What happens when common sense overrules Covenants and Design Standards?

As community association managers, we are contracted to inspect properties on a frequent basis, adhering to the language in the covenants that bind that association and issue violations in situations that breach those covenants. There are times when something might be ever so slightly outside of these guidelines and as such, falls into a “gray” area." The question becomes "Where do you draw the line with things of this nature?"

When something straddling that line arises, we typically first consult the board for their take. We try (and also advise the board) to look at the big picture and all of the possible outcomes. What consequences may arise if we decide to pursue this violation and take it as far as filing a lawsuit?

Remember that governing documents are very general and broad and require particular rules and regulations created by the board of directors to narrow them down. Also, these covenants and rules have to be followed consistently. If not, you have a selective enforcement issue where an owner could argue that you are picking on him and not on his neighbor: This could get really ugly in court!

We have witnessed certain cases where the association loses because they either didn’t have every fact straight or they were being too harsh on the homeowner. Recently here in Georgia, an owner decided to place a large American flag in his yard and was told by the association that it did not conform to the covenants and therefore had to be removed. This caused a huge uproar with the community and ended up on the local news. Adding fuel to the fire: The owner was a disabled vet showing his patriotism, and the ‘Federal Freedom to Display the Flag Act’ of 2005 allows everyone to display his flag in front of his home.

Something else to consider is that “times change”. Most governing documents were written 10, 15 or even 30 years ago. Some things that were standard practice then might not be so today. For example, some covenants might require a particular kind of material to be used on all homes - and now research shows that the material is deemed not as sturdy(or maybe even hazardous to your health). In a case like this, it’s not in the board’s best interest to push for continued use of this material.

The bottom line is that sometimes you have to pick your battles. Choose carefully when deciding to push an issue that may end up getting the association into hot water. When in doubt, consult with legal counsel. An attorney experienced in HOA laws will be able to decipher your documents and give you the best legal advice, based on what they see happening elsewhere. Having an attorney back you up provides the best ground to stand on when defending against attacks.

Going Cheap

New Board members may question the selection of vendors used for various projects in the community, looking for ways to cut costs.  Such inquiries can create friction with the more seasoned Board members, who feel their own judgment is being called into question. Its best to tackle this topic in the very first Board meeting:  Initially address any mistrust that otherwise could linger and poison otherwise productive meetings throughout the year. 

Here are questions to discuss with your new Board members, helping them consider different aspects of vendor selection.

Why not use a handyman to do basic electrical work around the property?  If damage should occur, days or months after the work is done, the Board can be held responsible for using an unlicensed and under-insured worker.  Also, it only takes a phone call from an upset resident to bring in a county inspector.  If the work is not to code, fines and penalties will rack up along with the demand to redo the work.  Also, if someone is injured in a dark area (because of improper electrical work) the Association may be the one funding a claim settlement, without the benefit of insurance.

Why not just force the handyman to obtain the property insurance and do work that doesn’t require a license?  Proper insurance coverage can be expensive, one of the reasons why handyman can do the work so cheaply.  All too often, false proof of insurance documents are provided, or the contractor cancels coverage immediately after being awarded a job, before any claims arise.

Why not have our manager, who is locked in at a fixed rate, go around and do basic maintenance (such as replacing light bulbs)?  This takes the manager away from overseeing critical issues, and also upsets homeowners unable to reach the manager quickly in certain situations.  Don’t under utilize your manager.

Why not have my fully-qualified friends or relatives do the work?  Besides a perceived conflict of interest for personal gain, you expose yourself to homeowner criticism if problems crop up.  It also creates opportunities for things to become ‘personal’, clouding your judgment and undue issues with your actions.

Why not have volunteers handle some of the duties?  The proper liability and workers compensation insurance needs to be in place, as waivers are not worth the paper they are written on.  Parts purchased down the street may not be commercial-grade, resulting in early wear-and-tear.  The volunteer may unknowingly be skipping crucial maintenance steps or fail to fully consider possible system failures.

Retaining the right person includes more than just price.  You are hiring for specialized knowledge, for proper safety, for efficiency, and for insulation against claims.  You get more than you paid for by not cutting contract corners.

