The California Association of Realtors (CAR) has, for the most part, steered clear of infringing on the desires of the California Association of Community Managers (CACM) or the Community Association Institute (CAI) and have allowed these two groups, who represent association management companies, boards and owners in associations. That seems to be ending, and CAR is taking a far more active role in creating and supporting legislation that corrects the bad behaviors of these constituents. Why now?
Rising Transfer and Demand Fees
With swift consolidation in the management industry, and 4 companies (Associa, First Service, Management Trust and Keystone Pacific) now controlling over 65% of the associations in California, and increasing their fees to fund those acquisitions, some of these costs have caught the attention of agents representing sellers. For example, the fee charged to a seller during the sale of their property, has increased significantly even though the cost to provide this service has decreased dramatically.
These fees consist of a transfer and demand requirement, along with the documents required by law to be provided to a buyer (CC&Rs, reserve study, budget, rules and regulations, minutes, insurance declaration page, etc.). It is not unusual for a seller to be charged $1,000+ for this service.
When broached with CACM or CAI, their response is: if you cap that fee, the monthly management fee would have to be increased. Their argument seems to be: we prefer to stick it financially to the few that sell every year in an association rather than have all the owners pay for their services. Seventeen other states have capped this fee, and it has not caused widespread fiscal damage to the management companies.
Underfunded Reserves and Special Assessments
Many boards do not understand their primary role on the board: to protect the assets of their non-profit corporation but having sufficient funds on hand to pay for the repairs and replacements they are legally obligated to pay. Unfortunately, many board members want to appease the owners in their community and strive to “keep the dues low” instead at the level necessary to maintain their common areas.
Without sufficient reserves, which we consider to be 35% to 65% of the fully funded goal provided by their reserve study, the underfunded boards put their owners at risk of a special, or in some circumstances, an emergency assessment. Ample reserves are necessary for expected repairs or improvements, but unexpected events. Few boards expect a major utility issue, lawsuit or a true emergency that no one saw coming.
Because of this, you may see a mandated amount of money each year dedicated to reserves. It may start out small, like 5% of the fully funded amount, but increase each year 5% until that balance reaches 50%.
Surging Insurance Costs and Coverage Reductions
One of the largest expenses for a board is insurance. Depending on the type of HOA, and particularly for attached townhomes or condominiums, they usually cover not only the replacement cost, that is, the cost to rebuild the units. But they also insure for “general liability”, e.g., trip and fall, for workers compensation, and they insure the board with directors’ and officers’ insurance.
Due to the wildfires, and claims all over the country, which impacts all insurers, the premiums have increased higher than inflation, and in some cases, we have seen insurance costs increase 100% over a few years. To keep their premiums lower and the dues in check, boards have resorted to or have explored these options:
- Increase the Deductible Substantially. Where in the past a $5,000 deductible was common, we are seeing boards increase their deductibles to $25,000 or even $50,000. That is fine, but boards should communicate this clearly to owners and understand that they may be paying out of pocket more often for claims.
- Reduce the Percent of Replacement Cost. Where in the past it was assumed that if a structure in an association were lost, the insurance company would pay for 100% of the rebuild, some boards have lowered this to 75% or even 50%. This also must be communicated to owners, but more importantly, “conventional” lenders require the 100% coverage and may not be willing to lend in communities with lower percentages.
- Change What is Covered by the Association. This cannot be done arbitrarily and usually requires a change to the governing documents, which requires a supermajority of all owners (67%) to agree to the change. This is both relatively expensive to do and not necessarily easily achieved.
CAR has taken note and may seek legislation that prevents a board from reducing the replacement coverage to less than 100% and there is already some movement to make changing the CC&Rs easier.
The Case for Licensing and Oversight
Unlike residential management, where companies are audited and watched by the Department of Real Estate, and tenants have numerous rights and owners can be heavily penalized for not abiding by state law, association management does not require a license, nor is there any state body overseeing them, or any entity to enforce potential fines and penalties. Association management companies watch billions of dollars in reserves and operating accounts, but other than their internal checks and balances, there is little oversight of these funds.
CAR would like Community Manager and company owners to be licensed and under the purview of the DRE and require boards to have even nominal education. It may only be a few hours, but it would emphasize their corporate responsibilities, and the fiduciary duty they have to that corporation (their association). It would review their important duties: duty of care, loyalty, obedience and oversight. The Community Managers would obtain a “specialty license” and it would educate them on the Davis-Stirling statutes, legal basics, and how to keep an association in compliance.
Why This Matters: The Scale of California HOAs
Associations were largely ignored for the past 40 years but are now under intense scrutiny by CAR and the state legislature. And for good reason: there are over 53,000 associations in California, 5 million housing units with over 15 million Californians in those homes. Over 95% of all new housing constructed is created in an HOA, and 36% of all households are living in a homeowner association. These people expect their board to be accountable and make sound financial decisions. The board should expect their management company to be transparent with their business model and the fees they charge. Buyers considering buying in an association should do so with confidence and clarity.
