support
Would allow an association to request that the mortgagee of a property provide the name and address of anyone who purchases that property at a foreclosure sale. The mortgagee or trustee must provide the information within 15 business days.
ECHO Journal | December 2008
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2008 ECHO Business & Professional Directory $20.00 Non-Member Price: $25.00
Condominium Bluebook 2009 Edition $18.00 Non-Member Price: $25.00
Homeowners Association and You $13.00 Non-Member Price: $20.00
Community Association Statute Book—2009 Edition Available February 2009
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 developments in California now includes a comprehensive index of the book and a chapter containing more than 200 frequently-asked questions about associations, along with succinct answers.
A practical problem solving guide to all aspects of community association living. Written by two long-time association residents, it provides an insightful overview of community living from the viewpoint of experienced owners in readable language. Recently revised and expanded.
Contains the 2009 version of the Davis-Stirling Common Interest Development Act, the Civil Code sections that apply to common interest developments and selected provisions from the Civil, Corporations, Government and Vehicle Codes important to associations.
Robert’s Rules of Order $7.50 Non-Member Price: $12.50
The Board’s Dilemma $10.00 Non-Member Price: $15.00
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.
California Building Guidelines for Residential Construction $52.50 Non-Member Price: $60.00
Homeowners Associations— How-to Guide for Leadership $35.00 Non-Member Price: $45.00 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.
Reserve Fund Essentials 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.
$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.
The Condo Owner’s $15.00 Answer Book 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 easy-to-read manual is an excellent tool to understand a new home. It contains chapters covering more than 300 conditions that have been sources of disputes between homeowners and builders, offers homeowner maintenance tips, and defines the standards to which a residence should be built.
CID Leadership Two-Disc DVD set $30.00 Non-Member Price: $40.00 Board—An orientation for new board members and a refresher for current members. Meetings—How to conduct effective meetings that stay focused and achieve results. Reserves—How adequately-funded reserves prevent problems in associations. Insurance—Considers insurance to protect multi-million dollar community assets.
Dispute Resolution in Homeowner Associations $20.00 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
Board Memberâ&#x20AC;&#x2122;s Guide for Contractor Interviews $20.00 Non-Member Price: $25.00 This report is a guide for directors and managers to use for interviews with prospective service contractors. Questions to find out capabilities and willingness of contractors to provide the services being sought are included for most of the contractor skills that associations use.
Bookstore Order Form 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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Yes! Place my order for the items above. Board Memberâ&#x20AC;&#x2122;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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Calendar of Events
Save these dates in your calendar Wednesday, December 3 Maintenance Resource Panel 12:00 Noon Location TBD Friday, December 5 East Bay Resource Panel 9:30 a.m. Angius & Terry 1900 N. California Blvd. Suite 950, Walnut Creek Wednesday, December 10 South Bay Resource Panel 12:00 Noon Il Fornaio 302 Market St., San Jose Wednesday, December 17 Wine Country Resource Panel 11:45 a.m. Eugene Burger Mgmt. Co. 6600 Hunter Dr., Rohnert Park Monday, January 12, 2009 Accountants Resource Panel 6:00 p.m. Francesco’s Restaurant Oakland Tuesday, January 13 Central Coast Resource Panel 12:00 Noon Pasatiempo Inn, Santa Cruz
the r o f e t a d is Keep th Seminar l a u n n A O ECH 2009 , 3 1 – 2 1 e n u J
Thursday, January 15 San Francisco Luncheon 11:45 a.m. St. Francis Yacht Club San Francisco
Wednesday, February 11 South Bay Resource Panel 12:00 Noon Il Fornaio 302 Market St., San Jose
