Journal_09_09

September 2009

A Journal for California Community Association Leaders

echo-ca.org

Obligations and Liabilities of Association Directors

ALSO INSIDE THIS ISSUE:

• How to Read Your Reserve Study • Upgrading to Energy Efficient Windows

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The ECHO Journal is published monthly by the Executive Council of Homeowners. The views of authors expressed in the articles herein do not necessarily reflect the views of ECHO. We assume no responsibility for the statements and opinions advanced by the contributors to the magazine. It is released with the understanding that the publisher is not engaged in rendering legal, accounting or other professional service. If legal advice or other expert assistance is required, the services of a competent person should be sought.

Contents How to Read Your Reserve Study —page 14

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Obligations & Liabilities of Directors: Part I Every person who serves on a board of directors must understand the basic obligations and potential liabilities of that position. Failure to do so means legal exposure for the association and individual directors. This article identifies the primary obligations of a director, guidelines by which tasks should be carried out, and the potential liabilities should a director breach these obligations.

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The board of directors is responsible for ensuring the association’s sound management and operation. One of its primary duties is the review and preparation of an annual budget, which must address two areas: operating funds and reserve funds. This article offers guidelines for reading and interpreting a reserve study.

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How to Read Your Reserve Study

Upgrading to Energy Efficient Windows Developments more than 30 years old often share a dilemma when homeowners want to replace singlepane windows with newer energy-efficient windows.

This article discusses how boards can clearly write easily attainable guidelines for upgrading windows, while ensuring that the upgrades blend with the existing design and look of the complex.

Departments 29 Directory Updates 32 News from ECHO 33 Legislation at a Glimpse

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34 ECHO Bookstore 36 Events Calendar 38 ECHO Volunteers 38 About ECHO

Acceptance of advertising does not constitute any endorsement or recommendation, expressed or implied, of the advertiser or any goods or services offered. We reserve the right to reject any advertising copy.

Copyright 2009 Executive Council of Homeowners, Inc. All rights reserved.

Reproduction, except by written permission of ECHO, is prohibited.

The ECHO membership list is never released to any outside individual or organization.

Executive Council of Homeowners, Inc. 1602 The Alameda, Suite 101 San Jose, CA 95126 408-297-3246 Fax: 408-297-3517 www.echo-ca.org info@echo-ca.org Office Hours: Monday–Friday 9:00 a.m. to 5:00 p.m.

Board of Directors and Officers President David Hughes Vice President Karl Lofthouse Treasurer David Levy Secretary Dorothy Kopczynski Directors Paul Atkins John Garvic Diane Rossi Richard Tippett Steven Weil

Jerry L. Bowles Robert Rosenberg Kurtis Shenefiel Wanden Treanor

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

41 ECHO Marketplace 41 Advertiser Index

On the Cover Obligations and Liabilities—page 6 4

September 2009 | ECHO Journal

ECHO Mission Statement The mission of ECHO is to advance the concept, interests and needs of homeowners associations through education and related services to board members, homeowner members, government officials and the professionals in the industry.

2010 ECHO Annual Seminar Yes, it’s already next year.

The 2009 Annual Seminar is just behind us, but we are already preparing next year’s community association event.

Do not forget to mark these dates in your calendar for the ECHO Annual Seminar: June 18 and 19, 2010. You will not want to miss California’s largest common interest development event.

here are numerous motives as to why a person seeks or agrees to run for a position on a homeowner association board. Sometimes it is an attraction to the political aspect of the position, other times it is because no one else is willing to serve and often it is because the individuals running genuinely wish to participate in the management of the property in which they have an ownership interest. Whatever the underlying motivation, it is often a new experience for those elected that is fraught with danger both to the association and the individual directors unless those individuals are willing to become educated about the responsibilities they have assumed and act accordingly.

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The relationship between the individual owners and the managing association of a common interest development is a complex one. On the one hand, each individual owner has an economic interest in the proper business management of the development as a whole for the sake of maximizing the value of his or her investment and maintaining a certain quality of environment. In this aspect, the relationship between homeowner

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September 2009 | ECHO Journal

and association is a fiduciary one, somewhat analogous to that between shareholder and corporation. On the other hand, each individual owner, at least while residing in the development, has a personal, not strictly economic, interest in the appropriate management of the development for the sake of maintaining his or her security against foreseeable risks of physical injury. In this aspect, the relationship between owner and association is somewhat analogous to that between tenant and landlord.

This discussion will identify some of the primary obligations of a director of a homeowner association in each of these roles, the general guidelines by which these tasks should be carried out, and the potential liabilities should a director breach these obligations. Finally, there will be a brief discussion of some of the techniques and procedures that can be employed by a director to minimize the potential for incurring personal liability.

Basic Obligations In the context of managing the business of the association, it is often stated that a person

PART I

By John D. Garvic, Esq.

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EVERY PERSON WHO IS ELECTED to serve on a board of directors of a homeowner association must understand the basic obligations and potential liabilities of that position. Failure to do so means legal exposure not only for the association, but also for the individual directors.

Legal Obligations and Potential Liabilities of Association Directors elected to serve on a board of directors of a homeowner association becomes a “fiduciary.”

Generally speaking, a fiduciary is one who has been legally entrusted with the care, protection and use of another’s interest. In the case of a homeowner association, the duties and powers of a homeowner association, and thus the individual members of its board of directors, are dictated both by statutes such as the Davis-Stirling Common Interest Development Act and the Nonprofit, Mutual Benefit Corporations Code, and by the association’s governing documents such as its bylaws and declaration of covenants, conditions and restrictions. A person who has accepted the position of a fiduciary and then fails to exercise it properly can be held legally responsible.

behalf of the association, obtaining various forms of insurance, preparing annual budgets, establishing and maintaining reserve funds, collection of assessments, supervising contract services, enforcement of the governing documents and rules promulgated pursuant to those documents, architectural control, and the maintenance of association records. Certainly this list is not intended to be all inclusive. However, it does demonstrate that the obligations of a director are extensive and can often be complicated. It is important for each member of the board to keep in mind that he or she has been placed in a position of trust in which the property and related interests involved are substantial. This being the case, a breach of that trust can result in substantial liability.

Most of the responsibilities of a director of a homeowner association are set forth in the governing documents, and quite often more particularly in the declaration of covenants, conditions and restrictions. Some of the important obligations of a director include maintenance of the common area, entering into service contracts on

In the context of a landlord-tenant relationship, the association and its board members have a slightly different relationship with the members of the association. In this context, the association and its board members must act in a non-negligent fashion so as to avoid any physical injury to its members or others who come onto the

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development. Here the standard of care is that of a reasonable person under the same or similar circumstances. Again, directors who participate in decisions that result in negligent injury to others, including the members of the association, are exposed to personal liability.

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Guiding Principles of the Fiduciary Relationship Since the concept of fiduciary responsibility is a legal one, it is appropriate in understanding that concept to look both to the statutes and to case law of California. One of the primary sources is the California Nonprofit Mutual Benefit Corporation Law (hereinafter referred to as the “Code”), which became effective on January 1, 1980. For the first time, the California State Legislature in adopting this Code created a complete statutory scheme for nonprofit corporations, separate and apart from corporations organized for profit. In addition to making numerous procedural changes relating to such things as quorums, meetings of the membership, etc., the Code established certain guiding principles for those individuals who serve as directors on nonprofit corporations. Even though these provisions are only directly applicable to incorporated homeowner associations, such guiding principles have been used by the courts in scrutinizing the conduct of directors in both incorporated and unincorporated homeowner associations.

One such guiding principle is found in §7210 of the Code, which reads as follows: Subject to the provisions of this part and any limitations in the articles or bylaws relating to action required to be approved by the members, or by a majority of all members, the activities and affairs of a corporation shall be conducted and all corporate powers shall be exercised by or under the direction of the board. The board may delegate the management of the activities of the corporation to any person or persons, management company, or committee however composed, if the activities and affairs of the corporation shall be managed and all corporate powers shall be exercised under the ultimate direction of the board. (Emphasis added.)