Protecting Your Covenants

One Board member asks, “In your Board training class, you mentioned that a benefit of converting our community from a common law homeowners association (HOA) to a statute Property Owners Association (POA) permits us to rely on automatic statutory liens, rather than having to file paper liens on delinquent homeowners.  What if our Declaration of Covenants (CC&Rs) already says that we don’t have to file paper liens, even though we are not a POA?”

Great Question!  If your community is not submitted to the POA, then a paper lien is still required to protect the Association’s debt claims, regardless of what is written in your Declaration.  Your Declaration doesn’t overwrite the law regarding property lien notification.

There are certainly a lot of reasons to convert communities over to Georgia’s Property Owners Association Act (POAA), and we encourage all of our clients to take steps to gain such protection.  Here are some of its benefits:

• Creates certainty – HOA authority is constantly changing under court challenges, but more of your regulations are locked if you are operating under the POAA
• Explicitly states homeowner protection from being sued individually against claims others may make against the Association
• Provides 21 days notice - rather than the normal minimum 10 day notice - required for upcoming meetings
• Clearly allows you to hold renters liable for their actions
• Places prospective owners on constructive notice about assessments
• Shifts the burden of collection expenses onto the delinquent homeowner
• Automatic statutory liens established, so you no longer have to pay $200+ in legal fees filing paper liens
• Avoids lien invalidation due to accidental misspellings
• Buyer and seller jointly liable until all funds collected at closing
• Association may foreclose on HOA debt while leaving the home loan bank note in place
• Blocks a judge’s arbitrary waiver of late charges, fines and attorney fees
• Amendments to the governing documents can be applied equally to everyone, not just those that voted to approve an amendment
• Creates a one year time limit for challenges against amendments
• Establishes a range of 66% to 80% required approval for future amendments
• Any regulations that are a violation of federal/state law may be amended automatically without a community-wide vote (such as removing rules that are now considered Fair Housing Act violations)

If your community is currently operating under a common law HOA regime, get with your property manager and legal counsel to explore how you can enact the above protections!

Email Exchange

Anyone who has worked as a Community Association Manager (CAM) for any length of time knows that responding to homeowners as quickly as possible is key! A quick response time goes a long way in forming a homeowner’s impression of us as a manager, their impression of the company we work for and their impression of the Association we work with.  Over the years as technology has evolved, the many ways for a homeowner to make contact with his/her manager has also changed.  Most managers do the vast majority of communicating through email - so being cognizant of how email is used becomes very important.

Email is a great “written” record of the exchanges we share with anyone - homeowners, contractors, etc. It is so convenient to go to your archive to find exactly what was said, agreed to, promised, etc. Besides being mindful of your grammar, punctuation, etc., WHAT and HOW you say something is equally as important. How many times when looking back through an email (after the fact) have you been surprised at the content????  Sometimes you can unknowingly become engaged in a long email trail with an unhappy homeowner - and even the most disciplined and low key manager can find themselves in this position at one point or another.  However, in some instances, what starts as a simple reply to a question, request or concern quickly changes tone and turns into something you would never remain engaged in if the person was physically in your office.  

  

Here’s what is key – make every attempt to craft each email response with the understanding that, should your email be brought back to support a legal action, it will reflect nothing but the kind of professionalism valued in our industry.  Clear, concise information that sticks to the subject is best.  Address everyone in a respectful manner, using the same etiquette you’d expect of a business you would want to become involved with.

 

In the end, your participation in all exchanges will be seen as a straight forward, friendly and professional attempt to be of assistance and address concerns of the homeowners and Boards we all serve.  

Reserving Activity

One of our clients asked the following:  I know that we transfer a fixed amount into the reserve account monthly.  My confusion is handling excess operating income and properly reporting the funding of capital projects.  In years where excess revenue exists, do you do an end-of-year transfer to the reserve account?  Should all capital projects be placed in the operating budget?  If so, this will create a net deficit.  Does this mean that instead of having a monthly transfer into reserves we then have to transfer from the reserve fund back into operating?  I don't see the point in doing both.  If there needs to be a transfer from the savings/reserve account, does that take place monthly, as needed or end of year?

Should reserve activity be included in the operating reports?  Communities with large volumes of capital reserve work often set up a separate set of reports to keep up with reserve activity.  Smaller communities with no amenities frequently roll in all reserve activity on the regular operating budget comparison report.  The Board should select whichever method is the least confusing for it to follow.

