Boards Behaving Badly

Popular media outlets are great in spotlighting contentious homeowner association issues, leaving an impression that very few communities are properly governed.  This contradicts numerous nationwide surveys conducted by various institutions, showing the majority of communities are actually great places to live.

 

That said, a recent case of abusive behavior should make all take notice.

The community of Ventura Homeowner Association, located in San Antonio, Texas, experienced years of Boards exceeding their authority.  One situation was so bad that the community forced Board President, Lisa Pfeiffer, to resign in 2010.  She had barred homeowners from all board meetings, spent more than $100,000 to sue several homeowners and then rigged her own re-election.  After her expulsion, lawsuits were filed on both sides (Pfeiffer sued the Association for $4 million on claims of that her removal was an act of discrimination – this claim was eventually dropped).

Following failed attempts at mediation, in late-December 2012, the Association obtained a judgment against her.  Besides an award of $208,000 owed by Pfeiffer, the co-defendant in the case, former attorney for the Association Susan Rice, was hit with additional $50,000 in exemplary damages.  The court concluded that both Pfeiffer and Rice had violated their fiduciary duty to the Association.

Fiduciary duty is the requirement to act in good faith for the benefit/interest of the Association.  The person is entrusted with the care, protection and use of community assets.  This duty also includes the sometimes painful and politically unfavorable obligation to increase the budget to address safety issues or items that would otherwise degrade the value of the community.  Examples of appropriate fiduciary behavior include:

• Not taking advantage of your position to further your own needs 
• Acting honestly and industriously 
• Never using privileged information to provide an advantage to family or friends 
• Providing adequate information upon request by homeowners and not misleading them 
• Never knowingly placing the Association in a potentially litigious situation

False dealings by a few bad Boards places a magnifying glass on all the rest of us – conduct yourself as to always be above reproach!

There Goes the Neighborhood?

Anecdotal evidence suggests that renters can be more destructive to communities than their homeowner counterparts - but at least by the measure of home property values, results are inconclusive in many research studies.  What can be said with certainty is that banks and the secondary lending market have placed caps on the percentage of acceptable rentals in a community.  Currently, FHA accepts up to 50% rentals, whereas many banks will cap rentals at 25% or 30%.  A few rentals will not drive down home values, but communities with large numbers of rentals do see an average 15% decline in housing prices.

With that being said, the dynamics have changed significantly since the Great Recession. New trends show more people electing to rent over purchasing a home, driving monthly rental rates higher and attracting a different clientele base.  In addition, some of the renters were until recently home owners, and have a different mindset (compared to “standard” renters) when it comes to property upkeep. 

In some instances, if renters "like what they see" in the community where they reside, they might opt to purchase a home there.  Outreach by the Association is critical at all stages of this residential cycle if the Association wants to foster the type of environment that raises home values, regardless of occupant status.

Community socials should be inclusive of renters, as frequent interaction with the neighbors establishes positive peer behavior.  Some committees, such as a pet or tennis group, should permit renters to take an active role to encourage interest in improving community standards.  Concerns voiced by renters should be treated as if coming from the owner. As a result, renters will be less likely participate in "destructive" behavior and more likely to want to contribute to the overall well-being of the Community.

While sensationalism fosters controversies as entertainment or to provide a false sense of self worth, managing expectations (of both renters and the Association) will draw a positive outcome while other communities permit contention to fester.  The desirability of your neighborhood translates in to increased property value if nurtured through the years.

Assess the Situation

Contingency planning will not cover all possibilities, and homeowner education is critical when disasters loom.  Whether due to deferred maintenance or insufficient insurance, a community may find itself having to vote on a special assessment to address a life safety situation - for example: deteriorated staircases or balconies, a slipping building façade, or a swimming pool unseated by hydrostatic pressure.

It is critical that third-party experts, including the association’s attorney and insurance broker, along with a construction engineer, speak before a gathering of the homeowners to explain the dangers of ignoring the issue and not agreeing to a special assessment.   The cost of a personal injury claim may reach into the millions of dollars, depending on circumstances, plus inflationary cost of repairs afterward.  Better to pay for the “fix” now, rather than facing an unknown cost that potentially damages the value of the entire community.

