Comparing and Contrasting
Four types of CIDs are common in California: condominiums, planned developments, stock cooperatives, and community apartments. Condominiums and planned developments, two of the most common CIDs, are similar to each other in that both provide the owner with title (ownership) to a residential unit and the right to use the common area within the development. The main difference between condominium and planned development ownership lies in the way title to the common area is held. In a condominium, each homeowner has an undivided interest in the common area with all the other owners in the development, whereas, in a planned development, the homeowners' association usually owns the common area.
By comparison, in the community apartment form of ownership the homeowner owns a title interest in the development. In the case of a stock cooperative, the homeowner owns a share of stock or a membership interest in the corporate entity that owns the structures and land comprising the CID. Coincidental with either of these two forms of ownership, the homeowner has the exclusive right to use a specific residential unit within the development.
When a subdivider develops a CID, the subdivider must simultaneously structure an association of the CID owners that will be responsible for the ongoing management, operation, and maintenance of the common area. In creating this association, the developer must establish reasonable arrangements for the total operation of the association, to include: levying assessments; member and governing body meetings; voting and elections; governing body duties; and rights and responsibilities of the association. Initially, these arrangements must meet the requirements of the Real Estate Commissioner's Regulations administered by the DRE.
The DRE's regulations constitute the standards by which DRE evaluates the governing instruments for subdivisions, however, they do not constitute substantive requirements in and of themselves. DRE's role with regard to CIDs is primarily one of seeing that the initial subdivision offering is made under reasonable arrangements.
The Declaration, By-laws, and Articles of Incorporation are the documents used to establish the framework for the operation of the association. They form the legal basis for the "mini-government" of homeowners that is created. These documents are generally enforceable in a court of law, if the need ever arises. Once the original subdivider or his or her successor in interest holds title to less than 25% of the lots or units in the project, the association is free to change the governing instruments as it sees fit as long as the changes are consistent with the Common Interest Development Act. (See Civil Code Section 1350 et seq.) Case law mandates that the developer operate the association at all times in the best interest of the homeowners throughout the marketing phase, up until such time as the developer is no longer in control and the management and operation of the association passes to the homeowners and their elected representatives. Once this transition of power is complete, sales by the developer cease and the homeowners are in charge. The association becomes a totally independent entity answerable to its membership.
The homeowners' association is unique to CIDs. It exists only to serve a particular CID. Each owner in a CID automatically becomes a member of the association on taking title to a lot or interest in the project. Membership automatically terminates on the transfer of title. Only owners are association members and all owners must be members.
With the exception of associations in which the developer is in control, each member of the association, generally, has one vote for each subdivision interest owned. When a lot or unit is owned by two or more persons as co-owners, the governing documents usually provide for a method of determining how the one vote can be exercised on behalf of the various owners.
Rights and Powers of the Association
The association must be given sufficient authority to effectively manage, operate, and maintain the common area which typically includes the landscaping, recreation facilities, private streets and driveways, outdoor lighting, structures, roofs, fences, and any other components of the common area of the CID. Powers adequate for this purpose are set forth in the CID's governing documents.
These powers are usually delegated by the association to a governing body that must be elected by the membership at an annual or special meeting. The procedures for the election and for the removal of the members of the governing body are provided in the governing documents.
Although the governing body is given the power and responsibility to act on behalf of the association, if an action contemplated by the governing body will have a material effect on the rights of the membership, prior approval by at least a majority of the association is sometimes required. Examples of actions requiring such a vote are:
Levying a regular assessment on each unit or interest that is more than 20% greater than the regular assessment for the preceding fiscal year or special assessments which in the aggregate exceed 5% of the budgeted gross expenses for that fiscal year. These limits do not apply to increases necessary for emergency situations. An emergency situation is defined as an extraordinary expense: required by the court; or, necessary to repair or maintain common areas or other areas for which the association is responsible, which could not have been foreseen; or, to remedy a threat to personal safety. The limitation set forth above also does not apply to a special assessment to reimburse reserves transferred temporarily by the governing body to meet short-term cash flow requirements;
Where necessary, extending the term of the Declaration of Covenants, Conditions and Restrictions.