How often should funds be transferred in to reserves?  For smaller communities, it makes sense to just do a single transfer of funds into savings at the end of the year.  Otherwise, it is best to schedule transfers to occur throughout the year.  Failing to plan is planning to fail, so Boards should actively plan for future large expenses by being disciplined in their savings pattern.

What about the problem of net deficits because of reserve expenditures?  If you are combining your reserve activities with you regular operating budget, your comparison report should have a sub-total line that captures the net effect of your regular day-to-day operating expenses, which hopefully is always a surplus.  If instead you are keeping track of capital expenditures separately, you definitely need a line item showing reserve fund transfers.  In either case, if there is a negative net total at the bottom of your report, this indicates that money is coming either from past year savings, or a bank loan.  You can trace this answer back to your balance sheet (the place that keeps track of all your money), under the line item ‘Net Income’, which should always match what appears on your budget comparison report.  

So why should we do transfers to a reserve account, if we are just going to move the money back to operating?  It used to be ‘standard procedure’ for communities to shuffle budget numbers to make it appear that money was being saved (and actually saving this money, not spending it on capital projects), when often there was no intention or ability to actually do so.  Bank loan underwriters are now savvy to this ploy, and have been rejecting home loans because of it.  Do not set up a monthly reserve transfer if you know that the money will have to be spent during the current annual operating cycle.

Obviously, financial reporting for an HOA or COA substantially differs from that of personal finances or even many for-profit businesses. It is extremely important to partner with a 3rd Party Expert (in this case a CPA) that actively deals in the Association industry. Reach out to your manager or your local CAI chapter for more info/recommendations!

D&O: Revisited

#1 Board/Director Rule:  Never serve on a Board of Directors for a community that does not have proper Directors & Officers (D&O) insurance coverage in place.  Without such coverage, money may not be available to defend you in the event that you are personally sued by an angry homeowner - leaving you potentially exposed to covering such costs out of your own pocket!  Of the different types of insurance communities need to carry, D&O is the least standardized. For instance, did you know there are three areas of coverage? 

• Side A coverage protects Directors from claims of wrongful acts when the Association refuses or is unable to provide indemnification
• Side B is for claims by the Association for money paid to indemnify a Board member 
• Side C is for claims by the Association against the Association itself.

Confusing? In addition, constant court challenges continue to add new wrinkles to how D&O is processed.  See how technicalities impacted three recent court decisions:

 

Internal lawsuit coverage

Normally, insurance cannot be used when parties within the same corporation are suing each other (ex: the Association suing an individual Board member, or Board members suing each other).  However, in Georgia this assumption has been weakened.  At the trial level, the D&O insurance carrier (St. Paul Mercury) obtained a judgment against the FDIC and former bank officers, barring coverage under the usual insured v. insured exclusion.  However, the Georgia appeals court reversed the ruling, saying that such exclusions are ambiguous under state statutes, and outside evidence might be necessary to determine intent.  

Timing of Contract

In a Rhode Island case (Transched Systems v. Federal Ins.), the insured client negotiated to sell its software products. Following delivery, the purchaser realized that the seller had breached the asset purchase agreement, and that the senior officers misrepresented the software.  Since the seller was no longer in business, the purchaser attempted to collect a judgment from the seller’s D&O insurance company, but was denied based on the breach of contract and other exclusions.  The court reversed this, saying that contract exclusion did not apply since the misrepresentations took place before the contract was formed.

Substandard Coverage

Over in Kentucky, (State Auto v Highland Terrace Counsel of Co-owners), Highland Terrace was sued by an owner trying to block a $700,000 special assessment.  The Association's D&O claim was denied by the carrier.   The court upheld the denial, since the underlying suit did not allege claims against the individual members of Highland Terrace for which the insurance could have had an indemnity obligation.  The State Auto D&O form did not provide entity coverage to Highland Terrace.

The above situations illustrate why it is critical that you use a professional insurance broker who regularly operates in the HOA industry – preferably someone who is active with the local Community Associations Institute (CAI) chapter.