Wednesday, January 21 Wine Country Resource Panel 11:45 a.m. Eugene Burger Mgmt. Co. 6600 Hunter Dr., Rohnert Park
Wednesday, February 18 Wine Country Resource Panel 11:45 a.m. Eugene Burger Mgmt Co. 6600 Hunter Dr., Rohnert Park
Monday, March 9 Accountants Resource Panel 6:00 p.m. Francesco’s Restaurant, Oakland
Saturday, January 31 Marin County Seminar 7:30 a.m. to 1:30 p.m. Embassy Suites Hotel 101 McInnis Parkway San Rafael
Saturday, February 21 Central Coast Winter Seminar 7:30 a.m. to 1:30 p.m. Best Western Seacliff Inn 7500 Old Dominion Ct., Aptos
Tuesday, March 10 Central Coast Resource Panel 12:00 Noon Pasatiempo Inn, Santa Cruz
Wednesday, February 4 Maintenance Resource Panel 12:00 Noon ECHO Office 1602 The Alameda, Ste. 101 San Jose
Thursday, March 5 North Bay Resource Panel 9:30 a.m. Contempo Marin Clubhouse 400 Yosemite Rd., San Rafael
Friday, February 6 East Bay Resource Panel 9:30 a.m. Angius & Terry 1900 N. California Blvd. Suite 950, Walnut Creek
Friday, March 6 East Bay Resource Panel 9:30 a.m. Angius & Terry 1900 N. California Blvd., Suite 950, Walnut Creek
Wednesday, March 18 Wine Country Resource Panel 11:45 a.m. Eugene Burger Mgmt. Co. 6600 Hunter Dr., Rohnert Park Thursday, March 19 San Francisco Luncheon 11:45 a.m. St. Francis Yacht Club San Francisco Saturday, March 21 North Counties Seminar 8:00 a.m. to 1:00 p.m. Rohnert Park Community Center 5401 Snyder Ln., Rohnert Park
Regularly Scheduled Resource Panel Meetings Resource Panel Maintenance North Bay East Bay Accountants Central Coast South Bay Wine Country Legal 36
December 2008 | ECHO Journal
Meeting
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First Wednesday, Even Months First Thursday, Odd Months First Friday, Monthly Second Monday, Odd Months Second Tuesday, Odd Months Second Wednesday, Even Months Third Wednesday, Monthly Quarterly
ECHO Office, San Jose Contempo Marin Clubhouse, San Rafael Angius & Terry, Walnut Creek Francesco’s Restaurant, Oakland Pasatiempo Inn, Santa Cruz Il Fornaio Restaurant, San Jose Eugene Burger Management Co., Rohnert Park Varies
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Assessment Collection Continued from page 29
garnishing wages, attaching bank accounts, or any other method set forth in the Enforcement of Judgments Act. This judgment is enforceable for ten years regardless of whether the debtor is an association member or not. An association may need to consult with legal counsel to assist in enforcement of the money judgment. 6. In the event the owner is foreclosed on by his or her lender, the assessment lien is extinguished. However, the assessment debt remains enforceable and the association may file a civil lawsuit against the now former owner for the unpaid assessments, interest, late charges, and attorneys’ fees, if applicable. Small Claims Court Procedure Code of Civil Procedure section 116.540 authorizes an “agent, management company representative, or bookkeeper” for a community association to appear in Small Claims Court. Under the old law, a manager could appear in Small Claims Court only if he or she was an employee of the association. This
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is a radical exception to the basic rule that only attorneys can appear in court on behalf of a client or other third party. Declaration Confirming Manager’s Authority to Appear on Association’s Behalf To appear in Small Claims Court on behalf of an association, the manager will be required to provide the court with a signed declaration under penalty of perjury attesting to the fact that he or she is authorized to appear on the association’s behalf and the basis for that authority. The manager will also need to make a representation that he or she was not hired by the association solely for the purpose of appearing in Small Claims Court. Until the new changes in the law become known, managers should take a copy of the statute to Court or at least be prepared to direct the Small Claims Court to the correct section of law so that the court will understand that a manager can appear on an association’s behalf. Tips for a Successful Presentation of a Claim Initiation of a Small Claims Court case is relatively easy. Many courts have small claims forms on-line that can be downloaded from the Internet. A small claims complaint is a
