Monthly Archives: November 2013

Why Aren’t Land and Buildings on the Condo Balance Sheet?

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J.S. from Maryland writes:

Dear Mister Condo,

My condo is in Maryland. Why don’t associations record the initial cost of the land and common buildings on their balance sheets? Where do you post expenditures for capital assets like road resurfacing, new roofs, etc?

Mister Condo replies:

J.S., I am not an accountant nor am I an expert on Maryland condo association recordkeeping so I will do my best to give you my understanding of the principals involved and what I have learned from my experiences in Connecticut. If you require a more thorough response with local flair, may I suggest you consult with your local chapter of the Community Associations Institute (CAI), of which there are two in Maryland? (i.e. Chesapeake Region Chapter at http://www.caimdches.org/ and the Washington Metro Chapter at http://www.caidc.org/)

All of the land and buildings that are owned in common are part of the association records and the deed and covenant that define the association with regards to municipal records. You can bet they are a part of your local municipality’s Grand List and are taxed as such. However, the condo association Balance Sheet is used to list all of the assets and liabilities of the association at any given time. Assets are most commonly cash either found on hand, in investments like CDs, in the Operating Fund, or in the Reserve Fund. Liabilities are numerous and include all of the association’s expenses (insurance, common utilities, repairs, and such). You couldn’t use the land or buildings to offset these expenses so they don’t appear on the Balance Sheet. The simplest explanation I can offer to describe the Balance Sheet is that it shows the “net worth” of the association which is a useful tool in determining if the association is being run in a fiscally prudent manner. A positive net worth indicates a good job while a negative net worth indicates a potential problem and the possible necessity for increased common fees or special assessments.

Expenditures for capital assets like road resurfacing and such are ideally budgeted and paid for from association reserves. Once a road is built, it is a known fact that it will need to be repaired and/or replaced over time. In theory, the association can build a Reserve Fund for such repairs and replacements at the time the capital improvement is initially installed or replaced at a later date. This is the business of Reserve Specialists. They look at all of the commonly owned assets and use a formula of useable life and likely replacement costs to come up with a suggested Reserve Fund contribution amount that the community should adhere to. However, not all communities use Reserve Studies or have adequately funded their Reserve Fund over the years. In that case, it is not uncommon for special assessments to be levied or loans to be engaged to make these needed repairs. In each case, the accounting treatment is different. Again, I suggest you speak with a local expert from your state on the specific accounting treatment for condo associations in Maryland.

Hope that explanation helps! All the best!

Attendance at Executive Session of the Board Denied

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R.R. from Hartford County writes:

Dear Mister Condo,

I requested to attend a recent Executive Board meeting at my condo but was told I could not because it was an Executive meeting and that general attendees were not allowed to attend. I thought there was a law passed that said any unit owner could attend any meeting of the Board. Why wasn’t I allowed to attend?

Mister Condo replies:

R.R., I am not certain of the circumstances that caused your Board to meet in Executive session so it is difficult for me to give you an exact answer here. As a rule, unit owners can attend any regularly scheduled meeting of the Board. Unit owners do not have the right to participate in the meeting (ask questions, debate, vote, etc.) but they are allowed to observe. Executive Sessions are generally used by the Board when there are sensitive topics at hand – discussion of employee or management company terminations. It is possible that this Executive meeting of the Board was for just such a purpose and that they are within their rights to refuse general audience. However, their discussions and actions taken in Executive Session should become public knowledge with the minutes of the meeting once they are recorded and any actions resulting from that meeting are taken.

I hope that helps. The law you are referring to is the revised Common Interest Ownership Act (CIOA). Now that it is the law in Connecticut, Boards need to act with more transparency. Best wishes!

Condo Owner Talking Trash!

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O.G. from Fairfield County writes:

Dear Mister Condo,

Why doesn’t the city pick up the trash at my condo? I pay the same taxes as everyone else in this town. I have no children in the schools and, thankfully, I have never needed to use city services like the police or fire departments. It seems to me the least they could do for me and my fellow condo residents is to have the trash removed. What do you think?

