Construction Defects? Utah’s First Choice for Help

November 9, 2013

Let’s take care of your construction defect issues.

Construction defects can be extremely expensive to fix; can cause your property to deteriorate; decrease your property values; and can subject your community to substantial future special assessments!  Obviously, as a Board, you want to do your best to avoid these problems – and fix them when they are discovered.

Richards, Kimble & Winn, P.C., (“RKW”) is pleased to announce the ability to now handle your community’s construction defect issues!  RKW is now working with a national law firm, and has formed a strategic partnership with, Ball Janik LLP, which has helped many associations  obtain substantial recoveries for construction defects.  While RKW remains your “first choice” for general HOA representation, we have teamed up with experienced, successful and knowledgeable attorneys who have a depth of understanding construction issues as they relate to HOAs of all types.

If you are concerned that your community may have construction defects – do not hesitate – contact the attorneys at Richards, Kimble & Winn for a free consultation.  We are pleased to further announce that we will be providing seminars about your rights and remedies if your community has construction defects  (in addition to our regular training seminars).  We are extremely excited for this strategic partnership and the ability to be your first choice to resolve your construction defect issues.  Best regards, John D. Richards


Keeping Your Board Together – End of Year Checklist

October 10, 2013

It is a familiar scene.  Something happens between Board members causing distrust, scrutiny and even rebellion.  As community leaders and as fiduciaries, Board members have an obligation to each other and to their communities to set aside differences that might arise and stay focused on community business.  The purpose of the brief article is to provide year-end tips for each Board to review to make sure their relationships stay in tact and to help ensure that the community’s interests remain paramount.

1.  Adopt a “code of conduct” for the Board.  This document, signed by each Board member, sets the standard of what the appropriate tone of discussions will be in meetings; reminds everyone to mutually respect differing viewpoints; commits Board members to fulfill their duties and assignments; and strongly outlines that rude, hurtful, or inflammatory comments will not be tolerated.

2.  Make sure that each Board member has a “job.”  Often times, the Board serves as the officers of the Association as well.  Review your Bylaws for such duties or adopt a job description for each officer and Board member.  Before you hold a Board member/officer accountable for their respective roles, you need to clearly define what is expected of each person and position.

3.  Before the end of each year and perhaps each quarter, review AS A GROUP the Board’s strengths and weaknesses.  Write them down (not in the minutes) and make it a goal to improve upon areas where the Board feels it can do better (such as communicate better with members; listen to other Board member’s perspectives more fully before voting on a matter; not spreading gossip or making disparaging comments about other Board members; even learning to read and understand financial statements better is a noble goal).  The variety of goals a Board might want to set for itself are truly limitless – the objective should be to start identifying GROUP weaknesses so improvements can follow.

3.  Request training from your attorney on the ever-changing state and federal laws and trends in the HOA industry.  You will be surprised that your attorney (of course, I’m speaking as an attorney) will likely be more than happy to have training sessions with the Board and provide legal and case law updates if you just ask. 

4.  Create a Board member binder that contains yours Articles of Incorporation, CCRs, Bylaws, Rules and Regulations and applicable state codes.  This “Board Binder” should be brought to every meeting and, at random, an Article or Section should simply be reviewed quickly at each Board meeting.  Knowing your own documents, by reading them together, frequently keeps disputes from arising in the first place as you educate yourselves in a Board setting.  (I am not suggesting a lengthy reading of your governing documents at each Board meeting.  I am suggesting something as simple as a Board member is assigned to pick a specific provision in the CCRs – liens for example – and then the Board takes 5 minutes to read the “lien” section of the CCRs.  This process continues over and over with a new topic each meeting.)

5.  Community Surveys.  Do not be afraid to send out regular community surveys to the membership-at-large.  Such surveys are not to rate the performance of a particular Board member, but to rate the community in general…”Do you feel that snow is being adequately removed?”  “Do you like the new landscaping company?”  You get the gist.

6.  Board Surveys.  Rate yourselves as a Board.  I am not suggesting that this survey go out to the membership – this is done by the Board itself.  Did we accomplish X, Y and Z this year?  Why not?  What has been our biggest challenge?  How can we prevent such challenges from arising in the future?

