The Perils of Hidden Damage: Part II

How do you fix it, What Happens if you can’t?

By Tyler P. Berding JD., Ph.D.

          Every community association will face a major reconstruction project several times in the life of the development. This may occur because of clearly anticipated problems, such as re-roofing or re-painting, but it can also occur because of completely unanticipated (and unreserved-for) problems such as dry rot repair, soil subsidence, or leaks in windows and siding.

          California’s Davis-Stirling Act only requires that a community association reserve include those components that visual inspections of accessible areas reveal have a useful life of 30 years or less, and makes no allowance whatsoever for reconstruction due to hidden and unknown deterioration. There can be two decidedly different outcomes to any attempt to repair previously unknown damage. The first is a predictable project that succeeds in repairing the damage within the association’s means. That is the subject of Part I. Part II, however, considers the situation where invisible damage is so unexpected and expensive to repair that it overwhelms the association’s resources.

Part II

What if the Cost of Repair exceeds all Expectations?

            That can happen and when it does it creates a dilemma for the board of directors. The problem that was the original reason for a major repair may not be the end of the story, depending upon how much was known about the extent of that damage before the job began. Its one thing to discover some dry rot in one isolated area during a routine repair, but quite another if that dry rot is part of systemic deterioration of the building.

If your major repair project is begun with an insufficient understanding of the extent of hidden damage, your entire funding scheme may be overwhelmed and owner equity could go with it. It is critical in an older building, therefore, to determine the scope of work and the cost of repair as accurately as possible before the project begins. But what happens when all else fails and the damage exceeds all reasonable expectations and funding?

The Perils of Hidden Damage: Part I

How do you fix it, What Happens if you can’t?

By Tyler P. Berding JD., Ph.D.

       
      Every community association will face a major reconstruction project several times in the life of the development. This may occur because of clearly anticipated problems, such as re-roofing or re-painting, but it can also occur because of completely unanticipated (and unreserved-for) problems such as dry rot repair, soil subsidence, or leaks in windows and siding.

California’s Davis-Stirling Act only requires that a community association reserve include those components that visual inspections of accessible areas reveal have a useful life of 30 years or less, and makes no allowance whatsoever for reconstruction due to hidden and unknown deterioration. There can be two decidedly different outcomes to any attempt to repair previously unknown damage. The first is a predictable project that succeeds in repairing the damage within the association’s means. That is the subject of Part I. Part II, however, considers the situation where invisible damage is so unexpected and expensive to repair that it overwhelms the association’s resources.

Part I

 How to Extract a Successful outcome from an Unexpected Repair

            Even during planned or expected repairs, surprises can occur when building components that are not “visible or accessible” are exposed during construction. Normal painting projects can reveal rotted areas due to long-term intrusion of water. A minor deck or siding repair can expose framing components that have allowed water to enter slowly for years without any way to get it out except evaporation.  Problems with deteriorating concrete walkways or driveways due to the invasion of roots, or soil subsidence due to unconsolidated fill may develop so slowly that they escape notice. Or there can be a catastrophic event—a spontaneous failure that occurs when someone leans on a rotted balcony railing, for example. Three people in Antioch, California were severely injured recently when such a railing collapsed.

            None of these building components would likely be included in the usual reserve account and unless detected by some other means, would not appear in the maintenance budget, yet the association in a typical condominium and in many planned developments, is nevertheless responsible for necessary repairs. Unexpected repairs for which there was no reserve funding. So now you have a collapsed balcony or maybe a lot of rotted framing-- what do you do? Follow these steps and you will improve your chances of successfully solving the problem.

Report: State spurred gated developments

     "Developers have a financial incentive to set association fees on the low side — they want to sell lots to builders and homeowners. High association fees might scare off potential buyers. Also, developers may believe the fees do not need to be high in the beginning because maintenance costs in a new community should be fairly low... It could leave a new association in the hole as it gets started, and struggling to raise artificially low association fees. Usually association fees are set by a vote of all community homeowners. Residents planning to stay in the community for a limited time do not see the need to pay more."

 This rare report from a public agency makes clear what many of us have written about for years: that community associations are often created more for the benefit of municipalities (tax dollars) and developers than for the eventual owners. There is an incentive to underfund the operation and reserves of the new association to keep assessments low and facilitate sales.

