1	Anatomy of a Homeowners Association – Part 1 (Board Member Orientation)
2	"Laura Tate – CMCA^®,..." Laura Tate – CMCA^®, AMS^® Laura is a Vice President and stockholder of C.I.A. Services working at our North Office for more than 15 years. She is currently the General Manager for two master planned communities in northeast Harris County with more than 4,000 properties. Ms. Tate has an AMS^® designation and has earned the CMCA^® certification and is working toward the completing the requirements for a PCAM^® designation. She is a frequent presenter in the C.I.A. Services Seminar Series for board members and volunteers. Libby Hodges – CMCA^®, AMS^® Libby was recently promoted to Branch Manager of our Southwest Office. She has 10 years of industry experience and joined C.I.A. Services in 2005. A resident of the League City area, Libby manages several Clear Lake area properties. In this capacity, she is uniquely qualified to understand the intricacies of community management. She has earned CMCA^® and AMS^® designations from Community Associations Institute. Libby is married to a Kemah Police Sergeant and has four children, one of which is proudly serving in the United States Army. C.I.A. Services, Inc. C.I.A. Services has been providing professional management services to community associations for 24 years. We proudly manage 100 communities in the greater Houston area. 9800 Centre Parkway, Suite 625 8811 FM 1960 Bypass, Suite 200 Houston, Texas 77036 Humble, Texas 77338 Phone: 713-981-9000 Phone: 281-852-1700 Fax: 713-981-9090 Fax: 281-852-4861 www.ciaservices.com
3	Agenda Association governing documents Other defining codes Organization & roles Responsibilities & authorities Conduct of meetings Pop quiz Insurance Taxes Myths in management
4	Association governing documents Articles of incorporation Creates Association as a legal entity under state and corporate laws Defines the basic purposes and powers of the Association Few reasons to amend - generally high consent requirement Bylaws Provides the “operating instructions” for the Association Covers topics such as: Membership in the Association Board, officers & committees Meetings, elections & voting Powers and duties of the Board Insurance requirements & indemnification of the Board Can typically be amended by the Board alone
5	Association governing documents (continued) Deed restrictions aka Covenants, Conditions & Restrictions (CC&Rs) Collection of covenants imposed on all property in subdivision Defines Association obligations Defines owner rights and obligations Lists restrictions on each owner’s use of property and behavior Establishes obligation of each owner to share in funding of costs of Association operations Defines membership and voting rights – defines developer control issues Establishes architectural control authority Provides authority for the Association to administer and enforce the provisions of the CC&Rs Amendment requirements vary greatly (50%, 2/3, 75%, 90%, 100%, majority at a special meeting, TPC override chapters)
6	Association governing documents (continued) Plats Shows lots, legal descriptions, reserves, easements, building lines Sometimes includes additional restrictions (e.g. no driveways may face specified major thoroughfare, prohibited uses of easements) Guidelines Established by the Board to more specifically define or clarify a specific topic and are often a proactive approach at avoiding violations: Architectural guidelines for acceptable modifications or additions (e.g. house colors, fence designs, play equipment size and location) Interpretation of DR provisions (e.g. annoyance & nuisance, home maintenance standards) Authority for Association to create binding Guidelines established in CC&Rs as well as Texas Property Code
7	Association governing documents (continued) Rules & regulations Further definition of owner obligations (pool rules, parking regulations) Authority for Association to create binding Rules & Regulations established in Bylaws as well as Texas Property Code Policies & procedures Further definition of Association operations (investment policy, collections procedures, withholding of voting rights, access to records, public comment process at board meetings) Established for smooth operation of Association business – cannot be in conflict with higher governing documents or law
8	Other defining codes Texas Non-Profit Corporation Act Defines the overall authorities of NPCs in Texas Supplements provisions of Articles and Bylaws Texas Property Code Title 11, Chapters 201 thru 211 – Restrictive Covenants Expands, limits, supplements authority of Associations Title 11, Chapter 82 – Uniform Condominium Act (there is currently no equivalent Act for single family homes in Texas)
9	Other defining codes (continued) Over-riding and supplemental local, state and federal laws Local: zoning, building codes, animal control, health, sanitation, tree pruning, noise, fireworks, signs, businesses, parking, junk vehicles, rental property licensing & inspections State: pool code, group homes, water diversion, transportation code, debt collections, political signage, display of American flag Federal: telecommunications, ADA, fair housing, debt collections, display of American flag None of these give Associations more authority – many limit Association authority (e.g. flag legislation, political signage laws, telecommunications act) Many local codes give Association an ally in dealing with difficult issues (e.g. loose dogs, green backyard pools, criminal issues, 18 wheelers)
10	Organization & roles Board of directors Determine association’s mission & purpose Ensure adequate resources to accomplish mission & purpose Set policies, procedures, rules, guidelines, standards and budget Serve as a “court of appeal” to the members of the community Determine and monitor the programs and services Recruit and develop volunteers to work with the association Selection and oversight of management company Provide “eyes and ears” for community issues Enhance the association’s image in the greater community Appoint officers
