Creating an HOA in Oregon

Creating a Homeowners Association in Oregon

Many older subdivisions have recorded CC&Rs but no homeowners association to govern the community. Who enforces the provisions of the CC&Rs?  Who maintains the common areas? Who ensures compliance with the architectural requirements? As a practical matter, it often makes sense to have an HOA handle these issues, rather than an individual owner or group of owners.

The Oregon Planned Community Act (ORS Chapter 94) contains a process for owners to use to form an HOA. The procedure applies to pre-2002 communities with shared maintenance responsibilities (private roads, perimeter fence, entrance monument) and with CC&Rs that require owners to pay assessments.

The process is started when at least 10% of the lot owners initiate the process. Once that happens, here are the following steps:

1. Notice of an organizational meeting is sent to all lot owners in the community.

2. The notice must include the names of the individuals initiating the process, a statement that the purpose of the meeting is to form an HOA, and a copy of the proposed articles of incorporation.

3. In addition, the notice must state the required number of votes necessary to form the HOA. If the existing CC&Rs are silent, then at least a majority of the lot owners must vote to create the HOA.

4. Lastly, the notice must state that the owners will vote to elect a board of directors to govern the new HOA.

5. At the organizational meeting, a new board of directors is elected. The new board is then required to file the articles of incorporation and record any required documents in the county recording office.

Assuming the owners vote to form the HOA, all of the organizational expenses are a common expense shared by all owners.  Now, this is a simplified version of the process. The statute governing the process (ORS 94.574) is a bit more complex, and you should consult a qualified attorney before embarking on the formation of a homeowners association.

But what if the subdivision has recorded CC&Rs but no shared maintenance obligations or payment of dues? In that case, the owners must amend the CC&Rs to form an HOA. The CC&R amendment would add provisions creating the HOA and authorizing the election of a board of directors. The required vote may be high. Some CC&Rs required the approval of at least 90% of all owners. In that case, it’s critical that owners understand the benefit and value of forming an HOA.

Once the amendment is approved and recorded, the owners should incorporate as a nonprofit and file articles of incorporation with the Oregon Secretary of State. In addition, the owners should adopt bylaws. The bylaws are the operational guidelines for the new HOA and the board of directors, and should be recorded in the county recording office.

The process to form an HOA can be complicated, and as always, you are encouraged to seek competent legal advice.

Document Amendment Timeline

To learn more about amending your governing documents, check out our article: Amending Your  Governing Documents 

Florida Amends Statute Governing Termination of Condominiums

This year the Florida legislature adopted Senate Bill 1520, governing the termination of condominium associations. You can review the changes here.

Oregon Condominium Conversions

Definitions

1. “Declarant” means a person who records a declaration under ORS 100.100
2. “Declaration” means the instrument described in ORS 100.100 by which the condominium is created and as modified by any amendment recorded in accordance with ORS 100.135 or supplemental declaration recorded in accordance with ORS 100.120.
3. “General common elements,” unless otherwise provided in a declaration, means all portions of the condominium that are not part of a unit or a limited common element
4. “Sale” includes every disposition or transfer of a condominium unit, or an interest or estate therein, by a developer, including the offering of the property as a prize or gift when a monetary charge or consideration for whatever purpose is required by the developer

Statutory Framework - The Oregon Condominium Act (ORS Chapter 100) governs:

1. • Formation

• • Operation

• • Sales

1. Ownership Interests - Most condominiums consist of two types of real property: units and common elements. Each type is governed by substantially different rules regarding ownership, use, operation, and responsibility for maintenance, repair, and replacement.
2. Units - The unit consists of the cubic air space created by the horizontal and vertical boundaries described in a condominium declaration. It is a separate parcel of real property capable of being platted, conveyed, and encumbered like any traditional parcel of real property.
3. Common Elements - Generally, the balance of the property covered by a condominium plat not constituting units is called common elements. While units may be individually conveyed and encumbered, common elements, as their name suggests, are owned in common by all unit owners as tenants in common. Under the Oregon Condominium Act, common elements may not be conveyed, encumbered, or subjected to lien or attachment except under special circumstances. See ORS 100.440.
4. General vs. Limited Common Elements - Common elements are further divided into two types: general common elements and limited common elements, which are distinguished from each other on the basis of right of use. A general common element is one that all unit owners are entitled to use on a nonexclusive, theoretically equal, basis, while use of a limited common element is restricted to less than all of the units (and typically to only one). See ORS 100.005(7), (16), (18). Some typical examples of limited common elements in residential condominium developments are decks, patios, assigned parking spaces, and courtyards. Limited common elements must be designated as such on the condominium plat, and their assignment to units and the description of use rights and limitations must be set forth in the condominium declaration and bylaws.
5. Formation - To submit any property to the provisions of the Oregon Condo­minium Act (Condominium Act), the declarant must record a condominium declaration, bylaws, and plat in the office of the recorder of the county in which the property is located. ORS 100.100(1), ORS 100.115(1), ORS 100.410(1)
6. Declaration - The required contents of any condominium declaration are set forth in ORS 100.105. In summary, for other than staged or flexible condominiums, the declaration must include a description of the property being submitted to unit ownership, a statement of the interest in the property, the name of the condominium project, the unit designation, a statement that each unit’s location is shown on the plat, a description of the boundaries and area of each unit, a description of the general common elements, and an allocation to each unit of an undivided interest in the common elements and the method used to establish that allocation. ORS 100.105(1).
7. Bylaws - The Oregon Condominium Act (Condominium Act) requires the declarant to adopt on behalf of the association of unit owners the initial bylaws governing the administration of the condominium. ORS 100.410(1).
8. Plat - A plat must be prepared and recorded simultaneously with the condominium declaration. ORS 100.115(1). The plat must comply with the requirements of ORS 92.050, ORS 92.060(1)–(2), ORS 92.080, and ORS 92.120 (requirements for surveying, preparing, filing, and recording plats). The plat must show the location of all buildings and public roads; show the designation, location, dimensions, and area of each unit, including the vertical and horizontal boundaries of each unit and the common elements to which each unit has access; identify and show, to the extent feasible, the location and dimensions of all limited common elements described in the declaration; and include a statement of a registered engineer, architect, or surveyor certifying that the plat fully and accurately depicts the boundaries of the units of the buildings and that construction of the units and buildings as depicted on the plat has been completed. ORS 100.115(1)(a)–(d).

