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New Jersey Legal

David Bryne

David Bryne

Ansell Grimm & Aaron, PC

Covenants, Conditions and Restrictions (CC&Rs)

How are the elements of a community defined? What determines the components of the common areas versus homeowner-owned areas? Where is it written that certain elements are the responsibility of the homeowner and others are the responsibility of the association? These issues and others are established in what’s commonly called an association’s Covenants, Conditions and Restrictions (CC&Rs). Attorney David J. Byrne, of Ansell Grimm & Aaron, PC in Princeton, New Jersey spoke with us at length and explained the nuances of CC&Rs as well as many other important common interest community topics.

One important note – in New Jersey, as well as some other states, statutes vary for condominiums, homeowners associations (HOAs) and cooperatives. Additionally, in New Jersey, neighboring Pennsylvania and New York, the phrase Covenants, Conditions and Restrictions is not used, although it’s the way most people across the country recognize these governing documents, Byrne said. Instead, you’ll find terms such as master deed or declaration and bylaws used when referencing CC&Rs in a legal sense. Similarly, there’s no real distinction between the terms covenants, conditions and restrictions, Byrne said. CC&Rs could just as easily be called restrictions, instead of using three words to illustrate the same point.

CC&Rs are recorded with the government entity in which the particular association is located. In New Jersey, Pennsylvania and New York, they are recorded with the county clerk’s office. In some states, they are accessible via a governmental Internet system, Byrne said. In others, they can be found using a conventional title search. CC&Rs should not be confused with the rules and regulations of an association. Rules and regulations are something entirely different. Most notably, boards can generally change rules and regulations without holding a vote of the association’s members. CC&Rs cannot be changed in this manner. Generally, they require an owner vote –often a super majority but sometimes the absence of an owner objection – to amend.

According to Byrne, CC&Rs are the documents that govern the community from its outset. They are created by the developer, sometimes known legally as the “sponsor.” Rules and regulations, though, are created by the board, typically over the course of time. Rules and regulations are more easily created and more easily revised, Byrne said. Occasionally, however, they are not as easily enforced. Rules and regulations work in conjunction with the CC&Rs. They are used to supplement the governing documents, Byrne explained. “A decent analogy is the United States Constitution,” he said. “The Constitution lays out the powers of the branches of government, and then the branches create things within their perceived or actual powers. Rules and regulations are similar to the acts of Congress and more like the laws it enacts. The branches will inevitably seek to address issues that could not have been imagined when the Constitution was adopted and ratified in 1787. That’s how you look at rules and regulations working in conjunction with the CC&Rs.”

As an example, the CC&Rs may say that no commercial vehicles shall be parked within the confines of the community without board approval. That implies that the board can theoretically approve some commercial vehicles, Byrne said. The questions then become: What commercial vehicles will be approved? How will they be approved? And, how will the restriction be enforced? “That’s what a rule or regulation is for,” he said.

Which governing document carries the most weight? According to Byrne, it’s the initial set of CC&Rs, or in New Jersey, Pennsylvania and New York, the document legally defined as the master deed or declaration. “Those are considered the more fundamental documents, and those are the ones that are typically harder to amend,” he said. The master deed or declaration will require an incredibly large super majority to amend, a super majority that flows from the total number of interests in the community, not necessarily the interests that are “in good standing,” Byrne explained. Bylaws, however, can oftentimes be amended by a smaller super majority, he said. They can be amended by a super majority of owners who are in good standing or owners who are present at a meeting, which is obviously significantly lower than the number of owners who exist throughout the community as a whole. In New Jersey, a community’s board can amend the bylaws subject to the right of a not less than10% of the owners to invalidate that amendment.

How detailed do the CC&Rs need to be in the governing documents? And what role does vague language play in drafting the “supreme law” of the community? Vague language can make CC&Rs more difficult to enforce, but it can also give the people serving on a board flexibility. According to Byrne, specificity is always best but not necessarily specificity in so much that it limits the flexibility of the board. For example, the CC&Rs could include the board’s power to levy a fine or penalty against an owner for some infraction. A very specific way to define that power would be that the board has the power to fine, that fine can be no more than “X” dollars, and it has to be administered in a certain way, etc.

“I would suggest, however, that what you really want to do is just create the power itself,” said Byrne, “which would simply be that the board has the power to levy fines subject to applicable state law.” This provides flexibility in terms of the amount, the way in which the fine gets levied, the way in which it gets waived, and the mechanism by which fines are noticed, he said. It gives the board the ability to function.

“If you’re looking at these things as a board member, you’ll think specific language gives more ability to enforce, but vague language gives more rights to create,” Byrne said. That’s especially important as boards are charged with the responsibility of creating and revising rules and regulations over the course of time to supplement existing CC&Rs. Conventional wisdom holds that boards are looking to enforce and control things, but that is quite often not the case, Byrne said. In fact, boards are often looking for ways to avoid controlling things and are sometimes limited in their discretion if the specificity of the language in the CC&Rs mandates that they do something. “They don’t want to end up in litigation,” Byrne said.

Often, he said, boards want to be flexible and are looking to the CC&Rs for ways to prevent a lawsuit, rather than having those governing documents held over their heads. As Byrne explained, “It would, often, benefit the community as a whole to have CC&Rs that simply enumerate association powers, with the discretion as to when and how to carry them out, but not mandate various things.”

If boards follow their rules and documents, does the potential exist for them to be challenged successfully? “Yes,” said Byrne. “The board’s action or inaction can be judged on good faith.” A board that is adhering to its governing documents is either doing something it is authorized to do or refusing to do something it doesn’t have to do, he said. However, a legal component regarding “good faith” allows someone to challenge that action (or inaction) – even if it is consistent with the governing documents – by arguing it’s being done in bad faith.

As an example, Byrne used an association’s ability to restrict or prohibit the installation of energy efficient systems for aesthetic reasons. He said that there are modern-day, state-by-state regulations that have tried to limit the powers of a planned unit community to regulate those types of things. Even absent those laws, owners could successfully challenge a board’s attempts to regulate or prohibit energy-efficient systems. “The owner would argue that it’s wholly unreasonable and in ‘bad faith’ to deny energy efficient modifications for aesthetic reasons in this day and age,” Byrne said. “Solar panels on the roof look weird, but so what? An owner adds something to his home in an attempt to save energy costs and conserve energy, and some board votes to fine the poor guy; that’s the kind of thing that ends up on the news. A board would be hard-pressed to take that position and take it all the way home,” he said.

Other rules that would be tested are those that violate the Fair Housing Act. Byrne said that he most often sees those successfully challenged by disabled residents, typically those requesting that the association modify its practices in such a way as to accommodate the disability of the resident. He further broke it down into two areas, specifically parking and pets. “Sometimes we will see meritorious challenges concerning how close parking spaces have to be to the front of buildings and/or when an association may or may not allow pets and/or allow only certain types,” he said.

Is a committee’s decision final when penalizing a resident rule-breaker, or can a resident appeal to an association’s board? “It all depends upon the community’s governing documents and the state in which the community is located,” said Byrne. The appeals process might exist based on the governing documents. There may be specific language in the CC&Rs about an appeals process, how rules are enforced and how penalties are administered, he said. But absent that language, there’s no specific way an appeal would take place.

In New Jersey, a person does not have the right to appeal to the board. However, associations are obligated to make alternative dispute resolution available as an alternative to litigation, Byrne said. “That doesn’t necessarily mean appeal to the board,” he said. “It can mean some other thing, some other fair process that would potentially result in the avoidance of litigation.” According to Byrne, that’s the focus of the New Jersey law. “It’s not necessarily one practice or form over another, but simply that every association has to come up with ways to potentially keep things out of the court system,” he said.

How does an association determine fine amounts? Byrne likened the process to starting a football team and choosing who your quarterback will be. In other words, common sense and reasonableness should always prevail. “A fine that is reasonable is ultimately what you’re going to look for,” he said. “If you have to stand before a judge and explain why you set the amount you did, you better be able to come up with something that makes sense.” Byrne said that fining someone $5,000 because they failed to take their Christmas wreath off the door by the deadline may be very inane and, like denying solar panels, is just going to get you in the newspaper. “It might be legal, but it’s not smart,” he said. “Besides that, a judge may laugh at you.”

Likewise, some state laws place restrictions on fine amounts. New Jersey is one of those states that has such laws, Byrne said. So is Pennsylvania, but not New York. In addition to traditional fines, an association may also seek to recover costs it has incurred because a violation has taken place. These “processing fees” are often more enforceable and more reasonable than traditional fines, Byrne said. For example, if an owner violates a parking rule and parks his car in a prohibited place during a snowstorm, the association can likely recoup the cost of having that car towed in order to get the road plowed.

“Whether it chooses to fine the guy $50 on top of that is something else,” he said. “I’m not a big fine guy. I tend to think boards rely too heavily on them.”

Speeding tickets may be another way associations can levy fines, according to Byrne. For the most part, he said, associations can issue them, unless the state or local government has ownership of the road or has been assigned the right to exclusively enforce the speed restrictions via state law or some other mechanism. He advised against issuing tickets to visitors because the association would likely have difficulty enforcing them. In rare instances, associations could also have the right to pull residents over, but that would depend largely on the community’s way of living. “If you have a 3,000-home community in west Texas where everyone has four acres and the local government essentially wants the association to regulate those types of things, there may be a private security company pulling people over,” Byrne said. “It really depends on the culture and the location.”

How do associations define “reasonable”? “You know it when you see it,” said Byrne. “It’s almost impossible to define. Ultimately, something is likely reasonable if it doesn’t spark laughter or ridicule upon it being heard.” If either of those things happens, one can more easily argue unreasonableness, he explained. “You feel like a fool if you try to argue it,” he said. “But if you can stand up in front of people and defend yourself, it may very well be reasonable.” According to Byrne, it would be reasonable for associations to require that renovation work be permitted and specify that contractors be licensed and bonded.

Keeping that in mind, he suggested that associations also proceed with caution when attempting to restrict certain visual elements, such as holiday displays and political signs. In New Jersey, he said, those types of regulations are not necessarily legal because the state regulates an association’s powers in a free speech context. “When it comes to speech, assembly, religion, or expression, some states deem private communities to be quasi-governmental,” said Byrne. “They’re subject to rigorous scrutiny, much the same way the government itself would be scrutinized if it attempted to limit the citizens’ rights.” Instead of prohibiting certain types of displays, he said that the association should attempt to regulate their size and extent, including how long they are allowed to stay visible in the community.

Reasonableness should also govern other exterior issues, such as lighting, Byrne said. But a board shouldn’t be overly concerned about whether or not it will be held liable for its decision. “There’s no way to tell a board ahead of time for what it will or won’t be liable,” he said. “An association can be liable in some fashion for refusing a request for lights and liable in some fashion for granting the request. Ultimately, I don’t think an association should be guided by whether it’s going to be sued or not,” he added. “Boards just have to be reasonable. They should follow normal human common sense, and if the lawsuit comes, it comes.”

CC&Rs establish the components of the common areas versus the homeowner-owned areas, according to Byrne. The governing documents contain those delineations, which typically include boundaries, easement rights, where units and lots begin and where common elements begin and end.

How do associations deal with encroachments in the common areas? Byrne said that there’s a “lawyer” way of handling it and a more diplomatic approach that often benefits each party (the association and the owner who encroached). Using the example of a resident who planted shrubbery in the common area, Byrne explained that the “lawyer” method would simply involve forced removal of the item. If the encroachment might actually harm the common property or cause drainage or other problems, removal will be the only way to remedy the situation, he said. However, absent such a threat (or other factors), he advised that associations simply render the encroachment harmless and come to an agreement with the owner. “Of course, the owner may have to pay a fee as a ‘license’ fee, and/or reimburse the association’s costs. Otherwise, a board’s decision to allow/maintain the encroachment could be more easily subject to attack,” he said.

Notably, play sets, like plant life, can sometimes encroach on common areas, but before they are forcibly removed or made the subject of an agreement between association and owner, it should first be determined if they are a temporary structure. “Some are fixed items that are set in the ground,” said Byrne. “But others can theoretically be folded up and moved away. It’s really going to depend on the magnitude of the play set in question, and as is the case in most of these situations, it will depend on the particular facts of the actual situation.”

Collection of Delinquent Dues

Delinquent homeowners can affect a community in a variety of negative ways. Obviously, the association needs homeowner dues to be paid, preferably on time, in order to operate. However, there are many residual undesirable consequences of having too many delinquent accounts. A community with an abundance of homeowners in arrears could be declined for a capital improvement loan when needed, therefore preventing the community from performing necessary major repairs or replacements. The Federal Housing Administration (FHA) looks at the number of delinquent homeowners in a community in its approval process and will not approve communities with past-due accounts over a certain percentage. If an association can’t obtain FHA approval, which allows potential purchasers to obtain FHA mortgages for homes in the community, owners will have a smaller pool of available buyers. Cleaning up past-due accounts in an expeditious manner will not only benefit the association itself but also all the homeowners who have a stake in the community. How, then, should this be done?

According to attorney David J. Byrne, the first step in the process of collecting delinquent dues from a unit owner, generally, is a letter from the association. This is a formal notice demanding that the unit owner pay his or her outstanding assessments, which are detailed within the document. This notice also warns of impending legal action if the debt is not paid by the specified deadline. Depending on the situation, the association’s letter may have a variety of other contents. Association counsel may thereafter send such a notice.

Byrne noted that there are two options an association can pursue if the demand letter was unsuccessful in recovering the assessments owed and if any other efforts, such as the recording of the lien, were also unsuccessful. Generally, those two options are filing a money judgment lawsuit or a foreclosure of the lien.

In New Jersey, the association has to record a lien before it can foreclose on it. A lien is generally recorded whether a money judgement is filed or not. The “simultaneous” part applies more to the foreclosure and money judgement suit than it does the recording of a lien, Byrne said. According to Byrne, both actions can be performed simultaneously, although they usually are not.

He further explained that a money judgment is a personal judgment against the record owner, which is the basis of attempts to try to execute on the person’s assets, such as wages and bank accounts. On the other hand, a foreclosure is designed to seize and/or change ownership of the property so that it can be rented, sold at a sheriff’s sale, or both.

How can an association determine if an account is likely to be collectible? “There are ways to know when amounts are more likely to be recovered than not,” Byrne explained. “For example, if a house is worth more than the balance of the underlying mortgage, there may be equity, in which it’s more likely than not that there will be a recovery.”

On the other hand, Byrne added, if the house is worth less than the balance of the underlying mortgage, the house is empty, and the owner is missing and/or judgement-proof, there is not much likelihood of the account being collectible (from the owner); that is, unless the association uses the empty unit to try to generate revenue by renting it out, which is the path that Byrne suggests.

“It’s very difficult to know ahead of time if an amount is recoverable. The problem associations have is that the amounts will constantly accrue; balances get larger. Even if you believe an account is uncollectible, you still have to take action because the balance will simply rise and keep rising, inevitably allowing a person to continue to live in the unit and/or enjoy the ownership of it without ever paying the assessments,” Byrne explained.

What if the association deems collection doubtful? According to Byrne, as long as a home is owned by a person rather than a bank, and it has not been sold through a sheriff’s sale, no account can be deemed 100% uncollectible.

However, if a home is sold through a sheriff’s sale, the previous owner is no longer obligated to pay at that point, and thus, his or her balance will no longer rise. “That’s when the association should take a hard look at writing off a balance,” advised Byrne.

Can associations embarrass their residents by publicly disclosing their delinquencies? “No properly operated organization can ever intentionally embarrass anybody,” said Byrne. “On the other hand, an association can let its homeowners know the factors that go into the calculation of an assessment, including the amounts that are not paid by owners. For example, the association can show the homeowners who owes money and how much,” Byrne explained. “In some states,” Byrne added, “it is required that an association do that.”

