efficient - State Representative Sara Feigenholtz

Excerpts From
PUT YOUR BEST FOOT FORWARD
a book by Dimitrius and Mazzarella, 2002
Learn to listen•
•
•
•
•
•
•
•
•
•
Listening makes others feel important
Listening encourages others to listen to you
Tips for good listening:
Don’t interrupt
Avoid distractions
Be an objective listener
Be patient
Actively participate
Prompt others to talk
Be direct and responsible
Decide how you want to be regardless of how you are treated•
•
•
•
•
Don’t set double standards
Do the right thing
Be thoughtful
Show consideration for others
Respect others privacy
Vocal emotion•
•
•
•
•
•
•
•
•
Volume
Tone and itch
Pace
Other qualifications:
mumbling
rough voices
whining
pretension
breathiness
Toxic Traits
•
•
•
•
•
Offensive physical acts
Unappealing word usage
Insensitive communication
Aggressive behavior
Pettiness
Dimitrius, Jo-Ellan, Ph.D, and Mark Mazzarella. Put Your Best Foot Forward: Make a Great Impression by Taking Control of How
Others See You. New York, NY: Simon & Schuster, 2002. Print.
A PLETHORA OF PERSONALITIES UNDER ONE ROOF or THE WHITE
ELEPHANT IN THE ROOM NO ONE WANTS TO TALK ABOUT
In an Illinois case concerning an owner's claim of abuse of board authority the court
quoted from a long ago case as follows, "I think a Florida appeals court said it best some forty
years ago. In the 1971 case of Stirling Village Condominium Association v Breitenbach, the
court said: "Every man may justly consider his home his castle and himself as king thereof;
nonetheless is sovereign fiat to use his property as he pleases must yield, at least in degree,
where ownership is in common or cooperation with others. The benefits of condominium
living and ownership demand no less. The individual ought not be permitted to disrupt the
integrity of the common scheme through his desire for change, however laudable that change
might be."
Once in your home you are free to be whomever you want. In the common areas and
during community events the goal is to be objective and focused on the collective issues and
concerns. Buying into a condominium form of ownership requires each member understands
this. There is no I in team, member or board. Think of your association as a color printer,
sometimes it has just four colors; sometimes more ...these are the personalities in an
association. The ink comes out as tiny dots on the page and the colors combine to create a
clear image.
Unlike our printers some of these personalities dominate our meetings and exchanges
and often times muddy and off color the purpose of these events. Many times displeasure of the
board, their actions or policies is the mantra of members who don't participate creating havoc
among the membership. Board members who hold similar disdain for the members and only
hear their own words and ideas are just as guilty.
While the concept of working together eludes some, others understand that getting
along means understanding, respecting and appreciating the differences among us as well as
utilizing each of us as fully as possible. Dale Carnegie wrote, "When dealing with people let us
remember we are not dealing with creatures of logic. We are dealing with creatures of
emotion, creatures bristling with prejudices and motivated by pride and vanity." And, in the
book, "Getting to Yes" by Fisher and Ury, it is stated that, "The goal is not to eliminate
conflict but to transform it. It is to change the way we deal with our differences-from
destructive, adversarial battling to hard-headed, side-by-side problem-solving. We should not
underestimate the difficulty of this task, yet no task is more urgent in the world today." (Refer
to CAI article, In Harm’s Way, Common Ground™, March/April 2013).
Bottom line, it's not about winning, it's about solutions. It is important that everyone in a
community separate themselves from their personal positions and focus on the concerns and
interests of the community. Factions fighting over what they believe is the right decision
instead of the best decision for their community results in hasty and reckless outcomes as well
as endangering the cohesiveness and well-being of a community.
© 2014 This article is not intended as advice. Please arrange your legal services through Sima L Kirsch, PC
4831 North Bell Avenue Ste 2 Chicago, IL 60625 - Phone (773) 784-2883 - [email protected]
The first place to start developing this mindset is before the decision to purchase in a
condominium community begins. Recognize that what exists when you're looking to purchase is
subject to change and decisions may not always be unanimous. If you don't like rules, the glue that
holds an association together, well just maybe, this isn't the place for you and you most certainly
shouldn't hold a seat on the board. If you decide to make the purchase you will have a happier
experience, a happier life, figuring out how to become part of the solution not the problem.
Understand, it all begins with the members. In the very beginning, before a turnover, there are
members. Members, that before becoming members, signed a contract that pledged their allegiance to
the Illinois Condominium Property Act, the declaration of the community they will live in, their by
laws, CCR' s, all collectively known as the operating documents and the rules and regulations. At
turnover, members step up and volunteer or are elected to become the first owner led board. It is at this
point that the path an association will take is formed; sometimes if the path is derailed a future board
will put it back on track. In any case the path toward good governance and building a successful
community is in educating the board and its members on a regular ongoing basis in the ways of running
an association, in addition to practicing good citizenship and leadership.
Although in theory everyone seems to understand these goals at the time of purchase
somewhere along the way from the closing table to moving in, the message is lost. The members
of an association and its board would do well to have a synergistic relationship. An educated
member exercising good citizenship supports an educated board and vice versa. Each group
needs to function under the same terms to have the type of community they envisioned when
purchasing their unit. Boards and members alike must be compassionate and kind, gracious,
interested and attentive, humble and modest. There is no place for the know it all, whether a
member or on the board, that is boastful, dominating or critical.
Unfortunately the list of bad habits displayed by members and boards alike is long and
their effect is devastating. Members that monopolize meetings, disrespect other owners and the
board, disregard rules, are quick to judge the efforts of others yet fail to volunteer, come to
meetings or participate are just as harmful to the life of the community as the renegade board
that fails to give proper notice, passes specials contrary to restrictions, skips elections, does not
aggressively collect assessments and fails to appropriately plan and adequately communicate
important decisions.
Creating the community you want will require work on everyone's part and in the long
run will be beneficial to all. The funny thing about all of this is, just as the good witch Glinda
said to Dorothy, '...silly girl you always had the power to get back home". Take off those rose
colored glasses believing it's not your responsibility, it's someone else's and that includes other
owners aside from the board and hunker down to the task at hand. Aside from conforming your
behavior to the standards set out above, there is a correct and best way to follow. It is what's
called in the industry, "best practices" in creating harmony and running the business. Creating
this environment takes everyone's cooperation and members and board learn how to do this
through education and a re-commitment to the laws and rules they originally subscribed to.
Whether you are on the board or one of the members living in a community environment it's all
about responsibility, and being held to that responsibility. Don't think it will happen any other
way
Associations would be well served if one of the conditions to purchase is the signing of
a code of conduct and each new board member is also made to enter into a code of conduct. It
2
seems neither group feels it has the teeth, although not true, to take action under current law.
Next a well drafted purposeful communication policy goes a long way toward creating a
healthy relationship between members and the board and solves many of the issues that plague
their relationship. It is a key piece in establishing general operational protocol. These policies
set limits and boundaries, times the board will be available to work on association business,
where communications should be directed and the form of communication and deadline for
submitting items to consider placing on the agenda. Other learning opportunities exist with a
new owner orientation and welcome basket for owners and tenants, annual signed renewal
statements, a state of the association review at the annual meeting including updates in the law
and a review of your operating documents and any changes.
One of the most important tool, if not most important, an association has at its disposal
is a well drafted set of policies and procedures and housekeeping rules. These policies provide
certainty, order and safety. Policies and rules only become troublesome when they are abused,
created for non issues, passed improperly or without sufficient notice or to satisfy the interests
of the board du jour. Rules are necessary as long as they address a real concern or need
connected to an interest of the community. Rules are an association and board's friend, they
provide a basis for protecting members' equity, protecting the health and safety of the owners
and occupants and by setting expectations of behavior for everyone: in essence, they provide
the framework within which people can live in harmony in a group situation. For a purchaser,
the rules describe the standards of life-style of that particular community. Unfortunately most
prospective purchasers don't read them and only find out after the fact the constraints on their
individual freedoms.
Every board member should strive to set an example for the other board members and
the owners. One out of control board member can destroy years of hard work, put the board at
odds with each other and disrupt the groups harmony. Then there's the hoarder that won't share
any of their work product, not to the board or owner's. Owners in this situation seem to be at a
loss and helpless. They spend their time looking for outside sources to help. In fact the
operating documents provide the frame work for accomplishing this. Recognize that your
association is designed to run like a miniature government. As with our state and federal
elections, if a board member is not meeting their duty, and there are sufficient grounds to
remove them, then organize and do just that. Call a special meeting, provide an agenda and
questions you want answered in advance to avoid the tactic of surprise, and then attempt to
resolve the problem in the open meeting, peacefully, bring someone to mediate if necessary. If
a code of conduct is in place that officer may just need to step down or other members of the
board when they feel supported may just vote the bad seed off the board. If all else fails hold a
second meeting immediately following the first meeting for election of a new board.
Successful leaders on the other hand are doers, they lead and don't push. They are open
minded, educated to the ways of condominium life and rules, support and empower others,
appreciate others, show respect for others. Successful leaders embrace the differences of their
members, are not judgmental and take into account the needs of the whole, without losing site
of the objective. In essence successful boards build strong partnerships which in turn create
successful associations. Be kind to each other, support each other, look for the goodness and
commonality among you, keep the common interest in the forefront, personal positions in the
background. In the words of the 14th Dalai Lama, ''the true essence of humankind is kindness."
3
SIMA L KIRSCH PC
ATTORNEYS AT LAW
5 TIPS FOR RUNNING A SUCCESSFUL ASSOCIATION
1. Remind owners you’re not required to have a consensus. To do this re-set expectations; create
clear regulations and policies to establish uniformity of operation that works for your group,
explain you’re going to follow the operating documents, the law and best practices. Have an
annual session for this purpose and lay it all out. If the group understands what is happening, and
what is expected many issues fall away. Remind them, if they want to know more or have more
input they can sign up for a committee or even run for the board.
2. Communication (limited, regular-according to your rules and the law, and strategic) is key ...
no one likes to get blindsided. Members are more likely to accept changes when they are aware
of them from the beginning, have an opportunity to become involved in a dialogue, and
understand the basis of the decision. While transparency is a best practice, the board should not
release its internal discussions or opinions. State the issue, open it for discussion, have a second
discussion, if needed and then take the vote.
3. Just because the previous board did it, does not mean it is correct. When a transition occurs,
the new board cannot escape its fiduciary duty by merely saying that's the way we've always
done it. A transition review of the state of the corporation and its operational systems is an
exercise in best practices.
4. Revise you operating documents now, before an issue arises. Many associations’ operating
documents are outdated and/or contain provisions unfriendly to current circumstances. It is
difficult to get enough votes to amend them when no issue exists and almost impossible when a
community becomes divided over an issue.
5. There’s something called the Business Judgment rule, rely on it. What does it mean? Hire a
professional for specialty specific work. A board is not expected to do all of the work, only
oversee that the work being done is accurate. A board should have a financial expert (CPA) to
consult and rely upon; with assets and liabilities that belong to everyone they shouldn’t play
around. You can rely on your attorney's opinion. The rule protects boards that rely on legal
advice given by their counsel. Board members should take advantage of this whenever
possible. A board that understands and applies the Business Judgment rule with their practices is
a best practices board.
© Law Offices of Sima L. Kirsch, P.C 4/2013
This article is not intended as advice. Please arrange your legal services through Sima L. Kirsch, PC
4831 NORTH BELL AVENUE STE 2 CHICAGO ILLINOIS 60625
P: 773.784-2883
F: 773.784-2882
[email protected]
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Top Five Things Lawyers Wish Boards Knew
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While some condos and HOAs are lucky enough to have lawyers serve as
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members of their board, the majority of boards don’t have an in-house
other means.
The problem is that sometimes the board will reach out too often, calling
attorneys about things the board should already know, or which have nothing to do with the lawyer, or
that are just variations of the same questions that are asked over and over. Then there are those boards
that don’t call their lawyers enough, and try to do things on their own that they really shouldn’t be.
It depends on the lawyer and the attorney-client relationship, but a competent lawyer needs to be
prepared to give difficult advice to the board members if the actions are not in the best interest of the
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We polled some area lawyers to come up with a list of the “Top 5 Things Attorneys Wish Boards Knew.”
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Often times, boards make the mistake of taking legal matters into their own hands in an effort to save
funds. However, this is a misstep that can lead to financial woes much greater than the cost of
Recent Comments (all Articles)
professional counsel.
“Every association should have an attorney upon whom they can rely for advice,” Mark Roth, an
attorney and partner with the Chicago law firm of Orum & Roth, LLC, says. “A good attorney well-versed
in association law will generally save the association much more than the cost of that lawyer’s advice.
Most experienced association attorneys are able to answer a board’s more routine questions in a
relatively short period of time. Boards should consult their association attorney before a contemplated
actions is taken— not after,” he adds.
Coping With Arrears
5
Patrick Shaughnessy
As a 10+ year plus board member I support Mr. E
The Paper Trail
Gary Schwartz
Recently, the Illinois Supreme Court rendered an
To Ban or Not to Ban?
What good is having proper representation if you don't take full advantage of it? While your attorney is
surely an expert on all things community association related, he or she is not omniscient. It's therefore
vital for boards to keep counsel updated on any questions or concerns members might have. Doing so
John Cabral
I liked this article because it ends by recommend
The Play's the Thing
Furious
Our Association is small but children are not allo6
can prevent unnecessary litigation expenses in the long run.
“There’s no such thing as a bad question, or a dumb question when it comes to what the declaration
provides or what the rules provide,” says James Stevens, senior counsel at the law firm of Tressler LLP
in Bolingbrook. “A lot of times, I’ll see perfectly well-intentioned boards go down the wrong path when
the declaration requires something else—maybe doing something at an owner’s meeting versus a board
meeting, and not seeing that distinction. And unfortunately, we might have to go back and the board
might have to redo its decision when a very simple question could have been asked.”
Legal counsel is not the only guidance a board needs. Charles M. Keough, a partner with the law firm of
Keough & Moody, PC in Chicago, recommends hiring added help such as an engineer and an
accountant.
