Monthly Archives: December 2013

How to Handle Tax on HOA Reserve Fund Interest

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Anonymous from New Haven County writes:

Dear Mister Condo,

Federal tax law specifies that Reserve funds and operating expenses cannot be co-mingled.  Does that apply even when we don’t make enough in interest income?

Mister Condo replies:

I know better than to tackle an accounting question without checking in with one of my expert friends. I reached out to my friend Sam Tomasetti, CPA of Tomasetti, Kulas & Company, P.C. for his advice. Here’s what he had to say:

Except for very unusual circumstances, tax law requires that interest income earned on funds held by qualifying homeowners associations be subject to tax no matter how much or little income is earned.  However, tax law also allows a 100% statutory exemption and the ability to offset the cost of earning income with the income. Simply stated the tax is calculated on net income not gross income.

I hope that helps! All the best!

Can the Condo Board Meet by Teleconference?

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P.R. from Hartford County writes:

Dear Mister Condo,

Is there a legal reason why the Board cannot teleconference its meetings

Mister Condo replies:

P.R., I am not an attorney so please accept my answer as one from experience and not one from an attorney. If you require an attorney’s answer, kindly consult with one who specializes in community association governance law. That being said, I can think of no legal reason a Board could not use teleconferencing technology to hold a Board meeting. Under CIOA, all unit owners have the right to attend any Board meeting so the teleconference would have to be made available to any interested unit owner who wished to attend. Also, there would need to be a physical place for unit owners to attend as there is no law that would compel them to participate via teleconference. In other words, the teleconference could be in addition to more traditional meeting methodology, meaning people show up at a physical place for the meeting. If voting were allowed via teleconference, records would need to be kept just as if the voting Board member were in attendance at the physical Board meeting. Given the technical challenge that may arise, I can see where some Boards would not have an interest in creating a teleconference to support their Board meeting. However, I cannot think of any legal reason they could not. Hope that helps.

Nothing Special about this Condo Special Assessment!

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L.F. from Fairfield County writes:

Dear Mister Condo,

We have received an assessment for 2014 – 2017 for $112.00 per unit per month (total of $5,400.00) to fund five capital projects totaling 2 million dollars. As of the last Board or Managers meeting minutes distributed in October of 2013 from a June, 2013 meeting where all of these projects were listed as ‘Deferred’. The funding for these projects will fully be funded by the unit owners; no money is coming from Reserve or loans. The owners share my concerns with this four year assessment. We feel we were blindsided and that something shady may be going on with the involvement from a previous Board member and his using his “friends” for these major projects. I sent a letter asking for further details on this assessment as we have not received any details other than the amount being charged and a bulleted list of the projects with no itemized details.  What should we do?

Mister Condo replies:

L.F., I feel your frustration. Even in the best of situations special assessments often feel like they are being thrust upon the unit owners of any association. So many questions arise about why wasn’t this money set aside years ago. In a nutshell, the answer is that since volunteers manage the association’s finances, it is very easy for necessary maintenance projects to get labeled as “deferred” while the association deals with more pressing issues and pressure from unit owners to keep common fees low. I saw a recent study that indicated as much as 70% of the nation’s condominiums and HOAs are currently underfunded with regards to their Reserve Funds! There is no reason to expect that your community is immune from the same problem.

That being said, the unit owners have a voice in how items are to be paid for. You haven’t mentioned whether or not this assessment was voted on by the entire membership or just the Board. Board members are elected by the unit owners and therefore do provide unit owner representation when deciding to levy a special assessment. However, if a community association loan would have accomplished the same financial objective and given owners a better option or better terms it should have been discussed. For all you know your Board did speak with a bank only to find the association wasn’t eligible for such a loan. Banks do require pretty good finances before they will lend money to an association. If you have delinquencies or lawsuits pending against the association they might not have been able to get financing.

