Echo Journal – Issue 5 2021 by Echo

JOIN THE BOARD MEMBERS’ CLUB!

BETTER BUDGETING

LOOK AHEAD BY LOOKING BACK

Share experiences and practical solutions

Tips to avoid the possible traps

Get organized for 2022 by assessing 2021

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ISSUE FIVE 2021

INSURANCE COVERAGE DENIED Avoiding a Costly Insurance Denial

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BOARD OF DIRECTORS & OFFICERS PRESIDENT

DIRECTORS

David Hughes

Jerry L. Bowles

VICE PRESIDENT Adam Haney TREASURER

Rolf Crocker Sarah Dunia John Gill, Esq. Mark Guithues, Esq.

Karl Lofthouse

David Levy, CPA

SECRETARY

Katrina Solomatina, Esq.

Sandra Long

Click to Visit the Echo YouTube Channel

Wanden Treanor, Esq.

CHIEF EXECUTIVE OFFICER

David Zepponi dzepponi@echo-ca.org DIGITAL OUTREACH SPECIALIST

Connor Zepponi connor@echo-ca.org MEMBERSHIP & SALES ADMINISTRATOR

Jacqueline Price jprice@echo-ca.org ADMINISTRATIVE ASSISTANT

HOA Education On Demand! Echo has launched its YouTube Channel! Echo Members have exclusive access to our entire library of HOA-focused educational programming including Community Conversations, Educational Seminars, Workshops, Ask the Attorneys and Ask the Experts. There’s also free content available to HOA homeowners and board members. The presentations listed below are free to HOA homeowners and board members. Click a title to watch!

Patty Kurzet pkurzet@echo-ca.org

Balcony Inspection & Reporting Law: One Year Later The Echo Journal is published bimonthly by the Executive Council of Homeowners (Echo). 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 professional should be sought. 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 or image.

The Importance of a Strong Banking Relationship Identifying Harassment in Your HOA Preparing the HOA for Taxes Avoiding HOA Reserves Quicksand Board Ethics and Decorum After the Dust Settles: Surfside Disaster & Case Law Exposed Breaking Up Is Hard to Do Board Decision Making: When Is Enough Enough for a Decision?

© 2021 Executive Council of Homeowners (Echo) All rights reserved. Reproduction except by written permission of Echo is prohibited. Echo member information is never released to any outside individual or organization, unless agreed to by the member.

For more information visit www.echo-ca.org ECHO journal | ISSUE FIVE 2021

Click a page number or article title to jump directly to the article!

Features 8

Insurance Coverage Denied: Avoiding a Costly Insurance Denial

BY CHARLOTTE ALLEN

Better Budgeting: Tips to Avoid the Possible Traps

BY DAVID LEVY, CPA

The Self-Managed Association Look Ahead by Looking Back: Get Organized for 2022 by Assessing 2021

BY JOHN CLIGNY, AMS, PCAM, CCAM-HR

The Process of Reasonable Inquiry

BY PATRICIA ARNOLD, CCAM, CMCA AMS

To Zoom or Not To Zoom?

BY JOE PRICE, CCAM, CAMEX, CMCA

Happenings

ISSUE FIVE 2021 | ECHO journal

HOA Education on Demand: Visit the Echo YouTube Channel!

CEO’s Message: Echo Launches the Board Members’ Club for Peer-toPeer Learning

November 13 Saturday Seminar: Legislative Session in Review

All-New 2022 Statute Books Are Available for Pre-Order!

Welcome to Our New Professional Service Providers

32 36

Legislation Tracker November 16 Livestream Webinar: Human Resources: Best Practices in an HOA

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Liberty HOA Election Services, LLC Inspectors Of Election GET STARTED NOW > WWW.HOAELECTION.COM ECHO journal | ISSUE FIVE 2021

news from ECHO CEO’S MESSAGE

Raison d’Etre – The Reason for Bo

Echo Launches the Board Members’ Club What a beautiful phrase, raison d’etre (reason for being). It is a for Peer-to-Peer Learning every board member should consider and collectively agree.

hope that HOA leadership connections will be made, Echo is pleased to announce the formation of the The phrase engenders humanity. The words roll from one’s tong and friendships will grow through peer-to-peer Board Members’ Club Resource Panel. The Board stark of businesslearning sensesand and adds the element humanity to the knowledge sharing in theof interest of Members’ Club is designed to build a network building better communities. board members sharing experiences and a practical board: Strategic planning, execution and evaluation; mission solutions peer-to-peer. Club members will meet management. The business realities should be reflective of com Miguel Sanchez and Tom Connelly will lead the 2022 monthly to share stories, best practices, and common values of individuals in the community. Board Members’ Club program for Echo. Each has strategies to better manage HOA communities. years of volunteer experience in HOA Communities are imperfect – because they aremanagement made of humans. H including board membership and leadership as board The Board Members’ Club is available only to Echo relating. Humans using. Human living. Basically, humans being presidents. This highly energetic team will make sure members who are currently serving or have recently human, communities sometimes forgetand that manageme you leave the program feeling recharged armed served on their HOA board of directors.being Meetings are establish a successful community. In a sense, withfor innovative ideas and a sense of connection to a the bo planned for the second Tuesday of the month from norms larger of your 5:30 PM to 7:00 PM Pacific Time. the community. Its group purpose is peers. to establish order and elevate o

progress and pace by establishing norms and constraints to b

It’s easy to join this outstanding group of volunteer Each meeting will have a topic for discussion and a to benefit all. HOA leaders like you. Simply click the blue button general gathering. Numbers permitting, the general below and you can quickly and easily sign up. You session will be followed by smaller special interest It seems apparent that board leadership must understand and may also contact Patty Kurzet at (408) 816-1544 or breakout groups (for example: a group for small owners in orchestrate a sense of community viato email at pkurzet@echo-ca.org for assistance. and gener associations, another for active 55+ communities, or order and smaller protect community values. The purpose of a board, therefore perhaps another on insurance issues). These groups will be used to create personal connections build community based on common for the good of all. Sign Up forvalues the between members who have like concerns. It is our Board Members’ Club Here

It takes time to orchestrate a community. It takes time to know yo time to listen to the voices and build a vision reflective of comm and you will be more effective as a board member and satisfied your reason for being on the board.

