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Articles Posted in HOA Finance

*Asked & Answered

Untitled-1Asked – Our insurance was cancelled and with the new policy the premium sky rocketed. There is not enough money in the operating account or budget to pay for the new premium. Can we pay from reserves?   

Answered – California has suffered significant wildfire damage in recent years.  Coupled with several years of severe drought and increased wildfire risk, fewer and fewer insurance companies are willing to write policies for communities that may experience wildfire damage.  In addition, admitted carriers are highly regulated by the Department of Insurance, which limits the amounts they may charge for insurance premiums.  This has caused many associations to be cancelled or non-renewed by admitted carriers or those in the “primary” market.

As a result, HOAs are left to purchase insurance from the non-admitted or “surplus” market. Carriers in the surplus market are less regulated and, when demand is high and supply is low, prices skyrocket.  The HOA’s CC&Rs generally include language specifying that the association “shall” purchase insurance, and may require coverage to provide for “full replacement cost.” If the association does not purchase the insurance as required by the governing documents, the association and its board of directors could be exposed to liability for failure to obtain adequate coverage.

So, what is an HOA to do if it doesn’t have the money to pay for the skyrocketed insurance premiums? Yes, an HOA may temporarily borrow funds from reserves in this situation without membership approval because this act would be needed to “meet short-term cash flow requirements or other expenses.” (Civ. Code § 5515(a).) This action should only be taken with the guidance from the association’s legal counsel due to the significant procedural requirements that must be satisfied under Civil Code section 5515. Those requirements include, among others, providing the membership with notice of the board’s intent to borrow the funds.  The notice must additionally include the reasons the transfer is needed, the options for repayment, a description of how the funds will be restored to the reserve account within one (1) year of the date of the transfer, and a whether a special assessment will be utilized for that purpose.

A special assessment will likely be the mechanism utilized to restore the borrowed reserve funds. However, special assessments greater than five percent (5%) of an HOA’s annual budget cannot be imposed without membership approval.   Civil Code section 5610 fortunately exempts boards from having to comply with this membership approval requirement in situations where the special assessment (regardless of its amount) is needed to address an emergency expense which “could not have reasonably been foreseen by the board when preparing and distributing the annual budget report.”  While this emergency special assessment could allow for the board to restore the borrowed reserve funds the first time, the question then becomes whether levying a similar assessment in future years would remain a legally valid option as the assessment would no longer be tied to an unforeseen expense.  HOAs should therefore consult with legal counsel on this issue before imposing an emergency special assessment to understand its implications on future budget planning.

HOAs should also consult with legal counsel and their association’s insurance professionals for guidance as to how the increased premium expense may be mitigated carrying forward. For example, boards may be able to reduce their association’s insurance premiums by increasing deductible amounts. To illustrate, if the HOA has a $5,000 deductible, an increase to $25,000 or higher may be sufficient to generate a significant premium decrease under the master policy. That is because more risk (the higher deductible amount) is being transferred from the association’s master carrier onto the individual homeowners and the carriers of their respective HO-6 insurance policies.  The HO-6 (aka “unit owner’s insurance”) policies are designed to cover anything that the association’s master policy does not—namely, anything below the deductible on the association’s master policy.  Most sets of CC&Rs fortunately allow the board to make these adjustments to deductible amounts without triggering the need for any membership approval or vote on the matter.

Other options may include reducing the scope of insurance coverage the association is required to purchase under the CC&Rs. For example, if the CC&Rs require full replacement cost, or an ‘All-In’ policy, consider an amendment to a ‘Bare Walls’ policy, which only covers the common areas.  This type of amendment would likely require membership approval and should therefore only be considered if the board is ready to devote the time and resources needed to properly educate the membership and secure enough participation in the voting process. We typically recommend in these situations that the board conduct one (or more) townhall meetings to show the cost comparisons of (a) the special assessment(s) and/or assessment increase(s) that would be needed to maintain All-In coverage over the coming years versus (b) shifting to Bare Wall coverage for the association and each homeowner only incurring a minor increase in premium under the average HO-6 policy.

California HOA lawyers This is often successful in giving the membership a clear and powerful explanation as to why voting for the amendment is in their best interest; in our experience, this substantially increases the likelihood that the ballot measure will be successful.

