Insurance Notice Deadline

Lawsuits are almost always unwelcome surprises.  Combined with the regular daily stresses Board members face for their communities, it's a relief knowing you have proper insurance in place, right?  So, when the insurance company denies the claim saying you didn't report it quickly enough, you reach for the heartburn medicine. 

Unlike in Georgia, many other regions of the country are lenient when it comes to missing reporting deadlines.  In these States, the thinking is that only material breaches relieve obligations under a contract.  Insurers should not benefit if they haven't suffered an actual disadvantage due to late notice.  And as one court said, "It would also disserve the public interest, for insurance is an instrument of a social policy that the victims of negligence be compensated."

A century ago, insurance policies were truly private contracts and judges avoided altering them.  Many courts now recognize that insurance policies are no longer fully negotiated agreements.  Instead, these are based on standardized forms with conditions dictated by the insurance company.  Since these forms are now used industry wide, there really aren't alternatives for the consumer to tap into.  But we live in a pro-insurer state, so let's dig a little into this whole "notice" thing.

Your insurance covers a time period defined as either "occurrence" (for damages that happen during the term of the policy, such as a windstorm) or "claims made" (for when you are served a lawsuit, not necessarily when an incident occurred).  "Claims made" policies have become more popular for insurance companies.  It helps them avoid losses from asbestos, environmental, and other claims having roots in actions occurring decades ago.   Among other reasons, the insurer isn't having to defend a previous customer from thirty years back, and can tack on stipulations to the claims-made policy to limit covering similar events for new clients involved in such items. 

The claims-made version can be either "general claims made" (discovery policies) or "claims made and reported policies" (reporting policies).   A general-claims-made policy may say something like,  "The Insurer shall pay on behalf of the Insured on account of any claims first made during the Policy Period."  A claims-made-and-reported policy may be something like, "The Insurer shall pay on behalf of the Insured all sums which the insured shall become legally obligated to pay because of any claim or claims first made and reported to the Insurer during the policy period." 

See the difference?  General-claims-made versions often give you a longer window to place a claim.  While Georgia courts usually side with the insurer when it comes to determining the notification period, on occasion something known as the "prejudice" rule comes into play.  In this arena, prejudice means that delaying notification to your insurance carrier placed it at a disadvantage.  It needs time to investigate, set aside reserves, and control or participate in negotiations if it hopes to have the best outcome possible.

If the insurance company can show prejudice, it avoids covering the situation even if there is a question about the late notification.

The take-away is this:  As soon as you suspect a claim, notify your insurer.  If your claim is denied, consult with your Association's legal counsel.  And most importantly, be sure to only use insurance brokers who regularly operate in the homeowner association industry.  You can locate them at the Georgia CAI (Community Associations Institute) website.  The first mistake many Boards make is cutting corners on costs by using an insurance broker who is not familiar with all the intricate pitfalls faced by HOAs.  An inexpensive policy fails you when you need it the most.  Don't scrimp in this area.   

Like A Good Neighbor...

Like a good neighbor...dah, dah, is there! Many of us recognize this popular slogan. So what defines a "good" neighbor exactly? They are many ways that owners choose to manage their relationships with neighboring units. Let's take a moment to look at the more successful ways these relationships have been managed.

New ownership is the best time for  owners to make a good first impression. Some immediately introduce themselves to neighboring homeowners by visiting their homes. While others, choose to write little courtesy notes with notifications about pending work that will likely prove messy and disruptive to nearby units or homes. These small acts of kindness go a long way with building a good rapport with new neighbors. There's a high probability in attached multi-family structures that  an owner may have to one day confront an owner about a leak, noise, smoke intrusion, or any of the other items that may come up. An initial good rapport will make these confrontations more pleasant and better managed if the neighbors are already starting from a position of mutual respect.

Owners who have passed the new neighbor period can still strive for good rapport with their neighbors. For example, if an owner is being disturbed by a neighboring unit’s noise, then they have a couple of choices. Most owners either contact management or they confront the noisy neighbor directly. We've seen more success with owners who choose to politely address their noisy neighbor versus asking management to step in and address/handle. People are often a bit offended when management is contacting them with a report from an incident that took place a couple days prior and they are even more frustrated that management is not permitted to disclose who the reporting party is. However, when an owner chooses to confront a neighbor with an issue, it's often best if they introduce themselves and begin by saying "you may not be aware of this but...." or “probably don’t know or realize it but….” The noisy neighbor will sometimes offer their cell phone so the impacted neighbor can call or text if they hear future disturbances. Again, small acts of kindness go a long way.