Your allegation about a previous Board member using his “friends” for major projects is concerning but unless you have specific proof that malfeasance occurred I doubt you will get much traction from that. Records for these projects are available to unit owners (perhaps for a fee) but you should be able to research requests for bids, bids, and contracts if you need closure on the issue. Of course, if you determine theft or foul play occurred, I encourage you to speak to an attorney who can advise further action.

Other than that, the special assessment is the only method of collecting the needed funds that is left to the community. The Board is obviously working with unit owners by spreading out the payments. I know of many communities that would simply levy the assessment as a one-time fee and force unit owners to pay within 30, 60, or 90 days. At least you have four years to come up with the money. It is unpleasant and my guess is that it may not be the only assessment or increase to common fees your community will see. If common fees that were too low to begin with are what caused the assessment, you can bet that fees need to be increased substantially or the community will face the same problem time and time again. Good luck!

Developer Transition Queries in New Haven HOA

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P.A. from New Haven County writes:

Dear Mister Condo,

I recently had a new home built in an over 55 condo community that currently has 28 free standing homes completed out of a potential 60 units. Since we are in the development phase, we are seeking advice as to how the governance should be structured. We have a property management company who reports directly to the Board, which consists of the 3 builders and developers. Although there are 2 residents unofficially on the board, we are not able to impact any decision as we do not have a vote. Because of this structure, there is a constant disagreement between builders and residents as to who is responsible for things like replacement of dead shrubbery in the common areas, vandalism, and/or stolen building material left on site, etc…

Once more than 50% of the units are complete, one board member will be replaced by a resident and continue to replace the builders as additional units are completed until the entire community is finished and the builders leave. In the meantime, should we have a resident occupy an official board seat now? Should we have elected association officials before 50% of the units are finished? It is not our intention to create an antagonistic relationship with the builders. We just need clarification on rights and responsibilities for both parties.

We will most probably need to obtain some legal advice but there is a meeting on Friday with the builders so we are hoping to present some information for discussion at that meeting.

Mister Condo replies:

P.A., condominiums and HOAs that are transitioning from developer control to full Board control can be a tricky time in the association’s life cycle. This is no time to go it alone. The Board needs guidance from professionals like attorneys, Property Managers, and CPAs, preferably folks who specialize in community association law and have experience with developer transition and governance issues like what your community is now experiencing. You can find the resources you need in the Service Directory at the Connecticut Chapter of the Community Associations Institute website at http://www.caict.org/?page=Directory. Check it out.

I did reach out to an experienced community association attorney for some quick advice to your question. Here is what the attorney had to say:

“The developer is entitled to control the executive board (and therefore to direct the management company) while the first several units are being marketed and sold. Sixty days after one-third (in your case, 20) of the units are sold, the developer must allow at least one-third of the board members to be elected by the owners. Sixty days after two-thirds (in your case, 40) of the units are sold, or after certain other events like the developer stops selling units, all of the board members must be elected by the owners. The developer can surrender some or all of the board seats earlier than this, if either it wishes to or the declaration so requires. But for as long as the developer legitimately controls the board, the only constraints on its powers are that it act with fiduciary good faith and in accordance with the law and the governing documents. You and the other unit owners should consider retaining an attorney to review your declaration and bylaws to ensure that the developer is both obeying them and giving up control of the board along the proper timetable.”

Hope that helps and hope to see you at future CAI-CT functions. Welcome to community association living!

Short-Circuited and Short Changed at this Condo

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D.Y. from Windham County writes:

Dear Mister Condo,

I have lived in my condo for 8 years and over the last 4 years there has been a drop in voltage when someone hits the elevator button and all my lights dim and turn off. We have had engineers and DWP look over everything and they thought it was the elevators engine which was replaced but it did not fix the problem. At this point I have spoken with realtors who have told me that now that the problem is public knowledge it must be disclosed if I ever sell the property. That being said my realtor told me it would hurt the value of my property but he has no idea how to quantify such a loss. Do you have any idea how I would determine my loss? So far it does not look like the issue can be fixed.