Thanks to Evan McKenzie and Fred Pilot for this post.

Report: State spurred gated developments PoconoRecord.com

Rentals, Yes--Condos, No?!

 Are Rental Apartments the New Condos?

          If you check in regularly with the community association social media—blogs, Twitter, Facebook—you cannot miss the group of correspondents who have a decided bias against community associations. It’s not always possible to separate fact from fiction, or personal bias from social concern, but the message is clear—there are many people who don’t like their homeowners association specifically or the entire concept generally. Claims of over-reaching by boards of directors or managers; vendors who see community associations as a piggy bank; and professionals—attorneys especially—who are blamed for overzealous enforcement of the rules and regulations and foreclosures, are all listed as reasons why community associations are not a good thing, or maybe even unconstitutional!

          Of course, these commentators’ understanding of the legal framework of homeowner associations can be a little thin and hence their opinions often lack practical application, but the passion is clearly there. I have read many times that we should (somehow) restrict or ban this type of housing altogether. I can empathize with some of the frustration that they feel because it is obvious that community associations are often creatures of convenience for developers and municipalities rather than organizations with their eventual owners in mind. They are created under laws enacted by state legislatures that respond more to the notion that we need to build more affordable housing now than to the idea that it has to be practical to maintain and manage in the long run. Regardless, boards, managers, and vendors inherit the real-life responsibility for these projects no matter how flawed they may be in concept. 

          But for now, the pundits' prayers may be answered—at least for a little while. Rental, rather than owned, housing seems to be the real estate concept du jour. And of course, rental housing does not come equipped with a homeowner’s association. That’s not the same as banning them outright as some politically naïve souls might like, but it probably has the same practical effect—you will be able acquire affordable housing without the drawbacks of an association of owners to weigh you down and interfere with your constitutional rights.[i]  

And Justice for All

How and why to provide meaningful notice and an opportunity to be heard to members of a Community Association

      Steven S. Weil, Esq.

    Chapter 15 of Robert’s Rules of Order begins like this:

“Every organization has the right to enforce its rules and expect ethical and honorable conduct from its members. Most organizations have discipline problems from time to time. A discipline problem may be something as simple as a member misbehaving at a meeting or an officer overstepping the boundaries of his or her office. If the problem is not corrected when it arises, it can escalate into something more serious…”

    An association has several ways to discipline its members. The fairness and effectiveness of each depends on the nature and context of the misbehavior, the enforcement tools available under the governing documents and the manner in which they are used by the association’s board of directors.

Be Prepared!

Natural Disasters aren’t the Only Reason for Major Reconstruction of a Community Association

Big Surprises

    Every community association will face a major reconstruction project several times in the life of the development. This may occur because of clearly anticipated problems, such as re-roofing or re-painting, but it can also occur because of completely unanticipated (and unreserved-for) problems such as dry rot repair, soil subsidence, and leaks in windows, siding, and foundations. And yes, it can occur because of a natural disaster. The Davis-Stirling Act only requires that a community association reserve study include those components that visual inspections of accessible areas reveal have a useful life of 30 years or less, and makes no allowance whatsoever for reconstruction after major natural disasters or because of hidden deterioration.

    Even with expected deterioration, surprises can occur with building components that are not “visible or accessible.” What about areas under staircases that sponsor dry rot due to long-term intrusion of water? Framing components under siding that have allowed water to enter slowly for years without any way to get it out except evaporation? Deteriorating concrete walkways or driveways due to the invasion of roots, or soil subsidence due to unconsolidated fill? Failures that occur when balcony railings rot off of their supports? Three people in Antioch, California were severely injured recently when such a railing collapsed.

    None of these building components would be included in the usual reserve study and unless detected by some other means, would not appear in the maintenance budget, yet the association in a typical condominium and in many planned developments, is nevertheless responsible for necessary repairs. This scenario has played out in many associations. Unexpected repairs for which there was no reserve funding. So now you have a collapsed balcony or maybe a lot of rotted siding--something that involves more than just the one failed area--what do you do?

