You are absolutely correct.
Your community manager is correct in what he said, but wrong in his application of that fact to HOA’s. The non-profit corporation act Title 10 of the Arizona statutes section 3821 allows a board of a non-profit corporation to take action without a meeting with unanimous consent. In fact based on that long standing statute most HOA bylaws include the exact same provision.
But Title 33 Chapters 9 and 16 apply open meeting laws to Condominiums (33-1248) and Planned Communities (33-1804). There are no open meeting laws for non-profit corporations. And what the courts have long held , is that when general statutes conflict with more specific statutes the more specific statutes prevail. Any aspect of Title 33 Chapter 9 or 16 that conflicts with statutes in Title 10 the provisions in Title 33 chapter 9 or 16 prevail.
Arizona open meeting laws for Condo’s and Planned Communities’ require that any meeting of the board must be noticed and must allow the members of the community to attend and participate in those meetings. The only time action by a board can be taken outside of a noticed and open meeting is for emergency meetings, that cannot wait for the 48 hour prior notice. Many attorneys and community managers also confuse the issue further by saying that executive session meetings can occur by e-mail. While again technically accurate because the members are excluded from attending and participating in executive meetings of the board. they forget that even executive sessions must be noticed 48 hours in advance of the meeting, unless it is an emergency and the action or subject of that meeting cannot wait the 48 hours for the notice to occur.
The open meeting laws go on to describe what must be done after an emergency meeting of the board.
I’ve heard many arguments that e-mails are not meetings so therefore the open meeting laws do not apply. To that I simply answer that in 1997 the Attorney General of Arizona cited in an official opinion that in the absence of definition of what constitutes a “meeting” in Title 33, you can go to the only other definition of the word “meeting” in statutes and that is in Title 38 for public bodies. The definition in that Title (38-431 (3)) is clear and in detail discuss types of e-mails that constitute a meeting. That particular statute was modified last year to incorporate another Attorney General opinion directly related to the use of e-mails.
The most powerful aspect of the open meeting laws for HOA and Condominiums is the public policy statement contained in those statutes. In 2017 I initiated a bill that include language into that policy that specifically held the board and the community managers responsible to ensure that if there was any doubt in whether the open meeting laws applied to clear that doubt in favor of open meetings. That was the first time where a so called community manager was held responsible for anything in statutes.
Clearly they (the community managers) have not gotten that message. It is about time that AACM and CAI start including in their so called training programs the development of community managers ability to read the law, and the governing documents.
I’ll provide my perspective on this issue not for Joan’s benefit we have had this discussion all day, but rather for all of you. While the association has the authority to raise whatever funds they need to pay the expenses they have no authority to abuse that power and repeatedly overcharge homeowners in assessments. Associations Budgets have to have some contingency considerations to address unexpected needs and often result in excess income at the end of the year. In my opinion not as an attorney of CPA that the associations fiduciary responsibility to the members is to do one of three things with those excess funds. Refund it back to the homeowners, pay it forward to defray assessment in the subsequent year, to transfer that money to the reserve fund the defray the need for additional assessments for long term capital maintenance. Doing nothing with the money and letting it sit in a non-designated slush fund is nothing short of simple theft.
What the association does with that money depends on the tax method they chose and how they pay taxes on those funds. HOA and Condominiums have a very rare luxury. They get to chose between two tax reporting methods.
The first and most frequently used is as a special HOA treatment using form 1120-H. The Association gets to choose this every year but must meet three specific qualification requirement to use this method. With that process they get to pay no taxes on exempted income and only pay taxes on non-exempt income , but at 30% for the first $50K. What is included in exempted income is Capital contributions , but they also have very specific rules and controls over what qualifies as a Capital Contribution. If the association sets up and manages the reserve funds properly and provides proper notice to the membership in advance that they intend to move any excess funds at the end of the year to the reserve account , then and only then can they legitimately move that money into the reserve account. In my humble non legal opinion Joan’s association in doing nothing with the money and filing a 1120- H, without reporting profit and paying taxes on that profit (excess exempt income) violated the IRS tax code, and they could be subject to an audit and substantial tax liability, fines and penalties, as well as a breach of the association’s fiduciary responsibility to the homeowners.
