Managing Bank Foreclosures in Associations

Today I will be discussing the impacts of a bank foreclosing on a developer, the impacts that has on the membership, and the steps a bank's asset manager should take after taking the property over. To narrow the topic, I want to focus my point on banks foreclosing on developers who held a majority of unsold units in an association.
When a bank forecloses on developer who owns a majority of units in an association there are two things to consider: 1) the property, and 2) the corporation that exists behind the property. I've bulleted five items below to start the hamster wheel moving on the topic: 

-          From a property level the biggest factor to consider is if the property is in shape enough to be marketable. If the property isn’t in good shape, then you need to consider the best route to bring the property up to par, likely by issuing a special assessment from the association. For example, if the project is a condo and the association is responsible for fixing the roof or painting the buildings, we would facilitate the best way to issue a special assessment. Even if the project isn’t a condo, there are other factors to consider, such as painting the curbs red or conducting an asphalt slurry.

-          The next level to think consider is the association’s corporation. Now that the original developer is gone, who is in control of the board? Every association is a non-profit mutual benefit corporation, and like any corporation you need to have a Board of Directors in place. When a bank forecloses on a developer, you likely have a “headless” corporation on the association level and need to elect a new board. We find that banks want to take control of the board because they own a majority of units in the association, and want to be in the position to make property and financial decisions.

-          Is the association’s corporation current on tax returns, and other state filings (statements of information, statement by CID, etc.)?

-          Is there a property management company hired to handle hiring vendors, placing them in contract, and paying bills or was the developer handling?

-          Was the developers declarant status transferred? Developers in CC&R’s are considered the declarant, and often have super majority voting rights, rights to elect the majority of the board, etc.

Let's face it ... If a developer is foreclosed on by a bank, the association's bank account is probably run thin, and there may be outstanding assessments never collected from the original developer. If a well versed association manager doesn't grab this problem by the horns there could be potential liability for all parties involved. I've consulted on multiple of these projects, and 9 times out of 10 the association isn't being addressed properly.

Who pays the consulting fees for this type of project? Well, I've seen banks pony up the cash so they have a better understanding of what they now own, and I've seen associations pay the fees to ensure everything is in proper working order. Think about it like this, if you suddenly were a 70% owner in a corporation would you want to know everything was being handled properly? I would. Banks do. Potential buyers of units in an association do. An association is a corporation, and by taking ownership of the building, you are essentially buying stock in the association. Very few people buy stock without doing some research, and many hire a professional to advise them before making a final decision.

Happy New Year! I wish you the best in 2012.

Association Voting Procedures

Associations in California must take certain steps and meet certain requirements outlined by the State of California when electing a Board of Directors. The election process can be found in the Davis-Stirling Act under sections 1363.03, 1363.04, 1363.05, 1363.07 and 1363.09. For the purpose of this blog I will dive into Civil Code 1363.03 (Election Procedures, Secret Ballots, Inspectors of Election), and Civil Code 1363.09 (Civil Action for Violations) to demonstrate the implications of not holding a proper election.

First, let's discuss the steps of selecting an independent third party as an inspector of elections, and dovetail that with proper balloting methods.

Methods for Selecting an Independent Inspector of Elections:

Civil Code 1363.03, paragraph (5) of subdivision (a):

(A) Appointment of the inspector or inspectors by the board.

(B) Election of the inspector or inspectors by the members of the association.

(C) Any other method for selecting the inspector or inspectors.

Balloting Requirements:

Civil Code 1363.03, paragraph (1 and 2) of subdivison (e):

(e) Ballots and two preaddressed envelopes with instructions on how to return ballots shall be mailed by first-class mail or delivered by the association to every member not less than 30 days prior to the deadline for voting. In order to preserve confidentiality, a voter may not be identified by name, address, or lot, parcel, or unit number on the ballot. The association shall use as a model those procedures used by California counties for ensuring confidentiality of voter absentee ballots, including all of the following:

(1) The ballot itself is not signed by the voter, but is inserted into an envelope that is sealed. This envelope is inserted into a second envelope that is sealed. In the upper left hand corner of the second envelope, the voter shall sign his or her name, indicate his or her name, and indicate the address or separate interest identifier that entitles him or her to vote.

(2) The second envelope is addressed to the inspector or inspectors of election, who will be tallying the votes. The envelope may be mailed or delivered by hand to a location specified by the inspector or inspectors of election. The member may request a receipt for delivery.

