Who, Why, What, When and Where do I Perform Due Diligence When Buying or Selling Real Estate in a Common Interest Community?

With a Very Special thanks to attorney Brian McLean, who expanded on our published question list and with helpful contributions from other Forum attendees, several useful tips appeared in our October session. Since attendees represented condominiums only, that's became our discussion focus.

Who's Responsible?

Whether you're about to purchase a unit for yourself, your college student dependent, or your mum/dad, there are several  entries that you can add to your checklist of what to look for in order to perform the due diligence necessary to make an educated buy.

If you're selling a unit, you, too, can develop a checklist of facts so as to maximize the transparency and 'inspect-ability' of your association's documentation.

If you're a board member, you can hereby be reminded that the condition of your association's documents must bear scrutiny, whether by owners, prospective buyers or the legal community.

High-level Overview: What's Important to Explore as a Buyer or Seller?

Regardless of the nature of the community, Brian recommends looking particularly at two items: the building structures and the association's finances and governing documents.

1. "Hire an analysis of the building structure." There may be other analyses or documents prepared by others that address the structure, but if you commission and pay for your own analysis, you are more assured that your interests are being protected.
2. "Review the financials and governing documents." 

• Request the most recent financials and the past couple of years' worth of audits, as a way to assess the financial health of the association. Use your business judgement to spot abnormalities or irregularities that signal caution and more investigation.
• Does the association possess 'healthy reserves'? Compare reserve funding to a current reserve study. Do your homework and reach out to professionals if necessary.
• It's hard to tell good from bad governing documents without experience. You can compare covenants to what you find in the Resale Certificate, for example, to find matches. If there is a difference, the covenants govern the issue.

What is a Resale Certificate, who prepares it, how do I trust it?

In Washington State, the condominium law dictates that a Resale Certificate be prepared by the owner prior to any resale of a unit. In practice, however, the association's management company is best prepared to provide the bulk of the data required, and generally, the owner commissions and pays for the certificate.

Use your critical thinking to review what is presented there, so that you're confident that you are comfortable with all the data. Review everything, so that if there is an attachment referenced in one of the entries, you understand fully what is implied in the attachment. Again, reach out to professionals if necessary.

Tip: Brian recommends that if you are a seller with an interested buyer at hand, that you commission a Resale Certificate and review it. In your review, verify that there is no point of view or language that will 'kick the slats out from under' your sale.

What is a Reserve Study, what questions should I ask about it?

A Reserve Study is a financial planning tool that associations can use to put away money to pay for repairing significant real estate assets owned by owners in common with other owners. Questions you can ask include:

• How current is the Reserve Study?
• Who prepared it?
• What is the contribution level recommended?
• What is the funding level that the association has in the bank?

What should I look for in association financials that I inspect -- three years' worth?

Brian's first caveat is that a potential buyer is only given access to association records through the seller/owner. In fact, the buyer only as a right to deal with the seller: not the board or the association manager. 

One way to obtain financials -- and meeting minutes -- is to prepare a written request detailing what you want to inspect, and passing it along to the owner/seller, who then exercises their right to examine and copy the business records of the association. You can expect to pay for any copies that you make.

You can ask for past audits if they are available, or financials for several years: three years will give you a good idea of the trend of the association's financials.

What should I look for in board meeting minutes that I inspect -- three years worth?

Association board meeting minutes are not included automatically in a Resale Certificate, but a potential buyer can request them, as above in writing, for review.

You can look for transparency and form in the meeting minutes. The caveat, however, is that a properly formed set of meeting minutes may not reflect a dis-functional board -- which you want to look out for, and newsletter-length minutes detailing every comment made may not reflect a properly functioning board that makes sound business decisions and exercises its duty of care of the association's business affairs -- which you also want to look out for.

What you can look for is explanation of agenda items, motions, seconds, and votes that detail the actions of a cohesive board that conducts business in a transparent manner and for the benefit of the association.

 What questions should I ask of the board?

Again, a prospective owner cannot approach any director or board directly, but must work through the owner/seller. If you gain access and the director lives in the community, you can ask about how the director likes living there, and open an informative dialog.

How can I attend a board meeting in advance of buying?

You  may be able to attend a board meeting at the invitation of the owner/seller, depending on the board meeting and the agenda items listed. There may be meetings where the board wants to limit the dissemination of data, such as a meeting where a construction defect attorney makes a presentation about pursuing a developer for defects, which you may not be invited to attend.

The spirit of a board meeting often reflects the spirit of the community, so attending one can be deeply informative.

Who else should I speak with, such as the association manager?

Attendees suggested returning to a community without a realtor, and asking people who live there -- someone publicly visible -- how they like living there and what a buyer needs to know about the community. Again, buyers only have access to the association manager through the seller/ owner.

What Else Do I Need to Know?

An attendee recommended asking for a Condominium Purchase and Sale Agreement, to best understand what's involved in the transaction. Especially for first-time or inexperienced buyers, buying into a condominium association can be revealing as to what's included in the purchase.

Assessments, Budgets, Money: The Heart of Any Association

     INTRODUCTION

In case you need a reminder, the center of any association's business is based in money: the dollars owners pay as assessments into accounts dedicated to the maintenance, preservation and protection of the real estate assets owned in common. (Other monies are also key: settlement awards, judgements and so forth.)

