Raising Dues

March 29, 2009

RAISING DUES IN
DIFFICULT ECONOMIC TIMES

QUESTION: Can the board continue raising dues, without ever asking the individual homeowners to vote about such an issue in these very difficult economic times???

ANSWER: As long as the board stays within limits set by Civil Code §1366 (5% special and 20% regular assessments), it can raise dues without a membership vote. Even though board members are owners just like everyone else in the association, legal duties are imposed on them as soon as they are elected to the board. They may not want to raise dues any more than you do but they face potential liability if they fail to repair the common areas.

Spending. Boards have narrow budgets with little or no discretionary spending. At best, they can defer some maintenance and implement limited reductions on a few expenses. Maintenance deferrals can, however, pose considerable risk if a leaky roof results in significant water damage, mold, and litigation. In the end, the deferral may be much more expensive than the original repair.

Easy Answers? There are no easy answers. Boards can defer what is reasonable to defer, squeeze every penny out of the budget, and limit dues increases. But associations still have to pay their utilities, buy insurance, update reserves, collect assessments, prepare financial statements, mow the lawns, and make repairs. If service providers raise their rates, boards may have no choice but to raise dues.

The Federal National Mortgage Association (Fannie Mae) recently changed its lending guidelines. Changes that went into effect on March 1 will impact attached condominium developments throughout California.

Fannie Mae is the nation's largest player in the secondary mortgage market. First, it insures lenders against losses on condominium loans, thereby making lower-cost loans available to buyers. Second, it buys mortgages from lenders, serving as a source of funds for banks and making it possible for more buyers to borrow at affordable rates. As a result, lenders that want access to these funds can only lend in associations that comply with Fannie Mae guidelines. Following is a summary of some of the relevant provisions:

10% Ownership. No more than 10% of the units in the development may be owned by a single entity.

Delinquency Rate. No more than 15% of the total units in may be 30 days or more past due on their HOA dues. For example, a 100-unit project may not have more than 15 units that are 30 days or more delinquent.

HOA Master Policy. The following insurance is no longer permitted: (i) blanket policies that cover multiple unaffiliated condominium associations, and (ii) self-insurance arrangements whereby associations are self- insured or have banded together with other unaffiliated associations to insure all of the general and limited common elements of the various associations. NOTE: This means that management company "pool" programs (as well as programs such as CIBA and CAASA) where unaffiliated homeowner associations share a single property limit on a blanket basis no longer qualify for Fannie Mae financing.

Unit Coverage. Buyers will now be required to purchase an HO-6 insurance policy, also known as “walls-in” coverage, unless the association's master policy provides equivalent coverage. This means insurance must cover all unit improvements, not just original construction.

Fidelity Insurance. Condominium projects with 20 or more units require fidelity insurance.

Developer Control. There are additional requirements for developments still under developer control or in transition to owner control, and mixed-use developments with more than 20% percent of its space devoted to non-living areas.

RECOMMENDATION. If associations subject to the new guidelines do not meet them, potential buyers cannot get Fannie Mae backed loans. Financing will still be available but the costs will be higher and fewer buyers will qualify. This may have the effect of driving down property values in the development. To make their associations Fannie Mae compliant, boards should consider the following:

1. Investors. Associations should amend their CC&Rs to limit persons or entities from owning more than two units. This will have the added benefit of reducing rentals.

2. Pooled Insurance. Boards should have legal counsel review the lender provisions in their CC&Rs to see if the association is required to comply with Fannie Mae guidelines. If so, their association can no longer be in a pooled insurance program. If the CC&Rs do not require compliance, boards must make a business decision--they must decide whether they want lower insurance premiums or increased loan eligibility.

3. Unit Insurance. When it comes to insuring unit improvements, associations can (i) leave it to buyers to obtain their own HO-6 policies, or (ii) increase the association's master insurance policy to include replacement of unit improvements. This means improvement such as Berber carpet, hardwood floors, tiled entryways, silk wall coverings, granite countertops, walnut cabinets, exotic plumbing fixtures, etc. For those associations with "bare walls" policies, increasing the master policy's coverage to expensive unit improvements will increase premiums. If an association's CC&Rs require owners to provide their own insurance, no action is required by the board. If the CC&Rs are silent, boards should consider amending their documents to require owners to carry their own insurance and to allow the association to purchase "bare walls" policies. This will keep premiums down.

4. Fidelity Insurance. This protects an association's funds against embezzlement or fraud, thereby preserving funds for maintenance, repairs, reserves and operating expenses. This type of insurance is not expensive and all associations should carry it regardless of Fannie Mae guidelines.

5. Collection Policy. Associations must be aggressive in collecting delinquent assessments.

6. Future Fannie Mae Requirements. Our firm is now amending CC&Rs with language that gives boards the ability to amend their documents to meet Fannie Mae requirements without the slow, costly, and uncertain process of a membership vote every time Fannie Mae changes its requirements. Boards should check with their legal counsel about doing the same.

7. PUD Insurance. Some rumors have been circulating that PUDs need to buy condominium insurance. The rumor appears to be inaccurate. In light of the new Fannie Mae guidelines, all PUD and Condominium boards should have their insurance brokers review their policies and make recommendations.

Thank you to Michael Berg of the Berg Insurance Agency and Tim Cline of the Timothy Cline Insurance Agency for their input on Fannie Mae guidelines. Their contact information is in our Vendor Directory. For more information on Fannie Mae's lending requirements see Announcement 08-34

PROTECTING VOLUNTEERS

I work for a public agency that allows volunteers on public owned land. These volunteers are not covered under workers compensation laws and if injured are on their own for medical care etc. Although our private insurance carrier would cover them under the medical part of our liability insurance policy if they did not have private medical coverage. Each Volunteer is made aware of the policy and sign waivers to the fact that they understand they are not covered by workers comp insurance. -Anon. Reader

POOL SAFETY REVISITED

QUESTION: Our pool only has one drain. We called the Los Angeles County Department of Public Health’s Bureau of Environmental Protection Swimming Pool Program. We were advised that we will not have to have another drain installed until such time as we resurface, renovate or drained for any reason. Since we currently do not plan to resurface, renovate, or drain the pool, are we still required to close the pool and lock the gate?

ANSWER: Ask the LA Public Health Bureau the following question, "Does our pool comply with the Virginia Graeme Baker Act?" If the answer is "Yes," get it in writing and open the pool. If the answer is "No," close the pool until your are in conformity with the Act. If you are not in compliance and someone dies in your pool, in addition to having a death on your conscience, you face crippling lawsuits and massive fines.

Very truly yours,

Adrian Adams, Esq.
Adams Kessler PLC

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