ECHO is committed to helping homeowner boards and residents ing and advocacy – this is our “raison d’etre”.

Good luck and stay safe, Sincerely,

ECHO CHIEF EXECUTIVE OFFICER 6

ISSUE FIVE 2021 | ECHO journal

David Zepponi Executive Director

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INSURANCE COVERAGE DENIED Avoiding a Costly Insurance Denial The sight and sound of a large red rubber stamp pounding the paper documenting a major loss a community just suffered is an image no homeowners association wants at the time of an insurance claim. So how can communities worry less about denied coverage of a loss claim?

ISSUE FIVE 2021 | ECHO journal

BY CHARLOTTE ALLEN

laims can be denied for a number of reasons. Simple and logical steps to avoid denial include paying insurance premiums on time to avoid lapses in coverage, working with a broker that specializes in homeowners association insurance to ensure policies are adequate for the specific risk of the HOA, avoiding false or misleading statements on insurance applications, and understanding (and helping other homeowners understand) where the policy for the association ends and their own personal homeowners coverage begins. But one of the most common denials for coverage, which can be avoided if the right steps are taken, is the lack of maintenance, or wear and tear on community assets. Tragically, and in light of devastating losses such as the Berkeley balcony collapse and, more recently, the Champlain Towers South in Surfside, Florida, the lack of maintenance can lead to deadly consequences. Too often “maintenance” of property begins with an insurance claim denial or a new law. Poor maintenance creates a liability that can be avoided by using best practices and planning maintenance before an incident occurs. Planning starts with the community and includes a toolbox of professionals. Often, signs of wear and tear are not obvious to an untrained eye. And in some cases, even a trained eye has to do some professional digging in order to discover components that need repair or updating. There are a few reliable sources that provide warnings of maintenance needs. The first line of defense for a common interest development includes the community at large, the board of directors, and the community manager that serves them. Due to the pandemic, homeowners

are spending more time at home than ever before, and folks are noticing maintenance issues that went unnoticed when lives were hurried by the hustle and bustle of daily routines and commutes. It is important to track trends and threads of comments from the residents of the community. These can often identify problem areas and help to avoid risks of greater loss if the issue was undetected. Professional community managers are highly specialized leaders who often have seen many properties and may notice issues of concern well before they are visible to a homeowner. Boards should trust their intuition, listen to homeowner concerns, and if they have a community manager, rely on their advice. Having a good system in place to detect potential problems is the first step to minimizing long term risk. When a maintenance or repair issue is identified, it is important to call in professionals. Whether the original developer, a construction management company, restoration specialists, or the association attorney, a qualified team of experts will help the association to make the repairs needed to avoid costly insurance claims, denials, or, worse yet, structural failure and loss of life. Calling in professionals and obtaining bids is a good start. But the board should follow through with their fiduciary duty by comparing bids, understanding the strategy to fix the issue, and comprehending and relaying a plan to the membership. These best practices will keep the process transparent and imbue faith in the board. The earlier maintenance needs are discovered and tackled, the less likely a loss will occur, and almost certainly fewer out-ofpocket expenses will be accrued. Insurance companies and agents often give early Continued on page 10 ECHO journal | ISSUE FIVE 2021

Insurance Coverage Denied Continued from page 9

warnings and recommendations. These should be taken seriously. Many insurance carriers conduct their own property surveys every few years. When an insurance company inspects a property, it will look for deficiencies such as missing fire extinguishers; or components that need attention, like raised or cracked concrete; or elements that need updating, like fire sprinklers and alarms. The intent is to be a good business partner with the communities by using their expertise and experience to minimize risk and avoid loss. The recommendations may cost money to accommodate; however, in the long run, the cost is often far less than the insurance deductible itself. By following the recommendations of the insurance carrier, these actions should minimize the risk of claim denial, but more importantly, the community may avoid costly repairs and maintenance, and potentially a catastrophic failure 10

ISSUE FIVE 2021 | ECHO journal

and even loss of life. In addition, a well-prepared reserve study can often point the association in the right direction. A highly proficient reserve analyst will take the necessary professional steps to inspect the property and offer advice on component life expectancy, including an estimate on the reserve funding needed to repair, maintain, or replace a component. If a reserve study is followed properly and the right assessments are collected and used to maintain common areas, then the association may avoid loss or claim denial, and also increase the value of the homes and the morale of the community. This in turn will improve the desirability and buyer interest in the community. A poorly funded reserve study does not and should not prevent proper maintenance from taking place. Special assessments may need to be taken into consideration. Banks that specialize in low-cost loans for homeowners associations are

also available to walk communities through the loan process. Even as loans are secured and projects are completed, a proactive approach to funding future projects is the best bet for communities. Getting on track with appropriate regular assessments and maintaining a well-funded reserve study only furthers trust in the community and contributes to home values. Maintenance of community property should be a routine part of community management, whether the association is small or large. The devastation of the Champlain Towers South only highlighted the endemic risk and importance of a maintenance plan for larger buildings and high-rise structures, and the need for better inspections and management action to avoid catastrophic failure. These large-scale buildings often need more direction than simply the homeowners’ comments and insurance company recommendations. They need more than a well-prepared reserve study. Maintenance of these unique buildings will benefit from more invasive studies such as engineering reports, regular fire inspections, and city or county guidance. Associations should stay tuned for anticipated changes to state, federal and local laws for required maintenance and inspection of these larger, multistory buildings. Other reasons association insurance claims may be fully denied or, more commonly, partially denied by insurance companies include policy exclusions (of which the board may be unaware), lack of insurance, or failure to submit the claim on time. Associations can sometimes feel blindsided by denials due to

policy exclusions of which they were not aware. It is important and extremely valuable to review policy exclusions and address hypothetical scenarios before any such loss occurs. For instance, a standard fire insurance policy excludes earthquake and earth movement. Only a DIC (difference in conditions) policy can protect the association in the event of an earthquake. Be mindful that, despite the best efforts of a board, some homeowners may be unaware of this exclusion and may even assume that damage due to an earthquake is automatically covered by the master policy of the association. Older associations should be particularly careful. Older communities may be required to bring their buildings up to code when repairing, maintaining, or replacing a community asset. Often building codes and

