"We'll tell you what the reserves are after you purchase"

Most owners live within their unit, but some do not and rent their unit. A few owners decide they made a purchase mistake. This realization may occur shortly after purchase, or after some years. For example, the real estate bubble that led up to the financial collapse of 2008 was a fun ride, until the bubble burst. Then the value of real estate "reset" to a much lower figure.  At that time, when the fun went away and the costs spiraled, some condo owners found themselves with a condo they could not flip as intended. A few also realized that they don't like being a landlord, and some woke up to the reality that condo flipping was no longer a path to riches.

Some who purchased during the run up in real estate, particularly at the peak, are still underwater. In fact, nationally it has been reported that 16 percent of all homeowners with a mortgage are still underwater.  If one purchased with a long term perspective, the current value of their home or condo may not be important. After all, what it is worth is really important only if one intends to sell or get a second mortgage, etc. However, some are unhappy to be in their current financial situation

Many complaints can be traced to circumstance, but some can also be traced to a buyer's failure to do due diligence prior to purchase. Here are a few examples.

Here's a true story. A friend had been looking into the real estate market in Chicago after relocating. They narrowed the search and decided a condominium would be nice.  I suggested that they check reserves as part of a short list of items I gave them. They came back and said "I was told by the realty professional that I would be given the reserve information after I purchase."

It is true that there is no requirement to release a reserve study to a non-owner. However, the financials should include the dollar amount of current reserves and potential buyer is entitled to know that information. I do wonder when I am told about these things. This is precisely why I put together a short list of things to check or to ask about when considering purchase in a HOA. It's published elsewhere in this blog. It may take the signing of a contract to get certain details, but many should be available before doing so.

Buyers can be unreasonable and can ask for information and details that are not critical to a purchase. One does need to exercise some common sense. Yet, there is no harm in asking questions and the HOA representative can comply or not. I would suggest that one also retain a real estate attorney and give them your list of questions. In my limited experience most management firms respond well to buyer questions and are familiar with them. A prospective buyer is not the first to ask these questions. Nevertheless, a prospective buyer should be prepared to do some research. You may be given a series of printouts and you'll probably have to do some work distilling the information.

My "Potential Buyers Guide" is not all inclusive. It also gives a potential buyer some things to do and read, as well as think about. No one ever held a gun to a HOA owner's head and forced the to make a purchase decision. So buyers need to do the responsible things to alleviate any concerns prior to making the purchase decision. It is common sense to read the ByLaws and the Rules and Regulations and understand them prior to a purchase. Ditto for the recent financials of the association. But one needs to be aware that the annual financials are a "snapshot" in time. For the unit under consideration it is also possible to hire an inspection firm. However, that firm will not be inspecting the common elements, so ask management questions about maintenance, who performs it and what is included as owner responsibility would also be prudent. As would questions about reserves.

But always remember that the written condominium documents take precedence over whatever you are told. There is a hierarchy to these documents. Federal. state and local laws come first. In Illinois the Illinois Condominium Act (written statute) takes precedence over the written Bylaws of the association, and the Bylaws take precedence over the Rules & Regulations.

Here's another example. A few years ago an associate asked my opinion about a condominium on the east coast. I did review the financials and I saw that this rather large building (approx 60 units) had about $180,000 in reserves. Could that be a problem? I suggested to my associate that they should be prepared for 1) fee increases, 2) possible special assessments and 3) resistance to fee increases or special assessments by other owners which could have an impact on maintenance. That potential buyer did hire an inspector and they did find some unit issues, but they proceeded with the purchase. They are happy in their unit, but the reserve situation has created problems for that HOA.

At that HOA several years later the board and management faced replacing all of the hallway carpets. It was determined that reserves were inadequate. So the carpets were removed, the concrete floors patched and then painted. No carpet was installed. You can imagine that some owners were unhappy about that; the long corridors became echo chambers. Yet others also argued that they were unwilling to shoulder the burden of a special assessment.

When there are insufficient reserves to handle capital costs, there may be differing opinions among owners on how to deal with this. Some owners may have their own idea of priority of spending of those reserve funds and it may not include fair distribution on the property. That priority may also take the perspective "If it really isn't broken then don't fix it" and the board may operate with an austerity program. That program may show up in interesting ways. The example of painting hallways in lieu of replacing carpeting is an example.

Some owners will be unhappy when  maintenance alternatives are employed to avoid special assessments or increases in reserve funding. Some will accept maintenance compromises to keep those fees where they are. Some will be unhappy with what they perceive to be a change in quality if alternative methods and materials are used. A few may complain about any common area maintenance which occurs in areas for which they derive no immediate benefit.

Here's another example. An associate lived in a townhouse complex in which the windows were defined a "common elements". They thought that was wonderful as they would never have to save for or deal with window maintenance and replacement. However, about 10 years after purchase the board of that HOA decided it was time to replace all of the windows and assessed each unit about $10,000 to do this. My associate insisted that the windows in their unit were fine and did not need to be replaced, but to no avail. The board had decided to change all windows so as to treat all owners fairly and equally. A few other owners were unhappy with this, but it is my understanding the majority were not willing to make it an issue. So the project proceeded and my associate received their $10,000 invoice.

It can go both ways. However, if there are adequate reserves, the maintenance becomes more one of establishing priorities and adhering to reasonable budgets.

This is why I argue for setting reasonable maintenance priorities, performing reserves studies on a regular basis and then taking incremental steps to accrue sufficient funds to handle the identified issues. I've concluded that many of the complaints of owners can be traced to maintenance and condition, and that in turn is directly a consequence of available funds. There will be exceptions to the rule, but I've seen enough in my 15 years to make the simplistic statement that "money is the root of most issues".