7.  Adopt the following philosophy:  I may disagree from time to time, but I won’t be disagreeable.  In other words, vibrant Board discussions and even debate is healthy for your community.  However, Boards need to be trained to listen to all sides of an issue, compromise when they can, but don’t disagree just to disagree.  Board members must understand that once a majority has made a decision, a BOARD DECISION has now been made and you must stand behind it and not speak ill of those who voted in favor of action that you perhaps did not agree with.  In fact, I often find it helpful to have an agreed upon response if Board members are questioned if they supported an action such as “…we took the matter under serious consideration and had a lot of discussion on topics X and Y.  In the end, I stand by the Board’s decision…”  You can have your own variation on this concept.

These are just a few ideas.  I hope as 2013 is quickly coming to an end, each Board can evaluate its own performance but do so in a way that feelings are not hurt and that the community’s best interests stay above personal agendas and emotion.   John D. Richards, Esq.


Did the Vote Pass? What Various Voting Requirements Mean

August 27, 2013

By Curtis G. Kimble.

You and the rest of the board have worked hard to communicate the importance of a renovation project to the members and a special assessment is desperately needed to fund the project.  But, the approval of the members is needed to pass the special assessment.  You know your CC&Rs require a majority of members to vote yes to approve a special assessment.  But, you’re not sure if it’s a majority of all of the members, or a majority of those that actually vote, or of those that show up at the meeting.

The language in CC&Rs and bylaws specifying how many votes are needed to pass a proposed action by the members, such as a special assessment or amendment to the CC&Rs, can be difficult for even experienced homeowner association professionals to understand.  CC&Rs usually require that at least one of the following three thresholds be met for a vote to pass: (1) a percentage of the total outstanding voting rights of the association, (2) a percentage of those votes that are actually cast at a meeting, or (3) a percentage of those members present at a meeting.  Here are examples of what those provisions may look like in CC&Rs.  See if you know what they mean.

1.  “This declaration may be amended if members holding at least two-thirds of the total votes of the Association approve the amendment.”

This one should be easy.  But, it can be easy to forget that this is requiring two-thirds of the total votes of the association, and not just two-thirds of the members that show up at a meeting.  So, if an HOA has 100 members with one vote each and a meeting is held to vote on a proposed amendment to the CC&Rs where 50 members attend, how many votes are needed for the amendment to pass?  If you said 67, you’re right (if you said “more than they’ll be able to get at that meeting, you’re also right).

How about the same example as above, except in a condominium association where half the members have a .75% undivided ownership interest in the common area, and the other half have 1.25%?  How many members need to vote yes for the amendment to pass?  If you said it doesn’t matter how many members vote yes, what matters is whether two-thirds of the total voting rights of the association vote yes, then you’re correct.

In a condominium, the law requires voting rights of a member to be directly tied to the undivided ownership interest of the member (Utah Code Section 57-8-24).  This means that if a member has a .75% undivided interest in the common area, that member has a .75% vote in any matter put before the association membership.  In this situation, the association needs the yes votes to add up to 66.66…% of the total voting power of the association for the vote to pass.

2.  “A special assessment shall require the approval of a majority of the members voting in person or by proxy.”

Taking the example above where the HOA has 100 members with one vote each and a meeting is held to vote on a proposed special assessment where 50 members are represented (39 in person and 11 by proxy), how many votes are needed for the special assessment to pass?  If you said “Well Curtis, we can’t tell until you tell us how many members actually voted,” then you’d be correct.  This provision requires approval from a majority of the members that actually cast a vote.  If 45 votes are actually cast, how many votes are needed to pass the assessment?  23 (more than half of the 45 votes cast).

What about this same situation but in the condominium association mentioned above where the members have percentage interests that aren’t equal?  Do you need a majority of the percentage-votes that are cast, or a majority of the actual members that cast a vote?  You need a majority of the percentage-votes that are cast, regardless of how many actual people (members) vote.  Remember, by law, membership voting rights shall be available to the unit owners according to their respective percentage interests (regardless of what the CC&Rs say).

3.  “A special assessment shall require the approval of a majority of the members represented in person or by proxy.”   