Mister Condo replies:

O.G., while I agree with you that condo residents tend to get the short end of the stick when it comes to municipal services like trash removal, snow plowing, and lighting of their local roads, the reality is that your condominium association was most likely built and approved by the municipality where you live with the provision that these things would be taken care of privately at the expense of the association. There are many reasons for this, first and foremost is that high density housing (HDH) actually does puts an extra burden on the municipality. It is a high number of residents who may require some services of the city, including police, fire, and EMS as well as the more traditional items such as education. The roads are generally private so it is not the responsibility of the municipality to maintain or plow them. Trash removal is also, generally, at the expense of the association. However, that is not always the case. Several associations in the state have actually banded together with their fellow condos and sought remediation from their local municipality. I know of two towns where the local government now provides trash removal as part of the city services to the unit owners. So, all is not lost. I would encourage you to speak with your Board and ask them to begin speaking with the local authorities to see if there is any room for negotiation. While trash removal is not generally an enormous expense any monies saved by the association is potential savings for all unit owners. Best of luck!

Conflict of Interest as Condo Board Member Becomes Association Employee

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P.K. from Tolland County writes:

Dear Mister Condo,

We have an issue where I believe it would be a conflict of interest for one of our board members to vote on an item.  We have five board members.  What happens if he is asked to remove himself from the vote and does so, only for there to be a tie?  The question at hand is his possible hiring as an employee.  Thank you.

Mister Condo replies:

P.K., I can’t imagine a more accurate description of the term “conflict of interest”. If I understand you correctly, this Board member would be voting on whether or not to hire himself as an employee of the association? Not only should he excuse himself from the vote, the Board needs to address the ongoing issue of his ability to remain impartial on future votes that may affect his employment. What if his performance is subpar? Will he be allowed to vote on whether or not to fire him? What if the association is thinking of taking on a new project like roofing that will involve him doing more work for the association? How can he remain impartial?

I understand that there may be no malice involved in his decision to work for the association. In fact, it is likely just the opposite. He may end up being one of the best workers the association has, seeing as he lives at the property as well and wants it to look its best. This is, at best, a slippery slope. At worst, it is a conflict of interest that could end up costing the association dearly.

My advice is that this individual needs to choose one path or the other. He can either serve on the Board as a VOLUNTEER or he can work for the association as an EMPLOYEE. Both are noble choices and both add value to the community. However, volunteer Board members need to be impartial for their own sake and for the sake of the community. I think he should abstain on the vote to hire him and he should also offer his resignation from the Board upon being hired by the association. Far better for the community to attract a new volunteer to serve on the Board than to face conflict of interest charges from the community. Even if there is no impropriety, the appearance of impropriety will surface and that can be quite detrimental to even well-intentioned Boards. Good luck!

Condo Board Forcing Removal of Unregistered Car Stored in Garage

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J.B. from New London County writes:

Dear Mister Condo,

Can a Connecticut Condo Association force the removal of an unregistered vehicle from an owner’s garage?

Mister Condo replies:

J.B., as you may know, I am not an attorney so, please, consider my advice here as friendly and not legal. For a true legal opinion, I advise you to consult with an attorney who is verse in condo law. As a general rule condo association boards are empowered to remove any items from community association grounds that they deem inappropriate, dangerous, or in violation of community association rules. Depending on how your garage is classified, it may be a common or limited common element giving the Board the authority to enforce provisions of the association’s by-laws, which, I’m guessing from your question, include a provision prohibiting unregistered vehicles on the property. If, however, your garage is entirely owned by you, the association board may be overstepping their authority. Regardless of whether they are in the right or not, there is a procedure they need to follow before forcing the removal of your vehicle. They need to send you a letter informing you that you are in violation of the association rules regarding unregistered vehicles. They need to give you an opportunity to address the Board and the accusation. They then need to vote to take action against you either in the form of a fine or in the removal of the vehicle if the by-laws so state.

My bigger question for you might be why do you have an unregistered vehicle in your condo garage? May I assume if it is unregistered that it is also uninsured? If so, how did it get in your garage and what are your long-term plans to dispose of the vehicle or get it registered? The risk to you and your association is primarily damage that could be caused in the event of accident or if the vehicle were to catch fire. If it is unregistered and uninsured, the association could be at risk if there were an accident, which is why almost every association I know of has a by-law prohibiting unregistered cars on the common grounds. If the simple act of registering the vehicle will satisfy your condo association and allow you to keep the car, why not just get it registered? Otherwise, why not just dispose of the car? You’ll get the use of your garage space back and keep your association happy. As I often say, “the best way to have a good neighbor is to be one.” All the best!