Finances are one of the first criteria that any association-savvy buyer will inspect, before buying into an association. Any failure to account for monies spent, plan for predictable expenses, or follow the law is a red flag to this kind of buyer. Potential buyers are entitled to review the past three years' financials for any association.

In our meeting invitation, we promised to cover the subjects below. We learned from several related conversations during the session, but here are the highlights for the topics promised.

     THE ASSOCIATION BUDGET PROCESS

Best practices dictate that a budget plan be prepared in reverse of these steps, starting at the end date, which tops the list below. Then work backwards through your calendar to determine these dates:

• For some, produce assessment coupons. Work with your association manager to ascertain how long this process takes, which is usually three to four weeks.
• Hold the Budget Ratification Meeting
• Give proper notice for the Budget Ratification Meeting according to your governing documents
• Finalize the budget, based on input from the association's long-term strategic plan
• Hold the board meeting to give the board an open forum for discussion of final line item budget numbers
• Give proper notice for the budget discussion board meeting
• Hold the board meeting to give owners an open forum for discussion of line items
• Give proper notice for the owners' budget discussion board meeting
• Build the model for the planned expenditures given vendor research for next year's costs, owner  values' input, and review of the association's longer-term strategic plan
• Gather next year's increases from vendors; price new vendors
• Survey owners to confirm satisfaction with preservation, security, maintenance, and 'look-and-feel' of the property 
• Inspect this year's invoices to identify vendor costs
• Develop a matrix of line item expenses across budget period planning window (12 months).

If your fiscal year ends in December, you can begin the budget process anytime, but July and August are the months when you can begin in order to avoid any 'crunch' or excess of volunteer work required to complete the budget process on time. This makes budgeting about a half-year process.

NB: If no budget work is performed, the next fiscal year's budget will continue forward based on the current year's budget, which is also true when owners fail to ratify a proposed budget.

     UNDERSTANDING CURRENT EXPENSES AS PREDICTORS OF FUTURE EXPENSES

Expenses drive association budgets/ assessments. This means that the board must be aware of both practical and legal requirements necessary to operate the association according to the owners' expectations, and the law.

If the strategic plan anticipates that this is the year for 'the rental cap' amendment, the 'collection resolution', the major preventative maintenance project, and so forth, its expense falls into this budget.

Current expenses may expose or verify strategic plan timing. For example, if more than 10% of the units are rented, it may be time for the rental cap amendment, especially if the association expects to qualify for FHA or other common funding sources for unit sales.

     FINANCE COMMITTEE TIPS AND TRICKS

The Finance Committee is generally a standing committee, described in your governing documents. Every effective board enables this committee, and delegates tasks to it. Owners interested in how assessments are established and spent can participate. Your governing documents explain committees and how they operate within the realm of board work.

For example, when the committee reviews invoices, the committee can spot mis-categorized charges, inappropriate charges, and unexpected charges that should not be paid. 

NB: Crawling through invoices for every association regularly is a board obligation. Without this task,  the board can fail to earn a trustworthy rating from owners.

A competent committee meets as frequently as monthly, reviews the association's finances and discusses expenditures as indicators of the association's financial health. The committee may make recommendations to the board for actions to be taken, based on financial indicators.

     INTERVIEWING VENDORS FOR NEXT YEAR'S RATES

Often, when you contact a vendor in summer and ask about next year's increases, you'll catch the vendor off-guard. If you cannot tease an answer from a vendor, you can estimate the increase based on last year's increase, a new series of tasks for the vendor, for which the vendor will give you a new quote, or chose an arbitrary number, such as five percent.

Maintaining contact with the vendor to glean the new rates, up to the date of the board vote is wise, given that predictable budget numbers are more realistic than SWAG estimates.

     FLOAT, BAD DEBT, 'SUGAR JAR' FUNDS

As a past association president, I can tell you that getting the call from the manager asking whether to pay the master policy premium or the water bill is an uncomfortable position. Cutting a budget 'to the bone' makes unrealistic assumptions including that every owner will pay their assessment on time and in full, and that expenses will never exceed their budgets.

Commonly, new condominiums are sold requiring that two-months' worth of assessments be paid at closing, to afford the association a reasonable float. Best practices for cash flow management dictate that a float amount be present in the operating account, so that the association can pay all its bills as they are due. A review of past years' cash flow requirements may dictate a float percentage to include in the budget.

In addition, there are owners who do not pay assessments, and over time, this income must be 'written off' the books, because it will not be collected. Bad debt write-offs are always difficult to predict. One strategy is to review past years' late payments or non-payments and include an average of this amount in a line item titled 'bad debt'.

Either of these amounts -- float or bad debt -- can be considered 'sugar jar' funds: you've got them even if you don't need them.

     CARRY-OVER, YEAR-TO-YEAR

Amounts that you carry over from the end of one fiscal year to another can appear as such in your budget.

The worst idea is that the board refund unspent assessments. This sets up unreasonable expectations for future years, since refunding assessments, and generally lowering assessments, is rarely wise.

