Steps to Assessing Association’s Strength

QUESTION: With interest rates at a low point, I am considering purchasing a condominium. I found one I really like, but I don’t know how to determine the financial strength of the association.

What documents shall I ask for, in addition to the financial statements? After I obtain the documents, what should I look for when I review them?

ANSWER: Be prepared to spend considerable time analyzing the association and the surrounding area before you make your decision.

Prior to signing a purchase agreement, make sure that there is a clause in the agreement that allows for cancellation if the following documents are not provided or if they do not meet with your approval:

1--The declaration, often called the covenants, conditions and restrictions (CC&Rs;), is the association’s “constitution.” It explains the powers and duties of the association and the board of directors, the restrictions that owners must obey, the authority of the association to collect assessments to pay for the maintenance costs of operating the association and many other detailed legal requirements such as insurance protection and financial controls. Look for architectural controls in the declaration. Architectural controls govern what alterations or improvements are allowed in the interior and the exterior of your unit.

2--The bylaws explain how the association is to be operated. This document expands upon the declaration, giving the specific procedures for carrying out the responsibilities of the officers of the association and more detailed information about the powers and duties of the board of directors.

3--The rules include the do’s and don’ts for everyday living, such as parking regulations and pool rules. The rules will often include the architectural guidelines for modifications. If you are a person who likes to “do your own thing” and the rules consist of a 50-page document, I can tell you that you aren’t going to enjoy living in this association.

4--The latest annual financial report will tell you whether the association is operating without a loss and reserving funds for future repairs and replacement. The annual financial review or audit must be done by an independent licensed accountant if the association’s annual income is greater than $75,000. Check if the association has a detailed reserve analysis or reserve study that shows the amount of money needed for maintaining the association’s common areas such as roofs, painting, mechanical equipment and other major components.

5--The current budget will reveal the planned expenditures. You will find out whether the association employs personnel or contracts with a professional management company. You’ll learn how much the association is supposed to be setting aside for reserves out of each month’s assessment income. Don’t look for an association with low monthly assessments. The assessment amount depends upon the type of amenities and the level of services as well as the reserve funding.

6--The minutes of board meetings for the prior six months will reveal the current projects that the association is working on and whether there are problems that are not being resolved. Since minutes do not always reveal legal matters, you should ask for written disclosure of lawsuits or construction defects.

In addition to reviewing these documents and records, you may want to ask some of the residents how long they have lived there and how they feel about the association. Sometimes this is the only way to find out about noise problems, average age of the owners, traffic or parking problems and other factors that may have an impact on your day-to-day living and your future happiness.

Concerned About Lack of Reserve Funds

Q: My husband and I are very concerned about the lack of financial planning in our condominium complex. Even though I am serving on the board, I am unable to convince the other directors that we need to start accumulating reserve funds to pay for some of the major expenses that we know will be needed soon. A majority of the people seem to think that special assessments can pay for any need or emergency that arises. Can you help us?

A: I have addressed this issue several times, but I continue to get many questions about reserve requirements. I’m sure this is a controversy in many associations.

The board has a fiduciary duty to adopt a budget that serves the best interests of all of the owners. In my opinion, that means setting aside money for major repairs that will be needed in the future. Special assessments cause too much of a hardship for some owners, and the money is not immediately available if an emergency occurs. Boards that fail to plan for the future are not protecting the owners’ investment very well.

California law states that the association must identify all of the major components that will require future repair or replacement, the estimated cost of the repairs and the anticipated life span of the components. At present, the state law does not require that money be set aside for this purpose, but full disclosure must be made as to the methods of funding, or lack thereof.

Some owners say they don’t want to pay for a roof that may not be needed until after they have sold their unit. If your reserve analysis indicates that your 50-unit condominium complex will need a new roof within five years and the cost will be $100,000, is everyone just going to sell their unit before the roof is needed?

Potential buyers and mortgage lenders are getting very wary of associations that do not have adequate reserves. An owner who is unable to sell his or her unit because of this factor may decide to take legal action against the board of directors.

Since you are a member of the board of directors, make sure that your views are clearly noted in the association’s meeting minutes when any votes are taken on this subject. You should make every effort to protect yourself from liability.

10% Penalty Is Legal for Late Payments

Q: Our condominium association is collecting a special assessment from all the owners to pay for major repairs. Does the association have the right to request payment of a special assessment before the repair work is even started? Can the association add a 10% late charge if the special assessment is not paid?

A: When major repairs are necessary, the association may need to accumulate a major portion of the money before the work is started. Construction companies often require deposits to pay for materials, permits and other “up-front” costs. Some companies require proof that the association can afford to do the work before they will enter into a contract.

Unless your association’s legal documents specify a smaller percentage or amount for late charges, California law states that unpaid regular and special assessments are subject to a late charge of either 10% of the assessment amount, or $10, whichever is greater.

Posting ‘Deadbeats’ Not Recommended

One of the board members in our homeowners association said she had read in your column that you recommend posting the names of “deadbeat” owners in the common area of the property. Is this an effective way of collecting from owners who are continually late in paying their monthly assessment to the association?

A: No, I definitely do not recommend posting the names of late payers in the common area or printing this information in the association’s newsletter.

This kind of peer pressure may be effective in collecting late dues at your country club or social organization, but community associations have more effective means of collecting delinquent assessments rather than using public embarrassment.

Though all owners with reasonable purposes are entitled to review the association’s accounting records, the association should not blatantly announce to the general public that an owner is delinquent in his or her payments. Occasionally, accounting errors occur which would be very embarrassing for the owner and the association if the publicized information were incorrect.

Hickenbottom is a past president of the Greater Los Angeles chapter of the Community Associations Institute (CAI), a national nonprofit research and educational organization. She welcomes readers’ questions, but cannot answer them individually. Readers with questions or comments can write to her in care of “Condo Q&A;,” Box 5068, Thousand Oaks, Calif. 91360.