The powers of the association to manage the CID are normally exercised by a board of directors or similar governing body that is elected by the homeowners. The governing body is usually delegated the complete authority to manage the affairs of the entire project, subject to the control of the homeowners. The specific duties and powers of the governing body, generally set forth in the governing documents, normally include, but are not limited to the following:
- Enforcement of the governing documents and any other instructions necessary for the management of the project;
- Collection of assessments from association members for the payment of taxes, insurance, and operational costs related to the common area;
- Contracting for goods, services, and insurance on behalf of the association, subject to some limitations;
- Delegation of powers to committees, officers, and employees appointed and hired by the governing body to assist in the management and operation of the association;
- Preparation of budgets and financial statements as called for in the governing documents or as prescribed by law;
- Adoption and enforcement of rules for the operation and control of the common area;
- Ability to take disciplinary action, including fines, interest, and late charges, against association members who violate the governing instructions;
- The right to enter a privately owned unit or interest in connection with construction, maintenance or emergency repair for the collective benefit of the owners;
- Election of officers of the governing body and filling vacancies, except for one created through a removal by the association membership; and
- Repair and maintenance of the common area.
The sole source of income for most associations is assessments levied on all owners in the project, including the developer, for each interest or unit owned. (In CIDs where some owners may receive greater services or benefits, assessments may be determined by a formula or schedule that is based on the proportional value of common area services provided.) Regular assessments cover the day-to-day costs of running the association, which include the management and operation of common area recreational amenities such as swimming pools, clubhouses and tennis courts, and services that include landscape maintenance, security guards and scheduled social activities.
Additionally, the governing body has the authority to levy special assessments against all CID interests or units for major repairs, replacements, or new construction on the common area or for a one-time, unanticipated expense which cannot be covered by the regular assessment (for example, insurance premiums that unexpectedly "sky rocket").
Some CIDs establish user fees or special charges for uncustomary services and activities. Typically, they are imposed on an owner specifically benefiting from the service, such as an owner who wants to use the common area pool, club house, or tennis courts to entertain private guests. The fees are usually on a pay-as-you-go basis, and they generally cannot become a lien on the owner's unit or interest.
Procedures for establishing and collecting regular and special assessments, late charges, interest, and fines are usually set forth in the governing documents. Even if the governing documents are more restrictive, the governing body may not, except in unusual situations or with the vote of a prescribed percentage of owners, impose a regular assessment that is more than 20% greater than the regular assessment for the preceding fiscal year, or special assessments which in the aggregate exceed 5% of the budgeted gross expenses of the association for the current fiscal year. The association must give owners notice, by first class mail, of any increase in regular or special assessments. Current law states that a late charge may not exceed 10% of the delinquent assessment or $10, whichever is greater. However, the governing instruments may specify a smaller amount. Also, any interest charged may not exceed 12%, commencing 30 days after the assessment is due. (See Civil Code Section 1366.)
Once levied, the assessments, any late charges, reasonable collection costs and interest assessed according to the law become a debt of the owner of the separate interest. The amount of the assessment plus the other described charges becomes a lien on the owner's interest at the time the association files a notice of delinquent assessment with the county recorder of the county where the separate interest is located. The lien can be enforced in any manner permitted by law, including the sale of the property in order to recover money owed the association. If and when the owner pays the amount for which the lien was filed, the association must record a notice releasing the lien.
Prompt payment of assessments by all owners including the developer is essential, not only to cover the costs associated with the day-to-day operating costs, but also to build a reserve fund for future repair and replacement of major components of the common area. The reserves are an important part of the association's annual pro forma operating budget. They are generally collected with the regular assessment and set aside in a separate reserve account for the years to come. Ideally, all major repair and replacement costs will be covered by funds in the reserve account.
A reserve study prepared by the association or professionals hired by the association gives a current estimate of the cost of repairing and replacing major common area components over the long term, commonly thirty years. A reserve study generally consists of an inventory of all the major component parts of the common area, an estimation of the remaining useful life of each component, as well as the cost of replacing each component at a predicted time in the future. A well-prepared reserve study allows the association, the owners, and potential buyers to compare estimated required reserves with the reserve funds on hand, and thereby serves as a guide to their respective future actions. If the replacement value of the major components which the association must maintain is equal to or greater than one-half of the association's gross budget, the association must, at least once every three years, cause a reserve study to be completed and review that study annually in order to make any necessary adjustments to the analysis of reserve account requirements.
