What You Need to Know About Living In & Managing a Community Association by JacksonWhite

What You Need To Know About

Homeowners Associations

Living In & Managing a Community Association

Introduction

Welcome to JacksonWhite Attorneys at Law and our guide, What You Need to Know About Living In & Managing a Community Association. We hope the information contained in this booklet offers a better understanding of community associations for board presidents, new homeowners and community managers alike. There are many things to consider when living in and/or managing a community association. Maintaining common areas and managing cash flow are often the first things thought of when running a community. But what about things like what type of insurance is needed and what the associationâ&#x20AC;&#x2122;s responsibilities are to part and full-time employees? These types of issues are equally important, but often not immediately thought of when living in a community, serving on a board or committee, or managing a new association. It is our hope this guide will educate on not only the more common questions and concerns, but also those not usually considered. JacksonWhite has attorneys practicing HOA law, business and corporate law, insurance law, and labor and employment law, should additional questions arise after reading this guide. We are ready to assist community associations no matter what the need or legal issue. For more information about JacksonWhite, please visit us on the Web at jacksonwhitelaw.com and arizonaseniorlaw.com. Both Web sites are loaded with helpful videos, blogs and information, aimed at explaining all our legal practice areas and answering general legal questions. All legal consultations can be set up online or by calling the JacksonWhite office toll-free at 1-800-243-1160.

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Duties and Obligations of Community Association Directors 8

III

Duties and Obligations of Homeowners

Running a Community Association

Money and Cash Flow

Collections

VII

Pointers for Community Association Directors 22

Table of Contents

I Community Association Overview

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What You Need To Know About Community Associations

Community Association Overview

Community Association Overview Community associations go by a number of names, including homeowners associations, common interest communities, planned communities and condominium associations. Associations vary, but their underlying purpose is always to preserve the nature and value of their community. Most Arizona community associations are either condominium associations or planned communities, which primarily differ in how their members own common areas. Members of condominium associations share ownership of common areas, and members of planned communities do not. In a planned community, the association owns the common area.

Characteristics of Planned Communities: » The association, not the members, owns common areas or common elements. » Typically located in residential neighborhoods with single-family homes. » Unit owners are required to join the association and pay assessments to maintain the common areas.

Characteristics of Condominium Associations: » Members own an undivided fractional interest in common areas or common elements. » Homeowners are required to join the association and pay assessments to upkeep the common areas.

What do non-profit corporations have to do with community associations? For a number of reasons, community associations should incorporate. Doing so protects members from becoming personally liable for claims against the association, makes it easier for the association to own real property and gives the association greater borrowing power. Moreover, corporate documents provide guidance on legal and procedural issues that associations routinely confront. Community associations by their very nature tend to be non-profit, so it makes sense for them to incorporate as such. Non-profit corporations differ from for-profit corporations because their purpose is not to create wealth for members, but to provide services that would otherwise not be available.

What You Need To Know About Community Associations

For community associations, this purpose is to preserve the nature and value of the community.

What types of documents are important to community associations? Community associations derive their power from several key documents, and look to these documents for guidance on managing the community’s affairs. Homeowners rely on these same documents to help them clarify their rights and obligations as members of the association. Everyone who lives in a community association should be familiar with these documents, as they structure and outline the community’s operating procedures:

Declaration of Covenants, Conditions and Restrictions (CC&Rs) An association’s Declaration of Covenants, Conditions and Restrictions (CC&Rs) outlines what members can and cannot do with their property, and is recorded against the property. Homebuyers should promptly and carefully inspect the CC&Rs because they become contractually binding once the purchase of the home is complete.

Amending CC&Rs Community associations that have been around for some time may find it useful to amend their CC&Rs. However, board

members generally cannot change existing CC&Rs unilaterally. Most associations have procedures in place for amending CC&Rs, by which the proposed changes go before the association members in a vote. By periodically revisiting their CC&Rs, community associations can update their practices to accommodate the community’s needs and goals.

Articles of Incorporation To incorporate, every community association must file Articles of Incorporation with the Arizona Corporation Commission.

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Overview, cont’d

• CC&Rs • Articles of Incorporation • Bylaws • Rules and Regulations

As legally enforceable contracts, associations rely heavily on CC&Rs to maintain a community’s integrity. Individual homeowners come to rely on CC&Rs to maintain the community’s uniformity and preserve property value.

