Reimagining Legislation for Community Associations


Draft 8/17/21 — George Markle

Costly consequences of underinformed directors

How many corporations exist with directors responsible for protecting a large portion of stakeholders’ equity typically having so little applicable experience or knowledge of their duties or legal responsibilities?

We have all seen and read about consequences of failed governance of community associations — from petty irritations of hapless administration of architectural rules preventing a homeowner from flying a flag, to devastation of a community and lost lives resulting from failure to maintain adequate reserves for structural maintenance.

HOA managers and attorneys too often witness the dearth of volunteers and the inordinate costs in time and funds wasted by HOA Boards attempting to navigate issues affected by laws and best practices about which directors are unaware — and time and costs for recovering from consequences of actions or inaction.

Pool of qualified candidates varies with community size

Populations of most towns and cities usually are sufficient to enable competitive elections and town- and city-councils with talents in disciplines applicable to operating their governments. However, the comparatively small population of most homeowners associations often means a dearth of board candidates, many without applicable qualifications. Often, HOA boards find themselves with directors with virtually no experience in business, finance, insurance, law, construction or many other applicable fields.

HOAs with underqualified directors are the rule — not the exception

HOA boards with under-qualified directors can have profound, negative and costly effects on the lives of their members.

In my over forty-years of experience with HOAs I’ve found well-meaning volunteers in a neighborhood setting tend to conduct meetings within a social context wherein decisions are heavily influenced by uninformed sensibilities and impulses of neighbors present, without due diligence and investigation, consideration of state regulation or standards of governance intended to protect broader interests.

Mere availability of director education hasn’t been sufficient

Even if a well-trained volunteer is elected and advocates for established best practices and legal compliance, such informed advice is often disregarded with deference given to an opposing director’s longevity or assertiveness, or to expedience or politics. Statutes and case law may as well not exist unless multiple directors are aware of them. Often, only when a second director reinforces and validates a director’s advice as deriving from an authoritative source, does the dynamic change; only then are directors apt to heed the advice.

To improve board performance in community associations, we must find a way to increase community association members’ participation on boards and ensure broader exposure of directors to best practices, statutes and case law.

Certification to an established baseline of knowledge and continuing education to maintain minimum standards is mandated in Business and Professions code for attorneys, physicians, real estate professionals and a myriad of other vocations with the potential to affect consumers’ welfare. HOA directors also may profoundly affect HOA members’ interests. Even so, while performance requirements exist, education requirements making directors aware of them are conspicuously absent.

Conventional licensing could hobble recruitment

Consider this argument against making director education compulsory through legislation to require licensing:

“HOA directors are volunteers and many HOAs have difficulty recruiting sufficient volunteers for their boards. An increased burden of required education or certification may dissuade potential volunteers, further exacerbating recruitment.”

At least one state, Florida, did try a licensing model. (See below.)

A flawed model

We can learn from the Florida model, which loosely follows consumer protection licensing requirements, ostensibly requiring training to minimum standards. However, presumably to address the objection that licensing would discourage potential volunteers, the legislature created what I believe to be fatal loophole that effectively nullifies the program’s purpose: A would-be director may circumvent training or passing an exam simply by indicating in writing to the secretary they have read the governing documents and agree to uphold them.

While this may have been a compromise to enable bill passage, foreseeably it could be fatal to the purpose of informed governance.

With a twist on the licensing model, we can do better.

Rather than compel, we can incent education

I propose we create model legislation giving legislatures in each state guidance and a head start in crafting bills that would enable this program to incent members to participate on their associations’ boards, and to seek to educate themselves as directors and for boards to encourage directors’ education. (See Summary of state legislation required to enable program.)

I propose that CAI (Community Associations Institute), ECHO (Educational Community of HOA Homeowners), and other community association-oriented education institutions advocate for such legislation.

First, legislation would create a new law (in the case of California, Civil Code Section 6200 to Division 4, Part 5, Chapter 12) that would

Director certifications could earn benefits for their associations

The BCCAD would calculate and publish ratings for community associations based generally upon the proportion of its directors with current certifications, how well infrastructure reserves are funded, whether the board has committed to training and legal oversight, and whether it is actively managed by a manager certified as provided by the state. It would foster an environment wherein communities with higher ratings may garner favored insurance premiums and prestige of being identified by the state as being in the top-10, top-100, top-1000.