one-page document that requires the plaintiff to provide name and address of the defendant and to briefly describe the nature of the dispute. Once the association files the case and pays the filing fee, the court will issue a hearing date. The association then needs to have a process server serve the owner with the complaint and notice of hearing at least 15 days before the hearing. The proof of service must be filed with the court five days in advance of the hearing. The association may recover the filing fee and service fee in the case. When appearing in Small Claims Court, the key is to be prepared with your evidence and be as clear and concise as possible. The Judge may have 20 cases scheduled that day and a limited time within which to hear them. Therefore, the Judge will appreciate a party that gets to the point quickly. Remember, the Judge knows nothing about your case. A few brief statements about who you are, who you represent, and why you are in court will give the Judge a thumbnail sketch Continued on page 39 ECHO Journal | December 2008
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Honor Roll
About
ECHO Honors Volunteers Mike Muilenburg 2008 Volunteer of the Year ECHO Resource Panels Accountant Panel Richard Schnieder, CPA 707-576-7070 Central Coast Panel Jim Harmon 831-425-3622 East Bay Panel Scott Burke, 408-536-0420 Legal Panel Mark Wleklinski, Esq. 925-691-1191 Maintenance Panel Mike Muilenburg, 408-996-3897 North Bay Panel Diane Kay, CCAM, 415-846-7579 Stephany Charles, CCAM 415-458-3537 San Francisco Panel Jeff Saarman, 415-749-2700 South Bay Panel Geri Kennedy, CCAM 650-348-2691 ext. 1006 Kimberly Payne, 408-200-8470 Wine Country Panel Maria Birch, 707-584-5123
Legislative Committee Paul Atkins Jeffrey Barnett, Esq. Sandra Bonato, Esq. Jerry L. Bowles Joelyn Carr-Fingerle, CPA John Garvic, Esq., Chair Geri Kennedy, CCAM Wanden Treanor, Esq.
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December 2008 | ECHO Journal
2008 Annual Seminar Speakers Jeffrey Barnett, Esq. Sandra Bonato, Esq. Lori Burger, PCAM, CCAM Doug Christison, PCAM, CCAM Rolf Crocker, CCAM Jeffrey Draeger James Ernst, CPA Lisa Esposito, CCAM John Garvic, Esq. John Gill, Esq. Sandra Gottlieb, Esq. Walt Grady, CPA Beth Grimm, Esq. Robert Hall, Esq. Linnea Juarez, PCAM, CCAM Geri Kennedy, CCAM David Kuivanen, AIA Karl Lofthouse Kerry Mazzoni Ann Rankin, Esq. Rob Rosenberg, CCAM Kurtis Shenefield, PCAM, CCAM Dennis Socher Paul Terry, Esq. Wanden Treanor, Esq. Stephen Weil, Esq. Glenn Youngling, Esq.
SF Luncheon Speakers John Allanson Tyler P. Berding, Esq. Ronald Block, PhD. 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.
Beth Grimm, Esq. Brian Hebert, Esq. Roy Helsing Julia Lave Johnston Garth Leone Nico March Kerry Mazzoni Larry Russell, Esq. Steve Saarman Nathaniel Sterling, Esq. Debra Warren, PCAM, CCAM Steven Weil, Esq. Mark Wleklinski, Esq. Glenn Youngling, Esq.
Recent ECHO Journal Contributing Authors September 2008 Linda Alexander, CCAM, PCAM Tyler P. Berding, Esq. Michael J. Gartzke, CPA Diane Marie Rossi, CCAM Chris Seeger October 2008 Tyler P. Berding, Esq. Paul Collins, PCAM, CCAM John Paul Hanna, Esq. Jan A. Kopczynski, Esq. Larry J. Pothast, PCAM, CCAM David Van Atta, Esq. November 2008 Derek Eckert Tom Fier, Esq. Kerrington Fier Mike Muilenburg Andrea L. O’Toole, Esq. Steven S. Weil, 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 1,525 homeowner associations, you can become an associate member and join 325 other firms serving this important membership.
What are the Benefits of ECHO Membership? • Subscription to monthly magazine for every board member • Yearly copy of the Association Statute Book for every board member • Frequent educational seminars • Special prices for CID publications • Legislative advocacy in Sacramento
ECHO Membership Dues HOA Size 2 to 25 units 26 to 50 units 51 to 100 units 101 to 150 units 151 to 200 units 201 or more units Business/Professional
Rate $120 $165 $240 $315 $390 $495 $425
ECHO Journal Subscription Rates Members $50 Non-members/Homeowners $75 $125 Businesses & Professionals
How Do You Join ECHO? Over 1,800 members benefit each year from their membership in ECHO. Find out what they’ve known for years by joining ECHO today. To apply for membership, call ECHO at 408-297-3246 or visit the ECHO web site (echo-ca.org) to obtain an application form and for more information.