New FHA condo rules cutting owners' loan options

Editor's note: The following article has appeared in several major newspapers recently. It is very relevant to the readers of this blog...Thanks to Evan McKenzie for his post about this article.

"...the new rules put board members into legal jeopardy by requiring them to sign certifications attesting that the condo documents comply with all local statutes and that they have no knowledge of situations that could cause any unit owner to become delinquent later. The mandatory certification carries a maximum penalty of $1 million in fines and 30 years imprisonment if found to be incorrect."

By Kenneth R. Harney, Special to the Times
In Print: Sunday, October 23, 2011 

WASHINGTON — Condo industry leaders, from the 30,000-member Community Associations Institute to individual unit owners and realty agents, say a series of rule revisions by the Federal Housing Administration has caused thousands of condo projects to become ineligible for FHA mortgages. This, in turn, has abruptly shut off loan money for condo buyers and refinancers, forcing them to pursue conventional bank loans requiring much higher down payments.

FHA says the rule changes — which focus on project budgets, insurance and financial reserves — have been prudent and are designed to avert losses from delinquencies and foreclosures. But the agency confirms that thousands of condo projects have failed to obtain or apply for recertifications under the new rules. Out of about 25,000 condo projects nationwide with expiration dates for FHA eligibility between December and Sept. 30, 2011, only 2,100 (8.4 percent) have been approved or recertified by the agency, according to Lemar Wooley, an agency spokesman.

Bernard Robinson, an owner of a unit in District Heights, Md., says that because of delinquencies on homeowner association payments in his development that exceed the FHA's limit, he and his wife have not been able to refinance. "We are qualified to refinance personally," he said in an interview, but because the development is not certified, "our unit isn't. We've exhausted all our options. They're going to force us to walk away."

City in a Salt Pond Revisited

OP-ED: Future salt pond residents, left holding the (sand) bag

October 13, 2011, 02:39 AM By Tyler P. Berding

As an attorney who has defended Redwood Shores homeowners and who has represented homeowner associations battling over responsibility for flood protection — and the resulting damages when it fails — I have watched Cargill’s proposed new city-in-a-salt-pond moving forward in Redwood City with growing alarm. Hearing the developer claim that new Bay Area sea level rise plans are somehow good for their scheme is like rubbing salt in a wound.

As they tout the “benefits” for Redwood City, proponents of this development always carefully imply no costs to “current” city taxpayers. Because the fact is that future residents of any Cargillville will be left with massive, unrecoverable costs. This is particularly true given Cargill’s plan to build a levee that will not only have to be maintained in perpetuity, but also raised significantly even to meet their optimistic estimate of sea level rise.

All of this is at homeowners’ expense, long after Cargill has taken its profits and left town.

Flooding around San Francisco Bay has happened many times, and the riskiest areas are locations where the Bay margin was filled to create housing and commercial developments. San Mateo County already is the top county in the state with the most people and infrastructure threatened by sea level rise.

But what is different today from developments built three or more decades ago is that most are built as community associations which are then given responsibility for the expensive engineered facilities. Levees, berms, pumps, riprap and retaining walls will have to be maintained and repaired by the homeowners in those associations.

Developers avoid long-term responsibility and deflect opposition from existing cities with the claim that the huge tax burden for this expensive new infrastructure will not fall on them. Eventual property owners within these new developments are obviously on their own.

Maintenance and repair obligations start immediately, and as Cargill’s own plans anticipate, the facilities will eventually prove inadequate to forestall the coming rising seas. Eventually, the costs to these new Redwood City residents will be enormous. The costs of inaction are worse. Failure of private associations to maintain landscaping or potholes is one thing — imagine the consequences of neglecting critical levees and retaining walls essential to keeping the waters of San Francisco Bay from flooding thousands of homes, businesses and Highway 101.

There are plenty of places in the Bay Area available for the necessary higher-density infill, away from the shoreline on land not threatened by rising tides. And the eventual homeowners would not inherit the potential for both fiscal and physical disaster.

Anyone concerned with the Cargill salt pond development proposal should ask the city one simple question: “Who will be responsible for keeping these massive flood control improvements working in the years to come?”

Don’t be surprised by the answer.

