July 31, 2009

Association Records – The What, the When, and the Audit

A former Florida condominium association bookkeeper was arrested earlier this month on charges of stealing almost $500,000 from the association since 2005. The individual allegedly wrote checks to herself, transferred association funds into her personal account, and submitted fraudulent invoices. It was reported last week that an audit of a Virginia community association discovered nearly $700,000 missing from its accounts. The association’s treasurer disappeared at the end of June. Proper maintenance and evaluation of association records can help boards avoid problems of this magnitude.

The state laws that govern Washington condominium and homeowners associations do not specify what records should be maintained or how long they should be kept. It can be inferred that financial documents like bills and receipts should be kept at least the length of time necessary for them to be reviewed during the annual CPA audit (mandatory for Washington condominiums consisting of more than 50 units and mandatory subject to annual waiver for all other Washington condominiums and also Washington homeowners associations with annual assessments of $50,000 or more).

The state law governing Washington nonprofit corporations requires them to maintain, among other documents, financial statements and meeting minutes at their registered offices. Washington condominium and homeowners associations that are nonprofit corporations should comply with this law. The state law governing Washington profit corporations requires them to maintain meeting minutes on a permanent basis and states that they must keep, among other documents, shareholder meeting minutes, annual financial statements, and communications to shareholders at their registered offices for at least three years. Boards could decide to comply with those standards as an added safeguard. The governing documents of many associations contain specific record-keeping requirements that must be followed as well.

Diligent maintenance and evaluation of association records can help boards make more informed financial decisions, defend against owners’ claims of misconduct, and spot theft of association funds more quickly. Boards should ensure that their association records policies allow them to take advantage of those benefits.

July 24, 2009

Is Chinese Drywall Hazardous to Homeowners' Health?

American construction companies used large quantities of Chinese-made drywall over the last five years because it was abundant and cheap. Now many homeowners are complaining that Chinese drywall gives off fumes that corrode metals and sicken people. State and federal authorities are currently investigating whether Chinese drywall poses a direct health risk to people.

More than 500 million pounds of Chinese drywall was imported into the United States between 2004 and 2008. Most of it came into the country in 2006. Washington State has imported nearly 2.5 million pounds of Chinese drywall since January 1, 2006. Complaints about Chinese drywall appear to be concentrated in the Southeast at this time. Chinese drywall has been reported to be present in 21 states thus far, including Washington State.

There are several signs that your home may contain Chinese drywall. You may detect a sulphur, rotten egg, or acid type of smell. The electrical wires connected to outlets may be corroding too rapidly. Air conditioning coils or other HVAC components may be failing too frequently. Silver jewelry and flatware may be tarnishing too quickly. You may be able to locate a “Made in China” stamp on exposed drywall in places like your attic or basement.

If Washington condominium and homeowners associations and owners have been adversely affected by Chinese drywall, they may need to consider filing lawsuits against the manufacturer and distributor of the Chinese drywall and/or against the developer and contractors that constructed their buildings. Those entities may have assets to pay for any damages caused by Chinese drywall or may have purchased insurance policies that cover any damages caused by this product. Participation in class action lawsuits is another option, but those lawsuits usually take much longer to complete than individual lawsuits.

July 17, 2009

Amending Your Association's Declaration or Covenants

The original United States Constitution has been amended 27 times in the 222 years since its adoption. There have also been 6 other proposed amendments that passed Congress but were not ratified by enough states to become binding amendments. Most condominium and homeowners associations also find it necessary to amend their declarations or covenants from time to time to correct inconsistencies, shift responsibilities, and furnish themselves with additional tools to address recurring problems.

Condominiums created before July 1, 1990 are legally required to obtain the approval of at least 60% of the owners to amend their declarations. Condominiums created after July 1, 1990 are legally required to obtain the approval of at least 67% of the owners to amend their declarations. Those newer condominiums must also secure the approval of at least 90% of the owners (including the owners of all affected units) to enact certain types of amendments (including those that change unit boundaries, allocated interests, or uses of units). Some condominium declarations state that higher percentages of owner approval and the consent of a specified number of mortgagees are required for amendments. Washington law does not specify a minimum amount of owner consent that homeowners associations must obtain to amend their covenants, so it necessary to review those covenants to determine what is required to amend them.