The association can also chose to file their taxes as a normal corporation and pay 15% tax on any non-exempt income and any excess exempt income. This is a much more complicated process but provides substantial tax savings if used properly. With this process comes a specific tax ruling issued in 1970 identified as 70-604. What that ruling says is that to exempt excess funds for the fiscal year they must have a vote of the members decide if the association should return the excess money to the members or roll it forward to the next fiscal year to defer assessments. Ruling 70-604 only applies to association filing a 1120 tax form and provides no option for the reserve fund roll over. With this process the part of the annual assessment that is dedicated to the reserve fund must also satisfy the “Capital Contributions” test and criteria.
With all this said the association can still ignore all of this and simply pay the tax on the excess funds and illegitimate capital improvements, the IRS will be fine with that but the board will have breached their fiduciary duties to both the association and the members and could be individually held liable for those actions. The indemnification clauses in the governing documents do not protect the board members from criminal acts or intentional acts that were not accomplished in good faith.
I do hope as Joan asked that any other informed member weigh in on this subject because it has ramification for all homeowners in HOA’s and Condo’s across the country.
While these are all good questions there are no simple answers. In Arizona in Condos or HOA of 50 units or less the seller is required to provide the disclosure information to the buyer. If the community has greater than 50 units or homes the association is required to provide the disclosure information. The buyer is required to sign a document at closing that he/she has received and read the community documents. I’ve never know of any board ever being concerned about the member/ buyer getting any of the information required in state law. The disclosure fee is a very sour subject for me. In 2010 the current state law on this subject was enacted, in an attempt to curtail the totally out of control and unreasonable fees being charged for this service by management companies. That law set a limit at $400, but did nothing to base that fee on actual and direct cost to provide that service. In fact if the home seller provides the disclosure information the association management company is entitled to charge the seller for the service that they did not provide. This is what happens to state law when left in the hands of the self serving trade groups and why I build this organization and directly lobby for the homeowners interest with the legislators. What my research has determined is that Arizona’s fee at $400 is the highest fee allowed in the country, and it is also the only fee that is not based in any way on the actual cost of providing that service. The state laws are essentially subsidizing these community management companies out of the pocket of every home seller in the state. This absolutely has to change and I will attempt to do that with one of my proposal this coming legislative session.
As for the transfer fees or operating capital fee, most CC&R’s provide and describe many types of fees some of which are triggered by a transfer of title on the units or homes in these associations. The names of those fees is limited only by the imagine of the attorney that drafted the CC&R’s. The real issue here is they are all schemes to get more money from either the buyer or the seller, to augment the already unlimited power of the association to raise whatever money they need to pay the expenses of the association. When a home is sold a lot of money changes hand as part of that transaction and the HOA and Condominium simply wants a piece of that pie, because they can. In 2010 plus or minus a year or two, 44 of the 50 states declared all private covenants transfer fees by any name void and unenforceable. However thru the influence of CAI the HOA Industry Trade group managed to get an exception to all these state laws enacted in every state that allow HOA’s and Condominium to continue to charge transfer fee.
While not an attorney it is my contention that any working capital fee is illegal under servitudes law because they require either the buyer or the seller to make a contribution to the operating fund so that they have more working capital. Remember the association develops its budget for the year based on what it will need to operate and then charges each homeowner their appropriate share of that cost in assessments. The timing of payments is what generates working capital to pay the bills until the next installment is due. The only condition affecting these assessments is that they must be applied to everyone equally. So when they charge either the buyer or the seller this working capital fee they are unfairly asking those individual to pay more than their fair share of the associations cost. While the fundamental case law in this area is called Servitudes Law allows transfer fees they have 4 qualifiers, they must be paid to the association only, they must be reasonable, rational and fair. Anyone that does not meets that test is invalid and unenforceable.
Once again I have provisions in my legislative proposals for this year to attempt to fix and clarify these issues.
I apologize on the length of this response I’ve been trying to fix these laws for three years now and this hits very close to home for me.
I hope I’ve answered your questions. As to who get these fees and what are they used for that will truly vary for each association, because once they have your money they can and often do whatever they want with the money irrespective of the stated purpose of the fees.
While this was posted by one of our members it is unfortunately so true for so many communities. Boards need to understand that they are responsible for running the community not the community manager. That manager works for them not the other way around. If that manager violates the law it will be the board that is held accountable not the community manager or the management company. When these untrained and unlicensed individuals are allowed to get total control over a community without oversight chaos ensues, to the detriment of all homeowners. That property manager does not work for you but does work for the board, so hold them accountable for that managers actions and approach to dealing with the community.
