New Jersey Lawyer & Attorney : Stark & Stark Law Firm : New Jersey Law Blog

David J. Byrne, Shareholder and Co-Chairperson of Stark & Stark's Community Association Group presented materials related to legal issues connected with community associations and solar energy, during a seminar entitled "Community Associations, Solar Energy & Legal Issues".

The presentation was part of Wentworth Property Management's Solar Symposium, held at the Renaissance @ Manchester Association on February 18, 2010.  Mr. Byrne focused his presentation on the rights and limitations of boards in relation to solar power.  He discussed the fiduciary duties of community associations, the interpretations of restrictive covenants and the enforcement of rules, all in connection with solar power.

You can download the full presentation online here. (13.4 MB)

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Realizing that the "fixes" put in place by the federal Home Affordable Modification Program ("HAMP") have been an abysmal failure, the Obama Administration and the Treasury Department have reached for a new arrow in their quiver. Beginning April 5, 2010 the new Home Affordable Foreclosure Alternative program ("HAFA") will attempt to assist hundreds of thousands of the delinquent homeowners who could not be rescued under the HAMP program by allowing them to shed their homes through the short sale process. 

Traditionally, a short sale is when the proceeds from the sale of a home are insufficient to fully pay off all outstanding debts and encumbrances recorded against the property.  In these situations, the selling homeowners can either bring funds to the closing to make up the difference, or obtain approval from their mortgage lenders to accept a reduced amount to satisfy their outstanding loans.  

Under HAFA, the lender must offer a short sale in writing to the homeowner within 30 days after the homeowner either is found ineligible for mortgage modification under HAMP or has been ruled unable to sustain payments under a trial plan. Under the new plan, a lender will use real estate agents to determine the value of the encumbered home and this figure will be the  lender’s minimum to accept for a short sale. This figure will not be shared with the homeowner, but if an offer comes in that is equal to or greater than this amount, the lender must accept it and proceed with the short sale. 

Under this new program the primary lender will receive $1000 if the short sale is completed. A lender holding a secondary lien could get up to $3000 of the short sale proceeds, or can attempt a short sale outside the program if it does not agree to share.  In addition, the selling homeowner will get $1500 in "relocation assistance".  

While HAFA will attempt to make short sales easier and a more likely alternative to foreclosure,  short sales require significant time and patience by all parties involved. Luckily, with the seemingly continuous delay of the foreclosure process by the New Jersey courts, one thing that delinquent homeowners seem to have is time. 

At the beginning of foreclosure crisis lenders shunned short sales and would regularly refuse to participate in the process. However with the failure of other federal programs to effectively turn the tide of the foreclosure flood, it may now be time for short sales to see their moment in the sun. For condominium and homeowner associations ("Associations"), HAFA may mean fewer empty foreclosed homes waiting to be sold by uninterested and unmotivated lenders.  Another direct benefit of the HAFA program for Associations is that the common assessment liens recorded against the homeowners’ units must be paid in full for the short sale to be completed. This will provide Associations significant leverage to ensure that unpaid common assessments are recovered. 

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The FHA insures loans made by FHA-approved lenders all across the country.  In fact, 30% of all mortgages in the United States are insured by the FHA.  The availability of this insurance enables lenders to make loans and extend credit to a broader class of borrower, allowing owners within a condominium to market their homes to more potential buyers.  The FHA will insure only certain loans - those that meet FHA requirements.  As of February 1, 2010, the FHA may insure loans made with respect to condominiums only in condominiums that have been certified by the FHA.  These new rules do not relate to homeowners associations.  Condominiums that are currently certified must be recertified every two (2) years.  The new FHA rules apply to condominiums in New Jersey, New York, Pennsylvania together with all of the other 47 states.

 

FHA certification will likely make the sale and purchase of homes within a condominium easier.  There are arguments available to owners by which a condominium may have a fiduciary duty to seek FHA certification.  The condominium's approved status will be published, and FHA will be free to insure loans there.  To the extent that management or your board would like to secure FHA certification, Stark & Stark's Community Association, and Condominium & Co-Op, Groups are ready to discuss the relevant issues, and prepare and file the applications.  If you would like additional information, or to hear more about the FHA, condominiums and/or the certification process, please contact David J. Byrne  or A. Christopher Florio. 

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David J. Byrne, Shareholder and Co-Chairperson of Stark & Stark's Community Association Group presented materials related to lending-related guidelines and condominiums, during a seminar entitled "FHA, Fannie Mae & Freddie Mac:  New Guidelines Impacting Your Association". 