Potential for lower dues

Insurance premiums typically are one of the largest budget items affecting monthly dues. Insurance companies would be incented to offer reduced premiums to those community associations that maintain a certain rating as risk management would be part of the BCCAD certification curriculum and exam. And reduced premiums translating into lower dues may be a powerful incentive for community associations to participate.

Potential for higher property values

Real estate values in communities that can boast such ratings may benefit and provide a strong incentive for members to keep electing candidates who are certified. Those that do not risk being at a disadvantage.

Other benefits may be fostered as well, such as discounts from services vendors, who may justify discounts as educated boards are easier and more profitable to work with. (See Multiple broad benefits.)

Board of Certification for Community Association Directors (BCCAD)

The BCCAD would

Training and certification would be available to any member

The COMPETENCE training program

The training program would be known as the COMPETENCE program, an acronym for Community Oversight and Management Principles Education To Engender Community Excellence. (This acronym also complements the preferred means of attaining certification — through the Competency Based Education1 method.

The state would not require community association directors to participate in the COMPETENCE training or to be licensed; thus, community associations may continue to operate as they have without fear of a requirement that might discourage members from volunteering. However…

There would be incentives for those associations that encourage their directors to participate and become certified. (See Multiple broad benefits.)

The program would allow any association member of a residential common interest development to attain a certification as Certified Community Association Director by passing an examination on essential rudiments of CID oversight. Certification would be maintained by accumulating continuing education credits.

This would ensure consistency with legal requirements (for California, Civil Code § 5105-a-3) that any association member be eligible for candidacy and provides equal footing for non-directors to attain certification that may affect perceived qualifications as board candidates.

Any member’s certification status under this program would be verifiable via a website, as for verification of licenses and certifications for professionals and service providers (for California, those operating under Department of Consumer Affairs regulation).


Multiple broad benefits

Benefits described below — particularly those involving reduced costs for the association affecting dues — may motivate CID boards to press directors to engage in the program and maintain their certifications and association ratings that would merit such benefits. Thus, association members may be motivated to vote for those candidates who are certified to maintain qualifying status and thus help control dues.

Benefits for community associations

An overall board COMPETENCE score or rating would be calculated for each community association, derived primarily from the percentage of funding of reserves requirements, proportion of directors’ seats that are filled and proportion of directors who are certified, whether they have engaged a manager who is certified and have committed to continuing education and have engaged an attorney specialist. (See Determination of community association COMPETENCE star rating.

The BCCAD would maintain a list of the top-10, top-100, top-1000 community associations by rating. Real estate values in communities who can boast such ratings may benefit and provide a strong incentive for members to keep electing candidates who are certified. This also should incent directors and members to keep their association’s rating high to enhance property values.

Disclosure of the board’s rating would be required in the annual policy statement provided to all members (in the case of California, pursuant to Civil Code §5310), also ensuring prospective purchasers would receive it. (See example candidate biographies document.

Benefits for community association insurers

Insurance companies have long recognized the value of training of customers in improving risk management and reducing casualty costs. This program should result in more directors with demonstrated knowledge of best practices, current law and awareness of principles of risk management. An informed Board should be less likely to under-fund reserves, fall askew of the law and incur unexpected legal expenses or special assessments. As such education could lower risk and insurance premiums — typically one of the biggest budget items for CIDs — this could provide a compelling motivation for boards to promote education among their directors and make certified candidates more attractive to the dues-paying members.

The BCCAD could work with insurance providers to demonstrate how such a program could reduce risks and encourage offers of discounts on premiums for those associations that can maintain a certain rating.

Benefits for candidates

Indicating certification status on ballots and election materials with candidate lists — with a CCAD designation or simple asterisk and footnote — would be an indicator of a candidate’s commitment to improve knowledge of best practices and legal requirements. For associations where elections are competitive, this could influence members in their voting and increase overall board competence.

Benefits for management companies

The program should strongly incent management companies to ensure all of its managers are certified. This is because an association’s COMPETENCE rating will be affected by whether its manager — If it has one — is certified. (See the calculation for an Association’s rating under Determination of board of directors COMPETENCE star rating.)

