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Avoiding Fraud in Condominium and Homeowners Associations

Last week an Indiana newspaper published an article titled "Homeowners association supervisor faces 21 counts of forgery." (Click here to read article) The article states:

A McCordsville woman is charged with 20 counts of forgery and one count of theft of at least $100,000 in Marion County.

Marcy M. Smitley, 39, the owner of MCS Management Group Inc., was hired to supervise the Winslow Crossing apartment and condo complex on the southeast side of Indianapolis.

Court documents state Smitley repeatedly wrote and cashed checks without the permission or knowledge of Winslow Crossing Homeowners Association, pocketing more than $120,000 during the course of four years.

Fraud and embezzlement can occur in any condominium or homeowners association.  Here are some steps to help minimize your risk:

1. Purchase fidelity insurance to protect your association from theft of funds.  Your fidelity policy limits should match the amount of funds in your accounts.

2. Require two signers for all checks.

3. Have an independent CPA perform an annual financial review or audit.

4. Require monthly bank account reconciliation.

5. Keep blank checks in a secure location.

6. Consider background checks for any employee or contractor who may have access to association funds.

Solar Panels in Homeowners Associations

Solar panels are becoming increasingly popular, even in the cloudy Northwest. Oregon and Washington both have statutory provisions which apply to homeowners associations. In most cases, these statutes will override prohibitions in the CC&Rs related to solar panels. The best approach is to work with owners and develop reasonable guidelines for the installation of solar panels. Washington - RCW 64.38.055

Washington’s statute governing homeowner associations and solar panels states:

The governing documents may not prohibit the installation of a solar energy panel by an owner or resident on the owner's or resident's property as long as the solar energy panel:

(a) Meets applicable health and safety standards and requirements imposed by state and local permitting authorities;

(b) If used to heat water, is certified by the solar rating certification corporation or another nationally recognized certification agency.

However, there are some restrictions that an association may place on the installation of solar panels. For example, the governing documents of the association may prohibit visibility of a roof-mounted panel above the roof line or require the materials and installation hardware to be color coordinated.

Oregon - ORS 105.880

Oregon’s law governing solar panels is not as broad as Washington’s. ORS 105.880 reads:

Conveyance prohibiting use of solar energy systems void. No person conveying or contracting to convey fee title to real property shall include in an instrument for such purpose a provision prohibiting the use of solar energy systems by any person on that property.

Any provision executed in violation of subsection (1) of this section after October 3, 1979, is void and unenforceable. For the purposes of this section, “solar energy system” means any device, structure, mechanism or series of mechanisms which uses solar radiation as a source for heating, cooling or electrical energy. [1979 c.671 §5]

Forest Heights Homeowners Association in Oregon has adopted and published a great set of guidelines for solar installations within the association. Click here to view.

Open Meetings and Executive Session

Open Meetings Requirement Washington and Oregon require homeowner association board meetings to be open to the membership. (ORS 94.640 / RCW 64.38.035)

First, it is important to understand what constitutes a “board meeting.” Oregon law defines a board meeting as “a convening of a quorum of members of the board of directors at which association business is discussed, except a convening of a quorum of members of the board of directors for the purpose of participating in litigation, mediation or arbitration proceedings”

If a quorum of the board is discussing association business, whether in person or by electronic means, the board communication is considered a “meeting" which must comply with the open meetings requirements as set forth by statute.

In general, all meetings of the board must be open to owners and properly noticed, except for emergency meetings. There is no specific definition of an “emergency,” but it would likely include addressing items such as threats to the immediate health, life or safety of residents or preventing significant or irreparable damage to the common property of the Association.

Board members often ask if it’s okay to communicate with other board members via email. Oregon law addresses this issue: “the meeting and notice requirements in this section may not be circumvented by chance or social meetings or by any other means”.

In other words, alternate forms of communication, such as email, cannot and should not be used for the purpose of circumventing the open meetings requirements. It is crucial to understand the risk that any decisions that the Board makes at, or as a result of, improper meetings could potentially be invalidated.

Executive Session

Oregon and Washington provide an exception to the open meetings requirement. Boards may meet in executive session, outside the presence of the owners, to discuss certain topics.