The presentation was made to the Pennsylvania and Delaware Valley Chapter of the Community Association Institute on February 18, 2010, in Mt. Laurel, New Jersey.  Mr. Byrne focused his presentation on the new guidelines issues by the Federal Housing Administration ("FHA"), the Federal National Mortgage Agency ("Fannie Mae") and Federal Home Loan Mortgage Corporation ("Freddie Mac") in relation to loans made in condominiums.  He explained the new guidelines, outlined the eligibility rules and discussed the requirements connected with FHA, Fannie Mae and Freddi Mac lending.

You can download the full presentation online here. (26.8 MB)

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A law pending in the New Jersey State Assembly would, if adopted, regulate condominium and homeowner association's hiring of vendors and would also address how to deal with potential conflicts of interest. 

Assemblyman Peter Biondi introduced a bill in January 2010 in which he stated that with the quasi governmental powers provided to associations should come standards of "fairness and due process."  The bill provides that associations should be held to similar standards of transparency and fairness.

As to the bidding requirements, Assemblyman Biondi is proposing to enact rules which would force associations to:
 

1. Obtain three quotes for any contract for services or materials whenever the amount payable by the association is over $10,000 in any 12 month period.
2. Use sealed bids with required specifications , to be opened only a publicly announced meeting for any contract that exceeds $25,000.
3. Award all contracts to the vendor that provided the lowest quote or bid, unless the board determines, for good cause, that accepting the bid would be detrimental to the best interests of the residents. 

Interestingly, any association with fewer than 30 units can, by resolution, waive any of these provisions. 

 

Although community associations are similar in many ways to government, the last thing any association wants to do is model itself after any level of government.  Government agencies are often marred by corruption, red tape, cost overruns and unnecessary levels of bureaucracy; things that most associations in New Jersey try to avoid.  On its face, obtaining three bids sounds like a reasonable and prudent business practice.  However, Board members are entirely capable of determining how many bids to obtain for a particular project or service, and obtaining three is hardly a panacea for problems that result from hiring the wrong contractor.  Moreover, obtaining three quotes may be impossible, for example, for an association that pursuant to the master deed must hire a property management company within 5 miles of the association, and only 2 fit that description.

 

However, when you get to section 3, the real problem is revealed.  Forcing associations to hire the cheapest vendor guarantees problems.  The old axiom, "you get what you pay for" has proven true over and over again.  Think about how well this formula has worked for the government.  The least expensive contractor has given us shoddily built schools, bridges and government buildings.  Why should associations model this behavior?  In fact, some governments have completely scrapped this program.  New York City and Camden both ended their lowest bidder programs (allowing for consideration of experience, completeness of the quotation, references, etc.) with shocking results: construction quality got better. 

 

If an individual association wants to enact such a rule, it is obviously free to do so, but the mechanism to prevent problems is already in place.  First, the governing documents of many associations require the approval of 2/3 of the homeowners to approve assessments related to work in a certain dollar amount.  Second, the system of goverenence itself ensures that if the Board makes a habit of hiring the first contractor to provide a bid, or is hiring friends and relatives who do shoddy work, then the unit owners have the right to vote them out of office during the next election.  Like most legislation, this proposed law is likely a reaction to one or two troublesome boards who made poor decisions, prompting an Assemblyman to react in such a way that will saddle all associations with unnecessary requirements which are likely to cause more problems than they cure.

As for dealing with conflicts of interest, Assemblyman Biondi is proposing that:

1. No member of the board or management can have an interest in any business which is in conflict with the proper discharge of their duties, including having a direct interest in any contracts for work or materials used by the association or any fees paid to a broker, architect, etc.;
2. No board members or managers can use their position to obtain any unwarranted privileges for any person;
3. No board members or managers can act in his or her capacity in any matter in which he or she, a related person, or any other person residing in his or her household or the household of a related person, or any business organization in which any of such persons has an interest, has a direct or indirect financial or personal involvement that might reasonably be expected to impair the objectivity or independence of judgment of the board member, employee or property manager.
    

Like most legislation, these may be obvious and proper rules to have.... until they are applied to the real world.  As with any law or rule, there are always unintended consequences.  If a Board Member's brother owns a painting business and can do a quality job for 15% less than the competition, shouldn't the Association be permitted to hire that person, provided the Board Member in question discloses this fact to his fellow board members?  Arguably, under section 3 of the proposed legislation, the board wouldn't even be permitted to consider hiring this contractor.  But under the existing Nonprofit Corporations Act, which applies to associations, such a contract would not be void solely due to the fact that a trustee has an interest in the contract or transaction, as long as the interest is fully disclosed to the entire board before they vote on the issue. N.J.S.A. 15A:6-7.  The proposed legislation would obviously conflict with the Nonprofit Corporations Act, causing further confusion for board members and homeowners. 
 