If the purpose of doing this, however, is to embarrass, shame, or punish someone, then it is not acceptable and may constitute a fiduciary duty breach. It is acceptable if the purpose is to educate the homeowners. “Every homeowner has the right to know all the aspects that go into calculating the assessment amount, including the amounts that owners are not paying,” said Byrne.

A judicial foreclosure is a foreclosure via the court system. It entails recording a lien and filing a foreclosure complaint, just as is done with a mortgage. “When you don’t pay your mortgage, the bank often files a foreclosure complaint and takes the home away from you,” Byrne explained. A judicial foreclosure must be performed by the court, and a court must enter judgement and authorize the home’s sale.

The redemption period refers to the period of time after a sheriff’s sale during which the owner has a unilateral right to undo the sheriff’s sale by paying the amount due on the foreclosure judgment, Byrne explained. In New Jersey, the redemption period is ten days long.

Once an association determines that it is going to pursue foreclosure, a foreclosure complaint must be filed. If for some reason the unit owner is not accessible, is deceased, does not accept service, or evades service, then a foreclosure can generally be openly served via publication, such as by publication in a newspaper, Byrne said.

Once the foreclosure complaint is served, Byrne added, there is a period of time during which the owner can file an answer. “If the owner doesn’t file an answer within that period of time, then the association can file initial papers for the purpose of getting a foreclosure judgment. Once the foreclosure judgment is entered, the association is now entitled to direct the sheriff to sell the unit,” said Byrne. A sheriff’s sale is then scheduled and held with the buyer from that sale becoming the unit’s new owner.

Debt collectors have a variety of obligations in relation to communication with debtors. “Debt collection laws, for the most part, are not applicable to property management companies and are never applicable to associations themselves,” Byrne noted. “Laws like the United States Fair Debt Collections Practice Act (FDCPA) are applicable to ‘third party’ debt collectors; people or entities hired for the purpose of collecting a debt, but they’re not applicable to the person to whom the debt is owed,” he added. Byrne also said that the regulations/limitations on communication are to be followed by the attorney who has been hired by an association. With regard to associations themselves, Byrne said that communications should be undertaken in the best way possible to serve the purpose of recovering dollars owed and to get people to pay assessments moving forward.

Byrne noted that, for the most part, it does not make sense for associations to sell unpaid assessments to a collections agency. It may make sense, according to Byrne, when an unpaid assessment amount happens to be owed by someone whose ownership has been taken away through a sheriff’s sale. The post-sale unit is now paying assessments every month going forward, but the previous owner is carrying a balance. “That owner debt perhaps should be sent to a collections agency. Other than that, it’s almost always a breach in fiduciary duty to do so,” Byrne noted.
Byrne said that when hiring a collections agency that bases its compensation upon a “contingency” of some sort, the nature of the agreement is for the association to accept a smaller portion of the total amount owed. He said that, if an association is hiring a collections agency to deal with a situation where a unit’s prior owner still carries a balance, this is a debt that the association has already deemed to be uncollectible. Therefore, an association may be more willing to turn it over to a collections agency and to share a percentage of the collections amount with them. The association is aware that the debt would have been a loss for it anyway, so “losing” 40% of any money recovered is still 60% more than it would have gotten otherwise.

“Setting up a repayment plan is certainly a preferred approach if there is an owner who’s prepared to do the right thing and sign something, especially if the balance is relatively minor,” Byrne said.
With regard to setting up a repayment plan, Byrne offered some tips. First, the plan should be in writing to protect the association. The agreement should also be focused not only on the amount of money owed as of the date of the agreement, but also on the amounts that have not yet accrued. “The agreement needs to account for ongoing assessments,” Byrne said.
“The agreement should provide for the owner remaining current on all assessments that accrue subsequent to the agreement. It should provide that failure to do so will give the association grounds for a judgment for the amounts that are then due. This will allow the association to shortcut the collection process if the owner fails to pay accruing assessments,” Byrne said.

“The Fair Debt Collection Practices Act (FDCPA) is a federal law that protects people from unconscionable collection processes. It applies only to third party debt collectors, including lawyers,” said Byrne. He explained that once the FDCPA is applicable with regard to a given debt, there are a variety of controls on the debt collector. Associations are not governed by the statute, as the association itself is not a third-party debt collector. Therefore, associations do not have to comply with the FDCPA with regard to setting up payment plans or pursuing debtors, he added. Byrne concluded, “recent judicial decisions in various circuits have rendered decisions in support of the concept that management companies are not ‘debt collectors,’ for the purposes of FDCPA, so long as those companies adhere to certain guidelines.”

According to Byrne, once an association is granted a money judgment, the association can use this tool to seize the delinquent unit owner’s assets. If the court case resulted in a foreclosure judgment, he said that the association can buy the unit through a sheriff’s sale and then rent it out (in the typical situation that the unit enjoys no equity).

According to Byrne, to execute an asset means to take or seize it. He said that execution is the physical act of enforcing the judgment. He explained that garnishments and levies are types of executions. Usually, common language provides that a garnishment is a wage execution, while a levy is a bank account execution.

According to Byrne, New Jersey law requires that liens be prepared by attorneys. A non-lawyer’s preparation of a lien could be deemed the “unauthorized practice of law,” Byrne said. The point in the debt collection process at which a lien is actually recorded depends on the association and its governing documents. “Associations should not wait to record liens,” Byrne urged. “Liens protect associations in the context of an owner’s bankruptcy and a delinquent owner’s attempt to sell or refinance. Liens should be aggressively prepared and recorded in my opinion,” he said.

According to Byrne, in most cases, short sales are not in the association’s best interest. “Short sales, by their very nature, are relevant to units that enjoy no equity. Associations are better off carrying out foreclosures and renting units to generate rental income to pay amounts that are due to cover ongoing, accruing assessments,” Byrne said. “Although a short sale will ultimately result in a paying customer going forward, it will almost always inevitably result in not recovering all money owed prior to the sale. A ‘short sale’ that will result in the association’s receipt of full payment (but the lender’s loss) should be accepted.”

It is not advisable to pursue delinquent owners who decide to walk away from their properties, according to Byrne. He said that, instead, an association should seize the unit via any number of strategies and rent it out. “A person who abandons a unit should almost never be sued personally,” said Byrne. “The chances of recovery are small.”

In some instances, small claims court can be a viable option with regard to delinquent owners. “In some ways, it’s a very smart option because hiring an attorney is not required in New Jersey for small claims court,” Byrne said.

If the unit’s lender comes in once the association has already started the foreclosure, can the association discontinue it? According to Byrne, the association can discontinue the foreclosure process at any time, but he advised against doing so. He noted that even when a lender has begun its own foreclosure process, there is no guarantee, or law, that requires the lender to advance and/or finish.

Should the association move forward with its own foreclosure once the lender begins the foreclosure process? “The association should start its own foreclosure when it makes sense to do it. Typically, when a lender has begun a foreclosure, an association might be more hesitant to proceed with its own foreclosure. At the same time, the association might be interested in being more active and moving more quickly since the lender has demonstrated at least an interest in proceeding,” Byrne noted.

When must a lender pay delinquent assessments? According to Byrne, under New Jersey law, a purchaser via a sheriff’s sale is not required to pay any assessments that accrued prior to the sheriff’s sale, except in some instances when six months’ worth of assessments must be paid.

What are the pros and cons of foreclosing on a delinquent owner with the intent to rent out the unit to recoup association fees?

“All pros,” said Byrne. “By doing so, the association is actively protecting itself, preserving the unit, making the neighbors happy, and it has the potential to recover dollars that are due and that are becoming due every month.”

An association’s best practice when it comes to its landlord duties is to follow the law, Byrne said. He added that New Jersey has detailed laws governing the obligations of landlords and suggested that associations become familiar with these laws and follow them.

If a lender comes in when the association is renting a unit, can it argue that there are no delinquent assessments that it must pay?

“Maybe, especially if everything is paid that has accrued after the sheriff’s sale,” said Byrne.

According to Byrne, an association should have previously adopted policies relating to collections procedures readily available, and be sure that it is not authorizing actions contrary to them. Also, it should be sure that all accounting is correct.

To sum up the collections options available to New Jersey associations, it generally comes down to foreclosure vs. money judgment.

A foreclosure is an in rem proceeding, which is an action that focuses simply on the property and does not seek any personal judgment against the homeowner. A foreclosure judgment does not allow asset execution. “It’s a judgment simply used for taking the house away from the person,” Byrne said. He said that the process begins by recording a lien, though it is not necessarily the case that a foreclosure will follow from a lien. However, there is no foreclosure without a lien, added Byrne.

A money judgment, on the other hand, allows the creditor to take an individual’s personal assets, including money. Generally, it is not a vehicle to take the house, Byrne said.

The Association’s Records

Knowing which association records should be kept, where to keep them, and how to store them can help an association maintain access to important historical data. Association records should contain information that the board can use as a reference for future projects or possible evidence in a lawsuit or audit. Records are useful when the board is negotiating contracts for landscaping or snow removal. Boards can refer to work records, financial records, or even minutes from the meeting where the contractor was chosen to weigh future decisions.

Should associations keep records, and if so, what records should be kept? “Most associations do keep records,” said attorney David J. Byrne, noting that state statutes govern which records have to be made and kept. A community’s governing documents will also typically detail the records that have to be made and kept, he added. Byrne also explained that there are typically accounting requirements recommended by an auditor with regard to record keeping. With regard to the length of time records are to be kept, Byrne said relevant tax authorities may set forth requirements.

Byrne said that in general, associations are required to create and maintain certain meeting minutes, as well as financial records consistent with generally accepted accounting principles.

How detailed do board meeting minutes need to be? “There is no mandate,” said Byrne, “but we advise clients to have minutes that document decisions made by the board and perhaps detail the deliberations that led to that decision.” He explained that the facts and circumstances that relate to the decision are important to include in the minutes. “They could be used to refresh someone’s recollection two or three years down the road if there’s a challenge to a particular decision,” Byrne noted. “Minutes should almost always not be transcripts of board meetings.”

Where may association records be stored? Can they be stored in the home of a board member? According to Byrne, it depends on the association, along with the state statute or the governing documents. He explained that an association with a clubhouse or management company would typically store the records in the clubhouse or with the management company. “That’s the proper way to do it,” said Byrne, but he noted that if a community doesn’t have a clubhouse or has a self-managed clubhouse, the board president or another board member might have to store records at their home.

Are there any restrictions against putting records online, available to a particular association’s members? According to Byrne, there are no restrictions connected with such online member access. He also noted that he is not aware of any law that governs the length of time that associations should make their records available for review.

Who has access to records, and can some records remain private? “Owners have access to records,” said Byrne. “Generally speaking, financial records are always available to owners.”

What is the process for residents to review records? “Any community governed by a statute that empowers an owner to review records limits the conditions that community associations can impose upon an owner in trade for the review,” said Byrne. He gave a scenario wherein there is a statute that states that the owners can have access to board meeting minutes without any limitations or conditions. In turn, a board may have no authority to accept a rule that requires an owner to pay a fee, or sign a confidentiality agreement, to obtain meeting minutes.

Can associations charge owners to see records? Can they set a limit on the number of records reviewable by a member? According to Byrne, unless these items are laid out in the state statute or governing documents, access should likely be decided on a case-by-case basis with regard to what is reasonable in the particular situation.

What is an association’s responsibility regarding members’ personal information? “A lot of that is governed by state law and governing document provisions, but in my view, there isn’t much privacy at all if you’re a member of a community,” said Byrne. As an example, he said, “If you submitted paperwork to put a deck on your home, and that’s in your file, why is that secret? Well, ‘it’ is not private. Community members have a right to know what’s going on.”

Byrne added that he is not aware of many privacy concerns, except perhaps connected with a community’s attorney-client privilege.

Association Board Member Elections

Cultivating, nominating and electing board members is something that should always be on the minds of current board members. Politics in any arena can be tricky, but in associations it can also sometimes be difficult to find people willing to serve. Many people feel unqualified or even afraid to volunteer due to fears of being taunted by potentially disgruntled residents. While these fears are not wholly unfounded, current board members should encourage volunteerism by running fair elections, showing that residents with different types of views and knowledge are needed and desired, and letting potential candidates know that their service will be valued, even if all residents don’t agree with every decision they make. Most associations have safeguards in place to indemnify board members from potential liability, so if a resident has the time and desire to serve, they shouldn’t be afraid to run for the board..

According to attorney David J. Byrne, while associations are not required to have written election procedures, in New Jersey elections are strictly regulated.

Is there any legal obligation to provide members notice of an election? Byrne stated that notice of an election is typically governed by state law and/or the community’s governing documents, even the community association’s articles of incorporation. Both would include details such as the date, timeliness of the notice, and to some extent, even the content of it. He added that state law and/or the governing documents also dictate the frequency of elections for an association. The same applies for requiring annual meetings. Byrne said that an annual meeting is typically required, but again, it ultimately depends upon the state law and the governing documents.

In New Jersey, a community’s elections are heavily regulated by New Jersey’s Planned Real Estate Development Full Disclosure Act (PREDFDA). PREDFDA makes it clear that every association in New Jersey must handle its elections (not necessarily non-election related members’ meetings) in accordance with its governing documents that “do not conflict with” PREDFDA’s election-related provisions. “Interestingly,” Byrne said, “PREDFDA, in regards to a community’s elections, makes a distinction between associations of fewer than 50 units and associations consisting of 50 or more units.” PREDFDA governs associations with fewer than 50 units in regards to elections. However, Byrne said, its mandates and guidelines are more general, and “appear to recognize the need of associations with fewer than 50 units to be flexible in how they plan, notice and carry out their elections.”

Associations with 50 or more units must provide written notice to members no later than 30 days prior to the date for the mailing of the notice of the meeting that tells members that they have certain rights to nominate members to be candidates for election to the board. For such associations, PREDFDA also includes express instructions with regard to the notice of the actual election. According to Byrne, that “notice must be provided by personal delivery, mail, or electronic means.” He added that this notice must be provided “no less than 14 nor more than 60 days prior to the meeting at which” the election is scheduled. Furthermore, Byrne advised this notice must include “a proxy ballot and an absentee ballot,” unless prohibited by that community’s bylaws. If being mailed, notice is considered effective when deposited in the mailbox.

Byrne said that PREDFDA recognizes the relevance of various election-related activities that might take place electronically. An association consisting of 50 or more units can only send notice, according to Byrne, “by electronic means if either the particular member had already agreed in writing to accept notice by electronic means, or that association’s governing documents permit electronic notice.” Even if an association’s governing documents do so provide, said Byrne, “it must also ensure that another form of voting by absentee balloting or proxy voting is available.”

Can associations install term limits for their board members? According to Byrne, associations can install term limits for their board members if the bylaws and/or the declaration are amended to include term limitation. “If you have a set of bylaws that does not provide for term limits, but the owners want it to, the owners can amend the bylaws to impose term limits, and it would be legal.” Bylaws do not usually contain term limit provisions, but that doesn’t mean the bylaws can’t be amended to include such limits. With respect to associations with 50 or more units in New Jersey, regardless of a community’s governing documents, the term of a board member cannot be more than four (4) years. This, however, merely regulates the length of a term, not the number of terms that a person may serve.

Byrne explained that typically, the bylaws only list the qualifications one must have in order to serve as a board member. For example, the bylaws might say that in order to become a board member, an individual must be an owner of a home within the community. Byrne noted, however, with respect to associations of 50 or more units in New Jersey, that notwithstanding the contents of one’s governing documents, “only members in good standing can be a candidate for service on the board and, generally speaking, all members in good standing have a right to vote in every board election.” In addition, Byrne advised that New Jersey law now defines “good standing” as eligibility to vote in a board election, eligibility to vote to amend the bylaws and eligibility to both nominate or run for position on the board. According to Byrne, a member is in good standing if he “has paid all common expenses, late fees, interest on unpaid common expenses, legal fees and any lawfully assessed charges.” However, a member that may be current at that moment may still not be in “good standing” if he has failed to satisfy an outstanding association judgment. Also, and an interesting nuance per Byrne, a member is in “good standing” even though he may be delinquent “if he is in compliance with a payment plan or has a pending ADR process concerning that delinquency.”

