New State Condo Law Protects HOAs from Financial Fraud and Embezzlement

| Jay Drake

Responding to reported cases of fraud and embezzlement against homeowners associations (“HOAs”), the California Legislature enacted Assembly Bill 2912 (“AB 2912”), which became effective on January 1, 2019.  AB 2912 amends the Davis-Stirling Common Interest Development Act by adding safeguards to protect HOAs for common interest developments by increasing HOA board of directors (“Board”) oversight over the HOA’s financial accounts, establishing tighter control over monetary transfers, and generally protecting HOAs from financial fraud.

The key provisions of AB 2912 are summarized below:

  • Civil Code Section 5380 has been amended to prohibit an HOA’s managing agent from making transfers of greater than Ten Thousand Dollars ($10,000) or five percent (5%) of an HOA’s total combined reserve and operating account deposits, whichever is lower, without prior written approval of the Board.
  • Civil Code Section 5500 now requires an HOA Board to review the HOA’s financial statements monthly (rather than quarterly under the prior law).  The Board’s review must now include more complete financial statements and HOA account records.
  • Civil Code Section 5806 requires that HOAs maintain fidelity bond insurance providing coverage for dishonest acts, including computer fraud and funds transfer fraud, by an HOA’s managing agent and their employees, in addition to the HOAs’ directors, officers and employees.  The coverage must be in an amount equal to or more than the combined amount of the reserves of the HOA and the total assessments of the HOA for three (3) months.

HOA Boards and managers should review their procedures to make sure they comply with the new legal requirements.  While AB 2912 may increase the burden on HOA Boards and HOA managers, the new rules will help to ensure that HOAs maintain control over their finances and protect the investments of home owners.

 

Authored by Reuben, Junius & Rose, LLP  Attorney Jay Drake

The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient. Readers should consult with legal counsel before relying on any of the information contained herein. Reuben, Junius & Rose, LLP is a full service real estate law firm. We specialize in land use, development and entitlement law. We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.

Is the San Francisco Condo Lottery Dead?

| Michael Corbett

Prior to 2013, the City of San Francisco (“City”) implemented an annual condo conversion lottery system for 2-6 unit residential and mixed-use properties. But with the lottery resulting in a backlog of applications extending well over a decade, the Board of Supervisors passed Ordinance No. 117-13, ushering in changes to Article 9 of the City’s Subdivision Code (San Francisco Subdivision Code, § 1300, et seq.) and temporarily supplanting the lottery system with an “Expedited Conversion” program (the “ECP”). The following summarizes the scope of the ECP, its current status, and what property owners hoping to accomplish a condo conversion should be prepared for in the coming years.

The ECP halted the conversion lottery program for a minimum of 10 years, and was intended to allow properties stuck in lottery purgatory to convert to condos over the course of a 7-year period. Under the ECP, the Department of Public Works was required to stop accepting and processing new condo conversion applications for properties that would otherwise be subject to the lottery. (Subdivision Code § 1396.5)

Controversially, the ECP also required applicants to offer binding, lifetime leases to all tenants who do not own the property in which they reside (“Tenants”), and included a poison pill that would essentially suspend the ECP in the event litigation were filed challenging the legality of the ECP. (Subdivision Code §§ 1396.4, 1396.5) In light of the lifetime lease provision, such a legal challenge was considered at the time to be a fait accompli.

Sure enough, in June 2017, a federal lawsuit was filed by San Francisco property owners against the City in the Northern District of California. The lawsuit, which challenges the constitutionality of the ECP’s lifetime lease provision, brought the vast majority of the ECP to an abrupt halt. This matter is now at the court of appeals, with no timeline for resolution.

As outlined by the Department of Public Works, the impacts of the ECP’s suspension for various categories of ECP applications are as follows:

Notably, 2-unit, owner-occupied residential buildings are not subject to the ECP and may bypass the lottery system altogether. With regard to such properties, when the separate owners of each unit have occupied the building for at least 1 year they may submit an application for condo conversion. More information for 2-unit, owner-occupied condo conversions can be found at the Department of Public Works’s website (Residential Condominium Conversion Application Materials & Two Unit Owner Occupied Conversions).

Barring further changes approved by the Board of Supervisors or court action, the Department of Public Works will not begin accepting new condo conversion applications, nor conduct a condo conversion lottery, until at least 2024. Yet again, local property owners are left to the mercy of the City and court system to determine their property rights.

 

Authored by Reuben, Junius & Rose, LLP  Attorney Michael Corbett

The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient. Readers should consult with legal counsel before relying on any of the information contained herein. Reuben, Junius & Rose, LLP is a full service real estate law firm. We specialize in land use, development and entitlement law. We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.