NB: Be aware that a negative carry-over from the past year should dictate an informed and positive budget for the next year, so that negative carry-over doesn't continue year-to-year.

     RESERVE STUDY DISCLOSURE
     REQUIREMENTS, NEW FOR 2013 BUDGETS

Washington State Legislators discussed association reserve studies for several years, and enacted a law requiring associations to budget for a Reserve Study beginning with the 2013 budget. Savvy boards budgeted for reserve studies in their 2012 budgets, where possible, so that the 2013 budget could reflect up-to-date reserve contributions.

You can read this legal opinion about the effect of the new Reserve Study Law, as it affects reserve study/ reserves funding reporting for associations formed after July 1, 1991 (new act condominiums) and Home Owners Associations, and discusses the content of any Reserve Study.

Here are a few comments about Reserve Studies:

• A Reserve Study affords an association a means for saving up monies for major asset repair or replacement, which avoids owner-sinking special assessments often required without them. It follows the notion of 'pay as you go' use of real estate assets. 
• Owners and boards that resist this common sense task, desiring to 'push off' this requirement to new owners/ boards, demonstrate a certain lack in common sense thinking, because assessments in future will be higher overall, and potential buyers will cross units off their lists which belong to associations that demonstrate the lack of a current Reserve Study and/or underfunded reserves.
• Owners and potential buyers are interested in their personal financial requirements for the next five years, which can be documented -- okay, as estimates: sound, solid estimates -- by a Reserve Study. 
• Reserve Study vendors can also prepare annual Preventative Maintenance Plans based on details established in the Reserve Study. This strategy is one of the most effective for boards so that they can preserve and maintain real estate assets, which are board charters under state law.

     BUILDING THE MODEL, TWEAKING THE MODEL

One suggestion is to use a digital, commercial spreadsheet software product, such as Google Docs, Spreadsheets, or Microsoft^© Excel^© to develop the budget model.

It's simple to architect the digital spreadsheet with a top, summary page, and with separate tabs for Landscape, Utilities, Professional Services, Preventative Maintenance, Reserves Funding, and Miscellaneous categories. Then you can list the detailed line items, accordingly, in the left column, and add the months across the top in a row.

The top sheet summarizes each major category and contains the income line item, which represents total monthly assessments.

You can connect cells from the tab sheets to the top sheet, so that your model can be exercised, adjusted and modified as you proceed through the several iterations of gathering data from vendors, and finalizing approvals from owners, board members, and association manager.

Finally, you can produce a graph -- a pie chart works -- of the budget categories, for presentation to owners. One suggestion included listing all expenses by unit, starting with the highest expense, and explaining the total amount by category and purpose, by month. An entry in this list, for example, read "$26.51 pays our Master Insurance Policy premium."

     PRESENTING THE DRAFT BUDGET TO OWNERS

When possible, in September -- four months before the Budget Ratification Meeting, add an agenda item to a board meeting to discuss next year's budget. You can present what you've learned from vendors and lead an open discussion with owners about the overall state of the property. Because the board has developed a long-term strategy for the community, you can discuss items such as next year's painting project, changing landscape vendors, increasing the community charity contribution, projects that didn't take place this year, put off until next year, and so forth. 

The goal in this presentation is to verify and ascertain the values of owners relative to the community's reputation, its 'look and feel' and so forth. This may also be a good time to discuss security, parking, pets and other community-centric values.

In this draft budget, you can include expenses to cover all the items you discuss, so that owners can help prioritize what to pay for next year, and what to include in this budget. 

Often, this is the best chance for an open dialog with owners about the 'state of the community', since it involves values and how to pay for them.

     PRESENTING THE BUDGET PROCESS TO OWNERS

Your CC&Rs specify that a budget for common expenses be prepared and ratified by owners each year.  Too many condominium owners, -- whether they be 'apathetic' about their ownership:  they pay their assessments, live their lives and expect that 'everything will be okay'; or 'ignorant' of assessments, their purpose and genesis -- don't understand the budget process.

Explaining the process to owners is vital in engaging owners in it. Budget ratification by pro-active non-ratification by owners -- see your CC&Rs -- may appear backward. But, this style of budget ratification gives boards the funds required to complete their legally-mandated tasks, regardless of owner resistance, unless such resistance is the majority specified in your CC&Rs.

You may want to include this education in your draft budget meeting with owners.

NB: Associations which hold Annual Meetings that contain Budget Ratification can confuse themselves and owners. Here's why. Agenda items at Annual Meetings requiring a membership vote can be voted by proxy, except Budget Ratification, which cannot be voted by proxy.

     HOW OWNERS CAN OPPOSE A BUDGET/ ASSESSMENTS

Owners who are not willing to approve -- ratify -- any budget, must appear at the Budget Ratification Meeting in person and cast a negative vote. The majority of owners required in the CC&Rs must appear in person and vote similarly in order to defeat a proposed budget.

NB: Commonly, this is 51% of owners, but your CC&R percentage may be different.

     HOW **NOT** TO OPPOSE OR PROTEST ASSESSMENTS

Some owners believe that if they don't agree with a board, a board action, or otherwise wish to protest, simply do not pay their assessments. This is not a smart position for any owner to take. Why?