If an individual is injured due to the community’s negligence, there are more than just medical bills/funeral expenses to cover.  Pain and suffering is calculated using the Martinez Formula, which takes the number of remaining days an individual is expected to live and multiplies by a daily cost composed of reduced salary, scars (physical and mental), and the impact on quality of life with loved-ones.

For example, if 30 year old lady is hit by falling brickwork, and the actuary tables indicate she could expect to live to 80 years of age, this is 18,250 days of life permanently impacted.  If the value of each day is determined to be $500, the Association is looking at over $9 million in damages!

Faced with this information, homeowners will agree that it is less painful for all if the community moves forward with repairs supported by a special assessment.  It will take Board leadership to successfully navigate through this process.

Keys to Security

Safety and security within your Association is not something that should be taken lightly.  While Associations are not set up to be the entity responsible for the homeowners’ security, communities across the world are continuously striving to find ways to provide additional security to both homeowners and their visitors/guests.  These ideals, along with budgetary constraints, are a battle that many Associations face each and every day.  Within this post, we will break down some ideas to better protect yourself as an Association and as a homeowner.

There are numerous ways that an Association can provide added security to both themselves as a community and to their homeowners. However, in most cases, acting on all of these security measures is not feasible. A community must review it's budget and financial situation before acting on these items:

• Lighting is a necessity.  For any Association having a lot of common area space, roads, parking lots, and amenity areas - it is important to keep these areas well lit.  When an area is well lit, it can be seen more easily by others, which also generally decreases the chances of illegal activity.  Contact your power company to set up a walk through. They can provide recommendations on where lights need to be placed in your common areas.  If it’s a road or other area not owned or maintained by the Association, contact your city or county representative to put in the request for additional lighting.
• Gates, cameras, and entrance swipe cards go a long way for Association security.  While these items do not guarantee that you can keep the "riff raff" out of your Community, it does make it a lot more difficult for uninvited guests to gain access.  For communities that do have gates, it is important that entrance gate codes are not published.  Cameras are also a deterrent for criminals because, even though no one may be watching them at the time, these cameras can pick up their every move.  If you currently have or decide to obtain these options for security measures, it is important to work with a qualified security company. They can provide back up to these systems and can the supervision needed to properly maintain these items.  Also check with your legal counsel to confirm appropriate signage related to the systems that your community has in place.
• A less affordable option for an Association is the hiring of a security guard or company.  These security officers can be off-duty police officers or those screened and hired by security patrol companies.  These also do not guarantee no illegal activity will occur but knowing that someone is always in the community watching may encourage anyone looking to perform a crime to go elsewhere.

• Neighborhood Watch has also become a huge benefit for Associations.  If enough members of the community show interest in a Neighborhood Watch, then a police officer from your local precinct will meet with those interested to officially establish the Neighborhood Watch for the community.  The benefit of this is prominent signage throughout the community along with a commitment of neighboring eyes who will contact police in the event of suspicious activity.

As a homeowner, there are also many things you can do to protect yourself from crime.  

• Lighting comes up again as a huge importance.  Never make it look like your home is empty.  Criminals flock to such homes.  Leave exterior lights on in the areas that burglars would attempt to break in (around doors, windows, etc.).  Leave a few lights on in your home to make it more difficult for a burglar to hide if they do happen to make it into your home.
• Alarm systems may be the most beneficial option for your home.  Depending on your alarm company, they’re generally set to go off whenever someone breaks into a door or window and also if someone opens a door and does not have the correct alarm code.  These alarm companies have the ability to contact the police once the alarm is signaled so the authorities can get there as quickly as possible.

• Make sure to call 911 should you see any suspicious activity whatsoever.  This could even relate to a neighbor of yours in the Community.  If there is ever an occasion where you feel unsafe due to someone else, the police is always the best and fastest option.  To get as much detail as possible, the police do generally ask for your name and contact info but you always have the option to not give them this information and call in as anonymous.
• Most municipalities also have a website for their police departments.  Many of them have links where you can give details on suspicious activity and request additional patrol in your area.  The more people who do this generally results in more police presence.  Be sure to review municipal websites to see what options you have for safety as well as checking for suggestions from your police department on other ways to keep you and your home safe and secure.