D.Y., I am sorry for your problems. Your situation got me to thinking of one of the best Property Engineers I know so I reached out to him. Here’s what Tim Wentzel, PE and owner of Connecticut Property Engineering had to say:

“I would first question the comment that it is not a solvable problem. There would appear to be either an excess usage problem and/or a supply problem. Electrical supply can best be thought of like a water pipe if the pipe is too small or the pressure too low your volume will drop when someone else turns on the water. If the elevator usage problem (ie: the other faucet being turned on) is too big you need larger pipes. In your case perhaps the electric service needs to be increased either to your unit or to the elevator.”

My thoughts exactly, D.Y.. So the real question is how will you get your Board to take further corrective action? Since you are speaking with realtors, I assume you are now selling. Before you do so, I would speak with an attorney about what damages you may seek against the association and/or the utility company. No one wants to sue their association but, in this case, I do not see where you have any choice. You have done nothing wrong but you are being denied reasonable use of your property and there is now a documented fault with the unit that is being caused, wittingly or other, by a common element owned and operated by the association. As Tim Wentzel pointed out just because the problem has not been identified and solved yet this process isn’t over. I would definitely continue to fight until you get your power situation restored or a substantial settlement is reached. All the best!

HOA Parking Problems

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R.M. from New Haven County writes:

Dear Mister Condo,

I’m a new president of 55+ community and could use some advice. We have been trying to limit parking on the roads of our community. Each homeowner has a garage and driveway and we have limited overflow. It was projected that unit owners would house one or two cars. But many unit owners now have in-laws and children that have moved in with them and they now have three or four cars. I know we can’t tell people how many cars they can have but can we limit the amount that can be parked on property? Any advice would be helpful.

Mister Condo replies:

R.M., thanks for writing! Let me begin my remarks by stating that I am not an attorney. This advice is friendly, not legal. If you need true legal advice, kindly contact an attorney who specializes in community association law.

As you can imagine, too many cars and too few parking spaces is one of the top complaints nationwide for condo dwellers. As you have mentioned, developers envision a community where a typical unit is occupied by one or two people with one or two cars and occasional guests. The garage, driveway, and overflow parking areas were designed to handle exactly that situation. Extra residents can be a burden on the property in many ways (extra use of common elements like sidewalks, roads, storage areas, utilities, trash, pools, tennis, etc.) but the demand for increased parking, more times than not, simply cannot be met by the association.

As a rule, the condo documents are very clear on what parking is available to unit owners and other residents (renters and guests). You need to start with what the rules state about parking and then strictly enforce those rules to stop the problem parking. You didn’t mention it but I can guess that some folks are parking where they don’t belong – fire lanes, on the streets, T-parking behind their own vehicles in driveways, long-term use of visitor spaces. All of these infractions need to be corrected and the by-laws are your best friend when it comes to enforcement. If your by-laws do not state parking rules (highly unusual), you need to add parking rules at your next Board meeting.

Do you have a community newsletter? If so, you need to tell the story to your residents by detailing what the rules for parking are. In most communities, the rules are assigned parking is the ONLY parking available to unit owners and renters. Extended family falls into this category as well unless they are truly visitors (a day or two at the most). Visitor spaces are generally reserved for visitors (non-resident). Other vehicles are to be domiciled off property at the expense of the car owner. Vehicles that are parked illegally will be given an initial written warning, followed by a fine, followed by towing at owner’s expense for repeated offenses. Under CIOA, unit owners who are cited with warnings or fines have to be invited to address these warnings and fines at the next Board meeting.

With a little conviction and strict adherence to the rules you can manage this situation to everyone’s satisfaction. Those folks with 3, 4, or even more vehicles may decide the community isn’t right for them and move out. Guess what? They’re right! The community isn’t for folks with lots of cars. No condo is! The folks that are following the parking rules (my guess, most folks do) will appreciate that there is order in the community. That is what they bought when they decided to live in your HOA. Best wishes!