Your governing documents -- which you agreed to when you purchased your property -- specify that your clear title is involved in your requirement to pay your assessments. You may also be personally liable for them. 

When you don't pay your assessments, your association can pass your obligation along to a collection agency, or an attorney, to file a lien on your title. When it takes this step, you are also obliged to pay fees and expenses of collection. As a final and drastic step, the association can sell your property in order to satisfy the debt that you legally owe.

     SUMMARY

Since money is at the heart of every association, engaging and educating owners as to the expenses of ownership, demonstrating trustworthy and thoughtful work in developing budgets, and taking the most care in spending association funds is one of the best ways to keep association members generally calm, content and happy with their common interest community ownership.

Transparency regarding money can represent the integrity required of boards, as they exude their power over multi-million dollar associations.

Violating money matters offends all owners, and a few may take issue with these violations. Mis-use and abuse of OPM -- other people's money -- can become a criminal matter. 

Protecting the Association When Banks Do (or Do Not) Foreclose

Thanks to Jeremy Stilwell, a partner in Barker Martin, with offices in Bellingham, for a deeply knowledgeable and engaging interaction with Forum members on this topic.

First, let's acknowledge that these kinds of matters are expert matters that are best guided and handled by association counsel, while preparing the materials so that legal action can be taken is a key task for the board.

Jeremy delivered an appropriate disclosure at the beginning of the meeting and further explained that he would never develop a Handy-Dandy Foreclosure Kit to sell to associations, because of the pitfalls and errors that can take place in this process that will defeat the association's ultimate goal.

Jeremy explained that condominium associations have a statutory lien on each unit based in their governing documents, and based in state law. See RCW 64.34.364. This is not to be confused with recording a lien, which gives notice to all third parties researching the real property records that a lien exists on the title. The board must decide when and how to record a lien against a unit owner's title. Recording a lien will be done correctly, if done by counsel.

Within the subject of collections and liens, Jeremy discussed debts, collection policies, and the lien statute of limitations. He wrapped up the lien topic explaining the board's responsibilities regarding extinguishing a lien once the debt is satisfied.

A collection policy is a formal board Resolution, usually prepared by association counsel, that protects the association and establishes actions to take when assessments are not paid. Given the consumer protection provisions in today's world, a Collection Policy is well-advised for every association. The Resolution sets forth the definitions for being in arrears, the steps that both the unit owner and the association take in order to satisfy the debt. Lacking such a formal, adopted and published collection policy, an association or its manager can fail in collecting past-due assessments, because of unintentional yet illegal collection procedures.

Discussions followed detailing the difference between voluntary transfers of title -- a market sale or deeded transfer, and involuntary transfers -- i.e., foreclosure, and how each type of title transfer operates relative to an outstanding lien.

An association receives notice of a judicial foreclosure -- this is rare and is usually based in a lawsuit, and a non-judicial foreclosure, which is evidenced by a Notice of a Trustee's/ Sheriff's Sale of a unit.

There's not much the association can do given a judicial foreclosure, except to review its budget to determine how it can continue to pay its bills with the reduction of this unit's assessment income -- if that's the case.

For a non-judicial foreclosure -- a bank-ordered sale of the property: a foreclosure -- the board can continue to pursue the debt. The debt is owed not only as its connected to/ secured by the unit, but the debt is also owed by the unit owner, personally. In this scenario, Jeremy advises ramping up collections according to the collection policy in place, and gleaning information about the unit owner. Where does the owner work? What are the bank accounts owned by the owner?

"A trustee's sale does not eliminate prior owner's personal obligation to pay amounts owed," he reported.

Usually a lender who forecloses is interested in selling or renting the unit. While the bank owns the unit, work to collect assessments from them: they are owed to the association. As well, ask the bank to keep up the unit, paying utilities, keeping the unit warmer than 52 degrees F, so that there is no risk of freezing pipes in cold periods. See your governing documents for owner's responsibilities for upkeep within the unit.

When the bank doesn't foreclose -- and the owner is not paying assessments, the association has several options: collections, small claims court, money judgement, foreclosure, or do nothing, which is not really an option.

The association must decide on a goal for the unit before beginning any action. Here are few scenarios:

• Sometimes banks step up and pay the debt, to protect their interests. 
• A new owner may take ownership subject to an existing mortgage. 
• The association can take the issue to small claims court -- beware of being accused of practicing law if you appear as an association manager or a board member.
• The association can file to collect a money judgement, which is less expensive and takes less time than a foreclosure process, and is limited by the owner's ability to pay.

The key is communication with the debtor.

If the declaration provides, the association can proceed with a non-judicial foreclosure. The unit owner is named by the judge in a receivership process, and it could be a trustee. The judge could order a Sheriff's Sale. There is with this type of foreclosure, a redemption period of 12 months, when the owner/ debtor can redeem title given satisfaction offered in the foreclosure process.

The situation may devolve into a bankruptcy filing, in which case the association may not continue collection activities. However, the association is owed assessments going forward from the date of any bankruptcy filing and can collect those monies if they are not paid.

Bankruptcy in a Chapter 7 filing discharges the pre-filing debts if there is a discharge. If there is no discharge, then the debt remains outstanding.