Pay very close attention to what specifically is authorized in the CC&R’s relative to rules for the association. While the board can create and establish rules on their own without any approval from the community they can only create rules specifically authorized in the CC&R’s. They cannot create a restriction on the use or the behaviors on and within your property that does not exist in the original CC&R’s without amending the CC&R’s and that amendment would require 100% approval from the members. This is common law for the country compiled in the Restatement of Servitudes Law published in 2000.
Please if the board is trying to do something that just does not feel right it is probably not. Contact us and if necessary we will provide you contact information for qualified attorneys, to help you stop the board.
You are absolutely correct, in this case the Arizona State Law trumps the lack of guidance in your community documents. The language in the law has an “and” between the in person and the absentee ballots. The language added relative to other forms of delivery are not a substitute for the first two but rather alternatives to snail mail in absentee ballots. This will apply to all votes requiring action from the members or unit owners. The absentee ballots also count toward satisfying the quorum requirements for the meeting.
So to your specific question; are associations required to provide absentee ballots to all members prior to a meeting to vote on an issue, the answer is yes.
I will also note that based on a revision to the language to the open meeting laws that I introduced and got passed in 2017 all votes required from the members must be taken at a meeting of the members called for that purpose. The language change was to the public policy statement in the open meeting laws that specified that members must be allowed an opportunity to speak on an issue prior to any vote on that issue by the members. The only way for that to happen is to have that vote at a meeting of members. Those members not wishing to attend the meeting or speak on the issue must be given an opportunity to vote on the issue via absentee ballot.
If you can send me your CC&R’s and bylaws I’ll gladly look them over and help you understand what the requirements are for your community. Use email@example.com. I’m assuming of course that you live in either an HOA or Condominium? If in an HOA or Condo and the streets are part of the common area (not public streets) the association has a duty and responsibility to maintain those streets and to raise the necessary assessment to accomplish that duty. What approval authority will be required from the association members or unit owners will be specifically prescribed in the two documents that I discussed earlier. The only state law that specifically addressees assessment approval is a statute for HOA’s ARS 33-1803 only that limits the increase in assessment to 20% over the prior year, without the approval of a majority of homeowners. No such limitation currently exist for condominiums. I’m working on fixing this, this year.
One more though to your post. If board or committee members thought like you half of all issues in HOA’s or Condominiums would be solved. You simply applied your on sense of values to determine what felt right and what made sense in making decisions and questions the guidance of the so called professional community manager. I’ve stated many time that if the HOA trade groups really wanted to make these communities better places to live like AACM and CAI continually state in their self serving propaganda that they would start training the community manager to help these communities not focus only on what the laws tell them they can and cannot do but rather help them understand what they should do in making any decision for their communities that truly represents the best interest of the community as a whole. Because the unfortunate language of the current law allows them to avoid the open meeting requirement for these “not regularly scheduled” committee meetings does not mean that they should not apply those standards to these committee to ensure true transparency in the important decision of the community.
Technically since 2010 this use would be within the specific language of 33-1804. I will say that it is not in any way within the intent of the statute, as stated in the opening paragraph and in the public policy statement that was included in the same Bill that included the words “regularly scheduled committee meetings”. This was a very unfortunate inclusion in that bill because regularly scheduled is not defined in any way. This has probably been the most abused language in all the statutes, because by simply stating that a committee even the most significant committee that a community can have is “not regularly scheduled” it is allowed to circumvent the requirement of the open meeting laws for boards. It also open the door for any board to delegate all important decision for the communities to committees and allows them to conduct that business in total secrecy. This loophole in the open meeting laws has been abused for ACH committees, budget review and consideration committees, Rule enforcement committees, and capital improvement recommendation committees, to name a few. Having said this, relative to the conduct of these meetings the records of those decision are and must be maintained as community records. They do not in any way constitute personal information unless the requested deviation from the community documents would relate to health information about that homeowner. the rules for community records request in 33-1805 still apply to all these community records. The only way for the association members can ensure that they are all treated consistently and fairly by these significant committee is to have the conduct and decisions of that committee totally open to the members of the community.
I will commit to you and to anyone else out there, that I will not stop working with the legislators to correct this abuse of the open meeting laws and ensure that these important community committees are made subject to all the provisions and limitations for board open meetings until those laws are changed for both planned communities and condominiums.
Thank you for your question.
Thanks! Very helpful advice. I’ll share this link with my neighbor.
Hello Dennis, Thank you for your responce to my quesstion yesterday regarding the height of tower I want on my new home. Your reply gives me hope and courage to stannd up against the HOA... Read More