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.
But funding is only the start of an association’s dependence upon its members. Owners are the members of the board. Owners decide if the governing documents--CCRs, Bylaws, Articles of Incorporation—remain the same or are amended. The assets of owners are security for the debts of the association. The owners must approve special assessments or increases in regular assessments above a certain amount. A decision to terminate the association requires member approval. Without a member vote, no action can be taken on any of the above.
We often hear arguments that even with member approval required for all of these critical actions, boards of directors still have too much authority. Boards are charged with conducting the day to day affairs of a community association and must be free to make decisions based on their business judgment and the fiduciary duty they have to all of the members. But there’s another argument against expanding member authority--they won’t exercise it. If you take too much authority away from the board and give it to the members, paralysis may be the result.
Start with board meetings. Those of us who attend dozens of regular board meetings every year can testify that in most associations if six members show up for a meeting it would be considered a crowd. Annual meetings are not much better. Election of board members usually occurs at the annual meeting. If it weren’t for proxies, most elections would fail for lack of a quorum—and many do, even with proxies available.
What is lacking in many community associations? It’s not greater member authority. What’s lacking in many associations is the exercise of member authority sufficient to keep the association up and running. Board members will often serve successive terms, not necessarily because they’re in love with the job, but because no successor can be found. Boards will present repair plans to the membership that require member approval to fund and no quorum can be obtained.
The majority of members don’t participate in the affairs of a community association. There is a popular argument among community association detractors that this is because members know that the board of directors will not listen to them. But at the meetings we have attended where there is an active contingent of members wishing to address issues before the board, they get the board’s attention. The board members we know are very interested in what their constituents have to say—but the constituents have to say it.
But what I fear is the real reason owners don’t participate has nothing to do with frustration with their board of directors. What concerns me is that owners don’t participate because they do not see their stake in the association as significant to their lives—that nothing the association does or doesn’t do will have a serious effect on them. They own property in the association—probably one of their biggest investments. But sales occur more frequently and many owners view their piece of the association as a short-term, transferable interest that they will soon pass on to someone else.
The sale of a condominium is not like the sale of a single-family home. When an owner sells a single family home, the property is inspected in various ways so that the prospective buyer has at least a reasonable understanding of its condition, and a reasonable understanding of the financial issues that will have to be dealt with to insure proper repairs in the future. But most significantly, deferred maintenance is dealt with in that transaction. The effect of the condition of the home on asking price is direct and immediate.
The issue of deferred maintenance (or inadequate reserves) is not usually a factor in the sale of a condominium. The level of understanding required to demand adjustments to the purchase price is simply not achievable in the sale of a condominium unit. Regardless of how sophisticated a prospective buyer may be, or how knowledgeable the real estate agent might be, or how complete are the statutory disclosures, it is impossible for anyone to properly evaluate the physical condition of all of the buildings in a condominium complex or the adequacy of its funding to meet present and future maintenance and repair obligations.
Why? Because even most boards of directors and managers don’t know the true condition of the project. Community associations in California are required to conduct a “reserve study” every three years. But that study is not an in depth inspection of the project. It covers only visible and accessible areas—and many associations find themselves with major unexpected expenses at some point, usually later in their service lives. We’ve written about this problem before. And even if the true condition is ultimately determined, the accounting practices recommended by some management companies and CPA firms allow for deferral of reserve deposits in order to meet operation expenses—leaving reserves seriously underfunded. The actual condition of the project will not be known until later in its life—usually when a scheduled project exposes other serious internal damage, or years of underfunding the association’s reserves means even routine projects cannot be funded without special assessments or bank loans.
This means that in the early years of an association’s life, an individual unit owner can transfer his or her individual interest unaffected by deferred or undiscovered maintenance. This easy transferability often translates for many owners into apathy—they have little interest in the present activities of the association. Owning an interest in a condominium association is like owning a share of stock. If you can sell it easily, you don’t really care what happens later. By not insisting on in-depth investigations or full funding of reserves, we’ve enhanced transferability at the expense of owner interest in the policies of the community. But worse, we have disguised the value of those interests to the detriment of future owners.
The Legislature needs to consider changes to California’s Davis-Stirling Act which will tighten up the rules for maintaining an adequate level of reserves and for conducting periodic inspections of the property. They should also eliminate the opportunity to “balance the budget” by understating the amount of necessary reserve funding. Lack of member participation can be excused because we have made it easy to pass on the liabilities of the association to the next buyer. The Legislature might be excused because of prior lack of understanding of this issue. Those excuses no longer exist, however, and its time for our lawmakers to act.