-Blog post authored by TLG Attorney, Steven J. Tinnelly, Esq. and Ramona Acosta, PCAM.

*New Legislation

hoa-financial-protection

AB 2912, passed in 2018, provided welcome protections to homeowners in HOA’s from fraudulent activities by those entrusted with managing an HOA’s finances. AB 2912’s protections included: 1) requiring Associations to secure fidelity bond insurance in an amount equal to or exceeding current reserves, plus three months of assessments; 2) requiring a monthly review of financial statements rather than quarterly; and 3) prohibiting electronic transfers of funds without board approval. However, certain provisions of AB 2912 were unclear.

To settle any confusion, AB 1101 was passed by the California Legislature in September of 2021.  Effective January 1, 2022, Civil Code Sections 5380, 5502, and 5806, will be amended in order to clarify existing law by:

1) Specifying that HOA funds shall be deposited into accounts insured by Federal Deposit Insurance Corporation or the National Credit Union Administration Insurance Fund. This ensures that HOA funds are properly preserved and not invested in any high-risk investments or stocks.

2) Establishing clear limits before board approval is required for the transfer of HOA funds. While AB 2912 provided a process by which HOA’s should approve major expenses, the process for calculating those limits was somewhat confusing and was subject to change based on the amount of money on deposit in the HOA’s bank accounts. With AB 1101, the process is clear. For HOA’s with 51 or more units, transfers of $10,000.00 or more must be approved by written approval of the board. For HOA’s with 50 or fewer units, transfers of $5,000 or greater must be approved in writing by the Board.

3) Specifying that the HOA must not just maintain fidelity bond coverage, but that it must now also maintain crime insurance and employee dishonesty coverage, or their equivalent, for dishonest acts of the person or entity and their employees. This coverage would extend not just to the HOA and its directors, officers and employees, but also to managing agents and their employees.

California HOA lawyers Common sense legislation that protects the financial interests of HOA’s, which are unfortunately often targets for embezzlement, is a breath of fresh air. As always, HOA’s with questions regarding new legislation or legal requirements related to insurance or finances, should contact their HOA lawyer.

-Blog post authored by TLG Senior Attorney, Carrie Heieck

calculating-budget2020 has strained the purse strings of California homeowners associations. When the pandemic hit in March, it forced HOA’s into uncharted territory, which resulted in unanticipated legal fees to address a myriad of issues such as how to conduct meetings, enforce the governing documents, and maintain common areas during state-ordered shelter-in-place directives.

As restrictions were lifted, re-imposed, and continuously adjusted, HOA’s needed the advice of counsel to determine how to best navigate the fluid landscape of COVID-19 regulations. When the heat of summer arrived and quarantine-fatigued residents were demanding pool re-openings, Boards had to consider whether to adopt emergency rules to safely and legally reopen community facilities, again with the assistance of legal counsel. COVID-19 regulations also required increased cleaning and sanitation measures, which were further unanticipated costs.

The pandemic has also resulted in unemployment and reduced incomes for millions of Californians, many of whom live in HOA’s and pay assessments. Government programs have been supplementing unemployment benefits, providing stimulus checks, and issuing emergency loans, but this temporary relief is not unlimited and many fear we are heading toward a crash similar to 2008 where Associations were faced with a wave of delinquent assessments.

As 2020 nears its end, many California communities are finding themselves over budget. Pursuant to Civil Code § 5600, Directors have a duty to levy regular and special assessments sufficient to perform their obligations under the governing documents, which includes maintaining the common areas. To this end, Boards will need to evaluate how to best accomplish this task within budgetary constraints, focusing on safety as a first priority and possibly putting off larger, non-urgent projects until the pandemic has subsided and the economy has begun to recover.  If the community facilities are too costly to safely remain open, Boards may consider closing them or increasing assessments to offset the increased sanitation, cleaning, and monitoring costs if they decide to keep the facilities open.

California HOA lawyers Boards should review their financials closely with management and their accountant to determine where they may be able to cut costs and/or increase assessments to operate within budget. Although directors may be sympathetic to owners experiencing financial hardship, Boards have a duty to collect assessments and the failure to collect places a burden on the paying members who may be subject to increased assessments and reduced services to cover budgetary shortfalls. To protect against this, boards must record liens on delinquent owners and initiate collection actions. Associations should retain the services of a competent collection firm for these purposes.