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ordinances change from the time of original construction. Fire sprinkler systems and elevators are two examples of likely code changes in older buildings. If the association has little or no building ordinance coverage, it could be facing major out-of-pocket expenses at the time of loss. When an incident occurs, association management often feels confident they are taking

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the appropriate steps and time to investigate the claim and look into a potential loss. The claim is filed only after they know more about the nature of the loss, including location, components impacted, and estimated cost of repairs. But if the potential claim falls under a claims-made policy, like most directors and officers (D&O) liability policies, delaying a claim Continued on page 12

ECHO journal | ISSUE FIVE 2021

Insurance Coverage Denied Continued from page 11

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ISSUE FIVE 2021 | ECHO journal

or waiting to submit a claim can result in a denial and ultimately a large financial loss. If the board becomes aware of a potential D&O loss, they are urged to put their insurance carrier on notice quickly. There is little harm in making an insurance company aware of a possible issue and great potential harm in withholding it. If the board is unsure of what warrants notice to the carrier, they should contact their insurance specialist for clarification. Insurance experts, such as brokers and agents, are there to offer guidance and advice. At the end of the day, repairs cost money and maintenance takes work. Oftentimes, communities are reluctant to raise assessments, and spending money is not always welcomed or made easy by the homeowners. But in order to uphold the fiduciary duty of the board, to avoid liability exposure to board members and the community, and to prevent denial of claims and perhaps even greater out-of-pocket expenses, these maintenance obligations must be met. Communities should start these important conversations with their insurance professional today to avoid that big red rubber stamp of a claims denial. Charlotte Allen first walked through the doors of Socher Insurance Agency in 2005. As director of marketing, Charlotte works collaboratively with our brokers to highlight Socher’s service, knowledge, and dedication. Her commitment remains focused on educating common interest developments and their community leaders in some of the most prevalent issues faced today.

SESSION 2

SESSION 3

Presented by Laurie Poole, Esq.

Presented by John Gill, Esq. and

Presented by J. Spencer Edgett, Esq.

and Megan Hall, Esq.

Rolf Crocker, AMS, CCAM, CAMEx

and Jeanne Grove, Esq.

2021 Legislative Session Review

Prospective Legislation Resulting from Surfside Tower Collapse

Lot Splitting, In-Law Units (ADUs), Limits on Rental Restrictions and Beyond!

What changes will the Champlain Towers South collapse have in the legislature for our HOA communities here in California? Legal expert John Gill, Esq. and Management Professional Rolf Crocker will speak about legislative changes that may be coming down the pipeline, and how these changes will affect your HOA in the future.

Attorneys J. Spencer Edgett, Esq. and Jeanne Grove, Esq. will provide an in-depth look at both Senate Bill 9 and Senate Bill 10. This overview will reveal the impact of this legislation on your community and how it is designed to increase housing density and affordability in homeowners associations.

With the 2021 Legislative Session behind us, we have some new laws coming into effect in 2022. Laurie Poole, Esq. and Megan Hall, Esq. will be covering laws such as election by acclamation, virtual meetings, document delivery, rental restrictions, board approval of operating and reserve transfers, and more. Board members will leave with an understanding of how these laws will affect their associations and what actions need to take place to ensure compliance.

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BETTER BUDGETI

Tips to Avoid the Possible Trap BY DAVID LEVY, CPA

ISSUE FIVE 2021 | ECHO journal

ING

According to Merriam-Webster, a budget is “a plan for the coordination of [financial] resources and expenditures.” While most financial and management professionals agree that an annual budget is a good idea, California state law mandates that residential community association members receive one every year. The typical community association budget consists of two parts: the operating budget and the reserve budget. Tips and traps for each are discussed below.

How Much Should Be Budgeted for Expenses? The operating budget covers most day-to-day expenses incurred by an association: utilities, building and landscape maintenance, management, legal and other professional services, etc. The unwritten rule for the operating budget is that, ideally, the operating portion of assessments (plus any miscellaneous income) should equal operating expenses – with little or no remaining “revenues in excess of expenses” (profit) or loss. Continued on page 16

ECHO journal | ISSUE FIVE 2021

Better Budgeting Continued from page 15

Most associations create the budget for the next year by looking only at the current year’s budget and actual expenses. A better way to prepare a budget would be to look at the preceding two or three years of actual expenses to detect possible trends that might not otherwise be noticeable. It may be appropriate to consider going out to bid if certain categories of expenses have been trending upward and the expenses can best be accounted for by the price charged by a vendor rather than the usage incurred by the association. For larger expenses, in addition to considering the possibility of going out to bid, one might contact the vendor for an

estimate of the expense amount for the next year. This can be particularly important for certain

the original developer budget is supposed to cover commonarea major components with a

Unlike individual owners, board members have a fiduciary duty to represent the best interest of all the homeowners, and included in this duty is the long-term funding of reserves. expenses that may be subject to less predictable market pressures, such as insurance and consulting expenses.

How Much Should Be Budgeted for Reserves? When an association begins its existence, the project developer prepares a budget of both operating and reserve expenses. The reserve expense portion of

life of more than one year and, usually, a substantial cost. Reserve items often consist of painting, roofing, paving, and many other larger projects with high costs. In general, the original reserve budget should be computed for each item by dividing the current replacement cost by the useful life of the item. For example, if the roof costs $100,000 to replace in current dollars and is expected to

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ISSUE FIVE 2021 | ECHO journal

last 10 years, then the budget for the roof would call for funding of $10,000 in the first year. In future years, the original cost would be increased by inflation, or the thencurrent cost would be used to calculate the amount of funding. Once an association is in operation, its board typically seeks the assistance of a professional reserve study company to assist with estimating current replacement costs and useful lives of components. While such firms will generally make recommendations to fund reserves, the board of directors ultimately makes the final funding decisions. Most owners, and perhaps board members, prefer to keep assessments as low as possible. But, unlike individual owners, board members have a fiduciary duty to represent the best interest of all the

homeowners, and included in this duty is the long-term funding of reserves. In at least one study of approximately 100 Southern California community associations, a national reserve study company found that there was a significant difference in the market value of well-funded associations compared to those that were less well funded. In California, there are mandatory financial disclosure laws, but not mandatory funding requirements. In other states, such as Hawaii, funding of reserves is required, but not necessarily as much as the amount of annual depreciation (wear) of all the major components. Based on several large-scale financial surveys of California associations (totaling approximately 55,000 HOAs statewide), most existing associations are only 50% to

