First Steps

Newcomers to a Board of Directors face a steep learning curve.  Without understanding the mindset and lingo, a volunteer will more than likely be ineffective and frustrated.  And any short-term accomplishments may be overshadowed by negative long-term consequences. 

Prior to your first meeting it would be beneficial for you to review the governing documents (Declaration, Bylaws, Amendments and any Board Resolutions) of your community.  Highlight any areas of importance or of which you feel you do not fully comprehend. 

In the first Board meeting held after a community's annual meeting, it is good practice to have the Association's attorney speak about basic rules.  This step gets everyone off on the same foot.  Discuss your highlighted items with the attorney to ensure you have a full understanding of the topic.  The standard “there are no stupid questions - except those not asked” definitely applies when trying to understand these documents.

One topic should definitely be a quick introduction to contract law.  Yes, you will (hopefully) have your attorney reviewing any contracts before you sign them, but the interactions before and after a signed agreement are just as important.

Another item is identifying the typical sections of the governing documents that cause confusion.  This is also a great time to identify the gaps in the regulations that need amending.  Declarations drafted twenty years ago, and those issued by developers, often fall short.

Your attorney should also discuss how judges approach typical situations in homeowners associations.  For example:  Without thorough documentation, a judge often will be very lenient toward the homeowner.  Another example:  Something as simple as 'may' versus 'shall' in a contract or governing documents can be disastrous.  The judge can be a grammarian with a microscope focused on a single word or phrase. 

The attorney visit will easily consume the first meeting, so the next should involve the insurance broker, CPA, and association manager.  These three will identify weaknesses that the Board should focus on, such as life-safety items or under-funded cash reserves.

While the above are just the beginning steps, remember the First Rule:  Always insulate the Board by always seeking professional advice from third-party experts.  Relying on a patchwork of self-knowledge only exposes the individual Director and the Association to liability that your insurer will likely refuse to cover.  This expensive lesson happens all too often in communities around the country - don't let it happen to yours!

As a new Board member it is very important to remember you are running a corporation for the benefit of all stakeholders (homeowners).  While being a Board member is a volunteer position, the responsibilities are quite real.  When reviewing any issue, be sure to ask how it will benefit the community - and then do what the documents allow. Keeping both these items in mind will help ensure your efforts will bolster everyone’s investment in, and enjoyment of, your community. 

There Goes the Neighborhood

The community is in an uproar.  Some of the neighbors have been using online services to lease out their homes on a short-term basis, bringing in new faces every few days.  Crime is a concern.  Unfortunately, for years no one has been enforcing the community's rental regulations.  Housing patterns changed in the face of hard economic times, and now nearly half of the homes are non-owner occupied (even relatives are technically renters).

A new Board of Directors has learned that it is legally required to uphold the land use restrictions about rentals.  Fines start being assessed when unauthorized rentals continue.  Now, upset homeowners are working to have these Directors replaced to stop enforcement.  Even one of the Board members has violated his duties to the Association and is assisting with the overthrow.

What to do?

While not everyone can be reasoned with in this situation, education is key.  The Board should send a respectful and professional communication to the community, describing the consequences for non-enforcement.  People often need concrete examples to see past short-term gains:  Hearing about some nebulous potential costs of selective enforcement is unconvincing.  It is difficult enough to have permanent residents understand and abide by noise, odor and visual regulations.  Short-term residents have even less motivation.  By the time citations and fines start accumulating, the tenant has moved out.

You must speak in terms of money.  What comes out of a person's pocket is a powerful motivator.  The lack of commitment by renters to the success of the community is a common complaint.  The wear and tear drives up expenses that result in higher assessments. 

Insurance premiums (both for individual homeowners and for the homeowner association) go up dramatically in communities with substantial rentals.  For example, Citizens Insurance treats any community having more the 25% non-owner occupied homes as a commercial operation.  Any coverages above very basic dollar rates may be at 400% higher premiums. 

And for unrestrained rentals, banks will refuse lending for purchases and refinances.  This depresses housing prices, and limits the pool of potential new homeowners.  One person with an extremely high credit score and 20% down payment was rejected by four banks because of the percentage of rentals in the community in which they were hoping to buy.   