A Chapter 11 (corporate) or Chapter 13 filing include plans for reorganization and restructuring debt -- Jeremy advises that the association participate in the plan.

The last topic covered occurs when the developer doesn't pay assessments on units it owns, once the association begins collecting assessments. The association can treat this as a collection matter. If the developer sits on the board and the board discusses collecting developer's past-due assessments, the developer cannot participate in the discussion, that being a conflict of interest.

Bottom line, no association board or board member can wave assessments. But the board can work with an owner so that the owner admits that the assessments are due, establish a payment plan to catch the owner up on past-due amounts, and ask the owner to sign a Money Judgement that the association can file if payments are skipped, late or not made. How the association wants to negotiate the money necessary to satisfy the money judgement is up to the association.

Finally, here is a link to more details about Jeremy, including at the bottom, several cogent and accessible Articles and Presentations that he's delivered and published for owners that you will find useful.

Governing Documents, Who, Why, What, When and Where

With many, many thanks to Tony Rafel, Managing Partner, The Rafel Law Group, we spent the evening discussing all the governing documents, as above.


Since attendees represented condominiums, this is the 'flavour' of common interest community that we focused on in our discussion, there being no need to cover HOAs or co-ops at the session. Be aware that different state laws apply to HOAs and to co-ops.


When one buys a condominium, one looks at the view, the exterior, the amenities and falls in love with the space. Maybe it's the granite counter tops, the hardwood floors, or the tricked-out bathroom fixtures.


But, what you're really buying is a lifestyle that will only become visible when you read the governing documents. In Washington, condominiums are sold with Resale Certificates (or as new condominiums, with a Public Offering Statement), which includes governing documents. (Currently, in Washington, warranty rights are robust for buyers of new construction.)


Buyer beware of not reading and understanding the governing documents for the community where you've decided to build a life in the space you'll purchase. These define your legal rights and obligations as an owner.


Here are a few nuggets about each of the governing documents. In the hierarchy of applicability, if the governing documents are silent, the state law applies.

Articles of Incorporation

This is the least frequently used document, written by the developer's attorney, and establishes the association as a business entity. It is filed with the Secretary of State and its validity updated annually by the payment of an annual filing fee. In Washington, some condominiums are incorporated as non-profit corporations.


The purpose of this document is to establish the state, corporate-business guidelines under which the community leaders operate the business of the association. 

Declaration Containing the Covenants, Conditions, Restrictions and Reservations

Nicknames for this document include decs and CCandRs. This document is written by the developer's attorney based on state condominium law -- Revised Code of Washington §64.35 -- and establishes the real estate entity known as the condominium.


CCandRs are filed with the local county records office and they detail the land-use parameters for the community.


Generally, initial editions are designed to protect the developer in the beginning stages of community development, so this version preserves development rights and identifies the developer as Declarant.

By-Laws

By-laws are prepared -- again by the developer's attorney -- as a template by which the association's business is to be conducted and managed. Generally, these are based on the guidelines established in the corporate guidelines for the style of corporation identified in the Articles of Incorporation, such as a non-profit corporation.


Association affairs are managed by a board, not by directors. Officers are different from directors. Officers carry out the directors' decisions. Owners elect directors, then the board appoints among all the directors elected, who serves in each officer role. Each director has responsibility to the association, the duty of care*, a fiduciary duty, and owe a loyalty to the association.


Directors vote, roles to not vote. Generally, proxies of board members are not allowed; but By-laws can be amended to accept unanimous e-mail votes, called 'consent in lieu of meeting'. All directors must sign the decision in writing. The board makes a record of this decision, and may choose to make a motion at a future board meeting to ratify such a decision. As well, decisions made in executive sessions can be ratified at an open board meeting, which protects the board by documenting business decisions.


If there is a conflict between what's written in the decs and what's written in the By-laws, what is written in the decs prevails.

Generally, unless stated otherwise, Washington State condominium board meetings shall be open to all members.
__________
*Duty of care means that a director must decide in favour of the association if there is a conflict of interest.

Rules and Regulations

Once the association begins operations, the board of directors can define rules and regulations for the association. These generally address, specifically, the behaviour required of residents, owners, guests, visitors, in addition to parking and animals. Generally, these are crafted by an attorney based on the requirements outlined by the board.


This is a smart place to include a fine schedule. Your fine schedule can be based on one used by the local municipality. Fines must be reasonable according to the geography, and to the violation.


Generally, if something is not prohibited, it is permitted. However, it's always wise to request advice or guidance from your board or from your association manager if you plan something that could affect your neighbors or the community.


Rules apply when they are sent or by a later effective date, and cannot be retroactive.

Resolutions

Boards can craft resolutions to address specific policies, such as assessment collections, master insurance policy, deductible-liability in the case of owner or unit-caused damage, or other policy guideline. Resolutions are published to owners, and have the same general effect as Rules and Regulations.

Resolutions must be reasonable and are best crafted by association counsel, based on guidance by the board.

Minutes

Although minutes are not governing documents per se, they do document the business actions of the association. There are basic requirements for board meeting minutes -- and for some meetings, there are special elements to include. The board approves minutes of board meetings; the association approves association meeting minutes. 