The Articles outline the association’s purpose, as well as the basic rules and structure for carrying this purpose out. Associations cannot officially incorporate without Articles of Incorporation, so drafting them is among the first orders of business for new associations.

Bylaws

Overview, cont’d

Bylaws outline the basic structure for running a community association. They regulate

directors and members, and create conditions for participating in the association. By establishing rules of governance, bylaws make sure an association uses the same framework regardless of the board’s membership. Given their centrality to a community association’s operation, associations should rely on legal counsel to draft bylaws. Bylaws should also contain provisions that instruct associations on how to amend them. If a conflict exists between an association’s governing documents, priority is given first to CC&Rs, second to articles of incorporation and third to bylaws.

Rules and Regulations Community associations have implied authority, and oftentimes express authority, as set out in the CC&Rs, articles and bylaws, to make rules that protect the community’s common areas and right to quiet enjoyment. An association’s CC&Rs should describe how to amend or add rules, and boards can generally make rule changes that do not conflict with other controlling documents. Conflict between community associations and members frequently stems from disagreements about architectural rules. Because associations regulate the community’s aesthetics, they operate as gatekeepers for members who want to make architectural or external changes to their property. Community associations have an obligation to uphold architectural rules, even if it invites contention from community members. Associations that fail to uniformly uphold architectural rules are susceptible to accusations of favoritism and unfair treatment. One way for community associations to enforce architectural rules is by forming a committee to maintain architectural uniformity. The association’s CC&Rs could require members to obtain approval from the committee before making certain changes to their property. Where required by the CC&Rs, homeowners would

What You Need To Know About Community Associations

have to obtain the committee’s approval before making external changes to their property such as digging a pool, adding a room to their home, or changing their home’s paint color. Homeowners should check to see if their CC&Rs outline the procedure for handling architectural change requests.

Community Associations as Employers Associations come in all shapes and sizes. Some are managed by a board, others hire professional management companies. Many have at least one or two full or part-time employees to help with day-to-day matters. Larger associations can have many employees. Associations with employees must comply with a large variety of laws from overtime pay regulations to safety requirements to benefits rules. Here are a few of the issues associations may have to address:

Many rules apply to employee compensation and time off. Employees must be paid on regular pay dates and, when terminating employment, must be paid within 3 days or on the next regular pay date, whichever is earlier. Time off is generally dictated by the employer’s policies. Associations should have clearly written policies concerning paid time off. Employee benefit

plans are governed by complex federal statutes and regulations, and employers must ensure they have developed and provided to employees the proper documents, even if benefits are provided through an insurer. Also, most employee benefit plans require annual reporting requirements to government agencies. Non-exempt employees who work more than 40 hours per week must receive overtime pay. In general, federal law requires an employee whose job duties do not meet a regulatory exemption to overtime must be paid one and JacksonWhite Attorneys At Law

Overview, cont’d

Community associations have authority to make architectural rules and guidelines, but they have to be reasonable and consistent with the CC&Rs. Rules cannot be arbitrary or capricious in nature, and should serve the community at large. Associations have discretionary power, but they cannot selectively enforce architectural rules in a discriminatory manner. To minimize the potential for conflict, associations can clearly delineate their architectural rules and regulations.

Associations should be mindful of rules governing employee compensation and scheduling.

one-half times that employee’s hourly rate for every hour worked in excess of 40 hours per week. Unfortunately, employers frequently misunderstand the overtime rules. For example, some employers believe if they pay employees on a salaried basis, the payment of overtime is not required. The overtime regulations provide relatively clear guidance concerning which employees are exempt from overtime requirements and

Regulations require the employer to keep records of information such as: » Time of day and the day of the week on which an employee’s work week begins; » The rate of pay and the basis of the pay an employee receives; » An itemization of all deductions or reductions from pay; » Total hours worked for each day and week; » Total straight time and overtime paid for each week; » Work week schedules of the employees; » Total wages paid; » The date payment and pay periods occur; and

Overview, cont’d

» Copies of employment contracts. which are not. Misclassifying employees as exempt when they do not meet the requirements of the exemptions exposes these employers to the potential of paying significant damages in connection with an administrative enforcement action or a civil lawsuit. Associations should keep good records of employee’s work. Some employers who may otherwise comply with the overtime rules and regulations may still be liable if they fail to keep proper records of the work performed by their employees.