Approvals

1. 1. Oregon Real Estate Agency - The Oregon Real Estate Agency carries out the provisions of the Condominium Act. See ORS 696.490(2) (appropriating funds for that purpose). The agency will review for substance and form both the original executed condominium declaration and bylaws, and copies of the condominium plat. The agency will also require the submission of a subdivision guaranty, a form of title insurance in favor of the agency, covering the property covered by the declaration.
   2. City or County - Depending on whether the property is located in a city or in an unincorporated county, the local government surveyor, tax collector, and tax assessor must review and approve the condominium declaration and plat. The city or county surveyor may be required to execute the plat.

Disclosure Statement

1. • General Description
   • Sale Agreements
   • Warranties
   • Common Expenses, Assessment and Budget
   • Operation and Management
   • Declarant / Developer Rights
   • Governing Documents

Reserves & Reserve Studies

1. 1. The Oregon Condominium Act requires all new condominiums to establish a reserve fund. The amount of reserves is based on a reserve study.  The reserve study should be prepared by a qualified individual and identify all property and components with a useful life of 1-30 years.  Reserves are only required for property or components which the Association is obligated to maintain, repair, or replace. 

Conversions 

1. A conversion condominium is a condominium in which there is a building, improvement, or structure that was occupied before any sales activity and that is at least partly residential in nature. ORS 100.005(10). The legal requirements for nonconversion condominiums apply with equal force to conversion condominiums.
2. Notice to Tenants - The declarant must give each tenant a notice of conversion at least 30 days before the declarant presents an offer to sell the unit to the tenant. ORS 100.305(3). The notice of conversion must include the following information:

1. 1. • A statement that the declarant intends to create a conversion condominium;

• • • General information relating to the nature of condominium ownership;

• • • A statement that the notice does not constitute a notice to terminate the tenancy;

• • • A statement regarding whether the tenant’s unit will be substantially altered;

• • • A statement regarding whether the declarant intends to offer the unit for sale and, if so, a description of the tenant’s rights under ORS 100.310(1) to (3); a good-faith estimate of the approximate price range for which the unit will be offered for sale to the tenant; a good-faith estimate of the monthly operational, maintenance, and other common expenses or assessments attributable to the unit; a statement that financial assistance may be available from a local governing body, the Housing and Community Services Department, or a regional housing center; and a statement that the landlord may not terminate the tenancy without cause if the termination would take effect; and

1. 1. • A statutory notice about restrictions on rent increases.
      • The notice must be hand-delivered to the tenant’s dwelling unit or sent to the tenant at the unit’s address by certified mail, return receipt requested. ORS 100.305(1)(f).

Right of First Refusal - Before the declarant sells any unit to a third party in a conversion condominium without substantial renovation of the unit, the declarant must first offer to sell the unit to the tenant who occupies it. The terms of the offer are specified by statute. The offer terminates 60 days after the tenant receives it or upon the tenant’s earlier written rejection of the offer, and it must be accompanied by all of the applicable disclosure statements issued by the Real Estate Commissioner as required by the Oregon Condominium Act.

Timing - The Oregon Condominium Act provides that the notice of conver­sion must be given to a tenant at least 30 days before the declarant presents the right of first refusal to the tenant. ORS 100.305(3). In addition, the notice of conversion must be given at least 120 days before the conversion condominium declaration is recorded. ORS 100.305(1).

Regulation of Sales - Unlike condominium statutes in other states, the Oregon Condo­minium Act relates only to the sale (or resale) of units by developers and not to casual resales of single units by individual owners. The act defines a developer as a declarant or any person who purchases an interest in a condominium from a declarant, successor declarant, or subsequent developer for the primary purpose of resale. ORS 100.005(13).

Snow Removal in Community Associations

The Portland metro area and central Oregon are covered in snow and ice. As a result, dangerous conditions may exist in common area parking lots, sidewalks, or roadways.  What is the community association’s obligation to clear or remove natural accumulations of snow and ice?

Some states have adopted the “Massachusetts Rule”. This rule states that property owners have no obligation to remove snow or ice from common areas under an association’s control. However, if the association aggravates the natural conditions, there may be liability.  For example, suppose an association shovels snow from a walkway, but fails to put sand or salt on the surface. The walkway is now covered in a sheet of ice and has created an even more dangerous condition.  In that case, there may be liability.