The message, if you will, of §7210 is basically, while a board may delegate some of their authority, they cannot delegate their responsibility. Certainly it must follow, if the board cannot delegate their responsibility, they likewise cannot delegate their liability.

This principle is particularly important to be mindful of in associations where manage-

ment companies have been hired to manage the affairs of the association. Unquestionably, a good management company is invaluable to a homeowner association; however, it is still the board of directors who are ultimately responsible for the actions of the management company and must therefore properly monitor and direct their management company. Further, §7210 of the Code also makes it clear that certain powers cannot be delegated by the board. Therefore, it is important that the board of directors clarify all delegated authority and non-delegated powers.

A second and perhaps one of the most important sections of the Code, and certainly one which each and every director should be thoroughly familiar with, is §72311, which the California Supreme Court in Frances T. v.

Village Green Owners’ Association (1986) 42 Cal. 3d 490 declared as the “standard of fiduciary responsibility for nonprofit directors.”

Section 7231 reads, in its entirety, as follows: (a) A director shall perform the duties of a director, including duties as a member of any committee of the board upon which the director may serve, in good faith, in a manner such director believes to be in the best interest of the corporation and with such care, including reasonable inquiry, as an ordinary prudent person in a like position would use under similar circumstances. (b) In performing the duties of a director, a director shall be entitled to rely on information, opinions, reports or statements, including financial statements and other financial data, in each case prepared or presented by: (1) One of more officers or employees of the corporation whom the director believes to be reliable and competent in the matters presented; (2) Counsel, independent accountants or other persons as to matters that the director believes to be within such person’s professional or expert competence; or (3) A committee of the board upon which the director does not serve, as to matters within its designated authority, which committee the director believes to merit confidence, so long as in any such case, the director acts in good faith, after reasonable inquiry when the need therefore is indicated by the circumstances and without knowledge that 1 See also §7231.5 of the Code, which restates that volunteer directors shall have no monetary liability if they comply with §7231.

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would cause such reliance to be unwarranted. (c) A person who performs the duties of a director in accordance with subdivisions (a) and (b) shall have no liability based upon any alleged failure to discharge the person’s obligation as a director, including, without limiting the generality of the foregoing, any actions or omissions that exceed or defeat a public or charitable purpose to which assets held by the corporation are dedicated.

(Emphasis added.)

It is helpful and instructive to consider each of the three subsections of §7231 individually.

Section 7231(a) is the guiding principle for a director in carrying out his or her obligations. First, it requires a director to act “in good faith,” which basically means that the action of each director must be genuinely directed towards those purposes set forth in the governing documents. There should be no ulterior reasons or motives. Secondly, each director must act in a manner that the director believes to be “in the best interest of the corporation.” In other words, a director may not place the interest of self or others above that of the association. Finally and perhaps most importantly, a director must act with the care of an ordinary prudent person, including the duty of “reasonable inquiry.”

This means that a director is obligated to investigate every situation sufficiently before acting and, once the director does act, he or she must do so in a non-negligent, prudent manner.

Section 7231(b) outlines the various types of information upon which a director is entitled to rely and which form at least a basis for a defense to a claim of breach of fiduciary duty. Obviously, the drafters of this section recognized that each director cannot be an expert in all aspects of a nonprofit corporation, particularly those areas that require substantial training, such as law, construction and accounting. This subsection further recognizes that each director cannot, in all probability, investigate each and every issue with the appropriate thoroughness to reach an independent judgment. It is certainly for that reason that the statute permits a director to rely upon other offices and employees of the corporation whom the director believes to be reliable and competent in the matters presented. Although subsection (b) permits a director to rely upon the information, opinions, reports and statements of others, it does not absolve him or her of the responsibility

to make reasonable inquiry and to use reasonable care to assure that the information, reports, opinions and statements are being provided by individuals competent in the matters being provided.

Finally, §7231(c) makes it clear that if a director follows the principles of subsections (a) and (b), no liability shall attach based upon any alleged failure to discharge that person’s obligation as a director. This is so even if the ultimate action or decision of the director or the board of directors is incorrect. Stated simply, a director may be wrong in his or her ultimate decision, but that director is liable only if he or she has failed to follow the obligations and principles of subsections (a) and (b).

These two sections of the Code were, in effect, the basis for the landmark decision of Ravens Cove Townhomes, Inc. v. Knuppe Development Co. (1981) 114 Cal.App.3d 783, which involved a lawsuit against the initial developer-controlled board of directors for failure to establish and maintain adequate reserve funds. The court initially noted that directors of nonprofit corporations are, in fact, fiduciaries and that they are held to a high standard of conduct, the breach of which may subject each or all of them to individual liability.

Ultimately, the court concluded that the failure to maintain and establish adequate reserve funds in a homeowner association constituted a breach of the fiduciary duties to act in good faith and exercise the basic duties of good management, and it held the directors individually liable. It is important to note that the court clearly indicated that such a breach may occur where a director, either because of the exercise or failure to exercise supervision, permits mismanagement or nonmanagement of the association’s affairs to occur. In other words, a director is exposed to personal liability when that director manages the affairs of the association either negligently or not at all.

The principles first announced in the Ravens Cove case were later affirmed by the California Supreme Court in Frances T. v.

Village Green Owners Association, supra, 42 Cal.3d 490, where the court acknowledged that the standard set forth in §7231 of the Code is the fiduciary standard for directors of incorporated homeowner associations (and by analogy, unincorporated homeowner associations). Thus, in California the standard relating to directors’ personal liability is defined by statute, §7231 of the Code.

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Having reviewed the basic governing principles by which a director must carry out his or her fiduciary obligations, it is appropriate to consider some of the obligations of a director and how these principles might apply in certain situations. In undertaking these considerations, it is helpful to separate the various functions of a board of directors of a homeowner association into two general categories. The first category relates to those functions that are governmental in nature and usually relate to many of the relationships between the association and its members, the association and third parties.

Governmental Functions Homeowner association documents generally contain a number of “use restrictions” that have as their primary purpose the maintenance of the property of the development and the harmony between the individual association members. Such documents often contain additional authority for the passage of rules and regulations that further promote the purposes of the association. The passage of such rules and regulations are generally the responsibility of the board of directors and the enforcement of both the rules and regulations, as well as the other use restrictions contained in the governing documents, usually rests with the association and thus, the board of directors. These functions are analogous to those exercised by governmental bodies; therefore, in addition to the general principles already discussed, additional principles apply.

The first principle is that where the board of directors adopts additional rules and regulations to further the purposes of the association, those rules and regulations must be rationally related to the protection, preservation or other proper operation of the property and the purposes of the association as set forth in its governing documents. In other words, the adoption of rules and regulations are limited to certain specified purposes in the governing documents, and rules and regulations that exceed that authority cannot legally be enforced. Where a board of directors attempts to enforce such invalid rules and regulations, they subject themselves and the association to potential liability.

The second principle is that, where rules and regulations are to be adopted by the board of directors, those rules and regulations must be carefully drafted so as not to infringe upon other protected rights of the Continued on page 28

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September 2009 | ECHO Journal

By Roy Helsing

How to Read Your Reserve Study ommon Interest Developments contain areas and facilities that are owned “in common” by the members. For the purpose of this article that common ownership may be in undivided interest, it may have been conveyed to the association as common area in fee title, or it may be privately owned but the association has maintenance responsibility through the governing documents. As the elected governing body of the association, the board of directors is responsible for ensuring the association’s sound management and operation. One of the primary duties of the board of directors is the review and preparation of an annual budget.