Did you spot the difference between this and number 2?  This one requires approval of a majority of the members represented at the meeting, rather than a majority of just those that actually cast a vote.  So, in the example above with 100 members where 50 members are represented at a meeting (39 in person and 11 by proxy) and 45 votes are actually cast, how many yes votes are needed?  If you said 26, you’re correct (a majority, or more than half, of 50).

If the voting language in your CC&Rs or bylaws isn’t clear, be sure the board contacts the association attorney for clarification before the association relies on a misunderstood requirement.


HOA Neighborhood Watch Liability After Trayvon Martin

August 6, 2013

By Curtis G. Kimble.

Since the Trayvon Martin death in Florida, neighborhood watch groups in HOAs have become a hot button issue.  The neighborhood watch group that George Zimmerman, the man that was carrying a gun and shot Trayvon Martin in self defense, was a part of was overseen by the homeowners association.  That HOA was sued by Trayvon’s family for wrongful death and other claims and ended up settling for an undisclosed amount of money that is thought to be over $1,000,000.

When something like the Trayvon Martin death occurs, claims are filed against anybody who could possibly have any culpability, which will include the HOA when the issue even remotely involves or implicates the HOA.  So, what’s an HOA to do?   Should your condominium or HOA establish, or continue, a neighborhood watch?  What are the risks and how do you mitigate them?  HOA insurance specialist Béat Koszinowski answers these questions in his recent article here: Neighborhood Watch Groups in Your HOA.

The single biggest factor as to whether a watch group will create more issues and liability for an HOA isn’t whether the neighborhood watch volunteer carries a gun or other weapon, because if it gets to the point where a weapon could be used, the HOA will likely be sued either way.  For instance, if the volunteer ends up being beaten to death and was not allowed to carry a weapon by the HOA, the HOA will likely be sued by the family of the volunteer (whether rightfully or not).  Instead, it’s when volunteers go beyond simply reporting suspicious activity and instead take law enforcement into their own hands that the issues and liability open up like floodgates.  As Béat points out, “watch groups can do more harm than good when group volunteers go beyond contacting the local police department and act as the HOA’s own law enforcement.  Watch groups that engage perpetrators, use physical force or carry weapons put your HOA at risk for a lawsuit.”

Béat also points out, and I agree, that, ideally, to reduce liability, a neighborhood watch program should have no official connection to the HOA and the board should have no involvement in the creation or regulation of the watch group.  But if your HOA decides to start a watch group, it’s imperative that the HOA:

  1. establish specific written guidelines and policy for the group stating what the volunteer should and should not do, what the volunteer’s duties are exactly, and a procedure when suspicious activity is encountered,
  2. contact the local police department to receive watch group training, and
  3. check that its insurance covers the watch group.

While neighborhood watch groups can serve an important and effective purpose, they can also create more issues and liability.  An HOA board should contact its association insurance professional and attorney and follow certain risk mitigation steps if it operates, or plans to institute, a neighborhood watch group.


Ever Wanted to Read a Court’s Perspective on HOA Drama?

June 13, 2013

By Curtis G. Kimble.

Are you interested in seeing how HOA conflicts unfold and are resolved by the Utah Court of Appeals and Supreme Court?  Whether you like the stories of the people and the interesting circumstances, or you like to know the law handed down from Utah’s highest courts regarding HOAs, RKW’s Utah HOA Law app lets you read the HOA case law decided over the years in Utah on your tablet or phone.  The latest update to the app contains select Utah HOA case law, and even includes concise summaries by RKW of certain cases.

One such case from 2002 showed how an agreement between a unit owner and the association to decrease monthly assessments as to only that owner was unenforceable:

Every unit owner in Canyon Road Towers is obligated to pay his or her proportionate share of the common expenses as a monthly assessment. The proportionate share of common expenses is directly tied to the undivided ownership interest that an owner has in the common areas, as required by Utah law for condominiums.  In any condominium project, each unit’s undivided ownership interest is stated in the declaration (CC&Rs).   In negotiating the purchase of a unit, the Johannessens learned that the unit the wanted had a 1.282 percent ownership interest in the common areas, which was higher than the interest assigned to other units (because it was the penthouse unit and had unique features and so forth).  The higher undivided interest of course meant a larger monthly assessment.