Sharing these examples resonates with resident owners, but many investor owners purchase in cash, so need a larger direct immediate impact:

Bank lending also dries up for the Association, too.  If a project pops up requiring large amounts of cash, everyone may be facing a huge special assessment.   Given the choice of either coming up with $5,000+ (per home) right now, or having a bank loan that is paid back over five or ten years, everyone (including landlords) opt for the loan.

Providing these dollar cost comparisons may be enough.  Or not.  In some communities, homeowners decide to essentially (though not legally) convert to an apartment complex.  Unless there is a disgruntled individual with enough money for a lawsuit forcing the neighbors to live by the covenants, such communities will remain landlord havens.  Until conditions deteriorate to the point that the local government steps in. 

Government action involves imposing daily fines for code compliance, requiring a very large special assessment to cover.  If the community fails to comply, condemnation is the final act, leaving all owners (including landlords) with worthless property.

Discuss the above with your neighbors if you find your community in this situation. Trust us, its not a great place to be!

Grills Gone Wild!

8,800 - The number of home fires involving grills each year, according to the National Fire Protection Association.  That's one home fire an hour.

$96 million - The average property loss caused by grill fires each year.  

16,900 - The number of people visiting emergency rooms in 2012 due to grill-sourced fires.  

These numbers are staggering! And building fires started by grills are not restricted to just the summer months - every month of the year sees homes destroyed due to grill fires.  While the majority of these fires are gas-fueled, charcoal-type grills are the cause of over one-sixth of the fires, and even electric grills cause 100 fires each year (thanks to exposed wiring or inflamed grease).

Because of the danger, many cities and counties ban the presence of grills in multi-family dwellings.  While you're welcome to risk you own home, if it is attached to other homes (apartments and town homes), or is part of a condominium (responsible for maintaining the building structure on behalf of the owner), endangering others is frowned upon.  

What to do if you already own a grill, which is resting comfortably out on the patio?  If a professionally installed fire suppression system (sprinklers) extends out over the patio area, often the fire marshal (and the insurance agent) will permit the grill to stay.  A possible option is to have the fuel source stored in a fire-resistance rated room.  Depending on various factors, this room must be able to contain fire for two, three, or even four hours.  Very few residential buildings meet this requirement.

As an alternative, communities may build a fire-rated building out on the commons, or may install grills on concrete pads, well away from all buildings.  Note that most bans do not extend to electric grills.  After discussing the above information with your neighbors, everyone may decide to convert to non-fuel (i.e. electric) cooking.  Just watch out for gas grills mysteriously sprouting power cords overnight!

Best Practices

Boards usually consist of people of diverse professional backgrounds.  And like the professions that they come from, effective Association management has best practices and principles that should be adhered to. Your Association Manager is a great resource in this area - and responsible Board members will actively implement these best practices in the daily operations of their community.

A great way to illustrate best practices is to review these in action.  The real life examples below provide a glimpse:

• Adam, Board President, adheres to Roberts Rules of Order. He officially calls the meeting to order. If an agenda topic needs to be reviewed he makes a motion and the other Board members  do the same. He asks angry owners to “please hold their concerns for open session” or he informs them that the forum to address their matter would be in a private hearing with the Board. If people become disruptive or extremely disrespectful, then he advises the audience that “unfortunately this business meeting may have to be adjourned if we are unable to conduct business.”
• Jamie is a Board Treasurer. She has actively led the Budget Committee meetings the last two years. She has created a spreadsheet that identifies all of the Capital Projects for the following year. She utilizes the Reserve Study and the committee member’s feedback in order to prioritize the projects.
• Tom is a Board Secretary who attends all of the Board meetings. He has a busy schedule but attending the Board meeting is a priority. He understands that lack of quorum would hinder the Boards ability to conduct business at Board meetings.
• John is a Board Secretary who takes concise meeting minutes and he distributes them to the Board at least one week prior to the Board meeting.
• Jackie has served on the Board for over three years. She often consults the Governing Documents before voting on a matter.
• Jason has served on the Board for almost 10 years. Early in his tenure he had some fixed ideas on how the community should be run:  He did not want to raise dues and thought a lot of services should be brought in-house. He has since discovered that small annual increases to keep up with inflation and to fund the reserves are necessary.  He has also learned that hiring a third party often provides the benefits of quality work and a buffer from constant time demands on Board members.
• Peter is a contractor who has served on his Board over the last six years.  When the Board is doing vendor selection he announces if he has a relationship with a contractor and abstains from voting.