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The annual budget process must address two areas: operating funds and reserve funds. California Civil Code Section 1365 requires that the association review its reserve fund annually. Additionally, the board of directors must attest in the budget notes to the adequacy of the reserve fund. The budget notes must clearly state, in bold type: The estimated replacement cost, estimated remaining / useful life of each component as of the end of the fiscal year for which the study is prepared a) The current estimate of the amount of cash reserves necessary to repair, replace, restore or maintain the major components. b) The current amount of accumulated cash reserves available to repair, replace, restore or maintain major components.

The percentage the accumulated cash reserve is of the estimated required reserve.

In addition, the Civil Code requires that the board of directors state in the budget notes whether they have “determined or anticipate that the levy of one or more special assessments will be required to repair, replace, or restore any major components or to provide adequate funds thereof.”

Lastly, specific disclosures must also be made under Civil Code Section 1365.2.5 in a prescribed format.

Your reserve study should assist the board of directors in complying with Sections 1365 and 1365.2.5 of the code by providing the information required by the code in order that the board of directors may carry out their fiduciary responsibilities in this budget process. Specifically, it provides: • the legally required data to estimate properly the useful remaining life for each component; • the financial information necessary to determine Reserve Fund requirements and percent of required funding currently on hand; • a recommended minimum monthly reserve contribution.

Not only should your reserve study provide the information necessary for the board of directors to make informed budget decisions, but it should also contain the preparer’s best professional judgment concerning the minimum reserve funding necessary for operating, maintaining and repairing the property. We point out that budgeting is not an exact science because the budget analyst cannot foresee or control the future acts of the association, its members, its board, its management, or of nature.

The ultimate budget decision (i.e., approving the budget) rests with the board of directors (or when the increase is over 20 percent, the decision rests with the members unless the documents impose more stringent standards). We believe this decision should be made after reviewing the professional advice contained in the reserve study and acting in a proper fiduciary manner to ensure the association is adequately funded.

In preparing this study, a comprehensive list of major components is developed and data is compiled concerning the age and costs of the components. The results of that compilation are found in various charts and tables within

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replacement, repair, restoration or maintenance. Fortunately, it is quite easy to make computations that take the expected effects of interest and inflation on each component into account using the following formulas: Desired Balance = Current Cost x Current Life Useful Life +

Current Cost x Current Life Useful Life (1 + Interest Rate)

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Current Cost x Current Life Useful Life (1 + Inflation Rate)

or using 5% interest and 3% inflation: the study. Certain assumptions are made concerning future inflation, current and future component costs, interest earnings, future aging, and other future events. Some of these assumptions may not materialize and unanticipated events and circumstances may occur in the future. Therefore the actual replacement costs and remaining lives may vary from your reserve study and the variations may be material. Thus, the association is required by Section 1365 of the California Civil Code to review this funding plan annually and then consider and implement necessary adjustments.

Each major component item should be accounted for independently in regards to the date placed in service, current replacement cost and the remaining useful life.

Once this information has been accumulated, the future replacement costs are calculated and all the reserve items are grouped together to calculate the future reserve fund balances, reserve funds required, and projected monthly contribution amounts.

What is the Current Status of Your Reserve Fund? (“Percent Funded”) A general concept behind reserve funding is that over time, owners will pay their fair share for the wearing out of the components, or at least that deviations from that concept are disclosed. While the State of California does not require that common interest developments maintain reserves, it does require that the association disclose to homeowners (and homeowners in turn to potential buyers) the status of the fund. This disclosure must include the amount of money expected to be “set aside” in the reserve fund, as well as the amount of reserve money “necessary,” at the end of the fiscal year. The amount of reserve “necessary” has generally been interpreted to be the amount of money that would be on hand if owners were paying 16

September 2009 | ECHO Journal

their fair share over time for the wearing out of the components. For the purpose of this article, we will refer to this figure as the “Desired Balance.”

Mathematically, there are two generally accepted methods of calculating the desired balance. One simple mathematical model which will give a reasonably accurate estimate is to take the current replacement cost of each component, divide it by its total life, and then multiply that figure by the current age of the component. Mathematically, this is represented by the following formula: Desired Balance = Current Cost x Current Life Useful Life

For example, a $100,000 component with a 10-year life, if it were 2 years old, should have $20,000 in the reserve fund: $20,000 = $100,000 x 2 years 10 years

The calculation indicated above is made for each component, and results are added together to determine the “Desired Balance” for the fund.

While this simplified method of determining the desired balance is easy to understand, mathematically it suffers from some inaccuracies because it does not take into account the fact that the reserve fund earns interest or that inflation will also impact the reserve portfolio over time. Simply stated (and using our 2 year old, $100,000 component with a 10-year useful life), we would not need to collect $10,000 each year because that $10,000 will earn interest. The amount of money that would need to be placed in the fund annually to offset the wearing out of this component will increase each year because that year’s contribution will have less time to earn interest before the end of the component’s useful life. At the same time, however, inflation is working on our economy and at the end of the component’s useful life we will need more than $100,000 in order to pay for its

$17,749 = $100,000 x 2 years 10 years +

–

$100,000 x 2 years 10 years (1 + .05) $100,000 x 2 years 10 years (1 + .03)

This calculation is run for each component in the portfolio and the results then added together in order to calculate a more precise “Desired Balance” for the fund.

The State of California also requires that the association disclose to homeowners the relationship between the amount of money set aside in the reserve fund and the amount of money that should be on hand in the reserve fund as a percentage. Specifically, it is the amount of money that is on hand divided by the desired balance for the fund. Both figures are as of the end of the fiscal year.

Unless the after-tax interest rate and the inflation rate are the same, there will be a difference in both the desired balance and the percentage of funding. Typically, after-tax interest is slightly greater than inflation and therefore the desired balance is lower and the percentage of funding is greater. Occasionally, we find an association that does not put interest into the reserve fund, and in this case the desired balance may be higher and the percentage of funding lower than in the simplified method. In the latter case, the desired balance we recommend is more accurately reflected by the more complex formula and is our recommendation concerning what disclosure you provide homeowners.

While the preceding narrative indicates the status of the fund, the impact of that status is another issue entirely. One caution about disclosing “Percent Funding” calculations is the fact that the uninformed often try to compare associations against other associations using this percentage disclosure.

Unfortunately, the “Percent Funding” calculation does not indicate the impact on current and future owners. It is possible for an association to have a very low percentage of funding, and the impact is only a few dollars or cents per door per month. Conversely, it is possible for an association with a very high percentage of funding to still need significant special assessments in the near future.

These anomalies can be caused by a variety of factors, including the number of homes compared to the size of the reserve responsibilities or the length of time available to replenish the fund, or both.

On the other hand, the closer any given association is to 100 percent funded, the better off it is because the “Percent Funded” calculation does disclose whether homeowners are paying their fair share over time. The extent that the “Percent Funded” disclosure is below 100 percent indicates the extent that current and past homeowners have not yet paid their fair share towards the wearing out of the components. The extent that the fund is greater than 100 percent funded indicates the extent to which current and past homeowners have paid more than their fair share of the reserve obligation. In either case, the association will eventually either need to raise the funds to do the repairs by increased regular assessments and/or by special assessments, or it will need either to reduce assessments or to hold them steady for some period of time to allow for the impact of inflation to offset the excess balance in the fund.

We can measure the impact of the status of the reserve fund by comparing it to some normalized notion of what the assessments should be if the fund happened to be exactly 100 percent funded. Using the simplified approach indicated above, this notional ideal assessment can be determined by taking the current cost of the component and dividing it by its useful life.

Assessment for the upcoming fiscal year was determined in order to move the association from its current state, discussed previously, toward a funding plan that fulfills a specific goal.

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How Are Your Reserve Assessments Calculated There are three general theories of funding: Full Funding: The association wishes to move from its current position to a position where the amount of money on hand in the reserve fund is equal to the amount of money ECHO Journal | September 2009

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Detailed on-site inspections, inventories and asset descriptions • Spreadsheet report format now available on request 30-year threshold and components models • 16 years of reserve study experience • Call today for a free proposal

it should have on hand at that point in time as determined by one of the methodologies discussed earlier.

