Frequently Asked Questions: Property Management
Do Community Associations Need Proper D & O Coverage?
Directors and Officers liability coverage insurance is needed so Board members don’t worry about their personal assets being at risk. Board members volunteer their time. They take on the responsibility to make decisions for the association. Board members are required to interpret the association’s governing documents. They have a fiduciary duty to make decisions that they believe to be in the best interest of the association.
Even with the best intent sometimes these decisions can lead to lawsuits alleging breach of contract. A good D & O policy will protect the homeowner association Board members. Have your insurance agent meet with the Board and review the D & O coverage so everyone sleeps at night….
Is an association required to make disclosures to prospective buyers?
No. a recent California Appellate Court decision confirmed that an association’s disclosure obligation is to the owner. Associations should only provide information to the owner, who may be required to provide that information to the buyer. If an association does make disclosure to the buyer, and if the information is wrong, the association could be held responsible.
Do board members get to ignore the rules?
No! Board members do not get to ignore the rules. They are tasked with enforcing the association rules. They need to set a good example by carefully following all the rules. They do have the power to change rules but they must follow all the rules like all homeowners..
THE FORECLOSURE NIGHTMARE…
Currently many banks have issued foreclosure suspensions. What does this mean to the HOA?
This means the homeowner can live in the condo or home for free. They have stopped paying the mortgage and then they have stopped paying the monthly homeowner assessment. In the past the HOA could expect a speedy foreclosure process by the bank resulting in the HOA getting paid the monthly assessments.
Now the HOA must pursue the foreclosure themselves. This is the quickest and cheapest alternative. The homeowner will quickly realize that to stay in the home they must pay the assessment with the savings from not paying the mortgage. Then the homeowner can wait and see what the bank will do.
The HOA’s can break the foreclosure suspensions. They have no choice!!!
Can an Association pay for lunch or dinner for the Board of Directors?
If the Board members are given lunch or dinner or are reimbursed they are not considered paid Board members. Board members are volunteers and at times miss meals to attend Board meetings. If they are fed they are likely to not be distracted by being hungry and can focus on the business at hand. Patience is
improved and they make better business decisions.
Is it appropriate for the Board of Directors ro send out recommendations to the members as to which way to vote? Boards can send out factual information about ballot proposals but not their recommendations. To maintain fairness the election material mailed to the members must remain neutral.
Apart from the official mailing Board members have the right to campaign at their own expense. They can support or oppose candidates, amendments, assessments, etc. It is not recommended that they use
No Quorum = No Election?
If you have no quorum at the annual meeting, you have no election?
Correct! Without a quorum there is no meeting. The ballots received by the inspector of elections shall be treated as a member present at a meeting for purposes of establishing a quorum. You must then refer to the By-Laws to follow the procedure for adjourned annual meeting when there is no quorum present.
IRS Revenue Ruling 1120 vs 1120H
With a filing of 1120 the tax rate is 15% and 30% for 1120H.
Filing as a regular corporation (1120) could expose membership dues to taxation if the exclusion does not adhere to the IRS ruling. The following are the rulings used to exclude membership dues when filing Form
Treated as an exclusion from gross income as a contribution to capital per Revenue Ruling 74-563, 75-370, and 75-371. Either offset by prior year Exempt Function Net Loss Carry forward per Internal Revenue Code Section 277 or by deferring the recognition of the income to the following year per the Revenue Ruling 70-604.
In order to exclude from taxable income the portion of the dues collected for contribution to the reserves, an Association should comply with the following:
1. Notify the owners in advance that a specific portion of their assessments represents a contribution to the capital of the Association. (This can be made by distributing a budget to the owners that separately classifies the assessments for future major repairs and replacements.)
2. Designate funds for future major repairs and replacements for specific capital expenditures.
3. Segregate the funds for future major repairs and replacements from the operating funds. Separate bank accounts would be required for operating and reserves funds.
When preparing tax returns if the tax exposure exceeds the savings given by the 15% rate, Form 1120-H is filed to avoid exposing the membership dues to taxation.
RULES & REGULATIONS
Rules and Regulations of an Association allow the Board of Directors to make rules that are needed to assist the Board of Directors in running the HOA. Rules exist to allow the members to enjoy community living while not encroaching on the enjoyment of others. Rules cannot contradict the CC & R’s or the By-Laws.
If a rule is to be added or changed the Board of Directors must authorize the management company to send out the proposed rule addition or change. The members have a thirty day comment period. This allows the members to express their opinion on the proposed rule or change and let the Board of Directors know the thoughts of the community. The Board of Directors can review the input and then make their decision. They can modify the proposed rule or change based on the feedback or can leave the rule or proposed change as it is.
It is important for all owners to realize that the Board of Directors are owners and they have to follow all the rules like any owner. They don’t get preferential treatment because they are on the Board.The Board of Directors make business decisions for the community. Even if an owner disagrees with the new rule or proposed change they have to realize what is important is what is in the best interest of the community.
You cannot please everyone you can only try.