Tyler P. Berding, a partner in the law firm of Berding-Weil, represents hundreds of homeowner associations all over Northern California.

Look Closer. Or Else!

         Older Community Associations Need Better Inspections to Avoid Financial Failure

         Community Associations are not financially prepared for potentially ruinous renovations. Period. Newer communities don’t know it yet. Older ones have found out the hard way—their cash is tight for even routine repairs and for major renovations? Only bank loans and special assessments will dig them out of a very expensive hole if they are lucky. Some will never dig themselves out. Many projects 25 years and older will not have enough money to do the repairs that will eventually be identified. Reserve studies intended to equip homeowner associations with sufficient cash to do repairs are fine as far as they go. But they don’t go far enough. That’s not the fault of the board, management, or the reserve study company.

Blame it on the law. California Civil Code Section 1365.5 requires that community associations conduct a survey every three years to determine which components belong in their reserve-funding program. The statute requires that components found to have a service life of less than 30 years be included. So far, so good. But the statute is flawed. It limits the survey to just those components that are visible and accessible.

Killer Weed in the Common Area?

How do Boards of Directors deal with the use of Medical Marijuana in Community Associations?

By Paul Windust

    Community Associations increasingly face issues with medical marijuana.  It is a confusing area because federal and state laws conflict and social mores are in constant flux—especially when it comes to marijuana.  Long gone are the days when the high school health teacher could show “Reefer Madness” and his students would accept that marijuana use leads straight to jail, depravity, or worse!  Today, attitudes toward many substances, including marijuana, are more relaxed—at least at the state level. But regardless of current social opinions on the use of marijuana, the question that board members and managers ask us is whether the use of marijuana, medical or otherwise, is a violation of their CC&Rs, and if so what can or should be done about it?

First Thing We Do, Let's Ban All the Bloggers!

   All speech is not necessarily objective or persuasive--merely posting something on the Internet does not make it right, or even important.

  

      Anyone who surfs the web for useful stuff about community associations has seen three kinds of information posted there--the good, the bad, and the ugly. “Good” information provides accurate facts and useful advice related to those facts. “Bad” information, while often inadvertent, provides neither accurate facts nor useful advice and is usually the result of carelessness or lack of experience. “Ugly” information, on the other hand, is accurate facts used as a cover for bias that either intentionally misleads or is simply invective—or both. The facts used, true as far as they go, are nevertheless intended to disguise or “beard” a political or social agenda. To illustrate “ugly” information, assume that the following is a blog post.  It is reproduced here in the blue font below, in its entirety as it appears in the blog—all of the emphasis is in the original. You tell me into which category this “information” falls: 

“HOA boards can be sued and not covered by insurance

Much of the abuse by boards, the management firms, and attorneys are tortious acts that are illegal and also constitute a fraud upon the members. You will not hear this at pro-HOA seminars sponsored by local governments and/or taught by CAI attorneys.

“D and O” means “directors and officers.”

“Most, if not all, D and O policies contain a provision that excludes intentional criminal and fraudulent acts committed by board members,” says Collins. “However, [our policy] will continue to defend the directors and/or officers until such time that a criminal action can be proven. The policy will then cease to provide any further protection once it is determined that a board member knowingly committed a criminal or fraudulent act.”
 

D and O coverage also doesn’t indemnify a board or board member against decisions made “in bad faith,” or with illegal intent. If a board is found to have acted in an illegal manner—deliberately discriminating against a prospective buyer, for example—and are hit with punitive damages, members are on their own when it comes to paying them.

The reason for pursuing these actions acts of bad faith is to force the homeowner into court, where the attorney gets his fees and the HOA gets a free ride, most of the time.  Directors and officers are legally bound to act in good faith toward their members.”

     
Yes it’s ugly, but let’s analyze why.

Staying in or Selling Out?

Whose Interest Comes First?

   The needs of short-term owners can conflict with the interests of owners who are in it for the long-term and with the overall interests of the homeowners association.  Community association boards which cave in to political pressure and avoid developer claims or artificially keep assessments low--are depriving the remaining and future owners of critical leadership.(1)

We hear it all the time, especially now with home sales so hard to close. Members of a community association who have their property listed for sale or those who are seeking alternate financing, complain that their association’s board is taking actions that are contrary to their interests. What actions? Raising assessments to comply with the recommendations of a reserve study. Imposing a special assessment or applying for a bank loan to raise funds for long-deferred repairs. Initiating an investigation of the condition of the project that might lead to a claim against a developer for construction defects. 