Threshold Funding: The association wishes to ensure that the balances on hand in the fund over some number of future years (generally 30) remain above some threshold to allow some safety for estimate variations that will always be inherent in this type of estimating. We recommend a minimum threshold of ten percent of any given year’s expenditures.

Baseline Funding: The association wishes to maintain positive balances in the fund 18

September 2009 | ECHO Journal

over the next 30 years. (In essence, a threshold of zero.) We never recommend this funding plan as we feel it does not provide adequate margins for the variations that are inherent, and unpredictable, in this type of estimating.

Of special note is the fact that in many instances, threshold balance estimates may be higher than full funding balances. As a general principle, we always recommend the funding plan that will provide the higher balances between threshold and full funding.

However, the final decision is up to the board of directors. There may be many rea-

sons the association may desire, or need, to fund to balances different from our recommendation, and this is perfectly permissible as long as clear disclosure is provided to the members.

The terms full funding, threshold funding, and baseline funding all represent a goal to be reached in the future. Without regard to which goal the association reaches, the assessment is determined by projecting expenditures across future years, and then projecting assessments across the same period in order to achieve that goal. There is much flexibility here, and the variations that may be adopted are almost limitless. There is no right answer.

What is a Major Component?

There are often questions concerning which components should be included in a reserve study. This is in part because the law does not define a major component, and boards of directors are allowed wide latitude in determining what items are to be included in their reserve fund, which items can be planned for in the operating budget, and which items can wait for future years before collecting monies for future repair or Continued on page 39

By John Schneider

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September 2009 | ECHO Journal

Lessons from the Field

ommon interest developments more than 30 years old often share a familiar dilemma when homeowners want to replace older single-pane windows with newer windows that are more energy efficient. Prior to the mid-1970s, most housing developments were built with single pane, aluminum frame windows that were either silver or bronze in color. These windows were considered the standard for multi-housing complexes because they were inexpensive, installed easily and were easy to maintain. However, these windows allowed condensation to form on the interior of the frames and glazing, had corner joints that tended to leak, and were good conductors of heat and cold.

Technological advances have made the windows of today highly energy efficient. Most windows currently manufactured are dual pane windows with a choice of wood, aluminum, fiberglass or vinyl frames. These windows can be ordered with several options to increase both the insulating value and heat reflecting qualities of the window and frame with grids and trim to enhance the overall design and look of the window. These options not only make it difficult for a consumer to choose the right window for their needs; it also creates problems for CIDs that have not clearly established guidelines for window replacement.

One of the associations I have recently worked with was faced with the problem of allowing owners to upgrade the existing windows in their units. The board was reluctant to agree to these requests because the CC&Rs did not clearly address the issue of window replacement as an energy upgrade. The CC&Rs stated only that the maintenance of the windows was the responsibility of the homeowner, and the repair and replacement of the window was the responsibility of the association.

The board reviewed the matter with their attorneys and decided that the original windows could be replaced for

C

energy-efficiency ones if the homeowner bore the costs associated with the work. Once installed, the HOA would take responsibility for the window as outlined in the CC&Rs. The style, type, and color of the windows would have to meet with the approval of the architectural review committee.

Since this was a new type of request, the committee had no prior experience on what types of windows would be acceptable.

The association, seeking professional advice, contacted a consulting company specializing in residential and multifamily construction and asked for assistance in creating guidelines for window upgrades. The association’s main concern was to ensure the replacement windows looked similar to the original windows, so as not to detract from the physical appearance of the complex. This presented the first hurdle the association had to face. The original windows in the complex were single pane, with anodized bronze aluminum frames, and the homeowners were requesting to install white vinyl-frame dual pane windows as an upgrade.

The second hurdle for the association was whether to allow nail-on windows or retrofit windows called flush fin.

Nail-on windows have a flange that is fastened to the wall framing of the building, necessitating the removal of both the siding and trim. Flush fin replacement windows are installed in the existing window frame opening (with the glass panels and stiles removed), and the flush fin is sealed to the existing frame. This method requires only the installation of new trim.

Flush fin replacement windows can be problematic in that they are often installed improperly. I’ve seen many instances in buildings where flush fin windows had been installed on top of the wood trim, and not sealed to the original window frame. This method of window installation does not reflect acceptable industry standards and is prone to

ECHO Journal | September 2009

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September 2009 | ECHO Journal

leak. When it does, repairing the damage from the leakage usually requires the new window to be removed from the opening.

The manner in which a window is installed raises the questions of whether permits are necessary, and who will be responsible if the installation causes damage to another part of the building in the future? Two of the most common safety violations that occur when upgrading windows are 1) reducing the size of the window opening for emergency egress in bedrooms and 2) failing to provide tempered safety glass where necessary.

Currently, bedroom windows are required to have a window opening of at least 5.7 square feet in size, with a minimum width of 20 inches and a minimum height of 24 inches for emergency egress. When windows are upgraded, the owner or contractor often alters the size or configuration of the openings, and then the window no longer provides a space big enough for emergency personnel to enter and occupants of the room to exit. Tempered safety glass is required whenever a window is within 18 inches of the floor (depending on window size), within 24 inches of a door, installed in a tub or shower surround less than 60 inches above the floor, and within certain prescribed distances of stairs and landings. Additionally, there are new requirements to the California Building Codes restricting windowsills close to the floor, but more than 72 inches above outside ground level. These mistakes may not be caught until after the window is installed, and they present liabilities for both the owner and the association.

To help answer the various questions regarding which type of window would be best, members of the architectural review committee looked at other complexes that allowed replacement windows. They discovered that most of the replaced windows did not match from unit to unit, many were not similar to the look of the original windows, and some units only made partial replacements. All of these conditions detracted from the overall look of the complexes visited.

After viewing these examples, this board was very clear on what not to allow and realized there were several issues that needed to be addressed.

The members needed to decide on the color, style, frame type, and manner of installation for the windows that they would eventually approve. Vinyl windows are available in white and almond. Aluminum windows come in white, bronze and silver. The visible por-

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tion of a window frame differs from aluminum and vinyl, and different manufacturers design their windows with different profiles. Based on the design of their complex, they were concerned that most styles of vinyl retrofit windows would detract from the overall aesthetics of the buildings. The committee wanted to ensure the upgraded windows blended in with the buildingâ&#x20AC;&#x2122;s design.

After meeting with the members of the committee and board to discuss these issues, I began to develop guidelines for specifications that could be placed in a Scope of Work detailing the steps necessary for replacing the existing windows with new energy efficient windows. My first task was to locate a reputable and established window manufacturer that made energy efficient, anodized bronze aluminum windows that closely matched the existing windows in the complex in size and color. The decision was made to use Milgard Window & Doors.

The committee members and I then met and discussed the pros and cons of specifying nail-on windows rather than retrofit windows.

Although retrofit windows would be easier and less expensive to install (no siding removal) the potential for an improper installation exists if industry guidelines are not followed. Retrofit windows are set into the existing window frame and the inner portion of the windowâ&#x20AC;&#x2122;s flush fin is sealed to the face of the original window frame, and the outer edge of the flush fin is sealed to the siding. These two sealed joints create both a primary and secondary barrier against water intrusion.

Problems can arise with retrofit windows depending on how the new window was sealed to the original window and whether the sealant joints are inspected and maintained periodically. If water penetrates past this sealant, damage may occur to the structure. If this were to happen, who would be responsible to pay for the repair, the association or the owner?