The Johannessens got the management committee (the board in a condo) to agree to decrease their assessment, but they did so without a vote of the owners and an amendment to the CC&Rs.  The Johannessens enjoyed the decreased assessment amount for a few years, until something must have happened that woke the management committee up and they began assessing the Johannessens based on their undivided interest.  Of course, the Johannessens sued.

Utah law requires a vote of the unit owners before the ownership interest of any unit owner can be changed.  “A reduction in the monthly assessment paid by any unit owner alters the ownership interest of that unit, and in turn, alters the ownership interest and assessment fees of all other units in the complex.  The facts are undisputed that the Association did not obtain the consent of all the unit owners before it reduced the Johannessens’ monthly assessment,” the court stated.  Thus, the association violated the law when it decreased the assessment for the Johannessens.

Granted, it’s not Harry Potter or Fifty Shades of Grey, and it’s not everyone’s cup of tea, but if you enjoy a court’s perspective on covenants, conflicts, parking, procedure, voting, assessments, and other HOA issues, our app has you covered.

In the case above, the court noted that the association did not obtain the consent of all unit owners because that’s what the law at that time stated.  Today, the Condo Act states that approval of 2/3rds of the unit owners is required, rather than all owners.  This is an example of the fact that a court’s ruling on an issue is often limited to the specific facts of that case and trying to apply the court’s ruling to other facts and circumstances should only be done with the advice of an attorney.  I know it sounds self serving, but really it’s that a little knowledge of the law can be more dangerous than no knowledge if used incorrectly.

One new law, or change to the law, rather, that I haven’t mentioned before is in the statute regarding towing.  Prior to May 14, an HOA with “multifamily dwellings of more than eight units” didn’t have to have signs where parking was subject to towing if parking in that location was prohibited by CC&Rs (or other contract).  That law was changed this year and that exception was deleted.

Now, state law requires that a tow truck operator may not tow without the vehicle owner’s knowledge at “multifamily dwellings of more than eight units” without signage that displays both (1) where parking is subject to towing, and (2) the website that provides access to towing database information, or the name and phone number of the tow truck operator, or the name and phone number of the HOA that authorized the vehicle to be towed.  There is an exception.  Such signs aren’t needed when a vehicle is parked in a location that is prohibited by law or “if it is reasonably apparent that the location is not open to parking” (by a red painted curb, or on a lawn or sidewalk, for instance).

The latest update to the app came out just before the new Utah HOA laws went into effect on May 14.  Make sure to download the update if you haven’t already so you have the current version of the laws.  A future update will contain the new laws that were passed that go into effect in 2014 (July 1, 2014).


An HOA Loan, a Viable Option for Funding an Association Project?

May 7, 2013

By Curtis G. Kimble.

Richards, Kimble and Winn held a brief seminar with Alan Seilhammer, Premier Association Lending, the other night where Alan discussed with many board members and managers the process of obtaining an HOA specific loan.  An HOA loan is not the answer to all of an association’s problems, it isn’t even the best choice in many cases, but it can be the best choice in certain situations.  It’s an important tool in any association’s financial toolbox.  Here’s a brief synopsis of Alan’s PowerPoint and of our discussion:

There are three unalterable truths when it comes to HOA maintenance:

1.  The project will not go away. Picture1

2.  The project will not get cheaper.

3.  Whether by reserves, special assessment or a loan, the money comes from the owners.

Because of these truths, when property condition reports and reserve studies uncover problems which require major capital expenditures, it’s important to deal with them. At the outset of any major maintenance project, the scope of the project must be defined, the options available and priorities must be known and understood (is insurance available, ramifications of not addressing entire project, etc.), legal issues must be known or anticipated, and funding options must be evaluated.  An evaluation of project funding options depends upon the project budget, project schedule, governing documents, legal review, and current cash reserves, among other things.

  • Utilize association’s reserves.
  • Special assessment.
  • Loan.

What Can be Funded?