-Blog post authored by TLG Attorney, Carrie N. Heieck, Esq.

*New Library Article!

electronic-funds-transfer-help-e1542145539349Assembly Bill 2912 (“AB 2912”) was recently enacted by the California Legislature.  Its changes to the law, which take effect January 1, 2019, are intended “to protect owners in a [HOA] from fraudulent activity by those entrusted with the management of the [HOA’s] finances.”  To that end, AB 2912 (a) significantly increases the financial review requirements of HOA boards of directors, (b) limits the ability for automatic transfer of HOA funds without board approval, and (c) imposes a requirement for the HOA to purchase and maintain a fidelity bond.

In the wake of AB 2912’s passage, questions and concerns have surfaced as to how HOAs and management companies may need to adjust their current operational procedures to comply with the new state of the law.  Our HOA attorneys have authored a new article to address some of those questions and to clarify some of AB 2912’s key components.

hoa laws The article, entitled “AB 2912: New Protections Against the Misuse of HOA Funds,” is available for download from our firm’s library. You can access the article by clicking here.

*New Legislation hoa-financial-review-

Earlier this year, the California Legislature proposed AB 2912 (Irwin) in an effort “to protect owners in a [HOA] from fraudulent activity by those entrusted with the management of the [HOA’s] finances.” To that end, AB 2912 significantly increases the financial review requirements of HOA boards of directors, limits the ability for automatic transfer of funds without board approval, and also imposes a requirement for the HOA to purchase and maintain a fidelity bondAB 2912 was signed on September 17, 2018 and its changes to the law take effect January 1, 2019. The following information summarizes the new state of the law in the wake of AB 2912’s passage:

Requirement for Written Board Approval of Account Transfers Above $10k:

Existing Civil Code § 5380 has been amended to prohibit the automatic/electronic transfer of funds greater than $10,000 or 5% of a HOA’s total combined reserve and operating account deposits (whichever is lower), without prior, written approval from the HOA’s board of directors. This requirement is also reiterated in new Civil Code § 5502.  HOA boards that previously gave blanket consent to their managing agent for such electronic/automatic transfers should expect the need to now give written approval for such transfers (i.e., large payments to vendors of the HOA) each time a transfer is required.

Financial Review by Board Must Now be Performed on a Monthly Basis:

The law previously required the Board to review the financial information of the HOA on at least a quarterly basis. Civil Code § 5500 has been amended to now require that review to be performed on a monthly basis.  Moreover, it now requires the review to include the HOA’s check register, monthly general ledger, and delinquent assessment receivable reports.

But what about HOA Boards that only meet quarterly? Fortunately, new Section 5501 was added to the Civil Code to address this issue.  It provides that the financial review requirements may be met “when every individual member of the board, or a subcommittee of the board consisting of the treasurer and at least one other board member” reviews the financial information “independent of a board meeting” and that review is (a) subsequently ratified by the board at its next meeting and (b) the ratification is memorialized in the board’s meeting minutes. For HOAs that meet on a quarterly basis, there will likely be a need to form an executive finance committee of the board as contemplated by Section 5501. Such HOAs should work with their legal counsel to draft an appropriate charter for such a committee.

HOAs Now Legally Required to Purchase a Fidelity Bond:

A fidelity bond is a form of insurance protection which covers losses that the policyholder incurs as a result of fraudulent acts by individuals. It is used by a HOA to insure losses caused by the dishonest acts of the association’s employees, managers, board members or officers. Previously there was no legal requirement for HOAs to purchase fidelity bonds; however, many HOAs do so either because their CC&Rs require it and/or because it makes good business sense.

New Section 5806 is added to the Civil Code to formally require HOAs to purchase a fidelity bond. Unless a HOA’s governing documents require greater coverage amounts, the fidelity bond must be purchased and maintained in a coverage amount that is equal to or more than the combined amount of reserves of the HOA and total assessments for three (3) months. The bond must also include computer fraud and funds transfer fraud. Additionally, for HOAs that contract with a third-party managing agent or management company (which is the vast majority of HOAs in California), the HOA’s fidelity bond coverage must also include coverage for dishonest acts by the managing agent or the management company and its employees.