While there will always be kinks in obtaining the best coverage possible, here are some ‘best practices’ you can implement to reduce risk exposure, according to insurance attorneys:

• Create term limits
• Locate and train Board volunteers with diverse sets of skills and backgrounds
• Evaluate the quality and effectiveness of Board meetings, including the use of agendas, the preparation and distribution of materials, and the timing and length of meetings
• Keep apprised of governance trends and legislation
• Develop and adhere to a code of ethics
• Develop and implement committees to oversee and monitor areas of potential liability, such as  director nomination, financial audits, and regulatory compliance
• Prohibit related-party transactions or require independent review of such transactions
• Maintain open and active homeowner relations

Financial Sense

Occasionally new clients or Board members express confusion about how community financials are reported.  For those of us working in the for-profit business world, using anything other than accrual-based accounting seems backward.

What is accrual accounting?   It is planning for the transfer of funds before they actually occur.  So, you report expected income a month or more in advance of when you actually receive money, and also post expenses for items that will come due at a future date.
However, for homeowner associations, there are downsides to this method:

• It may require that the financial books be kept open longer into the month so that bills can be received and properly accrued 
• It requires a higher level of accounting/bookkeeping knowledge to properly prepare financial statements 
• It can be more difficult for the layman user (most volunteer Board members) to understand
• Fraud/theft may take longer to detect

On the other hand, there is cash-based accounting, which is what most of us use for our personal banking.  Only at the time cash actually goes in or comes out of the bank are transactions recorded.  Delayed deposits or check payments result in an inaccurate picture of the financial status. A Board of Directors using this method may incorrectly assume that there is less or more cash, income and expenses than there actually is.

For small associations with very few transactions, the cash method of accounting may be appropriate. However, for most communities, most Georgia accountants feel that a modified cash method of accounting should be used.  The modified cash method is a hybrid between cash and accrual. There is no formal standard as to what items are modified, but common practice is to record income on the accrual method and expenses on the cash method. So you will only see accounts receivable on the balance sheet, not accounts payable.

This method of accounting is a valid option because most expenses are ‘standard’:  The majority of them occur on a monthly basis and are fairly static. Examples include utilities, management contract, pool and landscaping.   There really is no point in creating opportunities for error and confusion by accruing a future expense that rarely varies month-to-month!

When it comes to long-lasting (capital) assets like furniture, vehicles, tools & equipment, the depreciation question comes up.  Depreciation is a way of slowly reducing the value of these items, to spread an expense out over a period of years.  While it is possible to report this depreciation on the financials under any method of accounting, it is not typically done in not-for-profit associations.  The items in question are usually not integral to your core operations, and the main benefit of recognizing depreciation is during the tax season, which your CPA automatically handles for you. 

Another term you may hear mentioned when reviewing a Balance Sheet is the word ‘liability’.  This is just another way of saying ‘future expenses’.  Cash method financial statements generally do not list liabilities. While you may choose to list long-term liabilities (such as a bank loan) on a modified cash method statement, the balances often only update at year end, since the expenses are not accrued monthly or quarterly.

While the full accrual method is respected and has a valid place in for-profit corporations, for community associations CPAs recommend a K.I.S.S. (Keep it simple, stupid) approach by using modified cash to assist in understanding the financial health of your community. As always, please consult with your community's CPA about the benefits of all approaches prior to making any changes. 

Full Disclosure

New homeowner association clients occasionally ask, “Why do we need to provide the management company the bank statements for Board-controlled accounts, such as CDs or money markets?”  Since the management company doesn’t draw on these monies, the confusion is understandable.

Although not directly handling these funds, the management company is required to provide a full picture on the financial health of the community.  Incomplete disclosures impact several areas:

• Insurance.  The fidelity/crime coverage must be adjusted based on actual dollar amounts held.  Besides not receiving back all funds in the event of a loss, lenders may also refuse to provide home loans if the Association is under-insured in this area.
• Tax Returns.  These could be delayed or require re-filing if the CPA does not have full, timely access to bank statements of all assets.
• Homeowners & Lender Inspection Rights.  Georgia Statutes and the Association’s Bylaws require that financials be made available for review, often within five days of a request.  Providing inaccurate balance sheets (by not listing all funds) exposes the Association to potential litigation which may not be covered by the Directors & Officers (D&O) insurance carrier.
• Speaking of D&O:  Withholding account information may be considered a violation of fiduciary duty, which can be used as an excuse to deny coverage for any D&O claim, not just one directly related to financial disclosures.  It gets expensive litigating with the insurance company afterward, trying to reverse a denial of coverage.