The age old adage do unto others as you would have them do unto you is very true. In communities, a strong rapport amongst the neighbors is very important. Management often has to coach people through this process. People have diverse backgrounds with varied upbringing. So banging on the ceiling to make a neighbor be quiet is totally fine to some, or smoking in the bathroom where smoke goes into a shared vent is no big deal, or allowing contractors to leave messy trails of construction dust in the hallway is ok because they think the janitorial team will clean it. The Governing Documents, the Rules and Regulations, and community newsletters are designed to establish these standards for everyone. So on-going education about these standards is crucial to having a successful, vibrant community!

What Does the Architectural Committee Really Do?

Are you getting ready to make an addition to your house or build a new shed or fence in your back yard? Before you break out the miter saw, make sure to get your plans approved by your association’s architectural committee.

While it may seem arbitrary from an individual homeowner’s standpoint, the architectural committee looks out for the entire community. Aside from stopping residents from painting pink polka dots on their houses, the committee’s job is to make sure that the size and style of the project, the type of building materials being used and the overall look of the new structure adhere to the association’s design requirements. Not only does this keep the community looking cohesive, it also helps to keep property values up by preventing individual structures from standing out. Of course, it’s also important to note that unapproved structures might legally have to be removed at the owner’s expense, so save yourself money and headaches by getting approval before building.

So when you’re ready to start your new project, or if the design of your project changes midway through building it, send your plans to the architectural committee first so that the committee can make sure they’re in compliance with the association’s design standards. If the committee does find any issues, they will let you know what they are and try to help you come up with other options. The Association does appreciate all the hard work residents do (and have done) to make their homes and their community beautiful—so help the Association keep your community looking great by keeping them in the loop on all of your building projects.

Homeowner Rights & Responsibilities

As a homeowner in our association, you have certain rights—and certain responsibilities. And its just as important to know both!

You have the right to . . .

• A responsive and competent community association
• Honest, fair, and respectful treatment by community leaders and managers.
• Attend meetings, serve on committees, and run for election.
• Access appropriate association records.
• Prudent financial management of fees and other assessments.
• Live in a community where the property is maintained according to established standards.
• Fair treatment regarding financial and other association obligations, including the opportunity to discuss payment plans and options before the association takes any legal action, and the right to appeal decisions
• Receive all rules and regulations governing the community association—if not prior to purchase and settlement, then upon joining the community.

You also have the responsibility to . . .

• Maintain your property according to established standards.
• Treat association leaders with honesty and respect.
• Read and comply with rules and regulations of the community and ensure that your tenants and guest do too.
• Vote in community elections and on other issues.
• Pay association assessments and charges on time.
• Contact association leaders or managers, if necessary, to discuss financial obligations and alternative payment arrangements.
• Request reconsideration of material decisions that personally affect you.
• Provide your current contact information to the association so you receive all information from the community.

How the Budget Committee Works

The budget committee comprises members of our community association, which enables residents to have a say in how their money is spent. How does the budget committee work and who serves on it? 

The Treasurer’s and Accountant’s Roles

It makes sense for the board treasurer to chair the budget committee. As chair, it’s the treasurer’s job to keep everyone on track as the budget is prepared. The treasurer also presents the budget for approval to the board and members. If the association works with an accountant, he or she may offer consulting, but the accountant really has no significant role in the process of devising the budget.

Who Should Be on the Committee?

The owners who serve on the budget committee should represent a cross-section of the community. Of course, if there are members willing to serve who have expertise in areas such as insurance, that’s even better. When it comes to size, a good general guideline is that the committee shouldn’t be so large that it becomes unwieldy.

What the Committee Does

The treasurer will make sure that all committee members understand the three basic components of the budget:

1. Funds needed for daily operation of the community, such as common electricity and water, grounds maintenance, management, insurance, and general maintenance. These expenses are either contractual or can be reasonably estimated based on experience. An important consideration when looking at items in the operating budget is the expectations of the community—for example, do members want a landscaper who is a “blow, mow, and go” type, or do they want a landscaper who provides a higher level of service? Obviously, the latter requires more of an investment.

2. Funds needed to maintain our reserves at sufficient levels. Reserve funds provide money for the repair and replacement of the community’s assets—such as the pool, roofs, pavement, etc.

3. Funds for additions or enhancements to the existing property. This is a function of what members of the community want and are willing to pay for. The community should provide input and approval for this component.