The Rule of the Denominator:

Rule of the Denominator defined as it pertains to associations:

Expenses incurred by an association with few members (units) carry a heavier burden than expenses incurred by an association with lots of members (units).

I mostly manage commercial business parks that are governed by an association. The average commercial business park association is much smaller than a residential association. Residential associations are typically hundreds of units and commercial parks are generally less than 30 units. I pulled those numbers out of thin air and are based off personal experience, nothing else. Why is the average number of units important in a conversation about election procedures? Because of the Rule of the Denominator, of course. For example, let's say the cost of an independent inspector of elections is $1,000 per election. That number split between a 5 person business park is $200 per unit, per year. In an association with 200 units, the cost for the election is closer $5 per person, per year.

What I'm getting at is this law creates very strict standards and should be re-looked for commercial associations, associations with small budgets , and/or associations with under 30 units. In fact, these laws are being re-looked by the California Law Revision Commission (CLRC). Check this website for more information: http://www.clrc.ca.gov/H855.html and get involved!

Improper Election Procedure Penalties:

Civil Code §1363.09. Civil Action for Violations:

(a) A member of an association may bring a civil action for declaratory or equitable relief for a violation of this article by an association of which he or she is a member, including, but not limited to, injunctive relief, restitution, or a combination thereof, within one year of the date the cause of action accrues. Upon a finding that the election procedures of this article, or the adoption of and adherence to rules provided by Article 4 (commencing with Section 1357.100) of Chapter 2, were not followed, a court may void any results of the election.(b) A member who prevails in a civil action to enforce his or her rights pursuant to this article shall be entitled to reasonable attorney's fees and court costs, and the court may impose a civil penalty of up to five hundred dollars ($500) for each violation, except that each identical violation shall be subject to only one penalty if the violation affects each member of the association equally. A prevailing association shall not recover any costs, unless the court finds the action to be frivolous, unreasonable, or without foundation.(c) A cause of action under Section 1363.03 with respect to access to association resources by a candidate or member advocating a point of view, the receipt of a ballot by a member, or the counting, tabulation, or reporting of, or access to, ballots for inspection and review after tabulation may be brought in small claims court if the amount of the demand does not exceed the jurisdiction of that court. Read more: Davis-Stirling Act.

My Recommendation:

Follow the law, be ethical, hire the right association manager, and get involved with state legislature.

Property Management: Vendor Processing

Vendor Proposals: Get Them Apples to Apples

As much as we qualify our vendors and hold them to the highest standards when doing work on our projects, it's inevitable that when a request for proposal (RFP) is sent out to multiple vendors, the bids do not come back "apples to apples." I have a recent example with painting nine buildings in a business complex in Orange County. As much as you try to be proactive and spoon feed your vendors with what the project requires, it's inevitable that the bids you receive will all be different. In this example, I had proposals that included different paint manufacturers, pole lights included/excluded, trash enclosure doors included/excluded, differing number of coats to be painted, and of course, differing dollar amounts for each line item. As with anything in property management, each proposal (for any type of work) needs to be scrutinized and matched to the scope of work that is required. It's our job to hand our clients a package that has the correct scope across all proposals and to be able to make a recommendation based upon accurate information. If you can't get your vendors on the same page, you'll be spending more time than necessary to get to the end result.

My answer to this dilemma: meet with your vendors on site (at the same time), walk the project, get recommendations from each vendor, make a decision on the scope, and communicate to your vendors what is expected of them. Give them a date to have their proposals submitted and re-iterate the scope to them in writing after you've met with them. If there are any incidental items they want to include, have them put them as a separate line item in the proposal as an "extra".

Some people think that meeting on site with each vendor at once is uncomfortable and unprofessional. I disagree. In fact, many of our vendors appreciate being able to meet the competition and ensure that their clients (our property owners) are receiving accurate and timely information in order to make a decision. Vendors certainly get frustrated if they've lost a job because their proposal wasn't based on the scope that was intended. This way, everyone knows what is expected of them and the decision to go with one vendor or another will be based on quality and pricing, not whether their numbers are different due to incorrect scope.

Condo Association Management

What does it mean when you buy a commercial condominium unit in an association?

This question can best be answered through a hypothetical situation where a condo building is burned completely to the ground. By explaining this situation you'll have a better understanding of what buying a condo means, and how to properly insure your condo unit.