To ensure information is getting forwarded to your management company in a timely fashion, be sure to notify all of your lenders to automatically mail copies of bank statements to the manager.  You want to reduce human error and avoid any appearance of impropriety:  Failing to fully disclose only raises red flags.

Condo Loans

HUD hands down stricter condominium lending regulations every year!  In September 2015, HUD stated that loan approval would not be granted for communities where the Declaration of Covenants gives the Association approval authority over leasing units.  During the question and answer session, it was added that the Association cannot have the power to evict tenants. 

Although not every single loan is directly tied to FHA/HUD, 90% of all loans are impacted.  Other lenders need to be able to sell their loans on the secondary market, which can’t be done unless they conform to FHA/HUD demands.  So unless you want cash-only home sales (i.e. slum lord investor owners) dominating your community, you should look to amending your leasing language.

Even for communities with pre-approval HUD/FHA status (which must be done every two years), we are seeing each new home loan being scrutinized for community restrictions.  It’s best to proactively address this situation, before an angry mob of homeowners shows up at a meeting, unable to sell their homes.  Hopefully, your governing documents give the Board of Directors authority to automatically amend to comply with federal regulations, without the need for a community vote!

HUD also clarified that the Association can:

• Restrict total number/percentage of units that can be rented 
• Maintain a hardship exception 
• Require the landlord to provide a copy of the lease 
• Require that the lease be on a specific form
• Set minimum and maximum lease periods 
• Require that the lease conforms to the Declaration 
• Require the landlord to check the Registered Sex Offenders list
• Require rent to be assigned to Association if the unit owner is delinquent
• Provide corporate leasing restrictions

The Association cannot: 

• Ban all leasing, except in age-restricted and affordable housing communities 
• Require the owner to live in the unit for X amount of years before being allowed to lease 
• Restrict leasing by delinquent owners 
• Require tenant interviews with the Board 
• Require credit references 
• Require criminal background checks (except for the Registered Sex Offenders list) 
• Be granted automatic power of attorney 
• Have the power to void leases
• Allow short-term leasing

As always, consult with the Association’s attorney before acting upon the above information.

Lending Restrictions

Worried about what trouble your future Board might create?  A great way to lock in good governing habits is with a bank loan.  Yes, a bank loan.  All those restrictions for an Association loan guarantee that no funny business will be happening under someone else’s watch.  Just make sure the loan includes the following:

The 'proxy put'   This provision allows the lender to immediately call the loan due if a majority of the Association's Board of Directors becomes filled with 'non-continuing Directors' that were not approved by the original Board members.  Take it a step further to a 'dead hand proxy put', which prevents current Directors from bestowing 'continuing director' status to any new directors seated via a contentious election.

Governing Amendment   The lender holds veto power over any changes to community regulations.  That smoking ban will just have to wait.

Annual Audits   No, the treasurer did not pay for that Porsche with community funds.  Conspiracies are a thing of the past, when you’re required to have a CPA touch the books every single year. 

Insurance coverage    No corner-cutting here.  Great way to ensure that D&O insurance, fidelity, and workers comp coverage - the three coverages that typically get neglected - are fully in place.

Self-Managed?  No way.  That lender is going to have the last say on any changes in professional management.  And self-managed always turns out to be more costly in the long run.

Minimum Annual Budget   Yep, put the kibosh on all those crazy candidate promises of ‘lowering assessments’.  A related requirement keeps wastrels from draining your reserve funds.

First priority asset status   This allows the bank to have first dibs over any money or property the Association holds or might hold in the future.  Since HOAs rarely actually own real estate, the next best thing is having rights to all future assessments paid by homeowners.

Collections  The days of “going easy” on deadbeats are over.  Your banker expects the community to hit delinquent behavior with both barrels.  Absolutely no write-offs of debt without prior approval!  Best of all, if the delinquency rates slip above 10%, the note is called due.

Cross Default   Not cross-dressing, but close.  If the Board stiffs the plumber, it’s an automatic bank loan default.  It is also a default for any other creditor to have the ability to elect a majority of the members of the Board.

The point is this:  Requirements like those above have ramifications most of us never guessed existed, so be careful navigating past potential problems.  When your community obtains a bank loan for a major renovation/repair project, be sure your attorney is heavily involved. 