There are dozens of cases in different jurisdictions dealing with a property owner or association’s obligation for snow and ice conditions. For instance, in a number of cases in which an individual slipped and fell on ice or snow while walking on or across a parking lot, the courts, reasoning in general that a defendant was not liable for slip-and-fall accidents on natural accumulations of snow but could be liable for unnatural accumulations or aggravations of natural conditions, held that it was or could be proven that there was liability because the defendant plowed, sanded, or otherwise cleared the snow in a poor manner, or left icy or slushy ruts or tracks in which the plaintiff slipped.

Many court decisions have found that It is unfair to make a landowner or community association absolutely liable for every slip-and-fall accident on snow in a lot, especially as this would require the owner or association to spend the entire winter clearing the lot on pain of losing a liability suit. Moreover, it is equally unfair to require the lot owner or association to shoulder the expense of plowing and replowing the lot during the course of a continuous storm. In this vein, many jurisdictions have ruled that there is no liability for an accident that takes place while a storm is still going on or a reasonable time thereafter, to give the owner a chance to clear out the lot.

Here are the general rules of thumb for community associations:

1. If the Declaration or Bylaws requires the association to plow, shovel, or clear common areas, the association must do so. Many community associations, particularly in central Oregon, are obligated under the governing documents to provide snow removal.  Use a licensed, insured, and bonded contractor to perform those services.

2. In the case where the association has no obligation for snow removal, there is a potential to create liability if the association engages in those activities.

3. If the association has common areas which are generally open to the public, there is typically an obligation to keep those areas clear of snow and ice, regardless of any requirements in the governing documents.

4. If the association has no obligation for snow removal, but decides to provide that service, it should hire a licensed, insured, and bonded contractor.  The removal of snow or ice must result in a safer condition than leaving the natural accumulation on the common areas.

Disclaimer: By reading the information above, you do not become a client of the firm. The information provided above is based on general legal principles, and may not be applicable to you. If you have a legal issue or question, you should speak with an attorney.

Free Speech in Community Associations

Condominium and homeowner associations in Washington and Oregon often deal with free speech issues.  Political signs are perhaps the most common issue. It is commonly misunderstood that owners have a right to display political signs.  Generally, there are no free speech rights in community associations unless granted under the governing documents or state law.  There are a few exceptions, though.

Some states, such as Maryland, have enacted statutes authorizing owners in community associations to display “candidate” signs. (Maryland Code Annotated, Section 11-111.2(c)). The Maryland statute specifically states that community association CC&Rs and rules may not prohibit the display of signs advocating for political candidates.  Illinois has adopted a similar statute. (765 ILCS 605/18.4(h)).

Another exception is the Federal Flag Act. (18 USC 700, et. seq.). The Act prohibits community associations from barring the display of the American flag.  Thus, if the association’s governing documents prohibit flags, that provision in the governing documents is void.

Free speech rights in community associations were given articulate treatment in a New Jersey Supreme Court case. (Committee for a Better Twin Rivers vs. Twin Rivers Homeowners’ Association, 192 NJ 344 (2007)). While the case is not binding in other jurisdictions, the reasoning and basis for the Court’s decision would likely be followed by most state courts. I’m attaching a copy of the decision to this letter. 

I’ll explain the facts and discuss the outcome: 

Twin Rivers is a planned community consisting of condominiums, townhouses, single family homes and commercial buildings.  The community consists of nearly 10,000 residents. The Twin Rivers Homeowners’s Association is a nonprofit corporation created to oversee the affairs and operations of the community.  Each owner, upon purchasing property in the community, becomes a members of the Association. 

In early 2000, a group of owners formed the Committee for a Better Twin Rivers.  The committee repeatedly placed signs throughout the community, and the Association promptly removed the signs each time.   The Committee filed a lawsuit against the Association to invalidate its rules governing signs on the basis of free speech protection.  The Association’s sign rules prohibited political signs on individual owner’s property and in the common areas of the community. 

The case went through the trial court, the Court of Appeals, and ultimately to the New Jersey Supreme Court. In summary, the Court held that in order to enforce constitutional rights, there must be “state action”. This means that a governmental actor or entity must attempt to curtail an individuals free speech rights in order to trigger enforcement.  Here, the court held that the Association’s enforcement of its sign rules did not constitute “state action” and that the owners’ expressional activities were not unreasonably restricted. 

Condominium Review for Purchasers

Buying a condominium is a significant investment. Prior to purchasing, buyers receive numerous documents relating to the condition and operations of the condominium project. We will review those documents and provide an opinion on the overall health of the condominium. We will requested the following documents from the potential buyer:

• Declaration / CC&Rs
• Bylaws
• Rules and Regulations
• Meeting Minutes for the previous 3 years
• Reserve Study
• Maintenance Plan
• Articles of Incorporation
• Insurance Policy Declarations

After receiving the documents, we will provide an opinion on the following:

• Declaration or Bylaw provisions which are outdated or contrary to state law;
• An overview of the financial standing of the Association;
• Potential for construction defect issues;
• Any pending litigation;
• Restrictions on renting or leasing of units;
• Conflicts between rules/regulations and other governing documents;
• Adequacy of the Association's insurance coverage; and
• Whether the reserve account is properly funded.