Would a Property Manager Have Prevented an Underfunded Reserve Fund?

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N.G. from New Haven County writes:

Dear Mister Condo,

I recently purchased a condo in a 35 unit association that has no manager. I have been told that the reason for this is to keep the monthly common fees low. However, I have been informed that there is going to be a special assessment for repairs needed for the parking areas because the Board failed to save enough money over the years. I like the idea of low common fees but I am not happy about the special assessment. Wouldn’t it be better to have a professional manager that would make sure things like this don’t happen?

Mister Condo replies:

N.G., regardless of whether a condo association chooses to manage itself or contract the services of a professional property manager, fiscal shortcomings that require special assessments are the responsibility of the community as a whole and a direct reflection on policies and procedures by the Board for the years that have passed without enough money being collected. In fact, it is quite possible that your current Board members weren’t even unit owners back when the real problem began. Let me explain.

From the moment the foundations is laid and the parking lot is paid, deterioration and aging begin. It is not a question of “if” these common elements will fail but, rather, “when”. Forward thinking community association employ Reserve Studies to keep track of their common elements, their likely usable lifespan, and what it will likely cost to replace them. They then budget monthly contributions to their Reserve Fund as part of the common fees. Truly, that makes sense as the unit owners who are in place as the common elements age are the ones who are benefitting from them the most. As the common elements age, the Board can arrange for their timely replacement and know that there is enough money in the Reserve Fund to cover the repair or replacement. When the common elements fail and there is no money in Reserve, the current Board is faced with finding a way to pay for the needed repair. They may choose a community association loan or they may choose a special assessment.

Hiring a professional manager may help the Board get a handle on this problem sooner rather than later as a professional manager who recognized inadequate money in the Reserve Fund might encourage the Board to increase common fees in anticipation of the coming need but the Board is under no obligation to take that advice and the manager cannot simply raise common fees without the Board’s approval. When a community places its desire to keep the common fees low in lieu of taking a realistic approach to budget preparation and adequate Reserve Fund contributions it is all too common for a community to find itself in the same fiscal situation as yours. I wish you and your fellow unit owners all the best!

What Happens If I Can’t Pay My Monthly Condo Fees?

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R.F. from Hartford County writes:

Dear Mister Condo,

I lost my job this past September and I am having difficulty paying my monthly mortgage and common fees on my condo. If I don’t pay my mortgage I am pretty sure that the bank will foreclose on me. What will happen if I miss a month or two of my common fees? Will the condo association foreclose on me as well?

Mister Condo replies:

R.F., I am sorry that you have lost a job and are now struggling to make ends meet. There is no doubt that the current economic situation in our state is proving challenging for many residents. I hope you find gainful employment soon to get yourself back on your feet. The short answer to your question is “yes”. Your condo association can foreclose on you for non-payment of common fees. However, it is not likely that they will do so if you are simply late one month. There is a process of collections that involves late fees, legal fees, and a court order before a foreclosure and eviction can occur. That being said, you do not want to head down that path if you can avoid it. You will lose far more than you might gain, including your condo.

Common fees are the lifeblood of the condo association. All sorts of common items are paid for by these fees. Many of them directly benefit you and all other unit owners. Insurance, maintenance, management, common utilities, and much more are all paid for using common fees. When the common fees don’t arrive as planned, the association can quickly find itself unable to meet its financial obligations. State law protects the rights of your fellow condo unit owners by allowing the association to take fairly swift collection against unit owners who aren’t paying their fair share on time. In addition to fines for late payment, you could also end up paying for the legal fees the association incurs to take action against you. If your common fees were $300 per month and you decided not to pay for 3 months, you would have not conserved $900 for yourself. Now add the penalties of $25 per month and $500 for legal fees to take collection action against you and you’ve incurred a cost of $1475 for 3 months use of $900. That hardly makes sense!

If possible, I would encourage you to borrow the money from a friend or family member until you get back on your feet. You could even offer to pay it back with generous interest and you would still come out ahead. And your association will be able to pay its bills it incurs on your behalf. I hope this explanation helps. All the best!