It’s refreshing to serve on a Board in which the members are committed to injecting professionalism in all aspects of their duties.  The best Board member is an informed Board member.  Your challenge is to read and refer to your Governing Documents more often. You would be surprised at the increased depth of knowledge that is gained about your community! 

Identify the areas that your community is struggling in.  Perhaps it is high delinquency, numerous ACC violations, contentious Board meetings, aging amenities, etc.  Learn the best practices for addressing these areas in Homeowner Associations by tapping into resources such as your Property Manager, Community Associations Institute and similar organizations.  Your community is not the first to tackle these issues and certainly will not be the last. Those Boards that heed lessons from others ultimately enjoy smoother operations, and higher home values.

Well Driven

This is the seventh in a series of postings providing a detailed look at the governing documents for homeowners associations (HOAs).  Our final focus of the Bylaws is on Board duties and responsibilities. 

Just how dysfunctional can a Board become?  Several years ago, a dog was elected to serve on one community’s Board of Directors.  Go ahead and Google ‘Beatha Lee’!

The underlying problem is that the Board is often composed of volunteers with limited experience and knowledge.  The result is that many of the basics, such as using Roberts Rules of Order to run productive meetings, are completely overlooked.  There is also very little understanding about the roles of Board officers, with each person ‘making it up as they go along’.  Phrases like ‘Fiduciary Duty’ may not even be on their radar.

None of us would permit an untrained person to drive a car, and it should be no different when placing someone in the driver’s seat of the Association’s business.  However, the disaster of a car accident is immediate and physical, while a poorly driven Association takes longer before the ‘impact’ occurs.

Compounding the problem are Board members who have been ‘cruising’ or are actively destructive or self-serving in their behavior.  You wouldn’t let someone take a ‘joy ride’ with your personal finances, and yet essentially this is what occurs in some Board settings.    

To tighten control, consider amendments that:

Permit more reasons for removal of Directors.   Normally, the only situation that allows removing a Board member is three consecutive unexcused absences.  Sometimes, but not always, he/she can be removed after becoming delinquent on paying assessments.  Barring these reasons, the entire community faces the arduous process of calling a special meeting to vote the person off of the Board.  For the effort involved, everyone decides to just wait it out until the person’s term expires.  A lot of damage may occur over the year or two until the next regular election for that position. 

To deal with a wayward Director, consider providing these additional triggers for removal:

• If the Director misses four meetings in a year, no matter the reason
• If he/she takes actions on behalf of the Association beyond the scope of authority and without the consent or knowledge of the other Board members
• If the person is so contentious as to stymie the Board from conducting ordinary business.  This may require some level of court action.

Require Education/Certification. Mandate that education occur within 90 days of a new member joining the Board, and that each Director signs a statement affirming:

• He or she has read the Association's Declaration, Articles of Incorporation, Bylaws, and Rules & Regulations
• He or she will work reasonably to uphold such documents and policies to the best of his or her ability
• He or she will faithfully discharge his or her responsibilities to the Association and the Association's members.
  

Follow this up with the requirement of continual education courses each year, and a provision for temporary suspension from Board service if these directives are not met.

Insist on a well-educated Board to steer your community along the proper path.

Be sure to share a comment below about this latest series of postings! We'd love to hear from you

Voting Rights & Wrongs

This is the sixth in a series of postings providing a detailed look at the governing documents for homeowners associations (HOAs).  Today’s focus is on the Bylaws, which detail the internal governance of the Association.