Governing document amendments can take many forms. Some amendments require owners to maintain and repair specified portions of the property (such as windows) and repair damage to common property if certain circumstances are present. Others restrict the ability of owners to alter their property (such as by installing hard surface flooring) without the board’s consent. Amendments can provide associations with more options to collect delinquent assessments (including non-judicial foreclosure) and can enhance their lien rights in some cases. They can also place limits on how owners may use the property (for example, by imposing a cap on rentals). If an association’s governing documents contain contradictions (documents that make maintenance and repair of limited common elements the responsibility of owners in one place and the association in another are surprisingly common), amendments can fix those mistakes.

An association’s governing documents reflect its values and priorities. Seeking input from the association’s property manager, attorney, and owners at an early stage will make the amendment process as smooth and productive as possible. The end result will be a document that empowers the board to better serve the needs of the community in the future.

July 10, 2009

Understanding the Reserve Study Requirements in the Washington Condominium Act

My wife Elisabeth does her best to place a small portion of our income into a savings account each month. She is currently in good company. The New York Times reported last month that the national savings rate is at its highest rate in over 15 years. In a similar vein, the Washington Legislature took action last year to nudge Washington condominium associations towards a more saving-oriented mindset by requiring them to obtain and update reserve studies. Condominium board members should be aware of the obligations imposed by those new provisions of the Washington Condominium Act.

A reserve study attempts to project how much an association must save each year to pay for certain common expenses (including major projects such as replacing a roof) that will need to be paid in the future. Condominium associations must prepare and update reserve studies unless this imposes an unreasonable hardship. Associations must also establish reserve accounts. Initial reserve studies must be based upon a visual site inspection conducted by a reserve study professional. Existing reserve studies must be updated annually unless this imposes an unreasonable hardship, and they must be updated at least every three years based upon a visual site inspection conducted by a reserve study professional.

The Washington Condominium Act does not require condominium associations to place any funds in their reserve accounts. The Act permits associations to withdraw any funds that are deposited in such accounts to pay for unanticipated expenses subject to certain notice and repayment conditions. The Act states that owners holding at least 20% of the voting power can demand that an association obtain a reserve study prepared by a reserve study professional if more than 3 years has passed since one was obtained. An association can overcome such a demand if it demonstrates that obtaining a reserve study would impose an unreasonable hardship, and the Act provides that an unreasonable hardship definitely exists if the cost of preparing a reserve study exceeds 10% of an association’s annual budget.

Subject to the general guidelines described above, condominium board members have broad discretion to make decisions regarding reserve studies. The Act provides that condominium associations and their board members may not be held liable for monetary damages for failing to obtain or update reserve studies. The most significant legal consequence for failing to comply with this part of the Act is that an association must include a specific disclosure in resale certificates warning potential purchasers of units that the association’s lack of a current reserve study increases the risk that they may be forced to pay a large special assessment at some point.

July 3, 2009

Property and Liability Insurance – Is Your Association Paying Too Much?

In times like these, every part of a community association’s budget should be scrutinized. Insurance is a tempting target when boards are looking to reduce spending, and some associations can obtain substantial savings while maintaining quality coverage. However, condominium and homeowners association boards should be aware of what state law and their governing documents say about insurance before they decide to make a major change in this area.

Condominiums created on or before July 1, 1990 and homeowners associations should focus on their governing documents when evaluating their current insurance. The Horizontal Property Regimes Act and the Homeowners’ Associations Act do not impose any insurance-related requirements other than those in the association’s governing documents. Condominiums created after July 1, 1990 are required to maintain the insurance that is required by the Washington Condominium Act, which includes property insurance on the condominium in the amount of at least 80% of the actual cash value of the insured property at the times that the policy is purchased and renewed and liability insurance for death, injury, and property damage relating to the use, ownership, or maintenance of the condominium’s common elements.

Once community association boards are aware of the minimum insurance requirements established by applicable statutes and their governing documents, they should examine their associations’ present insurance policies. Automatically renewing those policies without considering other available options could result in some associations missing a better deal. Mary Register, an insurance agent at Lovsted Worthington, recently pointed out to me that many condominium and homeowners associations can obtain as much or more insurance coverage for less money by switching to direct writers like Philadelphia Insurance or Fireman’s Fund. She also indicated that some associations would benefit from a re-assessment of the value of the insured property and the cost to rebuild it given the current market conditions. Even if an association decides to stay with its present insurer, Ms. Register noted that it can lower its insurance premiums over time by installing safety features like fire alarms and security systems.

It only takes one serious incident to realize the value of an association’s property or liability insurance policy. Boards should ensure that their associations have adequate insurance coverage, but they should also take advantage of the increased competition for their business to lower their associations’ premiums if possible. The owners will (or should) thank them later.