Associations should not try to avoid liability by calling employees contractors. A related issue is the classification of workers as employees or independent contractors. Many employers classify and pay employees as independent contractors when they are more appropriately classified as employees. In general, the amount of control an employer exercises, the extent to which an employer provides tools of a job, and the exclusivity of the worker’s service for a single employer are factors considered in determining whether an individual is an

What You Need To Know About Community Associations

independent contractor or an employee. Failure to properly classify a worker as an employee can result in tax penalties, interest costs, damages for failure to pay wages, including overtime, and other significant financial penalties. The determination of a worker’s status as an employee or an independent contractor must be made under several areas of the law including the overtime rules, Internal Revenue Service rules, workers compensation rules, insurance policy provisions and related rules, to name a few.

to keep a copy of the documents produced by each employee to satisfy form I-9 requirements. An association should use the federal government’s e-verify system for each new employee. Associations should be aware of safety rules and regulations. Both the federal and the state government continue to regulate and review safety in the workplace in Arizona. Violations of safety rules can expose employers

Associations should request and maintain proper documentation of each employee’s immigration status.

to significant penalties to the government and civil liability to employees. An association should consider the work its employees perform and determine which safety standards apply. An association could consider inviting state safety inspectors to review its operations and compliance, since doing so may protect the association from liability if an employee is injured. Associations should avoid discrimination against any employee on a prohibited basis.

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Overview, cont’d

In recent years, immigration concerns have resulted in legislation in Arizona designed to penalize employers for hiring undocumented aliens. Employers can protect themselves from liability by taking appropriate action at the commencement of the hiring process. Employers must take care once an employee has been hired in responding to questions concerning immigration status to avoid claims of discrimination. An association should maintain proper tax withholding forms (W-4 and A-4) as well as form I-9 for each employee. These forms should be completed by the employee at the time of hire. An association may want

Federal and state laws provide that it is unlawful to discriminate against an employee on the basis of race, color, religion, sex, national origin, or disabilities. Age discrimination is also prohibited. These rules generally apply to employers with 15 or more employees, although state laws prohibiting sexual harassment discrimination apply to employers with one or more employees.

Overview, contâ&#x20AC;&#x2122;d

Associations should maintain clear policies against discrimination

that provide employees multiple avenues for complaining about discriminatory or harassing behavior. The association should immediately investigate and address any complaints. For employers with more than 50 employees, federal law allows qualified employees to take time off for certain family medical reasons. Disabilities laws require employers to interact with qualified employees and provide them with reasonable accommodations to perform the essential functions of the jobs. Each association should ensure that current posters summarizing discrimination laws and

employee rights are posted in the associationâ&#x20AC;&#x2122;s place of business.

Duties and Obligations of Community Association Directors Under good direction, community associations make communities a better place to live. Even well intentioned directors, however, must be careful to uphold their duties if they are to prevent contention and dissension among members. Acting as arbiter of the rules almost intrinsically invites disagreement from at least some members, and even minor disagreements can potentially grow into serious disputes. Seemingly petty issues sometimes turn to litigation, which can be taxing on associations and members alike. Upholding their duties to associations helps directors avoid these issues.

What general duties must community associations uphold? A community association is in many ways like a smallscale government, in that the association elects a board of directors to manage and preside over the communityâ&#x20AC;&#x2122;s affairs. Directors have authority to act on behalf of the association as a whole and it is their responsibility to fulfill certain duties. In electing directors, then, associations should carefully appoint those who are best suited for the job.

What You Need To Know About Community Associations

exercise prudence and keep the association’s funds separate from their own.

» Manage money and cash flow.

Directors are protected from personal liability so long as they exercise good business judgment. When directors’ malicious or intentional acts harm the association, however, there is reason to hold them personally liable. Boards that seek professional help and outside management are better equipped to exercise good business judgment and avoid personal liability.

» Uniformly enforce governing documents, without partiality or selective treatment. » Manage a nonprofit corporation.