Faced with competing bids from two management companies — one who will provide a CACM-certified manager that will increase the board’s rating, and one that cannot — which will they select?

Much of a manager’s time may be spent advising directors and dealing with issues that would not have surfaced had directors been better informed. This program should help with such education.

Management companies may discover such benefits sufficient to warrant offering a discount for boards that can maintain higher ratings or increasing management fees should the board’s rating drop below a certain number. Management fees usually are one of the largest budget items affecting dues.

Increased membership for community association educators

Should we succeed in having legislation passed to create the BCCAD, community association education organizations likely would see a substantial increase in membership. Those already at the forefront — CAI, ECHO, CACM — particularly should benefit given their established prominence and reputations for excellence.

Other benefits of the program

Community Association services providers may by convinced to offer discounts for those associations who maintain high ratings, as informed boards should be easier and more profitable to work with.

May help bootstrap volunteer recruitment

As legislation would mandate publishing of the board’s rating and the certification status of candidates, association members should become increasingly aware of the potential cost of insufficient participation on the board by qualified directors and the effect of directors’ education on dues, likely to induce increased participation.

Also, the need and techniques for recruitment, training, motivation and retention of volunteers should be part of directors’ education within this program. Thus, while it may be naïve to anticipate director education will completely solve recruitment issues, my experience has shown that awareness of the need for such activities has made a difference in both quantity and qualifications of volunteers.

Would save time and help keep directors on the same page

An inordinate amount of time in meetings is spent debating directors’ lay opinions regarding how issues should be treated, when applicable regulation and proven best practices already exist.

I suspect almost anyone who has attended association board meetings over time can relate anecdotes reflective of this. I attended a meeting where an influential senior director argued against seeking legal advice regarding a potential liability, rationalizing a consultation would be pointless because “there will always be another attorney with a different opinion.” She boasted that, while she had been president, “we never got legal advice” — as if that should be the board’s policy. Her argument prevailed, reinforced by a new board president who declined to heed a statute called to her attention, responding “I’m not an attorney and I won’t interpret the law.”

Had even a couple of directors been in exposed to rudiments of risk management, I believe this would not have occurred. Such exposure would be part of the training and certification process.

May help freshen board composition

Many boards have one or more directors who have remained year-after-year having exhibited no effort to inform themselves regarding directors’ obligations. For no other reason beyond longevity, perceived seniority or force of personality, they continue to maintain strong, if underinformed, influence. If directors and members do invest in education under this program, theoretically, continued tenure of underinformed directors may become less likely, raising overall board competence.

May help ensure incorporated associations retain corporate status

In order to participate, the applicant’s association must be registered with the program. Associations will be required to enter their entity number assigned by the Secretary of State when incorporated or when registering pursuant to the law (in the case of California, Civil Code §5405). When checking for that number, any lapse in the association’s registration should be revealed so the association may take remedial action.


Becoming certified

Initial certification

An individual seeking initial certification must pass an exam to demonstrate knowledge of essential rudiments of CID law and governance best practices.

Regarding stringency of requirements for director certification

Director testing requirements are modeled somewhat after California Business and Professions Code §11502 — Certified Common Interest Development Manager Criteria. However, whereas testing for manager certification represents an opportunity for vocational and income advancement, testing for volunteers’ certification has the potential to be a barrier for essential director recruitment — already difficult for many community associations. Therefore, requirements for director certification are reduced from those for manager.

The number of questions and required percentage of correct answers would be determined by BCCAD, the objective being to ensure knowledge of fundamentals while not discouraging participation by unpaid volunteers. The policy may be adjusted over time as results are gauged and as required to meet this objective. An example policy might be the following:

These example policies may be modified as experience is accumulated.

Maintaining certification

An example policy for maintaining certification might be the following:

To maintain certification, one must accumulate a minimum of eight continuing education credits (CECs) every four years from date of initial certification. At least 50% of those credits must derive from material covering state law or legal topics, authored or approved by an attorney practicing CID law in the state.