11	Organization & roles (continued) President Presides at all Association meetings Represents the entire Board before the membership Has the power to execute legal documents Attributes: leader & diplomat Vice President Performs all duties of the President in his absence May be assigned as liaison to staff, committees or contractors There may be multiple Vice Presidents and not all need be Board members Attributes: coordinator, people-person
12	Organization & roles (continued) Secretary Ensures that all meeting agendas, minutes and reference materials are accurately prepared and distributed Receives, verifies and maintains all proxies Attests to the legitimacy of certain documents (e.g. contracts) Attributes: organized, detail oriented Treasurer Works with Community Manager to ensure that annual budget is prepared and submitted for approval Receives, reviews and signs checks for disbursements Reviews the monthly financial reports for accuracy Authorizes routine independent audits of financial records Attributes: detail oriented, numbers-person
13	Organization & roles (continued) Architectural control committee aka Architectural Review Committee, New Construction Committee, Modifications Committee, Architectural Control Authority, Design Review Committee, etc. A mandatory committee required by the governing documents May be a subset of the Board, may report to the Board, may be wholly independent of the Board Reviews all applications for new homes and improvements, additions or modifications to existing homes Ensures that all applications presented for approval are in harmony with the rules set forth in the governing documents Authorized to establish architectural guidelines which may be written
14	Organization & roles (continued) Nominating committee A mandatory committee required by the governing documents Responsible for ensuring that enough candidates are placed on the ballot to fill the positions up for election The committee should be appointed at the close of one annual meeting to serve until the next annual meeting – in practice, the committee is typically only formed a few months prior to the meeting In most Associations, the Board carries out the function of the Nominating Committee in seeking candidates for the ballot The committee may assist in the election process by screening candidates, distributing candidate information to voters, hosting a candidates forum, and introducing candidates at the annual meeting
15	Organization & roles (continued) Other committees Most associations have several other committees such as: Social, Recreation, Activities, Sports, Community Events Newsletter, Communications, Website Landscaping, Beautification, Yard of the Month Pool, Tennis, Parks, Facilities, Clubhouse Security, Crime Watch, Citizens on Patrol Welcome, Garden Club, Civic Club, Babysitting Co-op Ad hoc committees may also be established for a single purpose and then dissolved when the task is complete To analyze a proposed annexation or merger To amend governing documents A Board member is typically assigned as a liaison to each committee to assist the committee and keep the Board informed of activities
16	Organization & roles (continued) Contractors Fill role & obligations to the Association as defined in contracts A management company is a special contractor in that it is the Association’s managing agent (and in most cases, their registered agent with the State) and is able to act on behalf of the Association under certain circumstances Serve as the “chief operating officer” of the association Provides the Board with timely and accurate financial reports Keeps the Board fully and accurately informed Recommends actions for consideration Implements policies and decisions of the Board Serve as a professional advisor to the board
17	Responsibilities & authorities Board’s fiduciary duty The Board’s fiduciary duty is to the Association’s membership Simply put, it is the duty of each Board member to act in the best interests of the membership as a whole Duty of loyalty Prohibits a board member from using position for personal advantage Prohibits self-dealing and conflicts of interest Duty to exercise ordinary care Perform duties with in good faith and due diligence Perform duties in a manner which one would reasonably believe to be in the best interests of the membership Perform duties with such care as an ordinarily prudent person in a similar position under similar circumstances would use
18	Responsibilities & authorities (continued) Code of conduct Code of Conduct for Community Leaders is attached – all new board members need to understand this Avoid conflicts of interest or acting out of self-interest Always apply reasonable business judgment rule to any action Operate in the best interest of the entire community Respect the rights, opinions and ideas of others Accept criticism in good faith and in a constructive manner Be positive, fair, factual and impartial in your decisions – avoid negative or derogatory comments Strive to be knowledgeable and aware of all association issues Do not knowingly violate any of the rules or policies of the association
19	Responsibilities & authorities (continued) Confidentiality Do not disclose or distribute any information regarding individual owners outside of Board, management or attorney Breaches may violate state and federal laws on fair debt collection, privacy and others Do not discuss potential or pending litigation outside of the Board, management or attorney Breaches could compromise the attorney client privilege and jeopardize a lawsuit Do not disclose the content of any discussions which occur during closed Board sessions Breaches could destroy the trust among board members and create division and embarrassment
