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SBA LOANS

Q. 
If our homeowner association in Los Angeles accepts a prepayment from a homeowner on an SBA loan, is the association required to use the proceeds of the prepayment to make a principal repayment on the SBA loan?

A. 
No.  While it may be prudent to do so, it is not required by law and the board may have a good business reason to apply the funds elsewhere.

Q. 
I own a property management company that manages two condominium associations that obtained Small Business Administration (SBA) loans shortly after the 1994 Northridge Earthquake.  Can the associations prevent individual owners from prepaying their portion of the loans?  The SBA will not permit the association to reamortize the loan if it is prepaid.  

A. 
The association cannot prohibit a prepayment by a member.  The amount owed is based on a special assessment which can always be prepaid.  Top


RESERVE ACCOUNTS

Q. 
Our homeowner association in Beverly Hills recently lost money on its mutual fund account.  Is a board of directors allowed to invest association funds in a mutual fund?

A. 
Absolutely not.  All funds must be placed in an insured account in a bank, savings and loan association or credit union. Top


RESERVE STUDIES AND AUDITS

Q. 
Our homeowners association has not obtained a reserve study for more than four years.  We do obtain audits each year.  Can an audit report be truly accurate if we don’t have a current reserve study, when the audit is completed?

A. 
No.  Without a current reserve study, the balance sheet included in your audit report will reflect the numbers on your books, but it will not reflect your association’s current, actual liability for future replacements.  This liability may be substantial.

The California Civil Code requires associations to complete a reserve study every three years and to review it for accuracy each year.  Not only are reserve studies required by law, they are excellent planning tools. Top


DISTRIBUTION OF FINANCIAL STATEMENTS

Q. 
I own a townhome in Santa Monica, but am not on the board of directors.  While attending a recent board meeting, I asked our management company representative for a current financial statement.  My request was denied and I was told that I am only entitled to a year-end report.  Is this correct?

A. 
No. California law requires a board of directors to provide every member with a year-end financial report but it does not preclude you from receiving interim reports.  You are entitled to a monthly report, less the member delinquency report, but will be required to pay the cost of duplication.  You are also permitted to inspect association records for any association related purpose. Top


AUDIT REQUIREMENTS

Q. 
Is it necessary for our homeowner association to be audited yearly?

A. 
No, however a review of the financial statement of the association must be prepared by a licensee of the California State board of Accountancy for any fiscal year in which the gross income to the association exceeds $75,000.00. Many associations prefer an audit to a review because the examination by the accountant is more complete and the cost is not much more.

Please note that a copy of the review (or audit) of the financial statement must be distributed to each member of the association within 120 days after the close of each fiscal year. Top


ANNUAL BUDGETS

Q. 
Our homeowner association board cannot complete and distribute the annual budget on time. What do you suggest we do?

A. 
Distribute it on time in the most accurate form possible with a note to the members indicating that it will be revised at a later date. Be certain to include any anticipated increase in assessments up to 20%. You can always reduce the assessments later. Top


BANKRUPTCY OF MEMBERS

Q. 
I am the treasurer of our homeowners association.  Recently, a member of our association filed for bankruptcy under Chapter 7.  He owes the association over $6,000.00.  Our management company has advised us that there is nothing we can do.  What is your advice?

A. 
Section 523(a) of the Bankruptcy Code provides that dues owed to condominiums, cooperatives or other similar membership associations after the filing of a bankruptcy petition are not dischargeable, to the extent that the dues are payable while the debtor either lived in or received rent for the condominium or cooperative unit.  In other words, so long as the homeowner still lives in the unit or rents it out to someone else, the dues will continue to accrue after the date of the filing of the petition.  Your association management company can collect these dues. Top


SUSPENSION OF ASSOCIATION

Q. 
How can I determine if my homeowner association has been suspended by the California Secretary of State?

A. 
First, go to the California Secretary of State website: www.ss.ca.gov/business Next, click on “California Business Search.” Type the exact name of your association into the “Corporations Search Bar” and click on “search.” The exact name will be found in the Bylaws. When the name comes up on the screen, click on it. The “status” will indicate either “active” or “suspended.” Top


TRANSFER FEES

Q. 
Can a homeowners association charge a transfer fee when a home sells?

A. 
Yes. However, associations may charge no more than what is necessary to
defray the costs. This limitation does not apply to management companies.
Thus, if an association relies on its management company to handle all
record keeping, the association cannot charge a fee. Top


BUDGETS

Q. 
Our association in Santa Monica is self-managed. We do not have anyone capable of preparing a reliable budget. What do you suggest?