Given that CID directors are unpaid volunteers, this program strives to achieve a balance of incenting meaningful education without overly burdensome requirements that may discourage volunteer recruitment. We also recognize individuals’ learning styles vary and allow for this in awarding certification and continuing education through these methods:

Technology-centric to minimize costs and issues

Inasmuch as the program’s creation and existence may be predicated upon efficiency and minimal budget impact, emphasis will be given to applying technology for

Determination of credits

Each unit of continuing education credit would be equivalent to exposure to one of the following:

Approval of classes

A detailed lesson plan or class outline should be submitted to BCCAD, nominally via its website.

Approval of online courses and published articles

Writing style variation defies precise assignment of credits per given volume of material. However, an author or instructor should attempt to meet the following guidelines before submitting material via the BCCAD website for approval:

One credit may be awarded for each 1,000 words of substantive material2 with a minimum of 75% correct answers to questions that follow. The author should include approximately 1-question per each 200 words of substantive written material. For example, a 1,000-word article would be followed by 4-to-6 questions. The minimum number is indicated in the table.

A variance for extraordinary circumstances may be applied for to BCCAD.

Table — Credit calculation examples


Method
Substantive
length

Credits
Min. Quiz
Questions
Number of
Questions
In-person class or presentation 10 min 0
15 min 1
20 min 1
30 min 2
40 min 2
45 min 3
50 min 3
1 hr 4
2 hr 8
Online courses, articles, written material 1,000 words 1 4 4-6
1,500 1 6 6-9
1,600 1 6 6-10
1,700 1 7 7-10
1,800 1 7 7-11
1,900 2 8 8-11
2,000 2 8 8-12
3,000 3 12 12-18
4,000 4 16 16-24

*A minimum of 75% correct answers is required for credit. Continuing education exams may be open-book, with full access to material, encouraging an applicant to review any material about which he or she may be uncertain. A failed exam may be taken over until successful.

Example credits earning scenarios

The following include examples of how one may accumulate the required 8 credits to maintain certification for a 4-year certification period.

Credits in excess of those required for certification are laudable but cannot be applied to certification in subsequent periods inasmuch as current certification implies exposure to and knowledge of current legislation and developments in best practices. However, the total number of credits accumulated by an individual may be published in the online database as an incentive toward continuing education


Determination of community association COMPETENCE star rating

Whereas a calculated numeric score or rating may require interpretation, ratings based upon the popular and ubiquitous five-star model have come to be immediately and intuitively recognized. An eminently recognizable star rating next to the association’s name may incentivize an effort by its directors to increase its rating by ensuring all positions are filled and directors’ receive training — the primary objectives of this program. Directors informing association members how the rating may affect dues may heighten members’ awareness of the importance of volunteering for board participation.

The rating calculation includes normalization to a maximum of five for presentation in the five-star format, e.g., a rating of 2.9 would be presented as

A board’s COMPETENCE rating would be determined by a formula that may be adjusted by BCCAD from time to time as relevant factors become apparent. Factors to be integrated into the rating formula include those most heavily associated with a healthy community.

Note, in the initial formula below, the sufficiency of accumulated reserves is given substantial weight — an entire star. Reserves funding stratagies include percent funding, zero-based and a couple of others. The proposed formula below accommodates only the percent-funded method; a future formula must accommodate the others.

The initial formula is as follows:

…where RP is Reserves Percent funded and FP is the Foundational Partners credit. (See below.)

RP: Reserves percent funded

Community Associations Institute (CAI) defines reserves percent funded as “The ratio, at a particular point in time related to the fiscal year end, of the actual (or projected) reserve balance to the fully funded balance, expressed as a percentage.” Generally, percent funded is a gauge of how well the association has anticipated infrastructure repairs and replacement require-ments and assessed members so as to accumulate amounts sufficient to cover such costs without additional funding or special assessments. The state must pass legislation to require community associations to engage a professional engineering firm every two-to-five years to physically inspect physical infrastructure, determine estimated remaining life, projected repair and replacement costs, and specify a dollar amount that must be contributed on a regular basis in order for such funds to be available when needed. The topic is discussed more fully in the CAI publication, National Reserve Study Standards.

FP: Foundational Partners credit

FP is the foundational partners credit and credits the association with having established the two key relationships essential to directors’ education and informed decision-making:

Rating calculation example

The COMPETENCE rating would be displayed as both stars and a number.