The board decided in this instance, that if windows were upgraded by the homeowner, it would be installed in the same manner as the original windows, with slight modifications incorporating the fact that the building was not new construction. Once decided, guidelines were drafted and put into a scope of work. The scope needed to contain details on how trim was removed, how the siding was to be cut back and/or removed, how the winContinued on page 26 24

September 2009 | ECHO Journal

New election rules: $500 In today’s economic crisis, there may be some items that associations can cut to reduce costs. ECHO membership is not one. Let’s face it, educated board members are better fiduciaries, which helps them to avoid costly law suits and possibly personal liability.

ECHO is the premier resource in California for board member education. ECHO offers new articles each month with practical and easy to understand advice about current California requirements, and what may be on the horizon. ECHO staff is available by phone or E-mail to answer members’ questions about association problems or to recommend competent professional services when necessary.

And with discounted member rates at more than a dozen educational events throughout the year, ECHO is simply the best educational resource for California homeowners.

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

Mailing ballots: $200 Make Better Financial Choices Many associations struggle to understand reserve funding requirements and strategies, the benefits and disadvantages of using special assessments, proper collections practices, and even how to determine what components the association is required to maintain.

At a time when wise financial planning is essential, ECHO members have access to a wealth of articles about reserve funding, budgeting, insurance, collections, and much more.

Fight Costly Regulation Every year, Sacramento legislators introduce more legislation that confuses the job of California board members and increases the costs of compliance. ECHO is committed to fighting unnecessary regulation in California and promoting the interests and welfare of common interest developments.

Hire Competent Professionals ECHO offers a variety of articles and publications to help members evaluate their service providers, including questions to ask prospective management firms and contractors. All ECHO Journal articles are available to members at no cost, and publications are sold to members at a discount.

Avoiding a lawsuit: Priceless.

Spend a Little, Get a Lot The cost of ECHO membership is minimal. In a worsening economy, associations are looking to cut big expenses from their budgets. Yet, ECHO membership is as little as 25¢ per unit each month. For that small cost, here’s what every board member receives as part of being a member of ECHO: • A subscription to the ECHO Journal • An annual copy of the current Community Association Statute book • Unlimited access to ECHO’s library of past articles • Telephone consultations with ECHO staff about their problems • Reduced fees for ECHO events • Discounted prices on publications • And much more…

In These Tough Economic Times, ECHO Membership is a Necessity As the only California organization devoted exclusively to board member and homeowner education, ECHO is a one-of-a-kind resource that your association can’t afford to lose.

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dows were flashed, and how the siding and trim were reinstalled.

Before approval by the board, the guidelines were reviewed for legal considerations by the associationâ&#x20AC;&#x2122;s attorney. The attorney pointed out that the specifications could not limit the window type or purchase to just one manufacturer or distributor, and that the specifications should be based on sound and proven industry practices. Otherwise, there may be potential liability for the association by the mere fact that they created a scope and guidelines governing window installations.

The attorneyâ&#x20AC;&#x2122;s concerns were met by revising the specifications and included a comment stating the window shall be â&#x20AC;&#x153;similarâ&#x20AC;? to the window the association decided to be the best match for the look of the complex. We also included the name and contact information of the window manufacturer, in case an owner wanted more information. To ensure the window installations were done properly and in a workmanlike manner, the guidelines required that all work be approved by the architectural review committee, installed by licensed and insured contractors, and permits pulled as required.

Finally, to give guidance to an owner contemplating a window upgrade, an associationâ&#x20AC;&#x2122;s guidelines should reference the American Architectural Manufacturers Association (AAMA) Standards 2400-02 and 2410-03. The first deals with nail-on windows and the second with flush fin retrofit windows. Both standards should be considered a minimum, and specific requirements may need to be added to the guidelines by boards to improve the installation based on local conditions. Although the AAMA standards are voluntary, many window manufacturers and design professional reference them. The standards can be obtained from the AAMA website at www.aamanet.org, or by calling 847-303-5664.

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September 2009 | ECHO Journal

By making the effort to research window replacement and by working with an industry professional, boards can devise clearly written and easily attainable guidelines for upgrading windows, while at the same time ensuring that the upgrades blend with the existing design and look of the complex.

ECHO Peninsula Seminar Donâ&#x20AC;&#x2122;t miss this opportunity to stay informed on how your association can survive the economic crisis of 2009.

The Seminar Agenda will be announcedâ&#x20AC;&#x201D;Watch for it in the upcoming flyer

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Obligations and Liabilities of Directors Continued from page 12

individuals involved. In other words, when a board of directors attempts to carry out their obligations by enacting rules and regulations that conflict with well recognized individual liberties, they have once again exposed themselves and their association to liability.

Finally, the third principle is that both rules and regulations that are adopted by the board of directors and the various use restrictions contained in the governing documents must be enforced in a fair and nondiscriminatory manner.

With all of these additional principles in mind and the general fiduciary principles discussed above, let us consider some examples and how these principles might apply.

Consider a homeowner association that has governing documents that permit owners to have pets in the development and further authorize the board of directors to promulgate certain rules and regulations limiting or qualifying the presence of pets in the development.2 Since this use restriction on its face permits pets in the development, it would seem clear that should the board fail to pass any rules and regulations relating to pets, an owner would be permitted to bring virtually any pet into the development that was not otherwise illegal by local ordinance, statute or otherwise. Therefore, the board of directors first has an obligation to its members to establish rules and regulations relating to pets so as to clarify the conditions under which pets are to be permitted. Recognizing the requirement that directors act in good 28

September 2009 | ECHO Journal

faith, the board cannot use this process as a subterfuge to effectively and impermissibly limit or exclude pets. All limitations in any proposed rule must have a legitimate and compelling basis and must be consistent with the intent of the provision in the declaration permitting pets in the development.

The next question in this example then becomes what types of rules and regulations would be appropriate. At this point, the directors have an obligation to make reasonable inquiry and perhaps even establish a committee upon which the directors can rely for such input. Once this information has been gathered, the directors are now at a point where they must adopt rules regulating pets. As indicated from the governmental principles discussed above, these rules must be specifically related to the preservation of the development and to the harmony of the individual owners, as well as to the intent of the drafters of the declaration to permit pets in the development. They must be reasonable in nature and must not violate the individual rights of the owners. Therefore, such rules may consist of limiting the number of pets, the types of pets, the size of pets, etc., as long as there are compelling and justifiable reasons. Further, such rules may require that all pets be maintained within the individual units and not be permitted to roam about the common area of the development. Such rules may further provide that any damage done by such pets will be the responsibility of the pet’s owner. Finally, in view of the fact that pets were permitted in the governing documents, it may well be appropriate to provide that owners who have pets that

would be in violation of the rules once they are adopted would be permitted to retain those pets but not permitted to replace them, so long as the pets do not otherwise constitute a nuisance.

These considerations are obviously just an example of the considerations that should go into promulgating rules by the board of directors. As long as each aspect of the rules can be reasonably related to a valid purpose of the association, and is not discriminatory upon its face, the rules should withstand a challenge.

Obviously, if there are members of the board of directors who simply do not wish pets at all in the development, and are therefore using their position on the board not to pass reasonable rules, but to limit as narrowly as possible the presence of pets in the development, they should seriously question whether or not they are acting in good faith and in the best interest of the corporation.

2 Since the purpose of this example is to demonstrate the application of the fiduciary principle is a common process in a common interest development, such issues as the rules adoption procedure as set forth in Civil Code §1357.100, et seq. of the Davis-Stirling Act and the issues and unanswered questions of Civil Code §1360.5 relating to pets are not discussed here. However, with the adoption of Civil Code §1363.03 in 2006, which requires all homeowner associations to adopt election rules, Civil Code §1360.5 is now applicable to all associations, with the result that all associations must now permit at least one pet per separate unit, subject to reasonable rules and regulations.