The First Amendment and Community Associations

My 15 year old son often argues that I have no authority or control over his right to say what he pleases. His justification is that he has First Amendment rights under the United States Constitution. He’s correct that he has First Amendment rights, but he’s wrong that the First Amendment applies in my home. The rights granted under the First Amendment prohibit government interference with free speech, the right to assemble, and the right to religious freedom.  But, you see, I am not the government and therefore not bound by the First Amendment.

For the most part, community associations are not bound by the First Amendment, either. CC&Rs and Bylaws often restrict owners’ rights to display signs, even political signs. In a well-known Pennsylvania case a unit owner wanted to place a “for sale” sign on the window of their condominium. The CC&Rs contained a “no sign” provision which the Association attempted to enforce.  The owner argued that the Association had no right to enforce the prohibition under the First Amendment. The Court held that the condominium is private property and that the Association’s enforcement of its CC&Rs was not state or governmental action. Thus, the First Amendment did not apply.

A few years ago the New Jersey courts decided perhaps the most significant case involving community associations and free speech. Owners at a condominium posted flyers in the common areas, which the Association quickly removed. The owners argued that the Association had no right to remove the flyers under the First Amendment. They also argued that the Association acted more as a municipality, since the community contained approximately 1 square mile of townhouses, single family homes, condominiums and commercial shopping and was home to about 10,000 residents.  That court ruled that "the minor restrictions on plaintiffs' expressional activities are not unreasonable or oppressive...," and that the association's rules didn't violate the freedom of speech and assembly clauses of the state constitution.

Some forms of expression are legislatively allowed regardless of the restrictions in the governing documents.  For example, the Freedom to Display the American Flag Act was adopted in 2005. This federal legislation prohibits homeowner associations from banning the installation or display of the American flag. The Washington Homeowners Association statute incorporates the federal law:

(1) The governing documents may not prohibit the outdoor display of the flag of the United States by an owner or resident on the owner's or resident's property if the flag is displayed in a manner consistent with federal flag display law, 4 U.S.C. Sec. 1 et seq. The governing documents may include reasonable rules and regulations, consistent with 4 U.S.C. Sec. 1 et seq., regarding the placement and manner of display of the flag of the United States. (RCW 64.38.030)

In addition, some states mandate that associations grant freedom of expression regardless of the contents of the governing documents. Arizona passed a law that community associations may not prohibit the indoor or outdoor display of a political sign within 45 days of an election and seven days after an election. However, associations may regulate the size and number of political signs as long as their rules aren't more restrictive than city or county ordinances.

Community associations should strike a balance between the restrictions governing the community and owner’s rights to speech and expression.  Here are some things to consider when adopting amendments or rules which may impact freedom of speech or expression:

• Consult state statutes. State law may already provide the maximum restrictions allowed. If the state regulates political signs in community associations, the association's rules must be consistent with state law.

• Review city and county ordinances. If state statutes or court decisions don't allow association regulations to be more restrictive than those imposed by local government officials, the board members must follow the local regulations.

• Don't prohibit political signs without exception. If the association's regulations are reasonable, content neutral and consistently enforced, the board is more likely to avoid expensive litigation and preserve the delicate balance between the community's aesthetic values and individuals' free-speech rights.

• Remind residents of sign rules prior to election season or when they become effective. Use the association newspaper, website, a letter or a community meeting to remind residents of the rules at least 15 to 30 days before signs may first be displayed.

• Don't forcibly remove signs. This should be done only as a last resort.

• Approach enforcement reasonably and in a way that encourages compliance rather than acrimony or litigation. Don't feel compelled to measure the size of everyone's yard signs. If a sign obviously violates the size restrictions, then proceed with enforcement.

Transitional Advisory Committees

The Oregon Planned Community Act (ORS Chpater 94) and the Oregon Condominium Act (ORS Chapter 100) provide for the formation of a transitional advisory committee to facilitate the transition of the association from the developer to the owerns. For condominiums, the formation of a transitional advisory committee is only required if the condominium consists of at least 20 units or, if it is a staged or flexible condominium, the number of units that may annexed or created totals 20.

For a planned community created on and after January 1, 2002, a transitional advisory committee is only required for Class I Planned Communities.

A transitional advisory committee is advisory only.  However, it can request access to the information, documents and records that the declarant must deliver to the owners at the turnover meeting.  Serving on the committee provides owners an opportunity to become familiar with the governing documents, budgets, architectural and other restrictions, rules and other critical aspects of association operation and management.  Members of the advisory committee are often those owners who ultimately run for, and are elected to, board positions at the turnover meeting.

Understanding Easements

Easements are very common in condominium and homeowner associations throughout Oregon and Washington.  Simply put, an easement is the right of someone to use or access the property of another.

There are numerous forms of easements.  For example, an owner may have the right to drive across their neighbor’s property in order to access their own property.  This is called an "easement appurtenant", where there is a dominant estate (the property where the driveway is located) and a servient estate (the property benefited by the use of the driveway).

The other type of easement is called an easement in gross. With this type of easement, the ownership of an adjacent parcel doesn’t matter.  An easement in favor of a utility company through a subdivision is an easement in gross—it doesn’t matter that the utility company doesn’t own adjacent property.

Either type of easement may be created in a variety of ways. Typically, easements are written and then recorded in the county records.  The written document will detail the duration of the easement, the permitted uses, and who should maintain the easement area.  If the written document does not specifically state how long the easement lasts, the easement will typically last in perpetuity.