Assessment Collection Continued from page 37
about what kind of evidence he or she is about to hear. In making your presentation, you should have the following documents as “evidence” to support your delinquent assessment claim: 1. The CC&Rs that authorize the association to levy assessments 2. The association’s collection policy 3. Copies of letters asking the owner to pay the assessment 4. An itemized statement of the owner’s account showing the delinquent assessments Presenting your case in chronological order will make the most sense to the Judge. Start with a brief discussion of the association. Tell the Judge where the development is located, how many owners there are, the amount of the monthly assessment, and that the association is governed by a set of CC&Rs that authorize it to charge assessments for the maintenance, repair, and reserves of the association. Explain to the Judge that under the association’s collection policy (and the Davis-Stirling Act), an assessment is delinquent if not paid within 15 days of its due date. You will need to explain that the association is entitled to recover late fees and interest on the delinquent assessments. Also, tell the Judge that when one person does not pay his or her assessments, the other paying members are forced to bear added maintenance, repair, and reserve obligations. Next, tell the Judge that the association maintains a statement of account for each member. Give the Judge the details on how the account is maintained. For instance, tell the Judge that the payments go to a lock box that is digested into a report that the association uses to keep the statement up to date. Basically, the Judge needs to be able to rely on what the account statement shows as a delinquency. Tell the Judge exactly what is owed, the late fees, and the interest and ask the Judge for judgment in that amount. After you conclude, the debtor will be able to present a defense. Many times the debtor will not appear because he or she will have no defense. Owners that have refused to pay because they are unhappy with management or the Board likely will appear and argue that they have not paid because they have not received the services for which they are paying. California cases have held that such an argument is not a good reason to withhold
assessment payments. Further, the DavisStirling Act provides for an informal dispute resolution procedure within the community that allows the owner to meet with the Board or Board representative if he or she objects to something the Board has decided. “Meet and confer” provisions are found in the Civil Code beginning with section 1363.810. At the conclusion of the hearing, the Judge will enter a judgment. If the judgment is in the association’s favor, it can be enforced just like any other money judgment. Under the rules, the judgment is stayed for 30 days, which means it cannot be enforced during that time. After 30 days, the judgment can be recorded to create a lien on the owner’s unit. The association can undertake an execution sale to foreclose on its judgment lien. The judgment can also be used to levy the owner’s bank account or garnish his or her wages. If the Judge rules against the association, there is no opportunity to appeal. However, that does not mean that future assessments are not owed; it only means that the association has not persuaded this Judge in this circumstance. If the judgment is in the association’s favor, the owner
may appeal to the Superior Court and request a new trial. In such a case, the association can retain legal counsel to represent it in the trial proceeding. Summary In a “good” market, property appreciates and an assessment lien and the threat or actual foreclosure of the lien is likely to result in payment to the association. In a “down market” where property value collapses, there may not be enough equity to satisfy all debt holders, including the association. Thus, pursuing collection against the property may have little benefit (other than perhaps resulting in its ownership but a new paying owner). There are alternatives: suing in small claims court or, for larger claims in which it makes economic sense to hire a lawyer, suing in Superior Court.
Paul Windust is an attorney at the Alamo Office of Berding & Weil. He participates regularly in the activities of the ECHO Legal Resource Panel and speaks at ECHO seminars. ECHO Journal | December 2008
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Save this date for the Central Coast Winter Seminar Donâ&#x20AC;&#x2122;t miss this educational opportunity to keep informed on how todayâ&#x20AC;&#x2122;s laws and economic situation affect you and your association
Yes, reserve ___ spaces for the Central Coast Seminar. Amount enclosed: $__________ (attach additional names) Name: ______________________________________________________
Central Coast Winter Seminar Saturday, February 21, 2009 7:30 a.m. to 1:30 p.m.