What is the distinction between directors and officers? According to Byrne, officers are typically a subset of the board of directors. He explained that there are usually only a few officers. For example, on a seven-member board, there may only be three officers, such as a President, Vice President and Treasurer. “All officers are board members but not all board members are officers,” noted Byrne.

How is the nominating committee chosen and what is its role? “My experience is that most communities don’t have a nominating committee and that most communities simply solicit candidates through notices,” Byrne said. “The precise method of identifying candidates and whether there’s a nominating committee may be set forth in the state law or the governing documents,” he added. In fact, Byrne said, in New Jersey, when it comes to “associations with 50 or more units, the rights and obligations of members and those associations are set by PREDFDA.”

More specifically, in such associations, Byrne advised that the nomination and candidacy process is “pretty much set by law.” Regardless of what an association’s governing documents provide, Byrne said any member is empowered to nominate any member in “good standing,” whether it be the owner himself or another. Are nominations from the floor or ‘write-ins’ allowed? In New Jersey, the ballot connected with associations of 50 or more units must include space for “write-in candidates for as many seats as are up for election.” More recent PREDFDA regulations do not mention “floor nominations”. In fact, very strong arguments exist by which “any election procedure that allows for floor nominations may be improper.”

In other states, or with respect to New Jersey’s associations that are fewer than 50 units, associations may have flexibility as to nominations from the floor and/or ‘write-in candidates.’ In that regard, Byrne has generally counseled his clients to approach each situation carefully, and decide it on a case-by-case basis within its reasonable authority.

Can an association ban self-nomination? “Not in New Jersey,” Byrne said. Otherwise, according to Byrne, “a self-nominaton ban would depend on state law and the governing documents,” though he believes that a court, even aside from any law, would be very skeptical of associations banning self-nomination.

What is the procedure for a member who is not nominated by the nominating committee to be listed on the ballot? Byrne said that it depends on the situation of that particular association and whether such a thing is even permitted by that state’s law. “I don’t find nominating committees all that prevalent, but there may be specific things that flow from a law or governing documents that relate to that community. If you’re going to have a nominating committee, presumably there are provisions in the bylaws that talk more about that. If there aren’t, the board might have to do more analysis with regard to that,” Byrne said.

Can an association board endorse a single candidate or a slate of candidates? According to Byrne, an association and/or board disseminating material endorsing someone may be a bit sketchy, but he can’t say that it’s necessarily illegal. However, he added that in some states, such as New Jersey, an official association endorsement or ‘audit’ of the various candidacies has been ruled to be outside the bounds of the board’s authority. “Certainly, an individual board member on his or her behalf can do whatever he or she wants,” Byrne said.

Can associations adopt a rule that restricts certain people from becoming board members? Byrne said that, generally speaking, in order to enforce something like that, it would have to be made part of the bylaws or declaration. “I don’t think the board necessarily can vote to limit the type of person that can run for the board,” he said. New Jersey law expressly provides that an association’s bylaws may provide that “not more than one owner” or an “entity-owner representative” from “a single unit may serve on the [board]” simultaneously. However, Byrne added that situations could be taken on a case-by-case basis. For example, if a community had evidence that someone was stealing money, a court could validate a board’s decision, prohibiting that person from running. For New Jersey, PREDFDA regulations include a provision by which a board, without owner vote, can remove an existing member of the board “for good cause directly impacting the member’s ability to serve.” An association may be able to successfully argue that the provision can also be used to prospectively prohibit one form starting a board term.

Can an association request a background check on potential board members? “If the governing bylaws and declaration set forth qualifications to be on the board, without mentioning such a thing, the board likely does not have that power. Since a board may not be able to bar someone from running (whether following a background check or otherwise) unless the governing documents limit a person’s right to run background checks might be unreasonable,” Byrne explained. “However, if someone wants to perform a background check and use that in the world of democracy to influence people’s votes, that might be okay, on a case-by-case basis, especially if it didn’t come from the association itself,” he added.

How far can an association go in vetting applicants? “A board can go only as far as it’s allowed per the bylaws and the qualifications set forth therein” or “as far as the state’s law allows,” said Byrne. He noted that, if the bylaws specify that the only qualification to be on the board is that one must be an owner of a home within the community, then the association does not have the authority to vet anything other than a person’s status as a homeowner. Byrne added that in order to make it legal to vet candidates for other reasons, it may be acceptable to amend one’s bylaws to provide for that if state law doesn’t prohibit it.

During the actual campaigning phase of an election, do associations need to provide equal access to association media for candidates to campaign? According to Byrne, this is governed by the laws of each state. In New Jersey, he said, associations are required to do so.

If someone believes that a candidate is making false claims, can the association notify members of this? “The association doesn’t really have any powers to influence voters beyond what are set forth in the governing documents; however, people running for the board or their neighbors are almost free to say whatever they want to say,” said Byrne.

Can associations require members to register in order to vote in a board election? Byrne noted that most governing documents probably state that everyone who owns a unit and is in good standing can vote. He said that a board could require owners to register in order to vote if this stipulation is put into the bylaws. However, there is a lot of skepticism from courts, and appropriately so, Byrne said, regarding the ability of boards to regulate elections and to limit the democratic process. Byrne could not envision a scenario whereby an association could lawfully utilize voter registration fees as a way to generate additional revenue.

How does the ballot process work and what does it involve? According to Byrne, the ballot process differs from state to state and community to community. “There’s no set rule about it,” he said. “Presumably, a ballot has enough information on it so that the association can identify it and attach it to a particular home for proof that person had the right to vote.” In New Jersey, Byrne said associations with 50 or more units appear to be explicitly authorized to use “absentee ballots” unless prohibited by one’s bylaws. Furthermore, with respect to those associations in New Jersey, every ballot, said Byrne, “has to list the nominated candidates in alphabetical order by their last names.” Also in regard to those types of associations, ballots (whether paper or electronic) must contain every name of each person properly nominated to be a candidate. Lastly in this regard, Byrne advised that an association cannot “prevent a member from voting by electronic means once the board has decided to allow it and that particular member consents to it.”

Who has access to election results? Byrne said that there may be governing document provisions or statutes that address access to election results. “My view is that if a board wants ballots to be reviewed by owners, they can view them. If they don’t, they can’t. It’s at the board’s discretion,” he said. In New Jersey, an association should look to the state’s Non-Profit Corporations Act in this regard. In fact, according to Byrne, associations of 50 or more units are absolutely obligated to strictly adhere to that law’s requirements concerning the counting of ballots.

What’s the process for validating a proxy vote? According to Byrne, some states have no provision at all. “If it looks reliable, it’s good enough,” he said. However, there are some states that limit proxy voting and make it more difficult to establish a valid proxy. He said that, in his view, New Jersey is one of the states that empowers people to use proxies for voting. Byrne also said that any proxy used by any association in New Jersey “has to have a prominent notice stating that proxy use is voluntary, that a proxy can be revoked at any time before the holder of the proxy votes and that the absentee ballots are available to the member.” Furthermore, according to Byrne, no New Jersey community can use proxies for a board election without also having absentee ballots available.

To illustrate cumulative voting, Byrne gave an example: “Let’s say you have three seats open and every home has one vote per home. Instead of casting three separate votes, with cumulative voting, you’re able to cast your three votes for one person. You’re able to put your votes together,” he explained. State law may regulate or otherwise prohibit such voting.

When an election results in a tie, how should the association proceed? According to Byrne, it depends. The board would have to come up with some reasonable way to determine a winner. “You’re not typically going to find something that governs that ahead of time. It’s going to be more of trying to figure out what’s best once you find yourself in that situation,” said Byrne.

What’s the process for an election challenge or recount? There really isn’t any set process, Byrne explained. He did say, though, that New Jersey law specifically addresses the ability of members of an association to have elections reviewed and challenged.

What is the role of an election inspector, and who typically would qualify for this role? According to Byrne, in New Jersey, inspectors are empowered to decide all questions pertaining to the election (i.e. eligibility to vote, results, the election process, etc.). With regard to who qualifies for the position, Byrne said there really are no requirements, but presumably the person should not be a candidate or related to any of the candidates.


What is a transition? According to attorney David J. Byrne, there are two types of transitions. The first, he said, is transition of control. The transition of control is when a community’s control is transferred from the sponsor to the developer during the sales process.

The second, Byrne said, is the transition to responsibility, connected with the common property, or common elements. “During that period of time, the association should evaluate the nature of the construction, the propriety of the sponsor board’s management and a variety of other things,” he explained, “for the purpose of determining whether the sponsor complied with all the applicable standards, rules and plans before the association takes on full responsibility for the common elements.”

What should an association do if any construction defects or problems are found prior to the transition? “In New Jersey, for the most part, you present the nature of the defects to the developer, assuming the developer is still in business, which is not always the case, and see what that developer says,” said Byrne.

“In the event the developer is not in business, or the defects are of such a substantial nature that providing reports to the developer would be futile, the association should probably file a lawsuit,” he noted.

Byrne added that oftentimes when an association facing construction defects is not working with one of the larger development companies, its recourse may not necessarily come from the developer itself or the contractors the developer used. “Instead, it may come from insurance carriers through insurance policies that were taken out and maintained by the developer and the contractors during the course of construction,” he explained. Byrne said this is important for associations to be aware of, especially if they are dealing with particularly bad defects.

Can anything be done by the board before the actual transition date? “Not legally,” said Byrne. “Legally, until such time as a majority of the board consists of owners, the enforceability of anything that board does regarding defects is questionable.”

Is there ever a situation where a developer will pay expenses out of its own pocket to keep assessments artificially low? “That’s pretty much what a developer will always do,” said Byrne. “New Jersey law provides, though, that developers fund an association’s operations in a specific way during the course of development and make certain disclosures regarding.”

Do homeowners have the right to inspect a developer’s financial records? According to Byrne, the answer is no. However, he added, “Developers are required to file certain things with the state in connection with approvals to build and sell condominiums. Those records are presumably available to the public.”

If the developer enters into a contract on behalf of the association, what happens after the transition? Is the association responsible in this case? “It depends with whom the contract is made and on the relationship that entity may have with the sponsor. It would really have to be addressed on a case-by-case basis,” Byrne noted.

Construction Defects

What is a construction defect and what should an association do if one is discovered? “A construction defect is a condition of a constructed item that exists in deviation from the applicable architectural drawings, applicable building codes, and/or applicable industry standards (manufacturer specifications),” said attorney David J. Byrne.

The first thing an association should do if a construction defect is found is engage an expert to evaluate the concern and to determine if it is in fact a defect, Byrne said. Once it is determined that there is a defect, the next step would be to determine the nature of the deviation, the cost associated with its repair, and whether any consequential damages exist or will accrue because of it, he added.

When is a defect the concern of individual unit owners instead of the association? “If the defective item is something over which the owner has exclusive ownership (i.e. it’s part of the defined unit), then the association may not even have standing to make a claim regarding the item or even to remedy it,” Byrne noted.

How can an association complete necessary repairs quickly while still pursuing any claims that have been made against the developer? “An association has a fiduciary duty to maintain, repair and protect the common elements, whether they’re built correctly or not,” Byrne commented. “The association has to be able to recover the dollars from the responsible parties and yet not allow defects to get worse, thereby increasing the amount of damages that are to be recovered,” he added.

Should contractors doing the repair work document everything? “If the association is ever going to look to recover dollars equal to what it spent to repair the defect, the association needs to give prior notice to the contractors and/or the developer,” said Byrne. He added that the purpose of this is to allow them to come to the site to witness an item before it is fixed, not necessarily to make repairs itself. Byrne also noted that an association can pay its expert to photograph the item in order to provide more in-depth and accurate reports; otherwise, the contractor should be required to provide these items.

When and how should an association notify a developer of a problem? “If the association believes the developer can cure the problem in some way, and that a developer fix is in the community’s interest, notice can be provided to give the developer the chance to fix it,” said Byrne. However, he explained, if there is a larger problem, and it is one the developer cannot fix, the association will probably have to file suit or make the repairs.

In addition, Byrne noted that, if the developer claims a warranty has expired, it is usually not determinative of anything. He also said that the board has total authority to make changes to the rules and regulations adopted by the developer-controlled board.

According to Byrne, there is no mandatory arbitration in construction defect claims in New Jersey. He noted that arbitration is allowed if the parties involved in the defect claim agree to arbitration. Byrne explained that the arbitration process runs similar to that of a court proceeding, but without a jury.

The Fair Housing Act and Civil Rights​

Violations of the United States Fair Housing Act (FHA) can result in severe penalties for associations. Knowing how to govern your community responsibly in this regard is highly important. What is a common sense approach to staying in compliance with the FHA?

According to attorney David J. Byrne, there generally are two subsets to the FHA and community associations. “The first,” he said, “is in relation to an over fifty-five adult community, which is different than a regular community. These communities are allowed to discriminate on the basis of age and/or familial status, under certain circumstances. There are affirmative obligations on the part of those types of communities to keep certain records in order to preserve the exemption that they enjoy from the FHA.”

Byrne noted that the FHA makes any discrimination based on age and familial status illegal, but that’s exactly what an over fifty-five community does. “It’s allowed to continue to do that as long as it satisfies the law by keeping certain records of age, etc., and does additional things,” he explained.

The second subset is in relation to disabled people or people who claim to be disabled, Byrne said. When an owner or resident with a disability requests an accommodation (a modification of the rules) he/she feels is necessary to facilitate his or her use of the property, the most proactive approach the association could take, according to Byrne, would be to seek legal counsel. He said that an association should never say “no” to a request until it’s absolutely necessary and appropriate. “Under the law, until you say ‘no’ to an accommodation request, you can’t be guilty of having violated it,” Byrne explained. “This is true even if you’re taking the condition where you’re investigating the request, looking into it, asking for more information, etc.”

What are some problems with, pitfalls of, and penalties for non-compliance with the FHA? “The Act is pretty tough with respect to violations,” said Byrne. He noted that the act provides for the recovery of legal fees and penalties. This fact requires an association to be very careful and completely sure that it is making the correct decision before it says “no” to any request.

“The law provides for fee shifting, meaning that if you lose, you have to pay the other side’s attorney fees,” Byrne explained. “For the most part, it usually makes the most sense for an association to interpret its obligation broadly, with respect to requests because saying ‘no,’ and then having been ruled to have violated the law, will result in drastic consequences.”

Byrne said that, because of the fee shifting, penalties are harsh for an association. “Be careful and only say ‘no’ when you’re absolutely sure that a win is likely if a person brings an action against you,” Byrne said.

As Byrne said, the Department of Housing and Urban Development (HUD) is responsible for enforcing the aspects of the FHA related to associations. He explained that each state has its own enforcement mechanism as well. “The HUD operation functions across the country, but in most states, a state-employed investigator is assigned to the individual cases. People will complain to HUD about a particular practice they believe violates the FHA, and then HUD will either investigate it or send it to the applicable state asking the state to investigate it,” Byrne said.

What are some civil rights, and how do they apply to associations? The FHA makes it illegal for an association to discriminate in certain fashions in the provision of services, Byrne said. According to the Division on Civil Rights section of the New Jersey Department of Law and Public Safety’s website, some prohibited discriminatory bases include, but are not limited to, race, creed, religion, color, national origin, age, ancestry, nationality, marital/domestic partnership/civil union status, sex, gender identity, sexual orientation, disability and family status.

Could FHA violations be considered civil violations or criminal penalties? Byrne stated that FHA violations are considered civil violations, not criminal.
What constitutes problematic wording in a covenant or rule made up by the association? “The most problematic,” said Byrne, “would be rules or covenants that on their face discriminate against folks on the basis of one of the prohibited classes.”