HOA law attorneys HOA boards should work with their managing agents to develop a protocol for adhering to the new legal requirements regarding automatic transfers of funds and monthly financial reviews.  Additionally, HOAs should contact their insurance professionals to ensure that they are carrying fidelity bond coverage which satisfies the new legal requirements.

first-time-homebuyerWe previously blogged about H.R. 3700, the “Housing Opportunity Through Modernization Act of 2016”, which was signed by the President on July 29, 2016.  H.R. 3700 required the Department of Housing and Urban Development (“HUD”) to streamline the Federal Housing Administration (“FHA”) recertification process, provide regulations for commercial space exemptions, allow for deed-based transfer fees, and lower the owner-occupancy requirement within ninety (90) days of the bill’s approval.  In response to these provisions and changes in the condominium market, HUD proposed a new rule governing the certification requirements for condominium associations.  The proposed rule includes the following reforms:

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Taxes-PictureA bi-partisan group of the House of Representatives would like to think so.  According to the Community Associations Institute (CAI), more than 66 million Americans live in homeowners associations across the country, with an estimated 13 million of them living in California.  These homeowners pay assessments to cover the costs of road maintenance, street lighting, street cleaning, snow removal and other municipal services.  However, they also pay for these services through their local, county, or state property taxes.  U.S. Representatives Anna G. Eschoo (D-CA) and Mike Thompson (D-CA) have introduced H. R. 4696, the “Helping Our Middle-Income Earners (HOME) Act” to correct this double-taxation.  The bill is co-sponsored by US Representative Barbara Comstock (R-VA).

Under the Home Act, association members with annual incomes of $115,000 or less (or $150,000 in the case of joint returns) would be eligible for a tax deduction of up to $5,000 for qualifying assessments.  To qualify, assessments must be mandatory and regularly occurring, apply to the taxpayer’s principle residence, and benefit the taxpayer’s principle residence.  The obligation to pay assessments must also arise out of the taxpayer’s automatic membership in the association.  Under these provisions, special assessments and rental properties would not qualify for the deduction.

Homeowners associations would be required to provide a statement to each member showing the name, address, and tax ID number of the homeowner, the amount of qualified assessments received from the homeowner during the calendar year, and the name, address, and phone number of the contact person for the association.  The statement must be provided annually by January 31st.

“The Home Act recognizes that millions of middle class homeowners are struggling to keep up with rising household expenses like child care, college tuition, health care, mortgage and community assessments,” says Rep. Eschoo.  “The Home Act can go along way by providing relief from this tax burden on millions of middle class families.”

“Congress needs to do all that it can to reduce barriers to homeownership for hard-working middle class families,” said Thompson.  “By helping to alleviate the cost of community association fees this legislation is an important step.”

hoa laws The Home Act has been referred to the House Committee on Ways and Means, but may have trouble moving forward during an election year.  CAI has taken a “support” position on the bill, and has issued a Call to Action to seek additional sponsors.  Even if the bill does not pass in 2016, it sends a message to the legislative committees working on tax code changes, that it’s an initiative whose time has come.

Blog post authored by Tinnelly Law Group’s Director of Business Development, Ramona Acosta.

fhaWe have previously blogged about the Federal Housing Administration’s (FHA) revisions to its condominium approval guidelines.  Recently, the Community Associations Institute (CAI) announced that progress was made towards reasonable reforms to the FHA approval process.  On February 2, 2016, the US House of Representatives passed H.R. 3700 the “Housing Opportunity through Modernization Act of 2015” (Act).

The bill is now referred to the Senate for review and approval.  If passed, the Act would:

  • streamline the recertification process,
  • allow the Department of Housing and Urban Development (HUD) to grant commercial or nonresidential space requirement exemptions, and
  • reduce the minimum owner occupancy requirement from 50% to 35%.

If this bill becomes law, the recertification process for condominium projects would become substantially less burdensome, allowing associations to maintain their FHA approval status, thereby making homeownership more affordable.

For further analysis of the bill, click here to read CAI’s blog post and letter to US Representative Leuketmeyer, Chairman of the Housing and Insurance Subcommittee.

hoa laws Association boards and managers can verify the status of a condominium project’s FHA approval at the Official HUD Directory.

