Sunday, April 28, 2013

My time on my HOA Board

One of the first questions I ask legislators, candidates seeking a job with my firm and vendors who sell services to community associations is: Have you ever served on your community's board of directors?  

How can any of us really know what a volunteer director job entails if we have never filled that role?

I served on my homeowners' association board for two years and that was almost ten years ago. Prior to me, my husband served on the board and prior to that, other residents who were lawyers were recruited to serve on the board in the hopes that a legal background would somehow assist the board.  I am not sure how much that  theory was borne out in reality but my experiences from my time on the board have stayed with me and I believe have made me better able to relate to my association clients and their daily issues.
Our HOA board meetings were all held in the various directors' homes and they were not well-attended. Occasionally, a resident with a specific request such as an exterior modification would attend and then leave after his or her item was discussed. Usually it was just the five of us alone discussing what needed to be done. The director hosting the meeting usually laid out coffee and refreshments. Although we were in comfy surroundings, we were there for business purposes and most of the directors were all very well prepared. My first year we had a director who really did not understand that the "job" entailed actually reading the minutes, attending meetings and performing the tasks assigned to him so he quickly tendered his resignation when he realized that our self-managed community (we did not have a professional manager and still do not to this day) meant  managerial and operational tasks fell on the directors' shoulders.

I was the only woman on the board and more than two decades younger than my male counterparts. Some memories of my time as a director are fairly vivid:
  • I was initially asked to become the secretary(with one director suggesting it was a natural fit given my gender) but I declined that offer.
  • One director was focused mainly on planting live oak trees in every home's front yard, claiming we had a landscape maintenance easement to do it. When I countered that the easement did not quite give us the liberty to undertake this project to the extent he desired nor was the entire community in support of it, this director suggested I resign from the board. I again politely declined that offer.
  • We had a resident who was unhappy with a violation letter he received requesting he put a door on his mailbox. He parked a car that was meant for the junkyard on his swale in protest. Eventually he moved his car and his mailbox to this day remains without a door.
  • We had zero delinquencies during my entire 2 years on the board.
  • We spent less than $1,500 in legal fees during my entire 2 years on the board.
  • We threw four well-attended social events each year which continues to this day.
  • We directors did not all agree with each other but we did listen to each other.
  • Our board meetings tended to last well over 2 hours and that was with no one in attendance!
When my term was up, I did not run for re-election. I suppose working in the community association industry made it less appealing to go home and work again as a volunteer director. Even so, I am grateful for my time on the board. It made me much more empathetic to the problems and complaints I hear on a daily basis from directors, managers and residents. 

So what did I learn during my 2-year tenure on my community's board of directors?  I learned that some of my fellow directors had engineering, managerial, entrepreneurial and other skills of which I had no idea previously. I learned that most of my fellow directors were very nice people who were serving on the board because they felt it was their duty to "give back" to the community in terms of their time and skills. I learned that there are bullies on boards just as there are bullies in the schoolyard and they should be dealt with the same way. I learned that serving on the board can be boring, exciting, frustrating, gratifying, enlightening, mystifying, easy and difficult depending on the circumstances.

I am grateful to those who serve their communities well and for the right reasons.

Sunday, April 21, 2013

Owner sues HOA Board for failing to preserve restrictive covenants

Occasionally, I will hear from an older Florida homeowners' association that is considering allowing its restrictive covenants to simply expire by application of  law. In some of these communities, there is not much in terms of common areas to maintain and insure or the entire concept of a mandatory association has lost its appeal. A new case out of the 4th DCA involves an action centered around an owner’s legal standing to compel the HOA’s Board of Directors to proceed with the “Preservation” of the Association’s restrictive covenants in compliance with Florida Statutes, Sections 720.05 & 720.06 in order to preserve such covenants from being extinguished under Florida Statutes, Chapter 712 - commonly referred to as the Florida Marketable Record Title Act (“MRTA”).