60% funded. Newer and larger California associations tend to be a little better funded than the average, and older and smaller associations tend to be less well funded. What is the risk of underfunding reserves (not keeping up with the expected rate at which the major components wear out)? The simple answer is that the HOA will require a “special assessment” to pay for the repair or replacement of the failed component. In essence, the board will have abdicated its duty by simply “kicking the can down the road” and accumulating financial risk and additional burden on homeowners. The impact of a special assessment, especially on older owners with limited financial resources, could be the difference between being able to stay in Continued on page 18

ECHO journal | ISSUE FIVE 2021

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As with many things in life, the more effort put into something, the better the result. The same is true of the budget process. Starting early and paying attention to budget versus actual monthly expense variances will pay dividends in creating a better budget for the next year.

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ISSUE FIVE 2021 | ECHO journal

Shoreline Property Management A Division of The Manor Association, Inc.

Better Together It is with excitement to announce that, Shoreline Property Management is now a Division of The Manor Association, Inc. Shoreline Property Management and The Manor Association share an unrivaled passion for serving its clients and the communities in which we work. Together we have longevity, experience, and most of all, people treating people like people – not a transaction or a process. Our local clients tend to refer other HOAs that are struggling to find the right service provider, and as our client base continues to grow, we are also expanding our team. Not only is our entire team local, but our services are also entirely in-house. That means you get 24/7 customer support from people who live in the community—real people, with real-time responses. Our mission to serve our clients well begins with hiring and retaining the best people. All of our managers are certified or working toward certification through CACM or CAI, and many have the highest designation available in the industry – Professional Community Association Manager. No one knows HOAs better. We bring decades of experience to our customer support services. Our team includes long-term employees who have great compassion and unparalleled expertise. Simply put, there is no task too daunting, we have seen it all, and together we have the knowledge and unique talent to organize and coordinate the best plan for any homeowners association and mobile home park. Our team is ready to help with a friendly smile and a quickly answered phone call or email. If you aren’t getting the quality services you deserve or have a tricky situation to solve, don’t hesitate to call us today. 1100 Water Street, Suite 1A, Santa Cruz, CA . 95062 shorelinepropertymanagement.com info@manorinc.com

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THE SELF-MANAGED HOA

ne of the most underrated best practices for effective HOA governance is objectively assessing the board’s and community’s performance against their governing goals and objectives. This “look back” assessment is critical for fine-tuning the board’s governance effectiveness. The HOA’s governing documents charge the board of directors with managing the affairs of the association. Although homeowners associations vary greatly in size, type, and complexity, the responsibility of the board to manage (govern) the HOA’s affairs boils down to some common oversight and leadership activities. There’s no better way to prepare for a successful 2022 than to examine, discuss, and assess 2021’s governance activities. Set aside some board meeting time in the next couple of months and review these five critical governance activities for a successful 2022.

LOOK A BY LOOKI

BOARD MEETING EFFECTIVENESS. The most critical component of HOA success is the board’s effectiveness in its meetings. Board meetings are the format by which board members are informed, discuss, and make decisions affecting the interests and quality of life of HOA members. With rare exceptions (executive sessions and emergency sessions), the board of directors conducts the business of the HOA in the open; HOA members have the right to attend board meetings, observe deliberations and board decision making, and monitor the board’s performance. How did 2021’s board meetings go? Are board meetings held regularly, calendared, and in compliance with the HOA’s governing documents and California state statutes? Are members noticed and provided a clear meeting agenda? Is the homeowner forum orderly and timed? Does the board stick to the agenda and refrain from going off-topic or on tangents that disrupt and derail meeting effectiveness? Are board members prepared for meetings, are they 20

ISSUE FIVE 2021 | ECHO journal

Get Organized for 202 encouraged to participate in discussions, and do they feel free to convey a dissenting opinion? When the board makes decisions, is the process consistent and understood? Do board members in the minority feel valued and appreciated? Are board decisions second-guessed or does the board speak with one voice? Finally, are board meeting minutes clear, well written, commemorative of the board’s decisions, and consistent with the public agenda?

LEADERSHIP. Governance is not management; governance is leadership. Boards of directors govern; therefore, boards of directors lead. What grade would the HOA board receive on leadership in 2021? Did the

BY JOHN CLIGNY, AMS, PCAM, CCAM-HR

AHEAD ING BACK

22 by Assessing 2021 board have clear goals and objectives? Did the board communicate its goals and objective to members, management, and key service providers? Did the board encourage member feedback, comments, and impressions? Are board policies consistent with the board’s goals and objectives? Are policies reviewed and implemented fairly and equally? Does the board proactively encourage member engagement and participation on committees? Are members exposed to the HOA’s financial condition, budget performance, and reserve obligations? Does the board use tools such as annual operating and governance calendars to monitor HOA governance, financial and maintenance activities, and objectives?