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Calendar of Events
Sunday, February 16
According to attorney Sima L. Kirsch, whose practice is Sima L. Kirsch PC in Chicago, “Hire a
professional for specialty specific work. A board is not expected to do all of the work, only to oversee
that the work being done is accurate. A board should have a financial expert (CPA) to consult and rely
upon—with assets and liabilities that belong to everyone, they shouldn’t play around.”
“You can rely on your attorney's opinion,” Kirsch says. “The Business Judgment Rule protects boards
Showing events after 2/16.
Look for earlier events
5
Thursday, February 20
8:30am
Maintenance Mornings - Plumbing 2014
Tuesday, February 25
that rely on legal advice given by their counsel. Board members should take advantage of this whenever
7:00pm
possible. A board that understands and applies the business judgment rule with their practices is a best
Thursday, March 6
ACTHA Seminar: "Elements of Good
practices board.”
8:00am
Bright Future for Best Practices
Friday, March 7
Change it Up
6:30pm
Boards might find themselves stuck in a rut due to following previous members' footsteps too closely.
Thursday, March 13
Don't get caught in the trap of picking up old members' bad habits. If something is broken, fix it, Kirsch
7:00pm
IREM Premier Awards 2014
6
ACTHA Seminar: “Physical Aspects of an
urges,
“Just because the previous board did it does not mean it is correct,” Kirsch says. “When a transition
occurs, the new board cannot escape its fiduciary duty by merely saying, 'That's the way we've always
done it.' A transition review of the state of the corporation and its operational systems is an exercise in
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best practices.”
◦ Q&A: Waiving Warranty of Habitability?
Kirsch also recommends keeping on top of operating documents, and recommends revising them
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before an issue arises.
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“Many associations’ operating documents are outdated and/or contain provisions unfriendly to current
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circumstances,” he says. “It is difficult to get enough votes to amend them when no issue exists and
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almost impossible when a community becomes divided over an issue.”
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A Failure to Communicate
As any couples' counselor will say, strong and steady communication is essential to a successful
relationship. This sentiment applies to the board/owners relationship as well.
“Communication is key—no one likes to get blindsided,” Kirsch says. “Owners are more likely to accept
changes when they are aware of them from the beginning, have an opportunity to become involved in a
dialogue, and understand the basis of the decision.” “While transparency is a best practice,” he
continues, “the board should not release its internal discussions or opinions. State the issue, open it for
discussion, have a second discussion, if needed and then take the vote.”
This leads to a frequently asked question: What is the best way for a board to be transparent?
Be Transparent
The best way to ensure owners feel like they are clued in to the happenings of the association is to make
meetings as open and accessible as possible, Roth says. This includes not holding meetings
unannounced to owners and making minutes available, whether it be through publishing minutes on a
website, posting them on the property or sending them via email at owners' request.
Before sending out meeting minutes, make sure they are drafted correctly, as to minimize confusion
and maximize clarity.
“Board meeting minutes should contain such standard information such as the date, start time and end
time, and place of the meeting; and the board members who attended or were absent,” Roth says. “The
meeting minutes should contain motions, votes and points of order. Finally, if there is an important,
potentially contentious decision one board member may want to explain the thought process behind the
board’s decision. For example, if the board is voting to take out a loan to pay for a project, the board
may want to explain the results of any professional inspections necessitating the project, the number of
lenders that the association contacted to discuss loan terms, the general terms of those loan proposals
and the rationale for selecting the particular lender. That information may properly be included in the
board minutes.”
http://chicagocooperator.com/articles/629/1/Listen-Up/Page1.html
2/16/2014
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Setting boundaries with owners is another important step in creating and maintaining transparency.
Newspapers
■ The Cooperator (NY)
“Remind owners you’re not required to have a consensus,” Kirsch says. “To do this, re-set expectations.
■ The New Jersey Cooperator
Create clear regulations and policies to establish uniformity of operation that works for your group.
■ New England Condominium
Explain you’re going to follow the operating documents, the law and best practices. Have an annual
■ The Chicagoland Cooperator
■ The South Florida Cooperator
session for this purpose and lay it all out. If the group understands what is happening and what is
■ The Western & Central Florida Cooperator
expected, many issues fall away. Remind them, if they want to know more or have more input they can
sign up for a committee or even run for the board.”
Choose a
Liaison
Want to know what irks a lawyer almost more than anything? It’s when several people from a board call
about the same matter or when three different board members reach out on the same day to discuss
three different issues.
“I think a liaison can be very useful as long as that person is diligent about sharing the attorney’s
feedback with the other board members and that the person is also diligent about getting input from the
other board members too,” Stevens says. “You don’t want to have the attorney liaison from the board be
the only person that knows what’s going on with legal concerns. It can be very helpful and does save
some attorney time because there are not 45 different questions coming in from each board member.
The communication has to be free flowing both ways for it to really work well.”
By doing so, it provides a much more structured flow of information to the board and keeps the
attorney better in the loop.
.Keith Loria is a freelance writer and a frequent contributor to The Chicagoland Cooperator.
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RIGHTS AND RESPONSIBILITIES
Perhaps the greatest achievement for any association is creating and
sustaining a sense of community among residents and leaders. This goal is
best achieved when homeowners, non-owner residents and association leaders
recognize and embrace their rights and responsibilities. It was with this goal in
mind that CAI developed Rights and Responsibilities for Better Communities. These
principles can serve as an important guidepost for board and committee members,
community managers, homeowners and non-owner residents.
Rights and Responsibilities for Better Communities
EVERY COMMUNITY has
Principles for Homeowners and Community Leaders
its own history, personality,
Homeowners have the right to:
attributes and challenges, but
all associations share common
1.
A responsive and competent community association.
2.
Honest, fair and respectful treatment by community leaders and managers.
3.
Participate in governing the community association by attending meetings,
serving on committees and standing for election.
4.
Access appropriate association books and records.
5.
Prudent expenditure of fees and other assessments.
6.
Live in a community where the property is maintained according
to established standards.
7.
Fair treatment regarding financial and other association obligations,
including the opportunity to discuss payment plans and options with
the association before foreclosure is initiated.
8.
Receive all documents that address rules and regulations governing
the community association—if not prior to purchase and settlement
by a real estate agent or attorney, then upon joining the community.
9.
Appeal to appropriate community leaders those decisions affecting
non-routine financial responsibilities or property rights.
characteristics and core
principles. Good associations
preserve the character of
their communities, protect
property values and meet
the established expectations
of homeowners. Great
associations also cultivate
a true sense of community,
promote active homeowner
involvement and create a
Homeowners have the responsibility to:
culture of informed consensus.
1.
Read and comply with the governing documents of the community.
2.
Maintain their property according to established standards.
The ideas and guidance
3.
Treat association leaders honestly and with respect.
conveyed in this brochure
4.
Vote in community elections and on other issues.
speak to these core values
5.
Pay association assessments and charges on time.
and can, with commitment,
6.
Contact association leaders or managers, if necessary, to discuss financial
obligations and alternative payment arrangements.
7.
Request reconsideration of material decisions that personally affect them.
8.
Provide current contact information to association leaders or managers to help
ensure they receive information from the community.
9.
Ensure that those who reside on their property (e.g., tenants, relatives and
friends) adhere to all rules and regulations.
inspire effective, enlightened
leadership and responsible,
engaged citizenship.
Community Associations Institute | www.caionline.org
Community leaders have the right to:
6.
Conduct open, fair and well-publicized elections.
1.
Expect owners and non-owner residents to meet
their financial obligations to the community.
7.
Welcome and educate new members of the
community—owners and non-owner residents alike.
2.
Expect residents to know and comply with the
rules and regulations of the community and to stay
informed by reading materials provided by the
association.
8.
Encourage input from residents on issues affecting
them personally and the community as a whole.
9.
Encourage events that foster neighborliness and a
sense of community.
3.
Respectful and honest treatment from residents.
4.
Conduct meetings in a positive and constructive
atmosphere.
10. Conduct business in a transparent manner when
feasible and appropriate.
5.
Receive support and constructive input from owners
and non-owner residents.
6.
Personal privacy at home and during leisure time in
the community.
7.
Take advantage of educational opportunities (e.g.,
publications, training workshops) that are directly
related to their responsibilities and as approved by
the association.
Community leaders have the responsibility to:
1.
Fulfill their fiduciary duties to the community and
exercise discretion in a manner they reasonably
believe to be in the best interests of the community.
2.
Exercise sound business judgment and follow
established management practices.
3.
Balance the needs and obligations of the community
as a whole with those of individual homeowners
and residents.
4.
Understand the association’s governing documents,
become educated with respect to applicable state
and local laws and manage the community association
accordingly.
5.
Establish committees or use other methods to obtain
input from owners and non-owner residents.
Community Associations Institute | www.caionline.org
11. Allow homeowners access to appropriate
community records when requested.
12. Collect all monies due from owners and non-owner
residents.
13. Devise appropriate and reasonable arrangements,
when needed and as feasible, to facilitate the ability
of individual homeowners to meet their financial
obligations to the community.
14. Provide a process residents can use to appeal
decisions affecting their non-routine financial
responsibilities or property rights—where permitted
by law and the association’s governing documents.
15. Initiate foreclosure proceedings only as a measure
of last resort.
16. Make covenants, conditions and restrictions as
understandable as possible, adding clarifying “lay”
language or supplementary materials when drafting
or revising the documents.
17. Provide complete and timely disclosure of personal
and financial conflicts of interest related to the
actions of community leaders, e.g., officers, the
board and committees. (Community associations
may want to develop a code of ethics.)
GOVERNANCE GUIDELINES
CAI developed the Community Association Governance Guidelines to help
community association boards govern fairly, responsibly and successfully.
Embracing these 12 basic principles can help any association board increase
harmony, reduce conflict and build a stronger, more successful community.
Community Association Governance Guidelines
1.
Annual meetings. Conduct at least one membership meeting annually, providing at least two weeks notice to
homeowners and more than two weeks if specified in the governing documents or dictated by state statute.
2. Assessments. Collect assessments and other fees from homeowners in a timely and equitable manner and in
accordance with state statutes and board-approved procedures.
3. Communication. Provide at least one form of regular communication with residents, and use it to report
substantive actions taken by the board.
4. Conflicts of interest. Disclose all personal and financial conflicts of interest before assuming a board
position and, once on the board, before participating in any board decisions.
5. Elections. Hold fair and open elections in strict conformance with governing documents, giving all candidates
an equal opportunity to express their views and permitting each candidate to have a representative observe the
vote-counting process.
6. Financial transparency. Share critical information and rationale with residents about budgets, reserve funding,
special assessments and other issues that could impact their financial obligations to the association. Give members
an opportunity—before final decisions are made—to ask questions of a representative who is fully familiar with these
financial issues.
7. Foreclosure. Initiate lien and foreclosure proceedings only as a last step in a well-defined debt-collection
procedure—and only after other, less-disruptive measures have failed to resolve a serious delinquency issue
in a specified period of time.
8. Governance and the law. Govern and manage the community in accordance with all applicable laws and
regulations. Conduct reviews of governing documents to ensure legal compliance and to determine whether
amendments are necessary.
9. Grievances and appeals. Allow residents to bring grievances before the board or a board-appointed
committee and follow well-publicized procedures that give residents the opportunity to correct violations before
imposing fines or other sanctions.
10.Records. Allow homeowners reasonable access to appropriate community records, including annual budgets and
board meeting minutes.
11. Reserve funding. Account for anticipated long-term expenditures as part of the annual budget-development
process, commissioning a reserve study when professional expertise is warranted.
12.Rules. Uniformly enforce all rules, including architectural guidelines, but only after seeking compliance on a
voluntary basis. Distribute proposals for new rules and guidelines to all homeowners and non-owner residents.
Advise them when the board will consider new rules and encourage input. Once adopted, new rules and effective
dates should be distributed to every owner and resident.
Note: Laws governing common-interest communities vary considerably from state to state. Association boards should consult
with attorneys to ensure their association is governed in accordance with all federal, state and local laws and regulations.
Community Associations Institute | www.caionline.org
MODEL CODE OF ETHICS
CAI developed the Model Code of Ethics for Community Association Board
Members to encourage the thoughtful consideration of ethical standards for
community leaders. The model code is not meant to address every potential
ethical dilemma but is offered as a basic framework that can be modified and
adopted by any common-interest community.
Model Code of Ethics for Community Association Board Members
Board members should:
Board members should not:
1.
Strive at all times to serve the best interests of the association as a whole regardless of their personal interests.
1.
2.
Use sound judgment to make the best possible
business decisions for the association, taking into
consideration all available information, circumstances
and resources.
Reveal confidential information provided by contractors
or share information with those bidding for association
contracts unless specifically authorized by the board.
2.
Make unauthorized promises to a contractor or bidder.
3.
Advocate or support any action or activity that violates
a law or regulatory requirement.
4.
Use their positions or decision-making authority for
personal gain or to seek advantage over another
owner or non-owner resident.
3.
Act within the boundaries of their authority as defined
by law and the governing documents of the association.
4.
Provide opportunities for residents to comment on
decisions facing the association.
5.
5.
Perform their duties without bias for or against any
individual or group of owners or non-owner residents.
Spend unauthorized association funds for their own
personal use or benefit.
6.
6.
Disclose personal or professional relationships with
any company or individual who has or is seeking to
have a business relationship with the association.
Accept any gifts—directly or indirectly—from owners,
residents, contractors or suppliers.
7.
Misrepresent known facts in any issue involving
association business.
7.
Conduct open, fair and well-publicized elections.
8.
8.
Always speak with one voice, supporting all
duly adopted board decisions—even if the board
member was in the minority regarding actions that
may not have obtained unanimous consent.
Divulge personal information about any association
owner, resident or employee that was obtained in the
performance of board duties.
9.
Make personal attacks on colleagues, staff or residents.
10. Harass, threaten or attempt through any means to
control or instill fear in any board member, owner,
resident, employee or contractor.
11. Reveal to any owner, resident or other third party
the discussions, decisions and comments made at
any meeting of the board properly closed or held in
executive session.
CAI provides learning opportunities for community managers, homeowner volunteer leaders, association residents
and service providers. Visit www.caionline.org/education to learn more.
Community Associations Institute | www.caionline.org
COMMUNITY ASSOCIATION FUNDAMENTALS
1.