Armed with this knowledge, the committee will estimate total expenses for the coming year and compare that sum to the association’s potential revenue (assessments, interest on investments, concession income, and so on). If expenses are greater than revenue, the committee will look for ways to lower expenses without compromising service. If that doesn’t balance the budget, the committee may have to make a tough decision—whether to increase assessments or levy a one-time special assessment.

Its not always an easy job - but its absolutely essential to the health and longevity of your association. Homeowners always want to know where their money (or dues) are being spent. Serving on the budget committee can be a very eye opening experience!

Sounds Like A Good Idea

Noise is a concern for every resident and because you live in a community, it’s important to understand that some degree of noise is to be expected. At the same time, residents need to consider the consequences of their noisy behavior. To keep everyone happy and maintain civility among neighbors, the following are a few steps that you can take to reduce or eliminate annoying noise (and if everyone follows these guidelines, your community will be a much happier (and more peaceful) place!):

            Be kind and respectful. A little common courtesy makes a big difference. Keep your music and television at reasonable levels, do your vacuuming before bedtime, and before remodeling, check with the manager about acceptable hours and days of the week that work can be done. If you put in hardwood or tile flooring, use a sound-reducing underlayment. Move your noisy appliance away from walls and put sound-absorbing material underneath before your neighbors complain.

            Keep a log. If you’re disturbed by a noise problem, note the times and the nature of the noise. Ask the manager to listen and verify the noise as well. There may be a pattern in the noise that can be adjusted.

            Visit your neighbor. If your neighbor is the source of the noise, try a friendly chat. Sometimes people just don’t realize how noise is affecting others. People are usually considerate once they realize they’re disturbing others. And, if your neighbor knocks on your door, listen politely and be willing to made changes to reduce your own noise.

            Contact the manager. If a polite request doesn’t change your neighbor’s noisiness, it may be time to ask the manager for help.  Have your noise log ready, including attempts to solve the problem yourself.

Reducing noise sounds like a good idea. A quiet, peaceful community, relatively speaking, is a happy community.

Community Association 101

Even though so many people live in an association, you might be surprised by how many of those neighbors—owners and renters alike—don’t really understand the fundamental nature of common-interest communities. And we know that many others, including the media and government officials, lack a true understanding of the community association (or condominium) concept.

Community Associations Institute (CAI), a national membership organization that represents the best interests of common-interest communities, developed 10 basic principles that answer three essential questions: What is the basic function of a community association? What are the essential obligations and expectations of homeowners? What are the core principles that should guide association leaders?

 

Lets take a look:

1. Associations ensure that the collective rights and interests of homeowners are respected and preserved.

2. Associations are the most local form of representative democracy, with leaders elected by their neighbors to govern in the best interest of all residents.

3. Associations provide services and amenities to residents, protect property values and meet the established expectations of homeowners.

4. Associations succeed when they cultivate a true sense of community, active homeowner involvement and a culture of building consensus.

5. Association homeowners have the right to elect their community leaders and to use the democratic process to determine the policies that will protect their investments.

6. Association homeowners choose where to live and accept a contractual responsibility to abide by established policies and meet their financial obligations to the association.

7. Association leaders protect the community’s financial health by using established management practices and sound business principles.

8. Association leaders have a legal and ethical obligation to adhere to the association’s governing documents and abide by all applicable laws.

9. Association leaders seek an effective balance between the preferences of individual residents and the collective rights of homeowners.

10. Association leaders and residents should be reasonable, flexible and open to the possibility—and benefits—of compromise.

Fundamentals can be downloaded at www.caionline.org/governance/fundamentals.pdf. For more information about Community Associations Institute, go to www.caionline.org.

Point of Contact

It’s always a good idea to have a single point of contact between various groups and businesses.  Having too many hands in the cookie jar can lead to confusion and misunderstanding.  Important issues and resolutions are almost always missed. 

This is especially true with committees, boards and vendors.  Committees are frequently made up of three or more homeowners - and when there are a lot of volunteers, there tends to also be a lot of opinions.  So it is important to designate a committee chairperson who reports the wants and needs of the entire committee to the board and/or management. 

Having a member of the board acting as a liaison for each committee is equally important.  That way each committee chairperson can report to one member of the board instead of all five or more members.  Around budget season each committee should have met and discussed their proposed budget amongst themselves for the upcoming year.  They then send this proposed budget to the Treasurer for review and to be included in the Association’s budget.  If you had three or more committee members trying to convey their budget needs to each board member, something inevitably will get marginalized. 