As an example, consider an association

Displayed rating vs. precision rating

Displayed rating

The above rating result would be rounded to, for example, 3.2 for the star-rating display on the BCCAD website and downloadable report in both stars and number format as in the following example. (See page 26.)

Precision rating

While a rounded number would be displayed with the star rating, a full-precision floating point value would be used to further differentiate community associations when calculating ratings for Top 1,000, Top 500, Top 100, etc. placement. These ratings may further incent directors to maintain their education as such ratings might be used by insurance underwriters in evaluating risk factors and by real estate professionals when promoting property sales and values.

Effective date of rating

The community association’s rating would be recalculated and effective immediately following any change of Board composition or certification or change of manager or foundational partnerships that would affect the rating. Thus, an association’s rating could not readily be manipulated by temporary director appointments or resignations.


Summary of state legislation required to enable program

Success in incenting participation and education for informed governance is predicated upon universal applicability of COMPETENCE ratings. Were application of ratings merely elective, there would be little incentive for community associations to maintain ratings. Therefore, legislation would be required that would do all of the following:

General Legislation for Community Associations

For states that have not yet passed extensive legislation, I suggest examining statutes passed by other states in a reference index compiled by Community Associations Institute. Inasmuch as California was early to adopt comprehensive legislation for common interest developments in the early 1980’s, which has since been refined, restated and proven, I suggest reviewing that first. This code for Common Interest Developments is also known as the Davis-Stirling Act. California also has substantial Corporations Code specifically for Non-profit Mutual Benefit Corporations, including community associations.

This description and proposal for a voluntary state-sanctioned program to promote participation on and education for community association boards is being circulated within the industry for discussion. Comments and suggestions are requested.


Exhibit A — Example statute enabling creation of certification authority

This example is numbered for California but should be readily adaptable for any state.

Proposed new Civil Code Section 6200

A new Section 6200 would be added to Civil Code Division 4, Part 5, Chapter 12:

Chapter 12 — CERTIFIED COMMUNITY ASSOCIATION DIRECTOR

6200 For purposes of this chapter, the following definitions apply:

  1. “Common interest development” has the same meaning as defined in Section 4100 of the Civil Code.

  2. “Association” and “Community Association” have the same meaning as “Association” as defined in Section 4080 of the Civil Code.

  3. “Board” has the same meaning as defined in Section 4085 of the Civil Code.

  4. “Director” has the same meaning as defined in Section 4140 of the Civil Code.

  5. “COMPETENCE program” is a program administered by a Director certification organization to promote Community Association governance training for Directors and is an acronym for Community Oversight and Management Principles Education To Engender Community Excellence.

  6. “COMPETENCE rating” of a Community Association’s Board shall be determined by a formula created by a Director certification organization as defined below and such formula may be adjusted by such organization from time to time as experience may influence. It shall include but not be limited to the following:

    1. the proportion of directors currently certified under this program.
    2. whether a manager it engages has qualified for certification under [state law authorizing certification for community association managers — in the case of California, Business and Professions Code §11502].
    3. reserves percent funded determined by a licensed structural reserves study professional.
    4. whether it maintains a current membership in an organization that provides training to residential common interest association members on legal requirements and best practices for community oversight.
    5. whether it maintains a retainer for an attorney specializing in residential common interest law.
  7. “Director certification organization” means an organization that meets all of the following:

    1. Is chartered to administer tests and grant certifications to citizens of [state name] who meet their standards of knowledge of best practices and basic legal requirements for governance of California Community Associations.

    2. Operates pursuant to Section 501(c) of the Internal Revenue Code.

    3. Requires adherence to a code of ethics and standards of practice for Community Association directors.

6205 — In order to be designated a “Certified Community Association Director,” a person must have passed an examination or examinations of no less than fifty (50) questions that test knowledge in common interest development oversight in the following areas:

  1. The law that relates to the oversight of common interest developments, including, but not limited to, the following courses of study:

    1. Topics covered by the Davis-Stirling Common Interest Development Act, contained in Part 5 (commencing with Section 4000) of Division 4 of the Civil Code.

    2. Topics covered under Nonprofit Mutual Benefit Corporations, contained in Part 3 of Division 2 of Title 1 of the Corporations Code.