Associations ensure that the collective rights and interests of homeowners are respected and preserved.
2.
Associations are the most local form of representative democracy, with leaders elected by their neighbors to govern
in the best interests of all residents.
3.
Associations provide services and amenities to residents, protect property values and meet the established
expectations of homeowners.
4.
Associations succeed when they cultivate a true sense of community, active homeowner involvement and a culture
of building consensus.
5.
Association homeowners have the right to elect their community leaders and to use the democratic process
to determine the policies that will protect their investments.
6.
Association homeowners choose where to live and accept a contractual and ethical responsibility to abide
by established policies and meet their financial obligations to the association.
7.
Association leaders protect the community’s financial health by using established management practices and sound
business principles.
8.
Association leaders have a legal and ethical obligation to adhere to the association’s governing documents and abide
by all applicable laws.
9.
Association leaders seek an effective balance between the preferences of individual residents and the collective rights
of homeowners.
10. Association leaders and residents should be reasonable, flexible and open to the possibility—and benefits—
of compromise, especially when faced with divergent views.
ABOUT CAI
With more than 32,000 members dedicated to building better communities, CAI works in partnership with 60 domestic chapters, a chapter in South Africa and housing leaders in a number of other countries. In addition to providing
information, education and resources to those involved in community association governance and management, CAI
also advocates on behalf of common-interest communities before legislatures, regulatory bodies and the courts.
We believe homeowner and condominium associations should strive to exceed the expectations of their residents.
Our mission is to inspire professionalism, effective leadership and responsible citizenship—ideals reflected in communities that are preferred places to call home.
Learn more at www.caionline.org/aboutcai, or start getting member benefits immediately
by joining at www.caionline.org/join.
www.caionline.org
(888) 224-4321
HOMEOWNERS ASSOCIATION CODE OF CONDUCT FOR DIRECTORS
The Homeowner Association Board of Directors has approved the following code of conduct
for its members in order to ensure that they maintain a high standard of ethical conduct in the
performance of the Association business, and to ensure that the residents maintain confidence in
and respect for the entire Board. The following principles and guidelines constitute the code of
conduct:
I agree to serve on the board of directors for (“Association”), and to be guided by the following
principles:
•
To attend and participate in all meetings and communications to the best of
my ability to be present.
•
To respect parliamentary procedure at all meetings; refrain from speaking
out of turn; and participate in a business-like manner.
•
To maintain confidentiality with respect to the board’s executive session
meetings, including any related discussions or other communications.
•
To accept the board’s decisions even if I disagree, because I understand there
may not be unanimous support for every action taken by the board and to
not act individually without consent of the board.
•
To promote the goals and interests of the Association in a constructive
manner, and not to create unnecessary conflict among the homeowners.
•
To disclose to the board and in the meeting minutes any financial conflicts of
interests.
•
To avoid writing, publishing, or speech making that defames any other
member of the Association Board or resident of the Association community.
•
To do my best to ensure that the Association’s finances are well managed.
•
To uniformly enforce the covenants and other governing documents.
•
To never solicit or accept, directly or indirectly, any gifts, gratuity, favor,
entertainment, loan, or any other thing of monetary value from a person
who is seeking to obtain contractual or other business or financial relations
with Association; to influence a decision or action; or for being a director.
•
To place the best interests of the Association, of a particular homeowner; or
the interests of a faction of homeowners above my personal interests or
opportunity for gain.
•
To resign from the Board if I find I cannot maintain this agreement to serve.
Any Board member who violates this code of conduct agrees that the Board of Directors
may seek injunctive relief against him/her and agrees to pay the attorney's fees incurred
by the Board in that enforcement effort.
Signed this day of
, 20
Signature:
© 2013 Law Offices of Sima L. Kirsch, PC. This form is being provided for general information and does not
constitute legal advice. Please contact an attorney with your legal questions. [email protected]
HOMEOWNERS ASSOCIATION CODE OF CONDUCT FOR OWNERS
Homeowners have responsibilities, too. There is conduct homeowners should always follow,
along with conduct to be avoided:
Be engaged. Keep your contact information and that of a tenant current. Attend
meetings. Participate, and when asked, whether it's to vote, to respond to a request or to
volunteer; do it otherwise the task of running the association rests with a few; losing the
benefit from the wisdom of diverse voices and opinions.
1)
Read your governing documents. These documents form the framework that everyone
in the association must live by and follow.
2)
Comply with your governing documents even when you disagree. Rules allow
everyone to enjoy the community. Following rules also helps when you want the boards help
with an issue. Not sure whether something you want to do is permissible; ask before acting.
3)
4)
Pay your assessments timely. An association is a not-for-profit business that has fiscal
obligations. Delinquent assessments directly affect monthly operations and limit the board in
its attempt to maintain and enhance the community. The benefits you get from your
association, whether heat and lighting or the beautiful grounds that surround your home the
association pays to provide them. If you don't pay, services suffer and everyone loses.
Support your board of directors. This may sometimes be hard, and in some
communities, an us versus them mentality can develop. But for a community to be
successful, everyone needs a "we" mentality. Remember that board may make decisions that
inconvenience a few homeowners, but they're made based on the long-term good of the entire
community. Anyway there is usually a process to dispute rule changes in your governing
documents; if you have an issue follow them, don’t harangue the board.
5)
Be professional, follow communication protocols. If you're supposed to contact your
manager with a problem, don't call board members. Or if you're having a personal dispute
with a neighbor, don't ask anyone to take sides. Treat your neighbors, the board, and manager
with respect and decency. Never make personal attacks, harass or defame your board,
manager or other residents. Even when you disagree, there's no need to be disagreeable.
6)
Extend common courtesy toward your neighbors. Be considerate about things like noise
levels. Don't do things that will impose a burden or expense on your community or other
owners. For example, don't remodel your unit and throw the debris in the community trash.
Many associations have rules about trash and refuse.
7)
8)
Get to know everybody. Be on a first-name basis with your board members, your
manager, and your neighbors so that you feel comfortable calling to report problems, ask
questions, and offer to help. Knowing what's going on with your neighbor is the first step
toward knowing what's going on in your community. The more that people within the
association respect each other, the better the experience will be for everyone.
Signed this day of
, 20
Signature:
HOAleader.com/2014 Plain English Media, LLC
Board of Directors Commonsensical Checklist
1. Know your responsibility as board members.
2. Educate members on association life.
3. Prepare owners for tough times.
4. Board blues, talk to the owners.
5. Provide easy document access.
6. Don’t play favorites.
7. Move fast if owners are delinquent.
8. Keep delinquencies from affecting your insurance coverage.
9. Don’t scrimp on insurance.
10. Think long range.
11. Don’t minimize problems.
12. Plan for trouble, know your trends.
13. Make your budget process transparent.
14. Invest your reserves wisely.
15. Protect your reserves.
16. Prevent repeat offenses with smart fines.
17. Don’t waive your right to enforce your rules.
18. Protect your association from unruly renters.
19. Bid out ongoing contracts every year.
20. Review and modify contracts where necessary, before signing, this includes your
management company and lawyer.
21. Get signed contracts.
22. Don’t give up all your leverage before its over.
23. Protect yourself from contractors with lien waivers.
24. Don’t get into tax trouble.
25. Trust but verify your management company’s promises.
26. No quorum, push proxies or electronic voting.
© 2009 Law Offices of Sima L Kirsch, PC
This checklist is not exhaustive and is not intended as advice. Please arrange your legal services
through Sima L Kirsch, PC
[email protected]
The UnOccupy Movement
It's not unusual for associations to be left without any board members. But the show
must go on. Here's how.
By Debra H. Lewin
Reprinted with permission from CAI’s Common Ground TM magazine, July/August 2013
What happens to a community association when each member of its board resigns during an
open meeting? Sound far-fetched? Not at The Pines at Dickinson Condominium in Columbia,
Md. Few associations lose their boards so theatrically, but attorneys report receiving this
question on a regular basis.
"With the housing downturn and the economy the way it is, we've gotten the question again and
again: 'What happens if all the board members resign?' " says Brian D. Moreno, an attorney with
Richardson Harman Ober in Pasadena, Calif.
The Pines, a 256-unit community, found out when a dissatisfied homeowner circulated a written
list of complaints against the board. Marsha Broaddus, who was vice president at the time, says
the board countered with a reply. Homeowners ignored the response and an unruly mob showed
up for a forum in June 2011.
"The room was packed that night. People were loud and aggressive, and we were unable to hold
our meeting," says Broadus, who admits she knew little about her responsibilities and agreed to
serve on the board simply because no one else would.
Overwhelmed and frustrated, the untrained and relatively inexperienced board members went
down like dominos, resigning and walking out one after the other.
Manager Kim D. George, CMCA, AMS, with Community Association Management LLC in
Stevenson, Md., turned to the association's governing documents and the Maryland
Condominium Act for guidance. "Both were silent on any process or procedure for electing an
entirely new board," she says.
The bylaws were not just silent, they were frustrating. Like many documents, The Pines' bylaws
stated that remaining board members should fill board vacancies by appointment. What
remaining board members? There were none left.
The association's attorney, P. Michael Nagle, principal of Nagle & Zaller in Columbia, Md., says
the Pines' governing documents "completely controlled" board elections. And apparently
prevented them at the same time.
The bylaws stated elections were to be conducted at the annual meeting, but that was five months
away. Nagle, a CAI past president and a member of CAI's College of Community Association
Lawyers, advised George, "It is crucial to the lawful operation of the condominium that an
elected board is in place at all times." The Pines couldn't wait to elect new leaders. A special
meeting was needed. Now.
And who had the authority to call a special meeting? The nonexistent board or 25 percent of
members.
Collecting signatures from that many owners is labor intensive and time consuming—especially
in large condominiums, where ownership turns over with some frequency. The longer it takes,
the more likely it becomes that those who already signed will sell, rendering their signatures
moot. The process can drag on, making a member petition unsuitable if you're in a hurry.
Nagle was in a hurry. "The exigencies of the current circumstances do not allow this provision
(of the bylaws) to be followed to the letter ... (and) the condominium should not await the time
necessary to obtain owner signatures on a petition," he wrote.
Percentage requirements for member petitions vary widely between states. Maryland's 25percent requirement presented an unacceptable obstacle. But Moreno says this wouldn't be a
problem in California, where only 5 percent is sufficient for members to petition for a special
election. If the association can't or won't react to the petition, then any one member may petition
a court to hold the special election.
Under the circumstances, if Nagle couldn't follow the letter of the bylaws, he nevertheless
adhered to their intent: The Pines' bylaws required the association to have a management agent
who would "perform such duties as may be specified by the ... board." In his opinion,
management, which had been contracted by a properly seated board, could call a special
meeting. "(Nagle's) instruction about procedures was essential to elect directors as quickly as
possible," George says.
Not to mention as inexpensively as possible.
Controlling Costs
Chad J. Toms, Esq., of Whiteford, Taylor & Preston in Wilmington, Del., says he always tries to
find the most efficient way to make things work with the least cost to the members. "Even to the
point of identifying all available options, including those that might not withstand the scrutiny of
a challenge in court," he says.
The alternative, which would withstand a challenge in court, is neither quick nor inexpensive.
The association would need to petition the court to appoint a receiver, who would have authority
to govern and manage it. Receivers typically are attorneys who charge the association for their
services and may hire others to assist. The receiver would conduct an election and get the
association's affairs in order—all for a price.
According to Toms, a court in New Castle charged an association $64,000 for such services,
since the association apparently "was unable to govern itself." (See Common Ground, Sept/Oct
2012, p. 59.)
Toms says when associations in Delaware are without a board, they tend to be small and lack
professional management and big budgets. "Unfortunately, in those situations, a community can
go a couple of years without a board, and only when a problem arises will a volunteer step
forward and say, 'OK, I'll be elected.' The elections are not what I would call by the book, but if
they're not challenged, there's rarely a problem."
According to Moreno, "If you have a situation where no one is paying insurance, no one is
keeping up the common areas and the whole place is in shambles, then the county or city—
depending on the jurisdiction—could initiate a court process to take over the association. That's
an extreme example. But the point is, if members don't take action to govern the association, it
will be in the city's hands or in receivership. It's a big penalty for members because it's very
expensive."
The Pines was never in danger of such an extreme and expensive outcome because of Nagle's
professional expertise and George's continued vigilance while the association was in limbo. "The
property was maintained, safety issues were addressed, and the well-being and financial welfare
of the community were never in jeopardy," says George.
Some homeowners were uncomfortable with the amount of responsibility management had.
"This was difficult for them once they realized they had no voice and no decision-making
powers," George says.
To reassure homeowners, she provided daily updates on operations. "I understood and
appreciated the individual concerns," she says. "I assured them I was handling their property as I
had over the years and that had not changed."
"Kim went out of her way to keep us informed," says Anna M. Smith, the association's
newsletter editor of eight years.
Solutions
It's a bit disconcerting to imagine an association functioning without leadership. But since it isn't
entirely unheard of, should anything be done to address it?




Prevention is always better than the cure. Associations must find ways to cultivate
qualified candidates and make board service fulfilling. See Volunteers: How Community
Associations Thrive for a few tips.
Board or association members can refuse to accept a director's resignation until a
replacement has been appointed. According to Toms, "Directors serve until their
successors are elected and qualified or until they resign or are removed. In the absence of
an election, the former board has an obligation to remain." Unless the governing
documents impose term limits, directors can stay on beyond their terms.
Developers might consider drafting—and attorneys might consider amending—
governing documents in ways that allow flexibility for associations struggling to fill
board positions. "As a practical matter, it's a good way to address it. If it's in the
documents, you don't have to spend the money to go to court," says Moreno.
There also may be value in professional association directors, according to Moreno. "In
the event there are no board members, and you need someone to step up to the plate,
perhaps you can have a paid board member." That is, of course, if the governing
documents don't preclude such solutions; some require board members to be association
members, and some don't allow board members to be paid. Amending provisions like
these might allow associations more flexibility.
As for The Pines, a new board was elected within six weeks, and Smith became the new
president. She credits Nagle's "tremendously helpful" advice and says, "George was particularly
invaluable to us during this period."