Keep these tips in mind - both as a homeowner and a Community - to keep the place you call home safe!

Association Insurance 101

Every Community Association - no matter how big or small - must maintain an extensive insurance policy to protect their property, their assets, their employees, and, most importantly themselves.  Whether you’re part of a homeowner association, property owner association, townhome association, condominium association, or office complex association it is very important to make sure you are fully covered and protected.

When thinking of insurance for Associations, more than likely, the first thing that comes to mind is coverage to protect the "common areas" that are the responsibility of the Association.  In a homeowner or property owner Association this may include the amenities such as pools, tennis courts, clubhouses, etc.  With townhomes or condo communities, it may be a little more extensive, when contemplating the building(s) themselves, roofs, parking lots, amenity areas, etc. 

It is crucial that these things be contemplated and included in the Association’s insurance policy.  In the event of a large loss, the policy should provide coverage for a potential rebuild/repair, keeping homeowners from having to dig into their own pockets.  What many Association members do not realize is that there are several other insurance coverages that an Association needs to both be aware of and carry.  These other coverages include: liability insurance, fidelity insurance, Directors and Officers insurance, workers compensation insurance, and financial insurance.

The importance of each of these coverages has been summed up below:  

• Liability insurance protects the Association should there be any type of occurrence with a third party as it relates to the Association.  A good example of this coverage - someone slips and falls while on the Association’s property and then decides to sue the Association for recovery.

• Fidelity insurance is sometimes also referred to as crime insurance.  This protects the Association in the event that its property or money is stolen.  At Access Management, we make sure that every property carries fidelity insurance, so that each Association is even more protected.

• Directors and Officers insurance protects the volunteer Board members for their service on the Association's board . If a suit is brought against the Board or individual board members related to their service on the Board, this policy would step in, verifying that the Board was working in the best interest of the Community.

• Worker’s Compensation insurance is insurance that Associations should have if they have vendors or contractors working directly for the Association, or if they have any homeowners doing volunteer work (such as putting up decorations).  This coverage also protects the Association should an employee get injured while working in the Community.  It’s also important to ensure any contractor that isn’t a direct employee of the Association, hold their own worker’s compensation policy.  This will limit the liability of the Association, since the contractor’s policy will step in should an employee get injured while on the job.

• Finally, financial insurance is in place by the banks to protect your money.  FDIC or Federal Deposit Insurance Corporation guarantees the safety of the deposits within the Association’s bank account.  Access Management works only with banks that provide this FDIC insurance and are currently financially stable banking institutions.

Here at Access Management, we specialize in making sure our communities are fully aware of the insurance coverages that they need to have in place and work with only the best insurance agencies to provide these coverages.  If you’re a Board member for your Community or plan to be in the future, take the time to make sure your Association is fully protected.  You won’t regret that you did.

Show Me the Money

Due to the economic downturn over the last several years, we have seen many changes within the home finance market - including the decreased ability for many homeowners to afford to pay the mortgage on their homes.  This type of situation is unfortunate, but for now - it is a reality that many homeowners have had to face.  As a result, people often do not contemplate how situations such as these can affect an Association.  The fact is - Associations are also highly affected by economic downturns.

Associations have come to realize that if a homeowner is behind on their mortgage payments, it usually means that they are behind on other bills as well - including Association assessments.  These missed payments affect the financial stability of the Association.  The most beneficial option for anyone going through such hardship is the ability to sell their home.  These days, if someone is able to sell their home for a profit - or just break even - it is great news.  If a home does end up selling, the unpaid assessments are collected at closing (and are generally paid by the seller).  In a perfect situation, the seller does not owe any past due assessments and can sell the home without having to bring additional money to the table.  In either scenario, the Association is usually in good shape and will be able to collect this money.

When someone is going through financial hardships - which also impact their home - there are several different outcomes that ultimately affect the home and the Association.  In most of these situations, the Association does not fare as well.  These outcomes include: foreclosure, short sale, and bankruptcy. 