Blog post authored by Tinnelly Law Group’s Director of Business Development, Ramona Acosta.

hoa-fha-loansNew Legislation*

Civil Code Section 5300 requires a HOA to prepare and distribute to its members an annual budget report. The annual budget report serves as a consolidated disclosure statement which must include numerous items of information, such as information pertaining to the HOA’s reserve funds, operating budget, and insurance policies.

In June of this year, we blogged about AB 596 (Daly), a bill proposed by the California Legislature that would require additional statements of information to be distributed with the annual budget report for condominium HOAs. Those statements would disclose the status of the condominium development as being a Federal Housing Administration (FHA) approved condominium project or a Department of Veterans Affairs (VA) approved condominium project.

AB 596 was signed by Governor Brown on August 12, 2015. As a result, beginning July 1, 2016, Civil Code Section 5300 will additionally require condominium HOAs to provide the following statements in at least 10-point font on separate pieces of paper that accompany the annual budget report:

“Certification by the Federal Housing Administration may provide benefits to members of an association, including an improvement in an owner’s ability to refinance a mortgage or obtain secondary financing and an increase in the pool of potential buyers of the separate interest. This common interest development [is/is not (circle one)] a condominium project. The association of this common interest development [is/is not (circle one)] certified by the Federal Housing Administration.”

“Certification by the federal Department of Veterans Affairs may provide benefits to members of an association, including an improvement in an owner’s ability to refinance a mortgage or obtain secondary financing and an increase in the pool of potential buyers of the separate interest. This common interest development [is/is not (circle one)] a condominium project. The association of this common interest development [is/is not (circle one)] certified by the federal Department of Veterans Affairs.”

The intent behind AB 596 is to ensure that condominium owners and prospective condominium owners understand the benefits of a condominium development being FHA or VA approved and how the availability of FHA or VA financing benefits the marketability of the condominium units within the development.

Industry experts have expressed concern that a HOA which was certified at the time of the disclosure may not retain that certification throughout the course of the fiscal year. However, AB 596 does not add a requirement for the disclosure statements to be revised mid-year should the HOA’s FHA or VA certification status change. FHA approval expires every two years and requires a recertification process. If a community no longer meets the FHA approval guidelines, recertification may be rejected. If approval is granted, but the FHA learns of additional factors, approval may be withdrawn. HUD does not currently have a notification system in place to inform the association that FHA approval has expired or been withdrawn.

hoa laws Condominium HOA boards and managers are encouraged to regularly check for FHA Approval at the Official HUD Directory and VA Approval at the Official VA Directory to verify the current status of their communities. 

hoa-fha-loansWe have previously blogged about Federal Housing Administration (FHA) certification for condominium associations.  Recently, the California legislature proposed AB 596 (Daly), which would add a separate document to the Annual Budget Package disclosing whether the condominium association is FHA approved.  This bill would also require a second document disclosing whether the condominium association is approved by the federal Department of Veterans Affairs (VA).

When a community is a condominium project, AB 596 requires that the Annual Budget Package include a statement “in at least 10-point font on a separate piece of paper and in the following form:  ‘Certification by the Federal Housing Administration may provide benefits to members of an association, including an improvement in an owner’s ability to refinance a mortgage or obtain secondary financing and an increase in the pool of potential buyers of the separate interest.  This common interest development [is/is not (circle one)] a condominium project.  The association of this common interest development [is/is not (circle one)] certified by the Federal Housing Administration.”  A similar statement on a second piece of paper must be made regarding VA certification.

Industry experts have expressed concern that an association that was certified at the time of the disclosure may not retain that certification throughout the course of the fiscal year.  FHA approval expires every two years and requires a recertification process.  If a community no longer meets the FHA approval guidelines, recertification may be rejected.  If approval is granted, but the FHA learns of additional factors, approval may be withdrawn.  HUD does not currently have a notification system in place to inform the association that FHA approval has expired or been withdrawn.

CAI’s California Legislative Action Committee is requesting amendments to the bill that would direct homeowners to the official FHA and VA Approval websites to verify if the community is FHA or VA certified.  AB 596 has passed the Assembly, and is currently in the Senate.

hoa laws Association boards and managers are encouraged to regularly check for FHA Approval at the Official HUD Directory and VA Approval at the Official VA Directory to verify the current status of their communities. We will update our blog if and when AB 596 is ultimately signed into law.

Blog post authored by Tinnelly Law Group’s Director of Business Development, Ramona Acosta

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