HOA Restrictions on Signs

I was recently at a Community Association Institute seminar for California, when the subject of resident rights to post signs, flags and banners was discussed. Surprisingly, most of the managers in the room were unaware of the resident rights to display an array of signs and posters from their windows. Many managers assumed that because the signs / posters / banners were visible from the common areas, that the Associations had the authority to restrict signage. Civil Code 1353.6 - Displaying of Noncommercial Signs or Flags, is the section that pertains to the resident's right to display the signs, flags and banners. The Civil Code is actually very broad in that it permits just about any type of sign, and the size limits are pretty liberal as well. The Civil Code does permit Associations from prohibiting any penetration in to common surfaces in order to install a flag holder. Before Associations attempt to require the removal of a sign, flag or banner from a residence, I suggest that Associations review this Civil Code. If this section is still unclear, Associations may want to consult with legal counsel to determine the Association's authority. If you have any questions regarding this subject, please feel free to email me at Nedafirouz@gmail.com.

Protecting Assets

We all have assets that we have invested in and cherish. That may be your home, your car, or even an ipod. Just like we all have our own assets, businesses have assets as well. A Homeowners Association is, in fact, a business. Those that are incorporated are non-profit Corporations.

Some of the assets in a Homeowners Association can be obvious, such as the chaise lounges at the pool, the computers in an on-site office, furniture in the clubhouse, etc. Most of us don't recognize the largest assets of the corporation, which are the components that are the most costly to replace. For example, we tend to personally take care of our largest investment, such as our homes or our cars, a lot better than a pair of sandals, right? So, what are some of the largest assets in a Homeowners Association? These could include the vertical plumbing lines in stacked condominium units, the roofs, roads (in planned unit developments), structural components (beams, posts, catwalks, decks), paint to protect wrought iron, stucco and wood, etc.

Let's think of relating to this idea like we would our cars. We have routine maintenance, like changing our oil regularly, to protect our engines. We monitor transmission fluids to protect the transmission (both are two of the more costly components in a car, so we try to prolong the need to replace them). The same goes for our components. In order to prolong the life of the roads, for example, preventative maintenance is necessary. Planned Unit Developments should plan to add a slurry coat to the roads once every three or so years. In doing this, you are adding a protective layer to the roads to prevent premature deterioration. When compacted properly, a new road can last up to 15 years, but the lack of proper car can require replacement as soon as 10 years after it is done. A lot of communities consider painting to be an aesthetic component and usually put off the painting to get other projects done. Painting actually adds a protective coating on elements. On wrought iron, properly applied paint will help prevent rust and corrosion. On wood, the paint prevent dry rot.

Many homeowners struggle with the concept of slight increases in dues to properly fund for these types of projects. Just as we each don't want to have to replace our engines or transmissions within 7 years of having a car, the components in a community can also be maintained properly to avoid larger expenses when things completely deteriorate.

If you have any questions, please feel free to email me at Nedafirouz@gmail.com.

Operating Expenses vs. Reserve Expenses vs. Capital Improvements

Many residents and even Board Members do not know the difference between operating expenses, reserve expenses and capital improvements. Once people grasp the difference between the three, many don't know when homeowner votes are required for funding and/or expenditures. I'll be explaining the fundamentals of each.







Operating Expenses



These are the Association's day-to-day expenses. People should think of this as "repair" not "replace." Operating expenses include contracted services (i.e. landscaper, pool contractor, gate maintenance, management), insurance, utilities, taxes, administrative expenses (i.e. accounting fees, office expenses), and maintenance expenses (building repairs, plumbing repairs, lighting supplies). Association's use the pro forma budget to help create a map for the upcoming year's operating expenses.





The Association is required to distribute the budget package to the members every year. In California, the Board of Directors has the authority to increase the dues by 20% each fiscal year to cover operating expenses. Any increase beyond 20% will require the vote of the membership. The Board also has the authority to special assessment the members 5% of the gross annual income without the membership's vote. Anything beyond that would require the approval of the members. The Association would maintain a bank account as the designated operating account. The Board has the authority to enter into agreements and maintain the day to day operations...operating expenses.