The legislature is trying to get boards and associations to act in a proper and more efficient manner, but the real way to accomplish this is to become active in your association.  Vote, attend meetings, provide feedback and be involved.  If the majority of unit owners are involved in the process, then the Board will be responsible for their decisions, they will consider multiple points of view and incompetent or untrustworthy board members will be voted out of office.   That way, each Association can make decisions that best fit their particular situation and are less likely to have unnecessary rules forced upon them.

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People commonly think of home ownership in the form of owning a single family house situated on its own parcel of land.  However, increasingly, condominiums, and to a lesser extent, co-operatives, are providing  alternative forms of home ownership.  What are these forms of ownership and what is the difference between them?

In New Jersey, condominium ownership is no longer unusual.  It is a form of common ownership in which title to individual units vests in each unit’s owner.  In addition, each unit owner also owns a percentage interest in the common areas which are shared by the unit owners, e.g.,  the land, building exteriors and any facilities for the unit owners’ common use.  Descriptions of both the individual units as well as the common areas are set forth in a Master Deed which is recorded in the County Clerk’s Office in the county where the condominium is situated.  Thus, condo owners own their unit plus a percentage interest in the condominium’s common areas. 

Co-operatives appear  more prevalent in New York City and North Jersey than Central Jersey. In this form of common ownership, the owner’s interest in an individual unit is held in the form of a leasehold interest.  The individual owner acquires a proprietary lease to his/her unit.  In addition, each unit “owner” owns shares of stock in the co-operative corporation which owns the underlying land and improvements on the land as well as those facilities intended for the common use of the owners of the co-operatives.  Co-op owners have a leasehold interest in their unit and their only ownership rights to the common areas are through ownership of  shares of stock in the co-op corporation which owns the common areas.

Condos  are managed  by  unit owners associations which manage the improvements for which they are responsible, i.e.,  the land and the common purpose facilities. Some co-ops are similarly  managed by associations.  In others, the co-operative corporation itself manages the land, and improvements it owns.  Both condo and co-op forms of ownership generally charge the owners of their units a monthly maintenance fee.   In condominiums, real estate taxes are assessed against the individual owners.  In co-operatives, however, real estate  taxes are assessed against the co-operative corporation, not the individual owners. 

Financing a condominium can be accomplished in the same manner as any other fee simple purchase, by mortgaging the unit owner’s interest in the unit.  However, since a co-op owner has a leasehold interest in his unit, lending institutions generally  require a pledge of the unit owner’s stock and an assignment of the leasehold interest as collateral.  Some lenders, however, now provide a leasehold mortgage.  For certain co-operatives created prior to 1988, financing may be difficult to obtain.

Condominium ownership is a form of ownership created by statute, and did not exist before 1970 when the Condominium Act, N.J.S.A. 46: 8B-1 et seq. was enacted in New Jersey.   Co-operative ownership was originally created in New Jersey under common law.  However, the Co-Operative Recording Act of New Jersey, N.J.S.A. 46:8D-1 et. seq. effective May 9, 1988 provided a statutory basis for the creation of co-operatives.  Pursuant to the 1988 law, a Master Declaration and Master Register of Units is recorded in the County Clerk’s Office to create the co-operative.  Unit transfers are accomplished by recording the proprietary lease or assignment of the lease.  Co-operatives in existence prior to the effective date of the Co-Operative Recording Act are not subject to these statutory provisions. 

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Community Association Property Managers ("CAPM") are much different than their "property manager" brethren.  In general, real estate property managers are responsible for ensuring that the apartment or condo building that they are charged with is functioning properly, much like a superintendent.  CAPM's on the other hand are fiduciaries of the properties that they manage.  They act on behalf of the Board on a myriad of issues.  They are the first line of defense and in some cases are the face of the community.  CAPM's contact, interview and bid contractors.   They enter into contracts on behalf of the Association.  They are responsible for the Association's finances, from tracking delinquent owners to paying vendors.  They are sometimes thrust into the role of mediator in attempting to settle homeowner disputes.  They are generally responsible for guiding volunteer board members in the procedures of the Association, and they are sometimes called on to interpret or explain the Association's governing documents or the law under which the Association is governed.  And yet, with all of this responsibility, community association property managers in New Jersey are not required to be licensed or certified.  There is no state-wide standard required for managers, no required training, no background checks, and no governing body charged with ensuring that managers have a minium amount of knowledge and/or experience.