He noted that in and of itself, one’s act of discrimination is not necessarily illegal. People discriminate all the time, he said. For example, we discriminate when we purchase one type of car over another or hire one person instead of another.

“As long as you discriminate in a way that’s not illegal, there’s no problem with it. If you are creating rules or have covenants that are based on, or reference, some of those particular things, then you’ve got trouble,” Byrne explained.

For example, he said that a clear example of a violation would be a rule that prohibits children from riding the elevator.

What is discrimination based on protected classes? Illegal discrimination would be an association’s actions that discriminate on the basis of one of the identified classes, such as race, Byrne said. For example, an association can regulate a lounge in regard to use, but not in regard to the type of person using it. A rule that prohibits families with children from using the lounge would be illegal discrimination based on age and familial status.

What are considered reasonable accommodations for people with disabilities? “It depends on the facts,” said Byrne. For example, is it a reasonable request for a wounded war veteran to seek a ramp added to his town home? “Probably,” Byrne said. However, if an engineer opines that the desired ramp would not be safe, that same request might not be reasonable.

“Each situation should be taken on its own. Be mindful that the law is set up to punish you if you’re wrong, so you should probably err on the side of granting the request,” Byrne explained. “You know, often the safest course of action is to follow the simple creeds of kindness, empathy, and class. Laws like the FHA are designed to reflect that.”

Is religion a potential legal concern in the area of civil rights? “Yes, religion is part of the equation,” said Byrne.

How are religious displays treated in the FHA? Byrne said that they are treated the same way as any other matter related to reasonable accommodations. “Religious displays,” he added, “are also governed by state laws in connection with free speech considerations. Many states like New Jersey believe that, despite the fact that these are private situations, there are some free speech considerations involved.”

Can associations prohibit religious services in common areas? According to Byrne, in New Jersey the association would have to decide whether that regulation is reasonable under the circumstances. “Ultimately, the association should handle it just like anyone else who’s using the common area. The focus shouldn’t be on the type of assembly,” said Byrne. When it comes to expression, Byrne said, time, place, and manner must be the focus.

Can an association prevent a sex offender from renting a unit? “It’s really difficult for an association to prevent anybody from renting anything,” Byrne said. Individuals decide how they handle their private homes, including to whom they rent, he said.

He added that, if a community amends its bylaws to provide for the association having more of a stake or interest in the rental of units, perhaps there would be some right. However, owners often realize that such a restriction affects the marketability and value of their units.

Are associations allowed to have any bias for or against families with children? “Those types of rules violate the FHA,” said Byrne, “unless connected with an active-adult community.” He said that rules should be based on conduct. As an example, Byrne said, if the community has a gym, children should not be barred. Instead, rules should prohibit the type of conduct that people typically associate with children.

Is an association required to allow residents to keep animals if they have a prescription from their doctor for a comfort or service animal? “It depends on the situation. The statute doesn’t expressly address that,” said Byrne. “In this circumstance, the statute allows those who are legally disabled (i.e., fit within the legal definition of “disabled”) to procure reasonable accommodations vis a vis rules when that accommodation are necessary to afford the resident equal use and enjoyment of his dwelling. Each such situation must be handled on a case-by-case basis,” he explained.

Can an association question a resident about the prescription or medical note for that animal? According to Byrne, the association can indeed question a resident about the prescription or medical note.

What is the difference between a comfort animal and a service animal? “A service animal provides some sort of a physical service,” said Byrne. He added that a service animal performs a tangible service for a person with a disability, such as someone who is deaf or blind. On the other hand, a comfort animal’s purpose is to make someone feel better. “A comfort animal doesn’t necessarily connect with the use of the property or the ability to actually physically function,” he explained.

Can associations restrict the size of these animals? “It depends on the circumstance,” Byrne said. For example, an owner’s guide dog might be a certain height, and the association may need to allow it. “You can’t make that decision in a vacuum,” noted Byrne. Again, much of these decisions must be made on a case-by-case basis.

Does the Americans with Disabilities Act (ADA) affect how an association makes up its rules for service animals? The Americans with Disabilities Act does not apply to this type of situation, Byrne said. Instead, he explained, the ADA applies to public accommodations and physical space (an association may not be a public accommodation) and employment.

Can an association ever restrict the areas where the comfort or service animals are allowed? Byrne said that placing restrictions on the areas where the comfort or service animals are allowed depends on the situation. He also said that limiting the number of comfort or service animals a resident can have depends on the situation.

Is it common or even permissible for associations to require that the animals are photographed when they are first brought onto the property? “It may be. Absent of the issue of disability, the board’s rule-making is subject to general reasonable analysis,” said Byrne. He then posed the question that if, for instance, a disabled person’s service animal won’t sit for a picture, does the association then prevent that person from having the animal? Associations must handle each case with care, erring on the side of caution when making decisions.

Contact Info:

David Byrne
Ansell Grimm & Aaron, PC
214 Carnegie Center, Suite 114
Princeton, NJ 08540
(609) 452-3870



While every homeowner association hopes for a community that runs smoothly and safely, HOAs must remain aware of the possibility of disasters and dangerous situations in order to provide their residents with the greatest amount of safety and security. Thomas Engblom, CMCA, AMS, PCAM, ARM, CPM, PhD, outlined a plan of action for homeowner associations, detailing what to do prior to a disaster, and how to manage if disaster does indeed strike. Disasters can include anything from weather-related incidents, including hurricanes and tornadoes, to man-made disasters and emergencies, including bomb threats. While each scenario differs in how an HOA must react, there is a certain amount of preparation that an HOA may do to help ensure the well-being of its residents, first and foremost, and to help reduce damage to property. 

Before enacting disaster preparation within an association, what exactly qualifies as a disaster? “A disaster is anything that would be unplanned,” Engblom said. Some common disasters include fire, flood, tornado, electrical malfunction, etc., which of course vary in scale. “You should always plan for something that would be abnormal to your area as well. Planning for a disaster, geographically you may have fire, flood, or tornado, but you should prepare for the unknown.” Consider any weather events that typically occur in your area, but also consider aspects of your surrounding area, including, for example, train tracks or chemical plants. Simply because a certain disaster or event has not occurred near an association or is quite rare, the association should still consider it a possibility and plan for it. Being over-prepared for a variety of disasters is a better plan of action than being completely unprepared. Bigger properties, with more units and residents, will need to prepare differently than smaller properties. 

Placing the burden of preparation entirely on the residents themselves is not an option. The association has a responsibility to its residents in the event of a disaster. The responsibility of the board is covered in the association’s governing documents. “This goes back to the board, and the board is the governing agency. The board has a fiduciary responsibility to maintain the common elements. How do you maintain those common elements? They essentially need to restore the common elements to the condition that they were in before [the disaster],” Engblom said. “You want to protect the association, and the bigger concern is that you don’t want any loss of life.” To illustrate this, Engblom gave the example of an association where the power went out. The association did not want residents to walk up to their units in the dark through the stairwells because residents could injure themselves. In addition to jeopardizing the safety of residents, such a hazard could become a liability to the association.

When actually planning for hypothetical disasters, Engblom suggested that associations prepare for different components of any problems that may arise. Additionally, disaster plans should be updated on a regular basis by trained professionals. Parties involved in the review process of a disaster plan include maintenance, management, the board of directors, or residents with a relevant skill set (fire personnel, tradespeople, medical personnel, etc.) to provide input. “You as a board member might not have the expertise, but if you call the fire department or the police department, they can give insight to some of the basic information that would be a part of this.” Engblom further noted that, if you have people involved in any of these fields within your own association, you can tap into their knowledge.

Insurance companies should be involved in the process as well. “You want to know how much they will cover and what authority you will have,” Engblom said. The insurance company can provide the funds necessary, depending on the situation, to prevent any additional damage after the disaster. He advised that the association should first call 911 in the event of an emergency before contacting any other involved parties (including restoration or insurance companies). 

Engblom also noted that FEMA (Federal Emergency Management Agency) provides information regarding disaster plans, including how to make a disaster preparedness kit and how to act both before and after a disaster occurs. They also provide booklets that can be kept by associations and their residents. The booklets cover a range of topics related to disaster preparedness, including what should be kept in preparedness kits — including water, flashlights, rope, plywood for boarding up windows, etc. Detailed information can be found on FEMA’s website at www.fema.gov.

Associations should establish command centers to prepare prior to, and to coordinate following, the disaster. “A command center can be in the office or it can be in a different location so that everyone who is filtering through — such as contractors and emergency response personnel — can be briefed,” Engblom said. In the emergency disaster plan you should also have a meeting place. “It can be down the street. Maybe it’s at a church, maybe it’s at a school. You want it conducive to your situation. You want people to go there and meet so that you can have a head count,” Engblom said. Meeting locations may change depending on the season or the type of disaster. The main component is that the meeting place will serve as an information and treatment point as well as a refuge for residents.

Engblom noted the importance of establishing if any residents have special needs or circumstances that would be affected by certain situations. For example, if the power goes out and a resident needs an oxygen tank, having that knowledge on file allows the association to better ensure that resident’s safety. Associations should provide evacuation plans for residents and stipulate specific plans for non-ambulatory residents. If your association allows pets, provide a plan for them. Local pet hotels serve as a good option for boarding. Planning for every type of disaster requires that the association plan for the aftermath of every scenario as well. 


Associations must also consider how to communicate information and updates to residents in the event of a disaster. Engblom said, “You may have a dedicated cable channel that you can utilize. You can call people at home, by cell phone, or email them.” Automated technology that utilizes email or phone to send out blasts of information to certain groups of people is a good choice. This can be customized to fit the needs of your association as well. If a task force exists, they can be sent information specific to them while residents can be sent their own relevant information. Note that some lines of communication will cease functioning during certain scenarios (i.e. if there is a fire, updates by home phone is not the most efficient choice).

In order to best prepare residents, the association should have meetings to go over the disaster preparedness plan. They may also want to hold a mock-drill. Inform residents of the potential of upcoming events, such as fire drills and town hall meetings. Forms can be provided for residents to complete. “Consider having owners acknowledge receipt of the plan with a signature page,” Engblom said. The plan can be included in association documents, such as the rules and regulations, and can be mailed out on an annual basis with a summer communications or annual meeting packet. Ensure that the plan is included in your resale disclosures.

In the event of a disaster, an association should hold meetings on a regular basis to keep residents informed and to discuss what damage has been addressed and how the situation should be dealt with. This harkens back to maintaining open lines of communication. “If you’re with a management company, they will be the conduit for the communication that you have.” 

Following a disaster, the association demonstrates their responsibility by liaising with a restoration company to repair any damage that occurred. The restoration process is discussed in detail in the next chapter, but here is a briefing of what typically should occur. If the disaster covered a wide area, a restoration company will need to prioritize a list of their own, which may delay repairs within your association. “The question becomes, do you have multiple restoration companies as a backup?” Engblom said. As will be detailed in the next chapter, associations should be prepared with information about restoration company contacts to help speed up the process of fixing any damaged common elements and returning the community to a place of normalcy.

Associations also should be aware of security issues and put measures in place to prevent burglaries if units will be unoccupied. “Call your vendors to make sure they are ready, willing, and able to perform board-up services and begin interior dry out,” Engblom said. While security of your residents remains the priority, securing a building against theft helps to mitigate the stress following a disaster. Associations should further secure their important documents, including insurance policy documents, checks, owner lists, banking information, and a complete set of the governing documents.

As far as documentation of the disaster itself, associations need to report any damage to their insurance company. This process is detailed in Chapter 10 — Insurance. Briefly, the extent of documentation is done on a case by case basis and depends on the type of disaster, Engblom said. Insurance companies typically ask the date and time that the event occurred and what steps you are taking. Engblom recommended that you schedule an adjuster to call as soon as possible. If possible, require your restoration contractor or other vendor to meet with the adjuster on site to verify damage; try not to allow the adjuster to visit the site unaccompanied. Get the claim number as well as your insurance company contact’s email address so that you can immediately follow-up with them, noting all of the information previously exchanged over the phone.

As part of preparing in advance, associations should catalog specific building information. Keep a file of the brand, model, and serial numbers of pumps, motors, appliances, swimming pools, and any other major equipment. Conduct a physical inventory of items such as furniture and equipment. Engblom added, “Videos of these items [before a disaster] will be invaluable.”


he media may show up at an association in the event of a disaster. Engblom suggested letting a representative from the management company deal with the media, as they are more likely to have the expertise and the knowledge necessary to adequately address any questions. Engblom also suggested keeping the media off of the property, as they may only exacerbate ongoing problems. 

While disasters can occur on a vast scale and vary greatly in type, associations do have the power to mitigate damage and panic to a certain extent. Preparing for a wide range of scenarios can help provide residents with a greater sense of security and can help the association fulfill its responsibility to the residents.

  • First aid supplies
  • Emergency cordoning tape
  • Rope
  • Sheets and blankets
  • Battery-operated megaphone and whistles
  • Flashlights
  • Portable AM/FM radios
  • Walkie-talkies
  • Spare batteries and manual battery
  • Chargers
  • Flares
  • Poster board and markers
  • Blockades and flashing lights
  • Bottled drinking water
  • Water purification tablets
  • Non-perishable food
  • Camera
  • Plywood Sheets
  • Portable generators
  • Hygiene products
  • Filtering face masks
  • Tool kit
  • Plastic sheeting and duct tape

Contact Info:

Thomas Engblom, Ph.D, CMCA, AMS, PCAM, ARM, CPM
Vice President Regional Account Executive Midwest
CIT Group Inc.
(312) 209-2623

New Jersey Insurance

Dawn Becker-Durnin

Dawn Becker-Durnin

PeopleFirst Insurance

Content also provided by Robert Travis, retired from CAU.

Association Insurance — Ensuring You’re Protected

Insurance is a complex subject in any context, and in the realm of community associations — condominiums and homeowners associations (HOAs) — there are many bases to cover when it comes to ensuring the association, its board, manager and residents are all appropriately protected. We spoke with Robert A. Travis, CIRMS, CPIA from the Newtown, Pennsylvania office of Community Association Underwriters of America, Inc. (CAU), a national insurance company which specializes exclusively in insuring community associations and other common interest properties.

So how does a community determine how much and what types of insurance are needed? While an association’s governing documents of- fer meticulous details about the governance of a community, they don’t typically, and shouldn’t according to Travis, specify exact amounts of insurance needed. However, they usually lay the groundwork for building the proper mix of coverage. “They’re going to have an impact in setting minimal standards of insurance for every line of insurance the association needs to have,” he said. The types of insurance needed by associations are Property, Directors & Officers (D&O) Liability, Fidelity (otherwise known as Employee Dishonesty), Commercial General Liability, Workers’ Compensation and Commercial Umbrella. “The governing documents can have a lot to say, and have a strong demand about what the minimal level of insurance will be,” he said.

The association also needs to be comfortable that they’re fulfilling all the insurance requirements of federal and state statutes, and any contractual or lenders’ requirements. Above that, boards need to fulfill their business judgment — that is, ensure they’re fulfilling their fiduciary duty and exercising due care in their decisions — to make sure they have adequate coverage. But Travis noted there is no definitive answer as to how much is too much when discussing insurance. “No one can know what the future could bring in terms of losses,” he said.

Homeowners should note that there is different insurance needed de- pending on whether their community is a condominium association or an HOA.

In covering the properties in condominium associations, there is a master insurance policy for the association, then individual unit owners have their own insurance — commonly called HO-6 policies — which cover their individual unit’s contents as well as any upgrades made to the unit by the owner or previous owner. These policies also cover things such as loss of use, special assessments caused by a loss to the association, as well as giving General Liability coverage to the owner.

What should an association know about how its master policy inter- acts with the coverage residents have on their individual units? The first thing people need to understand is that, when it comes to insuring the unit in a condominium, the association’s insurance is always primary. When a loss occurs, the unit owner’s insurer is always going to look and see how the master policy dispenses of the claim, and then their HO-6 policy — the unit’s policy — will step in and cover what it can pick up after the association’s master policy applies to the claim first.