How Much is Too Much for the Condo Reserve Fund?

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L.D. from Ohio writes:

Dear Mister Condo,

Our condo community has 40+ units. We have $160K in our Reserve Fund. We recently completed new roofs on all units, all paid for by association funds. Thee is more than enough money in our operating account for the normal expenses (lawn care, snow removal, etc.). My question is should we keep saving when we have so much available and never dip into it as fees take care of all upkeep. Ohio mandates 10% contribution, which would be $5,000 per year. Should we still contribute above that amount when we have so much available? Thank you.

Mister Condo replies:

L.D., a colleague of mine who works in the financial services sector is fond of saying that there is NEVER enough money in the Reserve Funds of most condominium associations. While I tend to agree with that philosophy, you do make an interesting point about how much is too much. Your Board is wise to follow Ohio state law. Here in Connecticut, we do not have such a law but regular Reserve Fund contributions are a best practice that all common interest communities should embrace. I am guessing that the 10% mandatory contribution was arrived at using a statewide average of what reasonable Reserve Funds should look like. For some communities, I would think that to be adequate. For communities with more amenities and common elements, I would think that number could be too low. It really depends on what types of commonly owned items the Reserve Fund is protecting. It may also depend on what future plans the community has. Are all phases of the community complete? Will there be a new clubhouse in the future or the purchase of adjoining property to add trails and walks? Without knowing all of the details it is hard to render an intelligent recommendation for you.

Here’s what I do know. As long as your association is in compliance with local, state, and federal law additional contributions to the Reserve Fund are likely under the association’s control when it ratifies the Annual Budget at the Annual Meeting. If you and your fellow unit owners disagree with the Board’s recommendation to make a larger contribution to the Reserve Fund than most unit owners feel is necessary you can simply vote to not accept the budget as presented. I would encourage you to open dialogue with the Board about your concerns in advance of such a vote so that the Board has an adequate opportunity to explain why it feels larger than mandated contributions to the Reserve Fund are in order. They may have a perfectly good reason for the need that they have not expressed to the unit owners yet. Hear them out and then use your power to vote to get the budget and Reserve Fund contribution that is right for your community. All the best!

Miami Condo Parking Spaces Reassigned and/or Sold

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C.M. from Miami, Florida writes:

Dear Mister Condo,

Question 1. If we have 21 parking spots and 18 units and the spots are common ground, can we change the condo docs and now sell the lots to owners that want them?

Question 2. Our condo has 21 parking spots and 18 units. The condo docs say it is common area, but spots are given to owners not renters. Is this legal?

Mister Condo replies:

C.M., that is very few parking spaces to be divvied up between the 18 units. I am not an attorney so for a true legal opinion I suggest you contact a local attorney who specializes in community association law. My instinct tells me that the answer lies in the condo documents which most likely include the important details of what parking is included with each unit. If there are garage, carport, or parking lot spaces assigned to units then it is very likely in the docs. If there are signed and numbered spaces in a common lot, then the assigned spaces are most likely offered for the exclusive use of the unit to which they are assigned, regardless if the unit is owned or rented. The renter would receive the right to use the parking space transferred via the lease on the unit. I find it hard to believe that neither of these scenarios is true but if that is the case and the parking is truly at the discretion of the association to do with as they see fit, I see no reason they couldn’t sell or auction them to owners that want them. However, an attorney should be consulted before such transaction takes place so that a proper review of the condo docs can assure what right the association has to sell or auction off the parking spaces. Another solution might be to pass an amendment assigning the spaces (one per unit) with the final three being used as visitor’s parking.