Besides a formal written agreement to create an easement, there are other ways that easements may be created.  Similar to adverse possession, an easement may be created by “prescription.”  This is similar to adverse possession, where an individual may take ownership of property by unauthorized, but continuous possession or use.  For example, if I walk across my neighbor’s property to access the beachfront (without my neighbor’s permission), I may ultimately create a prescriptive easement.

Another way to create an easement without a written agreement is through an easement by necessity.  Suppose I split my property into two separate lots, and sell one of the lots to a third party.  But the only way for the new owner to access the highway is across the parcel I kept.  The courts in that case would likely grant an easement of necessity.

Homeowner and condominium associations are affected by several types of easements.  First, utility companies have easement rights to establish and maintain water lines, sewer lines, and electrical wiring. In association with common property, the right of owners to use those areas is an easement right.  Lastly, many governing documents provide a “right of entry” authorizing the association to enter lots or condominium units to remedy violations.  This too, is a type of easement.

Here are some depictions of easements common in homeowner and condominium associations:

This is an easement in favor of the State of Oregon. This easement is a walkway/bikepath open and accessible to the public.

The easement shown here is for a storm drain. The easement runs along the length of the individual owners' lot lines.

The notations on plat maps often indicate maintenance and repair obligations.

Another example of an access/utility easement found on a plat map.

The Importance of Bids

Most homeowner and condominium associations engage the services of professionals to help with the operations of the community. These professionals include accountants, landscapers, contractors, and managers. As board members, you have a duty to ensure that association funds are spent carefully and responsibly.  Part of the process to ensure financial responsibility is soliciting and reviewing competitive bids prior to hiring professionals or vendors.

1.  Define the Scope of Work

Prior to seeking competitive bids the board or committee must develop a comprehensive scope of work. In other words, what services does the board want performed? Let's suppose the association wants to hire a landscaping company to maintain the common areas. The scope of work may look something like this:

SERVICE	FREQUENCY	COST
GRASS MOWING, FERTILIZING, AND MAINTENANCE	3X MONTH
TRASH COLLECTION IN COMMON AREAS	WEEKLY
TREE & SHRUB PRUNING & MAINTENANCE	MONTHLY
IRRIGATION SYSTEM MAINTENANCE	BI-ANNUALLY
APPLICATION OF HERBICIDES AND INSECTICIDES	AS NEEDED
TOTAL ESTIMATED COST:

Each potential contractor receives the same bid form and returns the form to the association with their total estimated costs and a break-down of each line item cost.  Otherwise, its easy to be misled. Perhaps one contractor's price appears significantly lower, but it's because they haven't included the costs associated with the maintenance of the irrigation system.

Ideally, three bids should be solicited and compared.  However, some associations develop strong and lengthy relationships with vendors. That's ideal, but it makes sense to occasionally compare services and prices of other vendors even if the board is intent on continuing its relationship with its preferred vendor or contractor.

2.  Do Your Homework

Once bids are received, ask around about the vendors who submitted bids. What's their reputation? In Oregon and Washington you can check on the status of a contractor's license, review their insurance, and see if anyone has submitted complaints against the company.

For Oregon contractors visit: http://search.ccb.state.or.us/search/

For Washington contractors visit: http://www.lni.wa.gov/TradesLicensing/Contractors/HireCon/verify/Default.asp 

3.  Hammer Out The Contract

Very few people enter into a contract with the expectation of future disputes or that the other party may breach the terms of the agreement.  At a minimum, service contracts should contain the following elements:

• Detailed statement of when and how work will be performed;
• Amount and terms of the contract price;
• Acts or omissions which entitle a party to terminate the contract;
• A warranty of any work or services performed;
• A statement by the contractor that it is licensed, insured and bonded;
• Indemnification language whereby the contractor will indemnify and hold harmless the association and the board members from legal claims arising out of the contractor's work; and
• Provisions governing how disputes will be resolved, i.e. mediation, arbitration.

As always, have an attorney prepare or review all contracts prior to signing.

4.  Review

Once the bidding and contracting are done, follow-up with contractors and vendors to ensure that the terms of the contract are fulfilled.  The board or a committee should review all association contracts on an annual basis to verify that services have been performed, if new bids should be solicited, and that payments have been made.

FHA Certified Condominiums

Many condominiums throughout the United States are Federal Housing Administration (“FHA”) certified.  This allows prospective buyers to receive FHA-insurance loans and mortgages. If a condominium is FHA certified, that means that the condominium meets all of the FHA legal, financial, operational, and property requirements.

FHA certified condominiums allow for a larger demographic of potential buyers.  This, in turn, makes the condominium more valuable and marketable.There are certain requirements which must be met.  The requirements include:

1. Property Use and Type

Under federal law, FHA mortgages may be used only to purchase a primary residence.  You may not secure an FHA loan for the purchase of a timeshare, condo-hotel, or resort property.  There are other types of properties which FHA loans may not be used: condominiums where more than 25% is designated for commercial use or condominiums located in coastal barrier zones.

2. Financial Stability

To become FHA certified, the association must prepare and fully fund an annual budget.  At least 10% of the budget must be allocated to reserves. The reserve fund is used to maintain, repair and replace common elements of the condominium, such as the siding and roofs.  Lastly, no more than 15% of the condominium units may be more than 60 days delinquent on the payment of regular assessments.