I'll paint a bit of a picture ... Where there was once a beautiful, 2 story, 50,000 square foot, commercial office condo building that housed your office - there is nothing. Well, close to nothing. There is some rubble, your insurance policy and the association's insurance policy.

In a condo association everything is owned in common; excluding the airspace inside a condo unit and it's interior improvements. I'll better define this by describing who would re-build what part of a condo building in the event of a fire.

Association Responsible to Replace:

Any improvements on the lot that the development sits on.

• Landscaping
• Parking lot poles
• Monuments
• Elevators
• Roofs
• Building structure (the "shell" of the building)
• Irrigation systems
• Fences

Owner Responsible to Replace:

Any interior improvements built inside of the condo unit's airspace.

• Interior improvements (walls, ceiling tiles, etc.
• Interior bathrooms
• Office furniture
• Office equipment
• Interior electrical wiring
• Interior plumbing servicing the unit
• Lighting
• Computer equipment

Common Area Also Defined in CC&R's:

Coveneants Conditions and Restrictions (CC&R's) further define common area specifics. Questions to think about when specifically discussing association vs. owner responsibility in terms of a condo building are listed below:

• Do I own my HVAC unit or does the association?
• If a fire spinkler heads breaks in the interior of my unit does the association pay for the damages?
• Who is responsible to fix an exterior window that is broken?
• Who replaces the exterior door frame to a condo unit in the event of a break-in?
• If there is a roof leak who replaces the stained ceiling tile?
• Who repairs a concrete tilt up wall that is leaking water into the interior of my unit? Who is responsible to repair the damages to the interior of my unit?
• Is the electricity separately metered for each interior condo unit?

The list could continue for eternity, but I would guess few people that own a condo unit could tell me the answer to those questions if asked.

In short, if a condo building burnt down the association would replace the exterior shell of the building and each owners' insurance policy would pay to re-build their interior improvements. Said another way, when buying a condo unit you purchase the interior airspace, and any improvements constructued inside that that airspace.

Common Interest Development (CID) Association Management

As a co-owner of my company, Trestle Street Partners, a lot of my time is spent hunting for new association's to manage. The most frustrating part of this process is meeting owners that have a property management company and aren't being serviced properly. I'll break down the basics of what being an association manager involves:

1) To manage the property ... Duh! But what does that involve? Hiring and firing of service vendors, such as: landscapers, parking lot sweepers, day porters, window cleaners, lighting electricians, etc. Making those vendors sign contracts that protect the association, collecting W-9's, and then monitoring the insurance expiration dates of vendors that service the property. Not only do you need to monitor the insurance, but you need the vendors to add the association and property manager as an additional insured. Simple enough, right? Only in a perfect world ...

2) To manage the corporation that exists behind the property. Most every association is a non-profit mutual benefit corporation, and like every other corporation needs to file tax returns, elect a board of directors, file statements of information, review financials and keep adequate bookkeeping. Otherwise, the corporation will become "inactive" in the eyes of the State, and/or the corporate veil that protects property owners will be rendered useless.

3) Keep in line with California State laws. The body of law that specifically governs California Association's is the Davis-Stirling Act. I'm always using this website for helpful information: www.davis-stirling.com. Click on the "statutes" tab for a list of all the laws that are pertinent to California Associations.

4) Sending out monthly or quarterly assessments for Association dues and following up on late payments. Late payments and collection of bad debt really separates average and great property managers. Your association should have something called a billing and collection policy, which are really the rules for of collection debt and issuing late charges. Example: assessments are sent out on the 20th of the month, due the 1st day of the following month, a late charge placed on the 15th, and a lien is enforced on the 45th day of non-payment. By practice I call each owner that hasn't sent payment on the 10th of the month to remind them that in 5 days they will be receiving a late charge if the payment isn't received. That's the reminder call. On the 15th a letter is sent and a late charge applied to the account. The 45th day a lien is placed and the account sent to collections. By this time the owner has received 3 calls (if not more) and two letters.

In short, an association's property manager is responsible for the property, responding to phone calls, managing the corporation, and the collection of debt/assessments. If you have a property manager that is failing to meet any of the basic requirement outlined above, you should really be considering a transition in management.

Feel free to check out our website at www.trestlesp.com for more information.

Community Association Management

As a property manager, searching the weather is just part of the job. A few days ago it was wind that I worried about, and today we have rain in the forecast. One way or another mother nature always finds a way to affect the world of property management. I'll list a few topics that come to mind when I think of rain, but will focus on the topic of concrete walls leaking water into a building.