In 2008 Senator Christopher Bateman sponsored a bill (S-759) that would certify Community Association Managers (anyone managing a condo, co-op or homeowners association), and would require anyone in the business of property management for common interest communities to be certified under standards created by the Department of Community Affairs consistent with already existing national standards.  The bill would not require certification, but would prohibit those without the certification from holding themselves out as being "certified" in the field of property management. The act would also require all Associations in New Jersey to hire only certified managers, and would require that the contract between the Association and the manager include the insurance, bonding and certification requirements.

 
The two year certification would require a mix of schooling and experience, and would then require that the applicant pass a written examination. Each certified manger would have to be bonded in the amount of $3,000. 

 
The requirements of the training and exam are likely to be similar to the National Board of Certification for Community Association Managers (NBC-CAM) which has created a certification for community association property managers.  This certification requires classroom study and an exam involving subjects such as governance and legal matters, budgets, reserves and assessments, risk management and insurance, maintenance, contracting and human resource management.  This certification, while obviously not a guarantee of superior service or compliance with each and every standard, at least sets a minium standard for those who enter this field. The certification also requires that managers:

• Be knowledgeable, act, and encourage clients to act in accordance with any and all federal, state, and local laws applicable to community association management and operations.
• Be knowledgeable, comply and encourage clients to comply with the applicable governing documents, policies and procedures of the Client Association(s) to the extent permitted by that Client.
• Not knowingly misrepresent materials facts, make inaccurate statements or act in any fraudulent manner while representing Client Association(s) or acting as a CMCA.
• Not provide legal advice to Client Association(s) or any of its members, or otherwise engage in the unlicenced practice of law.
• Promptly disclose to Client Association(s) any actual or potential conflicts of interest that may involve the manager.
• Refuse to accept any form of gratuity or other remuneration from individuals or companies that could be viewed as an improper inducement to influence the manager.
• Participate in continuing professional education and satisfy all requirements to maintain the certification.

Manager certification has been an issue since at least 1999 when the Assembly Local Government and Housing Committee discussed the pros and cons of such a certification, related to the proposed Uniform Common Interest Ownership Act. The current bill is presently being debated in committee, and mirrors a similar bill introduced by then Assemblyman Bateman in 2006.  The 2006 bill was abandoned before being put up to a vote of the Assembly.  However, now more than ever, this certification may be a necessary step in the field of community management.  There are new and larger associations cropping up across New Jersey, and more and more management companies being created to service these companies, some of which have no experience with condominiums, townhouses or cooperatives.  While obviously not a panacea, it would be extremely helpful to give the Board of Trustees a comfort level that the manager they wish to hire has studied specific issues and subjects that will enhance their ability to serve the community.  This is essential for volunteer, part-time Board Members who are often times unable to separate the good from the bad in the ever growing property management world.  It may also allow the quality CAPM's out there to further distinguish themselves from those who do not fully understand the full breadth of their position, or who are unable to properly service their community.

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The New Jersey Clean Energy Program administered by the New Jersey Board of Public Utilities through its Office of Clean Energy offers a host of financial incentives.  Among these is the Pay for Performance Program, which is funded by the societal benefits charge authorized by the New Jersey Electric Discount and Energy Competition Act.  Under this program, a qualifying utility customer may receive up to 50% of the total cost of energy-efficient measures recommended by an energy efficiency expert, also known as a program “partner,” who the customer selects from a pre-approved list, provided that the implementation of such measures will achieve an energy savings of at least 15%.  A customer participating in the Pay for Performance Program may also receive funds to offset the cost of the program partner’s services at a rate of $0.10 per square foot up to a maximum of $50,000 or 50% of the annual energy cost of the building or facility that is the subject of the application for benefits, whichever is less.  There are also advanced measure incentives for combined heat and power under the program.