3. Operational Stability

The condominium association must show that at least 50% of the units are owner-occupied. This means that if your association has a high number of rentals, FHA approval may not be an option.  In addition, FHA certification requires that all of the condominium buildings and common element are in good repair.

4. Insurance Requirements

Every association should have certain insurance policies.  Click here for more on insurance. FHA approval requires that the association maintain the following policies:

A. Property/Hazard Insurance

B. Liability Insurance

C. Fidelity Insurance (if there are more than 20 units)

D. Flood Insurance (if required)

5. Legal Requirements

There are a handful of legal requirements to become FHA certified.  First, any rental restriction in the governing documents must comply with the FHA’s governing statutes.  Second, litigation (other than routine litigation for delinquent assessments) must be disclosed and explained.  Lastly, the association must certify that it is in full compliance with any applicable state or federal law.

To see if your condominium has been FHA approved, visit: https://entp.hud.gov/idapp/html/condlook.cfm

The Importance of Reserves

Adequate reserves are important to maintain property values and avoiding large special assessments. Most importantly, reserves increase the marketability of homes or condo units. Savvy buyers will base much of their purchase decision on whether or not there are adequate reserves. Typically, the amount of reserves is based upon a reserve study. The reserve study identifies all of the common property or common elements which the association is obligated to maintain, repair or replace. For single family home communities, this often includes entrance gates or monuments, play structures, fences or roads. For condominium communities, reserves are used to maintain or replace roofs, siding, clubhouses, decks and other limited or general common elements.

There are two components to reserves: the financial and the physical. A qualified professional first identifies all of the physical components of the community. Next, a reserve study and financial analysis are prepared showing how much money must be reserved. For example, if the professional indicates that the condominium roof must be replaced in 18 years, the reserve analysis will indicate how much money the association must save on a regular basis so that in 18 years it will have the necessary funds to pay for a complete roof replacement.

When choosing a reserve study provider, make sure the company carries liability insurance. If the association has complicated reserve items, it’s usually best if an engineer or architect conducts the site visit and reserve study.

Here’s an overview of the legal requirements in Oregon and Washington:

Oregon

• Reserve account must be established for all improvements which require major maintenance, repair or replacement in more than 1 and less than 30 years.
• Amount of reserves must be based on reserve study or other reliable information.
• Must perform reserve study (or review) annually and update accordingly.
• Reserve study must include:

- All items for which reserves are established - Remaining useful life for those components - Estimated costs of repair, maintenance or replacement

• Association may borrow from reserves for unforeseen expenses, but must do so with a resolution stating how and when the money will be returned to reserves.

Washington

• Non-condominium associations are “encouraged” to have reserves.
• Reserve account must be in the name of the association and administered by the board of directors.
• Amount of reserves is based on reserve study, which must be updated by a visual site inspection every three years by a “reserve study professional.”
• Reserve study must include:

- Component list - Date and statement of compliance with RCW - Level of detail of the reserve study - Association’s reserve balance - Other financial information - Reserve disclosure

• Association may borrow from reserves to pay for unforeseen or unbudgeted costs, but must do so by resolution sent to owners which explains when and how the funds will be repaid into the reserve fund.
• Association may be exempt from reserve requirements if there are 10 or fewer homes or units.

Turnover in Condominiums and HOAs - Oregon

Organization of Association The Oregon Planned Community Act (PCA) and the Oregon Condominium Act (OCA) require that an association of owners be formed for the purpose of administrating, managing, and operating the development. The PCA specifically requires the declarant to organize the association as a nonprofit corporation under the Oregon Nonprofit Corporation Act (See ORS chapter 65) and adopt and record the initial bylaws not later than the date on which the first lot is conveyed.   With respect to a condominium, upon the recording of the declaration and bylaws, an unincorporated association is created by operation of law. Typically, the governing documents require the declarant to incorporate the association as a nonprofit corporation under ORS Chapter 65 prior to the conveyance of the first unit or by the turnover meeting discussed below.

Declarant Rights Relating to Control of Association.  

Subject to certain statutory limitations, a declaration may provide for a period of declarant control of the association. A declarant’s control of an association may include the authority to appoint and remove officers and members of the board of directors of the association, to exercise powers and responsibilities otherwise assigned by the declaration and bylaws to the association, to approve amendments to the declaration or bylaws and, to allocate a greater number of votes to lots or units owned by the declarant. However, even though a declarant may initially control an association, the association itself is a separate entity.

Transition from Developer Control to Control by Owners

Transition is frequently characterized as a process and not an event. This concept is reflected in the PCA and OCA, both of which require the formation of a transitional advisory committee. This committee provides for the transition from administrative control by the declarant to administrative control by the association and its board and is generally referred to as a “turnover.” The timetable and procedure for turnover is established by the PCA or OCA and the declaration. A smooth transition, one that is well organized and amicable, will minimize conflicts and be in the best interests of all involved parties. A successful transition significantly contributes to the success of a development.