HOA or Firm: ________________________________________________ Address: ____________________________________________________ City: __________________________ State: _____ Zip: ____________
Best Western Seacliff Inn 7500 Old Dominion Ct., Aptos
Phone: ______________________________________________________
Registration Feet: $40 Non-Members: $50
Signature: ___________________________________________________
Visa/Mastercard No. _____________________ Exp. Date: ________
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
ECHO Marketplace
Advertiser Index
The place to find business and professionals for your association Alpha Restoration & Waterproofing . . .8 American Asphalt . . . . . . . . . . . . . . .20 American Management Services . . . .10 Angius & Terry . . . . . . . . . . . . . . . . . . .3 Applied Reserve Analysis . . . . . . . . . .29 A.S.A.P. Collection Services . . . . . . . . .9 Association Reserves . . . . . . . . . . . . .20 Bayridge Group . . . . . . . . . . . . . . . . .16
Advertise your business to thousands of association directors in California in the ECHO Journal.
Your Ad Seen Here You read this, didn’t you? Thousands of officers and directors of homeowner association boards also read the ads each month in the ECHO Marketplace.
Berding & Weil . . . . . . . . . . . . . . . . . .44 Collins Management . . . . . . . . . . . . .29 Community Management Services . . .41 Compass Management . . . . . . . . . . .29 Cool Pool Service . . . . . . . . . . . . . . . .16 Cornerstone Community Mgmnt . . . . .8 County Bank . . . . . . . . . . . . . . . . . . . .2 Draeger . . . . . . . . . . . . . . . . . . . . . . .11 Ekim Painting . . . . . . . . . . . . . . . . . . .26 Ertech . . . . . . . . . . . . . . . . . . . . . . . .26 First Bank Association Bank Services . .28 Flores Painting . . . . . . . . . . . . . . . . . .27 Helsing Group . . . . . . . . . . . . . . . . . .16 Hill & Company. . . . . . . . . . . . . . . . . .43 Kasdan Simonds et al . . . . . . . . . . . . .25 Louis & Riparetti . . . . . . . . . . . . . . . . .21 M&C Association Services . . . . . . . . .27 M. L. Nielsen Construction . . . . . . . . .28 Massingham and Associates . . . . . . .24 Pelican Management Group . . . . . . .20 PML Management Corp. . . . . . . . . . .11 Pollard Unlimited . . . . . . . . . . . . . . . .12 Popular Association Banking . . . . . . .37 R. E. Broocker Co. . . . . . . . . . . . . . . .12 Rebello’s Towing Service . . . . . . . . . .13 REMI Company . . . . . . . . . . . . . . . . .39 Saarman Construction . . . . . . . . . . . . .9 Statcomm . . . . . . . . . . . . . . . . . . . . .12 Steve Tingley Painting . . . . . . . . . . . .22 Steve’s Painting Services . . . . . . . . . . .10
ECHO Journal | December 2008
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January 31
Marin County Seminar Embassy Suites, San Rafael
February 21
Central Coast Winter Seminar Best Western Seacliff Inn, Aptos
March 21
North Counties Seminar Rohnert Park Community Center, Rohnert Park
April 4
San Francisco Spring Seminar The Firehouse, San Francisco
April 25
South Bay Spring Seminar Campbell Community Center, Campbell
June 12&13
ECHO Annual Seminar Santa Clara Convention Center, Santa Clara
September 19 Central Coast Fall Seminar Best Western Seacliff Inn, Aptos
Condominium Conversions Did You Get What You Paid For?
Condo conversions are not new condominiums. They are older rental apartments that were converted to condos. So, what’s wrong with that? Nothing, if the financial plan that came with your condo is up to the task of maintaining a building with 20-30 years of deferred maintenance. How do you know? You probably don’t unless someone
has taken a close look at the homeowner association’s budget and compared it to the actual condition of the buildings. The fact is, very few condominium conversions were sold with repair budgets that are adequate to meet the needs of the project. What does this mean to you? If the budget is inadequate, it will mean either increased homeowner assessments or a gradually deterio-
rating condominium project. Or both. In either case, you didn’t get what you paid for. If you’d like to know the truth now about what you bought, call us. If you want to wait and see what happens, ok, but either way, we’ll be here when you need us. Berding | Weil, LLP 3240 Stone Valley Road West Alamo, California 94507 925-838-2090 www.berding-weil.com