In order to be eligible for the Pay for Performance Program, (1) an applicant must be a customer of a regulated electric utility and/or gas utility in New Jersey, including Atlantic City Electric, Jersey Central Power & Light, Rockland Electric Company, New Jersey Natural Gas, Elizabethtown Gas, PSE&G and South Jersey Gas, and (2) the project for which an application is made must consist of one or more commercial, industrial, institutional or multi-family residential structures having over 200 kW average annual peak demand electrical usage (if the buildings are preexisting) or having at least 50,000 square feet or more of planned conditioned space (if the project calls for new construction).  Individual buildings, as well as multiple buildings in complexes owned by a single person or entity, may qualify for benefits under the program provided that they meet the above criteria.  Condominium associations may also be eligible to receive incentives for energy-efficient measures relating to common elements under this program.

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It is common knowledge that exterior modifications in a community association must be approved by the board of trustees.  Right?  Well, except for certain satellite dish antennas which, by federal law, can be installed on exclusive use areas without pre-approval (Over the Air Reception Devices, (OTARD), 47 C.F.R. Section 1.4000),  and United States flags and certain signs of troop support (such as yellow ribbons) all of which may be displayed as long as there is no threat to public safety, necessary maintenance activities can be performed and the property rights of others are not impaired (Planned Real Estate Development Full Disclosure Act (PREDFDA), N.J.S.A. 45:22A-48.1 This New Jersey law also states that flags can be prohibited if they are displayed in a manner inconsistent with the federal flag Code or other laws or guidelines. ).  There is another notable exception to that “common knowledge”: solar collectors.  Effective August 2007, New Jersey law prohibits a community association from adopting or enforcing any “restriction, covenant, bylaw, rule or regulation prohibiting the installation of solar collectors on certain roofs of dwelling units” (PREDFDA, N.J.S.A. 45:22A-48.2).   The law only applies to the roofs of single family dwelling units which are not designated common elements and the roofs of certain types of townhouse units where repair is unit owner’s responsibility.  Associations still under developer control are exempt from the law.
 

While an association may not prohibit the installation of solar collectors on such roofs, it may adopt rules to regulate their installation and maintenance.  However, an association is limited to the following installation rules: 

1. The qualifications, certification and insurance requirements of personnel or contractors who may install the solar collectors;
2. The location where solar collectors may be placed on roofs;
3. The concealment of solar collectors’ supportive structures, fixtures and piping; and
4. The color harmonization of solar collectors with the colors of structures or landscaping in the development; and
5. The aggregate size or coverage or total number of solar collectors
    

Lest an association attempt to indirectly prevent solar collectors by strict rules, the law clearly prohibits rules in which the effectiveness of the solar collectors are significantly reduced or the cost of installing them is significantly increased.  An association may not adopt or enforce any rule which would “increase the solar collectors’ installation or maintenance costs by an amount which is estimated to be greater than 10 percent of the total cost of the initial installation of the solar collectors, including the costs of labor and equipment.”  Additionally, none of the rules regulating installation and maintenance of a solar collector on the roofs may inhibit the solar collectors from functioning at their “intended maximum efficiency.” 
 

It is important to understand that not all unit owners may be entitled under this law to install solar collectors.  And, while the law does limit rules restricting installations where permitted, an association can and should implement policies for solar collector installation and maintenance. Consulting with the association’s legal counsel is necessary to ensure that policies conform to the law.  No matter where you stand on solar collectors, having policies in place will help ensure that your community maintains consistent aesthetic standards.

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As we all know, New Jersey continues to be plagued by both a troubled real estate market and economy.  Our real estate market remains awash in homes either in foreclosure, or having gone through a foreclosure and subsequent sheriff's sale.   It also remains awash in unsold new construction, and an essentially non-existent new construction pipeline.  October's figures show a "mixed bag" as they say.  First, construction of new homes in the New Jersey region fell 18.8%.  This included a nearly 10% decline in the construction of single family homes.

 

Second, and on the other hand, for the first time in 2009, the number of residential foreclosure filings was lower than it was over the same period in October 2008.  Lenders started 4,991 foreclosures against New Jersey homeowners in October 2009, down from 5,262 during October 2008.  The October 2009 figures were also less than a height of 6,138 filings, from June 2009.   These two relate via home builders' likely reluctance to erect new homes in the face of the existing inventory of homes, much of which stemming from the availability of foreclosed homes.

 

The extent and progress of these foreclosures appears to be slowing as well via the numerous state and federal programs designed to help owners avoid foreclosure.  More than 2,600 New Jerseyans have received counseling through New Jersey's foreclosure mediation program.  Of the 2,600 that received counseling, about 1,450 cases have been completed and roughly half of those were able to remain in their homes.  The federal government reported recently that approximately 22,100 New Jersey homeowners have reworked their mortgages through the federal loan modification program.

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