Continued on page 30

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

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Since 1990, our sole focus has been to deliver performance that enriches communities and enhances the lives of the people we serve. M & C is proud to be an Accredited Association Management CompanyÂŽ (AAMCÂŽ), which is the Community Associations Instituteâ&#x20AC;&#x2122;s highest GHVLJQDWLRQ DZDUGHG WR PDQDJHPHQW Ă&#x20AC;UPV

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29

Obligations and Liabilities of Directors Continued from page 28

Once the rules have been adopted, the next consideration is enforcement. Should the board undertake to enforce the rules against some but not others, a clear case of discrimination will be demonstrated. For this reason, the board of directors should once again make reasonable inquiry to ascertain who is and who is not in violation of the rules. Once violators are identified, non-discriminatory, uniform enforcement should be undertaken by the board. Such enforcement should provide for reasonable notice and hearing to those who are allegedly in violation of the rules. This requirement is often referred to as “procedural due process.” It is based not only upon constitutional and case authority, but also upon provisions found within the Code (see e.g., §7341) and the Davis-Stirling Act (see e.g., Civ. Code §1363(h)).

The above example relating to the promulgation and enforcement of pet restrictions is just one example of how the governmental principles as well as the more general principles of fiduciary responsibility might apply. Obviously, there are numerous other areas that could be considered. Such areas include rules and regulations relating to renters, children, architectural control, use of the common facilities, parking, etc. Whatever the particular area under consideration, it is clear that the director must act in good faith, in the best interest of the association and with reasonable care after having reasonably investigated the situation. Further, if rules and regulations are promulgated, they must relate to the purpose for which the association has been given authority, they must be non-discriminatory either on their face or in their enforcement. Equally clear is that the failure to observe these general principles not only constitutes a breach of the fiduciary obligation that each director owes to the association, but can also result in liability for individual board members who actively participated in the misconduct.

Part II of this article will be published in the October issue of the ECHO Journal.

John Garvic is the founding member of Garvic & Associates, a law firm in San Mateo, California, specializing in common interest developments since 1977. He is a member and past president of the ECHO board of directors and the chair of the ECHO Legislative Committee.

30

September 2009 | ECHO Journal

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31

News from ECHO

Legal Obligations and Potential Liabilities of Directors It is essential that every person who is elected to serve on a board of directors of a homeowner association understand the basic obligations and potential liabilities of that position. A failure to do so means legal exposure not only for the association, but also for the individual directors. There are numerous motives as to why a person seeks or agrees to run for a position on a homeowner association board.

Sometimes it is an attraction to the political aspect of the position, other times it is because no one else is willing to serve and often it is because the individuals running genuinely wish to participate in the management of the property in which they have an ownership interest. Whatever the underlying motivation, it is often a new experience for those elected that is fraught with danger both to the association and the individual directors unless those individuals are willing to become educated about the responsibilities they have assumed and act accordingly.

The relationship between the individual owners and the managing association of a common interest development is a complex one. On the one hand, each individual owner has an econom32

September 2009 | ECHO Journal

ic interest in the proper business management of the development as a whole for the sake of maximizing the value of his or her investment and maintaining a certain quality of environment.

In this aspect, the relationship between homeowner and association is a fiduciary one, somewhat analogous to that between shareholder and corporation. On the other hand, each individual owner, at least while residing in the development, has a personal, not strictly economic, interest in the appropriate management of the development for the sake of maintaining his or her security against foreseeable risks of physical injury. In this aspect, the relationship between owner and association is somewhat analogous to that between tenant and landlord.

Board members should make every effort to educate themselves in all phases of their responsibilities. This process begins by thoroughly familiarizing oneself with the governing documents of the association and the applicable statutes, and reading the minutes of previous meetings of the board of directors. But the education should not stop there. Numerous courses, seminars, periodicals, and books relating to the management of homeowner associations are available, and directors should make a reasonable effort to obtain this information.

Ignorance may sometimes be bliss, but it is definitely not a defense to an action for breaching the fiduciary obligation that each director has. Perhaps the most important thing to remember as a director of a homeowner

association is that it is very serious business and should not be taken lightly.

Upgrading to Energy Efficient Windows Common interest developments more than 30 years old often share a familiar dilemma when home owners want to replace older single-pane windows with newer windows that are more energy efficient. Prior to the mid-1970s, most housing developments were built with single pane, aluminum frame windows that were either silver or bronze in color. These windows were considered the standard for multi-housing complexes because they were inexpensive, installed easily and were easy to maintain. However, these windows allowed condensation to form on the interior of the frames and glazing, had corner joints that tended to leak, and were good conductors of heat and cold.

Technological advances have made the windows of today highly energy efficient. Most windows currently manufactured are dual pane windows with a choice of wood, aluminum, fiberglass or vinyl frames. These windows can be ordered with several options to increase both the insulating value and heat reflecting quali-

ties of the window and frame with grids and trim to enhance the overall design and look of the window. These options not only make it difficult for consumers to choose the right window for their needs; it also creates problems for CIDs that have not clearly established guidelines for window replacement.

By making the effort to research window replacement and by working with an industry professional, boards can devise clearly written and easily attainable guidelines for upgrading windows, while at the same time ensuring that the upgrades blend with the existing design and look of their complex.

IRS Finalizes E-Postcard Rules The Internal Revenue Service published on June 23 final rules for tax-exempt organizations required to file the annual electronic notification known as the Form 990-N, or e-Postcard. The e-Postcard must be filed by taxexempt organizations whose annual gross receipts are less than $25,000. The final rules are effective immediately. The ePostcard is due on or before the 15th day of the fifth month following the close of an organizationâ&#x20AC;&#x2122;s accounting period.

These rules apply to a few associations, according to CPA Joelyn Carr-Fingerle. Whether an association files depends on whether they were set up as public benefit associations and filed for federal exemption. CarrFingerle added that mostly such associations provide community parks or roads that are not private, and generally, they are also very old associations.

2009 Legislation at a Glimpse As of August 21, 2009 Bill No.

Author

Subject

Status

Position

Summary

AB 49

Feuer

Water Reduction

In Conference Committee

Watch

Would state the intent of the Legislature to enact legislation to establish a 20% water efficiency requirement for the year 2020 for agricultural and urban water users.

AB 121

Hernandez

Judgment Lien Extension

Passed Assembly.

In Senate, Third Reading

Neutral

Under certain conditions, this bill would allow creditors to extend judgment liens on specified personal property by filing a continuation statement in the office of the Secretary of State. The statement must be filed no earlier than six months before the lien is scheduled to expire.

AB 300

Caballero

Water Supply

In Senate Resources

Oppose

Would regulate water supplies to subdivisions of 50 units or more.

The bill is long, controversial and will likely become a two-year bill.

AB 313

Fletcher

Tax-based Assessments

Amended; Passed Assembly.

In Senate, Third Reading

Oppose

After December 30, 2009, would prohibit associations from levying assessments based upon the taxable value of the separate interests within the association. Associations that levied assessments based upon taxable value on or before December 30, 2009 would be exempted.

AB 370

Eng

Unlicensed Contractors

Senate Third Reading

Support

Would increase fines for unlicensed contractors.

AB 473

Blumenfield

Recycling Mandate

Senate Third Reading

Support if Amended

Would require an owner of a multi-family dwelling with five or more units to arrange for recycling services.

AB 566

Nava

Mobilehome Conversion Approval

Amended; Passed Assembly.

In Senate, Second Reading

Support

In deciding whether to approve or disapprove a subdivision map, would allow a legislative body or advisory board to consider whether a majority of the residents in a mobilehome park approve conversion of the park to resident ownership.

AB 869

Mendoza

Mobilehome Park Managers

Failed passage, twoyear bill?

Support

Defines “Park Manager” and “Certified Mobilehome Park Manager.”

AB 899

Torres

Disclosure Documents Index

Amended; In Senate, Third Reading

Support

Would require associations to distribute a list of all legally mandated disclosures to their members annually, if requested. Clarifies and improves provision allowing the electronic distribution of records.