Snowed In at New Haven Condo

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L.S. from New Haven County writes:

Dear Mister Condo,

Our condominium does not do a good job of clearing snow in winter. The contract is for 3 inches and it doesn’t include a clause for accumulated snow storms… so we could get 4 2-inch snow storms and the plow does not come until we get a 3-inch snow storm…so the parking lot is usually a mess. I personally shovel and salt in front of my unit to keep it clear for my visitors. I have some handicap-able friends and I don’t want them slip-sliding across the parking lot to my unit. Does this constitute a reasonable violation of the rules? I have one vehicle with two parking spaces in front of my unit. There is usually an abundance of visitors parking. And we are required for snow removal to park our cars in the visitors parking area.

Mister Condo replies:

L.S., what a timely question! Snow removal varies by community as each community generally hires its own snow removal contractor. Some associations have their snow removed as a service of their management company if the management company offers the service. Very few associations rely on residents to do their own shoveling and snow removal and for good reason. One of the top insurance claims filed against community associations is “slip and fall” which is what happens when an adequate snow removal system is not in place at a condo. From what you have told me there are no rules being violated. It is a simple matter of the Board trying to save money (unit owners like it when they do that!) versus purchasing a more aggressive (and expensive!) snow removal contract. If I were you, I would write to the Board to ask them to reconsider their snow removal contract. Of course, the question is how much is enough? Should the snow be removed at 1 inch, 2 inches? Can someone call the snow removal contractor in between storms so that when multiple 2-inch storms happen the lot gets plowed. These are all simple business decisions that need to be made. Don’t be surprised if the Board says it is happy with the contract the way it is now.

Snow removal is expensive and unpredictable making it a volatile budget item for many communities. I know of some that simply ran out of money a few years back when we had so much of the white stuff dumped on us. My guess is that you can use your powers of persuasion to at least get the Board to consider your request. At the very least, you may want to ask the Board to review the Association’s insurance policy to make sure that their current snow removal program is in compliance with the coverage. If a million dollar “slip and fall” claim were filed against the association and it was determined that the association was negligent in their snow removal the financial consequences could far outweigh the expense of a more aggressive snow removal program. Good luck!

Dysfunctional HOA Board Meetings – Can Someone Else Go In My Place?

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M.R. from New Haven County writes:

Dear Mister Condo,

I dread attending HOA meetings because they are so dysfunctional. I would like to have someone attend meetings as my representative or proxy. Where would I hire someone to represent me? Is there some kind of business or agency that does this? Thanks.

Mister Condo replies:

M.R., I am sorry to hear that your HOA Board meetings are so dysfunctional that you dread attending them. Admittedly, even in the best run associations, meetings can be a bit dry and not as much fun as going for a walk, watching sports on TV, or some other recreational activity. However, the Board meetings and, in particular, the Annual Meeting are very important to the governance of your association and can have a direct impact on the quality of life at your condominium. I am not an attorney but I do suspect that a quick review of your HOA documents details of who can and cannot attend your HOA meetings. If the documents allow you to designate someone to attend on your behalf, then, provided you follow the rules for doing so, you should be able to send a representative on your behalf. You may need to grant that representative limited power of attorney to attend and/or vote on your behalf. Proxy voting is far more common whereby you empower a fellow HOA member or Board person to vote on your behalf. Quorums are required at the Annual meeting so that the association can adopt a budget and elect directors for the upcoming year. If you choose not to attend the Annual meeting you should, at the very least, submit a proxy vote so that the association can conducts its business.

One other note for your consideration, M.R.. HOA Board meetings need not be dysfunctional. I advocate a very simple one-hour Board meeting formula that I have employed successfully for years. I first learned about this technique at a CAI-CT presentation by Craig Huntington. You can read an article by Mr. Huntington on the subject here – http://newenglandcondo.com/articles/101/1/The-One-Hour-Board-Meeting/Page1.html If your Board will follow his suggestions, the dysfunction can be ended and the community can get with its business with folks like you more than willing to attend the meetings. All the best!