Reserve Expenses

Reserve expenses are the replacement of existing building components; not the repairs. So, we can compare a component and demonstrate whether it is an operating or a reserve expense. If a homeowner relays they have a roof leak and the roof is repaired, that would be considered an operating expense. If the Association replaces the roofs, the roof replacement is a reserve expense. Associations use the reserve study as a guide on how much the components would cost to replace, and what the useful remaining life on each component would be. Associations must also maintain a separate bank account that is deemed the reserve account. The best way of distinguishing the operating and reserve accounts is to think of the operating account as a checking account while thinking of the reserve account as a savings...or even almost a CD account. There are many restrictions on the Association's ability to use the reserve funds, as the reserve funds should be used for reserve expenses. If the funds are used for non-reserve items, there are a set of Association requirements that will not be explained in this article. The Board has the authority to cause the replacement of existing components as needed, assuming that the funds are available.







Capital Improvements



Capital improvements are projects where a new component is introduced to the community. It is a project that, once installed, will then create operating expenses and future reserve expenses. An example would be a community's desire to install a spa when that ammenity does not already exist. The rule of thumb for a capital improvement project is that the Association should obtain membership approval before undertaking a capital improvement project. Because this component does not already exist within your community, the Board will have to re-allocate existing funds to pay for this component, or the Board may need to special assess members to obtain the funds to undertake the project. This new component will have to be added to future reserve studies, and additional reserve funding will be required to maintain the component.





If you have questions on these topics, please feel free to email me at NedaFirouz@gmail.com.

Budget Preparations - Start From Scratch or Not?

There are really two starting points in preparing your Association budgets. The first is to start from scratch and zero out all line items from the previous year. From there, contracts would be reviewed to determine the amounts to input in the line items, and all other known income and expenses would be inserted. The other starting point would be to use your prior history. In other words, you would work with your prior year's budget and tweak the figures depending on any known modifications to services.

When would you start from scratch on your budgets? My personal choice is to start from scratch once every three years, and to do the budget from scratch the same year the Association is conducting the full reserve study with the on-site inspection. There is a reason why statutes require Associations to conduct full studies every three years, and that is to maximize the accuracies of the report. We know the report will never be perfect. I can understand why statutes don't put such stringent requirements on operating budgets, as replacement of reserve components are far more costly than a lot of these operating line items. Nonetheless, it is good management practice and is a pro-active approach to budgeting.

At minimum, if a new Board is taking over from a prior Board, or if a new management company is in place, we should not assume that the work of the prior Board or company is accurate. We should be budgeting from scratch to verify that the budgeted figures are reasonable, and to see if we need to add or remove certain line items altogether.

I heard a story today where a community had been self managed for about 20 years and then hired a property manager. The professional manager worked for the community for 4 years and really assisted the community in conducting their reserve studies and help map the community's financial direction. After 4 years, the manager moved on to a different community. Meanwhile, the Board of Directors had noted that the reserve funding percentage was not in a desirable range. They arbitrarily decided to remove the reserve line item for their roofs, which of course substantially increased the reserve study funding. The Board instructed the reserve study company to completely remove the roof from the reserve study component list, and the reserve study company responded and advised against doing this because this would be blatant inaccurate reporting. The Board chose to disregard the reserve study company's advisement and pressed to remove the roofs. Another few years passed and the various new Boards and managers did not catch this removal. The Board's fiduciary duty is to rely on professionals to guide them, and instances where the Board of Directors opt to act in a manner that contradicts professionals is when Board Members can be deemed to be acting negligent or in bad faith. When the roofs finally needed to be replaced and homeowners were assessed over $25,000 each to fund the project, the Association pursued filing a claim on their D&O Insurance. When the insurance carriers subrogated the claim, the carriers were pursuing those individual ex-Board Members, who were personally liable. Remember that as long as Board Members use the business judgement rule and are acting in good faith, Board Members do have protections from being personally liable. In cases like this where they clearly took actions to cover up their funding percentages for whatever reason, they were acting in bad faith and were considered personally liable. My point in this story, is that had this community started from scratch when the new Board / Management came in, this would have been discovered well before the roofs became dilapidated.

The moral of the story is, while it may take us a little extra time to start from scratch, we should be pro-active and use our reasonable judgement to determine when it is necessary to prepare a budget from scratch.

If you have any questions regarding community management, feel free to contact me at NedaFirouz@gmail.com.