More importantly, George says, "The homeowners rallied to gain back their community." They
nominated a record number of candidates and attended the special meeting in record numbers. It
was the first time George had seen the association achieve a quorum since her company was
hired.
Debra H. Lewin is senior director of CAI Press.
© Community Associations Institute. The above article is reprinted with permission from Common Ground™
magazine, published by Community Associations Institute. Further reproduction and distribution is prohibited
without written consent. Go to www.caionline.org for more information.
By David Mack
Is theWorst Really Over?
Checking the Financial Health of Community Associations
As part of the research for this article I went to an early spring board meeting
I
of the condominium association in which I live to get an idea about how it
was doing financially in the distant aftermath of the collapse of the housing
market and the ensuing financial crisis.
In attendance were four board members and a representative of the management firm as well as
about ten residents of our seventy two unit community, which is laid out in six, three story, twelve unit
buildings.
A number of mundane issues were discussed including landscaping, parking lot resurfacing and a
scheduled power washing of the buildings. It was a fast moving session that seemed likely to end in no
more than one half hour despite a number of comments and complaints from the homeowner's gallery
that had been invited, welcomed and responded to.
Then just as the meeting was drawing to a conclusion I brought up a matter that the board
apparently was reluctant to discuss in the open forum. "How are collections coming?" I asked.
Collections are Sensitive Subject
We in the audience quickly learned why this was a sensitive subject as the Treasurer, sheepishly
and somewhat uncomfortably squirming in his seat, admitted the association was owed a substantial
amount of back assessments, including attorney fees. The assessment roll is a little over $14,000 a
month and delinquencies came to around $22,000, in excess of 150% of the total regularly due each
month. The Treasurer added that the association was in court with several unit owners and that one of
the best collection attorneys in the business was plying his trade for us.
I didn't perceive a lot of optimism regarding the timely collection of a good part of the debt but
liens had been and would continue to be placed on units in an attempt to recover debt through that
process. I don't know if maximum pressure is being applied through legal channels open to the
association as I detected a seeming note of sympathy in the discussion for unit owners who were still
out of work because of the recession.
Units are Selling
The Chairman then happily announced that two units had just sold at around the $100,000 level,
which exceeded by several thousand dollars what I had paid for my unit a few years ago at the bottom
of the market so apparently value was trending in a positive direction. But not nearly enough to
reflect the approximate $140,000 one of my sons had paid at the top of the market just before the real
estate bubble burst five or so years ago.
Evictions Send a Message
I brought up the subject of evictions with the possibility of the association taking temporary
possession and leasing units to recover delinquent assessments. This appeared to be an approach the
board had not given much consideration to because of the concurrent likelihood that lenders were
moving toward possession through foreclosure. But the Chairman did indicate she would look into
eviction possibilities with the association's attorney. A visible first eviction might send a message to
other delinquent members, especially those who are just deadbeats and unwilling rather than unable to
pay, that they might soon find their possessions in the parking lot too if they didn't satisfy their debt
C O N D O L I F E S T Y L E S 07.13
or at least enter into some form of payment plan directed toward a more gradual reduction of what
they owed.
So the association where I live is struggling although not insuperably with its finances. At this
point creditors are not apparently hounding the association to pay its bills but the future is
problematic. We may be looking at another assessment increase next fiscal year to make up for lost
revenue and to stay viable financially. And that may just mean more uncollected assessments.
Some Associations Hurt More than Others
Many associations seem to be having similar difficulties. Few escaped financial injury. "I think the
crisis has, in some manner affected all of the communities we represent,” said attorney Patrick
Costello of the Wheaton law firm of Keay & Costello, P.C. Keith Hales, President of Chicago based
Hales Property Management agreed but noted that some have been impacted less than others. "We've
seen that associations in relatively nicer areas of Chicago tend to be quite a lot less affected from the
financial crisis than 'up and coming areas;' he said.
Regaining Financial Health
But how are associations generally doing in the struggle to regain or maintain their fiscal health? Costello
has noted some degree of improvement in the circumstances of his clients. "I see that most associations we
represent are doing somewhat better:' he said, but that progress is not necessarily due to financial conditions
outside the association field." attribute it less to the economy and more to boards and managers budgeting better
and anticipating a certain level of delinquencies and foreclosures when determining their budgets." They are
taking the initiative in addressing their problems.
From the perspective of Mike Baum, President of Baum Property Management in Aurora, housing is
much like the rest of the economy in that it is governed by the same conditions that control elsewhere. "I
think housing is following the overall economic trends in the country, "he said, pursuant to which the upper
class is continuing to make great strides while "the middle and lower classes are sinking.” The result in the
association field is that those communities sitting at the low end of the spectrum, "are still struggling,” while
those positioned at the luxury end have regained any financial stability they may have lost.
Good Momentum for Real Estate Sales
One sign of improving conditions at many associations is that sales of units are beginning to occur, as the
chairman of my association had exulted about, and while not moving as readily as they did before the housing
bubble burst, after which transactions slowed to a trickle, some momentum seems to be building. "We have
seen a 300% increase in closings thus far and expect that number to climb even further by fall,” said Hales.
"And prices seem now to be climbing somewhat,” which, "obviously will add value to all units in an
association.”
Realistic & Practical Pricing
This is probably, in large part, due to sellers and their real estate agents becoming more realistic
in accepting what the true market value of their units is at listing and in subsequent negotiations with
prospective buyers. But as Hales noted, that still represents a growing increase in value and sales
price from what they were at the bottom of the market. Gail Filkowski, Vice-President of Portfolio
Management at Chicago based First Community Management, has also seen improvement in the
condo marketplace due to homeowners becoming more willing to accept offers somewhat less than
what they might have been at the peak of the real estate boom. They are, "coming to terms with what
their places are really worth and pricing them accordingly,” she said. “Units are no longer
languishing on the market for months (but) are selling in weeks.” Growing sales transactions can
have the additional advantage of bringing in new owners who may be replacing, in some situations,
sellers who had fallen behind in their assessments.
Less Prominent Locations Still Hurt
C O N D O L I F E S T Y L E S 07.13
But similar conditions do not exist everywhere in and around the City. "The properties that we
manage in less prominent areas of Chicago unfortunately have not seen as much growth activity (in
sales) versus the buildings in (better) areas,” said Hales. "We are actually seeing an increase in short
sales and/or foreclosures for these properties.”
Collections & Delinquencies Vary
Sources for this article reported differing experience with assessment collections and delinquencies. Nonpayment is still hurting the associations to which Rosenlund provides legal services. "Delinquencies remain quite
prevalent,” he said, noting that some boards are hesitant to pursue legal action, making their financial problems
worse. "Our office continually reminds our clients to adopt and diligently apply assessment collection policies.”
Costello has not observed any significant decline in assessment collections during the economic crisis but
where there has been some loss of revenue because of non-payment, that shortfall has been offset by providing
for unrealized income through thoughtful budgeting. "I think this is critical,” he said.
Some See Gradual Improvement
While Hales has noted that delinquencies are still problematic for some associations, others are beginning
to show gradual improvement in members paying in a timely fashion. "We have seen a slight decrease in
assessment delinquencies thus far and expect this issue to slowly get better as home values (continue) to rise,”
he said. Foreclosures are helping with collections. They "are improving as many foreclosed units have been
sold and are now occupied by new owners who are paying assessments monthly,” said Filkowski.
For Baum's associations it is again a matter of what income level they serve, with delinquencies being a
continuing problem for low end organizations but not those whose residents are well to do. He agreed with
Costello on the need for thoroughness in budgeting when it comes to accounting for diminished income
streams: "I think it is absolutely necessary to budget a realistic amount for uncollectible assessments- usually 510%,” he warned, to which he added a caveat on reserve funding that is affected by owners not keeping up
with their dues. "Some reserves are not being adequately budgeted as a result of delinquencies.” The same
holds true for foreclosures, which continue to regularly occur in the low and middle parts of the association
range but are "lessening" where incomes and housing quality are at the upper end, Baum noted.
Foreclosures Still Happening
Elsewhere foreclosures have not abated significantly yet. “ Our firm has observed mortgage foreclosuresincluding new filings- remaining very commonplace with many association clients,” said lawyer Scott Rosenlund of
Lake Zurich based Fullett Rosenlund Anderson, P.C., an assessment with which Costello agreed. "I would say that
foreclosures have continued on pace,” he said, with recent times.
Some See Foreclosures Declining
Hales, on the other hand, has begun to note an apparent diminution in such lender activity in the
associations he manages. "We are seeing a decline in the number of foreclosures,” he said, but even when unit
owners have been ousted this is proving to be a positive situation for associations as financial institutions
taking possession are fulfilling their obligations to associations that defaulting owners had become remiss in
meeting. "Banks are realizing that they are responsible for assessments,” Hales added.
Some See Surprising Approach
Filkowski has seen a surprising phenomenon when some unit owners are involved in a foreclosure action.
"Today many owners go through a foreclosure while staying current with assessment payments,” something
which she attributes to, "years of educating homeowners in the importance of paying assessments,” even when
their lenders are moving against them. "In those cases, the association is hardly affected by a bank foreclosure.”
More associations should be so fortunate.
C O N D O L I F E S T Y L E S 07.13
Putting Off Maintenance & Repairs Will Have Long Term Impact
Ongoing financial problems will be a stimulus for associations to find ways to shave outflows of shrinking
funds. "Many associations have cut back on expenses, putting off major projects and dealt with maintenance
issues on a piecemeal basis" said Costello, noting that one of the favorite ways to do this in summer months is to
cut back on recreational expenses. For example, some, "associations are temporarily closing pools if they can no
longer keep them running.”
Likewise at some of Rosenlund's clients' properties, which are delaying repairs. In one case, "an association has
let its streets fall into serious disrepair because the board does not have the will to increase assessments to the
extent necessary to properly maintain the property,” he said. Others have been shortchanging reserves and also
keeping pools dry. "Ultimately these approaches usually work to the overall detriment of the association, resulting
in dissatisfied owners, decreased property value and possible exposure to liability.”
Other Areas Being Cut
Some of Baum's associations are reducing landscape watering and other grounds maintenance expenses. "I
am seeing associations cutting back on lawn irrigation and some even eliminating lawn irrigation systems,” he
said. "Mulch also seems to be a discretionary expense being cut back a bit.”
Volunteerism On the Rise?
Filkowski, too, manages associations that are constantly looking for ways to spend less, "and it's not limited to
associations with high delinquencies.” Board members at several associations are taking on tasks that are normally
completed through a contract. "Everyone wants to stretch their money as far as possible these days.”
In financially strapped associations Hales has also seen board members contributing their labor to
accomplish work that would normally be done by outsiders. "We have found that, especially in some of the
smaller buildings we manage, more people are chipping in to help with snow removal, landscaping and
cleaning to help keep expenses to a minimum,” he said.
Bank Loan Option
Bank loans might be an alternative funding source under some circumstances and Rosenlund said this
has been a course of action some of his clients have taken but that approach to keeping up with necessary
repairs can be difficult to pursue. "To obtain a bank loan, an association will have to meet a certain
threshold of financial stability and a loan is likely not a realistic option for an association under serious
financial distress,” he explained, which disqualifies most of those with excessive shortfalls in assessment
revenue.
Don't Use Fines to Increase Revenue
Sometimes a board member will go to an extreme in his enthusiasm to bring in more money to the
association's depleted coffers. One that Filkowski worked with tried to increase revenues by issuing excessive and
nitpicking rules violation notices to residents with fines attached but the good sense of his colleagues on the board
led to the repudiation of this tactic. "Increasing fines for rules violations created ill will within the community and
since the other board members were not in agreement, the fines were never approved,” she said.
Leasing Units of Evicted Residents
As noted earlier, when nothing else works to maintain financial equilibrium, associations can resort to
evicting residents delinquent in their assessment payments and then leasing the units to others on a temporary
basis. "In the past several years we have seen more and more associations availing themselves of the remedies
provided by Illinois Law by obtaining possession of units and renting (them) out to recover unpaid assessments
and other expenses,” said Costello. The same holds true for Rosenlund's associations. "Many of our firm's clients
have evicted owners and are successfully renting (their) units:' he said but a lack of funds and serious disrepair
C O N D O L I F E S T Y L E S 07.13
issues in units can make this strategy unfeasible. ''A primary obstacle to an association renting a unit can be the
poor physical condition of the unit and the upfront costs required to make the unit rentable.”
Hales has worked with several associations that have gained possession and leased units. "In some
instances the board updates the rental restriction rule so that (such) units being rented would not be counted
toward the restriction,” he explained. "Homeowners were pleased that the association was able to recover past
due assessments,” in this way.
(It should be noted that because an association's taking possession of and leasing units is a statutory
remedy provided by law, any rental restriction policies in effect do not impede its implementation, according
to both Costello and Rosenlund.)
Filkowski has seen boards grow steadily acceptant of the act of taking over units and renting them out.
''As recently as 3 years ago, the idea of renting out an association’s possessed units was off-putting and
foreign to most board members,” she recalled. “Today it is standard operating procedure and homeowners see
that the benefits- the recovery of funds- far outweigh the negatives.”
Baum’s clients have also pushed evictions against seriously delinquent owner, which has worked to
their financial advantage. “What we have found out is that units can be leased on a month to month
basis fairly easily,” he said. “I am amazed at how easily we are able to lease,” them. “In fact we have a
following of folks just looking for rentals as they tend to be great deals.”
More on What Evictions Mean to CA’s
Can evictions serve as an example to others seriously delinquent in their assessments to get them to pay
their debts to their associations because they may feel their future residence may be in jeopardy? Costello is
not sure evictions have made any real impact on other debtors but Rosenlund believes they have in certain
situations. “It is our firm’s experience that setting an example can be very effective,” he said, primarily,
though, with single family homeowner's associations where assessments are required to be paid only once or
twice a year and boards had not previously applied any pressure to get delinquents to pay up. "Once it was
made clear that the payment of assessments is a serious financial obligation and it was demonstrated that there
are serious legal consequences (eviction) for failure to uphold this financial obligation, the delinquency levels
were reduced dramatically.”