Protect Yourself

Through the years this blog has covered several aspects of Board member liability.  One additional item for your consideration is the use of indemnification agreements.  These provide a more inclusive protection than what you might find in State statutes or your community's governing documents.  These agreements contain detailed procedures and time frames - and clarify the types of claims covered.  If you decide to utilize this option, consider clarifications in the following areas:

Expenses.  Protect yourself against expenses connected with any proceeding, by expanding the definition of “Expenses” to cover items often excluded in a D&O policy:   fines & damages, experts’ and arbitrators’ fees, bonds, settlements, and income taxes resulting from payments.  Proceedings should include any threatened or pending legal proceeding such as investigations, discovery requests, and administrative proceedings.

Fees-on-Fees.  Directors are not necessarily entitled coverage for legal costs needed to sue the Association to enforce your indemnification rights - be sure this is added! 

Insurance.  Require that the Association have its D&O coverage audited to obtain the highest quality insurance available in the homeowner association industry.

Express coverage for negligence.   An all-inclusive provision may be voided because it is overly broad.  Be sure that your agreement explicitly covers all negligence except gross negligence.   Here are a couple of court cases that talk about this quirk in Georgia law:  Service Merchandise Co. v. Hunter Fan Co   "Georgia courts never imply an agreement to indemnify another for one’s own negligence in the absence of express language.”    Satilla Community Service Board v. Satilla Health Services, Inc   "Contracts indemnifying one against the consequences of his own negligence are not favored, but will be given effect where the intent is expressed in plain and unequivocal terms." 

Procedures and Timing.  The agreement can require that the Association, when settling a claim against you, include an unconditional release from all liabilities relating to the proceeding, along with an acknowledgement that you deny all wrongdoing.  Require all indemnification payments be made within 30 days, and all advances within 20 days of a written request.   In the event of an adverse ruling, you can appeal, and be indemnified for all expenses.  Include a presumption in favor of indemnification, that you have met the applicable standards of conduct allowing for indemnification, and that a judgment, settlement, or criminal conviction does not create a presumption against indemnification.  And impose a reasonably short period on any claim that the Association might have against you.

It is important that you require immediate money advances to cover defense costs, regardless of whether you are the subject of a lawsuit, investigation or witness subpoena, with coverage continuing for your legal expenses - even after you leave the Board.

The above is not to be considered legal advice, and you should consult with a legal professional before acting. 

CAUTION: Insurance Ahead

"That's what insurance is for."   Uttered by a Board member after several 300-pound marble blocks plummeted from the sides of his condominium tower. 

What sounds like a punch line for a joke will punch a hole in your financials with this attitude.   A visit by the Association's attorney and insurance broker is vital so Boards can see how coverage is stripped away in these situations.  Insurance is not a 'Get out of Jail' card when you turn a blind eye to dangerous situations. 

Such coverage is provided with the understanding that you take steps to avoid having to use it.  A review recent lessons learned shows what happens if we’re not careful:

Confirm that you are only using top-rate insurance providers. Mountainside Holdings v. American Dynasty Surplus Lines   In this situation, the umbrella insurer (the one providing additional money beyond the limits of the regular liability insurance) did not have to pay when the primary insurance went bankrupt.  The additional coverage would only have kicked in if the underlying coverage had actually been paid out.   

Check your policy for 'consent-to-settle' restrictions.  Piedmont Office Realty Trust, Inc. v. XL Specialty Ins. Co   In Georgia, proceed carefully when settling claims against where policies include consent-to-settle and no-action provisions.  In this case, the umbrella carrier for the D&O (Directors & Officers) coverage refused to cover for the full settlement amount, since it had previously already agreed to only contribute $1 million.  The client settled a suit for $4.9 million, and then tried to claim this amount against the umbrella policy, saying the carrier unfairly withheld consent.  The appeals court said that settling without first obtaining consent means you forfeit coverage and are barred from suing. 

The clock doesn't stop if years pass between 'same claims'.  W.C. and A.N. Miller Dev. Co. v. Continental Cas. Co   An adversarial proceeding held years ago had enough similarities to a lawsuit brought years later to effectively be the same claim. A claim doesn't need to be covered in your insurance for it to be classified as an “Interrelated Wrongful Act” and be treated as a single claim.