In Washington, those topics include:

1. Consideration of personnel matters; 2. Consultation with legal counsel or to consider communications with legal counsel, and discuss likely or pending litigation, 3. Matters involving possible violations of the governing documents of the association; and 4. Matters involving the possible liability of an owner to the association.

In Oregon, executive session topics include:

1. Consultation with legal counsel; 2. Personnel matters, including salary negotiations and employee discipline; 3. Negotiation of contracts with third parties; and 4. Collection of unpaid assessments.

Here’s how executive session works: During a normal, open board meeting, any board member may make a motion to convene in executive session. The minutes of the meeting should reflect the motion to convene in executive session. The board members then discuss the relevant issues in executive session.  Once the discussion is complete, the board reconvenes to the open meeting. If any motions or decisions need to be made, they are done so once the board has returned to the open meeting. There are no motions, and no voting, during the executive session.

Remember, the purpose of the open meetings laws is to ensure that owners are able to observe the deliberations, debates and decision making of the board of directors. Open meetings and transparency are critical to a well-run association.

Renters and Rental Amendments

There are usually three types of occupants in condominium or homeowner associations:

1. Owners - motivated to maintain value and foster relationships

2. Investors - motivated by profit; usually less interested in quality of community

3. Renters - often view community association living as apartment living

The term “renters” often carries a stigma in condominium and homeowner associations. Not all renters are bad (and not all owners are good). If renters are a problem in your community, your best bet is to deal with the behavior rather than attempting to ban or limit rentals. If renters are causing parking issues, adopt a parking resolution. If renters are causing noise, enforce the noise or nuisance provisions in your governing documents.

In some cases, adopting a rental amendment makes sense. For example, prospective buyers in community associations may find it difficult to secure financing if the number of rentals is too high.

Adopting a rental amendment is no easy task. In most cases, at least 75% of the ownership must vote “yes” on the amendment. Grandfathering existing rentals will often increase the amount of yes votes. In addition, a good explanation to the ownership about why the board is proposing the amendment and the benefits to the community will go a long way in receiving support for the amendment. Have a lawyer draft or review any proposed amendment to your governing documents.

Here are some things to consider when contemplating a rental amendment:

1. Minimum lease periods - typically a 30 day minimum.

2. Grandfathering existing rentals - any owner renting their unit or lot when the amendment becomes effective is exempt from the rental cap unless that owner sells or transfers their interest in the property.

3. Tenants must receive governing documents - consider requiring owners to put a provision in the lease agreement mandating that tenants receive copies of the association’s governing documents.

4. Contact information - owners should be obligated to provide contact information of each tenant to the association or management company.

5. Hardship provision - think about including a hardship provision allowing an owner to rent their property in excess of the rental cap if circumstances require. A good example of a hardship is military service.

Electronic Voting

By statute, Oregon condominiums and homeowners associations may use electronic voting for association matters. ORS 100.428 governs electronic voting for condominiums in Oregon, and ORS 94.661 applies to Oregon planned communities. (Washington community association may also use electronic voting if the governing documents allow.) In communities where many owners live off-site, this is an effective way to increase participation and voter turnout. Here are a few things to keep in mind:

1) Notice of the electronic vote should be sent via postal mail. The notice should explain what will be voted on and the website address to access the online ballot.

2) The vote is effective as soon as it's electronically transmitted.

3) A vote by electronic ballot may not be revoked.

4) The board must adopt policies or procedures to ensure compliance with the statutory written ballot requirements. Those requirements include specific notice provisions to owners and the right of owners to request secret ballots.

Take a look at a sample electronic ballot here: Sample Online Ballot

Mapping Community Associations and Crime

How should condominium and homeowners associations handle crime in or around association property?  Proactively and carefully.  Certain steps can be taken by the board, such as improved lighting, upgraded locks, or in some cases, onsite security. Some associations have organized community crime-watch programs.  Be careful though--activities by such groups may not be covered by the association's insurance policy.  Many local law enforcement agencies will help associations and the members learn how to prevent crime, how to report suspicious activities, and steps that can be taken to make your community more safe.

The map below is a small section of Portland, Oregon, showing community associations (building icons) with reported crimes during 2013.