Here is an example of how this works. Let’s say there is a storm and a medium-sized tree falls on the roof of a two-story condominium building. While no major damage is done to the structure, the roof is torn causing water to leak into the kitchen of the unit below. The unit’s ceiling collects water and the sheetrock eventually breaches, causing a hole in the unit’s ceiling and water damage to the custom wood cabinetry the owner had installed after the original purchase of the unit from the developer. The condominium’s master policy pays to repair the roof and the ceiling inside the condo unit. Then the unit owner’s HO-6 policy picks up the cost to replace the custom cabinetry that was not part of the original unit sold by the developer.

Another example of how the HO-6 policy kicks in is when there is minor damage that is under the amount of the deductible of the association’s master policy. Then the HO-6 policy picks up the repair cost, making the unit owner whole again subject to the HO-6 deductible.

Travis emphasized that having an overlap of coverage in these cases is better than having a gap in coverage. “Don’t think of this adding up to 100% of the value. Having a little bit of overlapping coverage is a far better scenario than putting yourself in a position where you may have a gap,” he said.

With HOAs, on the other hand, sometimes the association is cover- ing the unit and sometimes it’s not. That would depend on the association’s governing documents. In townhome communities, even where there are common roofs, it is not always the case that the association’s master policy will cover the townhome building. Homeowners should have their insurance professionals make sure they have reviewed the Governing Documents and offer the proper coverage for their particular situation.

When insuring a property, it is best to be covered for the Replacement Cost Valuation (RCV) of what is insured. What is meant by Replacement Cost Valuation as opposed to an item’s Actual Cash Value (ACV)? When evaluating a loss, Actual Cash Value takes depreciation into consideration. Travis gave an example of someone who has a seventeen-year-old Plymouth Neon. Let’s say this person has Comprehensive and Collision Coverage on this car and has a total loss of the car in an accident. The insurance company will pay an amount to purchase another seventeen-year-old Plymouth Neon. That is Actual Cash Value. Inversely, Replacement Cost Valuation does not take depreciation into consideration. So a policy that is written to cover Replacement Cost Valuation will pay an amount for this person to buy a brand-new Neon. “So Actual Cash Value is a valuation where it is replacement cost, minus depreciation,” he said. “It does not give you enough money to rebuild a building, it gives you the depreciated value of that building.”

Associations need to make sure they regularly check their insurer’s estimate of the replacement value for their property to ensure they have enough coverage. How often should this be done? “In my opinion,” said Travis, “annually.” He recommended the association get a Replacement Cost Valuation from an actual replacement cost construction valuation company, and enter into a contract for the company to come back on a regular basis, such as every three years. Then on the in-between years, Travis said that you should get an automated increase based on construction cost increases at the time in that geographic area. He said that the valuation company can provide you with this as well.

Associations should also be knowledgeable of their property’s replacement value in connection with its property insurance policy’s co-insurance clause. Otherwise they could be subject to a co-insurance penalty should a loss occur. The co-insurance clause basically puts a condition upon the in- sured that they are properly insuring the premises to its true replacement value. The actual percentage of insurance required varies from company to company. “The co-insurance clause basically will state that if an insured does not properly insure the building or buildings to the proper percent- age of the true replacement value, that they will then be penalized on any and all claims on the property,” he said.

For example, let’s say someone has a building worth $100,000 from a replacement cost standpoint, and their insurance policy has an eighty- percent co-insurance clause — it’s saying that this person or association should at least be insuring the building for $80,000 on a replacement cost basis. If they choose to insure it for an RCV of $70,000, the insurance company is then going to do an evaluation at the time of the loss and dis- cover that the building is worth $100,000 and is only insured for $70,000. Therefore, the building is only insured for 7/8ths of what the co-insurance clause specifies. Consequently, the insurer can rightly say they’re only going to pay 7/8ths of any loss.

Travis explained if the person or association in the above example had a total loss, they would only be paid 7/8ths of the policy limit of $70,000. “That’s how the co-insurance penalty works,” he said.

Associations need to have special insurance to cover themselves and their board members in case they’re sued in relation to their actions in running the community. Board members can be sued for any wrongful acts or breach of their fiduciary duties to the association. A breach of fiduciary duty happens whenever a board member or any other person of authority in a community association does not properly exercise the proper controls or procedures in handling and utilizing the community association funds. “If I’m a board member and I am putting the association into contracts that they don’t really need to be in, I’m forcing money to be spent that doesn’t need to be spent, or I’m mishandling funds , that is a breach of my fiduciary duty. I have a fiduciary duty to protect the association’s funds,” said Travis.

A breach of fiduciary duty can also include when board members, or the manager, do not properly protect the assets of the association, including the resale value of the lots, units and homes in the association. “When you have a breach of fiduciary duty, you’re not fulfilling the fiduciary duty that you have to protect the money of the community association and its membership,” he said.

This is where Directors & Officers (D&O) liability insurance comes in. A D&O liability policy is designed to protect the association from various wrongful acts of its board members and association leadership. These wrongful acts can come in two categories. One is monetary losses — where someone sues an association for a wrongful act which has cost the claimant a dollar amount. Or, someone can sue a board of directors for a non-monetary claim. This is where they’re suing not for a dollar amount, but for injunctive relief. “It’s easy to say that most D&O claims are of the non- monetary variety,” said Travis. In cases seeking injunctive relief, it is when someone sues the board because they feel the board is enforcing a rule that is working unfairly against them. They want to go to court and have the court tell the board they must stop enforcing the rule in question. The opposite could also be the case. An individual can take the board to court saying that they’re not properly enforcing a rule. “They’re trying to get the court to make the board actually enforce the rule,” he said. So in these cases, the board is not being sued for a monetary amount, but in order to make them take some action, or to stop them from taking an action they are taking. In the non-monetary suits, the costs that need to be covered are all for legal defense.

Obviously, lawsuits can arise even when board members are fulfill- ing their fiduciary duties and following the rules of their associations to the letter. Travis explained that boards are faced with many difficult decisions, of which, whatever choice is made, could have some undesired effect for some residents. “Every day goes by where a situation is posed to a community association insurance professional, and we look at it and we know that the board was between a rock and a hard place. That either decision, you could back up as being a prudent decision, but either way you made a decision you’re setting yourself up for detractors and a possible lawsuit from those who think it’s the wrong decision,” said Travis. So even if every step of the way you’re trying to do the best you can do, many decisions that need to be made have no ideal choice that will satisfy everyone in the community. Even if there are two desirable choices in a decision, someone could say you chose the wrong one. “Even if you have the very best risk-management program on earth, you still do not eliminate all potential exposure to loss,” said Travis.

Are there things the D&O policy won’t cover? Travis said yes. One example is if someone is making a decision as a board member that helps them put money in their own pocket — such as if they sway jobs to a company the board member has a financial interest in, thereby profiting themself. Certain events are going to be excluded from D&O coverage. “If it’s criminal, if it is lining your own pockets, or something similar to these acts, there are just certain things that are not covered and certain types of wrongful acts that are not going to be covered,” he said.
Another item that possibly may not be covered by a D&O policy is when the board is accused of a wrongful act that is considered to be discriminatory toward someone in a protected class. According to Travis, there are some D&O policies that provide no protection for discrimination whatsoever. Alternatively, some D&O policies provide defense costs only, and then there are some that will not only provide defense costs but will also pay judgments made against the association for a discrimination claim. Travis said that there are different types of coverage available to boards and they should be sure they choose the D&O policy that protects their exposures to loss.

A somewhat gray area of coverage is the mismanagement or improper investment of funds. In terms of mismanagement or improper investment of the association’s funds, Travis noted this is a very broad topic. “For the most part, most D&O policies are not going to provide any cover- age for mismanagement or improper investment of funds,” he said, “but some do.” He explained further that if you’re getting into areas where the FDIC is not providing insurance for your monies while they’re sitting in an investment fund, the D&O policy might not provide coverage either.

One thing board members should be aware of is that D&O is not there for Bodily Injury or Property Damage losses. That’s what General Liability insurance is for. “If I’m going to sue a board because I got hurt, or I’m going to sue them because my property or my car was damaged, and I blame the board for my injury or my damage, that is not a D&O lawsuit, that is going to be a General Liability lawsuit,” he said. D&O does not get into the Bodily Injury, Property Damage arena.

How do board members determine how much D&O insurance they require? First, most states have something about this in their statutes. After referring to state guidelines, the next place to look is their own governing documents — the declaration, CC&Rs, articles of incorporation and the bylaws. “Someplace within the declaration, the articles of incorporation or the bylaws, there may be some minimal standards set out as to what limits the board should have as far as directors and officers liability,” said Travis. He added that there also may be lenders, such as Fannie Mae, Freddie Mac, or the FHA and HUD that require certain limits in order to comply with those lending institutions. There could be another type of contract also demanding a certain amount of coverage, such as that with a local municipality or neighboring property whereby there may be a cooperative venture. “After that,” he said, “then it becomes a business judgment.” So an association may evaluate their assets and decide to have additional insurance based on that value, rather than going with the mini- mum required by other entities.

Board members should make sure they’re named as an additional insured on the association’s D&O liability policy. “The community association is going to be what’s called the first named insured. The first named insured is the party that’s on the policy’s declaration page,” he said. All the other insureds, such as the board members, committee members and managers, are named in the body of the policy. “Those are the folks who are additional insureds,” he said. This ensures that if there is a lawsuit, and these board members are named along with the association, that they will be covered by the policy.

Board members should verify that they are, in fact, insured under the association’s D&O policy by asking to see a copy of the policy. “If I’m a board member and I have someone whose opinion I value, such as my insurance agent or attorney, I’m getting a copy of the association’s D&O policy and asking what they think about it. Quite frankly, I’m also reading it myself,” he said. Other than doing that, a board member would be relying on certificates of insurance and proposals, and Travis said that not even the most comprehensive proposal explains every exclusion or definition on a policy. For example, every D&O policy covers for wrongful acts, however, every policy also has its own definition of what a wrongful act is. “That’s the definition that the entire policy is hitched up to,” he said, “so I would want to see that definition of wrongful acts.”

What is a waiver of subrogation? Most states have this written into their statutes or their condominium acts. In the world of community associations, the waiver of subrogation basically means that the association waives its right to subrogate: that is specifically to go after a unit owner when the unit owner causes a loss or claim for the community association. Travis gave the following example: “I live in an eight-unit condominium and I’m in my unit and I fall asleep while smoking a cigarette and that cigarette then falls and sets my mat- tress on fire. I get out alive and I get everyone else out alive, but all eight units burn down to the ground. What the waiver of subrogation is going to stipulate is that the community association is not going to be able to come after me to rebuild all eight of those units.” This also means that the association’s insurer cannot go after the person in this example. The association and its property insurance need to pay this on their own, and they cannot subrogate against the unit owner.

Travis explained that the reason why the waiver of subrogation was written into the early condominium statues was to take certain decisions out of the board’s hands. Take an example of two unit owners having the same type of loss. Each of their water heaters burst and the result is $10,000 worth of damage to each of their buildings. Let’s say one of the unit owners is well liked by the board. He volunteers on committees, he is a good neighbor and always participates positively in association meetings. The other unit owner, however, is the bane of the board’s existence. He causes disturbances at meetings and frequently calls the board president to harass him. In this example you can see where this law protects the board from inadvertently making an arbitrary decision to sue one of the owners and possibly not the other due to their personal feelings about either individual. Because of the waiver of subrogation, one does not need to decide if an owner should be sued in these cases, as the association’s master policy pays the claim. Travis explained that, while insurance companies have lost large amounts of money due to paying claims, in cases where waiver of subrogation applies, it would have been much worse if they didn’t have the law because, he said, they would be paying even more in D&O liability claims.

Aside from the D&O policy, the board members should expect to have protection for their General Liability coverage. This would be for scenarios where they might get individually sued for a Bodily Injury or Property Damage to a third party that may find them individually responsible. “As an example, if I’m the head of the social committee and some- body gets hurt at one of the social events, they may sue the community association, but then sue me. As an individual I need to make sure that I have that kind of protection from my community association as a volunteer,” he said. Board members should expect to have coverage if they’re individually sued in this manner.

Property managers should follow a similar procedure in ensuring they’re insured in this manner. Travis recommended the manager make sure they are a named insured on all the General Liability and D&O li- ability policies that are written for all the community associations that they manage. Managers should also make sure that their management company, the site managers themselves and other management company employees are insureds on the policy as well.

This brings us to protecting associations, boards and managers in cases of theft of association funds. Fidelity insurance, which covers things such as employee theft, should be in place for this purpose. Travis ex- plained that, for the most part, this is purchased to protect the association from something an employee could potentially steal. Travis explained that a contractor would buy this type of coverage because they’re worried about an employee stealing their tools and equipment. A retailer could be worried about employees stealing their goods. Community Associations, however, are primarily concerned with people stealing the association’s funds. “The average community association really doesn’t have what you and I would define as an employee. So in a community association environment we need to expand the definition of an employee so that it not only includes the kind of employee the IRS defines as an employee, but it also includes committee members and volunteers operating within the scope of the direction of the association,” he said. He added that if the association is professionally managed, they need to make sure the site manager, the management company and all its employees are included in the definition of employee on the Fidelity policy as well. The policy is intended to protect for potential internal theft of community association monies.

As you can see the mix of policies procured by an association work together in a variety of ways. We’ve touched a bit on the General Liability insurance policy. So, what is General Liability insurance?

General Liability, like D&O, responds to what are called third party claims. These are when a third party, someone other than the community association or the Insurer, makes a claim or lawsuit against a community association claiming that the third party has somehow been injured or suffered damage because of the community association’s actions or lack thereof.

The first of these four is Bodily Injury. Bodily Injury is when someone has a physical injury to their person and claims the association is at fault.

The next item covered under General Liability is Property Damage. This is when someone has property that has been damaged, and they either have direct physical damage, or indirect damage, meaning loss of use of a property, and that direct or indirect damage or loss is claimed to be the community association’s fault.
Then there is Personal Injury. Not to be confused with Bodily Injury, this is when the community association is sued for something the association has said or done, which has hurt someone’s reputation or self-worth. Personal injury in this context is not when someone is physically injured.

Advertising Injury, said Travis, is the same as Personal Injury, except it’s in the written or published form. “So when we say things about people in board minutes or on the association’s website, we are talking about two classic examples of Advertising Injury exposure,” he said.

Under the General Liability policy, associations should include Host Liquor Liability insurance. This is for the Liquor Liability exposure an association has when hosting a party or event, since they are not in the business of selling alcohol. This is for those situations where a liquor li- cense is not needed, because liquor won’t be sold, but it is being served at no charge or given away. These situations include wine and cheese parties, picnic type parties, cocktail parties — or any event where liquor will be provided in this manner. This type of insurance needs to be added to the General Liability policy.

Community associations can get themselves into trouble if they decide to charge for liquor at such an event. In that case, an asso-ciation may need to obtain a liquor license and then can’t be cov- ered by the Host Liquor Liability coverage. In that case, an association would need Dram Shop Liquor Liability — that is, true Liquor Liability insurance.

Not every association has employees, however, every association should have Workers’ Compensation insurance coverage. Is this to cover volunteers? Travis said every community association should have Workers’ Compensation coverage, whether or not it has employees, to cover contractors who are sole proprietors or partnerships. Travis explained that in most states, sole proprietors and partnerships are unable to purchase Workers’ Compensation insurance to cover themselves. They are required to purchase it to cover their employees, and they will produce an insurance certificate to show the association they have the coverage for those employees. However the sole proprietor or partner in most states cannot cover himself under that policy. The reason being is that sole proprietors or partner are not considered employees of themselves. So if the sole proprietor or partner himself were to be injured on the job site, his Workers’ Compensation coverage would not cover him. What often will happen in the Workers’ Compensation courts is that since the sole proprietor or partner isn’t covered under his own policy, they will look at whom he was working for on the day he was injured. If they determine that the sole proprietor or partner was working for the community association that day as an employee, the association now owes Workers’ Compensation benefits for that sole proprietor or partner.