Always notify your insurer the first time round.  Hamman-Miller-Beauchamp-Deeble, Inc. v. Liberty Mutual Agency Corp   A broker received letters from an attorney claiming that a client suffered damages due to the broker's negligence. The broker waited until he was served with an actual lawsuit almost two years later before notifying his insurer.  The broker argued that the attorney letters didn't constitute a claim triggering reporting requirements. The court disagreed, since the letters said the broker was “legally responsible for...damages” making this a demand for damages.  

Don't take any action outside of your Board duties when dealing with the Association.   The Langdale Company v. National Union    This Georgia case reemphasizes the need to clearly operate only within your Board capacity.   Not having a clear delineation allowed the insurance carrier to claim a Director was operating in an uncovered capacity.  Because of this, the insurance could not be tapped by the corporation or other Board members to cover expenses.

Insurance companies are in the business of making money, so review the insurer terms with an expert to make sure you understand when you can and cannot rely on such coverage.

The Science of Forgiveness

As much as we try, it is difficult for Board members and managers to ‘let go’ when dealing with a homeowner or vendor that has wronged us or our community.  While no one is suggesting we blissfully ignore misdeeds and idiots, to forgive is critical to healthy community oversight.  Festering anger only clouds judgment and leads to burnout. 

‘Forgive’ has religious connotations for many.  However, whether or not you are a person of faith, over the last decade the physical and social benefits have been confirmed too often to be ignored. 

Getting scientific for a moment: Functional Magnetic Resonance Imaging (fMRI) brain scans traced forgiveness to the dorsal prefrontal cortex (for cognitive control), the posterior cingulate (for understanding how others are thinking) and the anterior cingulate cortex (for balancing the perception and suppression of moral pain (such as feeling wronged)).  From this, neurologist Dr. Pietro Pietrini notes that forgiveness is a moral distress painkiller.

Dr. Pietrini states, “The fact that forgiving is a healthy resolution of the problems caused by injuries suggests that this process may have evolved as a favorable response that promotes human survival.”  Forgiveness alleviates suffering.  It is a positive, healthy strategy for overcoming an otherwise stressful situation. 

In trauma burn units, anger interferes with the ability to heal. One doctor counseled a patient, “You can still pursue damages through an attorney. You’re entitled to be angry, but for now I’m asking you to abandon your entitlement and let it go, to direct your energy toward healing, and turn this over to God or nature or whoever you worship. It’s not up to you to get revenge on yourself or someone else.”

Another medical example:  In 2009 the journal Psychology & Health reported that patients with heart disease who underwent forgiveness therapy experienced higher blood flow and were at less risk of pain and sudden death, compared to those who underwent the standard treatment.

According to Professor Fred Luskin of Stanford University, “When you don’t forgive, you release all the chemicals of the stress response.”  Think about a wrong twenty times today, and your body releases stress chemicals each time, limiting both your physical and mental ability to tackle problems.

Reframe that painful memory by considering possible points of view that led the homeowner or vendor to act the way he did. This makes it more difficult to blame and demonize him, reducing the level of resentment you are feeling.

When you blame someone for how you feel instead of holding them to account for their actions, you become stuck in victimhood.  We’ve all experienced the same thing, and to get past it you have to accept that most often the person wasn’t intentionally out to personally hurt you.  How we’ve been dealing with anger hasn’t worked.  Instead, humanize the offender, and hate the wrong without hating the wrongdoer.

End Goals

We are frequently asked for advice on how Board meetings should be run.  One of the most critical pieces relates to strategy/goals.  Strategic thinking determines what we’re doing and where we’re going. To be successful, Directors must have a clear answer for both.

As a Board member, you must continuously engage in strategic planning - not just once a year.  It must be the central focus of each Board meeting.  It is really hard to create sustained, long-term value for your community when the Board (and homeowners) are blinded by short-term views.

Boards are most effective at developing strategies when partnered with a professional manager, working together based on mutual trust and respect. This means coming together throughout the year to identify important topics, consider strategic risks, and answer hard questions. Management by itself cannot conclusively cover everything in goal planning – but benefits from the collective wisdom of the Board.  