The Privatopia Papers: Home ownership hits lowest level since 1965

 Our essay, "Getting Sober in the New Economy" suggests that we should back off of new development of owned homes and focus instead on providing high quality rental properties, especially in urban areas. Click the title link above for a story that shows statistically why this may be the new direction for housing.

Bankruptcy Won't Work

A member raises his hand at a meeting and asks the question: if the association is too broke to pay its bills, why not simply declare bankruptcy? Hold the creditors at bay until the economy picks up? No one on the board has a good answer because it almost never happens. Here are the practical and legal reasons why...

Getting Sober in the New Economy

Are Rentals a Better Solution for Affordable Housing?

"The crux of (the) analysis is that the loose lending practices seen during the housing bubble allowed 5 million renters to become homeowners and the market is in the protracted process of evicting this group."

Sometime in the early sixties, a large California developer opened its first development of condominiums for sale. They were offered at rock bottom prices. A home for a single family that could be bought for $10,000.00 was big news even then. The desire for suburban housing that could be built in high densities and thus be affordable was apparent. Condos could be sold in volume which meant higher profits for home builders. Other developers followed suit, and condominiums became a ubiquitous part of the national real estate market. Those home buyers who could not afford a single family home on its own lot could still get in on the real estate ownership bandwagon. Low interest loans backed by the government gave many low and moderate-income wage earners the opportunity to purchase a home. Most people could buy with 5% or no money down. Veterans could buy a new home for nothing down. Condominiums, and their planned development cousins, became the darlings of the real estate industry and they were constructed by the carload.

It's Your Neighbors, Stupid.

Who, not what, is a Homeowners Association?

                 The blogosphere is alive with stories about the transgressions of homeowners associations. Foreclosures. Enforcement of arcane architectural guidelines. Lawsuits by associations for minor rule violations. Owners suing their associations for failing to enforce the rules. “Nazi” boards. Libertarian owners. Just surf the web for awhile and you will see numerous all-caps diatribes against what is perceived as a corporate enemy—the homeowners association. But the truth is that the association serves the owners—not the other way around—in ways that many people do not think about.

Disaster!

No Reserves. No Insurance.  
What’s Left if a Natural Disaster Destroys a Community Association?


By 

Tyler P. Berding and Steven S. Weil

       We have recently seen horrific earthquake disasters in New Zealand and Japan. There has been widespread loss of life and destruction of infrastructure and buildings. California has a history of devastating earthquakes as well—the San Francisco, San Fernando, Northridge, and Loma Prieta earthquakes, among others. Heavy rains have created landslides, mudslides and shoreline erosion all over California, damaging homes and property, some of it in community associations. Wildfires in the past decade have destroyed hundreds of homes. Rising sea levels are threatening to flood low-lying developments, including many common interest developments. 

A Funny Thing Happened on the Way to the Meeting--Or, Why is a Homeowner's Association like Wisconsin?

By Steven S. Weil

The Wisconsin Democrats employed a clever technique (denying a quorum) to prevent their legislature from adopting an anti-labor law. The Wisconsin Republicans responded with their own smart bag of tricks; they re framed the law to eliminate the quorum requirement and got it passed without the Democrats participating. Can this sort of politicking be used in the context of homeowner association votes? You bet.

Landslides: Nuisance or Construction Defect?

Sorting Out Liability and Damages

As I write this, northern California is experiencing the second straight week of rain in an otherwise very wet year.  Continuous rain soaks the ground and loosens unstable hillsides. Landslides can stay hidden for years until very wet weather suddenly breaks them loose. Also, slides can move very slowly, over long periods of time, gradually damaging the properties around them.

            In either case, earth movement can cause serious damage to buildings and other improvements on or adjacent to the unstable land. Mudslides, rockslides, and landslides are all versions of the same phenomenon—water plus gravity equals damage.