Owners can object to the contents of board meeting minutes, but they have no standing.

Association Progress  of Governing Documents Over Time

When the developer -- who wants to sell units -- controls the board, s/he may appoint members to the board. Your governing documents are specific about the duties of these appointed board members. Generally, there is a higher fiduciary duty required of these directors, who are required to put the interests of the association above all other interests. Depending on your governing documents, it's possible that the developer can remove board members that s/he appoints.


At some point, the control is passed to the association. The developer must convey control when 75% of the planned units are sold, or earlier, and there must be a termination date to the declarant's rights. Turnover is not a magic date, and in Washington State may be conducted unceremoniously. (Oregon requires a formal Turnover Meeting with the developer required to pass along materials to the owner-elected board.)


At turnover, the owner board may reject contracts -- usually within a 90-day period after turnover. Some associations use this option to change management companies, or invalidate too-long and developer-favoured contracts.


All governing documents can be amended, and should be as the association develops its community standards. Best practices dictate that amendments be prepared by the association's counsel, based, on guidance from the board.

Amendments to Governing Documents

Each governing document usually contains the percentage vote required, either by the board or by owners, to amend each. Generally, if an amendment is not challenged within 12 months of its adoption by the board, it becomes law.

For example: 

• Decs can be amended by 67% of the voting power of the association, or more may be required, depending on the amendment.
• By-laws can be amended by 51% of the total votes in the association, or as otherwise noted in the association's By-laws. There are times when the board can amend them: association counsel can advise the board in particular.
• Articles of Incorporation can be amended by the corporation, according to law for that style of corporation.
• Rules and Regulations can be amended by the board.

How Owners Can Employ Governing Documents

Owners can challenge a decision of the board by sending notice to the board. Owners can also call special meetings of owners, by written petition to cover a stated subject. For example, owners can remove a board member at such a meeting according to its voting requirements.

Decs contain a due process guideline that is useful in the case of a violation -- whether by an owner or a tenant. (Tenants must follow the governing documents and live in the community as owners, except that they cannot vote on association matters.) Due process contains guidelines for notices, hearings and ruling.

Decs define committee work, which is an easy way to become involved in the association's business, and focus on a topic of interest, such as finance, maintenance, safety, landscape and so forth. There are two types:

• Advisory committees have no power, but do advise the board, commonly only one director is required
• Authority committees are delegated authority by the board to perform certain tasks, such as rule on proposals. Two directors must sit on authority committees.

Best practices dictate that a committee be established by a resolution, or by a motion with stated authority.


There are some contents of the governing documents which can be 'abandoned' in place, because they are never enforced. However, when money is involved, the impact may be different and the board may want to act to amend those contents.

The Role of the President/ Vice President Forum Session

Wes Herman, President of The Woods Coffee, a chain of fine coffee shops in Whatcom County, spoke to our session sharing his thoughts about leading a business.

He spoke regarding the requirement that a leader must have full command of the business rules and understand the competition in ways to make a business stand out and become memorable. One key trait for him, his business leaders and employees is the notion of being in service. (This trait is an excellent tip for board leaders.)

Wes discussed becoming an integral part of the physical community as he described the development of their Boulevard Park location. Key here was his ability to envision what was possible with the site. (Finding ways for common ownership communities to support and fit into the larger physical community is also a key tip for board leaders.)

Wes spoke about budgeting projects according to funds available and told stories about demonstrating trustworthiness to his investors as a way to encourage additional investments. (Being trustworthy with owners' monies -- assessments, special assessments, insurance payouts, settlement awards, etc., and how they are spent, is key for all board work.)

Being a natural visionary and innate entrepreneur, Wes discussed the requirement that leaders take the time to 'take the long view'. He mentioned that early on in the development of The Woods Coffee organization, his mantra boiled down to '12in10' -- the goal to open 12 locations in 10 years. Keeping the long view top of mind helped Wes make decisions all along so that recently, The Woods Coffee was able to celebrate its 10-year anniversary with 12 open locations.

Finally, Wes admitted that it is lonely at the top. Leaders make decisions that not everyone agrees with, but because of the leader's perspective, these decisions must be made, and some of them are hard. Knowing where to look for others in the same position, where to go for peer relationships, whom to trust with confidential conversations during the tough times: these are all critical for leaders.

We are deeply indebted to Wes for his comments and his willingness to share his well-earned leadership skills with us.

The Role of the Treasurer Forum Session

With Huge Thanks to Cathy Kuhn from the CPA firm Cagianut & Company, this session covered this role in extensive detail.


Cathy's session proved informative and entertaining, and she's supplied links to her session handouts. 


As well, their Web site is rich with details for treasurers and others involved in the financial business of common interest communities. Their topics cover taxes, reserves, critical issues and more.

Comprehensive Tasks: The Role of The President/ Vice President

The Role of the President

Community association presidents are required to fulfill many roles, but the primary roles are leader and manager. Different situations will determine which role the association president assumes. Sometimes the president must set aside other roles, such as neighbor or friend, to accomplish a task or make a decision.