It is critical that all Board members understand the Association’s strategy and can articulate it consistently when responding to homeowners’ pointed questions and pressures.  There should be no surprises with a fully involved Board.

Placing education and discussion on strategy development into each agenda must be your priority.  All too often, the Board allows itself to get bogged down on governance and compliance issues.  Push as many of these items to your committees for processing.  If you don’t have committees, establish resolutions that capture the bulk of the situations dealt with by the Board, so management can proceed on autopilot.  

When it comes to the meetings, all Directors must arrive prepared, with all applicable materials reviewed in advance.  Plan to regularly include third-party experts for additional perspectives at your meetings.  A CPA, attorney, engineer or insurance broker provides an outside voice identifying potential disruptions to your goals.

You need to be talking about risks associated with your strategy and how these can be mitigated.  Effectively managing risks more than just protects value:  It actually helps create value by taking advantage of the unexpected.  You want to maximize opportunities and improve your community’s position compared to competing neighborhoods.

Manage this strategic risk by answering, “What is the amount of risk we’re willing to accept in pursuit of value?  What is the worst possible thing that can happen and still leave us standing?  What milestones do we need to check along the way to our five year goal?” While some things should not be changed (ex: always deposit money with FDIC-insured institutions), decisions on expansions and upgrades to the amenities are valid considerations.

The Board and management should be prepared to regularly readjust key assumptions.  Every goal has variables requiring mid-course changes.  Are you willing to alter the way you evaluate performance whether your plans exceed or fail to meet your initial expectations?

Final thought:  When bad decisions meet a good management team, the bad decisions win every time.  Don’t be quick to pin blame.  When things go wrong, take a deep breath and analyze the situation before making changes.

Quality Management

Our reality TV culture has only increased expectations for immediate responses to all of our demands.  Very few professions can continue to respond at the same pace as they did forty years ago.  Those of us in service-related industries are pushed the hardest.  And while automated attendants have growing capabilities to handle this environment, human interactions are still very necessary.

This demand for instant satisfaction comes at a price many aren't willing to pay, both in salary and in sacrificed private time.   The problem is this:  How do you expect to have a fully competent professional agree to 24/7 access at minimal rate wages?  Obviously, the answer by many industries is to outsource to other countries with lower living standards.  However, for those services requiring frequent personal interaction, such as in the medical or legal fields, you as the consumer can only push so far before the quality of service suffers.

The same holds true in the community association management industry.  While some parts of the United States understand and pay for quality management with salaries in the six-digits, other areas view management as an administrative only function.  In these suppressed regions, managers make half what their counterparts earn elsewhere, and turnover is horrendous.   Many new managers leave the industry within a year, and those that remain behind often are living in financial slavery.  The growing resentment and stress lead to behaviors that result in poor quality service, only reinforcing the cycle of keeping quality management out of the local market.

This must stop.  While very little is new under the sun, here are specific steps to manage our fast-paced world, and retain a growing pool of professionals:

Turn off the email.  The worst thing is walking out the door at the end of the work day stressing over some last-minute message that ruins your evening.  At least an hour prior to departure, turn off your email and work on projects.  Ditto with phone calls.  And don't check your smart phone for messages after work.

After-hours on-call.  Set up a rotating shift to handle evening and weekend demands.  It's better to have a few weeks of year where you have to handle all messages for the firm, if it means peaceful sleep for all those other weeks. 

Everything has a price.  You don't have to say 'no' to your client, but do set a price.  Sure you can stay for a long meeting, for an additional charge.  Sure you can take on a project, for an additional charge. 

Evaluate your clients.  Healthy growth requires pruning.  If a particular client is placing your reputation at risk, or is refusing to heed your advice, terminate the contract.  There is plenty of other business to be had, with those who will respect what you bring to the table.  If a client is soaking up lots of time, increase the rate.  In one instance, a client agreed to doubling the management fee in order to keep a quality manager in place.  It can be done.

Refuse abuse.  The client is NOT always right, and if the staff knows that the firm stands behind it, retention rates will soar.  A manager needs to know that it is okay to escalate a situation to higher management without being penalized.  Don't sacrifice a manager to retain a problematic client.

They are watching.  Support your managers.  Whether it is with a family emergency, education opportunities, or providing the latest technologies, loyalty is something that grows over time, but can be lost in an instant.  Be consistent in both your messages and actions.