Baum said it is difficult to determine if evictions serve as a warning to others to pay their delinquent
assessments but, "I would guess that word does get around the neighborhood when someone is evicted for not
paying assessments.” In any event, he added, "associations should not be afraid to utilize the forcible method of
collection.” Just the threat of eviction, he has seen, works 85% of the time and all the delinquent funds are
collected.
Challenges From Developer Woes
Filkowski brought up another important point with regard to unpaid assessments in properties in which
developers still own a few units that have not sold and for which they have never paid assessments. That can
place a significant financial burden on those associations that are now run by the unit owners. ''I've worked with
several associations where the developer leaves a handful of unfinished units, does not pay assessments and also
defaults on (his) bank loan,” she said. Where a bank is moving slowly on foreclosure, "the assessment
(delinquency) can grow,” and with, "4 or 5 units that adds up quickly,” making, “it nearly impossible for other
homeowners to sell their units.” Sometimes such associations have taken the developers to court over the
unpaid assessments and obtained an order of temporary possession while the lender is delaying on foreclosure.
But, is it, Filkowski asked, a prudent expenditure of funds for an association to build out these uncompleted
units with a goal of leasing them to paying tenants when foreclosure of the developer's loan may have
happened at any time? "Probably not,” was her answer.
Diligent Efforts Required for Turn
Is the situation hopeless for associations mired in a financial morass? That may be so in a few extreme cases but
diligent effort can achieve an eventual turnaroundnaround. "If an association gets serious about delinquencies and
tight on its budget, we have seen success,” said Costello.
Article Citation: Mack, David. "Is The Worst Really Over? Checking the Financial Health of Community Associations." Condo Lifestyles July 2013:
3+. Print.
C O N D O L I F E S T Y L E S 07.13
By Michael C. Davids
Reserves, Studies, Restoration &
Budgets
Given the financial challenges that community associations (and everyone) have faced since
the economic recession began in late 2007, many boards have had to make difficult decisions
regarding their budgets including whether to fund their reserve account. Tough decisions as
to whether your association(s) can under- take necessary restoration and maintenance
projects have also had to be made.
But to avoid funding reserves is generally deemed financially foolish as this practice will lead to the need for
separate assessments as a property's common elements wear with age and require repair and restoration. And an
association without a reserve fund will face difficulty trying to obtain a bank loan for major restoration work (or at least
pay a much higher finance rate for the loan}. In some situations, lenders may even decline to loan money to an
association that does not have any savings (a capital reserve account}.
Fortunately most associations are somewhat financially astute in their long range planning and short term
budgeting. Many hire management professionals, some of which distinguish between two types of reserves in the
budgeting process.
"Almost all of the budgets we prepare for our client associations contain capital replacement reserves;'said Cathy
Ryan, President of Property Specialists, Inc., who added that some are also now including a designated amount to
replenish any amount of their capital reserve account that was used in recent years to cover reduced assessment income
related to recent economic challenges.
Some Just Can't Afford It
While most of PSl's clients set aside money for a reserve account, Ryan realizes that for different reasons some
associations do not, especially those populated by retired residents, some of whom have limited income. Despite the
potential issues this can cause, they will rely on separate assessments for major repairs and restoration. "Some simply
do not have a membership that can afford it (paying regularly into the reserve} and still others are short sighted, stating
that they (the decision makers} may not be living at the property that long so why put money aside.”
An outlook of neglecting the funding of reserves places the burden on those who come after them to raise the
funds to do major repair work. This is no easy task for most associations that get caught in this kind of financial bind.
They find it very difficult to raise assessments to begin building a reserve when prior budgets have given regular
ongoing funding little or no consideration. Other factors begin to bear heavily on assessments forcing them higher just
when these associations finally come around and see the necessity of building up the reserve. "Prior to the economy
going bad in 2007/2008, the trend (in assessments) had been up and up, based primarily on the impact of
building/property maintenance needs and rising energy costs,” said Ryan. "For those who were struggling to make up
deficiencies in their reserve funds before the bad economy, replenishing reserve funds will be even more difficult.”
Educating Board on Reserves & Building Restoration
Much as with PSI, most of the budgets created for clients by ACM Community Management contain a reserve but
in some cases it has taken extra effort to persuade boards to go along with the recommended amount. "We have
received resistance when starting with an association when they feel the percentage we suggest is too high,” said Tom
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Skweres, Regional Vice President of ACM, who pointed out that most of those that ignore the reserve do so because
they do not value the preservation of the common elements by proper upkeep on a short or long term basis. But ACM
tries through an ongoing education effort (including seminars at their office facility) to over- come the reticence of
some associations to plan for those rainy and stormy days ahead that are sure to come. ACM explores with their boards,
"different scenarios that can happen when associations do not budget for emergency situations and have to slap the unit
owners with an expensive special assessment.” Most eventually see the light.
Planning with Common Sense
Funding of the reserves by most ACM clients eventually reaches an adequate level, although, again, it may require
continual encouragement by ACM staff of disinclined board members of some of the associations to bite the bullet and
raise assessments to where they have to be to meet sensible reserve funding goals. Not just putting aside funds to
handle major repairs and improvements to common elements but enough money to do the job thoroughly is what a
future oriented association should be doing in the present. For some, "there is always the need to educate some boards
where for some it seems like common sense,” said Skweres. "After all, we invest in our insurance policies for almost
everything, we plan for our retirements, we purchase car warrantees- why would we not plan for a building that is
going to age over time?" and do so realistically.
Ryan concurs that education is necessary and PSI hosts seminar programs at their office for boards as well.
Board Leadership Matters
At Werk Management, staff also finds the same need to inform and instruct the board members of the associations
it manages in the necessity of funding a reserve account before many get the point and realize that doing so is part of
their fiduciary duty to their unit owners. But that patience in leading those boards to this understanding eventually pays
off. "Most of our clients do have an adequate amount after they learn their responsibilities,” said Jack Mancione of
Werk, adding, though, that it is sometimes those who head up a board who are the biggest obstacles. "Properly funding
reserves is (not only) difficult when a board is not educated, but also when the directors do not have good leadership.”
Determining How Much
How much to set aside in reserves, Mancione explained, should be based on a number of factors- "historical
review, governing documents, reserve studies and constant evaluation of how current needs are being met.” But any
plan that Werk recommends to a client for dealing with future major repairs and improvements is only partially based
on the availability of reserve funds. The balance would come from assessments and bank lines of credit. But gradually
accumulated reserves can reduce the need, sometimes significantly, for tapping those other sources.
Don't Defer Major Repairs
Failure to adequately fund reserves can lead to deferring of necessary major repairs or capital improvements. PSI
has managed several associations like that (less than 10% of its clients that wouldn't budget for reserves) although some
were able to eventually get necessary work done by the other methods available to them- previously mentioned
separate assessments and bank loans. But not without putting a serious financial squeeze on unit owners and having to
convince lenders, with PSl's support, that they would mend their wayward financial ways.
Mancione has found that a few boards have neglected funding reserves sufficiently because of a mistaken
impression that keeping assessments low was their primary responsibility to unit owners regardless of the long- term
consequences. "We have experienced boards which refused to raise capital (reserve) funds in the best interests of the
association, thinking this was what a 'good' board member does;' he said. They acted in this way despite
recommendations of management.
ACM's efforts to educate associations in the necessity of making a "responsible contribution" to a reserve do
occasionally fall on deaf ears, with the result that major work gets postponed until a crisis point is reached when repairs
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01.14
can no longer be ignored and their cost will have increased beyond what it would have been if done earlier. This can be
a wake up call that hurts like a hard slap in the face and management can only sit back and bite its tongue to keep from
saying, "I told you so.”
"We can only advise of the downfalls or added expense from putting of repairs as opposed to handling them
sooner;' Skweres said.
Low Reserves Impact on Bank loan
As noted above, a deficiency in the reserves may force an association to seek bank financing for urgent repairs and
improvements. This can create a Catch 22 situation in which an association needs a loan because of a Jack of reserves
but its application is rejected because the reserves are inadequately funded. There are situations where a property can
be denied a loan because of a poor budget and low reserves. In other cases, associations may have to pay a higher
interest rate on their borrowing because of their financial condition.
Werk Management Knows the rules banks follow in considering applications for capital improvement loans and
works on improving the financial status of an association before collaborating in any such submission. "We would
never approach a financial institution until we felt all the required needs were in place,” explained Mancione. But that
can mean having to delay an application until all of an association's ducks are lined up, which often includes substantial
assessment increases to fund shortages in reserves. During that additional period further wearing of deteriorating
building components for which the loan is being sought is likely to occur with the consequence that it will cost more to
repair or replace them. There is just no easy way to get around the inevitable problems that will result from under
funding the reserve.
Guidance on Reserve Amount
Section 9(c)(2) of the Illinois Condominium Property Act offers some guidance for condo associations in the
determination of a reasonable reserve amount. A board should consider repair and replacement costs as well as the
useful lives of common element components; the current and anticipated return on investment of association funds; any
independent professional reserve study; the financial impact on unit owners and the market value of the units of any
assessment needed to fund reserves. Lastly, an association's ability to obtain financing should be added to the mix of
the evaluation. But as has been pointed out earlier, this last factor can be tricky. If board members believe, "hey why
put money in a reserve since there are a lot of banks out there just waiting to lend us the money when we need it?" and
choose to only minimally set funds aside, or to ignore doing so altogether, in a reserve they may find out when they
apply for a loan that prospective lenders will turn them down. Or require them to make some hard commitments that
involve significantly raising assessments before agreeing to a financing package.
Reserve Study is Great Tool
One of the most important elements to consider in the determination of how much to budget for a reserve is a
reserve study. Some associations arrive at reserve numbers haphazardly- by guessing how much to include in
assessments but not in an educated way. The intent of a reserve study is to bring more precision to the methodology
rather than relying on a shot in the dark. Professionals can come up with much better calculations.
Someone conducting a reserve study looks at each of the major and some of the minor components of the common
elements of a property and knowing their age projects their remaining useful life depending on the quality of the
material and construction. The estimate of remaining useful life will be based on an assumption of a reasonable degree
of care for each component through regular and preventive maintenance. A determination is made as to what it will cost
to replace each component when it has run its estimated life cycle, accounting for inflation as well.. The amount that
should ideally be budgeted in the reserve for any one element should be the cost to replace divided by expected
remaining years of life following the study. For example, to provide for a roof that has a projected 15 years of life
remaining and a future estimated cost of replacement of $45,000, the association should, absent other considerations,
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01.14
set aside $3000 per year in its reserve for this big ticket item.
However, when weighing such other factors in 9(c) as return on investment of association funds and the financial
impact on unit owners, the association may choose to budget less for it and to partially rely on other financing sources
when replacement time arrives. But some reasonable amount should be allocated.
Get Study Done Early
Ryan recommends that a reserve study be high on the agenda when owners take over a new association. It,
"should be one of the first items of business when the first homeowner board is elected,” he said. "It should be
completed in their first year of service and be used thereafter by the board or an appointed Long Range Planning
Committee to map out the long term financial needs of the association.”
For existing associations, a reserve study should also be high on the board's agenda as it is extremely helpful in
budget preparation and financial planning.
Some professionals in the reserve study business suggest that the analysis should be conducted even earlier than
the turnover of the association to the homeowner board. John Poehlmann of Reserve Advisors said, "the ideal time for
an association to have a reserve study is when a developer starts to market units.” It would, therefore, be developer
directed since he controls the board at that time and he could, "market the units with a fair and accurate estimate of
what condo fees (assessments) will be.” Unfortunately too few developers order up a reserve study. Other than at that
most favorable point, Poehlmann agreed with Ryan and added, "that the best time is as soon as the (first) homeowner
board takes over. The sooner they begin to plan for the capital replacements, the more time to accumulate the proper
reserves and the lower the monthly assessment for reserves will be.”
Transitional vs Reserve Studies
Before going further on reserve studies, a brief digression is warranted to distinguish between transitional and
reserve studies. While they may be conducted at the same time by the same person, their objectives are different. The
former are intended to uncover construction defects whereas the latter are, as has been pointed out above, budgeting
tools to establish a reserve allocation from assessments and assume that any construction deficiencies have been
remedied.
Moving on with reserve studies, they should be conducted on newer properties and conversions and then updated
as needed. "We have done them on new buildings and even buildings pushing 100 years old,” said Mark Waldman of
Waldman Engineering Consultants. "Each one has its major replacement costs but the older the building the nearer the
equipment is to the end of its usefulness.” When an association starts out with a physical plant that is a few decades or
more old, major repairs or replacements will generally be needed much sooner. It is especially important, therefore, for
a reserve analysis to be done as early as possible for existing structures that have been converted from a prior use to
community association use. And if your association has not updated their reserve study since the economic recession
began, "now is definitely a good time to do an update.”
Reserve Study is Helpful Regardless of Property Age
Even if not done at the birth of an association, a reserve study should be completed whenever a previously
negligent association realizes it has to begin planning for its future financial needs regardless of when that is. As the
saying goes, "better late than never'.' That may be when new board members are elected who foresee financial trouble
at some uncertain time ahead if they don't prepare for the inevitable failure of common elements.
"It's something that can be implemented at any time;' said Poehlmann and, "once they (the board) get a good plan
in place it will benefit owners in perpetuity so long as they use it and keep it updated'.' It's just that the later
implementing a study is started the more it is going to cost unit owners as the association tries to build a reserve in a
shorter period of time.
As far as Waldman is concerned, a reserve study will always have some practical value, "unless the building is
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falling down.”
And once the initial (or current) study is completed, it needs to be updated periodically. "It is important for a
reserve study to be done at least every 5 years,” said Skweres. Conditions change over time and follow-ups are
necessary to track them and to modify projections and estimates.
In most situations, professionals should perform reserves studies even if someone on an association board or in the
body of the membership feels qualified to undertake the effort. Ryan does not recommend the volunteer approach. "An
association is much better served by engaging the services of a firm that does these studies as a business and that has a
reputation of doing that work well,” she said. "It is always advisable for boards to obtain third party advice rather than
depend only on their own wisdom.”
Skweres concurred with Ryan. "We do not recommend someone just casually doing a reserve study since it should
be professional and (well) documented,” he said.
Mancione, on the other hand, noted that it might be possible for someone with an engineering background in an
association to conduct a study but the end product of the effort should establish a reliable framework for future
planning by the association. "Credibility and quality are important,” he said.