            We’ve seen slides gradually pull down the surrounding properties so slowly that trees growing on the hill have curved trunks. This is called soil creep and can last for years or decades. We’ve also represented clients whose homes were damaged in just a moment as a large landslide, hidden beneath the surface of the earth for centuries, comes down, bringing a large portion of the hillside with it.

            Property developers are required to obtain the advice of soil engineers when grading is done in a landslide-prone area, and most engineers are very good at detecting the presence of hidden slides. Aerial photo mapping, boring, or just reviewing the history of the area under development can do this. But regardless of the engineer or developer’s efforts, slides can still occur.

Is the Florida Legislature About to End Condo Dispute Arbitration?

(Editor's note: Florida has state licensing of condominium managers and arbitration of owner and board disputes. New proposed legislation would dismantle this system. This article recently appeared in the Fort Lauderdale Sun Sentinel)

By Daniel Vasquez 

A new Florida bill seeks to deregulate condominium community association managers and dismantle the state's arbitration system for settling owner and board disputes out of court.

What would that mean? Community association managers and companies, which often manage the finances and day-to-day operations of communities, would no longer be required to be licensed by the state or report crime convictions to state officials, critics say. In other words, virtually anyone - regardless of qualifications or criminal background - could become a manager in charge of what could be millions of dollars worth of property and assets.

Why Members Don't Care About Their Community Association

Many community association members are apathetic about association affairs because they don’t see their association as significant to their lives—that nothing the association does or doesn’t do will have a serious effect on them. This attitude often arises from the perception that a sale of their interest will pass any association problems on to someone else.

A community association is not the board of directors. It’s not management. It’s not legal counsel.  A community association is the sum of its members—nothing more, nothing less. The ultimate fate of a community association is always in the hands of the owners. An association is dependent upon its members in numerous ways. Funding is the most obvious example. Without member assessments an association will cease to function—those assessments are usually the sole source of cash flow to pay operational expenses, staff salaries, and to accumulate reserves for future maintenance and repair.

City in a Salt Pond

Future Salt Pond Residents Left Holding the (Sand) Bag

As an attorney who has defended Redwood Shores homeowners and who has represented homeowner associations battling over responsibility for flood protection and the resulting damages when that protection fails, I have watched Cargill’s proposed new city-in-a-salt-pond moving forward in Redwood City’s approval process with growing alarm.

Proponents of this development contend that it will be good for the economy, touting the potential shopping and new restaurants from Burlingame to Palo Alto. But from my experience, future salt pond residents will instead be left with massive, unrecoverable costs. This is particularly true given Cargill’s plan to build a levee that will not only have to be maintained, but raised significantly even to meet their optimistic estimate of sea level rise. All of this at homeowners’ expense after Cargill has taken its profits and left town.

Good Legal Advice or Confidence Game? You Decide.

By Tyler P. Berding and Sandra M. Bonato

     A new community association experiences some leaks. Management tells the board about an attorney who will provide a free seminar on the fiduciary duty of board members in the face of construction problems. The board accepts the offer. So far, so good. The attorney arrives and asks that the “seminar” be held in executive session with just members of the board. The attorney proceeds to tell the board members that they could face personal liability if they fail to thoroughly investigate construction defects throughout the project and bring suit against the developer. The attorney “advises” the board that they should hire him and his consultants. The attorney pulls out a fee agreement for himself and his consultants and urges the anxious board to sign it on the spot.

      The developer offers to fix the problems, but the attorney won’t permit it. The attorney fails to file the necessary statutory notices required by Title 7 of the California Civil Code. The board tries to cancel the agreement for legal services, but is again “advised” by the attorney that they could be held personally liable if they don’t follow his instructions. At a board meeting a motion is made to discharge counsel and the consultants. The attorney tells the board it cannot discharge him or his consultants, again “advising” that they could be personally liable if they were to do that.

What theme does this story present? An over-reaching attorney, who uses the lure of a “free seminar” to get access to the directors of a community association and, once in the door, threatens the board with personal liability if they don’t immediately hire him and his consultants to investigate and pursue a construction defect claim. This scenario is not fiction. It is apparently happening with alarming frequency in the current over-heated market for construction defect legal work. Let’s analyze it.

To read the rest of this story click on the title link above...