1. Most anything you can imagine. Funding tools have become rather sophisticated.

a.  Capital maintenance projects are most common.
b.  Construction defects are largely the same but are thought of differently.
c.  Litigation Expenses: Construct defect, unconscionable leases.
d.  Real estate purchases: Units, contiguous property.
e.  Buy out of land leases.
f.  Emergency line of credit.
g.  Operating line of credit for a business need.

2. Operating Expenses are most often not fundable

a.  An association with an operating deficit needs to solve that problem internally
b.  Insurance premiums can be funded within the fiscal year: 10 months
c.  Emergency operating needs depending on the circumstance.

Why You Do Not Want to Wait Until Later:

  • Multi-family construction costs increased nationally 37.4% between 2008 and 2012.
  • Construction costs are forecast to increase 5.5% in 2013.
  • Association investments currently yield less than 1%.
  • Loan Rates are about 4.0% – 4.75% & holding steady.

Picture2

What is Used For Collateral?

1.  Assignment of association’s regular and special assessments. Generally an association’s regular deposits should not be posted as collateral since the association needs access to its liquidity.

2.  There is no lien or mortgage on the common area or property of the association or any unit (unless purchasing real estate as part of the transaction).

General Loan Parameters:

1.  Term. 1 to 15 years.
2.  Points. A fee of .5% to 1% (can often be negotiated away).
3.  Rate. Interest you pay on the loan. Fixed and variable interest rate programs available.
4.  No prepayment penalties for paying before the term ends.  Because of this, there is inherent flexibility allowing the association to payoff the loan when it suits them.  HOA loans are often for a 10 year term, but most are paid off after around 6 years.
5.  Typical Structure. Initially a “non-revolving” line of credit during construction phase of 6 months to 1 year. Converts to a variable or fixed rate term when construction is completed.
6.  Interest rate may be reduced if association maintains its other accounts with the bank.

Loan Parameters to Avoid:

1.  Pre-payment penalties of any kind.
2.  Interest rates that are hard to understand (SWAP rate, etc.).
3.  Yield maintenance fee.
4.  Changed financial statement requirements.
5.  Approval of contractors.
6.  Control of deposit accounts or a requirement that operating accounts are to be held at the bank.
7.  Balloon payments.
8.  Payable on demand.
9.  Loan default if delinquencies are over some number (know all the events of default).
10.  A debt coverage ratio.

There’s no question a reserve fund is the funding option of choice for major maintenance projects.  But when that’s not an option, a special assessment could be inevitable.  Unfortunately, special assessments are fraught with risks and are fundamentally unfair because only the owners at a specific date have to pay for improvements that benefited past and future owners.  A bank loan is definitely a viable option for funding a project.  While evaluating your possible maintenance project funding sources, make sure you understand the association’s options, including the possibility of a bank loan.


8 Points of HOA Governance 101

April 24, 2013

By Curtis G. Kimble.

HOA governance isn’t simple or easy and, unfortunately, board members are just volunteers doing their best with too little time and too little money.  I think that’s why even basic principles of HOA governance are often misunderstood by board members (and managers too).  Here is some clarification of 8 frequently misunderstood issues:

1.  Officers and directors are not the same thing.  One of the most fundamental concepts of corporate governance is that directors and officers have entirely separate functions and positions.  Directors are the representatives of the members, elected by the members.  The primary, if not the sole, function of a director is to vote on the decisions before the board.  The directors make up the board, which has the authority to act for the association.

Officers are not (normally) elected by the members, they are elected or appointed by the board.  Usually, the officers are also directors, although there’s no law requiring that they be (but a lot of bylaws require it).  Officers only have the authority or power given to them specifically and expressly, by the bylaws or by the board.  Removing an officer is generally easy, the board is usually authorized to remove an officer, with or without cause.  But if a person is both an officer and a director, removing them as an officer doesn’t remove them as a director.  Removing a director may generally only be done with a vote of the members.

2.  Quorum.  What is a quorum?  Is it important?  A quorum is the minimum number of members that have to be represented at a member meeting in order to have the meeting (or the minimum number of board members that have to be present at a board meeting to have a board meeting).  That magic number will be stated in your bylaws or CC&Rs.  It may be an unreasonably high number (like 50% to 75% of all owners) or it may be a realistic number, but either way it’s required.  If it’s unreasonably high, change it, amend the bylaws, but don’t ignore it.  One of the first things to occur at any meeting should be the determination of a quorum.