AB 1061

Lieu

Low WaterUsing Plants

Amended; Passed Assembly.

In Senate, held at desk

Support

Would render void and unenforceable any provision in the governing documents of an association that has the effect of prohibiting low water-using plants or prohibits or restricts compliance with local conservation ordinances. Allows associations to enforce landscaping rules and regulations.

AB 1328

Salas

Contract Restrictions

Amended; In Senate, Third Reading

Neutral

Extends to 5 years contract length restrictions for water or energy efficiency programs for associations when the board reasonably anticipates verifiable savings to the association. Requires the board to provide notice of the contract length before approving it.

SB 23

Padilla

Mobilehome Safety Plan

Amended; Support Passed Senate. In Assembly Appropriations

Would require all owners or operators of mobilehome or manufactured home parks to adopt an emergency preparedness plan. Requires that the plan be posted and that an enforcement agency determine park compliance.

ECHO Journal | September 2009

33

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 Ed. $15.00 Non-Member Price: $25.00

This directory lists all business and professional members of ECHO as of December 2007. Current addresses, telephone and fax numbers, email addresses, and a short description are included. This directory is an invaluable tool for locating service providers that work with homeowner associations.

This well-known compact guide for operation of common interest 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 homeowners associations who want to learn how to manage and operate the affairs of their associations effectively.

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.

ric ReP duce ed

Questions & Answers About Community Associations $18.00 Non-Member Price: $25.00 For 12 years, Jan Hickenbottom answered homeowners’ questions in her Los Angeles Times column on community associations. Now collected in one volume, readers can find answers to almost any question about CIDs.

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

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 homeowners 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.

2009 ECHO Annual Seminar Program Book $15.00 Non-Member Price: $20.00 This 300+ page reference book contains the presentation outlines, text and handouts from the sessions at the 2009 ECHO Annual Seminar held on July 13, 2009. It also contains vital information for association directors, such as assessment collection policies, internal dispute policies, and much more.

Dispute Resolution in Homeowner Associations $20.00 Non-Member Price: $25.00 This publication has been completely revised to reflect new requirements resulting from passage of SB 137.

Publications to answer your questions about common interest developments Now Order Online at echo-ca.org

Bookstore Order Form Board Memberâ&#x20AC;&#x2122;s Guide for Contractor Interviews $20.00 Non-Member Price: $25.00

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

QUANTITY

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.

SUBTOTAL CALIFORNIA SALES TAX (Add 9.25%) TOTAL AMOUNT

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.

q Check q Visa q Mastercard Credit Card Number Exp. Date

Signature

Name (please print) Association (or company) Address City Daytime Telephone

State

Zip

AMOUNT

Events Calendar

Note these important dates Friday, September 3 North Bay Resource Panel 11:45 a.m.

Contempo Marin Clubhouse 400 Yosemite Rd., San Rafael

Thursday, September 17 San Francisco Luncheon 11:45 a.m.

St. Francis Yacht Club San Francisco

Wednesday, October 14 Wine Country Resource Panel 11:45 a.m.

Eugene Burger Mgmt. Co. 6600 Hunter Dr., Rohnert Park

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

Angius & Terry 1900 N. California Blvd.

Suite 950, Walnut Creek

Saturday, September 19 Central Coast Fall Seminar 8:00 a.m. to 1:00 p.m.

Best Western Seacliff Inn, 7500 Old Dominion Ct., Aptos

Wednesday, October 14 South Bay Resource Panel 12:00 Noon Il Fornaio 302 S. Market St., San Jose

Saturday, October 3 Sacramento Seminar 8:00 a.m. to 1:00 p.m.

Marriott Rancho Cordova 11211 Point East Dr., Rancho Cordova

Friday, October 16 Annual Membership Meeting 10:00 a.m.

ECHO Office 1602 The Alameda, Suite 101 San Jose

Wednesday, October 7 Maintenance Resource Panel 12:00 Noon ECHO Office 1602 The Alameda, Suite 101 San Jose

Saturday, October 17 Peninsula Seminar 8:00 a.m. to 1:00 p.m.

Sofitel Hotel 223 Twin Dolphin Dr., Redwood Shores

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

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

Wednesday, October 21 South Bay Resource Panel 12:00 Noon Il Fornaio 302 S. Market St., San Jose

Tuesday, September 8 Central Coast Resource Panel 12:00 Noon Pasatiempo Inn, Santa Cruz Friday, September 11 East Bay Resource Panel 9:30 a.m.

Angius & Terry 1900 N. California Blvd.

Suite 950, Walnut Creek Monday, September 14 Accountants Resource Panel 6:00 p.m.

Francesco’s Restaurant Oakland Wednesday, September 16 Wine Country Resource Panel 11:45 a.m.

Eugene Burger Mgmt. Co. 6600 Hunter Dr., Rohnert Park

Friday and Saturday June 18 and 19, 2010 ECHO Annual Seminar Santa Clara Convention Center Santa Clara

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

36

September 2009 | ECHO Journal

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

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

408-295-7767 or 877-295-FLOW

www.aquatekplumbing.com Fire Alarm Systems Fire Sprinkler Systems Testing, Service, Design & Installation

Tele-Entry & Access Control Emergency Exit Lighting Automated Gates Fire-Rated & Rollup Doors

Complete Service and Repair Plumbing Copper and CPVC Repipes AquaTek Plumbing, Inc. has been servicing residential and commercial customers faithfully since 1982. Call us today for more information about AquaTek and the full spectrum of plumbing services we provide.

For Information please call: 650 988-9508 or 888 988-9508 or e-mail info@statcomm.com Lic # 675521 Underwriters Lab #UUFX.S8915 Diamond Certified ECHO Journal | September 2009

37

Honor Roll

About ECHO

ECHO Honors Volunteers Tyler Berding 2009 Volunteer of the Year ECHO Resource Panels Accountant Panel Richard Schnieder, CPA 707-576-7070 Central Coast Panel John Allanson 831-685-0101 East Bay Panel Scott Burke, 408-536-0420 Mandi Newton, 925-937-0434 Legal Panel Mark Wleklinski, Esq. 925-280-1191 Maintenance Panel Brian Seifert, 408-536-0420 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 A. Barnett, Esq. Sandra Bonato, Esq. Jerry L. Bowles Joelyn Carr-Fingerle, CPA John Garvic, Esq., Chair Geri Kennedy, CCAM Wanden Treanor, Esq.

38

September 2009 | ECHO Journal

SF Luncheon Speakers John Allanson Jeffrey A. Barnett, Esq. 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. Beverly Gordon, CCAM Sandra Gottlieb, Esq. Beth Grimm, Esq. Brian Hebert, Esq. Roy Helsing Stephen Johnson, CFP Julia Lave Johnston Garth Leone Nico March Kerry Mazzoni Larry Russell, Esq. Steve Saarman Nathaniel Sterling, Esq. Debra Warren, PCAM, CCAM Steven Weil, Esq. Mark Wleklinski, Esq. Glenn Youngling, Esq.

Marin Seminar Speakers David Feingold, Esq. Linnea Juarez, PCAM, CCAM Wanden Treanor, Esq. Glenn Youngling, Esq.

Association Finances Seminar Speakers Joelyn Carr-Fingerle, CPA Bill Erlanger, CPA James Ernst, CPA John Garvic, CPA Donald Haney, CPA

North Bay Winter Seminar Speakers Sandra Bonato, Esq. Robert Hall, Esq. Diane Kaye, CCAM David Kuivanen, AIA Steve Lieurance, CCAM Steven Saarman Robert Smylie Barbara Zimmerman, Esq.