1)Window leaks
2)Leaks through slabs of concrete buildings
3)Water intrusion through roll up doors and building entrance doors
4)Sump pumps breaking down
5)Bio-swales turning into rivers and lakes
6)Retaining walls starting to fail
7)Roof leaks
8)Leaks through vent pipes
9)Storm drain filters falling apart due to over-fill of trash
10)Landscape lights shorting
11)Dirt lots flooding into parking lots
12)Unsealed roof penetrations appearing after a tenant improvement
13)Landscape flooding due to lack of drainage

When thinking about concrete tilt up walls, the first thing you need to remember is that concrete is porous, permeable and needs waterproofing. During the huge rains we experienced last year in Southern California, I received calls from buildings in Irvine, Ontario, Murrieta, Temecula, and Rancho Cucamonga about water intrusion coming miraculously through the exterior wall and damaging carpet and drywall. The problem usually occurred where landscape and dirt sit right against the concrete surface of the building. The thought process for this common problem goes something like this:

1)Is the water coming through a window that is not properly sealed?

2)Are there any small cracks on the exterior wall of the building that are allowing water to come through?

3)Is the landscape being property drained or is the water pooling and sitting against the wall?

4)Was the waterproofing properly applied to the concrete surface of the tilt-up that the landscape sits against?

5)How much money do I have to address this problem without issuing a special assessment?

6)Is this an association problem or an owner problem?

7)Is a pipe leaking (let's rule this out since we're focusing on tilt up wall water intrusion)

Just for the sake of fixing this wall, and assuming we have plenty of money in the association's bank account; I'll address how to solve the phone call below.
Phone call: Luke, you'll never believe it, I have water all over my carpet and soaking my drywall, and the problem looks to be coming in from the landscape straight into the building.

As an association manager the first step would be determining if this is an owner issue or association. Let's assume there is no gray area, this is a condo building that the association is responsible for the exterior walls, and every bit of the problem is for the property manager to handle. The best way to handle this would be to take the following steps:

1)Look for cracks in the wall. If you notice any cracks then have a water-proofer grind them down, fill in with an epoxy, and re-paint the area to the original color.

2)Remove the dirt that sits against building about 2' down. Apply a waterproof membrane along the foundation of the building. Infill the area with gravel and top off with dirt.

3)Make sure the landscape drainage is working properly, and/or install landscape drainage to properly drain the landscape.

4)If a window sits on the ground near the landscape, have a window leak specialist re-caulk and address any problems where water could potentially seep through.

The four-step process above has fixed the problem 100% of the time in my experience. However, this expense can easily get over a couple grand in the blink of an eye.

Trestle Street Partners Association Management

12/16 was windy and I thought it would be a good time to dive into best practices for everyone to think about. The common affects wind can have on an association's common area property are the following:

- Parking lot poles fallen over.
- Trees fallen over or needed to be re-staked.
- Loss of power to a building, creating troubles for tenants/owners.
- Property damage.
- Broken tree limbs needing to be hauled off by landscapers.
- Parking problems in the parking lot due to fallen trees, tree limbs, leaves and wondering tumble weeds.
- Loss of plant ground cover, such as mulch.

Yesterday winds in Orange County were recorded at 65 miles power hour in areas. To hedge off landscape property problems, I recommend the following:

1) Ask landscapers to restate/tighten poles that are holding up young trees.
2) Have your landscaper tour your property and remove fallen trees limbs and/or any extra plant material blown into your parking lots.
3) Trim trees annual. If trees are top heavy, they are more likely to fall over, and have a better chance of excess limbs falling onto cars.
4) Don't plan installing mulch if winds are in the forecast.

Tustin, California reportedly had a power loss to two-hundred and forty-one (241) customers. This creates a variety of phone calls for my firm, including power loss calls from tenants, and Fire Life Safety (FLS) phone calls from building's fire sprinkler monitoring companies. The fire life safety systems have a battery power back-up, but monitoring will only remain for the life of that battery.

Unnecessary property damage can occur if trash enclosure doors aren't locked down. I like to remind janitors, day porters, and owners to lock down doors in advance of the winds.

On a side note, I see so many different circumstances of tree limbs falling and trees falling over that I recommend never parking under a tree during winds. It's just a good precautionary measure to avoid the possibility of having something bad happen.

In property management, wind blows.