The same system applies to management and board members.  The board should assign each board member a specific committee to oversee (i.e. landscaping, pool, finance, etc.).  For example, the landscape committee discovers that a major irrigation leak has occurred and, after receiving three bids, they determine they would like XYZ Irrigation Company hired to conduct repairs.  The landscape chairperson reports the findings to management.  The manager then adds this to the manager’s report and notifies the board liaison for landscaping.  The liaison reports his findings to the rest of the board so they can quickly decide as a group on the request.  This also helps everyone to be more organized and efficient during the month and more productive at the board meetings. 

Along those same lines, it is always a good idea to have one point of contact with your contractors/ vendors -both to deal with on a regular basis and to report issues to.  With more than one point of contact you waste time navigating through the vendor’s organization to report specific issues, and may not have successfully followed through afterward.  Also, you risk the vendor misunderstanding the specific needs and conditions of the community, if he/she does not regularly interact with a particular person. 

A single point of contact creates accountability, pinpointing errors and decreasing communication snafus and lost time in working through your community’s challenges. 

Reserving Activity

One of our clients asked the following:  I know that we transfer a fixed amount into the reserve account monthly.  My confusion is handling excess operating income and properly reporting the funding of capital projects.  In years where excess revenue exists, do you do an end-of-year transfer to the reserve account?  Should all capital projects be placed in the operating budget?  If so, this will create a net deficit.  Does this mean that instead of having a monthly transfer into reserves we then have to transfer from the reserve fund back into operating?  I don't see the point in doing both.  If there needs to be a transfer from the savings/reserve account, does that take place monthly, as needed or end of year?

Should reserve activity be included in the operating reports?  Communities with large volumes of capital reserve work often set up a separate set of reports to keep up with reserve activity.  Smaller communities with no amenities frequently roll in all reserve activity on the regular operating budget comparison report.  The Board should select whichever method is the least confusing for it to follow.

How often should funds be transferred in to reserves?  For smaller communities, it makes sense to just do a single transfer of funds into savings at the end of the year.  Otherwise, it is best to schedule transfers to occur throughout the year.  Failing to plan is planning to fail, so Boards should actively plan for future large expenses by being disciplined in their savings pattern.

What about the problem of net deficits because of reserve expenditures?  If you are combining your reserve activities with you regular operating budget, your comparison report should have a sub-total line that captures the net effect of your regular day-to-day operating expenses, which hopefully is always a surplus.  If instead you are keeping track of capital expenditures separately, you definitely need a line item showing reserve fund transfers.  In either case, if there is a negative net total at the bottom of your report, this indicates that money is coming either from past year savings, or a bank loan.  You can trace this answer back to your balance sheet (the place that keeps track of all your money), under the line item ‘Net Income’, which should always match what appears on your budget comparison report.  

So why should we do transfers to a reserve account, if we are just going to move the money back to operating?  It used to be ‘standard procedure’ for communities to shuffle budget numbers to make it appear that money was being saved (and actually saving this money, not spending it on capital projects), when often there was no intention or ability to actually do so.  Bank loan underwriters are now savvy to this ploy, and have been rejecting home loans because of it.  Do not set up a monthly reserve transfer if you know that the money will have to be spent during the current annual operating cycle.

Obviously, financial reporting for an HOA or COA substantially differs from that of personal finances or even many for-profit businesses. It is extremely important to partner with a 3rd Party Expert (in this case a CPA) that actively deals in the Association industry. Reach out to your manager or your local CAI chapter for more info/recommendations!

Financial Sense

Occasionally new clients or Board members express confusion about how community financials are reported.  For those of us working in the for-profit business world, using anything other than accrual-based accounting seems backward.

What is accrual accounting?   It is planning for the transfer of funds before they actually occur.  So, you report expected income a month or more in advance of when you actually receive money, and also post expenses for items that will come due at a future date.
However, for homeowner associations, there are downsides to this method:

• It may require that the financial books be kept open longer into the month so that bills can be received and properly accrued 
• It requires a higher level of accounting/bookkeeping knowledge to properly prepare financial statements 
• It can be more difficult for the layman user (most volunteer Board members) to understand
• Fraud/theft may take longer to detect

On the other hand, there is cash-based accounting, which is what most of us use for our personal banking.  Only at the time cash actually goes in or comes out of the bank are transactions recorded.  Delayed deposits or check payments result in an inaccurate picture of the financial status. A Board of Directors using this method may incorrectly assume that there is less or more cash, income and expenses than there actually is.

For small associations with very few transactions, the cash method of accounting may be appropriate. However, for most communities, most Georgia accountants feel that a modified cash method of accounting should be used.  The modified cash method is a hybrid between cash and accrual. There is no formal standard as to what items are modified, but common practice is to record income on the accrual method and expenses on the cash method. So you will only see accounts receivable on the balance sheet, not accounts payable.