OVERSIGHT. A key component of the board’s effectiveness is its oversight of the management of the HOA. In the context of board governance, oversight of management includes board oversight of the managing agent, manager, or management company, whether they provide full-service community management, administrative services, or financial management services, and other vendors that provide regular service to the HOA, such as landscape maintenance, pool and janitorial services, and CPA, legal, and insurance services. For board oversight to be effective, the board must have a scope of work and an executed service agreement with vendors that define the board’s service level expectations, performance measurements, and vendor review and evaluation schedule. Looking back at 2021, how has the board done in its duty of oversight? Do all regular service providers have up-to-date contracts with a clear scope of work and expectations? Does the board ensure that all vendors have licenses as required and current certificates of insurance listing the HOA as an endorsed additional insured? Do vendors have workers’ compensation insurance in place? Do vendors that render opinions or provide compliance work (election inspectors) to the board have professional liability insurance? Is the board scheduling annual vendor contract reviews and evaluations at least thirty days before contracts auto-renew or expire? Does the board include its critical vendors in its planning for common area maintenance and reserve expenditures? PLANNING AND BUDGETING. Highly effective boards of directors spend most of their time on planning and budgeting activities. Planning and budgeting are two sides of the same coin. Careful and diligent planning informs the budget. While it is true that most Continued on page 22 ECHO journal | ISSUE FIVE 2021

Effective boards will take some time to look back, assess, critique themselves, and put into place policies, processes, and procedures to ensure governance success in 2022 and beyond. The Self-Managed HOA Continued from page 21

HOA boards concentrate on planning and budgeting activities in the last three or four months of the fiscal year, the data and groundwork for the planning and budgeting process should happen throughout the year. Looking back on 2021, does the board have a schedule and process for regularly reviewing (and understanding) the monthly financial reports? If the board meets less than monthly, does it have a policy and process to ensure that financial reports are being reviewed monthly? How does the budget reflect the board’s strategic plan and objectives for the HOA? Is the board reaching out to the members to assess their preferences and expectations for common area care, maintenance, rules, and priorities? Is the board communicating with the members, engaging them, and keeping them informed of the HOA’s progress, projects, and financial condition against its goals and objectives? Is the budget reasonable and does it take into account increases 22

ISSUE FIVE 2021 | ECHO journal

in goods and services, utilities, and insurance premiums? Are the HOA’s reserves adequately funded, and is the board authorizing reserve projects as scheduled, or are projects being deferred? If the board is deferring projects, is it disclosing the deferrals to members and making adjustments to the reserves? In the planning and budgeting process, is the board meeting its standard of care for both current and future owners?

RISK MANAGEMENT AND COMPLIANCE. Boards of directors bear the primary responsibility for the assessment and mitigation of potential risks and liability for the HOA and ensuring the board and HOA’s compliance with federal, state, and local laws affecting the operation of California homeowners associations. This responsibility is not to be taken lightly and can have serious financial consequences for unprepared HOAs. For 2021, did the board schedule time to meet with its attorney, CPA, and insurance agent to discuss trends

and new laws and to assess current and future risks? Is the HOA adequately insured? Has the board budgeted for insurance deductibles? Does the board have processes and policies in place to ensure that the board and HOA are operating in compliance with federal, state, and local laws? Is the board aware of laws that will go into effect in 2022 that may require new policies and procedures? Does the board have a process to review and inspect critical common area components that may pose a risk of liability or injury? Has the board confirmed that all required federal and state filings are up to date and completed?

LOOKING AHEAD TO 2022. By all accounts, 2022 looks to be “normal.” Boards will resume in-person and open board meetings, pools and spas will be open, and members will reacquaint themselves with the common areas and amenities of their homeowner associations. Effective boards will take some time to look back, assess, critique themselves, and put into place policies, processes, and procedures to ensure governance success in 2022 and beyond. John Cligny, AMS, PCAM, CCAMHR, is a veteran portfolio manager and community association management executive. As co-founder of Association Consulting Group, John is a trusted advisor primarily focused on educating and advising community association board members on effective governance to promote a positive public opinion of homeowner associations and community management. John is a frequent speaker and panelist on a wide range of community association topics and issues.

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Education Advocacy Connection

ECHO journal | ISSUE FIVE 2021

The Process of Reasonable Inquiry By Patricia Arnold, CCAM, CMCA AMS

What Does the Reasonable Inquiry Process Look Like? First, the association’s board of directors should define the issue or concern as clearly as possible so that all parties know exactly what the inquiry will cover. Then the association’s board should look at that issue 24

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impartially, without overlaying any set opinions as to the facts to be sought or found, and to make reasonable inquiry with as open a mind as possible. The preferred option, usually, is to start small, as small as possible, by making a phone call or sending correspondence to a knowledgeable party.

Possibly that will suffice, and the board will have the information it needs to make an informed decision. But if it does not suffice, the reasonable inquiry process needs to go up a notch. Does the problem require finding outside expertise to investigate and address it? Can the board find

When an issue arises at an association that challenges a rule or confounds the board of directors in its efforts to resolve, it is time for reasonable inquiry to step in.

that expertise at no charge to the association or will the association need to hire it? And so forth. The association and its board need to follow the thread of available data until the board can satisfy itself that it has the information needed to get to a reasonably determined resolution.

For Example . . . Leonard lives up the street in a single-family home. He has owned and lived in that home for more than 30 years. Leonard’s property is adjacent to a homeowner association community that was built and all homes sold eleven years ago. Leonard adamantly protested

the development of the neighboring property into a 90home community association when it was first presented to the building commission fourteen years ago. Leonard still brags that he stopped the developer in his tracks for nearly three years. Continued on page 26 ECHO journal | ISSUE FIVE 2021

The Process of Reasonable Inquiry Continued from page 25

Eventually, according to Leonard, he, the city, and the developer reached a compromise. The developer would proceed to build the community, and, in exchange, Leonard would have unfettered access to what would become the new association’s RV lot directly across from his home, at no cost to him. In addition, Leonard would have the option, once every twelve months, to use the association’s meeting and social center for his own private parties, also at no expense to him. Recently, Leonard approached the association to exercise his right to park a trailered boat and a small camper van in the association’s RV lot. Nobody on the board had any awareness of such an agreement between Leonard and the firm that developed the association. That Leonard would have been awarded free use of the association’s social center once a year was a shocking revelation for the board and the community. Reactions to Leonard’s revelations were swift and highly charged. The first reaction of board members and some homeowners could be best described as a “near-violent knee-jerk.” Words of outrage flew back and forth. Homeowners were distraught and in complete disbelief that the developer could have done such a thing and then left no record of it in association documents. “Impossible!” cried some. “I have my rights!” cried Leonard. Cooler heads on the board of directors opted for reasonable inquiry. If Leonard’s claim was found to be valid, they would 26

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cross that bridge later. The first step had to be finding out if Leonard’s claim to have been formally granted the right to use the association’s RV lot and the community’s social center, with or without financial consideration, had any merit. The board politely asked Leonard to provide them with a copy of his amended grant deed that supported his claim. Leonard continued looking through his old paperwork to find a copy of that grant deed. In the meantime, homeowners were continuing to be unstrung about the news. Expressions of personal outrage ran rampant at board meetings, poolside gatherings (pre-COVID), and residential cocktail parties. Normally, the board’s position would amount to letting Leonard do all the work; let him provide the proof. However, the board understood the level of emotional distress the issue appeared to be causing the owners. Not to mention that it was jeopardizing what little remained of good-neighbor relations with the neighboring lot owner, Leonard.