Expense for Reserve Study Can Vary
When done early in the life of a new property, a reserve study may cost less than if completed later, but not
significantly so. "Typically it is easier to access different areas and easier to read equipment tags on newer equipment,’
said Waldman, and other information if more readily available. "It should be less money.”
Poehlmann agreed that the expense can vary depending on age and conversions will likely cost more to do a
thorough analysis than new construction. "Older buildings take longer to inspect, tend to have more out of date systems
that take longer for engineers to research and may have more line items included,” he explained.
With fiscal audits an association can select from 3 different types that vary in depth of review but not generally so
with reserve studies. Although Reserve Advisors classifies its studies as new, an update with a site visit or an update
without a site visit all are exhaustive analyses of conditions. "We have a very detailed report performed by our expert
engineers,” said Poehlmann. "We choose not to offer a less detailed analysis, which would come at a lower cost so that
we maintain our reputation and homogeneity in our studies. Other firms may offer different levels of detail, we do not.”
Other than for associations built from the same design and construction template, reserve studies will vary
between properties because of the distinct physical characteristics each possesses. While there may be some ways in
which each is evaluated similarly, there is no one size fits all. "A general wide brush approach usually does not work
well with reserve studies,” said Waldman. "We still have to look at all of the equipment (and other components) and
give life expectancies, which takes time, and we try to give a detailed study to all of our clients.”
Once a reserve study is completed, it's up to the association what use will be made of it. In Poehlmann's
experience, more follow the recommendations for funding than those that do not. "I'd say most associations either
partially or fully implement the reserve recommendations,” he said, however, "I do know there are associations that
hired us to conduct a study and for whatever reason decided to never utilize it.” That could have been because a new
board took over or a reluctance to increase assessments to the extent needed.
Study is Only as Good as Application
It is a waste to have a reserve study done and then to ignore its conclusions because to follow them would mean
having to raise assessments. Some boards have done just that. "Reserve studies are great tools, but they are only as
good as people are willing to apply them,” said Mancione. "It does no good if the information is discarded and placed
on a shelf.”
Waldman knows from experience that some associations will decide to deviate from his recommendations and
they may guess right in doing so because projections regarding useful life are only best estimates rather than accurate,
dead on forecasts. Better preventive maintenance will likely extend durability for building equipment and components
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and usually lead them to lasting longer than projected before replacement or major rehabilitation is required.
Hardships Exist
Ryan has found that the vast majority of the associations PSI manages comply faithfully with their reserve studies
within the limits of the financial abilities of their unit owners. "Those that are serious about planning for the future
follow the recommendations as closely as the economics of their membership will allow,” she said.
"That would include a good 85 percent of our clients.” Occasionally full suggested reserve funding is just not
possible because it would be a financial hardship for many residents so an association has to go with a level that is
realistically achievable.
Skweres pointed out that his ACM's associations tend to do the same and as with PSI there is the added factor of
management's guidance that helps keep clients on target with their reserve funding so that a profound financial crisis in
the future can be averted.
Werk management also makes it a point to get behind a reserve study and urge an association to adhere as closely
as possible to its funding suggestions. The company has generally been successful in this encouragement and feels
responsible when it fails at the task. "Most associations endorse our recommendations,” said Mancione. "That's our role
as the professional involved. If they do not, we're doing something wrong.”
Danger Ignoring Reserve Study
There is a danger in ignoring the findings of a reserve study. Failure to fund reserves according to some
reasonable formula based on a study will not only almost certainly lead to the need for large separate assessments but
some unit owners may be so aggravated by such a call for money that they sue the board for breach of its fiduciary duty
in paying for the professional analysis and then disregarding its recommendations by not funding the reserve steadily
over time. It would actually have been better under those circumstances to never have contracted for the study than to
have one completed and then file it away.
Article Citation: Mack, David. "Reserves, Studies, Restoration & Budgets." Condo Lifestyles January 2014: 9 - 16. Print.
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Contract Provision Checklist
1. Introduction: The opening paragraphs should contain:
a. Identification of the parties and their respective roles in the transaction;
b. Addresses of the parties;
c. Basis for the contract;
d. Any other identifying markers, such as license number.
2. Scope of Services: The scope of services must be described, when applicable, the
standards/specifications to which the work or service must conform (i.e. blueprints,
standard specifications, etc.). If there are deadlines owner must meet, contractor is to be
held to those restrictions.
3. Payment Schedule and Billing: The contract should contain provisions dedicated to:
a. Detailed statement of payments;
b. Number of payments;
c. Time for payments;
d. Whether payments will be single or multiple;
e. Billing requirements;
f. Level of detail to be provided in invoice;
g. When invoices are to be submitted;
h. ALL MECHANICS LIENS provisions for contractor, for subs;
i. Payments to be tied to review of completed work and provision for problems related to
the work.
4. Completion Schedule and Timing: The contract should have a section addressing
completion schedules and work timing. The following represents a fairly exhaustive list of
provisions to be included in this section:
a. Dates for completion; a schedule should be set for each phase of the project, a firm
completion date for the entire project should be unambiguously stated in contract;
b. Times for services;
c. Designated work days and start and end times for the duration of the project;
d. Types of equipment;
e. Schedule not subject to change due to insurance disputes;
f. Liquidated damages clause for failure to complete work by contracted for date.
5. Agency: A contract should unambiguously state that the entity or persons performing the
work or service is an “Independent Contractor”, and that such contractor (1) is to use his
best efforts and skill, and (2) is to secure all permits and pay all fees associated with
securing such permits.
6. Costs and Quality: The contract should address, with specificity who will pay the
expenses associated with project or service and acceptable levels of quality:
a. Highest Quality should be specified with respect to materials and workmanship.
b. Contractor should be charged with paying all labor, materials, equipment, tools,
transportation, and facilities costs.
7. Subcontractors: The contract should address whether subcontractors will be allowed to
perform any part of the project, specify that the contractor is responsible for any defective
work completed by subcontractors and liability arising during or after performance.
1
8. Defective Work: These are important provisions they address the quality of work or
services to be performed. Payment should be contingent upon inspection by someone, an
independent inspector/engineer/architect named in the contract. It should also specify:
a. How defective work is repaired or replaced.
b. That contractor is to pay repair costs for replacement of defective work.
c. Consequences of failure to repair defective work (namely hiring an independent
contractor to repair and subtracting from amounts owed to original contractor).
9. Indemnification: EVERY contract should address all types of liability indemnification:
a. Property
b. Personal injury
c. Malfeasance or misfeasance
d. Workmen’s compensation
10. Insurance: The contract should deal with the following types of insurance:
a. Liability
b. Personal injury
c. Property damage
d. Workmen’s compensation
11. Termination/Default: this set of provisions is a principal purpose of any contract. These
provisions will save your association from protracted litigation in the event that a
contractor goes bad. The following list of contingencies should be addressed (the standard
remedy will likely be sufficient, namely completion of work or service by third party, loss
of right to payment by contractor, and compensatory damages associated with hiring third
party to complete work in conformity with contract):
a. What happens when work or service is not completed?
b. What happens if schedule is not met?
c. What happens if scope of services addressed earlier in contract is not provided?
d. What happens if contractor does not have insurance as agreed?
e. What happens if contractor fails to comply with ANY contract terms?
12. Warranties: Contractor should guarantee all workmanship and materials for a period of
years. This section should also address who will make a determination under this section if
contractor’s workmanship or materials used, was the cause of the subsequent defect.
13. General Provisions: are to cover a variety of miscellaneous but important issues:
a. Time of essence clause
b. Merger clause
c. Notices to parties clause
d. Requirement that all changes be in writing signed by both parties
e. Contractor has access to property for contract purposes
f. Choice of Law and ARBITRATION CLAUSE
14. DON’T FORGET THE SIGNATURES! and most of all make sure the person
negotiation, reviewing or editing your contract has the requisite knowledge for your
protection.
© Law Offices of Sima L. Kirsch, P.C 10/10/2010
This checklist is not exhaustive and is not intended as advice. Please arrange your legal services through Sima L. Kirsch, PC
\\Sima\slk law office\PA\Business\Contracts-Agreements\General\Contract Checklist Genl 10-10-10.doc
2
`
MORE LIVING.
LESS WORRYING.
BEST PRACTICES – LIFE/SAFETY
Keeping the community association safe and prepared in the event of a life/safety emergency is critically
important and the duty and responsibility of the board of directors. This document will discuss the most
important life/safety elements of a community association and what needs to be done to maintain the elements.
The National Fire Protection Association (NFPA) sets national standards and it is important to maintain the
life/safety elements in accordance with those standards. Please note that not all items will apply to all
associations.
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Sources of information:
www.NFPA.org
Total Fire and Safety Inc., Brad Schultz
Martin Mack Fire and Safety Equipment Co., Dan Marks
www.osha.gov
http://www.cityofchicago.org/city/en/depts/bldgs/provdrs/inspect/svcs/life_safety_highriseordinance.html
6. http://www.epa.state.il.us/water/field-ops/drinking-water/cross-connection-program-summary.pdf
7. http://www.cityofchicago.org/dam/city/depts/bldgs/general/Lifesafety/LSErulesregs.pdf
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About Chicago Property Services, Inc.
PREMEIR COMMUNITY MANAGEMENT:
Chicago Property Services, Inc. is Chicago’s premier provider of professional offsite management services for
condo and townhome community associations. Through innovative management techniques, CPS is creating
stress free living environments for thousands of homeowners throughout the Chicago area. With 50 exclusive
properties under management, Chicago Property Services is setting the gold standard in offsite management.
COST SAVINGS:
Through their cost cutting and price negotiation abilities, CPS is saving community associations thousands of
dollars annually. In addition, CPS has saved associations tens of thousands of dollars on their capital project
expenditures through the project management services offered by CPS.
TIME SAVINGS:
Through the guidance of CPS, client board members are much more effective in decision making and
planning. This allows board members to spend more time attending to their professional and personal lives.
The average CPS board meeting last no more than 1 hour and our typical client holds quarterly board
meetings.
Through proactive 5 year capital planning, CPS saves clients both time and money. Projects are completed
sooner and cost less money. In addition, CPS clients have access to a state of the art exclusive online support
tool called managemycommunity.com (MMC). MMC gives board member and homeowners real time access
to critical information such as contact information, maintenance issues, and financial information. Let Chicago
Property Services create a more pleasant living environment for your association. Experience MORE
LIVING and LESS WORRYING. For more information, visit www.chicagopropertyservices.com
About the Author, Salvatore J. Sciacca
Salvatore J. Sciacca is a leader in community association management, with more than 20 years experience.
Founder of Chicago Property Services, Inc., (CPS), the premiere community management company in
metropolitan Chicago for townhouses, condominiums, co-operatives, and homeowner associations, Mr. Sciacca
also serves as its chairman and president. Mr. Sciacca is also the founder of managemycommunity.com which
is soon becoming the leading online support portal for community associations. Mr. Sciacca is recognized for
his extensive knowledge of capital planning, preventative maintenance, and cost-saving measures. At present,
Mr. Sciacca’s firm manages a portfolio of 50 exclusive properties including the former Marshal Field
mansion. The portfolio has a combined value of $300 million.
Following rigorous exams, Mr. Sciacca became a Certified Manager of Community Associations (CMCA®) in
2002 by the Community Associations Institute (CAI), the top national trade association in the field. He was
designated an Association Management Specialist (AMS®) in 2004 through CAI. Mr. Sciacca is a member of
CAI, and the Association of Condominium Townhouse & Homeowners Association (ACTHA). Mr. Sciacca
regularly attends national conferences such as the CAI CEO Retreat and the CAI National Trade Show.
Locally, Mr. Sciacca regularly attends ACTHA and CAI trade show events and is a regular guest speaker at
ACTHA seminars and events.
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Through his continuous interactions with national and local trade associations and industry experts, Mr.
Sciacca remains at the forefront of best practices in the industry. Mr. Sciacca has often teamed up with the
legal experts at Kovitz Shifrin Nesbit to give seminars and presentations throughout the community about
current issues. He has been featured in several Chicago Tribune articles, CondoLifestyles articles and on CAI’s
radio talk show. Mr. Sciacca holds a Bachelor of Science degree in electrical engineering from the University
of Illinois at Urbana Champaign and a Masters of Business Administration in international business from
DePaul University.
Mr. Sciacca can be reached via phone at 312.455.0107 x102 or via email at
[email protected] or you can follow him on Facebook on his Condoboss page at
facebook.com/pages/Condoboss/420215411400058. You may also follow him on his Linked In group
titled “Condoboss” at: linkedin.com/groups/Condoboss-4923593. His Condoboss page and group is full
of free information and valuable tips on how to best run community associations.
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Top 10 Ways to Avoid Maintenance Emergencies and Life Threatening Events
By Salvatore J. Sciacca
President and Founder
Chicago Property Services, Inc.
As a board member and homeowner at your community association, one of your main responsibilities
(regardless of whether you have a community property management company or not) is to properly maintain
the common elements of the association and to avoid maintenance emergencies such as floods and life
threatening events such as fires. Fires clearly are the number one cause of deaths and causes the most
amount of damage while water leaks are the most common cause of damage within community
associations. In this article, you will find the most common scenarios that cause maintenance emergencies
and life threatening events and the ways to AVOID these scenarios.
10. Sump/Ejector Pumps – It is very important to frequently check the sump pumps (annually at minimum,
quarterly is preferable) and if possible install a power backup system to ensure the sump pumps continue to
operate in a power outage scenario. In some cases, it might make sense to install a backup sump pump
that will automatically turn on if the 1st sump pump fails. Failed sump/ejector pumps is one of the more
frequent reasons why condo associations experience water damage and the damage is often quite smelly!
Proactive replacement of sump pumps every 5 to 7 years is a great way to avoid headaches and will help
avoid water leak emergencies.