The law requires that the association prepare financial statements for distribution to its members annually so that the membership will have an accurate picture of the association's financial position and level of preparedness for the future, and so that the membership can participate in the financial decision-making process. These financial statements include:
- A pro forma operating budget which shall include: estimated revenues and expenses; a general statement describing procedures used to calculate necessary reserves; identification of cash reserves; an estimate of current replacement costs of and the remaining useful life of the major components the association must maintain; and a comparison, by percentage, of reserve funds accumulated and the current estimate of necessary reserve funds, with a statement as to whether any special assessment(s) will be necessary for any repair or replacement or to augment the accumulated reserves. (In lieu of the actual budget, the association may choose to distribute to all owners a budget summary with a notice that the complete budget is available upon request.) An association which does not distribute the required budget information to all owners may not impose an otherwise permitted increase in the regular annual assessment without a specified vote of the owners;
- A copy of a review of the financial statement done in accordance with generally accepted accounting principles by a licensed accountant for any association whose annual gross income exceeds $75,000;
- A statement describing the association's policies and practices in enforcing lien rights or other legal remedies for default in payment of assessments. (See Civil Code Sections 1365 and 1366.)
In order that the association function successfully for the whole as well as for the parts, the relationship of the collective rights, duties, and responsibilities of the association to those of the individual owner must be recognized. When a person purchases in a CID, he or she assumes both collective and individual obligations that are set forth in the governing documents, California law, and rules and regulations adopted by the association. These duties apply not only to the common area, but also to the individual unit or interest that the person owns.
Along with the duties and obligations to the association, owners have specific protection of their ownership rights under California law, as well as through the governing documents. One of the most basic of these rights is the owner's right to the quiet use and enjoyment of his or her unit or interest, as well as the right to use and enjoy the common area, subject to the established rules and regulations, and to the rights of others.
Many governing documents grant CID owners the right to vote on major issues affecting the association, such as:
- Election and/or removal of members of the governing body;
- Amendment and/or extension of the effective date of the governing documents;
- Approval of some third-party contracts entered into by the association;
- Approval of regular and special assessments in excess of annual amounts of increase allowed by law;
- Approval of various other decisions and expenditures such as improvement of the common area, annexation of other property to the existing project, and selling property of the association.
One person may speak at a time.
The chair decides who that person will be.
The speaker may speak only on the issue being considered.
Those wishing to speak will be given an opportunity.
Decisions require a motion, a second and a vote.
Once voted upon, no further discussion is permitted.
- An agenda is developed for the meeting and provided to all board members before the meeting so that they know which topics are going to be considered and they can come prepared.
- Minutes of the last meeting are distributed in advance so that they can be reviewed before the members come to the meeting. Any changes or corrections that have to be made can occur at the meeting.
- A moderate degree of formality must be used in conducting the meeting. Certain rules for discussion are defined. Everyone’s expectations regarding decision making are agreed upon and understood.
- Principles of good communication are practiced. These principles include courtesy: only one person may speak at a time. No interrupting. No ridiculing another person’s point of view. Direct communication, subtlety, and innuendo have no place at a board meeting. If it seems that there is another, unspoken meaning behind the words being used, it is the chair’s job to work with the speaker to identify the message.
- Set time limits. For example, the meeting will start at 7:00 p.m. and adjourn at 8:00 p.m. No more than 10 minutes will be spent on the financial report. The topics and the contracts under consideration regarding the painting schedule, for example, will be discussed and concluded in 20 minutes. If a minority of the members wish to continue beyond the agreed upon time limit, there should be a procedure for checking to see if others on the board are willing to continue the discussion.
- The chair must understand the role of the gatekeeper. It is the chair’s job to encourage free discussion of the topic being considered, to keep the discussion moving, and to identify issues relating to the topic. It also is the chair’s job to define the decisions that must be made. The chair must always remember that the board members have been elected to govern the association, not to discuss it.
- Adjourn the meeting on time.
- Follow up. There always will be action items that require attention from your managing agent or from specific committee members. See that the follow-up is accomplished before the next meeting.
Publish Date: November/December 1987
Origin: Common Ground
Reviewed by: James Devereaux, Esq.
- Sign-in Sheet
- Signed Proxies
- Annual Meeting Agendas
- Election Ballot
- Resolution Regarding Excess Operating Funds Ballot
- Declarant Ballots (If Applicable)
- Any Other Ballots
- Extra Blank Proxies (You may need the extra blank proxies if you do not have a quorum.)