Belling the Cat… Grant deeds are public records. For a fee, anyone may go to the county assessor’s office and, using the assessor’s parcel number for a given property, obtain a copy of any grant deed. The directors considered having someone on the board drive to the county offices to do a title search on the parcel number they assumed to be for Leonard’s property, and also for the parcel number they knew to be for the association’s property. The board surmised that if such

an easement of use had been granted to Leonard and recorded on his grant deed, there might be a similar recordation on the association’s recorded documents. As it happened, nobody on the board of directors was willing to take on the grant deed research task, even though they all agreed, in spirit, that someone needed to do the research. The board voted to engage a firm qualified to do an authorized title search, to see if an amended grant deed existed that might reveal whether or not Leonard was granted the access he claimed. A real estate professional, whom we’ll call Linda, was engaged to do the research. Linda drove to the county assessor’s office and dug up the grant deeds for Leonard’s parcel and the parcels that included the association’s entire development. Linda reported to the board that on the grant deeds she examined, those of the association and that of the neighboring parcel owned by Leonard, she found no recorded amendment and nothing that granted parcel owner Leonard access to the RV lot or the social center. The board reported that information to Leonard and to the association membership. Leonard countered with the claim that there must be another recordation and that Linda simply had not dug deeply enough. The association’s board reviewed the steps it had taken in pursuit of reasonable inquiry: 1. It had heard Leonard’s claim and listened politely to his account of events. 2. It had listened to association owners’ concerns and protests

regarding the matter. 3. It had asked questions of people believed to be knowledgeable – those having been original owners at the time who had prepurchased their lots before the actual construction of the development commenced. 4. Those owners were among the buyers whose preconstruction purchases had been suspended during the time Leonard was protesting the development. 5. None of the pre-sale owners who responded reported knowing anything about Leonard’s claim to access. 6. The board asked the neighboring lot owner (Leonard) to provide the association with a copy of the recorded grant deed, or the recorded amended grant deed, that showed the easement of use for the RV lot or the association’s social center. 7. The board voted to engage a professional to research the grant deeds at the county assessor’s office. 8. The board learned from the researcher that there did not appear to be a grant deed or amended document showing that Leonard had been granted easement or access to any association assets or properties. Upon review, the directors determined that they had made reasonable inquiry. The board informed the member owners and the neighboring lot owner, Leonard, that it considered the

matter sufficiently researched and was satisfied that no such amended grant deed had been recorded. In its written response to Leonard, the board stated that while the developer may have promised future use of the association’s assets, and while the developer may have shown Leonard a document purporting to provide that access, it appeared that the developer had not recorded any such document with the county assessor’s office. The board left the door open to Leonard such that, should he ever find a copy of the duly recorded amended grant deed he referenced, he was welcome to return to the association’s board for further review and consideration.

Patricia Arnold, CCAM, CMCA AMS, is a career professional community association manager serving the Greater Bay Area for more than three decades. Arnold Management & Consulting is located in Windsor, California, and offers community association training and consulting, expert witness, and interim community management to bridge between contracts while an association conducts a search for new management.

ECHO journal | ISSUE FIVE 2021

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ISSUE FIVE 2021 | ECHO journal

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To Zoom or Not to Zoom? Adapting to challenges during and after the pandemic

he past 18 months have presented HOAs with several new challenges and more than one opportunity to do things differently and still be successful. The homeowners association industry was one that took quick action when presented with the issue of holding meetings in person during the pandemic. Direction came down through the state government that boards could not meet in person with shelter-in-place orders in effect, thus the need for an immediate solution. Governor Newsom issued Executive Order N-29-20 on March 17, 2020. Paragraph 3 of the order provides, in relevant part: Notwithstanding any other provision of state or local law (including, but not limited to, the Bagley-Keene Act or the Brown Act), and subject to the notice and accessibility requirements set forth below, a local legislative

body or state body is authorized to hold public meetings via teleconferencing and to make public meetings accessible telephonically or otherwise electronically to all members of the public seeking to observe and to address the local legislative body or state body. In particular, any otherwise applicable requirements that… at least one member of the state body be physically present at the location specified in the notice of the meeting … [a]re hereby suspended. (Emphasis added) The Common Interest Development Open Meeting Act (“Open Meeting Act”) as outlined in Civil Code section 4090 et seq. is modeled after the California Ralph M. Brown Act and the Bagley-Keene Act (herein referred to collectively as the “Brown Act” for convenience), which are bodies of law that

require public and governmental entities to conduct business and discussions in meetings that are open to the public, in the interest of transparency. As such, the Open Meeting Act, like the Brown Act, permits a board to meet via teleconferencing, but requires that at least one director or another designated person (such as the manager) be physically present in an identified location where members can attend in person and hear the board discuss and deliberate on items of association business and address the board during open forum. (Civil Code section 4090(b)). Due to the shelter-in-place orders during the pandemic, associations ceased providing notice and a physical space for members to participate in meetings and began using remote technologies exclusively. This practice was legally supportable

California Civil Code §4090 – “Board Meeting” Defined “Board meeting” means either of the following: (a) A congregation, at the same time and place, of a sufficient number of directors to establish a quorum of the board, to hear, discuss, or deliberate upon any item of business that is within the authority of the board. (b) A teleconference, where a sufficient number of directors to establish a quorum of the board, in different locations, are connected by electronic means, through audio or video, or both. A teleconference meeting shall be conducted in a manner that protects the rights of members of the association and otherwise complies with the requirements of this act. Except for a meeting that