The very recent case of Southfields of Palm Beach Polo and Country Club HOA, Inc., et al v. McCullough may make some boards who are otherwise inclined to ignore the effects of MRTA to reconsider. In this case, Victoria McCullough, a landowner in the Southfields equestrian community, filed a complaint in Circuit Court claiming that the Association’s board was refusing to preserve the Declaration by failing to record the permissive notice of preservation allowed under Florida Statutes, Section 712.05.  McCullough requested an injunction and a writ of mandamus to compel the board to file the required notice.

McCullough relied on the fact that in 1981, the Association’s governing declaration was recorded to impose certain covenants, conditions, and restrictions within the Southfields community. The declaration stated that its “provisions hereof shall be liberally construed to effectuate the purpose of creating a uniform plan for the development and operation of the Property.” The declaration created a homeowners association whose stated purpose, according to its articles of incorporation, is “to provide for the regulation, maintenance, and preservation of the development of Southfields.”
The Court determined that the declaration was intended to preserve the equestrian nature of Southfields which thereby required that the board exercise its powers to maintain the declaration until and unless ninety-five percent of landowners vote to dissolve the declaration and disband the Association.

The trial court granted summary judgment as to both the prayer for injunction and mandamus.  The Appellate Court agreed with the trial court’s conclusion that if parcels were to drop out piecemeal without the requisite votes required by the governing  documents, the Association would begin to resemble a piece of Swiss cheese, with portions of Southfields covered by the restrictions and other portions not otherwise covered by the restrictions. The Appellate Court also agreed that the language of the declaration itself made it clear that the board of directors is mandated and has a duty to protect Southfields and the restrictive covenants running with the land.  Finally, the Appellate Court agreed that injunctive relief, as well as, mandamus relief was appropriate to compel the board to fulfill its duty and take the required action to preserve the declaration.

The Appellate Court noted the Mandamus relief is ordinarily used to compel a public official to perform a ministerial duty, but that neither party raised an appellate issue whether mandamus is appropriate to compel a homeowners association to act.  The Court pointed out that mandamus has been approved to compel a corporation to act,  citing, Faro v. Simplex Med. Sys., Inc., 748 So. 2d 342, 342-43 (Fla. 3d DCA 1999).

Some older HOAs have drawn criticism for attempting to preserve or revive older covenants that will be or have been impacted as a result of MRTA and now some older HOAs are being criticized for not being proactive in protecting and preserving those covenants. This falls under the category of not being able to please everyone. For older HOAs that have a unique lifestyle connected with their community (for Southfields it was equestrian, for others it may be communities with age restrictions, a golf course or waterfront lifestyle, etc.), the issue of their community's character being tied to and defined by the restrictive covenants makes the board's decision to preserve or not to preserve a more important one.

Sunday, April 14, 2013

The Tax Man Cometh for Associations Too!

Each of us is undoubtedly thinking about our own personal tax returns with April 15th upon us. However, board members have to think about tax time twice: personally and on behalf of the association.
Hopefully, every association has retained an accounting professional to guide them throughout the year and, in particular, when it comes to preparing the association's tax return. I reached out to Monte Kane of Kane & Company CPAs (industry experts in Florida) to give some insight into this process.
According to Monte, condominiums and HOAs file either standard Federal corporate returns, using Form 1120, or if they qualify for the "primarily residential" test, they can file the Federal Form 1120H.  When an association files an 1120H return, it does not file a Florida income tax return. However, there are pros and cons to filing the 1120H which you should discuss with your CPA. Co-ops generally can only file an 1120C.
While we all dread April 15th, an association's return is due on the 15th day of the third month after the year end. A calendar year association's federal return would thus be due on March 15th with an ability to extend filing by 6 months.
Any officer of the association can sign the association's tax return but he or she must understand what is being signed which is the same requirement when a personal tax return is being signed. A community association manager should not sign the association's tax return unless he or she is an officer of the association.
While a shared ownership community association is a not-for-profit corporation that does not confer tax exempt status. Associations are taxed and they can be fined/penalized for not paying taxes timely and/or for not filing their returns timely.
Associations occasionally do receive a tax refund, usually when an association is required to make estimated payments and those amounts exceed the actual taxes owed. A refund may also be due and owing where an amended return is filed due to the fact that a prior accounting professional was not aware of certain specific elections that a board could make and/or was unaware of certain IRS Revenue Rulings. The accounting professional you choose to guide your board counts.
Some areas that require expert assistance include:
  • Income resulting from settlements of construction defect and other lawsuits
  • Reserves for contingencies can pose tax issues
  • Understanding what is subject to State Sales and Use Tax
  • Be familiar with Revenue Ruling 70-604 and have your members take an annual vote to approve it (this can save the association taxes on excess income)
Lastly, Monte reminds us that associations can avoid or reduce taxes with proper planning. He cautions, "We have seen too many associations where rules are not followed and the Board is exposing themselves in the event of an audit. Remember, boards are fiduciaries."