Recent ECHO Journal Contributing Authors May 2009 Tyler P. Berding, Esq. Kim Goldsworthy Richard Tippett Glenn H. Youngling, Esq. June 2009 James O. Devereaux, Esq. Hermann Novak Steven O’Brien Debra J. Oppenheimer, Esq. Allen F. Schafer Dean Williams, PCAM July 2009 Andrew Baugh, Esq. Melanie J. Bingham, Esq. Matt Malone, Esq. Marjorie Jean Meyer, PCAM Matt D. Ober, Esq. Carole Robinson Brian Seifert

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.

Benefits of ECHO Membership • Subscription to monthly magazine for every board member • Yearly copy of the Association Statute Book for every board member • Frequent educational seminars • Special prices for CID publications • Legislative advocacy in Sacramento

ECHO Membership Dues HOA Size 2 to 25 units 26 to 50 units 51 to 100 units 101 to 150 units 151 to 200 units 201 or more units Business/Professional

Rate $120 $165 $240 $315 $390 $495 $425

ECHO Journal Subscription Rates Members Non-members/Homeowners Businesses & Professionals

$50 $75 $125

How Do You Join ECHO?

August 2009 Tyler P. Berding, Esq. Damon Burk Michael Gartzke, CPA Patrick Hendry Tracy Neal, Esq. Judy O’Shaughnessy David C. Swedelson, Esq.

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

How to Read Your Reserve Study

COM PA S S

Continued from page 18

replacement. Basically, in order for a component to be included in a reserve study it should: 1. be a common area component (i.e., the governing documents for the association indicate that the association is responsible for the maintenance, repair, or restoration of the component); 2. have a limited life; 3. have a reasonably defined life.

If the component does not meet all three of these qualifications, it does not qualify. For example, we do not normally reserve for total concrete replacement because it is considered to have an unlimited life (although we may reserve for partial replacement if the circumstances so indicate). We also do not reserve for light bulbs or sprinkler heads because most replacement is due to random failure, breakage or vandalism, and although a limited life may be assumed, timing and the extent of breakage problems are difficult to quantify.

Additionally, there is often concern over how we establish the useful life and useful remaining life for a given component, as well as questions pertaining to the accuracy of our predictions. In fact, these questions are related. Basically, components can be placed into one of five categories: 1. Cyclic Regularâ&#x20AC;&#x201D;Items such as asphalt seal coating or wood painting fall into this category. Such components have a very predictable life cycle. That life cycle may vary based upon local climate, usage, exposure to weather or similar issues, but it will generally stabilize for the components of a given property and have a reasonably high degree of predictability concerning both useful and remaining life.

2. Cyclic Irregularâ&#x20AC;&#x201D;Items such as deck surfaces and roofing fall into this category.

These items have a normal life span great enough that climate, level of preventive maintenance, owner care, and other issues can materially affect the actual life.

3. Predictable but Irregular Non-catastrophic Failureâ&#x20AC;&#x201D;This category includes pool pumps, spa heaters, and other items that can be expected to wear out with some predictability (regular or irregular) but do not need to be replaced until failure. With these items the association may well have accumu-

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Continued on page 41 ECHO Journal | September 2009

39

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ECHO Marketplace

Adver tiser Index

The place to find business and professionals for your association Affirmative Management . . . . . . . . .26 Alpha Restoration & Waterproofing . .8

WILLIAM FISHER ARCHITECTURE (831)246-0117 FAX:(831)457-0246 INC. MODERN-ARCHITECTURE.COM

ARCHITECTURE. CONSULTATION.

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SBI, LLC 180 Second Street Suite A Los Altos, California 94022 Voice: (650) 949-3774 Fax (650) 941-3689 Email: tom@sbiusa.net General Contractors • Civil Engineers

Reserve Studies • Energy Surveys Insurance Replacement Cost Analysis Construction Defects Mold Sampling Foundation and Drainage Inspections

LOCKING MAILBOXES Professional Installation & Sales

805-929-0555

www.lockingmailboxes.us CA License #911384 - Bonded

How to Read Your Reserve Study Continued from page 38

lated the money for repair or replacement and then actually wait for failure to spend this money. This does not affect the reserve contribution prior to the expected replacement date, but once that date is reached, assessments can be reduced until failure because adequate reserves are on hand.

4. Catastrophic Failure—With these items, waiting until failure is not appropriate. A hydraulic elevator falls into this category. In these cases, a fund is built for a general replacement time frame; then a decision is made to repair or replace before failure.

5. Outdated Design/Aesthetics—This category refers to items where aesthetics are a major concern. Examples include light fix-

Advertise your business to thousands of association directors in California in the ECHO Journal.

tures, window coverings, and other items that may be quite functional past the time they are desirable. They should be recognized and reserved for in order to keep the common area from appearing dated and unappealing.

These categories are not rigid, and in fact, some components may fit into a several categories. Rather, these categories are used as general guidelines in order to help us reach a reasonable conclusion concerning life estimates and funding strategies.

American Asphalt . . . . . . . . . . . . . .24 American Management Services . . .10 Angius & Terry . . . . . . . . . . . . . . . . .3 Applied Reserve Analysis . . . . . . . . .18 AquaTek Plumbing . . . . . . . . . . . . .37 A.S.A.P. Collection Services . . . . . . . .9 Association Reserves . . . . . . . . . . .17 Bayridge Group . . . . . . . . . . . . . . . .12 Berding | Weil . . . . . . . . . . . . . . . . .44 Coastal Termite Control . . . . . . . . .12 Collins Management . . . . . . . . . . . .18 Community Association Banc . . . . . .26 Community Management Services . .24 Community Reconstruction Solutions 37 Compass Management . . . . . . . . . .39 Cool Pool Service . . . . . . . . . . . . . .17 Cornerstone Community Mgmnt . . . . .8 Draeger . . . . . . . . . . . . . . . . . . . . .11 Ekim Painting . . . . . . . . . . . . . . . . .31 ERTECH . . . . . . . . . . . . . . . . . . . . .28 First Bank Association Bank Services30 Flores Painting . . . . . . . . . . . . . . . .29 Focus Business Bank . . . . . . . . . . .22 Helsing Group . . . . . . . . . . . . . . . .12 Hill & Company. . . . . . . . . . . . . . . .19 Louis & Riparetti, Inc. . . . . . . . . . . .13 M&C Association Services . . . . . . . .29 M. L. Nielsen Construction . . . . . . .30 Massingham and Associates . . . . . .31 Pelican Management Group . . . . . . .12 PML Management Corp. . . . . . . . . .11 Pollard Unlimited . . . . . . . . . . . . . .31 Pro-Craft Builders . . . . . . . . . . . . . .39 Professional Association Services . .39 R. E. Broocker Co. . . . . . . . . . . . . .22 REMI Company . . . . . . . . . . . . . . . .17 Saarman Construction . . . . . . . . . . .9 Socher Insurance . . . . . . . . . . . . . .43 Statcomm . . . . . . . . . . . . . . . . . . .37 Steve Tingley Painting . . . . . . . . . . . .2 Steve’s Painting Services . . . . . . . .10

Roy Helsing is president and CEO of The Helsing Group, Inc., a consulting firm specializing in community associations to include maintenance plans, reserve studies, construction management, association set-up, forensic engineering and construction consulting.

ECHO Journal | September 2009

41

ECHO Central Coast Fall Seminar Donâ&#x20AC;&#x2122;t miss this opportunity to stay informed on how your association can survive the economic crisis of 2009.

The Seminar Agenda will be announcedâ&#x20AC;&#x201D; Watch for it in the upcoming flyer

Yes, reserve ___ spaces for the Central Coast Seminar.

Amount enclosed: $__________ (attach additional names) Name: _______________________________________________________

Central Coast Fall Seminar

HOA or Firm: _________________________________________________

Saturday, September 19, 2009

Address:_____________________________________________________

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

City: __________________________ State: _____ Zip: ____________

Best Western Seacliff Inn 7500 Old Dominion Ct., Aptos

Phone: ______________________________________________________

Registration Fee: $40 Non-Members: $50

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

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