This method of accounting is a valid option because most expenses are ‘standard’:  The majority of them occur on a monthly basis and are fairly static. Examples include utilities, management contract, pool and landscaping.   There really is no point in creating opportunities for error and confusion by accruing a future expense that rarely varies month-to-month!

When it comes to long-lasting (capital) assets like furniture, vehicles, tools & equipment, the depreciation question comes up.  Depreciation is a way of slowly reducing the value of these items, to spread an expense out over a period of years.  While it is possible to report this depreciation on the financials under any method of accounting, it is not typically done in not-for-profit associations.  The items in question are usually not integral to your core operations, and the main benefit of recognizing depreciation is during the tax season, which your CPA automatically handles for you. 

Another term you may hear mentioned when reviewing a Balance Sheet is the word ‘liability’.  This is just another way of saying ‘future expenses’.  Cash method financial statements generally do not list liabilities. While you may choose to list long-term liabilities (such as a bank loan) on a modified cash method statement, the balances often only update at year end, since the expenses are not accrued monthly or quarterly.

While the full accrual method is respected and has a valid place in for-profit corporations, for community associations CPAs recommend a K.I.S.S. (Keep it simple, stupid) approach by using modified cash to assist in understanding the financial health of your community. As always, please consult with your community's CPA about the benefits of all approaches prior to making any changes. 

Protect Yourself

Through the years this blog has covered several aspects of Board member liability.  One additional item for your consideration is the use of indemnification agreements.  These provide a more inclusive protection than what you might find in State statutes or your community's governing documents.  These agreements contain detailed procedures and time frames - and clarify the types of claims covered.  If you decide to utilize this option, consider clarifications in the following areas:

Expenses.  Protect yourself against expenses connected with any proceeding, by expanding the definition of “Expenses” to cover items often excluded in a D&O policy:   fines & damages, experts’ and arbitrators’ fees, bonds, settlements, and income taxes resulting from payments.  Proceedings should include any threatened or pending legal proceeding such as investigations, discovery requests, and administrative proceedings.

Fees-on-Fees.  Directors are not necessarily entitled coverage for legal costs needed to sue the Association to enforce your indemnification rights - be sure this is added! 

Insurance.  Require that the Association have its D&O coverage audited to obtain the highest quality insurance available in the homeowner association industry.

Express coverage for negligence.   An all-inclusive provision may be voided because it is overly broad.  Be sure that your agreement explicitly covers all negligence except gross negligence.   Here are a couple of court cases that talk about this quirk in Georgia law:  Service Merchandise Co. v. Hunter Fan Co   "Georgia courts never imply an agreement to indemnify another for one’s own negligence in the absence of express language.”    Satilla Community Service Board v. Satilla Health Services, Inc   "Contracts indemnifying one against the consequences of his own negligence are not favored, but will be given effect where the intent is expressed in plain and unequivocal terms." 

Procedures and Timing.  The agreement can require that the Association, when settling a claim against you, include an unconditional release from all liabilities relating to the proceeding, along with an acknowledgement that you deny all wrongdoing.  Require all indemnification payments be made within 30 days, and all advances within 20 days of a written request.   In the event of an adverse ruling, you can appeal, and be indemnified for all expenses.  Include a presumption in favor of indemnification, that you have met the applicable standards of conduct allowing for indemnification, and that a judgment, settlement, or criminal conviction does not create a presumption against indemnification.  And impose a reasonably short period on any claim that the Association might have against you.

It is important that you require immediate money advances to cover defense costs, regardless of whether you are the subject of a lawsuit, investigation or witness subpoena, with coverage continuing for your legal expenses - even after you leave the Board.

The above is not to be considered legal advice, and you should consult with a legal professional before acting. 

The Science of Forgiveness

As much as we try, it is difficult for Board members and managers to ‘let go’ when dealing with a homeowner or vendor that has wronged us or our community.  While no one is suggesting we blissfully ignore misdeeds and idiots, to forgive is critical to healthy community oversight.  Festering anger only clouds judgment and leads to burnout. 

‘Forgive’ has religious connotations for many.  However, whether or not you are a person of faith, over the last decade the physical and social benefits have been confirmed too often to be ignored. 

Getting scientific for a moment: Functional Magnetic Resonance Imaging (fMRI) brain scans traced forgiveness to the dorsal prefrontal cortex (for cognitive control), the posterior cingulate (for understanding how others are thinking) and the anterior cingulate cortex (for balancing the perception and suppression of moral pain (such as feeling wronged)).  From this, neurologist Dr. Pietro Pietrini notes that forgiveness is a moral distress painkiller.