Foreclosure is a word that we seem to hear more and more frequently.  This occurs when someone does not make their mortgage payments, so as a result, the lending institution takes the house back.  Questions always arise as to how past Association assessments are handled in the event of foreclosure.  There is a lot of detail that goes into the collections efforts made by the Association to try to recoup these unpaid assessments - but all such efforts are generally for loss once the home moves to foreclosure. At that point, the lending institution takes over the home and all amounts owed to the Association are written off by the Association. From the date the foreclosure takes place, the acquiring financial institution is then responsible for Association assessments until they are able to sell the home.  Lenders generally always pay the portion that they owe (i.e. the amount since they foreclosed) when they sell the home but there is really no practical way to compensate for the loss funds due by the homeowner prior to the foreclosure.

Short sale is when an owner negotiates with their lending institution to obtain approval to sell their home for less than what is owed on the home.  In the event of a short sale, any outstanding Association assessments are still owed and payable at closing.  However, a lot of times in a short sale the seller does attempt to limit any additional costs that may be related to the sale.  This could include bank fees, Realtor commissions, and Association assessments.  Owners frequently contact the Association to try to work out a settlement to pay less than what is actually owed.  If this offer is reasonable it is generally recommended that the Association accept the settlement. This is due to the fact that if the settlement is denied, there is a good chance it will cause the closing to fall through - which then increases the chances of foreclosure and a complete loss of the unpaid assessments.  While the homeowner will still be personally liable, the probability of collections does decrease, and "some money is better than no money."

Bankruptcy is a situation that may not result in a change of ownership, but it does greatly affect the Association.  There are two types of bankruptcies that are generally seen with homeowners:  Chapter 7 and Chapter 13.  In a Chapter 7 bankruptcy, the debt of the homeowner is completely wiped off.  This means that the courts approved for all debts to be removed in order to help out the person in financial trouble.  This debt does include any past due Association assessments.  Just like a foreclosure, that past due amount must be written off by the Association.  In Chapter 13 bankruptcy, the debt is reorganized in order to make the debt more affordable.  In this scenario, the past due Association assessments are generally included in that reorganization and can still be collected.

Because of the above, one can easily see how unpaid assessments can affect the Association. Can you imagine the impact of multiple financial hardship situations within just one Association? As a result, it is so important for those in good financial standing to continue to pay Association assessments on time. This will help keep the Community from struggling any more than it already is!

Over Protective

“Indemnity” is when someone promises to insure someone else against certain situations.  In terms of community association management, an example of this would be when the Association carries the expense of protecting the property manager against homeowner allegations of unfair treatment.

Two recent Georgia court decisions address when such protection is enforceable. In Kennedy Dev. Co., Inc. v. Camp, an indemnity provision was ruled invalid.  The developer in an upstream development had the rights to use amenities downstream, but was obligated to maintain the downstream detention pond.  The developer assigned these rights and responsibilities to the upstream HOA.  The property of one of the owners in the downstream HOA was damaged by increasing storm water drainage, and filed a claim against the developer.

The developer’s agreement with the upstream HOA required that they protect him from all claims. Georgia has an “anti-indemnity” statute which makes certain agreements unenforceable if they relate to “construction, alteration, repair, or maintenance” of certain property, and if they also promise to indemnify for damages arising from that party’s sole negligence. Georgia courts broadly interpret “property” to include real property leases, design contracts, subcontracts, and traditional construction contracts. The developer agreement was in violation of the statute since it required the upstream HOA to protect him against all claims, “no matter the origin of the claim or who is at fault.”

The opposite situation occurred in JNJ Foundation Specialists, Inc. v. D.R. Horton, Inc., where the one providing the indemnity, not the one receiving it, was at fault.  In this case, the contractor   failed to have sufficient traffic controls in place during a project, resulting in an auto accident. The accident victim filed against the owner of the land where the work was being conducted. 

The contract between the real estate owner and the contractor had a provision requiring the contractor indemnify the owner for “any claims” connected with the construction work. This indemnity agreement did not limit the contractor’s liability to claims for which it or its subcontractors had been at fault.  The contractor had to find some other source of funds to cover the claim against the land owner, as his insurance policy only handled negligent acts, not breach of contractual duty.

When you see a broad indemnity provision in a proposed contract, consult your attorney before executing the agreement, and modify the indemnification to provide that some act of the contractor must have contributed to the harm.