ISSUE FIVE 2021 | ECHO journal

will be held solely in executive session, the notice of the teleconference meeting shall identify at least one physical location so that members of the association may attend, and at least one director or a person designated by the board shall be present at that location. Participation by directors in a teleconference meeting constitutes presence at that meeting as long as all directors participating are able to hear one another, as well as members of the association speaking on matters before the board. (Amended by Stats. 2013, Ch. 183, Sec. 10. Effective January 1, 2014.)

during the pandemic because community associations function as quasi-government entities with powers, duties, and responsibilities that parallel those of local governments (see Cohen v. Kite Hill Community Assn. (1983) 142 Cal.App.3d 642). Because California courts have analogized common interest developments to local governments, and because common interest developments are required to comply with open meeting restrictions based on the Brown Act, associations were similarly permitted to alter how they conducted board meetings and disciplinary hearings considering the lifted restrictions outlined in Executive Order N-2920. During this transition, many management companies did research to find the most userfriendly option for conducting association business meetings – not only for their clients but also for their team members. It was discovered that the application software trademarked and known as “Zoom” had instantly become the most popular choice. And so, the process of crash course training for both team members and clients began. The use of high-quality cameras and improved lighting expanded the quality of the engagement. The ability to turn users’ microphones on and off permitted managers to maintain decorum during meetings and disciplinary hearings. Although there were still challenges with engagement, associations could continue to conduct business while keeping everyone in compliance with the Open Meeting Act mandates. What about post-pandemic? Many associations have shared that with the use of electronic meetings there has been an increase in homeowner participation. Many boards of directors are considering keeping the process in place. During the pandemic, meetings were held by necessity and for safety. But it was also found to be a time-saver not only for the manager, who no longer drove to the physical meeting location, but for board members and homeowners, who could easily attend a board meeting from home or business. Valued business partners were also able to attend multiple meetings and personally engage in the information-gathering process for associations. So how can boards continue using this successful technological solution for meetings once the emergency meeting status is lifted? As noted above, Civil Code 4090(b) currently permits the use of teleconferencing for conducting board meetings if there is at least one director or designated person located at a predetermined physical location, of which the membership has been properly notified. Thus, under existing law,

a board meeting can take place physically and by electronic means simultaneously. For example, a manager could be at the management office, which would be announced to the homeowners and the board members as the official meeting place. Homeowners and board members could then either attend in person or from any virtual location of their choice. A board member could also choose to host the meeting in the clubhouse, leaving the option for the manager, homeowners, board members, and business partners to attend virtually or in person. Anticipating the value of technological solutions and increased participation by community members, the California state legislature recently passed Senate Bill 391. The new statute, Chapter 276 of the 2021 Statutes, allows boards to host virtual meetings without providing a physical location but only during certain declared states of emergency. Thus, once the pandemic has passed, managers should be prepared to have a physical location ready for board meetings that has the capability of simultaneously hosting hybrid virtual and in-person meetings. Several conditions must be met to 1) qualify the emergency and thus the need for a remote meeting, 2) to ensure members can participate as fully as possible given technological constraints, and 3) board decisions are clearly attributed and recorded. It is suggested that all boards, managers, and concerned HOA homeowners review this short, new statute to ensure compliance. The chaptered legislation can be found at https://bit.ly/3GYvjFk. Nothing will ever replace the personal engagement that is experienced in face-toface meetings, but virtual meetings have been a successful option during the challenging times of the COVID lockdown starting in March 2020. However, it is important for managers and boards to think outside the box to create even more successful options for hosting virtual meetings! Joe Price, CCAM, CAMEx, CMCA is the owner and president of HMC Property Management. After a successful career as a food industry executive, Joe joined the HOA management world nearly twenty years ago. HMC Property Management is based in Concord, California. A special thank you to Jennifer Jacobsen, Esq., of Baydaline & Jacobsen LLP, for her legal review of references to compliance with Civil Code 4090.

ECHO journal | ISSUE FIVE 2021

The Echo Legislation Tracker For more information, visit the HOA Advocacy section at the Echo website, www.echo-ca.org/article/hoa-advocacy/

The legislature adjourned sine die on Friday, September 20, 2021. The governor had until October 10, 2021, to sign all bills that passed both houses. Legislation that goes to the governor’s desk, generally, can be approved and signed, or become law by not being addressed by the governor. Of course, any bill that is sent to the governor by the legislature may be vetoed and sent back to the house of origin. Veto power is used sparingly, often as a threat to amend language favorable to the governor. Once the bill becomes law it goes to the Secretary of State, where a chronological chapter number is assigned. These sequential numbers are used to track new statutes until they are codified. Below are the outcomes of bills tracked by Echo in 2021.

2021 LEGISLATION AB-502 – SUPPORT STATUS: Approved by Governor October 05, 2021. Filed with Secretary of State October 05, 2021. Chapter 517 AUTHOR: Davies SUBJECT: Election by Acclamation POSITION: Support – Reasonably streamlines the election process and saves money for HOA SUMMARY: This bill would allow common-interest developments of any size to vote by acclamation. It would delete the requirement that the association include 6,000 or more units. And it would specify that this acclamation procedure applies notwithstanding any contrary provision in the governing documents of the common-interest development.

ISSUE FIVE 2021 | ECHO journal

SB-391 – SUPPORT STATUS: Approved by Governor September 23, 2021. Filed with Secretary of State September 23, 2021. Chapter 276 AUTHOR: Min SUBJECT: Meetings and Teleconferencing Procedures During an Emergency POSITION: Support – Sensible solution as learned from the COVID-19 pandemic. SUMMARY: This bill would establish alternative teleconferencing procedures for emergency board meetings or meetings of the members if the common-interest development is in an area affected by a federal, state, or local emergency.