Voting can be a highly emotional event at annual meetings.  The more structure you can insert, the better at controlling contention.  The following procedure will reduce allegations of results rigging:

·               The management company generates delinquency reports the day of the Annual Meeting, to account for any last-minute payments.  Individuals with past-due balances may opt to pay current on the evening of the meeting with certified funds

·               At the time of sign-in, all eligible voters are provided a ballot 

·               The meeting is called to order and the President announces whether quorum has been obtained

·               The President calls for three volunteers (non-Board, non-candidate) to conduct the count, which occurs while the meeting is in progress

·               Those selected to count ballots relocate to the back of the meeting room.  All others who wish to observe the count may do so in silence and without distraction

·               The delinquency report is made available for review by the three vote counters to confirm eligibility – any ballot may be rejected due to delinquency, incomplete information, duplicate conflicting votes (i.e. two owners in a unit each completed a ballot) or suspected forgery

·               All rejected ballots are set to the side.  All three individuals must unanimously agree to disqualify ballots.  Non-unanimous decisions may be referred to the Board to reach a conclusion

·               Eligible ballots are tallied under unanimous agreement by the three volunteer counters.  Those candidates receiving the most number of votes fill Board openings

·               A certification page is signed and dated by the three counters.  All materials are bundled and stored at management office.  Owners may inspect these by making an appointment with the management company

·               Prior to the conclusion of the annual meeting, a copy of the certified results is provided to the Board President for announcement.  The new positions become effective upon adjournment

When it comes to elections, consider amendments that:

Permit Electronic Balloting.  In the State of Georgia, explicit provisions are required to take advantage of the "Internet Age."  Because of protections that need to be maintained, some aspects of the voting process may be barred from electronic messaging.  Rely heavily on your legal counsel to craft the most effective language in this area.

Address Apathy.  No matter the incentive provided, such as conducting a drawing for gift cards, many communities struggle to reach the most basic level of involvement (quorum).  Approval of amendments is impossible in this climate, and the Association becomes the victim.   One possible solution is to permit the vote to be followed by another vote utilizing certified mail.  In this second round of balloting, if the homeowner fails to respond, it is considered a default approval by that owner.  Again, utilize your legal counsel to create this safety net.

Next post: Making Board members more accountable!

The Powers That Be

This is the fifth in a series of postings providing a detailed look at the governing documents for homeowners associations (HOAs).  Previous postings focused on the association’s authority to levy assessments; this one expands to look at the association's powers in general.

In most communities, the association retains all rights except for those explicitly granted to the homeowners - or ones that have been shifted by government regulation and court decisions (such as allowing religious displays).  Owner authority is primarily restricted to electing Boards, approving amendments, and rejecting budgets.

Association authority is explicitly outlined in State statutes, Articles of Incorporation, and Declarations & Bylaws - with the last two of these having information peppered throughout both documents.  What many people do not realize is that listing the powers in either the Declaration or Bylaws does not necessarily extend these over to the other document, as each document exists for a different function. 

Under the Bylaws, each person is a member of the Association, while under the Declaration, each person is an Owner – the law treats these relationships as two distinct areas of responsibilities.  Bylaws address internal rights and duties, while the Declaration deals with external obligations.   

When comparing the wording between these two documents, it is important to confirm that wording in the Declaration exists limiting Director Liability.  This protection may only appear in the Bylaws/Articles of Incorporation!  Have your attorney review for this!  Confirm you are acting within the authority delineated in each of these documents.

For example, consider the Association’s ability to take any actions necessary to secure common area items from damage, even if this involves entry into private homes.  A typical situation is the inspection of plumbing connections to reduce the potential for water breakages.

Unless an emergency exists, the Association normally notifies the homeowner and requires him/her to conduct the plumbing repairs.  If the homeowner fails to do so, the Association may have authority to conduct the work and bill the homeowner.

In this situation, the Board needs to confirm it does have the ability to authorize the entry of a third-party vendor into the home.  It also needs to confirm that neither it nor the vendor may be held liable for any damages that occur during the repair process.

While both of these abilities are very commonly listed, here are a couple of amendments you should consider:

Home Access.  What about the expense involved if you hire a locksmith, or must kick-in the door?  Have your docs clarify that if the homeowner fails to provide access, he/she assumes responsibility for any incidental expenses and repairs required to permit entry by the Association.

Reducing Risk.  Often the governing documents permit the association to require basic homeowner maintenance, such as replacing water lines or installing safety features, up to a fixed dollar amount.  Typically this ranges between $200 and $500 per year.  To keep up with inflation, consider changing this cap to a fixed percentage of the annual assessments, such as one-sixth of a homeowner’s dues.

Stay tuned for further ideas on plugging holes in your governing documents!