Association presidents gain their authority to lead a community association from state law -- generally called the Common Interest Ownership Act. The president should have a basic understanding of the law pertaining to community associations, as well as the association’s governing documents—the declaration (also called Covenants, Conditions, and Restrictions—CC&Rs), bylaws (which address the association’s structure, the board, the officers, definition of a quorum, ability to enter into contracts, etc.), and the rules and regulations (the operational and behavioral laws that apply to association residents). Therefore, presidents must perceive the association as both a community and a business, as well as operate on the democratic principles of government.

T H E   R O L E   O F   T H E   P R E S I D E N T  TO  OV E R S E E   O P E R AT I O N S

Association presidents must adhere to budgets, formulate and enforce rules and policies, conduct meetings, prepare agendas, and work with committees.

S P E A K   F O R   T H E   B O A R D   A N D   A S S O C I AT I O N

The president is the official spokesperson for the board -- to association members, the community manager (or management company), vendors, the press, and the greater community.

S E E K   K N O W L E D G E

Learning how to be president of a community association generally comes from on-the-job training. However, educational resources for association volunteers are available in books, seminars, periodicals, and networking offered by groups that serve common-interest communities, such as Community Associations Institute and its chapters.

W O R K   W I T H   V O L U N T E E R S

The president is the leader of the board, a body that typically includes:

** The vice president -- who substitutes for the president in his or her absence

** The secretary -- the official recorder of the association’s activities 

** The treasurer -- the chief financial officer of the association 

It’s in the president’s best interest to encourage the officers’ participation in association affairs and to develop their skills as team members. The president should also attempt to identify and train potential association leaders, encourage them to join the board, and orient them to their new responsibilities. 

T H E   R O L E   O F   T H E   P R E S I D E N T  T O  W O R K   W I T H   P R O F E S S I O N A L S

Many associations employ either a community management company or a professional manager who directs association operations based on policy set by the board. The president is theliaison between the manager and the association. Seeking the services of an attorney, architect, or insurance professional is in the best interests of the association. Experts provide information and expertise that board members don’t normally have. For example:

** Reviewing legal contracts requires advice from an attorney.

** Managing reserve funds requires guidance from an accountant or investment advisor.

P R O T E C T   T H E   A S S E T S

Board members (and, in particular, the president and treasurer) have a fiduciary obligation to protect the community association by:

** Preparing and adhering to an association budget (with the assistance of the professional manager) that reflects the values and wishes of the members. 

** Adequately funding reserve accounts and educating homeowners about the value and purpose of a reserve fund.

** Collecting fees from homeowners.

** Seeking the advice of a certified insurance specialist and protecting the association with appropriate levels of insurance coverage.

The position of association president is not for everyone, but fortunately every president has a board from which he or she can draw support. As long as the members recognize theimportance of the community that unifies them, the role of president can be very satisfying.!

T H E   R O L E   O F   T H E   P R E S I D E N T

Cautions

Working cooperatively with the board is essential to the success of the association. Heavy-handed or independent action by a president can put the entire association at risk. 

Presidents must educate themselves on the nature and scope of their obligations. Well intentioned but uninformed actions by a president can threaten a community’s economic and social stability.

The president must adhere to and enforce rules. Arbitrary or inconsistent application of rules weakens the association’s ability to enforce them. 

The president must see that the association’s insurance is adequate and appropriate. Federal and secondary mortgage agencies will not fund mortgages in the community otherwise, and this will affect property values.

Comprehensive Tasks: The Role of The Treasurer

The Role of the Treasurer

The association treasurer is responsible for maintaining the finances and ensuring the financial stability of the association. He or she is the financial voice of the board and liaison to auditors, CPAs, brokers, agents, and bankers. This includes a number of duties and responsibilities.

P R E PA R E   T H E   B U D G E T

The most important responsibility the treasurer has is preparing the annual operating budget.

M A I N TA I N   A S S O C I AT I O N   A C C O U N T S

The association’s documents and bylaws specify a number of financial responsibilities that the treasurer must oversee. These may include: 

** Maintaining adequate insurance coverage

** Keeping financial records

** Investing association funds

** Collecting assessments and delinquencies

** Reserving funds for future needs

** Filing income tax returns

UN D E R S TA N D   B A S I C   F I N A N C I A L   S TAT E M E N T S

The treasurer must understand at least the basic components of the financial statement:

** Assets

** Liabilities

** Members’ equity: reserves and operating fund balance

In addition, it would be advantageous to the association if the treasurer also had an understanding of the other components of the financial statement such as:

** Initial working capital

** Special project funds

** Income statement

** Statement of cash flow

R E P O RT   T O   T H E   B O A R D

The treasurer should report at regular board meetings on the state of the association’s finances based on the following information, which may be maintained and provided by the manager or finance committee:

** Balance sheet

** Statement of income

** Cash receipts and cash disbursements activity

** Unit owner balances

** General ledger activity and journal entries

** Schedule of accounts payable

** Bank statements and bank reconciliations

I M P L E M E N T   A   R E S E R V E   P R O G R A M

Reserves are a primary responsibility of the treasurer and the board of directors. The treasurer must:

** Conduct a reserve study.

** Update the reserve study periodically.

** Develop and implement a reserve funding schedule.

** Fund the reserve accounts appropriately.

S E L E C T   A   C PA   A N D   C O N D U C T   A N   A U D I T

Ensuring that the association is working with a qualified certified public accountant (CPA) is one of the treasurer’s important duties. CPAs with community association experience are better equipped to provide the expertise you need. The treasurer should work with the CPA to perform an annual audit—a very important document for a community association, the management company, and the board. Even if your association uses the services of a CPA, or if your treasurer is a CPA, all board members—especially in self-managed associations—should have a basic understanding of community association finances.