Another reason to have Workers’ Compensation coverage is to pro- vide coverage in case one of their contractors provides a false certificate of insurance. If one of these contractor employees is injured on the job and the contractor has no Workers’ Compensation Insurance, the Workers’ Compensation courts would likely deem the association responsible for the Workers’ Compensation claim. Again, they would look at whom the individual was working for the day he was injured much like the scenario described in the previous paragraph.
Travis said that yet another reason why it is needed is to provide coverage for casual labor. The association could casually pay a teen to clean up a small area around the association’s pond on a Saturday, for example, and pay him or her $50 out of petty cash. The association’s Workers’ Compensation coverage would apply here if that teen were injured while performing this casual labor. “The Workers’ Compensation courts are going to look at this as an employee/employer relationship,” he said.

So for these reasons, even if a community association has no payroll, they should have Workers’ Compensation coverage.

As for associations that do have employees, they should carry a type of coverage to protect board members and association assets against employee claims.

There are three types of employee coverage and claims that would come up here.

There is Employment Practices Liability, which is when the association or the board can get sued for how they practice being an employer. This includes hiring and firing, as well as how employees are treated on the job, raises, promotions and more. “Generally we get that coverage from our D&O liability policy,” said Travis. He explained that the D&O policy’s Part B is usually Employment Practices Liability when the D&O policy does provide this coverage.

Next is Workers’ Compensation coverage, discussed previously, which covers the association should an employee get hurt during a work-related incident. These benefits are required and determined by the state.

Then there is a second part of the Workers’ Compensation policy, called Employer’s Liability, which is for when an injured employee waives their rights to be taken care of by the Workers’ Compensation system, and they want to sue their employer for some additional funds. “That would be Part B of the Workers’ Compensation policy,” said Travis. He further explained that when an employee sues in this manner, waiving Workers’ Compensation coverage, not only does the employee have to prove that they were injured on the job, but that their injury was the result of their employer’s negligence.


As I’m sure you all know, an Commercial Umbrella policy is not a special policy to cover the umbrellas around your community’s swim- ming pool. This is an important liability policy that covers above and beyond other liability policies. “If you had a General Liability policy that had $1 million per occurrence and $2 million in the aggregate, and you had a $10 million Commercial Umbrella and you were to suffer a $5 million loss, then the General Liability policy is going to basically take the first $1 million. Then the Commercial Umbrella policy is going to cover the next $4 million above that,” Travis explained.

The Commercial Umbrella policy sits on top of your General Liability policy. It will also go over your D&O policy and any other liability cov- erage the association purchases. The Commercial Umbrella would help in case a claim goes over the limits of any of these policies. “It basically provides excess coverage to the limits that are shown in all of the underlying liability policies that are listed on the Commercial Umbrella policy’s declaration page,” he said.

Self-insurance is any scenario where an entity or community associa- tion could buy insurance, but decides not to. In these cases, the entity or community retains the risk, and if anything comes up, they would be the ones to pay for the loss and/or legal defense. Travis explained that to be self-insured is a two-step process. First, there needs to be insurance that can be purchased for that exposure. Then if there’s insurance that can be purchased for that exposure, the association makes the choice not to buy that insurance. They choose instead to take financial responsibility if something happens.

“If it was an uninsurable event,” he said, “then you’re not self-insuring and it’s just a business expense.” Events that are not insurable would include things like repairing the roads after a bad winter. Since there is no insurance that covers this, an association cannot be self-insured for it, and must absorb the cost as a business expense. “Self-insurance is when you could have bought insurance, and made the decision not to buy insurance,” he said. That is the act of self-insurance.

One special type of coverage that may be needed by some associations would be Garage Keepers insurance. Garage Keepers insurance covers when an association has someone else’s automobile in their care, custody and control. This could be if an association has unit-owners’ automobiles kept in an area under the care, custody and control of the association. For example, lots of community associations, especially in urban areas, have valet parking only. So residents and guests pull up to the building, give the valet their keys and they park the car in the garage for you. “That is the ultimate example of your car being in the care, custody and control of the community association, not you. That is a classic example of when you need what they call Garage Keepers insurance,” said Travis. This type of policy enables associations to insure vehicles they don’t own for when they are in their custody.

Associations can check an insurance company’s ratings in order to gauge the strength of the company and their ability to pay claims. Checking the AM Best Rating of the company is the best way to do this. It is an independent party’s evaluation of what position they are in financially to pay a claim. Travis said you can refer to other sources for the ratings as well, such as Moody’s or Standard & Poors. “There are several companies that evaluate an insurance company’s ability to pay future claims,” said Travis.

Do Associations Need Cyber Insurance?

According to Robert E. Barlow, Jr., CMCA, AMS, PCAM, CIRMS, of NFP Insurance in Easton, Pennsylvania, most commercial property and liability insurance policies exclude coverage for cyber security related losses.

“Cyber security threats pose a significant financial threat to all associations, and, without having the proper coverage in place, an association could be forced to assess their community members for damages,” he said. “Many community associations assume the property management company is responsible if their association’s data is breached, but that simply isn’t true. The rules and regulations surrounding the protection of personally identifiable information are becoming more and more stringent. Personally identifiable information, referred to as “PII” is defined differently in each state and in New Jersey it’s a combination of a person’s name and social security number, a driver’s license number and an account or credit/debit card number in combination with a security code. Keep in mind, PII protection and regulations apply to paper records too.

“After a loss of a laptop, theft by a rogue employee or independent contractor, network security failure, hack or data breach, a cyber policy can provide forensic investigation of the breach, costs to notify of the breach, credit monitoring, public relations/crisis expenses, loss of profits and additional expenses while the network is down. In addition, third party (liability) coverages include legal defenses, settlements, virus transmission, costs to have credit and bank cards reissued, as well as costs to respond to regulatory organizations, social media and website liability.

“Over time we’ve seen insurance companies include a minimal amount of ‘data breach’ coverage on their enhancement endorsements or have it built into programs, but data breach is just one of the many cyber threats associations face today.

“Cyber liability policies can have upwards of 10-coverage parts for first party and third party damages. While there’s no “one size fits all” solution, these policies are reasonably priced, can be quoted within 24-hours and, best of all, some policies afford valuable professional risk management resources to assist in preventing losses, with expert hotlines for specialized IT professionals, attorneys and guidance in the event of a breach.”

Contact Info:

PeopleFirst • Acrisure Insurance
Dawn M. Becker-Durnin, CSRM, CIRMS
Vice President, Insurance Advisor
M: (201) 294-2138

New Jersey Finance

Association Loans

Under what conditions may an association need to apply for a bank loan? Who is responsible for paying the loan? Can board members or homeowners be held responsible in the case of default? What are the benefits, if any, of taking out a loan as opposed to using reserves to fund projects? What are the general terms for associa-tion loans? There are infinite questions involving association borrow- ing. When would an association actually need to apply for a bank loan? Management and the association board should be ensuring that there are adequate reserves. If an HOA is applying for a loan, does that mean that it is in dire trouble and that the association is mismanaged? The answer to that question could be yes or no, depending on a few different factors. Associations do not seek loans, however, just because they’re misman-aged or low on reserves. Fortunately, Matthew Driscoll, Vice President of CIT Bank, answered these questions for us.

The best point to start talking about association loans is to determine why an association might need a loan in the first place. According to Driscoll, the reason for taking out a loan, and the different types of loans, are geographically driven. They depend on the type of physical property that comprises the association. The loan may be established for (but not limited to): roof replacements, paving, siding, carpeting for the halls of a building with interior residence entrances, decorating of a clubhouse or lobby, adding a pool, or adding a clubhouse — the list goes on, Driscoll said. An association could obtain a loan for any number of capital repairs or improvements to buildings and common areas.

According to Driscoll, financing litigation against the developer and manufacturers of building materials to remedy construction defects is another reason an association may need to obtain a loan. An HOA loan can be the best way to fund a construction defect litigation suit, as the loan can help the association through the process by funding both legal fees and building costs until the suit is settled, which can take several years.

Additionally, an association’s bylaws or declarations may have imposed requirements that prevented the association from securing and maintaining adequate reserves for its actual needs. Potentially, these documents may impose a minimum amount that needs to be maintained in reserves, Driscoll said. Therefore, those funds cannot be used at the time that the funds are needed.

Who is responsible for paying this loan? Unit-owners are only indirectly responsible for the loan, he said. Are the unit owners personally liable if the association doesn’t pay on time? Can the bank place liens on the individual units for the loan? Unlike a mortgage or home equity loan, Driscoll answered, the association loan is not secured by any physical elements of the community, including the individual units and common elements. Instead, an association loan is secured by the future assessments to be collected by the association. Additionally, there are no personal guarantors on the association loan, so board members are also not personally responsible for paying the loan.

What are the loan terms commonly assigned to these transactions? Driscoll said that the amount of an association loan can be anywhere from $50,000 to over $50 million, and several factors determine the length of the time for which the loan should be cast. This depends on the life expectancy of what is being financed. However, it also depends on the board and the individual association, and it generally includes factors such as how the association plans to fund those payments. For example, the board can actually special assess the unit owners in order to repay the loan. In this case, the board can give unit owners a choice of paying this special assessment as one large amount upfront, or they can pay over a specified period of time with an additional amount to be paid for interest, Driscoll said. The board can raise the monthly or annual assessments to pay the loan.

Either way, terms for an association loan are typically five, seven, ten, or fifteen years. Again, these terms would depend on the project to be financed. According to Driscoll, most association loans are actually paid before their term period expires. For example, he said, a five-year loan is typically paid in three years, and a ten-year loan is often paid in seven. Defaults are extremely rare in association loans. Driscoll noted that association loans are a fairly new phenomenon, only being around for about fifteen years. He also noted that they are among the safest types of loans for banks to issue to customers.

The last component of the loan would be determining the interest rate. This is commonly determined by the United States Treasury rate. What is required by the bank from the association when applying for a loan? According to Driscoll, banks typically look at a number of items to deter- mine if they can provide the loan to the association. One important factor is the association fee delinquency rate. The bank typically examines this over a period of four months and usually requires there to be fewer than 10% delinquencies in the community. This would include units with ac- counts over sixty days past due. Additionally, it is common for the loan documents to have language that states that, during the repayment of the loan, the association maintains this desired low fee delinquency rate. Since these common fees are the only collateral for an association loan, the security of these fees is very important to the lender, Driscoll said.

Another important factor is the size of the association. This affects the association’s ability to obtain a loan. Banks want to ensure that there are enough units within an association to help mitigate potential risk, should owners default. In essence, the more units in an association, the more the repayment of the loan will be spread out over a greater number of owners. According to Driscoll, communities with less than twenty-five units will face some challenges in applying for funding from a bank.

Banks also look at the number of investor-owned units in the community. According to Driscoll, if a community has greater than 40% of its units owned by investors who rent those units, that community could potentially face greater challenges with an association loan. Also, if one person owns a large portion of the units or has a large proportion of the voting control of the community, the association will not be approved for a loan.

Lastly, does having a loan on the books of the association affect the owners’ property values or cause the association to be viewed in a negative manner? This question can be answered in a number of ways and depends on many factors. However, if the loan prevents the property and/or its common elements from deteriorating, such as if the loan prevents putting off necessary projects, which could lead to structural problems or worse, the loan can help maintain or even bolster property values, Driscoll said. Additionally, in cases where a loan prevents special assessments or fee in- creases, residents maintain their personal cash to preserve quality of life and even have more available funds to put into their own individual units. Having well-maintained and updated units helps bolster property values as well.

Rather than taking out a loan, what if an association decided to replace the roofs in their community over a five-year period, which could be paid from their current assessments? Is there a disadvantage to doing this as opposed to financing the project and doing it all at once? Driscoll said that it is generally more cost-effective to replace all the roofs at the same time, as the cost per unit will be lower when purchasing in bulk. Additionally, there is the added benefit of having everything done at once and having all the units in the community with roofs of the same age. This makes it less likely that additional problems with the roofs will surface during the project if it were to span a five-year period. It also helps plan for future replacements more easily.

Let’s say that an association is applying for a loan to redecorate the hallways of its high-rise building. They have a proposal from the company they plan to use to complete the project, but how does the association determine the amount to borrow? What if there are unexpected costs that come up during the project? Driscoll recommended applying for a loan that is 20% greater than the amount needed for a particular project. He explained that, with the way association loans are structured, there is a draw period, during which the work is usually done. Therefore, the association doesn’t need to draw (that is, borrow) the extra funds if they are not needed. Associations should do this because it is more difficult to go back to the bank after a loan is closed to request additional funds. Doing that would be viewed as a loan modification, which should be avoided by the association. That is why it is very important to have accurate figures and then to leave some room for the unexpected when procuring your loan.

Driscoll said no, the residents and board members are not asked to provide personal information, such as personal tax returns, when the association is applying for a loan. Nor are the credit ratings of residents viewed. However, residents do indirectly affect the as- sociation’s ability to obtain a loan if they develop a history of paying their assessments late or allowing their units to go into foreclosure.

Contact Info:

Matt Driscoll
CIT Group Inc.
One CIT Drive
Livingston, NJ 07039
(866) 800-4656 Ext. 7561


Financial Management, Adhering to a Budget and Financial Warning Signs

Financial management is perhaps one of the most critical facets of a homeowners association. Financial transactions factor into day-to-day interactions in an HOA, with residents paying dues and vendors providing goods and services. The complexities of an HOA, however, demand a business-like approach to financial matters in order to provide a well-functioning environment for all involved. Budgets, therefore, become essential to success.

How does an association diagram a budget? What can the association do to limit surprises in a budget? How do reserve studies factor in? What are the different types of budgets? Creating a sound budget and adhering to it for the fiscal year for the association is very important. Thomas Engblom, CMCA, AMS, CPM, PCAM, PhD, provided us with an explanation of the budget process.

According to Engblom, “A budget is a roadmap that provides an estimate of a community’s revenue, expenses and reserves. It provides an avenue for a community to plan activities, goals, maintenance, repairs, reserves, determine assessments, and minimize the unexpected.” While the necessity of an association budget may seem clear, the process itself can be quite complex. Engblom stated that an association should first consider the legal requirements for a budget in their state. Refer to state statutes as well as the governing documents of your association as your guidelines. “Every community association must have a budget. It is required at various levels of the law and in the governing documents,” Engblom said. He added that local laws may require a budget, whether for insurance, emergency, life safety, etc. All associations must conform to IRS rules, and mortgage institutions may set requirements that a community will need to meet as well. Additionally, budgets mandate the procedures to determine the applicable requirement for reserves.

Once the legal necessity of a budget has been established, how must your association proceed? From there, your association may take into account the needs and desires of homeowners. What services do they require on a daily, weekly, monthly and yearly basis? Which do they expect? Engblom also noted that associations should not simply aim for a net profit or loss. Don’t simply set a budget including all known expenses (i.e. routine maintenance, electricity, water, etc.). The budget will also need to account for and include unexpected expenses. If, for example, a natural disaster occurs, your association will need to be prepared. Ideally, a budget will limit the impact of financial surprises. Within a budget there is a chart of accounts, which is an organized list of the numbers of the association, categorized showing each item being budgeted for. This is detailed in the previous chapter on association accounting under the heading “Preparing and Organizing Budgets.”

When is the budget due? This depends on the association and is generally contained within the bylaws. Typically, budgets are done either by calendar year or fiscal year. Most do them by calendar year, Engblom noted. The association’s manager typically puts the budget together. A budget committee, headed by the board treasurer, can be formed by board resolution to come up with the nuances in the budget. This is an ongoing, standing committee. Engblom again underscored that an association should not just budget for money it expects or does not have. As an example, Engblom said, “You shouldn’t necessarily be budgeting for fines and late fees.” If income is not expected, don’t budget as if it is.