Transitional Advisory Committee

As mentioned, the PCA and the OCA provide for the formation of a transitional advisory committee to facilitate the transition from the administrative control by the declarant to control by the association. For condominiums, the formation of a transitional advisory committee is only required if the condominium consists of at least 20 units or, if it is a staged or flexible condominium, the number of units that may annexed or created totals 20. For a planned community created on and after January 1, 2002, a transitional advisory committee is only required for Class I Planned Communities. A transitional advisory committee is advisory only. However, it can request access to the information, documents and records that the declarant must deliver to the owners at the turnover meeting. Serving on the committee provides owners an opportunity to become familiar with the governing documents, budgets, architectural and other restrictions, rules and other critical aspects of association operation and management. Members of the advisory committee are often those owners who ultimately run for, and are elected to, board positions at the turnover meeting.

Turnover Process

Turnover marks the time when legal control of an association is transferred from the declarant to the owners. However, a developer who retains a majority of the units may still practically control the association.

Calling of the Turnover Meeting

The PCA and OCA require the declarant to call the turnover meeting within 90 days of the expiration of any declarant control specified in the declaration. If no such control has been reserved in the declaration, the PCA and OCA specify a time by which such meeting must be called. The declarant must give notice of the turnover meeting in accordance with the bylaws and PCA or OCA. If the turnover meeting is not called by the declarant within the time specified, for a condominium, the meeting may be called and notice given by an owner. In the case of a planned community, the meeting may be called and notice given by an owner or the transitional advisory committee.

Turnover Meeting

At the turnover meeting, owners elect a board of directors and the declarant has the obligation to deliver all property of the owners and association held or controlled by the declarant, as well as all items specified in the PCA and OCA. This includes the association’s governing documents and financial records. Turnover is a critical time in the life of an association. It is therefore important that the association consider retaining the assistance of an attorney experienced in HOA law to ensure a smooth transition and enable the new board to function in a manner that is consistent with all applicable laws and meets the needs of the development.

Three-Month Period After Turnover Meeting.

To facilitate an orderly transition, during the three-month period following the turnover meeting, the declarant, or an informed representative, is required to be available to meet with the board of directors on at least three mutually acceptable dates to review the documents delivered at the turnover meeting.

Review of Financial Statement

For communities with annual total assessments of more than $75,000, the PCA and OCA require the financial statement of to be reviewed in accordance with statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants.

Audit of Association Affairs

After the turnover meeting, the owner-elected board of directors should conduct an audit of the affairs of the association. The board will ultimately need to decide the breadth and scope of the audit. However, consideration should, at a minimum, include a review of the following:

(1) Property Inspection. An inspection of the physical components of the association’s property is critical. In conjunction with such inspection, the following are recommended:

(a) An inspection of and written report regarding the physical condition of the development by someone with experience to recognize faulty workmanship, shoddy maintenance and construction defects.

(b) A written report by an engineer or other qualified person to determine if plans and specifications were followed in construction of the development.

(c) Determination of the status of any unfinished construction repairs.

(2) Association Status. The declaration and bylaws govern matters relating to the operation of the association, including whether it must be incorporated. Unless the declarant provided a copy of the articles of incorporation at the turnover meeting, the board of directors must review the governing documents and determine whether the association is required to be incorporated. If so, after confirming with the Corporation Division in the office of the Oregon Secretary of State, the board should cause the articles of incorporation to be drafted and filed in accordance with Oregon law.

(3) Association Records. As noted above, the PCA and the OCA require that the declarant deliver to the association at the turnover meeting specific documents and items. If not provided by the declarant, the board should specifically request:

-An original or photocopy of the recorded declaration and copies of the bylaws and articles of incorporation;

-A deed to the common property, unless contained within the declaration;

-The recorded minutes of the association and board of directors;

-All rules and regulations adopted by the declarant;

-Financial statements;

-Any and all records of association funds and accounts;

-Any and all tangible personal property of the association and an inventory of such property;

-Records of all property tax payments to be administered by the association;

-Copies of all income tax returns filed by declarant in the name of the association;

-Any and all bank signature cards;

-Reserve account and reserve study information;

(4) Assessment Collections Audit. There should be a complete analysis and evaluation of the collection process and the adequacy of the reserves fund. If there are a significant number of past due assessments, immediate action should be considered. Even if there are only a few assessments that are past due, it is recommended that if there is a transition committee, that it have a collection resolution drafted and ready for adoption by the owner-elected board of directors to facilitate the collection process. A professional reserve study may be needed to help properly fund this account.

Model Code of Ethics - Condominium and HOA Board Members

 Model Code of Ethics for Community

Association Board Members

Board members should:

Strive at all times to serve the best interests of the association as a whole regardless of their personal interests.

Use sound judgment to make the best possible business decisions for the association, taking into consideration all available information, circumstances and resources.

Act within the boundaries of their authority as defined by law and the governing documents of the association.

Provide opportunities for residents to comment on decisions facing the association.

Perform their duties without bias for or against any individual or group of owners or non-owner residents.

Disclose personal or professional relationships with any company or individual who has or is seeking to have a business relationship with the association.

Conduct open, fair and well-publicized elections.

Always speak with one voice, supporting all duly-adopted board decisions even if the board member was in the minority regarding actions that may not have obtained unanimous consent.

Board members should not:

Reveal confidential information provided by contractors or share information with those bidding for association contracts unless specifically authorized by the board.

Make unauthorized promises to a contractor or bidder.

Advocate or support any action or activity that violates a law or regulatory requirement.

Use their positions or decision-making authority for personal gain or to seek advantage over another owner or non-owner resident.

Spend unauthorized association funds for their own personal use or benefit.

