At the LSMCA Annual Meeting on November 7, some information was announced that will make a significant difference to about 800 LSM residences, whether they are members of the LSMCA or not. Those 800 households, which are primarily around the large St. Mark golf course, the Malls, and lakefront properties including those adjacent to the Malls, have Covenants, Conditions and Restrictions (CC&Rs) which are currently enforced by the LSMCA’s Architectural Control Committee (ACC).
At the meeting Treasurer Harry Bubnack gave an accounting of the significant legal expenses incurred in the past two years by the LSMCA, and the resulting dramatic increases in the LSMCA’s insurance premium and deductible, which are not sustainable. President Adela Franco then announced that the LSMCA Board of Directors, after consultation with our attorney, Ken Lounsbery, has made the decision to begin the process of reassigning enforcement of those CC&Rs to the individual homeowners of the affected properties. The details of this process have yet to be worked out. The CC&Rs will remain in effect for those properties. The LSMCA will continue its other functions in the expectation that without the risk associated with CC&R enforcement, the insurance premium and deductible will be reduced to a sustainable amount.
This decision will have no affect on the other approximately 1,600 homes in Lake San Marcos, most of which are in HOAs which enforce their own CC&Rs.
Below are the presentations given by Treasurer Harry Bubnack and President Adela Franco at the Annual Meeting.
In 2017, Jeff Jenco on San Julian Lane filed a law suit against Graham Bunney, their neighbor, in a dispute over the location of the wall separating their properties, and a golf cart garage built on the wall. The Bunneys countered with a law suit and filed a cross complaint against the LSMCA claiming the LSMCA lowered the value of their property, because the Architectural Control Committee approved a Jenco remodeling project. At mediation our insurance company ordered the acceptance of a settlement. The outcome of the settlement was that the covenants and the CC& R’s were upheld and the decision to approve the Jenco project was confirmed. Our insurance carrier paid out $109,730 toward the settlement. Our legal fees to answer this complaint was $12, 940.
For several years, CDC and many other parties have been embroiled in a lawsuit, triggered by an order from the State, to address the quality of the water in the lake. One of those parties is Hollandia Dairy Company, which has been cited for allowing water to run-off into to the Lake. Hollandia issued a subpoena in November 2017 to LSMCA asking questions about our role in the water quality dispute dating back to 2004. The subpoena requested that LSMCA and the Lounsbery Ferguson Altona & Peak Law firm turn over all documents relating to the enforcement of the CC&Rs, including any and all documents, referring to fertilizers, nutrients, environmental contaminations, sediment prevention, and removal since the lake was formed. Since Mr. Lounsbery, our attorney, also is the counsel for the City of San Marcos, a party to the lawsuit, he was not able to represent us. Therefore, we engaged Tyson & Mendes, the firm who represented the insurance carrier in the Jenco/Bunney case. The LSMCA submitted 180 documents and the Lounsbery firm turned over 300 documents to answer the subpoena. To date the association and our residents have been outside the circle of responsibility regarding water run off to the Lake. The LSMCA paid a total of $16,750 in legal fees to answer this subpoena. We have been informed by Tyson & Mendes, our attorney, that the Hollandia subpoena has been closed.
On April 15, 2018 we received notice from our insurance carrier that our directors and officers liability insurance was being canceled on May 15th. After being declined by 26 insurance carriers, we finally received an offer on May 14, one day before our insurance was cancelled, the premium was $15,000 a year with a deductible of $75,000 which meant that if sued we would pay the first $75,000. In addition, we were able to get trail insurance, for $2,027, which provides coverage for the years prior to settlement of the law suit.
Since 2017 we have paid the following
Legal fees for the Jenco/Bunney law suit $ 12,940
Legal fees for the Subpoena $16,750
Directors & Officers Insurance $17,207
Total $ 46,897
As of November 2018 we have $35, 890 in our liquid accounts, compared to $65,619 in 2017. The Community Association is in a very vulnerable financial position since our reserves are depleted and we are faced with high directors and officers insurance in the future, as a result of enforcing the CC&Rs. The cost of the Directors and Officers Insurance is not sustainable and needs to be reduced.
You have heard the Treasurer’s report by Harry Bubnack. As you can see, the payment of increased insurance premiums, coupled with a large deductible, is just not a sustainable approach to our budget.
We’re advised that the increase in coverage costs is due almost exclusively to the enforcement responsibilities of the Association’s Architectural Control Committee. While the ACC has had a long history of the successful defense of our community CC&R’s, it comes at a price, and that price cannot be continued. So, we’ve consulted our general counsel for alternative solutions, which I would like to outline here.
The initial option was to propose a working relationship with CDC. The proposal – LSMCA would partner with CDC, continuing to perform all the responsibilities of the ACC, but CDC would be our alter ego and would take over the responsibility of insurance coverage. The plan would return the community to the practice when the Frazars, the original developers, performed the functions of the ACC. It seemed to make sense because the standards of the community would be upheld, thereby protecting CDC’s investments in the Lake, the two golf courses, and the hotel. By its non-response, CDC seemed uninterested.
The second solution considered was to propose a revenue generating structure that would make it possible for the LSMCA to bear the cost of enforcing the covenant. The revenues would have to come from the owners of those properties that are subject to the CC&Rs. Imposing such a fee structure could only be accomplished by an amendment of the CC&R’s requiring a vote of all the homeowners affected. (These would include the homes on the large golf course, the Malls and some of the lake front properties.) The obvious problem was immediately identified. A vote by property owners to “tax” themselves is doubtful to succeed. And the doubt is increased by the inability to accurately predict the amount of the fee required. This alternative seemed untenable.
The final option became the solution by default. The LSMCA would relieve the ACC of the responsibility for enforcement of the covenants. The obligation of enforcement would become the duty of individual homeowners. The CC&Rs would remain in full force and effect, but enforcement of their terms would become the right of any homeowner whose property is protected by the covenant.
For the reasons stated with regard to options one and two, the LSMCA Board is reporting its selection of the third option. LSMCA is seeking the direction of counsel to determine the fairest means of effecting the change, which needs to happen before May, 2019, when the insurance coverage must be renewed. HOAs will continue to enforce the CC&Rs for the homes in their area.
You will be advised of the steps being taken to transfer the enforcement of the CC&Rs as they are being implemented.