There are two components of a budget: revenue and expenses.

•    Revenue: assessments (which Engblom noted is the only component of value that an association has), excluding miscellaneous income of  late fees, fines, move ins and move outs, etc.
•    Expenses: operating expenses (i.e.: maintenance, utilities, administrative, management, insurance, copying, printing, Internet, etc.)

Furthermore, two components are affiliated with each budget line as to whether it is mandatory or discretionary. Mandatory expenses are things such as insurance and utilities. These are expenses the association is obligated to cover, as opposed to discretionary items such as pool furniture, a community newsletter or the expectation of an individual unit owner.

There are also two types of budgets:

•    Zero base: In this type of budget  all line items are set to zero. Therefore, all line items must be justified, rather than assuming a base line from the prior year. This assures that every line item is necessary and reduces the fluff within the budget. This zero base approach requires every line item to be calculated accordingly (i.e. utilities) based on usage.
•    Historical trend: In this type of budget an association uses the historical data from budgets past, then reviews  its past history to determine what the increase or decrease in expenses will be for the next year. As an example, Engblom said, “To increase the percentage, you can look at two years ago. You spent 17%, and then this year you spent 19%. So you know to increase 2% again for the next year.” Typically the budget has numerous line items that have inaccurate numbers in those accounts.

There are three (3) types of accounting methods to be used within a budget as follows:

1.    Cash method. Using this method, the association will collect money and pay it out as invoices are received. A great comparison would be one’s personal checkbook.
2.    Accrual is based on when income is earned (or billed), and when expense are incurred. Income and expenses are accounted for outside of when the actual cash comes in or goes out.
3.    Modified cash, also know as modified accrual, is the most complicated method for accounting, but also the best. It records income and expense on a cash basis with some on an accrual basis.

As mentioned earlier, the association can take into account the needs of the homeowners. Budget line items are determined to be either mandatory or discretionary. Mandatory line items are a need or an obligation, such as water, insurance, or taxes. Discretionary line items are a desire or expectation, such as a pool, playground, or golf course. The discretionary items can be ranked based on the desires of the homeowners, but mandatory items must always be budgeted for.

Reserve studies themselves are detailed in another chapter, but here is an overview of the studies and how they are utilized within the framework of budget creation. Once revenue and expenses are established, the association has the so-called bottom line of the budget. Engblom advised that reserves are taken out at this point. Reserve studies serve as a resource for capital expenditures that would be in the the future of the association. The reserve study consists of two components including a physical inspection and a financial inspection. “Reserve funds are set aside for the future, for replacement of major components of an association,” Engblom said, “and reserve studies should be updated every three to five years.” They may be required by a state statute, regulations, mortgagees, or the association’s own governing documents. The Federal Housing Administration suggests setting aside 10% of the total budget for reserves.

Funding for reserves consist of four aspect as follows:
1.    Statutory — Required by state or federal agencies.
2.    Fund Safety — Maintain in FDIC insured accounts.
3.    Liquidity — Don’t have all funds in certificate. Have some cash on hand for emergencies.
4.    Yield — The return on investments.

Reserve studies generally include capital improvements and major improvements. Capital improvements include existing entities that must be replaced, such as a roofs, siding or playground equipment. Reserve studies set money aside for the future, anticipating that something will need to be replaced or repaired. Engblom noted that the amount of money set aside can be judged from the useful life of the structure in question. As an example, “A roof has a 30 year useful life, but because of weather or the like, it may need to be replaced sooner or later. Reserve studies plan for putting aside money for these sort of things,” Engblom said.

Major improvements, on the other hand, include the addition of something new to the association, such as a clubhouse, pool, or golf course. These improvements  are not being maintained, as with a capital improvement, but rather they are being constructed for the first time.

Engblom pointed out some of the benefits of using a reserve study: meets legal and fiduciary professional requirements, provides for planned replacement of major components, minimizes the need for special assessments, enhances the resale value of units, equalizes new and old,  reduces personal liability from financial mismanagement, prioritizes a business plan for repairs, acts as a communication tool for the owners, can reveal maintenance issues that you haven’t seen, saves planning time, reveals unbudgeted items.

He also mentioned some of the drawbacks of a reserve study: underfunding resulting in the need for a bank loan, deferred maintenance, overfunding, board member liability and possible loss of directors & officers liability insurance.

In relation to a budget, a reserve study can most importantly determine what has not yet been budgeted for. It can provide an association with a more thorough road map for the what-if scenarios and help secure an association’s future.

Engblom noted that there are certain financial warning signs that associations must look out for. As mentioned before, reserves are a necessary aspect to the life of the association. If replacement reserves are not set aside, the association may have a problem. Why weren’t they set aside from the rest of the budget? This underscores the necessity of having a transparent budgeting process and making sure that all expenses are accounted for, even those hypotheticals that are backed up by a reserve fund.
Further financial warning signs include increased overdue assessments (delinquencies) or an increase in what the association owes. Engblom advised that associations should look for significant differences between budget figures. Has the budget for a certain line item suddenly propelled upward? Additional signs of financial mismanagement include when members’ equity is less than one to three months of the operating expense. Maintaining control of the finances within the budget and reserve fund will provide an avenue over unexepected hurdles for the board and the homeowners in preventing a financial impact in the form of a special assessment.

In addition, having control of your financial reports will provide a means of best practices for procedures relating to accounts receivable or accounts payable. In the global aspect for the association it can help discourage dishonest behavior within the association that may result in embezzlement, fraud or theft.

Extra money goes into reserves.

Calculating Association Assessments

Assessments are a common conduit of condominium and homeowners associations, as an intricate component in providing income for the operating budget and funding reserves for future community expenditures. Thomas Engblom, CMCA, AMS, CPM, PCAM, PhD, detailed for us what assessments are, how they are calculated, and how special assessments factor in. Of course, in order to keep your association running well, you must understand assessments and their purpose in aiding financial stability.

“Assessments are the proportionate shares of the expenses to maintain the property of the association,” Engblom said. Assessments are sometimes called maintenance fees or dues. How are assessments calculated? “They’re typically calculated on a percentage of ownership — which never changes for each co-owner. However, there can be a change in the monetary amount of the fees, but it will always be based on that owner’s same percentage of ownership.” Assessments are usually calculated in the initial phase of the association by the developer. “The developer creates a mathematical formula based on the cost of maintaining the new association,” he said. Engblom noted that as the association ages, logically, additional maintence is required thus increasing the association’s fees. In Chapter 6, changes in fees after the developer leaves the community are discussed.

Each owner’s percentage of ownership can always be found in the association’s governing documents.

What could cause assessments to be higher in one association as opposed to another, even though all variables and amenities are equal? Assessments are quite dependent on the actions and professionalism of the board and management. If those running the community are educated in association managment, they will have the knowledge to provide a budgetary structure that will maintain the association in its daily operations, as well as building proper reserves for the future. However, it is also important that those running the community adhere to their fiduciary duties, and always act in the best interest of the association. Problems can occur when an association’s governing body is only concerned with the political advantages of maintaining low fees. In the most drastic situations, some board members, knowing they want to sell their units in a few years, can make the community seem attractive to potential buyers by keeping fees artificially low while not putting any funds in reserves. Such a community would eventually come in for a crash landing — specifically, needing to special assess the unit owners and/or obtain a bank loan for capital improvements as they became necessary, or otherwise causing the physical association to deteriorate.

Engblom pointed out other factors which affect fees among different communities. “If you’re going to buy in an association with a pool, it will cost you considerably more to live there compared to a association without a pool. A pool will require maintenance, repairs, chemicals, furniture, attendants and more. Communities with pools also have an increased insurance cost over those without. Assessments are the sheer cost of living for the association — what it costs to maintain the common areas of that community. Comparatively, owners of single homes outside of a community incur costs to run and maintain their homes and properties. In a community, these similar costs are multiplied by the number of units for those similar needs.”

When special assessments or fee increases are necessary, associations cannot randomly calculate assessments based on the whim of the board. The assessment or increase must be made within the parameters of the governing documents and specific state statutory requirements. 

Collection procedures for delinquent unit owners are detailed in other chapters, however here, Engblom outlined the methods and importance of collecting regular dues, and how to evaluate the health of an association based on its delinquency rate.

Assessments are a financial obligation to the community association during a given period of time, which is usually broken down into payments, such as monthly, quarterly, etc., unless a long-term special assessment is manadated. “Assessments are paid pursuant to the governing documents of the association. They’re mandatory, so residents are obligated to pay them,” Engblom explained. Presently, numerous methods for payment are available — check, ACH (automatic debit), online payements through an association or bank website and credit card.

Every association should have a formal collection policy and take the time to educate owners about the consequences of delinquency. Associations should avoid discriminatory actions against delinquent account holders. “You should have a procedure and protocol — rule or regulation,” Engblom said. Board members can establish these procedures utilizing the business judgement rule, he added. Not only can this improve relationships and communication between the board and the residents, but it can also help ensure that assessments and monthly fees are paid on time. Furthermore, collections are crucial to maintaining necessary cash-flow and to reducing loss of payments from owners. “The bottom line,” Engblom said, “is that a collection policy keeps owners informed, provides a guide for the manager, and enforces a written policy.”

Since assessments make up the major portion of an association’s income, it is crucial that they are paid by the unit owners. However, most associations have at least some delinquent owner accounts. Engblom delineated the delinquency rates and how they should be evaluated:

0-3%    good delinquency rate
4-5%    reasonable delinquency rate
6-10%    declining delinquency rate
10%    horrendous delinquency rate
Over 10%     very bad delinquency rate

Engblom also noted that for association loans, delinquency rates must be less than 10%.

Special assessments, in addition to regular dues, sometimes constitute part of an HOA’s income. Special assessments generally make up for expenses that cannot be covered by the budget, either because operating expenses exceeded the budget, a natural disaster or similar situation occurred, a special project began, or too many residents were delinquent in their dues. Reserve funds, as noted in Chapters 8 and 12, alleviate some of the pressure of unexpected expenses. Special assessments pick up any monetary gaps not covered by reserves or the budget. Engblom said, “They are a one-time fee or charge.” They are not charged regularly as plain assessments are, although they can be collected on a similar schedule (i.e. monthly, quarterly, or annually). The dollar amount of the special assessment each unit owner pays similarly depends on their percentage of ownership.

A special assessment is typically voted on by an association’s board for an item or project that was not voted on previously during the annual budget planning. “It’s all driven by what the state requirements are, but in theory, the board approves the budget or special assessment. The board communicates the information, allowing the unit owners to review or discuss it at a subsequent special meeting for the purpose of the special assessment. The board always has the power to initiate the budget or the special assessment, however, depending on the governing documents or state statute, final approval may be contingent upon a vote of the unit owners. Furthermore, some states allow unit owners to petition the board of director’s decisions thereby repealing an action of the board while other states don’t allow that option.

Percentage of ownership always equals 100% when all units are combined. Engblom’s example: “If all the units were the same size, and you only have 10 of them, each unit would have 10% of ownership. If you have 1,000 units, the percentage decreases as the percentage sum must always equal 100%. The equation to calculate the percentage is based on square footage and/or location of the unit. Henceforth, square footage of units will change the percentage of assessments depending on their percentage of ownership.”

“Let me give you a situation,” said Engblom. “One of the properties that I own as an investment property had a swimming pool. The swimming pool was used by hardly anyone, and it was costing the association approximately $35,000 each year. There were  numerous problems with the pool. Suddenly, the association was going to need to spend $60,000 obtaining proper licensing from the state. The board said, ‘Well, we’re not going to waste that kind of money. For $70,000, we’re going to fill that pool in.’ The community decided to put a park in place of the pool area, thereby deleting the pool expense from the budget forever! This resulted in a three year pack back for the association. The association manadated a special assessment — a one-time charge paid either in a lump sum within two months, or monthly for five years at $50 per month, including interest as a result of the funding by the association.”

New Jersey Reserves

David Chesky

David Chesky

The Falcon Group

The Importance of Reserve Studies

According to David Chesky, P.R.A., R.S., and Executive Vice President of The Falcon Group, headquartered in Warren, New Jersey, “Reserves are monies that community associations set aside as part of their monthly maintenance fees to save up for the replacement of their major common element components.” Establishing reserves allows associations to save up for the replacement of the common elements. By setting aside money for possible future major replacement projects, they save themselves from needing to assess the community or finance projects. Reserves are similar to emergency funds in general; they exist to fund major replacement projects. “A reserve study is a budgeting tool for management companies and boards to use in setting aside funds as part of their monthly maintenance fees for the planned replacement of the common elements of the community,” Chesky said.

In the event that the reserves are underfunded, the association has three options. It can assess for the project itself, it can assess to bring the reserves up to a sufficient level so that they are no longer underfunded, or it can finance the project in question. Associations should only use any of these options as a last resort, as they can have a negative impact on the community. Chesky underscored the importance of a reserve study to the financial health of an association.

The amount that should be held in reserves varies from association to association. That amount should be based on a reserve study performed by a professional, Chesky said, and thus it can change from association to association. The study from start to finish can take anywhere from thirty to sixty days. Larger associations typically take longer, while smaller associations can take less than thirty days. Studies very much depend on the type of association and the projects for which they must budget.

Reserves are crucial to well-maintained condominium and homeowners associations. What is their importance, and how does an association establish reserves? And once established, how does an association maintain a reserve account? A reserve study is perhaps the most important element when it comes to establishing reserves. Associations should know what to expect from a reserve study and from the professional who performs it. Going into the reserve study process with that knowledge can help associations achieve a successful reserve study as well as a comprehensive reserve account.

Chesky stated that associations should have a professional experienced in construction and cost estimating perform their reserve studies. A reserve study, he said, is not a generic study, as it directly affects whether or not an association has sufficient funds to go forward with a project.

Prior to a reserve study, the association will need to gather certain documents to provide the reserve professional. This typically includes the governing documents, reserve fund financial information (i.e. balances and current and past contribution levels to the reserve fund), project history, and a site map. “We use that information to generate satellite imagery of the community to get a better understanding before we go and do site inspections,” Chesky said. Governing documents tend to indicate what the common elements include. Only the common elements for which the association is responsible would be reviewed and included as part of the study. Providing maintenance and past project history allows the reserve specialist to factor in any past problems during the inspection.

The physical analysis portion of a reserve study is the inspection of the common elements to identify the lifecycle and condition of those elements. It analyzes any existing issues as well as any site variables that may affect the lifecycle of the component and the replacement cost of the component, Chesky said. The financial analysis is a review of the association’s reserve fund balance, along with contribution levels pertaining to the study’s calculated recommendations.

“The role of the association is to provide the necessary documentation to the professional performing the study, as well as the history of the community,” Chesky said. Reserve specialists may be on site for one to three days, depending on the size of the community, but board members and managers are involved in the community on an almost daily basis. Their extensive knowledge of the association makes them vital to the reserve specialist. They can communicate any past problems and help the inspector to focus on certain things.

Chesky noted that most communication is through management or board members, depending upon the association’s arrangement. Maintenance personnel or management may be interviewed for specific information on the association as a whole or on a specific building. “For example, if we’re doing a reserve study on a high-rise building, these buildings would typically have a full maintenance staff and a superintendent,” Chesky said. “We would normally arrange to interview the superintendent and tour the building together with the superintendent because they have a wealth of knowledge of the building, and that’s vital in preparing the study and making things accurate.” The completed report can then be used to advise the owners on what and why maintenance and replacement needs to occur.

What are some common reserve items that are typically overlooked by an association? Chesky provided a few examples: detention-basin components such as outflow/inflow structures and low flow channels in detention basins. In communities with lakes or ponds, they need to be aware that those bodies of water can fill up with silt or run-off from drainage structures, which would necessitate dredging. “Dredging is very expensive, and oftentimes that is overlooked in the community. Then they’re stuck with a two or three hundred thousand dollar project that they’re not ready for,” Chesky explained.