Accept any gifts—directly or indirectly—from owners, residents, contractors or suppliers.

Misrepresent known facts in any issue involving association business.

Divulge personal information about any association owner, resident or employee that was obtained in the performance of board duties.

Make personal attacks on colleagues, staff or residents.

Harass, threaten or attempt through any means to control or instill fear in any board member, owner, resident, employee or contractor.

Reveal to any owner, resident or other third party the discussions, decisions and comments made at any meeting of the board properly closed or held in executive session.

Emergency Preparedness for the Community Association

Disaster may strike at anytime. It could be a fire, tsunami, or earthquake. Community associations should be particularly aware of procedures and plans if affected by a disaster or emergency. For high-rise communities, a disaster plan is critical. Managers or contractors who typically maintain or service the building may not be available in the wake of an emergency. The board should consider: 1) how residents will be evacuated; 2) utility shut-offs (who and how); and 3) how communications will be established.

Here is a disaster/emergency outline for boards or committees to consider when formulating a recovery plan: Disaster Plan Outline

The following are some useful links:

“Prepare! A Resource Guide” from the Red Cross - http://www.portlandoregon.gov/pbem/article/410173

Portland Bureau of Emergency Management: http://www.portlandoregon.gov/pbem/46475

FAQs About Building Evacuation” from the National Fire Protection Association - http://www.nfpa.org/safety-information/for-consumers/occupancies/high-rise-buildings/faqs-about-building-evacuation.

“High Rise Emergency Handbook” from the City of Bellevue, WA - http://www.ci.bellevue.wa.us/pdf/Fire/mac8659-HighRiseHandbookFINAL.pdf

Understanding Common Interest Developments

“Common Interest Developments” or “CIDs” is a broad term used to identify condominiums, cooperatives, planned communities, or other housing developments where more than one owner shares in ownership or control of property. Chances are, you or someone you know lives in a CID. In 2006, there were approximately 57 million people living in some form of a CID. While news coverage of CIDS typically focuses on overbearing board members or angry owners, CIDs do offer advantages. Owners often share the expenses of utilities, maintenance and replacement of common property or facilities and in some communities, owners don’t have to worry about maintaining their yards or the exteriors of their homes. Gated communities offer security and high-rise condominiums offer a unique and enjoyable social setting. Most importantly, purchasing property in a CID usually comes with the benefit of knowing that your property value will be maintained.

With the increase of CIDs, most states have adopted laws which govern the operations and creation of these communities. Most states have very specific laws containing the requirements to form and operate a condominium, and there has been an increase in the number of states which have adopted legislation governing planned community developments in which owners own their lot and structure, but have a collective ownership interest in common property such as a recreation center or golf course.

It’s important to know the type of CID in order to know which statute may apply. A condominium is a form of legal ownership (not an architectural style) whereby owners own the “sheetrock inward” of their unit and are joint owners of the remainder of the buildings and structures, often referred to as “common elements.” Condominiums may take the form of a high-rise building, a townhouse style development, or even an office complex.

A cooperative is similar to a condominium, but in a cooperative a corporation holds title to the units and the common areas, and owners or members receive an exclusive occupancy right for his or her unit through a lease agreement.

Planned communities, on the other hand, are developments where individual owners own their land in “fee simple”, but are obligated to pay assessments used for maintaining common property typically owned by the homeowners association.

Both types of CIDs usually have recorded documents which bind the owner to certain obligations and restrictions. These documents are often referred to as “CC&Rs”, an acronym for “Declaration of Covenants, Conditions and Restrictions.” This document may restrict owners from painting their homes certain colors, requiring approval by the board prior to building fences or other structures, or prohibiting loud or obnoxious noises or behavior.

Most CIDs also have Bylaws which may or may not be recorded depending on the jurisdiction. The Bylaws contain the provisions on how the CID is to operate, such as how many individuals serve on the board of directors, when and how to hold the annual owners meeting, and the required number of votes in order to approve certain actions. If the CID association is incorporated, which many states now require, the CID will also be governed by its articles of incorporation.

Boards of Directors, with authority from state law or its governing documents, may also adopt rules and regulations. The rules and regulations must be consistent with the other governing documents, and are often used to interpret ambiguous language or set forth procedures for issues like violations of governing documents or failure to pay assessments.

CIDs are typically governed by a board of directors. The board is elected each year by a vote of the entire membership at an annual meeting. Although the board members may volunteer owners in the community, the law requires these board members to exercise “fiduciary duties.” This means that board members must act in the best interests of the association and the membership at all times, avoid conflicts of interest, and ensure that common property is maintained, repaired or replaced when needed.

Owners also have obligations to the association. The primary obligation is the payment of regular assessments or “dues.” These assessments are used by the association to purchase and maintain insurance, pay for common area landscaping, maintain recreation facilities, and for professional management of the association.

Most states and governing documents allow the association to place a lien on the property which may be foreclosed upon if an owner fails to pay these assessments. Although foreclosing on an assessment lien may sound harsh, it’s important to remember that when an owner fails to pay his or her assessments, the rest of the owners must make up that difference in order for the association to continue to operate.

Other owner obligations may include avoiding activities that may be a nuisance to other owners, and maintaining their unit or lot so that the aesthetics of the community remain consistent.

Ultimately, the goal of a CID is to foster a community, preserve property values, and create an enjoyable place to live.