    3. Risk management, including, but not limited to, the business judgment rule, reserves maintenance,liability principles and insurance coverage.

    4. Personnel issues, including, but not limited to, general matters related to independent contractor or employee status, the laws on harassment, the Unruh Civil Rights Act, the California Fair Employment and Housing Act, and the Americans with Disabilities Act.

    5. Business affairs of associations and common interest developments, including, but not limited to, necessary compliance with federal, state, and local law.

    6. Basic understanding of governing documents, codes, and regulations relating to the activities and affairs of associations and common interest developments.

  2. Instruction in general common interest development governance including, but not limited to, the following:

    1. Relationships with and communications with members, residents, employees and contractors.

    2. Types of meetings and notice requirements.

    3. Conduct of meetings and parliamentary procedures.

    4. Finance issues, including, but not limited to, understanding and working with budgets, income and balance sheets, and reserves requirements.

    5. Preparing project specifications, contractor bidding, qualifications and evaluation, awarding contracts.

    6. Board role in monitoring contractor and employee performance.

    7. Oversight of maintenance programs.

    8. Creation of rules and regulations, including architectural standards, and requirements for enforcement.

    9. Conflict avoidance and resolution mechanisms.

    10. Ethical conduct and standards of practice for common interest development directors.

    11. Current issues relating to common interest developments.


Exhibit B — Election materials must include certification info

This example is numbered for California but should be readily adaptable for any state.

Proposed amendment to identify certified candidates

Add new Civil Code §5105(a)(8) to require that any candidate certified under this program be identified as such:

“Ensure any ballot and list of board candidates identifies any candidate certified by an organization as provided under Civil Code §6200 as having a current certification by placement of an asterisk or other legend or footnote indicator next to the candidate’s name, and includes a legend or footnote containing substantially the following:

’*Indicates candidate has met requirements set by the [state name] Board of Certification for Community Association Directors (BCCAD) for designation as a Certified Community Association Director (CCAD).’

At the candidate’s option, any certified candidate may include the “CCAD” designation after their name.”

Example documents illustrating compliance are included below.

Proposed amendment to include certification eligibility information

This example is numbered for California but should be readily adaptable for any state.

Add new Civil Code §5105(a)(9) to require that information be provided regarding how any association member may apply for certification under this program. The new paragraph regarding mandated Election Rules might read like the following:

“Ensure any director ballot and list of board candidates include information regarding how any association member may apply for certification as provided under Civil Code §6200. Such information must include the association’s Secretary of State entity number so as to enable such application. The information shall contain substantially the following:

‘Any association member may apply for certification as a Certified Community Association Director (CCAD) online at BCCAD.org using Secretary of State file number [include association’s SOS file number].’”

Example documents illustrating compliance appear below.

Conforming examples

Examples that follow illustrate conforming election materials.


Exhibit C — Requirements for disclosures of board rating

This example is numbered for California but should be readily adaptable for any state.

Civil Code §5310 would be amended to require the annual policy statement include the Board’s COMPETENCE rating. As a convenience, BCCAD may provide a webpage from which a certificate of rating disclosure may be generated and downloaded. (See specimen.)

Proposed amendment to Civil Code §5310

Section 5310 (a)(12) would be renumbered as 5310 (a)(13) and new 5310(a)(12) would become the following:

[12] The Board’s current COMPETENCE rating and explanation of its purpose and calculation formula, substantially as indicted in the following example specimen:


Footnotes


  1. The US Department of Education describes Competency Based Education as a preferred alternative to a traditional Carnegie-Unit based approach to learning in the modern age for a population already employed and without the flexibility of full-time student status. https://www.ed.gov/oii-news/competency-based-learning-or-personalized-learning. The program focuses less on accumulated hours in passive attendance or exposure to lectures and presentations, and more upon actual knowledge gleaned from experience and learning from any source, such as articles, classes, and online education programs.↩︎

  2. Substantive material is that which conveys information essential for instruction and about which exam questions will be provided. For example, word count of coursework or an article would not include material employed primarily for introductory or stylistic purposes.↩︎

  3. The California Association of Community Managers provides training and certification of managers as Certified Community Association Managers (CCAM)↩︎