Associations should also keep an eye on chimney caps, which could be overlooked since they are high up and difficult to see. Chesky mentioned wood trim as another commonly overlooked element. Wood trim is often thought of either as part of the siding or as part of the building maintenance. “Some communities have extensive amounts of trim,” Chesky said. “If it all needs to be replaced at one time, it can be expensive, and if the association is not ready for this expense, it could be a big hit.”

Depending on the association, the largest expenses tend to be roof replacements, roads, and siding. High-rises must be approached differently, since their largest expenditures could be their mechanical systems, including elevators. High-rise buildings also have parking garages, extensive facade materials, balconies, and plazas, all of which could create large expenses for associations.

The cost of a reserve study varies greatly and depends on the association’s size and responsibilities. Smaller associations tend to spend less on a reserve study, while larger associations tend to spend more due to the extensive fieldwork required of the reserve specialist and to the greater responsibilities of the association.

The cost of the reserve study, from start to finish, generally includes a complete analysis of the association. That analysis includes a review of the documentation provided, an inspection of the common elements, and an interview with management and maintenance staff. The reserve specialist also performs quantity measurements in the field of all the relevant components of the association. “In order to properly estimate the cost of any one of the components, accurate quantities obtained from field measurements of that component are absolutely vital,” Chesky said. The study concludes with the report prepared by the reserve specialist along with the various funding strategies and recommendations for the association.

A reserve study, Chesky explained, provides an association with a professional assessment of the community with respect to the condition of the various common elements, the remaining life cycles, and cost estimates to replace those components. A study ensures that projects are funded properly and helps to avoid assessments or financing. Funds are set aside and projects are already planned out, reducing a lot of the risk of unexpected maintenance or failure. “For the homeowners, it provides a real benefit in that it maintains property values because, if associations are properly funded, and projects are done on time, nothing is left to deteriorate and nothing is left unsightly,” Chesky said. “For the property manager, it provides planned, scheduled replacement of components, rather than having to scrounge and find the money for things. The money should be there in a separate account.”

Further, a reserve study can enhance resale value by making the association as a whole more attractive to potential buyers. Common element replacements or maintenance is scheduled, and nothing is left to overgrow or deteriorate.
While some states require a reserve study, most do not, including New Jersey. Nothing mandates that an association must follow the recommendations in a reserve study. Reserve studies are meant to be used as guides, Chesky said. According to the general industry standard, reserve studies should be completed or updated every three to five years.

Chesky recommended that associations look for a reserve specialist with experience in the industry, qualifications in construction, and cost estimating. Companies that perform reserve studies and are also engineering and architecture firms can be helpful, especially since community associations assets can vary so widely. “You really need to have someone who understands all of the facets of construction, not just roof replacements and all the ancillary items that are included in that type of project but also mechanical systems and things of that nature, to properly assess the conditions and to provide accurate cost estimates,” Chesky said.

The relationship between an association and a reserve specialist typically extends beyond the initial study. Some firms assist clients with their scheduled future projects and provide consulting services. It can be beneficial to find a specialist who provides the association with future updates to the reserve study once projects are completed, as well as every three to five years.

What other professionals are involved in a reserve study? “Beyond the association manager providing documentation, the association’s accounting firm may provide financial information for the study. The association’s attorney may also need to clarify what the common elements are if the governing documents are unclear,” Chesky said.
Finding the right professional to perform a reserve study can make all the difference. The reserve study itself serves to secure an association’s future projects and helps it to fulfill its responsibilities to the common elements.

The four different methodologies or strategies commonly used for funding reserves are baseline funding, threshold funding, full-funding, and statutory funding.

“Statutory funding doesn’t really apply because that is funding based on statutory requirements, which we don’t have in New Jersey,” Chesky said.

“Full-funding methodologies are based on depreciation and sometimes referred to as ‘the component method,’” he said. This is the most conservative methodology of funding the reserves, with the goal being to have one hundred percent of the depreciation of all common elements for a community in the reserve fund at any given point in time.

“Threshold funding or baseline funding are cashflow funding methodologies where the goal of those funding methodologies is to have enough money to pay for expenditures based on the scheduled timeframe, while staying at or above the predetermined amount of money at any given point in time,” Chesky said.

In baseline funding, that predetermined amount of money would be zero dollars. In threshold funding, that predetermined amount of money would be some form of a threshold that the community would set, either an arbitrary number or 5% or 10% of their replacement cost values,” Chesky said.

While overfunding is uncommon, if it does occur, the contributions to the reserve fund should be adjusted downward. Reserve studies advise associations on the proper level of funding, and having that study updated on a regular basis can help to avoid overfunding. “The annual contribution recommendation is adjusted based on projects that have occurred and monies in hand,” Chesky said.

Contact Info:

The Falcon Group
David Chesky, R.S., P.R.A.
95 Mt. Bethel Road
Warren, NJ 07059
(908) 595-0050

New Jersey Restoration

Toni Licciardi

Toni Licciardi

Accurate Reconstruction

After the Disaster — Restoration of the Association

What steps need to be taken at the time of the disaster and afterwards in order to restore the property to its pre-disaster condition? Who is responsible for taking the necessary actions, the residents or the association? We spoke with Tom Licciardi of Accurate Reconstruction in Somerville, New Jersey to answer these questions.

Property damage events result in the destruction, ruin, and loss of possessions and property. However, the effects on a property manager, association board members and the affected co-owners can reach much further than just the property involved. Due to this, individuals involved in such situations need to remember two common themes: the necessity to keep a level head under intense emotional stress and perceived chaos, and they need to remember the difference that an experienced, qualified, certified insurance repair contractor, as opposed to just a regular contractor, can make.

Restoration companies handle cleanups and repairs for a wide variety of disaster situations. These can include many different situations. Anything from storm damage, such as shingles missing from a roof, siding that gets blown off the exterior, fires, floods and sump pump backups, to a car driving through a building or biohazard cleanup (such as situations where people pass away). Restoration companies have specialized training in a variety of restoration situations, such as smoke removal. They also have a unique knowledge and experience on how to properly clean and restore personal belongings that have been impacted by fire, smoke, soot, water, microbial growth, etc. It is then the reconstruction contractor, along with the insurance adjuster who determines when structural items should be replaced, depending on how much char they have on them after a fire.

An insurance repair/reconstruction company, sometimes utilizing the services of an engineer or architect, makes repairs, additions and modifications to buildings without the added challenge of dealing with soot, char, microbial growth, etc. However, some reconstruction companies, like Licciardi’s, offer both restoration and reconstruction services.

According to Licciardi, when faced with an emergency situation, the first step an association should take is to mitigate the damage by making the building safe and preventing further damage. Concurrently, noted Licciardi, the association must notify its insurance agent about the incident.

Who should the association call first — the insurance agent or a restoration/reconstruction company? “The association should call the insurance agent first,” said Licciardi. “However, if the disaster happens on a weekend, they may not be able to get their agent. For example, if it hap- pens on a Friday night, it may not be until Monday that they’re able to talk to their insurance agent,” he noted.

Therefore, Licciardi’s suggestion is for every community to have an emergency plan in place in the event of a catastrophe, whether it occurs during or after business hours.

What are the basic components of an emergency plan? According to Licciardi, the property manager of a community should have a list of emergency numbers, whether it is a physical list or one on his or her cell phone. This list should include the phone numbers for the police department, fire department and utility companies (gas, water, electric). The property manager should also know where the meter banks are in the buildings, as well as where the gas and water shut-offs are located. In addition, the property manager should have the insurance broker’s contact information as well as contact information (primarily cell phone numbers) for each unit owner.

Licciardi said the property manager should also have contact information for both a restoration and reconstruction company. He noted that the majority of restoration/reconstruction companies are willing to work with an association ahead of time with regard to preparing a disaster plan.

Is it acceptable for an association to contact a restoration company to start the remediation process even if attempts to contact the insurance agent have not been successful? “It’s the association’s obligation to mitigate the damage under the insurance policy. They’re not authorized to do anything beyond that until the insurance company has done an investigation as to the cause and an assessment of the damage,” Licciardi said. “They should also have a relationship with a restoration company that works with their insurance company and is qualified to at least mitigate the damage while they’re waiting for further instructions,” he added.

What does mitigating the damage entail? In the case of water damage, Licciardi said this involves turning off the source of the water and pre- serving the cause of the loss by putting the item aside or by not disrupt- ing it. In addition, a restoration company should be contacted to dry out the building as quickly as possible. This usually consists of extracting any freestanding water and installing drying equipment.

In the event of a fire, Licciardi noted that in most situations the fire department will not release the scene while the fire is being put out and for a short period thereafter. “No one is allowed to go anywhere near the building. It’s during that time the property manager can get a plan in place for when the property is turned back over to the association,” Licciardi said. “Generally, the first thing that happens is a fence is put around the property to prevent people from coming in and getting injured.” Licciardi noted that a good reconstruction/restoration company will handle getting the fence put up, as well as working with the insurance adjuster to have the cost of the fence covered. “Concurrently, all the utility companies need to be notified and the utilities need to be disconnected,” he explained.

Licciardi pointed out that most of the time, the fire department will contact the utility companies; however, in the case of a less severe fire, the contractor onsite or property manager will be responsible for calling them.

The next step in the case of a fire is to avoid further damage by preventing weather from getting into the building. This could include placing a tarp over the roof and boarding up windows, said Licciardi.

What should the board look for in a contractor and what role does the insurance company have in the process of deciding what restoration companies are hired?

“The association is at will to hire whomever they would like,” said Licciardi. “Preferably, they should hire someone that is an expert in the type of damage and that will do the work for exactly what the insurance company agrees to pay,” he noted, explaining that the insurance company will never pay more than the value it places on the loss.

In the instance that the board members do not have any contractors in mind, they can reach out to the insurance company who won’t recommend a particular company, but can provide some names of companies that perform this type of work within the community association industry. Servicing community associations is different than providing residential or general construction, said Licciardi. That is why it is important for the board to choose a company with experience in this industry.

Ultimately, it is the board (typically the board president) who is responsible for signing the contract with the restoration or reconstruction company. Therefore, Licciardi said that the board should interview con- tractors as well as check references from other associations with whom the contractors worked, which could involve a site visit to a project that is underway or one that has been completed.

“Some of these claims are very complicated. There are a number of insurance adjusters involved with trying to decide what’s damaged, who’s responsible and what’s the extent of that damage,” Licciardi noted, adding that it is important to hire a company that has experience with insurance policies and claims. “The company that will be handling the claim needs to be intimately familiar with how the insurance company works because it’s one big negotiation matrix and it all has to come back together at the end. The company has to be able to speak the same language as the insurance adjusters and to negotiate in a friendly way with each of the carriers that are involved without creating animosity and roadblocks,” he explained.

What are some red flags the association should look out for when choosing a restoration or reconstruction company? According to Licciardi, it’s important that the company the association wants to work with has a good relationship with the insurance carrier. One red flag is negative feedback from the insurance company. For example, if the insurance adjuster tells the association he or she has never had a good experience with a specific company — that would be red flag, said Licciardi.

He noted that some people prey on others facing a catastrophic situation. “These could be public adjusters and insurance reconstruction providers that don’t have the best reputation or the association’s best interests at hand,” Licciardi said.

He explained that these “predatory service providers” typically try to get people to sign a contract on the spot when they’re at their most vulnerable. He advised that the board should be cautious of such providers and should not sign any contracts until the insurance company has investigated and approved the value of the claim and several contractors have been interviewed. The only thing the board should do at the time of the claim is authorize enough work to control and mitigate the situation to prevent further damage, said Licciardi.

Who is responsible for the final payment to the contractor? According to Licciardi, it is the association who is responsible for the final payment to the contractor. “The insurance companies only pay their named insured, which is the association. The insurance company will pay the association the fair value for the work. The association will contract directly with the reconstruction company and is responsible to that reconstruction com- pany for whatever the amount of that contract is,” explained Licciardi. “That’s the reason why the claim has to be negotiated and settled before there can be any contract in place because no one knows what that number is until all the pieces get put together,” he added.

Therefore, Licciardi suggested, the board should wait until the cost of the repair work has been approved by the insurance company before committing to signing a contract.

Licciardi explained that once there is an agreed upon price for the work, the insurance carrier will send the association most, but not all of the money for the agreement on the claim. Then once the claim has been completely resolved, the insurance company will release the “hold back,” which is the rest of the money to pay the contractor.

According to Licciardi, the most common misconception many have is that the insurance adjuster is going to try to pay as little as possible for the claim. He explained that in most cases involving community associations, the adjuster is an independent adjuster, not an employee of the insurance company. “The adjuster’s job is to settle the claim as quickly as possible and as fairly as possible without supplemental issues coming in later if they can be avoided. It’s important for the association to under- stand the adjuster is there to work with them to help them get the claim settled as quickly as possible,” he said.

Licciardi noted that associations should also be cautious of contractor promises with regard to the claim because there really is no control initially regarding how the claim is going to be handled. He said that con- tractors should not make promises with regard to how long repairs will take, how much damage there is or how long it will take for the residents to move back into the building. Licciardi explained that the contractor should perform inspections along with the adjuster and prepare reports to discuss with the association. He said the contractor should be willing to meet regularly with the association, the board if requested, and the unit owners to keep them in the loop as to what’s happening.

What is the communication process between the contractor and the unit owners? “The reconstruction contractor has to have very close communication in dealing with every unit owner that’s involved. The association’s coverage, no matter how good it is, is not going to cover every cost of getting the project completed. There are certain obvious things that fall outside the insurance coverage for the association that the unit owners have to have their own insurance for,” explained Licciardi.

For example, he said, the unit’s contents are not insured by the association’s coverage and for that reason, most homeowners have their own insurance policies.

In addition, the association’s coverage usually does not include improvements that have been made to a unit. Therefore, with this type of policy, if a unit owner has made improvements, the association’s insurance policy would cover repairs to the original standards for the unit. For ex- ample, if a unit owner installs hardwood floors but the original standards included carpet, the association’s insurance policy will only cover replacing the carpet, not the hardwood floors. However, Licciardi noted that the reconstruction contractor may sit down with the homeowner and ask permission to speak with his or her insurance adjuster about covering the difference in value between the standard carpet and the hardwood floors. He explained that in most cases, this would require a separate contract with each unit owner.

“At the end of the project, every unit owner needs to be happy. That’s the only way the property manager is going to be happy. That’s the only way the contractor is going to get paid. There is more communication with unit owners than there ever would be with anyone else that’s involved with the project,” Licciardi noted.

According to Licciardi, there are three types of insurance policies for community associations. These include Bare Walls, Single Entity and All-In.

Licciardi noted that the Bare Walls policy is no longer common. With this type of policy, the insurance company insures from the unfinished sheetrock out. That means everything inside is not covered, such as cabinets, flooring, painting, light fixtures, ceramic tile and trim work. In addition, this policy usually only covers the weight-bearing walls, not the partition walls.

The Single Entity policy is the most common type in New Jersey, said Licciardi. With this type of policy, the insurance company will restore the unit to the way it was originally built at the time of its conveyance, which is the time the title was transferred from the developer to a unit owner. This policy covers everything the original builder installed but no betterments or improvements, Licciardi explained.

Lastly, Licciardi noted that the All-In policy covers whatever exists at the time of the loss as long as it is permanently affixed to the building, no matter what betterments or improvements have been made.

Contact Info:

Toni Licciardi
Accurate Reconstruction
161 W High Street
Somerville, NJ 08876
(908) 231-1234

The views expressed in our site do not necessarily reflect the views of AssociationHelpNow or Brainerd Communications, Inc. Answers and advice do not constitute legal or other professional advice. Consult your legal, accounting and other professionals to assess any situation before taking action. Brainerd Communications, Inc. reserves the right to edit questions and comments.