What specific duties must community associations uphold? In addition to the general duties listed above, directors of community associations are also obligated to perform the following specific duties: Financial Planning and Management Financial oversight is a big part of running a community association. Directors must comply with state law, as well as the association’s governing documents. They should also prepare an annual budget and stick to the budget, and keep an accounting of the association’s expenses and cash flow. When preparing a budget, directors should consider costs for renovating and maintaining common areas. They should also establish reserve funds to pay for future expenses, and avoid using reserves unnecessarily. In all of this, directors should

Duties and Obligations of Community Association Directors

Associations should only elect directors who can perform the following roles:

Duty to Insure The Condominium Act requires condominium associations governing condominiums to purchase general liability insurance and insure common areas. See A.R.S. §33-1253. Most CC&Rs also provide additional insurance requirements that associations should meet. For instance, associations commonly insure directors and officers against potential lawsuits brought by members. Many associations also insure directors against personal losses they may incur while performing official association business. Obtaining adequate insurance and paying policy premiums on time is an important part of a director’s duty to preserve the association’s assets.

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Construction Defects in Common Areas An associationâ&#x20AC;&#x2122;s responsibility to maintain common areas includes pursuing construction defect claims for members. This begins with investigating for potential problems in common areas and properly determining the scope of the damage. Where builders are to blame, associations may seek

allow for up to nine years. Legal questions always surround the issue of when the statute should begin running, so associations should rely on their attorney when pursing more serious claims. Because this statute of limitations only applies to implied warranties, however, associations can expressly contract for longer warranty periods pursuant to Arizona statutes.

Association Directors, contâ&#x20AC;&#x2122;d

Disclosure to Members

compensation for the costs of repair. Finally, associations should disclose issues they discover to members. Time is of the essence when it comes to pursuing construction defect claims because Arizona statutes provide only a limited time in which associations can recover on an action for breach of implied warranties of fitness, habitability or workmanship. Generally speaking, the statute gives associations eight years from the time the improvement was substantially completed to bring construction defect claims, but exigent circumstances may

Associations are designed to act on behalf of the community. They are typically not allowed to keep information from community members, except as provided by statute, and should thus be as transparent as possible with official association business. Boards have a duty to make financial statements reasonably available to members, including annual operating and reserve budgets and the results of professional audits. It is also a good idea for boards to keep members informed on assessment collection procedures in order to better facilitate compliance. Boards are many times the first to learn of facts and circumstances that could impact membersâ&#x20AC;&#x2122; property values. Depending on the situation, boards may have a duty to make certain information available to members without delay, and can be held liable for failing to do so. Other situations, however, call for boards to exercise more discretion by not

What You Need To Know About Community Associations

disclosing information. Under no circumstances, however, can directors disclose information that violates members’ reasonable expectation of privacy. They must be cautious not to divulge information that could injure individual members of the association. Because a board’s duty to disclose is so factdependent, boards should consult with the association’s attorney when deciding whether to make new information available to the association.

of members and a quorum of the board of directors. The two quorums have different functions. With respect to condominium associations, unless the association’s governing documents provide otherwise, a member quorum requires at least 25 percent of the voting members present in person and a board of directors quorum requires at least

Compliance with Corporate Formalities

Associations cannot make major decisions without a large enough body of voting members, known as a quorum. There are two types of quorums, a quorum

50 percent of the voting members present. Planned communities may have different quorum requirements. This corporate formality protects associations from being overrun by a small minority of the membership. Drafting Rules and Regulations It is up to directors to draft and implement rules and regulations that help the association function well. Rules need not cover conduct that is already illegal, and should use specific language to prohibit unwanted conduct. Even rules that are good in theory can lose their practical value if they are not drafted properly. JacksonWhite Attorneys At Law

Association Directors, cont’d

As non-profit corporations, community associations should follow corporate formalities. A big part of this is holding meetings regularly, providing directors and community members with sufficient notice to prepare for them, and filing reports with the Arizona Corporation Commission. Arizona corporations are also required to maintain organized records, including thorough minutes of association meetings, and accountings of voting members present at each meeting. Along with the duty to keep records comes the duty to allow members to examine them, subject to certain restrictions as provided by statute.