20	Responsibilities & authorities (continued) Authority levels Most governing documents do not give individual board members or officers the authority to award contracts, adopt policies, establish procedures or take other action Most governing documents do not give individual board members or officers the authority to expend any funds The Board may create and adopt policies, however, to establish various authorities – for example, any Board members may spend up to $100 without advance Board approval Board action, including adoption of policies, is done at a duly called meeting where a quorum is present and a majority of those present consent to the action
21	Types of meetings Regular board meetings Held on a routine basis to handle all normal association business Notice provided at prior meeting and through Board package A quorum of Board members required to conduct business Special board meetings Held as needed to handle old business or special topics Examples include budget workshops, contractor interviews, hearings with homeowners, etc. Advance notice to all Board members required (typically 3 days) but notice period may be waived by unanimous consent A quorum of Board members required to conduct business
22	Types of meetings (continued) Annual meetings Held once per year at the date, time & place specified in the Bylaws or as announced in the meeting announcement A quorum of owners is required to conduct business – Bylaws specify the quorum and options if a quorum is not achieved A quorum can be established in person or by proxy (a person given authority to act on behalf of another) – we accept voting by mail, fax and on-line through our website by utilizing the Secretary as the proxy Required agenda item is election of Board members for expiring terms (vacancies are not filled by election) Although the Board presides over the meeting, technically, no Board members need to be present to conduct the meeting
23	Types of meetings (continued) General membership meetings These meetings may be called to update the community on special topics of interest – examples might include updates on security issues, “public hearings” on proposed new guidelines, unveiling of new community center plans, etc. The meetings typically involve a guest speaker or contain complex information that can’t be conveyed through a newsletter article or mail outs No binding votes of the members are taken although the Board would typically want to receive feedback from residents and may take a straw poll No quorum is required to hold the meeting since no binding votes will be taken
24	Types of meetings (continued) Special membership meetings These meetings are unusual but may be called for the members to vote on a special topic The Bylaws and DRs specify issues which require votes of the membership – typically special assessments, increases in assessments over that allowed by the Board, removal of Board members and amendments to governing documents (limited) The Bylaws and DRs specify the notice, quorum and proposal passage requirements – they vary by the proposal
25	Types of meetings (continued) Decisions outside of meetings The Bylaws typically provide a mechanism for making binding Board decisions between Board meetings The typical mechanism is by “unanimous consent” where a proposal is written down and signed by all Board members – it is in writing and it is signed by all Board members – the rational is that since there will be no discussion the decision should be unanimous – in addition, the written consent provides documentation for the records Unanimous written consents can be burdensome so two reasonable alternatives exist: (1) call a special meeting, waive notice, achieve quorum & make the motion and (2) agree to the proposal via email, phone or other means, carry out the decision & ratify the decision at the next regular Board meeting to get it documented
26	Conduct of meetings Parliamentary procedures Ensure the orderly conduct of meetings and to protect the rights of minority to express their views Robert’s Rules of Order was created in 1876 by General Henry M. Robert for the U.S. House of Representatives – it is one type of parliamentary procedure – a very small subset is used in community association Board meetings Voting on motions Motions must have a 2^nd to be considered Discussion should only occur after a 2^nd – the proposal is presented by the proponents as a lead into their motion Motions pass with a majority vote of the Board members present
27	Conduct of meetings (continued) Executive sessions May be held to discuss topics among the only Board and key staff (manager, attorney) – litigation, specific homeowners, contracts, etc. Best to hold at the end of the meeting and confined to decisions only – i.e. no need to place the whole financial report under Executive Session when need is to discuss one homeowner account Motions, but not the discussion, should be documented in the minutes – separate minutes are not needed and serve no purpose Holding effective meetings Make sure the agenda contains all items needing attention Review Board package in advance – ask for missing info in advance Stay focused and on topic during the meeting When ready, make a clear and complete decision
28	Pop quiz On a 7 member Board with one unfilled vacancy, how many Board members are required to establish a quorum? (a) 3 (b) 4 (c) 5 With a 5 member Board, what is the minimum number needed to pass a motion? (a) 2 (b) 3 (c) 5 On a 5 member Board, 3 attend the meeting. During discussion of a motion, one member goes to the restroom. Can the discussion continue? Yes or No. Can the vote be taken before the Board member returns? Yes or No. On a 5 member Board with 1 member absent, a motion is made to approve the meeting minutes. Two vote in favor and two prefer to abstain because they weren’t at the last meeting. Does the motion pass? Yes or No. Did they have to abstain? Yes or No.