Wednesday, April 10, 2013

Jury finds Condo Association and Management Company 90% liable for child's death

In a tragic story dating back to 2011, a jury recently awarded $12 million to grieving parents and found a Jupiter condominium association 30% responsible, a management company 60% liable and an elderly driver 10% culpable for the death of a 9-year old boy.
The child was struck on his bike by an 81-year old woman exiting her Jupiter condominium community. The driver’s judgment together with association hedges that were twice as high as Jupiter Code permitted and a stop sign that was four feet shorter than the Department of Transportation required (and in the wrong location) created a fatal combination.
Without having access to the undoubtedly extensive discovery in this case, many questions remain about who did what and why. Did the manager inform the board about the condition of the hedges and the stop sign.? Did the board know and decide to do nothing either due to budgetary constraints or disagreement with the manager’s recommendations? Did the board assume the manager was on top of community maintenance and therefore was blissfully unaware that a problem loomed? Why was the landscape company not held responsible to ensure the hedges’ height complied with local Code?
The jury’s award reflects that it placed a greater expectation on the management company to take steps to prevent this tragedy. The association was held to be half as liable as the management company and the driver who actually struck and killed the victim was assigned the least amount of responsibility for the wrongful death.

This is a cautionary tale for other managers and boards who may be unaware of the condition of their communities. Certainly, regular “premises audits” would be advisable as well as ensuring that vendors such as pool companies, landscapers, etc. all warrant that their work will comply with local codes and ordinances. For those managers who may have identified items needing repairs and/or upgrades only to be ignored, it may be time to resign the account.

Sunday, April 7, 2013

Should boards reveal the names of delinquent owners?

A blog reader recently asked me what I thought about boards mentioning the names of delinquent owners at meetings when the question "who isn't paying their assessments?" is raised.
I advised that some boards handle this situation much more sensitively than others, preferring not to humiliate or punish anyone but merely conveying the specific information requested. For instance, a response to "how many delinquencies do we have?" can very easily be "we currently have 7 homes not paying and these files have been sent to legal." That question does not require the disclosure of specific names or property addresses.

What if, however, the questioner did ask the board to name names? Should they?

Publishing a "dunning" list of delinquent owners is never advisable as the information can be/become inaccurate while the list is still posted. Doing so could expose a board to potential defamation claims.  However, responding to a question at a meeting from a member who has the right to know the specifics of his or her association's financial health is a different matter entirely.

This reader was incensed over the practice as she was delinquent in her assessments as a result of having financial difficulties that were exacerbated, in her opinion, by job market issues. The reader asked if the law could be changed to prevent boards from advising community members of the names of the delinquent members. She suggested instead that the boards "discuss the names privately and just give a lump sum at the general board of directors meeting."
Naturally, this owner can contact her local State Representative and/or State Senator and request that he or she give some thought to changing the law next year. Her public policy makers might be receptive to her request and we could see a proposal next Session which prohibits boards from disclosing the names of the people who owe the association money to the general membership. That is how new association laws are made each year.
What do you think? Should boards alone have access to the names of the association members who are not paying their dues or should that information be disseminated to the members requesting same? Does naming names encourage folks to pay their assessments timely or is it simply designed to embarrass people or does it accomplish both?