Maryland Condo Board Governance Issues

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W.S. from Maryland writes:

Dear Mister Condo,

The Maryland Condominium Act (11-109d) authorizes the Council of Unit Owners enumerated powers subject to the Act and its own declaration, and bylaws.  Number (16) is the right to “… and, after notice and an opportunity to be heard, levy reasonable fines for violations of the declaration, bylaws, and rules and regulations of the council of unit owners.”  The “Powers and Duties” of the Condo Board in its By-law notes that the board may do …  “as are not by law or these By-laws directed to be exercised and done by the unit owners.”

So — can a board of directors (several associations have identical By-laws) enact rules/regulations (yes) to legally fine violators (no)?

When president of a Maryland board, I would not support fining.  I proposed a patriotic rule that would require only red cars to be parked in odd numbered spaces, white cars in free spaces, and blue cars in even numbered spaces.  After all I would have needed only two other board members to impose this edict on all hundred or so owners.

The last section is a fun thing while the first is very (legally) serious.

Thanks

PS:  You probably know that even though authorized by State law, the supreme courts of both Virginia and Rhode Island have found the laws imposing fines on condominium owners to be unconstitutional.

Mister Condo replies:

W.S., as you probably know I am not an attorney nor do I lay claim to a vast knowledge of all of the individual state laws regarding common interest communities. I am aware that Maryland has been very proactive in legislating what can and cannot be done by Boards with regards to how they govern the folks who have elected them to do so. In that way, your state is not so different from Connecticut where a large modernization of the Common Interest Ownership Act (also known as CIOA) that occurred in 2010/11 is coming to have great effect on how many Boards interpret the state statute as compared to simply abiding by their original condominium documents as had been the norm for many years. Regardless of which state your condominium is in, the Board must first abide by federal laws (few) followed by state laws (numerous and vary from state to state), local municipal law (becoming more common although primarily in larger cities) and then their own governing documents.

Ignorance of these laws is no excuse for not following them although, for the most part, it is incumbent upon the individual unit owners to take action against their Board when their rights are violated. States such as Florida which require Board members to become certified through state-mandated training and states such as Illinois who have a voluntary program of Board member training are seeing positive results in many of their community associations although even that system isn’t flawless. It really all comes down to education. In my state, many associations have come to rely on the local chapter of the Community Associations Institute (CAI).

You have two excellent chapters that service different parts of Maryland. The Chesapeake Region Chapter at http://www.caimdches.org/ and the Washington Metro Chapter at http://www.caidc.org/. If you have not already done so, I would encourage you to get in touch with them and seek to work with them to clarify best community governance practices for communities like yours. Thanks for the red, white, and blue humor. I find it best that we all take ourselves a little less seriously from time to time. It helps everyone enjoy their community association living situation a little bit more. When everyone plays nice and follows the rules, there can be no better place to live. All the best!

Hard to Enjoy New Glass Sliders in this Illinois Condo

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N.L. from Illinois writes:

Dear Mister Condo,

I have a similar situation as described in your question and answer entitled “Can Condo Association Collect Misappropriated Funds Paid for Deck Repair 2 Years Ago?” (http://askmistercondo.com/can-condo-association-collect-misappropriated-funds-paid-for-deck-repair-2-years-ago/In 2012, our association informed us it was going to replace our sliding glass doors at the cost of $4600. Prior to making the decision the board consulted with an attorney who reviewed our declarations and by laws. He stated (3 separate times) that due to ambiguities between our declarations and by laws the association should treat the sliding doors as common elements. In January of 2013, a new board was elected and in April of 2013 issued a resolution stating that sliding glass doors (amongst other things) were not considered common elements any longer. In September of 2013, we received a letter from the association stating that the legal opinions we received were flawed and due to that we are to repay the association $4,600.00. We never requested the doors, attended any meeting where they were discussed. We received a call from the management company telling us they were replacing our doors and our neighbor’s doors. The neighbors were the ones who initiated the request. Does the association have the right to charge us back? If they weren’t considered common elements in the first place why did they issue the Resolution? Also they are not asking any other unit owner that has work done to what they now consider Limited Common Elements over the last 17 years to repay the association. Can they retroactively and selectively enforce their decision? We offered to supply them with an additional legal opinion but I think regardless of what it says I feel they will assess back the costs? What are our rights? Any help would be appreciated. We live in IL as well.