A. 
First, you should hire a management company that is capable of preparing
your budget. If you don't hire a management company, your association should interview reserve study providers. Some of these firms will prepare
association budgets for a fee. Top


BORROWING M0NEY

Q. 
Can the board of our homeowner association borrow funds from a bank for our association?

A. 
The authority for associations to borrow money is found in the association’s governing documents. Absent any limitations in the governing documents, associations can borrow money if approved by the board of directors. Top


THEFT OF HOA FUNDS

Q. 
Our homeowner association in Glendale has been self managed for many years. We have only 8 units. Our treasurer of twelve years recently embezzled most of our funds and now claims that she doesn’t have the ability to repay the association. What are our options?

A. 
This is a fairly common question without a simple answer. Your best course of action can only be determined after an examination of your association’s insurance policies, a determination of whether your former treasurer has equity in her home, and possibly a professional asset search. Sometimes we find that the guilty party has quietly cancelled the coverage for dishonest acts in an attempt to discourage the association from attempting to obtain restitution. Your association needs to consult with an experienced attorney to determine the best course of action.

One lesson is clear. It is dangerous for an association to place its funds under the control of one person or even two related people. There is no substitute for accounting checks and balances.  Top


BUDGET FOR LEGAL FEES

Q. 
How do you recommend that our association budget for legal fees and costs?

A. 
Your board should start by getting a recommendation from the association’s legal counsel. The attorney will want to review your association’s annual legal expenditures for the last five to seven years and will want to discuss the status of your collections and other factors. Most HOA attorneys will provide this service at no cost to the association. Top


RESERVE STUDIES

Q. 
What is a reserve study?

A. 
It is a written report that evaluates the common area of the association. It provides guidance on how much your association should be setting aside each month for reserves so it can meet its future obligations without special assessments. Reserves are needed to pay for the replacement of common area components such as roofs and parking lots and to pay for major maintenance items such as exterior painting. The California Civil Code sets forth the minimum requirements for reserve studies. Your association's management company should have the in-house expertise to prepare a reserve study since it is part of the budgeting process.  Top


DISADVANTAGES TO MIXED USE PROPERTY

Q. 
I am considering purchasing a residential condominium in a mixed use development. I like the convenience of the retail stores on the lower level. What are some of the disadvantages?

A. 
Disputes frequently arise over the following:

Allocation of expenses,
Traffic and parking,
Nuisance issues such as cooking odors, and
Security considerations  Top
   
 


DEVELOPMENT OF BUDGETS

Q. 
What are the most common errors made by homeowner association boards and management companies when preparing their HOA budgets?

A. 
Following are the most common budget errors: 

Not including a realistic allowance for bad debts. This requires evaluating current receivables and examining historical financial data;
   
Updating the association's calculation of reserve contributions;
   
Omitting a contingency factor line item of 3% to 5%;
   
Making the assumption that every item in last year's budget should be the starting point for next year's budget. The prior year budget must be evaluated line by line;
   
Failing to recognize that insured claims require the payment of the deductible which must be included in the budget;
   
Not recognizing that some homeowner claims, such as water intrusion from the common areas, may not be covered by insurance. These types of claims may include interior damage to personal property for which the HOA may have liability;
   
Omitting an allowance for legal fees to cover the cost of legal advice for the board;
   
Deciding to defer necessary maintenance into the future in order to minimize the monthly assessments. This is likely to cost the members of the association far more in the long run;
   
Making the political decision not to increase the budget when reality requires an increase; and
   
Deciding to make future special assessments instead of increasing the regular monthly assessments.
  Top

 


BORROWING FUNDS BY HOA

Q. 
Our HOA is intending to borrow funds to upgrade our property in Van Nuys. Most of the owners are happy about it, but would like to know if we can deduct the interest on the loan.

A. 
The individual owners may not deduct the interest paid on the loan. The HOA is the borrower and will pay any interest.  Top


LIMITING WATER USE

Q. 
Our association water bills have dramatically increased over the last few years. Can our community association amend our CC&Rs to prohibit the washing of cars in the common areas?

A. 
Yes. Your HOA can prohibit members from using the common areas to wash vehicles, boats and trailers. It can also prohibit members from using common area water for such purposes. Since car washes recycle their water, utilizing a car wash saves water and it transfers the cost to the users.  Top


TAXES PAYABLE BY HOA

Q. 
Are homeowner associations required to pay property taxes on the common areas?

A. 
No. Taxes on the common areas are paid by the members of the association through their individual tax bills. The value of the common areas is reflected in the value of each separate interest. Notwithstanding, it is possible that an association could be required to pay special district user fee, but this is not common. Top


TRANSFER FEES

Q. 
Can a homeowners association charge a transfer fee when a home sells?

A. 
Yes. However, associations may charge no more than what is necessary to defray the costs. This limitation does not apply to management companies. Thus, if an association relies on its management company to handle all record keeping, the association cannot charge a fee. Top


 

Permission to reprint our HOA Questions and Answers is granted provided Michael T. Chulak & Associates (MTCLaw.com) is credited as the source.

 

 

 

 

 

 


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