Association Directors, contâ&#x20AC;&#x2122;d

To ensure clarity and enforceability, boards should rely on the associationâ&#x20AC;&#x2122;s attorney when drafting rules and regulations. Boards can only adopt rules consistent with the associationâ&#x20AC;&#x2122;s governing documents and comply with relevant statutes. They should discuss the merits of proposed rules in a meeting

before adopting them and record the discussion in the minutes. Boards must uniformly enforce the rules once they are adopted because rules not enforced may lose enforceability permanently. Preserve Attorney-Client Privilege Except for information that is statutorily exempt from disclosure, boards should provide members with information upon their request. Likewise, directors have open access to information and records so they can perform their job well. This open access to information,

however, is not absolute. For instance, legal advice from an attorney is protected by the attorney-client privilege. Because the association is the client in this equation, individual members are sometimes excluded from the privileged information. It is up to boards of directors to preserve the attorney-client privilege by preventing privileged information from entering unauthorized hands. To preserve the attorney-client privilege, boards should maintain a separate minute book when meeting with an attorney. This way, it is easier for them to keep communication between boards and their attorneys confidential. While there are times when boards should share information with members, they should consult with their attorney before disclosing information that may be privileged. Loans and Guarantees When it comes to borrowing money, directors are held to the highest fiduciary duty. Directors are never permitted to use association funds for personal expenses, even if they intend to repay the money. Likewise, directors cannot use associations to guarantee a personal loan. Directors who breach their fiduciary duty in this regard are personally responsible to repay the loan, and can be liable to the association for any losses caused by their breach of duty.

What You Need To Know About Community Associations

Conflicts Between Directors and Associations When handling official association business, directors of associations have a duty to avoid conflicts of interest, which are sometimes more apparent than others. Whether directors directly or indirectly benefit from a transaction, however, they must disclose the potential conflict of interest.

Every association should protect itself with adequate insurance, but communities differ as to exactly which types of insurance they need. The important thing is that associations thoughtfully consider

every possible contingency before deciding on what to include in their policy. On one hand, associations that underinsure their interests leave themselves open to serious financial repercussions. On the other hand, it is uneconomical for associations to purchase unnecessary insurance products. Associations should look into the following types of insurance when deciding how to best insure against issues they may encounter:

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Association Directors, contâ&#x20AC;&#x2122;d

The statutes governing community associations and planned communities state that directors must disclose potential conflicts of interest to the board, but can still participate in a vote on the issue. Agreements made in violation of this statute are unenforceable. The statutes governing non-profit corporations, on the other hand, state that directors must disclose potential conflicts of interest and also excuse themselves from participating in a vote on the issue. Agreements made in violation of this statute are only unenforceable if they are demonstrably unfair to the association. So while the latter statutes are potentially more restrictive, they also require a more thorough legal analysis. Because both sets of statutes can be applied, the surest method for directors to avoid complications is to disclose conflicts of interest to the board and excuse themselves from voting on the issue.

What types of insurance should associations consider purchasing?

Association Directors, cont’d

» Property Insurance: Protects against loss or damage to the property owned by the association. Associations should use a professional appraiser to value their property, and purchase a policy sufficient to cover replacement costs. It is also a good idea for associations to purchase an open policy that covers all losses without requiring them to prove how the damage or loss occurred.

» Liability Insurance: Associations are required to purchase this type of insurance to protect them from various types of liability. There is no statutory limit to the dollar amount for a liability claim for bodily injury, property damage, personal injury or advertising injury, so associations without liability insurance are at extreme risk. » Director’s and Officer’s Liability Insurance: Protects associations against losses caused by negligent board members.

» Fidelity Bond: Protects associations against losses caused by a willful or criminal act of a director or agent of the association. » Workers’ Compensation Insurance: Provides coverage to association employees or volunteers who are injured while on the job. » Automobile Insurance: In addition to insuring automobiles they own, associations may want to consider additional coverage to protect against liability arising from hired vehicles and vehicles they neither own nor hire. » Comprehensive Equipment Coverage Insurance: Protects associations from losses sustained as a result of mechanical breakdown. It can be specific to certain items, or general in nature; and it helps to cover things not included in a typical property insurance policy. » Umbrella Liability Insurance: Protects associations against losses that fall beneath or are in excess of their coverage limits. Associations should work with counsel and their insurance agent to negotiate a suitable umbrella policy.