3.  The documents that apply.  If your association has CC&Rs (a declaration), bylaws and articles of incorporation, do those documents have to be followed?  If so, how closely do they need to be followed?  The answers are absolutely and to the word.  I’m sure it will come as a surprise to the conscientious readers of this blog, but some boards . . .  how shall I put this . . . don’t appreciate the weight that should be given to what the governing documents say.  They tend to think you are able to pick and choose what you adhere to, or that if they simply aren’t aware of what’s in the documents, then there’s no need to comply with them.  Virtually nothing that is contained in governing documents is optional.  They must be adhered to strictly and literally.

4.  The laws that apply.  There are basically two types of HOAs in Utah – condominium HOAs (or condominium associations) and non-condo HOAs (also called PUDs or community associations).  It’s very important that you know which one you are in (consult your attorney if you don’t).

Condominiums:  The Condominium Ownership Act applies to all condominiums in Utah.

Noncondo HOAs (PUDs or community associations):  The Community Association Act applies to residential non-condo HOAs in Utah (and to mixed-use commercial/residential non-condo projects as of May 14, 2013).

Both:  The Utah Revised Nonprofit Corporation Act also applies to all associations that are incorporated as nonprofit corporations, as most are.

5.  Hierarchy of laws and documents.  If your CC&Rs and bylaws contradict each other, they aren’t simply ignored or tossed out as invalid.  There is a specific heirarchy that generally applies when documents or the law contradict each other.  When a lower document contradicts a higher document, the provision in the higher document is the valid and effective provision and the one in the lower document is ignored (until the documents are amended, which is hopefully promptly after the contradiction is found), unless the higher document is a law that specifically defers to a lower document.

In a condominium, the law states that the following order prevails:

(a) the Condo Act,
(b) the Nonprofit Corporation Act,
(c) articles of incorporation,
(d) declaration (CC&Rs),
(e) bylaws,
(f) rules.

In a non-condo HOA, the order is not set by statute or case law, but the following order should prevail:

(a) the Community Association Act,
(b) the Nonprofit Corporation Act,
(c) declaration (CC&Rs),
(d) articles of incorporation,
(e) bylaws,
(f) rules

6.  Voting Thresholds.  Too often, the subtle distinction between different voting approval thresholds are ignored.  For instance, is there a difference between these two requirements:   “a special assessment shall require the approval of a majority of the members voting in person or by proxy”  and “a special assessment shall require the approval of a majority of the members represented at a meeting in person or by proxy”?

The difference is that the first one requires approval of a majority of those members that actually cast a vote.  The second requires the approval of a majority of the members that show up at the meeting or who are represented by proxy.  So, if 90 members show up to a meeting personally, 10 have given proxies, a vote for a special assessment is held and 94 votes are cast, the number of votes needed for approval under the first requirement above is 48 (a majority of 94).  The number of votes needed for approval under the second requirement is 51 (a majority of 100).

Also remember that, in a condominium, the law requires that voting rights of each owner be directly tied to each owner’s undivided interest in the common area .  This means that if a member has a .837 percent undivided interest in the common area, that member has a .837 vote in any matter put before the association membership (elections, etc.).

7.  A board meeting is not an association meeting or member meeting.  Board meetings (usually held monthly or quarterly) are just that, meetings of the board.  While it is recommended that board meetings be open to the members and the members be allowed to speak during a specified comment period, they are not meetings of the association or member meetings. Typically, the only association meeting or member meeting is the annual meeting held once a year.

8.  HOA Registry.  Finally, remember that the law requires each association to update their information with the Utah HOA Registry within 90 days of any change in that information (e.g., after a board election where a new board member was elected, or after changing managers).  It wasn’t just a one-time requirement and it’s  not an annual renewal.  It must be updated after any change and all information required by the law for condos and the law for non-condos must be included.

This may be new information for some, but hopefully, it just serves as a helpful refresher for others.  In many HOA issues, the devil is in the details and attention to those details will help ensure proper and lawful operation and governance of your association.


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