9. Outdoor grills – When warmer weather comes to Chicago, many people love to grill outdoors. When
that happens, it is important that homeowners refrain from certain activities that could potentially create fire
hazards and life threatening emergencies such as charcoal grill usage. In fact, according to the National
Fire Protection Agency, 50% of all fires created by gas or charcoal grills start on balconies or porches. It is
recommended that each spring season, a notice is sent out to ALL homeowners (and tenants) about the
importance of following safe grilling practices. It is also advised that the community associations maintain
fire extinguishers around the entire property. Taking proactive measures is always a much less expensive
approach especially when it comes to fires!
8. Frozen water pipes – When the chilly Chicago winter hits, the temperatures often go below freezing and
sometimes dip into negative territory. What that means is that pipes that are not properly insulated are at
HIGH RISK of freezing and bursting. What is even more risky is having fire sprinkler pipes bursting. These
pipes will cause even more substantial damage to your community association property. In order to
minimize these circumstances, have your fire sprinkler pipes checked annually and make sure that all areas
of the community association including garages, vacant units, community rooms, and club houses are
heated at ALL times during the winter months. The temperatures in all areas should remain at about 50
degrees or higher. In extremely cold temperatures, it is advisable to turn on the hot water faucet so that a
very slow drip flows and this step can often times prevent freezing pipes from occurring and bursting. Water
flow helps minimize pipe freezing so fire sprinkler pipes that usually have no water flow tend to freeze before
other pipes.
1
7. Dryer Vents – Dryer vents can cause fires. The leading cause of dryer vent fires is due to the improper
cleaning of lint traps, vents, and the immediate areas surrounding the dryers. It is advised that community
associations especially condominium associations ensure that all the dryer vents are free from obstructions
especially where they exit the property and are properly maintained. In addition, it is advised the the
community association maintain fire extinguishers around the property common areas and that homeowners
maintain fire extinguishers within their homes.
6. Washing Machines – Improper maintenance of washing machines cause a fair amount of water leaks
and floods within condominium associations. It is advised that homeowners are educated and reminded of
the importance of checking the drain hoses and plumbing connections to the in-unit washing machines on a
regular basis. Some community associations adopt and enforce a mandatory washing machine hose
replacement resolution to avoid the potential of flooding especially in mid-rise and high-rise buildings.
Proactive education and regular reminders of best practices to avoid leaks and floods is always a cheaper
and more stress free approach.
5. Aging Electrical wires and systems – Should it be up to a homeowner to determine when outdated
electrical wiring is upgraded? Should the association require upgrading of all outdated wiring components?
Either way you look at it, the facts are that malfunctioning outdated electrical wiring and systems are one of
the LEADING causes of fires within a home and community association. These issues should be of
particular concern to board members living in community associations that have wiring and electrical
distribution systems that are 30 years old. I can personally attest to a situation where a homeowner, who
was living in an old vintage building with very old outdated wiring, was complaining about flickering lights
and upon further investigation, an electrician found an electrical extension cord within a wall actually
connected and conducting electricity. Of course I immediately notified the board of this circumstance and
advised that the association conduct a more detailed evaluation of the building’s electrical systems. The
board replied that they did NOT want to further investigate due to a shortage of funds……
4. Candles – In case you haven’t noticed, candles have grown in popularity over the last 10 years.
Unfortunately, so have the number of fire incidents caused by candles. The leading cause of candle fires is
due to having combustible materials too close the candle flames which results in a fire. Research has
shown that Christmas day, Christmas Eve, and New Year’s Eve rank 1st, 2nd and 3rd peak days of the year
for candle fires. As a result, it is advised that community association educate and remind homeowners the
importance of practicing safe candle usage. Simple reminders to the homeowners can help save lives and
help save unnecessary damage and headaches to the association homeowners.
3. Water Heaters – In unit water heater tanks are fairly common in certain newer community associations
but they DON’T last forever. The average life for a typical standard hot water tank is about 10 years. Board
of directors should expect hot water tanks to fail now for buildings built around 2003 or earlier assuming the
homeowner has not already replaced the tank. The question that comes up in my mind is the following
”Should the association intervene and require homeowners to proactively replace their individual hot water
tanks through an amendment of the governing documents?”. Regardless of your position, it is advised that
the homeowners are educated and reminded that it is important to have their hot water tanks checked
regularly for rust and leaks. Furthermore, it is recommended to proactively replace hot water tanks at or
2
around the 10 year mark in order to avoid potential leaks and flooding scenarios especially in mid-rise and
high-rise buildings.
2. Chimneys, vents and wood burning fireplaces – Does your community association have wood burning
fireplaces? Are your fire place flue pipes properly maintained? Is it the homeowners responsibility or the
association’s responsibility to maintain the flue pipes? Regardless of who ultimately is responsible, wood
burning fireplaces can cause fires if not properly maintained. Ideally, the flue pipes should have a newer
sheet metal liner rather than simply exposed inner bricks that can allow smoke and soot to enter into
people’s condos while traveling up the chimney shafts. Additionally, the fire places should be checked by a
professional fireplace technician annually. There are many ways that fires can start but educating
homeowners and taking proactive steps as a board of director will greatly diminish the possibility of fires.
1. Sewers and drain pipes – One of the most common causes of maintenance emergencies for community
associations is due to plumbing backups and clogs. These emergencies are frequently due to the lack of
preventative plumbing maintenance that should be part of an overall preventative maintenance plan.
Associations should have plumbing maintenance performed at least once annually for all major drain lines
and sewer lines and should have all catch basins cleaned out during the plumbing maintenance service. It
is usually much cheaper to have a plumber come out during normal business hours to perform proactive
plumbing maintenance versus calling out a plumber at 2am on Super bowl Sunday. Unfortunately, some
associations and board members have a fear of spending money and wait until issues become emergencies
before taking action. This however ends up costing the association significantly more money and creates
many more headaches than it would have otherwise through a more proactive approach.
In summary, boards of directors have a fiduciary responsibility to maintain the association. And it is usually
more cost effective to take proactive steps to maintain the building and to educate and remind the
homeowners on what are safer ways to live within a community association. Your association budget will
thank you!
3
By David Mack
Why Does Fraud Happen?
In opening his presentation at the 2013 ACTHA Winter Conference, Brad Schneider, President of
Condo CPA, Inc., and a Certified Fraud Examiner, pointed out that when it comes to the stealthy theft
of money it is hard to distinguish perpetrators in their public images from the normal population.
Looks Can Be Deceiving
"You can't tell by looking at somebody's appearance if they are a crook and will steal your money;' he said.
Community associations all across the country have been bilked of their funds by errant board members, managers and
management companies who didn't look the part. It has happened a few hundred times in recent years.
The Fraud Triangle
"Why does fraud happen?" Schneider queried his audience and then referred to what is known as the fraud
triangle, the three sides of which each represent a different aspect of the crime- pressure, opportunity and
rationalization. Pressure comes to bear on a person in the form of such financial dilemmas as the inability to pay bills, a
drug or gambling problem or an irresistible desire for status symbols such as a bigger home or a new car. Professional
problems can also contribute to pressure. "These are actual things that are happening,” said Schneider, referring to a
handout citing several cases of embezzlement at associations across the nation.
He also spoke about a small management company in Chicago whose principal had access to all of an
association's certificates of deposits and cashed them, stealing approximately $600,000."He was a very nice man who
told me he had a gambling addiction that he had to feed,” Schneider added.
The 2nd side, opportunity, relates to access to funds. An example would be an on site manager who has individual
signature authority on all of an association's accounts. "That's too much power in one person,” leading to an abuse of
the trust placed in the fraudster who perceives little danger of detection because others are not cognizant of the threat
posed by their inadequate oversight.
The third side, rationalization, often involves the thief finding justification for his larcenous actions in the idea
that he is underpaid, his employer has cheated him or perhaps is perceived as being dishonest to others and deserving of
reciprocity by the embezzler. Or the crook might justify his illegal actions on the basis that he was only borrowing the
money and intended to return it later. "A gambler might say he is only going to borrow the money and is going to win
and pay it back later,” said Schneider.
Internal Controls and Oversight
Associations need to be on the alert to protect themselves against fraud. "The two most important issues to
address to avoid fraud are strong internal controls and close oversight by the board, management (assuming those first
two have clean hands) and outside accountants;' said Schneider. One internal control that is important is the avoidance
of acceptance of cash. Schneider cited a local association where cash coming into the on-site office was received by the
sole staff person who saw the opportunity to appropriate it.
"I don't think an association should ever take cash,” he said. "There should be a sign in the office saying 'cash not
allowed'”. However, if cash has to be accepted the person(s) receiving it should not be permitted to do the accounting
for it.
Lock Box Option
A good internal control is the use of a lock box, which is a P.O. Box at the post office, the access to which is only
open to an association's bank. "Lock box usage is very common,” said Schneider. Checks are mailed by residents to the
box and, “are picked up by the bank and then deposited directly into an association's bank account. If I had a choice
with any association I would prefer to see a lockbox.”
Controls for Automatic Withdrawal or Checks
Another way to protect against the misuse of funds is through automatic withdrawal from a unit owner's account
(which is the way I pay my assessment). "When this method is used the management company must have controls set
up so that only authorized automatic payments can be approved,” said Schneider, who added that the least efficient way
to pay assessments is through checks sent directly to the management company. "This procedure will need a whole set
of additional internal controls to avoid checks being taken by the management company's staff person(s) who process
the bank deposits.”
To prevent the misuse of funds - a board member - generally the treasurer- should review and approve all bills
before payment and there should be at least two check signers. "You need multiple levels of approval,” said Schneider.
Financial Statements Review
Monthly or at least quarterly financial statements should be provided to the board and they should be reviewed.
"It doesn't take more than 5 or 10 minutes to look over a financial statement,” said Schneider as long as board members
understand what a financial statement discloses. All involved should be trained in their analysis. The general ledger
will show every individual invoice so the board as a whole can determine who is being paid and how much, so as to
confirm a treasurer's conclusions. "If something doesn't make sense, that should come as a red flag to the board.” The
annual audit required by Illinois Association law should turn up evidence of fraud if any has occurred during the year.
Bank Reconciliation
An association's bank account(s) should be reconciled each month. One person should do the reconciling and
another person should review the work to substantiate its accuracy. "An indication of sloppy bookkeeping or possible
fraud is deposits in transit that do not clear the next month or multiple adjustments to the bank reconciliation that bring
the bank account into balance with the books,” said Schneider. "If these items do not clear up quickly, questions should
be asked to understand why they are happening. If the bookkeeper is not competent or there is a fraudster involved, the
bookkeeper will not be able to explain these items very well.”
Small Associations Be on Guard
Small associations offer a good opportunity for fraud because they may be self managed and individual board
members may have excessive authority over the control of funds. "Only 1 person may write and sign checks,” said
Schneider. "This is real opportunity.”
Reduce Opportunity
Fraud can be considerably curtailed if the proper steps are taken and effective procedures are in place: “If an
association develops strong internal controls and oversight, then it will be very difficult for a fraudster to have the
opportunity, which is the most important side of the triangle,” explained Schneider. "Close down that side and there
cannot be fraud.” That absoluteness is hard to achieve, however, but with diligent oversight fraud goes down about
70%.
Detecting Fraud
Schneider cited numerous ways to detect fraud, some of which are unusual financial or related activity, stale
items on bank reconciliations, excessive purchases, large payments to individuals, employee overtime, ghost
employees, write offs of account receivables, a P.O. Box as an association shipping address, duplicate payments and
employee expense accounts.
The abuse of an association's credit cards is an increasing problem. "I've seen a lot of fraud with credit cards,”
said Schneider. "In many frauds I've seen (someone) is asked to sign a credit card payment without the back up invoice.
Never pay a credit card bill unless the invoice is attached.” Almost every time Schneider has seen this type of fraud
there has been no invoice attached to the credit card.
Background Checks
To have more confidence that those employees who will have access to association funds are honest, background
checks should be made of all job applicants. "You'll want to know if they not only have a criminal record but whether
they have bad credit,” Schneider warned.
Fraud Examples
Schneider cited some other specific types of fraud that he had seen.
o a property manager set up a fictitious company, invoiced the association for phony work and deposited
payment into a fictitious account.
o prices were changed on bids so a favored bidder got contract.
checks written to an association were endorsed by an employee and deposited in her personal account.
o treasurer signed blank checks and another person filled in false payees and amounts and deposited in his
account.
Cyber Fraud Growing
Cyber fraud. is a growing dilemma. "It is a huge problem in electronic banking,” said Schneider. One of the ways
this is done is by clicking on a link in an email that, unbeknownst to you, downloads a program to your computer that
'sees' your keystrokes and snares those that relate to banking, especially account numbers. "Never click on an unknown
link in your e-mail even from a friend for it might download one of these keystroke programs into your computer,”
warned Schneider, adding, though, that if this does happen or to prevent it from happening there are software programs
you can acquire that will tell if your banking and other important key strokes are being recorded by another outside
entity.
Final Alert
As a final alert, Schneider advised his audience to, "never use a debit card online as it will take forever to get the
money back,” when the use was erroneous and the debit card issuer is liable to reimburse you for the transaction.
Report Fraud and Get Insurance
Associations should report theft of their funds to law enforcement agencies but that won't necessarily lead to
recovery. The best way to protect themselves against misappropriation of their money is through insurance. If the
larcenist is apprehended an association can seek restitution but the stolen funds may have already been used. Therefore,
”the most important thing is to have fidelity bond insurance,” said Schneider. "People with access to funds should be
covered,” and management should be asked to furnish evidence of its coverage for all its employees who handle
money.”
Article Citation: Mack, David. "Why Does Fraud Happen?." Condo Lifestyles July 2013: 9 - 11. Print.
A Bad Deal
Associations fall victim to theft and embezzlement too frequently. Know the warning
signs and institute preventive measures before your community is left with a difficult
recovery.
By Steve Bates
Reprinted with permission from CAI’s Common Ground TM magazine,
November/December 2013
Vincent Lopez was everybody's friend. The manager at the Plymouth Hill Condominium in
Montgomery County, Pa., for nine years, Lopez always came through when you needed
something fixed. But he had a secret side—a highly lavish lifestyle—that few if any of the
residents in the 337-unit community recognized as a red flag.
He booked frequent limousine rides, bought jewelry and other pricey gifts for friends, and even
billed the association for a trip to a clothing-optional resort in Florida for himself, his wife and
his girlfriend, according to court records.