What You Need To Know About Community Associations

Homeowners play an enormous role in preserving the integrity of community associations. In fact, because they are ultimately responsible for filling association boards and monitoring director activity, homeowners are even more central to an association’s success than the board. While a board’s composition can change relatively quickly, only members who move from the community leave the association. This permanence gives most homeowners an incentive to fulfill their obligations to the association. Moreover, by purchasing within the community, homeowners assent to fulfill their duties and obligations as members of the association. Perhaps most importantly, homeowners are obligated to keep their units and lots in full compliance. This requires them to understand their CC&Rs as well as their association rules and regulations, and observe them accordingly. Homeowners are also obligated to timely pay assessments, which not

only provides associations with funds for upkeep and renovation, but also allows boards to be forward-looking instead of getting entangled in the collection process. Lastly, homeowners have a duty to participate in the association and avoid apathy. This ensures that the decisions of the board reflect the will of the members. Along with duties, members of associations have special rights and entitlements. Subject to the association’s governing documents, members have a right to use common areas and property belonging to the association. They also have a right to utilize any of the administrative procedures, and enforce any of the rules established by the association. Where associations fail to enforce governing documents or follow the appropriate procedures, homeowners have a right to seek judicial recourse to enforce the association’s governing documents. Homeowners who do not fulfill their obligations can be excluded from these entitlements.

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Duties and Obligations of Homeowners

Running a Community Association

How should an association run meetings? Associations must meet regularly to keep the community running at its best. Different occasions, however, call for different types of meetings. Boards can call special meetings to discuss specific issues such as bid proposals or emergency maintenance issues that confront the community. Regular member meetings, on the other hand, should be held at least annually to keep the association’s agenda aligned with the community’s will.

Meetings must be open to members Meetings must be open to all of the association’s membership. Associations can only close portions of association meetings to discuss: » Legal advice from the association’s attorney » Pending litigation » Personal, health or financial information about an association member » Complaints or job performance of specific association employees

Give adequate notice of meetings Unless the association’s bylaws provide otherwise, notice requirements for association meetings are controlled by Arizona statute. The statute provides that associations deliver notice to every member by mail or hand, no fewer than ten, but no more than 50 days, in advance of the meeting. The notice must state the time and place of the meeting, which must be held in Arizona. For special meetings, the notice must also declare the meeting’s purpose. Boards should deliver notice according to the statute, but the action they take at meetings is not necessarily invalidated if members fail to actually receive notice.

Members must be allowed to speak at meetings Associations must designate a time during meetings in which members or their representatives can speak. Associations can, however, place reasonable time limitations on members, so long as members have an opportunity to speak on an issue before the board votes on it. It is also the board’s responsibility to provide a forum for informed debate by allowing a reasonable number

What You Need To Know About Community Associations

of persons to speak on each side of an issue before holding a vote.

How should an association hold votes on community business? Members can cast in-person ballots

Members can cast absentee ballots Associations must allow members to vote by absentee ballot. Absentee ballots must meet the following requirements: » They must set forth each proposal. » They must provide an opportunity to vote for or against each proposal. » They are only valid for one election or meeting and they expire immediately thereafter.

What types of books and records should an association keep? Associations must keep corporate minutes Associations should appoint a corporate secretary to keep minutes at board meetings.

Minutes should include details such as attendees, time, date, reports and association business. Once the secretary finalizes the minutes he or she should submit them to the board for a vote on whether they truly reflect the details of the meeting. Upon a winning majority vote, the secretary enters the minutes into the official minute book for preservation.

Running a Community, cont’d

The voting process is particularly important because associations typically have to vote before taking any substantive action. Most governing documents outline the voting process, so the number required to pass a measure varies from community to community. Sometimes confusion arises when more than one member shares ownership in a unit. Where this is the case, a majority of the owners must decide how to cast the votes allocated to that unit. Condominium associations presume that all unit owners agree on their vote unless one of the owners protests. See A.R.S. §33-1250 (A).

» They must specify the time and date by which ballots must be submitted to the board, which must be at least seven days after they are delivered to members.

Associations must disclose most records to members One reason boards keep minutes is because they are required to disclose them to members.

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Boards must make financial and other records reasonably available to any member of the association upon the member’s request. Boards can, however, withhold the following types of information: » Information protected by attorney-client privilege » Information about pending litigation » Records of a closed meeting » A member’s personal, health or financial records

Running a Community, cont’d

» Records of an employee’s job performance, compensation, or complaints against an employee

Boards must provide requested information to members in a timely fashion Boards must give information to members within ten days of their request. They should provide this information to members free of charge, except for printing costs, which cannot exceed 15 cents per page.

Money and Cash Flow Generally, community associations do not operate for profit, but they still require steady

income to function optimally. Even with volunteer boards and unpaid officers, community associations rely on cash flow for maintenance, upkeep and repairs; and this says nothing of costs for hiring outside management and professional services. Community associations depend on income to stay up with the business of operating a community. One of the biggest responsibilities associations have is maintaining and conserving cash flow.