Dr. Pietrini states, “The fact that forgiving is a healthy resolution of the problems caused by injuries suggests that this process may have evolved as a favorable response that promotes human survival.”  Forgiveness alleviates suffering.  It is a positive, healthy strategy for overcoming an otherwise stressful situation. 

In trauma burn units, anger interferes with the ability to heal. One doctor counseled a patient, “You can still pursue damages through an attorney. You’re entitled to be angry, but for now I’m asking you to abandon your entitlement and let it go, to direct your energy toward healing, and turn this over to God or nature or whoever you worship. It’s not up to you to get revenge on yourself or someone else.”

Another medical example:  In 2009 the journal Psychology & Health reported that patients with heart disease who underwent forgiveness therapy experienced higher blood flow and were at less risk of pain and sudden death, compared to those who underwent the standard treatment.

According to Professor Fred Luskin of Stanford University, “When you don’t forgive, you release all the chemicals of the stress response.”  Think about a wrong twenty times today, and your body releases stress chemicals each time, limiting both your physical and mental ability to tackle problems.

Reframe that painful memory by considering possible points of view that led the homeowner or vendor to act the way he did. This makes it more difficult to blame and demonize him, reducing the level of resentment you are feeling.

When you blame someone for how you feel instead of holding them to account for their actions, you become stuck in victimhood.  We’ve all experienced the same thing, and to get past it you have to accept that most often the person wasn’t intentionally out to personally hurt you.  How we’ve been dealing with anger hasn’t worked.  Instead, humanize the offender, and hate the wrong without hating the wrongdoer.

End Goals

We are frequently asked for advice on how Board meetings should be run.  One of the most critical pieces relates to strategy/goals.  Strategic thinking determines what we’re doing and where we’re going. To be successful, Directors must have a clear answer for both.

As a Board member, you must continuously engage in strategic planning - not just once a year.  It must be the central focus of each Board meeting.  It is really hard to create sustained, long-term value for your community when the Board (and homeowners) are blinded by short-term views.

Boards are most effective at developing strategies when partnered with a professional manager, working together based on mutual trust and respect. This means coming together throughout the year to identify important topics, consider strategic risks, and answer hard questions. Management by itself cannot conclusively cover everything in goal planning – but benefits from the collective wisdom of the Board.  

It is critical that all Board members understand the Association’s strategy and can articulate it consistently when responding to homeowners’ pointed questions and pressures.  There should be no surprises with a fully involved Board.

Placing education and discussion on strategy development into each agenda must be your priority.  All too often, the Board allows itself to get bogged down on governance and compliance issues.  Push as many of these items to your committees for processing.  If you don’t have committees, establish resolutions that capture the bulk of the situations dealt with by the Board, so management can proceed on autopilot.  

When it comes to the meetings, all Directors must arrive prepared, with all applicable materials reviewed in advance.  Plan to regularly include third-party experts for additional perspectives at your meetings.  A CPA, attorney, engineer or insurance broker provides an outside voice identifying potential disruptions to your goals.

You need to be talking about risks associated with your strategy and how these can be mitigated.  Effectively managing risks more than just protects value:  It actually helps create value by taking advantage of the unexpected.  You want to maximize opportunities and improve your community’s position compared to competing neighborhoods.

Manage this strategic risk by answering, “What is the amount of risk we’re willing to accept in pursuit of value?  What is the worst possible thing that can happen and still leave us standing?  What milestones do we need to check along the way to our five year goal?” While some things should not be changed (ex: always deposit money with FDIC-insured institutions), decisions on expansions and upgrades to the amenities are valid considerations.

The Board and management should be prepared to regularly readjust key assumptions.  Every goal has variables requiring mid-course changes.  Are you willing to alter the way you evaluate performance whether your plans exceed or fail to meet your initial expectations?

Final thought:  When bad decisions meet a good management team, the bad decisions win every time.  Don’t be quick to pin blame.  When things go wrong, take a deep breath and analyze the situation before making changes.

Re-framing Expectations

Alexander Hamilton, the guy on the $10 bill (for now at least), authored much of the U.S. federal system.  In one of his writings (March 18, 1788) he said (paraphrased):  The representatives of the people sometimes fancy themselves as representing themselves, and become impatient and disgusted with the least sign of opposition from others, as if the exercise of someone else's rights infringes on their privilege and insults their dignity.