Association fees rose just about every year; and while many residents grumbled, none had an
inkling that Lopez had set up a shadow bank account, siphoned off dues and sales revenue, used
association credit cards for personal expenses and conspired with vendors to overbill the
community.
Eventually, however, owners started asking questions and taking a closer look at financial
records. "Originally, we thought, 'Maybe it's just sloppy bookkeeping,' " says Carol Graham,
president of the Plymouth Hill Condominium Council. The council kept requesting additional
documents, and Lopez's schemes unraveled.
It soon became evident that Lopez had the help of his secretary/bookkeeper plus contractors who
paid him kickbacks from their association jobs. When the forensic accounting was completed,
the losses totaled more than $580,000.
"I felt betrayal, utter disbelief," says Graham. "I had worked with him and known him for years."
Lopez was one of six persons convicted in the Plymouth Hill case. He was sentenced in 2012 to
two-to-four years in prison and ordered to pay restitution.
Essential Elements
Plymouth Hill's story isn't uncommon. Community associations of all sizes throughout the U.S.
have been ripped off by clever thieves. Embezzlement ranges from a few hundred dollars to
millions and can be perpetrated by managers, board members and others.
No one knows exactly how many associations are hit by embezzlement and other forms of fraud
because no one organization tracks such crimes, says Ronald S. Stone, an accounting professor at
California State University, Northridge.
In a 2013 Common Ground Member Pulse survey, 33 percent of respondents said their
association has been a victim of fraud or embezzlement. Nearly 28 percent said they have no
measures in place to safeguard community assets.
Some embezzlement is unreported. Sometimes when misdeeds are discovered, homeowner board
members believe their best chance for recovering their losses is for the thief to pay back what he
or she stole without being exposed—though payback occurs infrequently. Some board members
fear public embarrassment—including a potential drop in property values from the publicity—
and decide not to reveal fraud.
"They feel foolish for being duped because, in retrospect, all the warning signs were there," says
Belinda M. Kitos, a certified fraud examiner in Ocala, Fla., with experience probing
embezzlement against homeowners associations.
The vast majority of managers, management companies and board members are honest, but there
are steps that all associations should take to minimize the chance that they will be the next victim
and indicators of possible fraud to know. (See "Preventing Fraud" and "Fraud Indicators.")
Stone and Thomas M. Ware II, a partner with the law firm Kulik Gottesman & Siegel in
Sherman Oaks, Calif., use the term "fraud triangle" to describe the three essential elements of
embezzlement: motivation, opportunity and rationalization. Motivation is typically greed or
need. Opportunity often depends on the degree and nature of financial oversight. Rationalization
can be complex: Many people who steal tell themselves they will pay it back, or they deserve
what they take because they are underpaid, overworked or mistreated.
If a board member, manager or employee has motivation, opportunity and rationalization, he or
she could be tempted to steal. "If you take one of these elements away, you have pretty much
eliminated it," says Stone.
Many embezzlers believe that they are clever enough to talk their way out of misusing
association funds. Even after they are confronted, "They keep doing it," notes Ware. In fact, he
says, such interactions often "embolden them."
Harley G. Smith and residents of the Village at Canyon Lakes in Kennewick, Wash., found that
out the hard way. Smith says the manager in his 123-unit community would say, "I bought my
groceries today on my (association) credit card, and I'll pay it back."
But the association stayed on the honor system. After about five years, the association discovered
about $100,000 was gone. A court ordered the manager to pay back the money in 2009, but "he
doesn't have any," says Smith, current treasurer of the community.
The lesson, Smith says: "You've got to operate like a business."
That's not always easy for volunteer boards. Many board members don't have the acumen or
willingness to review financial records and ask probing questions. Some don't insist on strict
financial controls or review financial records because it might appear they don't trust their
manager or staff.
Those who have seen the damage done by embezzlers say that imposing strict financial controls
and asking tough questions is every board member's job. They add that these controls are the
best—and perhaps only—deterrent to embezzlement and other fraud.
"Look at the financial records. It's the whole board's responsibility," says Ware. "You don't really
need to be an accountant."
Kitos says board members should adopt the philosophy of trust but verify. "When people know
that other eyes will be looking at their work, they are less inclined to commit fraud, as they know
it increases the chances of being caught," she says.
Some board members "don't know that they have the right to an annual audit or at least a
review," adds Benny L. Kass, senior partner and community association specialist with the law
firm Kass, Mitek & Kass in Washington, D.C., and a member of CAI's College of Community
Association Lawyers.
In the Plymouth Hill Condominium case, board members weren't exactly asleep at the wheel,
says Graham. The crimes Lopez committed were sophisticated and well hidden for many years.
"We were doing the right things," she says. "We just were not diligent enough."
"(Lopez) was a trusted and loyal employee. He had worked there for nine years and became
friends with a lot of people," says Sylvia G. Polites, an assistant district attorney in Montgomery
County who prosecuted the defendants. "He had everyone fooled."
Lopez's criminal enterprise was discovered by virtue of a slip: Someone found a receipt from a
bank account that didn't look familiar. Homeowners queried Lopez and his staff.
"Their responses made us very concerned," says Graham. She and other board members brought
in experts. They found a strong ally in the local police department, which promptly investigated
the finances.
Lopez's secretary/bookkeeper was convicted and jailed in May for participating in the theft, as
were contractors who overbilled the association and split the overage with Lopez. Although
Lopez was ordered to pay restitution, Polites observes, "That money is gone."
Graham says Plymouth Hill has recovered some of the lost funds through insurance and
restitution from contractors, and has returned to good financial shape. The association has a new
management firm and has adopted strict financial controls to minimize the chances of further
theft.
Targeted and Abused
Homeowners associations are small businesses, and small businesses are particularly vulnerable
to fraud, according to the Association of Certified Fraud Examiners. A 2012 report revealed that
a typical organization loses 5 percent of its revenues to fraud each year. The median loss in the
study was $140,000, but more than 20 percent involved losses of at least $1 million.
The report stated that a typical fraud lasted 18 months before being detected. Organizations with
anti-fraud controls were much less likely to be victimized than those without. About half the
organizations hit by fraud didn't recover any losses.
In 81 percent of cases, the defrauder displayed one or more signs often associated with fraud,
such as living beyond his or her means. Surprisingly, the report said that most people caught
embezzling from small businesses are first-time offenders.
A massive fraud and corruption scheme in Nevada demonstrates how homeowners associations
can be targeted and abused. A federal investigation dating to 2008 uncovered a multimillion
dollar conspiracy that authorities say involved at least 11 associations. Allegedly, elections were
rigged to seat conspirators on the associations' boards who then approved huge construction,
management and legal contracts for co-conspirators.
Numerous federal criminal indictments have resulted, and two key figures in the case—attorneys
Nancy Quon and David Amesbury—reportedly committed suicide in 2012. More than two dozen
defendants have pleaded guilty so far.
Much more common is the embezzlement that occurred at the Boca Rio Townhome Association
in Florida, where Betty Marshal, the association president, took hundreds of thousands of
association dollars for personal use over more than two years, according to a lawsuit settlement
in 2010. Marshal committed most of the theft using checks and debit cards from the association's
bank account.
Marshal, who handled the day-to-day business at a time when the association had no manager,
started getting questions from homeowners when malfunctioning sprinklers weren't fixed, lawns
turned brown, exterior painting was delayed and contractors weren't paid. Marshal rebuffed
homeowners' requests for association financial records. Eventually, she resigned.
The association hired Jean Winters, an attorney with the firm of Winters & Winters in Boca
Raton, Fla. "The first thing I said was, 'You need to go to the bank and get the records.' "
When she and the homeowners saw them, "Our first reaction was, 'Oh my God,' " recalls
Winters. "There was page after page of online gambling expenses ... up to $50,000 a month."
ATM records showed withdrawals in casinos in Coconut Creek and Hollywood, Fla., and
Atlantic City, N.J., and online gambling transactions through offshore companies. In addition,
Marshal allegedly used association funds for rental cars, cable and Internet services, airline
tickets and file-sharing services.
The association filed suit against Marshal and her husband, Albert, and won a judgment finding
them liable for fraudulent acts. Shortly before a court date to determine damages, the Marshals
settled the case. While the couple had no significant assets remaining in Florida, the association
obtained title to the Marshals' house in Pennsylvania.
The Marshals could not be reached for comment.
In addition, the association had to fight to obtain relief from its insurance company. Eventually,
it recovered $150,000.
"We have been able to drastically improve (Boca Rio's) financial situation," says Jeffrey Estis of
JNE Management Co., which now manages the community. Strict financial controls have been
put in place. "Two board members sign every check," he says.
Difficult Recovery
As the Plymouth Hill and Boca Rio cases demonstrate, recovering funds lost through
embezzlement can be difficult. It can be accomplished in a number of ways, depending in part on
the nature of the crimes, on insurance policy terms and on state laws.
Associations pursue civil litigation in many embezzlement cases, but it can be costly and can
drag out for years. Often, as in the Plymouth Hill case, the pilfered money is gone.
Recovering funds through insurance policies is standard procedure but typically requires expert
guidance. Timing is critical; some policies won't pay if the claim is made too long after the
embezzlement is recognized.
Florida laws don't make it easy to file criminal charges for fraud that involves association funds,
which is why Boca Rio turned to civil litigation and an insurance claim. In Pennsylvania, police
and prosecutors worked closely with Plymouth Hill homeowners to seek justice on their behalf.
But people who are in jail have little ability to pay restitution.
Board members—and owners—have some new tools to help them battle would-be embezzlers.
In many cases, "technology makes it easier for the association to track things down," says Kass.
However, he notes that a computer-savvy thief "can create things online that look as if they're
real."
Regardless of the tool, "You're not going to catch or stop every single act" of embezzlement,
says John F. McCracken, treasurer of the Parkway Villas Condominium Association near Dallas.
"But you can insure against it."
Experts say the best practice for boards and homeowners is to seek clarification if they have any
doubts about using association funds. "When you ask questions and you're not very comfortable
with the answer, don't give up," says Plymouth Hill's Graham.
Steve Bates is a freelance writer based in the Washington, D.C., area.
Preventing Fraud
Experts say there are many steps boards can take to minimize the opportunities for
embezzlement:
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Review the professional credentials of the management company. Check applicant
references thoroughly.
Review insurance coverage annually to ensure that it contains adequate coverage for
embezzlement and other crimes.
Keep financial and accounting procedures in writing.
Do not commingle funds, such as operating and reserve accounts.
Separate responsibility for issuing checks from that of balancing and reconciling
statements.
Make sure that all investments are listed in the association's name.
Demand that your accounting firm give the board an audit report each year.
Obtain multiple bids for major contracts. Do not solicit or
accept bids from board members or their friends or family members.
Set low limits on credit cards issued to board members and association staff.
Make bank deposits frequently. If cash is accepted, keep it in a secure location.
Store blank checks in a secure location. Never sign blank checks or make checks payable
to "cash."
Require two signatures on every check and transfer. Notify the bank when an authorized
check signer leaves the association or board.
Stamp invoices "paid."
Maintain thorough payroll records. If there are several employees, create an account to be
used only for payroll.
Review bank reconciliations for operating and reserve accounts, and compare revenues
and expenses with the budget at least quarterly. —S.B.
High Fidelity
By Sherry Branson
A crime policy, also known as a fidelity bond, can help protect community associations from
wire funds transfers, check forgeries, fictitious invoices, unauthorized credit card use, property
thefts and other crimes.
The insurance can cover direct loss of money, security and property caused by an employee or
board member. In the event of a crime, it's important for a board to know how the claims process
typically works.
1. Notification. A community representative should call, e-mail, fax, file a lawsuit or
submit an accord loss form to your broker, who will then notify the insurance company.
2. Coverage verification. Once the insurance company is notified, it will appoint a claims
examiner who will verify the coverage by reviewing the underwriting file. He or she will
copy key documents, verify effective dates, limits, deductibles and endorsements.
3. Acknowledgement. The claims examiner then sends an acknowledgement letter to the
insured, stating that he or she will be handling the claim. The insured may contact the
examiner with any questions or concerns relating to the coverage.
4. Receipt and analysis. The claims examiner also will send a proof of loss form to be
completed by the insured. The forms typically require:
o A detailed explanation of the claim
o Supporting documentation for the amount claimed
o A notarized signature from an authorized individual
o The police report, if one is available
5. Investigation. Once the proof of loss has been received and verified, the claims examiner
will attempt to meet with the person accused of the crime. If that person admits to the
crime, the examiner will obtain a signed statement and a promissory note outlining an
agreement for restitution. The claim will be judged based upon the merits of the
documentation provided by the association. Occasionally, it's necessary to engage an
accountant to verify the loss amount.
6. Disposal of Claim. When the investigation is complete, the claims examiner has four
options:
o Accept and pay. If the claim is fully documented and insurance covers all
aspects, the claims examiner will issue a check in exchange for a release by the
association. The release closes the claim and gives all rights to the insurance
company to go after the accused for the money.
o Reject and deny. A denial letter is prepared if the loss doesn't qualify for
coverage under the policy.
o Compromise. Sometimes a claim cannot be fully documented; however, the
benefit of doubt lies with the association. In these cases, a compromise agreement
might be reached to resolve the claim.
o Salvage. The insurance company will examine whether others have some degree
of responsibility to see if it can recover the money paid on the claim.
—Sherry Branson is marketing project manager for Kevin Davis Insurance in Los Angeles.
Fraud Indicators
There are some common indicators of possible fraud to watch for too, including:
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Missing, copied or altered financial records
Large or unusual transactions
Unauthorized purchases or credits to accounts receivable
Duplicate payments to vendors, payments to unknown vendors or vendors not on the
approved list
Large variations between actual and budgeted amounts
Withholding financial documents from board or association members or failing to
conduct annual audits
Changes in lifestyle, behavior, attitude or performance. There are numerous behavioral
red flags, including, but not limited to, defensiveness, big spending, and erratic or
inconsistent performance. —S.B.
Resources: Safeguarding Community Association Assets.
© Community Associations Institute. The above article is reprinted with permission from Common Ground™
magazine, published by Community Associations Institute. Further reproduction and distribution is prohibited
without written consent. Go to www.caionline.org for more information.