29	Insurance Directors & officers liability insurance (D&O) Covers defense costs over deductible (typically $1,000) Covers losses to individual directors/officers/volunteers for which they aren’t indemnified & reimburses association for amounts it pays to indemnify directors and officers Highly variable in terms of coverages and exclusions Common exclusions: fines and other legal penalties such as punitive damages, losses covered by other insurance (e.g., motor vehicle), contract disputes, insured-on-insured actions, libel/slander actions, liabilities arising from fraud, dishonesty, or criminal conduct Needed by every association
30	Insurance (continued) Property insurance Covers the loss of any physical assets own by the association Needed if an association owns or maintains assets (clubhouse, playground, monuments, gates, etc.) Commercial general liability Covers damages due to bodily injury or property damage for which the corporation is legally obligated – pays for cost of legal defense. Needed if an association: hires independent contractors owns/leases real property operates or is responsible for recreational facilities, streets, esplanades, other publicly accessible areas operates food vending machines, sells food at bake sales, special events hosts events that involve alcohol
31	Insurance (continued) Business automobile liability Covers claims arising from owned, hired or non-owned automobiles used in the course of business or on behalf of the association Secondary to operator’s private auto liability insurance Optional but inexpensive (typically about $100 per year) Bonds aka Crime policy, fidelity policy Protect the association against the dishonest acts of its directors, volunteers and employees – can include management company Optional but not too expensive (typically under $400 per year) – a better option is to have good procedures & controls in place
32	Insurance (continued) Workers compensation Provides statutory protection under workers compensation laws Optional but not too expensive (typically under $400 per year) – a better option is to require this coverage plus general liability and automobile liability for any independent contractor and subcontractor the association hires Excess liability aka Umbrella policy Covers large liability amounts beyond the limits of your other policies (usually amounts over $1,000,000) Less expensive than increasing limits on the underlying policies Optional but the better way to increase the limits of coverage
33	Taxes Federal income tax A special section of the tax code (section 528) applies which allows Associations to file a one page return (1120-H) and pay a 30% tax on non-member income after a $100 exclusion An association can also file as a regular corporation by filing a longer return (1120-A) and paying the graduated corporate tax rate that currently starts at 15% The association can change from year to year depending on which method results in the least taxes – we typically see more associations benefiting from the long form Some association’s qualify as tax exempt organizations Prior to the March 15^th corporate tax deadline, taxes must be paid and the tax return or extension filed
34	Taxes (continued) State sales tax This is the same sales tax individuals pay on goods & services Certain services are exempt from sales tax such as professional services from attorneys, CPAs and management companies Grounds maintenance is taxable, however, mowing on public areas owned by a municipality (such as esplanades) is exempt if the grounds maintenance contract is properly worded – the concept is that the Association is donating those mowing services to a tax-exempt organization (i.e. the municipality) Pool chemicals and maintenance are taxable but lifeguard services are not
35	Taxes (continued) State business tax As part of the state business tax reform package passed in 2007, the former franchise tax has been replaced with the business tax This tax covers all companies doing business in Texas The financial impact of the new tax on Associations is not known It is our understanding that Associations that were exempt from the franchise tax are also exempt from the new business tax Presumably, Associations will be able to continue to petition for exemption under the new rules
36	Taxes (continued) Local property taxes Associations are entitled to “nominal valuation” on the land they own Each county determines what it considers nominal value The concept is that the land adds value to each of the homes in the community so to tax both the incremental value on the individual homes as well as the association land would be double taxation Tax exemption Some community associations can qualify for an exemption as a 501(c)(4) organization under the IRS tax code These organizations pay no federal income tax, state sales tax or state business tax A special 990 federal income tax form is filed each year
37	Top 10 myths in management * 10. We are a non-profit corporation therefore we should budget to make sure we don’t make a profit. 9. We have too many people who haven’t paid their assessments – let’s post a list at the pool on opening weekend to see if we can get them to pay. 8. We had a CPA look at our books last year so everything is OK. 7. We don’t need lifeguard at the pool – hotels don’t – let’s just post “Swim At Your Own Risk” signs. 6. No one reads the community newsletter so why bother to put one out?
38	Top 10 myths in management (continued) 5. If we don’t enforce every part of the deed restrictions then the whole thing will be unenforceable. 4. The lady in that house sells Mary Kay cosmetics from her home. That’s a violation we need to stop. 3. This is a deed restricted community so no soliciting is allowed. 2. We don’t have any “handicapped” homeowners in the community so we don’t have to convert our park to accommodate them. 1. We can’t hold a closed Board meeting because of the Texas Open Meetings Act.
39	Questions & Answers