What are assessments? Most of a community association’s cash flow should come from regular assessments. Generally speaking, associations charge assessments per unit, so owners with more units pay greater assessments. Subject to the CC&Rs and statutes, associations can increase assessments each year to keep up with rising costs and inflation, but they must keep members apprised of changes. Unless authorized by the community’s CC&Rs, associations must obtain a majority of the membership’s approval before they can significantly increase assessments.

What are special assessments? Sometimes regular assessments are insufficient to cover a community association’s expenses in a given year. Subject to the terms of the association’s CC&Rs, one line of recourse

What You Need To Know About Community Associations

How can associations protect their interests? Associations can protect the investment of the property by imposing fines, late fees and administrative charges. Associations can penalize members for any number of things, including late assessment payments, architectural infractions and parking violations. Boards should impose fines and fees uniformly, however, so members know what to expect. By adopting a fee schedule and abiding by it, boards can avoid the appearance of partiality. Community associations with cash flow problems may want to reevaluate their budget.

By cutting costs and perhaps forgoing certain expenses, associations can free up significant sums of money for other expenditures.

How should associations keep up with maintenance? Community associations assume varying levels of responsibility when it comes to maintenance. Associations with community pools, clubhouses, and lawn services have more maintenance duties than those with less facilities and services. Regardless of how much common area an association maintains, falling behind on upkeep is a mistake. It is up to associations to preserve their community, and this includes keeping common areas clean, safe and well maintained.

Money and Cash Flow

is for association boards to impose a special assessment on community members. To do so, directors must spell out precisely what the special assessment is for, and only charge enough to cover actual costs. Boards are limited on how much they can impose for discretionary expenditures unless they follow the procedure provided in the communityâ&#x20AC;&#x2122;s CC&Rs to obtain membership approval. As is also true of regular assessments, every member of the association is required to pay special assessments, including banks that own homes.

Because boards change membership frequently, it is a good idea for associations to adopt a successful maintenance plan that remains static over time. Implementing maintenance schedules and preventative guidelines gives associations assurance that subsequent boards will devote proper attention to maintenance. Moreover, by scheduling routine upkeep, associations can budget their cash flow and reserve funds to cover periodic maintenance expenses that arise. JacksonWhite Attorneys At Law

Collections

Collections Community associations cannot ordinarily exclude members from their services, and they are obligated to maintain common areas even if some members fail to pay assessments. This combination of factors makes community associations inherently susceptible to going unpaid for their services. The problem here is associations cannot perform without reliable cash flow. This means community associations too often get caught up in the business of collections, and are diverted from the business of preserving and developing the community.

What steps should an association take to collect? Reminder and Demand Letters Unpaid assessments and fees tend to grow more difficult for community associations to collect the longer they are overdue. Associations are thus wise to initiate collection on accounts receivable sooner rather than later. Even a simple reminder letter to members who are as little as fifteen days late is sometimes helpful. These letters should caution members that collection efforts and fines will escalate unless they promptly

pay. A demand letter from an attorney specializing in assessment collection may be more effective, as it is more likely to invite responsiveness in delinquent members. Payment Plans Sometimes members fail to catch up on payments to associations only because they do not know how. It is quite helpful for associations to work with these members to create a payment plan. In addition to creating a plan, associations should file a lien against the property, which will protect their interest should the member default. Payment plans should always be in writing and can be accompanied with a confession of judgment, which allows associations to automatically obtain a judgment against defaulting members without going to trial. Alternative Collection Strategies Associations are not limited to the collection process when trying to recover from members whose payments are past due. The following methods are sometimes useful alternatives: Âť Beneficiary Deed: Associations sometimes accept a beneficiary deed

What You Need To Know About Community Associations

instead of pursuing collection. Members who execute a beneficiary deed essentially make a future gift of their property to the association. They retain property rights, but the unit passes to the association upon the owner’s death without going through probate. Associations should take caution with beneficiary deeds, however, because members can unilaterally revoke or amend them as permitted by statute after they have been recorded. The association also takes the property subject to any liens on the property.