B O O K K E E P I N G

In smaller, self-managed communities, the treasurer’s duties may include bookkeeping.

F I N A N C I A L   L I A I S O N

The treasurer is the liaison between the association board and finance committee, its subcommittees, and between the board and the members on financial matters. In addition, the treasurer is the liaison to reserve study engineers, bankers, CPAs, insurance agents, investment brokers, and auditors.

M A I N TA I N   R E C O R D S

The treasurer should make sure that important financial records are safely maintained for an appropriate time.

T H E   R O L E   O F   T H E   T R E A S U R E R

Cautions

*Diverting association assets from their intended use or purpose is a very real possibility in any community association. It’s important that treasurers use internal controls to prevent the misuse of association funds.

*Safety and liquidity of association assets are essential to the community association. It’s important for treasurers to know where and how to invest homeowner’s funds to ensure their protection.

*Treasurers must decide whether to file the association’s income tax returns under Internal Revenue Service Code Sections 528 or 277. It’s important to make the right decision—the wrong one can cost the association substantial penalties.

*There are numerous important considerations when developing a community association operating budget. It’s important to avoid some and include others to maintainthe financial strength of the community.

*Check your state’s laws for specific provisions regarding audits, financial statements, delivery, etc.

Comprehensive Tasks: The Role of the Secretary

The Role of the Secretary

The association secretary is responsible for preserving the association’s history, maintaining its records, and protecting it from liability. The secretary should be efficient, well organized, and have a commitment to the future of the association. Associations with a professional manager can ask the manager to perform some of thesecretarial tasks. 

R E C O R D   M I N U T E S   F O R   A L L   A S S O C I AT I O N   M E E T I N G S

** Board meetings

** Special meetings

** Annual meetings

** Committee meetings

G U I D E L I N E S   F O R   R E C O R D I N G   M I N U T E S

** Record the association’s actions and record why they were taken.

** Preserve board members’ voting records.

** State the authority by which directors take a certain action and cite the documents granting that authority.

T H E   R O L E   O F   T H E   S E C R E TA RY

** Record all matters brought before the board, whether adopted, dismissed without discussion or vote, rejected, deferred, tabled, or simply presented as information.

** Remember that the association’s minutes are official records and admissible as evidence in a court of law.

U S E   S TA N D A R D   L A N G U A G E   F O R   R E C U R R I N G   F U N C T I O N S

Certain functions occur frequently in all meetings. Recording these will be easier if the secretary develops standard language to cover functions such as:

** Call to order by the presiding officer

** Proof of meeting notice or waiver of meeting notice

** Presence or lack of a quorum

** Reading and approval of the previous meeting minutes

** Reading and acceptance of various reports

** Unfinished business

** New business

** Adjournment

A N N O U N C E   M E E T I N G S   A N D   P R E PA R E   A G E N D A S

Notifying board members and association members of meetings is required by law. How and when notice is given is typically stated in the association’s governing documents. Agendas are essential to the success not only of the meeting, but of the association as well.

M A I N TA I N   A S S O C I AT I O N   R E C O R D S

** Store and retrieve association documents as needed.

** Devise an effective filing system, and keep files safe and accessible.

** Identify and categorize all current and stored records.

T H E   R O L E   O F   T H E   S E C R E TA RY 

** Prepare and maintain a retention schedule for document disposal.

W I T N E S S   A N D   V E R I F Y   S I G N AT U R E S

Many associations have policies to safeguard assets that require two signatures on checks or a witness to verify signatures. Generally this responsibility falls to the secretary.

M A I N TA I N   L I S T S

The secretary is responsible for maintaining lists of all association board and committee members, officers, and members, their current mailing address, and voting percentages.

V E R I F Y   P R O X I E S

The secretary accepts and verifies proxies for annual or special membership meetings, and ensures that proxies and ballots are kept in the association’s records. 

F I L E   F O R M S   W I T H   S TAT E   A G E N C I E S

The secretary is responsible for filing certain forms with state agencies. These might include employment forms, incorporation documents, and other official records of theassociation.

M A N A G E   C O R R E S P O N D E N C E

** Route correspondence to appropriate association representatives—manager, office, board member, committee chair, etc.

** Ensure that tone, form, and spelling of all association correspondence reflect positively on the association.

T H E   R O L E   O F   T H E   S E C R E TA RY

Cautions

*How and when you give notice of a meeting has a direct impact on whether the business conducted at the meeting is legal and binding. 

*It’s important to do it right. Not all association documents are public records. It’s important to know which documents must remain confidential and which must be available to members of the association and others.

*Failing to keep the membership mailing list accurate and current has legal ramifications. It’s important to know why and what to do.