Mister Condo replies:

N.L., Greetings from Connecticut and sorry to hear about your predicament. I am not an attorney nor do I reside in your state so my first-hand knowledge of Illinois-specific law is quite limited. However, I do have some friendly advice to offer so here goes. There are times when I suggest condo owners seek experienced legal counsel to assist in their legal queries. Clearly, this is one of those times. Your question concerns me on many levels. First and foremost is the question of common, limited common, and unit owned amenities. Something as specific to your personal use would likely be unit owned or limited common element. That is not to say your condo documents don’t address the issue but if a qualified attorney gave an opinion in 2012 that claims the sliders should be treated as common elements, what changed in less than two years that made the Board reverse that finding? Even if the current Board is correct in treating the sliders as limited common elements, there is now a major issue with what had been done previously. Also, if they just passed the resolution, I would think it would prove quite difficult for them to go after any unit owner for repairs or replacements performed prior to the passing of the resolution. There is also the issue of how they passed this resolution. Did they follow the procedures as outlined in your governing documents? These are all questions for a community association attorney to answer and even bring suit if it becomes necessary to involve the courts in sorting this mess out.

On the flip side, you did receive brand new glass sliding doors which are primarily for your enjoyment. Yes, they also enhance the building’s exterior but they will undoubtedly save you energy expense and look beautiful for years to come, inside and out. The $4,600.00 for the sliders is not unreasonable in my opinion but selectively choosing who should pay and who should not is not good governance. There needs to be very specific language in their resolution that states from the date the resolution was passed forward. If that language is there and you had your sliders installed after that and everyone else who has had similar repairs done from that date forward is being billed the same then it may be fair and square. I assume your neighbors who had their sliders done at the same time you did have been billed as well.

The bottom line is that condominium associations are governed by volunteers. Most are well-intentioned; not all are well-informed. You have an excellent resource in your backyard at the Illinois Chapter of the Community Associations Institute. (http://www.cai-illinois.org/). I strongly encourage you to visit their website and reach out to some local knowledgeable experts for guidance. You can search their membership directory for attorneys at http://www.cai-illinois.org/member/MemberSearch.asp and see if you can’t find some help. I counted 35 member attorney firms. These attorneys specialize in community association law so they are your local experts. I wish you all the best in putting this hoopla behind you. At least you can enjoy your new glass sliders.

Unlicensed Contractors and Condo Association Insurance Question

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V.B. from New Haven County writes:

Dear Mister Condo,

We were recently told by our Manager that any workman on the property that does not have a license doing work inside or outside of the condo and sues the association for anything, that the condo insurance is primary and homeowners is secondary. This does not sound correct since the association should not be responsible for the actions of others who do not obey the rules. Thank you. Await your guidance.

Mister Condo replies:

V.B., unlicensed or uninsured contractors are generally forbidden to perform work on association grounds as outlined in the association’s documents. Most association by-laws are clear on this and for good reason. Any unlicensed or uninsured contractor who gets hurt or damaged on association property is likely to sue everyone involved, including the association. Homeowner’s insurance generally protects homeowners from damages incurred inside their home, whether a friend trips on a rug or a contractor injures himself while remodeling a bathroom. A true accident is just that and most HO-6 policies (homeowner’s insurance in CT) provide some type of coverage for injuries sustained inside a unit. However, in the case of a contractor injured while performing work, it is possible that an injury would result in a lawsuit where the association was also named as a defendant. That is just an unfortunate reality of our overly litigious society. The association is not responsible for the actions of others; they are responsible for protecting the association’s assets, in this case the association’s cash reserve.

As far as which insurance pays first or second it is really a question of how the lawsuit is presented. If an uninsured or unlicensed contractor were hired by a homeowner without the association’s knowledge or approval, it is very unlikely that the association would be at fault. However, in order to protect all owners within the association proper insurance is maintained in the event of a lawsuit. After the legal proceedings were over I would expect the association to then sue the homeowner for violating the association’s governing documents and hiring an uninsured or unlicensed contractor. The insurance makes the association strong. Proper procedure makes the association whole after the event. Hope that helps.