- Tally Sheet for Each Ballot
- Extra Pens
- Committee Sign-Up Sheet
- Organizational Agenda Packets (If Applicable)
HERE’S WHAT YOU NEED TO KNOW.
- Cash Basis: Cash basis accounting is similar to a personal checkbook. Financial records track when cash is received or paid out. Income is recorded when a deposit is made to the bank. Expenses are recorded when a check is written to pay a bill.
- Accrual Basis: Accrual basis accounting tracks any and all transactions, even if cash is not received or paid out. For example, income is recorded when the dues are assessed, not necessarily when they are collected. The same is true for expenses. Expenses are recorded when they are incurred. For example, if the association buys new equipment, the purchase is recorded even if the bill has not been paid. Because it tracks all income and expenses, accrual basis accounting more accurately records the financial activity of a particular time period.
- Modified Cash Basis: Most associations use modified cash basis accounting for their record keeping. It is a compromise between the cash basis and accrual basis. With this method, most transactions are recorded on the cash basis, but some are logged on an accrual basis. For example, accounts receivable (amounts owners owe the association) and income commonly are recorded as they are billed (accrual basis). Expenses are recorded as the bills are paid (cash basis). Other accrual adjustments, such as prepaid expenses and income tax accruals, are not made.
- Assets: These are items the association "owns." Once again, the makeup of the balance sheet depends on the accounting method. Cash basis financial statements generally list only cash as an asset. An accrual basis financial statement may list cash, assessments receivable, prepaid expenses, and deposits (money held by the association which will be returned).
- Liabilities: These are amounts "owed" by the association, whether for products, services, or taxes. Cash basis financial statements generally do not contain liabilities. Liabilities may appear on a modified cash basis statement, but they are only updated at the end of the year, since the expenses are not accrued monthly or quarterly.
- Fund Balances: This section is also known as members equity or retained earning. This generally states the current balance in the replacement (reserve) and operating funds. However, some accountants prefer to list reserves as a liability item. The sum of the assets must equal the sum of the liabilities and fund balances. This is a basic rule of accounting. Thus the term "balance" sheet.
- Is there sufficient cash to cover operating expenses?
- Is operating cash significantly increasing or decreasing? If it is increasing, should the excess be transferred to reserves or an operating savings account?
- Is the association’s reserves on target with projections?
- Are reserve expenditures being paid out of reserves?
- Does the cash balance equal the "fund" or "liability" reserve amount?
- Has the association "borrowed" from reserves to meet monthly expenses? If so, is there a plan to repay the amount?
- Are receivables - the amount members owe the association - increasing or decreasing?
- If receivables are increasing, does the board need to increase its collection actions? Does it need to "write off" bad debts or set up allowances for them?
- Are there miscellaneous income items? If so, know what they are.
- Is the interest earned meeting the budget projection?
- If assessment income is logged using a cash basis, are actual collections keeping up with the budget?
- Compare the budgeted expenses to actual figures - are you over or under budget? In either case, understand the variance. If the association is severely over budget, you may need to adjust spending.
- Educate the Community: Effective rules enforcement always begins by educating community members--through newsletters, bulletins, and community meetings--on the rules and their purpose. Homeowners often do not understand the importance of reporting violations. Let them know why the rules exist and how they improve the community.
- Allow Anonymous Written Complaints: Residents should be allowed to submit anonymous written complaints. However, the board must also inform community members that anonymity may limit the association's ability to enforce the rule.
- Don't Promise Anonymity for Signed Complaints: Another problem comes when an association obtains a signed complaint, but promises an owner anonymity. State law or association bylaws may consider the signed complaint to be an association business record, subject to inspection by the alleged violator, destroying anonymity.
- Verify Reported Violations: The board should take enforcement action only after verifying a violation. That way, if a resident anonymously reports a violation, such as an unapproved utility shed, the board often can verify it without involving a neighbor. In many cases, however, the board will not be able to verify violations without resident assistance.
- Make it Simple: Reporting a violation should be as simple as possible. One way is to create a violation reporting form to distribute or make available to residents. The form should provide space to describe the violation and identify the violator. It should request a signature, but permit anonymity with a disclaimer that the board may be unable to verify and act on anonymous violation reports. The key is to make it easy for residents to report violations.