Unfortunately, we see this same mindset among some HOA Boards, and among some community association managers.  While these agents are tasked with representing a corporation (the homeowners association), not individual homeowners, it is easy to 'take it personal' when a homeowner challenges them.  Perhaps the homeowner doesn't have all the facts, or perhaps he has facts the agent needs to know.  As long as the homeowner isn't being abusive or using strong language, Board members and managers should hear him out.

Time not taken now becomes time & money taken next, under mandated arbitration.    Also, the views of future challengers are colored by how they see you treating the current ones.   You can expect respect when first you have shown it.  Not every person understands or agrees with a governing decision, but shutting the door on discussion should be your second or third action, not your first.

By the same token, everyone (homeowners, Board members, and managers) should start from the assumption that there is some validity to each assertion.  After thoughtful deliberation, you may discover that a person's expectations can't be reconciled with those of the community.  That doesn't make his position wrong, only wrong for the community.
 Sometimes you will find yourself in an endless loop with an upset homeowner.  Your attempts to bridge the gap failed.  Time to redirect your efforts to more productive Association business:  It is okay to end the conversation.  Just be sure it ends in a way that you would be proud to see reported in the news.

To Tow or Not to Tow?

Towing is a drastic step used only after other options fail - or when life & safety are at stake.  Too often, an over-eager Board member quickly calls in a wrecker, with expensive consequences for the community.  Be sure the following steps are taken to close out loop-holes:

• Review the community's Declaration of Covenants for towing notification requirements
• Confirm the tow zones are owned by the Association, not public roadways
• Issue a community-wide 30-day notice (& post at the mail box if there is one) of parking regulations and the intent to start enforcement
• Chalk the tires of vehicles suspected of being stored, and check weekly for at least three weeks to see if they have been moved
• Compare vehicles with community registration forms and contact vehicle owner
• Tag vehicles and wait a couple of days.  Tag again if these are moved but still in violation
• Provide police with the make, model and tag of vehicles scheduled to be towed.  This prevents police interference during towing, and eliminates ‘stolen vehicle’ claims
• Keep handy a copy of the Georgia Supreme Court case of Reinertsen v. Porter, showing towing from private property is authorized
• Snap two photos of each vehicle before towing:  One at a distance to show placement, and one of the tag/rear of vehicle
• Tow only on Monday, Tuesday, Wednesday or Thursday, to cut down on weekend calls
• Notify all Board members and management of vehicles actually towed, so when the calls come in, everyone is in ‘the know’
• Maintain documentation to demonstrate fair and equal treatment
• If in doubt, call off a towing event.  There will be future opportunities to tow if the vehicle owner chronically violates the regulations

Often, it only takes one round of towing to send a message, but any Board embarking on this path must be prepared to consistently tow for many months.  Changing negative behavior takes time.  In extreme circumstances where large numbers of vehicles need to be removed, be sure to employ an off-duty police officer or sheriff to assist with confrontations.  Avoid premature towing.  Be thorough and measured in your approach when it comes to removing personal property.

Conflicting Opinions

A homeowners’ association attorney was in the midst of a controversy:  Board members were split into two factions, each trying to vote the other off.

In two special elections, the attorney informed the Board each time that not enough ballots had been received.  The interpretation depended on whether only non-delinquent homeowners may vote, or all homeowners.  Poorly written governing documents only muddled things.

The attorney concluded that all homeowners were to be counted, not just non-delinquent ones.  Now, one Board member is locating another attorney to tell him that only non-delinquent owners are counted, and that enough ballots were received to remove all rivals.

What happens if this Board member does actually locate a conflicting opinion?  An expensive court case, with the Association losing - no matter the outcome.

We constantly preach to our clients, “Obtain a third-party expert opinion to insulate against lawsuits.”  However, a Board 'shopping' for an opinion to suit its needs may be failing its duty to the Association.

Board members are in some ways like contractors.  Reputable contractors expect a clear scope of work and depend upon direction from engineers.  You wouldn't want the person building your home to shop around for an engineer to tell him what he wants to hear so that he can cut corners - and Boards should expect the same of themselves.

Whatever field of expertise you are tapping into, utilize reputable vendors specialized in the homeowner association industry.  A vendor outside of our arena is less likely to know the nuances of HOAs, leading to advice that may not withstand a challenge.

However, even within our industry, you may come across a material conflict in opinions... sometimes even within the same firm!  One insurance agent may tell you that a certain policy is not needed, while another insists otherwise.   One engineer may tell you a roadway will last five years, while another tells you it lasts two. One CPA may advise for a limited review, while another insists on a full audit.