SB-392 – SUPPORT STATUS: Approved by Governor October 07, 2021. Filed with Secretary of State October 07, 2021. Chapter 640. AUTHOR: Archuleta SUBJECT: Email Delivery of Documents POSITION: Support – Requirement for association to have a website if more than 50 units could be a problem for some. Adds to cost of running the association. SUMMARY: This bill would allow associations to deliver specified documents by email unless a member opts out of email delivery. It requires members to provide their physical or email address annually, among other requirements. And it requires that associations with at least separate interest to maintain a website, with certain exceptions. It specifies that documents posted to the association website would satisfy the general delivery requirement. SB-432 – SUPPORT STATUS: Approved by Governor October 07, 2021. Filed with Secretary of State October 07, 2021. Chapter 642. AUTHOR: Wieckowski SUBJECT: Disqualification of candidates due to term limits in governing documents. POSITION: Support SUMMARY: This bill disqualifies termed-out board members of CIDs from running for reelection and requires an individual who is appointed to count and tabulate votes in a CID election to meet specified requirements. AB-611 – SUPPORT STATUS: Approved by Governor August 31, 2021. Filed with Secretary of State August 31, 2021. Chapter 151. AUTHOR: Quirk-Silva SUBJECT: Confidential Addresses – Safe at Home Program exception. Assembly Rule 77. POSITION: Support SUMMARY: When an association member is a participant in the Safe at Home program – an address confidentiality program that protects victims of violence, assault, stalking, trafficking, or abuse – this bill would require that the association use their designated substitute address, upon the member’s request. Additionally, it would require that the association withhold or redact information that would reveal the name and address of the Safe at Home participant in specified communications.

AB-1101 – WATCH STATUS: Approved by Governor September 23, 2021. Filed with Secretary of State September 23, 2021. Chapter 270. AUTHOR: Irwin SUBJECT: Funds Transfers and Insurance POSITION: Watch. AB-1101 has obvious advantages, protecting less engaged communities and especially boards, and clarifying recently passed law. However, Echo continues to have concerns (especially for small associations). The legislation would mandate certain insurances which would add unnecessary or unwanted cost to the administration of the association. Furthermore, the bill would require funds to be invested only in secure and insured accounts. This aspect of the legislation could force a community to lose money if the interest rates received were less than inflation rates. This bill would remove valuable financial tools for association boards. It is better that these limitations be placed in governing documents instead of in law and that the boards be entrusted with managing the association. On the other hand, AB-1101 would protect communities from poor management and give managing agents of CIDs the leverage to help HOA boards understand their fiduciary responsibilities. And in the unlikely situation of malfeasance or fraud, the legislation has protections and insurance in place to minimize the risk. The bill also addresses some needed technical amendments to existing law. There are several good, clarifying concepts in the bill; however, there are also some significant challenges that have driven us to a “watch” position. SUMMARY: This bill would require that certain association funds be deposited into a bank, savings association, or credit union with specific insurance. It also prohibits transfers of $10,000 or more without prior written approval from the board. And it requires that an association maintain specified coverage for itself and its managing agent or management company. SB-9 – OPPOSE UNLESS AMENDED STATUS: Approved by Governor September 16, 2021. Filed with Secretary of State September 16, 2021. Chapter 162. AUTHOR: Atkins, Caballero, Rubio, and Wiener SUBJECT: Land Use: Lot-Splitting and possible requirement for duplexes POSITION: Oppose. This bill could have a major negative impact on communities zoned for singlefamily residences and those with limiting CC&Rs restricting the community to single-family housing only. Continued on page 34 ECHO journal | ISSUE FIVE 2021

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SB-10 – OPPOSE STATUS: Approved by Governor September 16, 2021. Filed with Secretary of State September 16, 2021. Chapter 163. AUTHOR: Wiener SUBJECT: Planning and Zoning: Housing Development: Density POSITION: Oppose. Allows ministerial increase in housing density despite zoning for 10 units or fewer. It will void language in governing documents limiting development in HOAs. SUMMARY: Authorizes a city or county to pass an ordinance that is not subject to the California Environmental Quality Act (CEQA) to upzone any parcel for up to 10 units of residential density if the parcel is located in a transit-rich area or an urban infill site. ISSUE FIVE 2021 | ECHO journal

• Governing Document Interpretation • Governing Document Revisions • CC&R and Rules Enforcement

SUMMARY: This bill would allow lots to be split regardless of HOA governing documents, to make room for additional residents. It would give ministerial (local government) approval of not more than two-unit development (a duplex would be included in this definition). Furthermore, the language in the bill must be clarified to disallow duplexes if governing documents (CC&Rs) of an HOA preclude them. Clarification that the bill is not intended to affect HOAs is needed.

Join the Echo Insurance Denial Action Group and let the governor hear the voice of HOAs!

Annual Meeting Notice November 18, 2021 9:00 - 9:15 am •

Approval of 2020 Annual Meeting Minutes

•

Election

•

Financial Review

Location of the meeting: 52 Monte Vista, Laguna Hills, CA. Please RSVP to dzepponi@echo-ca.org if you would like to attend. Proof of vaccination and masks are required.

AB-1410 – OPPOSE STATUS: Failed to become law. Assembly. Rereferred to Housing and Community Development. AUTHOR: Rodriguez SUBJECT: Restrictions on Rules Enforcement POSITION: Oppose – This bill is far-reaching, covers many issues. Not focused enough for good policy. SUMMARY: This bill would prohibit an association from restricting a homeowner’s right to rent or lease their separate interest, or any portion thereof. It would also extend, to the entire separate interest, a homeowner’s right to use their backyard for personal agriculture. It would further require every director and association employee to complete a course in ethics and harassment prevention. And it would prohibit any restrictions on discussions critical of the association. It would also prohibit the association from enforcement actions during certain specified conditions. And finally, it would require specific standards for evidence of rules violations and mandate that evidence be made available to the accused.

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290 King Street, Suite 12, San Francisco, CA 94107 (415) 981-9350 bill@hoa-cpa.com ECHO journal | ISSUE FIVE 2021

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Echo Journal – Issue 5 2021

Articles inside

The Process of Reasonable Inquiry

To Zoom or Not To Zoom?

The Self-Managed Association Look Ahead by Looking Back: Get Organized for 2022 by Assessing 2021

Insurance Coverage Denied Avoiding a Costly Insurance Denial

Better Budgeting: Tips to Avoid the Possible Traps