» Deed in Lieu of Foreclosure: Associations considering foreclosing on a member’s unit can accept a deed in lieu of foreclosure, which can benefit both the member

When can an association take action in justice court? Arizona justice courts have jurisdiction in cases where the amount in question is $10,000 or less. When a member owes less than this amount to an association, the association can bring justice court action against him. Once filed, a lawsuit in justice court proceeds much like a lawsuit filed in superior court. Even where associations win a judgment, however, difficulties can arise in collecting on it. Part of collecting a judgment for associations involves knowing what assets and income the member has to collect. For additional court costs, associations can seek a debtor’s

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Collections, cont’d

» Deed of Trust: Deeds of trust give associations security that members will make good on past due payments. With a deed of trust, members name the association as beneficiary under a lien that is recorded against their unit and held in trust by a trustee. The deed of trust is released if the member repays the debt. If the member fails to repay the debt, however, the trustee has power to sell the unit and use the proceeds to repay the association once the note and any senior liens are paid off.

and the association. With a deed in lieu of foreclosure, the member conveys all of his interest in the unit to the association. This is quicker and less costly to an association than foreclosure, and it is also less detrimental to members’ credit. Before accepting a deed in lieu of foreclosure, however, associations should review the title report, as they effectively take title subject to any other liens on the property.

examination, which helps them obtain the member’s financial information. Once associations know what they are dealing with, they can pursue garnishment of members’ income or assets. With garnishment, the court orders the member’s employer or financial institution to send a part of his wages or assets directly to the association, which helps remove uncertainty as to whether a member will actually pay on a judgment.

can have harsh consequences. An automatic stay does not, however, preclude associations from collecting that portion of a member’s debt he accumulated after filing for bankruptcy, or the amount of secured debt filed before the petition. To avoid complications, associations should sort this out with their attorney.

Pointers for Community Association Directors

Collections, cont’d

Being on the board of directors for a community association can be both rewarding and challenging. Directors who take pride in their position and fulfill their obligations make a significant impact on their community. These five simple suggestions can help directors serve their communities and get the most out of their job.

What should associations do if a member files bankruptcy? Associations must take precaution when collecting from members who have filed for bankruptcy. A special rule, called an automatic stay, stops all collection activity against filing members and gives them a window within which they are shielded from creditors’ claims. Associations who willfully pursue claims after a court issues an automatic stay can be held liable for actual and even punitive damages. Pursuing collection after a court issues an automatic stay

1. Be willing to invest time into the position. 2. Understand your job and take the position seriously and help recruit other board members who will do the same. 3. Be familiar with the association’s governing documents and understand all of the community’s rules and regulations. 4. Support wise and frugal expenditures of association funds and use funds to preserve the community’s beauty.

What You Need To Know About Community Associations

Directors who understand their obligations to the community and strive to fulfill them find great satisfaction in their job. With committed directors, associations can be a driving

force behind a community’s unity and wellbeing. The good news is that running an association does not have to be complicated. Directors can seek professional guidance to eliminate the uncertainty that comes with making important decisions. With proper counsel, directors can prepare themselves to provide the most to their communities.

Checklist For Community Association Directors and Managers

Pointers for Community Association Directors

5. Understand what the community’s wants and needs are and see to it that the actions of the board are aligned with the will of its members.

Have you...

Read and understood your community’s CC&Rs?

Read and understood your community’s Articles of Incorporation?

Read and understood your community’s Bylaws?

Read laws and regulations associated with employees?

Read the duties and obligations of community associations and their directors?

Read the duties and obligations of homeowners?

Become familiar with the various insurance coverages available to a community association?

Learned how to run a community meeting?

Learned about assessments, special assessments and collection processes?

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Notes:

HOA Transactions & Collections

Labor & Employment

Real Estate

Business Transactions

Insurance

Tax Issues

Mediation & Litigation

Now, find all your community association needs under one roof. Itâ&#x20AC;&#x2122;s time for community association law to be more than collection and demand letters. EverycommunityassociationisdifferentandtheJacksonWhiteCommunityAssociation legal team works together to service the unique needs of each one. Let us show you the convenience of working with a law firm that meets all your needs under one roof. www.JacksonWhiteLaw.com | 1.800.243.1160 Mesa office: 40 N. Center St. Suite 200, Mesa, AZ 85201 Peoria office: 7972 W. Thunderbird Rd., Suite 105

Peoria, AZ 85381

Community Association Overview Duties and Obligations of Community Association Directors Duties and Obligations of Homeowners Running a Community Association Money and Cash Flow Collections Pointers for Community Association Directors