This is where the business judgment rule resides.  The Board makes its best educated guess for the appropriate path, backing up the decision with documentation.  If the unthinkable happens based on a faulty choice, the Board will be better positioned to defend itself, and the court more likely to side with the Board.

While time and circumstances may lead an expert to change his opinion from one year to the next, the Board of Directors should avoid seeking multiple opinions on a topic in a single year, unless there is documented support (such as proof that the initial expert was unfamiliar with the mechanics of homeowner associations).  If Board members can't reach a consensus based on an expert opinion, its best to table the issue and revisit it at a later date.

Civil Forfeitures

The ‘War on Drugs’ in the 1980's  resulted in escalated property seizures by state and federal agencies.  For some states (like Georgia) where 100% of the seizure proceeds went to law enforcement, seizures unfortunately became an incentive for police corruption. 

Since that time, we have seen confiscations jump dramatically in the new century.   At the moment, Georgia is one of the five toughest states when it comes to reclaiming seized property from the police.

After several years of trying to address this, finally in 2015, the Georgia legislature passed the Georgia Uniform Civil Forfeiture Procedure Act.  With the widespread support that this bill enjoys, it will likely be signed into law soon.  This Act caps the amount of funds going to any particular policing agency at 33% and establishes an easier avenue for innocent property owners to reclaim seized property.

Whether or not the law passes, your real estate can still be seized if it is being used for illegal activities such as drug distribution - even if you are unaware of the activity.  Under the new law, you now can more easily challenge and recover the home if you meet a series of criteria.   Some of these requirements are: that you did not know of the conduct, did not know the conduct was likely to occur, and should not have reasonably known it was likely to occur (Georgia Statutes section 9-16-17(a)(2)(C)(D)(E)).

What does this mean for you as a homeowner?  If your homeowners association (HOA) contacts you about suspected illegal activity occurring in your home, you need to immediately contact the tenant or relatives staying in the home and resolve the situation - and make sure to document to such effect.  If the HOA is worried enough to contact you, it's likely that they see it as something that endangers the neighborhood.  Their next phone call may result in a police raid, and the possibility of a home seizure.

As always when dealing with legal issues like this, be sure to consult with an attorney before acting.

Black, White & Gray

A wily Board member once said about governing documents:  "There is black & white, and there is gray, and gray is what I define it to mean."   When a community has poorly-drafted documents, a Board may find itself filling in the gaps where the documents are silent.  

One community had a problem with off-leash dogs.  The covenants were silent on the subject.  The Board used the generic nuisance provision in its violation notices, even though it was possible that a determined homeowner could successfully challenge it.

A Board may find itself getting creative within the boundaries of the governing documents, but realize that this ‘gray is what I say’ can also work against you.  This is especially true with service contracts, such as landscaping or pool maintenance.  One vendor hired to replace buried cast iron pipes left a path of plant destruction in the common area.  Although the contract included road repairs, it did not stipulate shrub replacement.    

It is not unusual for the wording in a contract to grow organically over time.  New situations lead the vendor to add wording which doesn't play well with the other sections.  Or an attorney ‘fixes’ items included by another attorney, which is ‘fixed’ in turn by yet another attorney.  

The longer the contract, the greater the chance that something important gets overlooked.   This is especially true when it comes to insurance.  These documents easily run 100+ pages, filled with a lot of ‘If-Then’ statements.  The contract definitions are not necessarily placed at the beginning of the document, and there may be other sections that completely redefine a definition.

For example:  How do you know whether a Board member’s spouse is being protected with the Association insurance policy?  With more and more claims being filed against spouses (as a way to get around the protection of a Board member), you want to be sure they are included in the General Liability, Directors & Officers, and Fidelity/Crime policies.

Even if your spouse is explicitly an ‘Insured’ in the definitions, 20 pages later there may be a listing of ways the spouse ends up excluded.  To avoid this snake’s nest, require the insurer to issue an Endorsement explicitly adding your spouse as additional insured and overriding exclusions listed elsewhere.

Community Association Managers also find themselves excluded from insurance coverage, even though the Association is required to provide protection.  Community managers act as agents for communities, but some insurance policies exclude agents from the definition of ‘employee’ when determining who should be covered. 

Another insurance document covers real estate managers, leading some to think this covers your manager.  However, in the State of Georgia, real estate managers are a distinct class from community association managers, making it a possible avenue to deny coverage.  Again, use endorsements to clear up any confusion.

The best way to manage the ‘gray’ in these situations is to insulate the Board with third party experts (i.e. an attorney).  If that gray item should suddenly become black & white, being able to shift the risk to the expert is an added layer of protection.