Not responsible for any errors or omissions. (c) N. Retzke 2017 All Rights Reserved.

Board Operation, Some Examples and Fiduciary Duties, revisited - Part I

I'm going to provide a few quotes and links to illuminate the subject of "fiduciary duty" as it applies to an HOA with some insights into these duties as they have been and are being applied in this HOA. Because of the length and richness of this subject, I’ll provide this in three parts. Part I will serve as introduction, Part II will include references and review of “fiduciary duty” in the words of "experts" and certified "professionals", and in Part III I’ll look at some of the practical application of  "fiduciary duties" as currently and previously applied in this association and I'll draw some conclusions and perhaps make a few recommendations. 

First, some background information. If you came here for entertainment, you came to the wrong place. I don't think this subject will be particularly entertaining, but I suppose it could be. I should also state that one of the forces that drive us is the desire to remain in the dark, and unenlightened. That way, we can continue on our merry way and do untold mischief, and feel good about ourselves at the same time. Yes, it is true that "ignorance is bliss" and if you crave that, you have also come to the wrong place. 

Our board is comprised of many newly elected, or inexperienced members. That is to say, some have no prior experience on the board of an HOA, or any board, for that matter.  Some have no “professional” or business experience. So it would be presumptuous on my part, and arrogant on theirs, to assume that they know their true duties. Most of us, and that includes myself, operate more as technicians than as leaders. That's a natural way for most of us to be. We all have immediate tasks and responsibilities to perform, and we can and do become readily absorbed in the day to day minutia. However, to do any task well requires some critical thinking skills and the willingness and ability to keep "the big picture" in perspective, and to prepare for the part. That preparation can take years; some of us prefer to think like the Nike ad, which purports that all it takes is a nice expression such as "Just Do It" and we are ready for the task at hand. Reality has a way of deviating from 30 second sound bites. If you have read about Chesley B. "Sully" Sullenberger, the pilot who landed a disabled aircraft in the Hudson River in January 2009, you quickly discover that he was unusually trained. That training, some on his own initiative, allowed him to accomplish what some people think was a "miracle".

For the members of the Board of Managers of an HOA in Illinois, part of the training is an understanding of the Illinois Condominium Property Act, another is a comprehensive  understanding of the Bylaws of the HOA and the Rules and Regulations. Another and perhaps most important is an understanding of their “fiduciary duties”. Finally, each member of the board  must possess sufficient education to exercise common sense, make sound business decisions, and perform their specific duties and assignments.  If we are to assume that an HOA is first and foremost a business, which it in fact is, then some rudimentary arithmetic and accounting skills are required. How else to review, approve and execute budgets? And so on.

It is the responsibility of candidates for the board to determine their suitability and  to either possess or rapidly acquire the fundamental skills necessary to function as members of the board of managers. They all vote on all matters, and they begin voting at the first association meeting. So it would be common sense that the members each possess these fundamental skills. Of course, if they don’t then they must rely upon “professionals” who are experienced in these matters, or they must rely upon other board members. In either case, the quality of the board is impaired. In the first situation, a board can become over-reliant upon the judgment of a single manager or professional. In the second case, the board may become the expression of one or several “powerful” board members. In both cases, the results can be less than satisfactory. For example, at one time, this association relied upon a manager who provided guidance on budgeting and reserves which was, to understate it, less than adequate.  We have the historical data to substantiate this. 

The opposite extreme is also possible. In such a situation the board decides that it is far too reliant upon the “professionals” and is eminently and inherently qualified to make more or most of the decisions.  At our HOA, the term “larceny” is sometimes used by some unit owners to describe past boards and management. There is no proof of any of this; it's simply innuendo and character assassination. I do have to wonder how people can think and say that the past situations were so terrible, and then in the next breath promote a position founded on the belief that our current board is so eminently capable, qualified, trustworthy and honest that such a situation “could never occur here”. This type of flip-flopping is not rational and certainly doesn't adhere to any definition of  "common sense" that I am familiar with. Any manager is somewhat familiar with the “Peter Principle” and if people are seriously considering this route, I suggest all unit owners read Tom Peter’s management book “Thriving on Chaos” (sorry for the pun, Mr. Peters). I do have a copy of this excellent book in my library.  But again, the fiduciary duties of a board would prohibit certain aggressive actions. 

Of course, a board could take the approach that they are first and foremost "administrators", hire professional threesomes in all categories, and then sit back and allow or direct, depending upon the skills of the board, the professionals to argue each position and present for each situation. The board would then simply select the two that, in the opinion of the board, are most satisfactory and vote on that. Using this approach could be prohibitively expensive and would run afoul of "fiduciary duty" issues. After all, could anyone really state that such an approach was a good and prudent use of association fees?

The members of our board are mandated and required to put the association first, at all times. Upon becoming members of the board of directors of BLMH, they gave up certain personal rights as a unit owner, because they must now act in the interests of all the owners of the association. They are prohibited from creating or supporting groups or sub-groups in an HOA. For example, as a unit owner, one can ignore the rules and assume this is primarily a social club and press for block parties, garage sales, street fairs and socials and coffees. However, a member of the board of managers, who also may have similar beliefs and agree with a specific group, is required to put their personal wants, needs and desires aside. They must view this solely with the perspective of an impartial member of the board of managers. That perspective should include a consideration of  the impact on all unit owners, which may include but is not limited to the cost of insurance for these public parties, the consequences of accident and possible litigation, direct and indirect costs, the problems of traffic and parking and possible hazards with visiting people driving our, to them, unfamiliar streets, and finally the consequences and desirability of the imposition of these events upon all unit owners. (Note: We don't have a sidewalk along our streets so most unit owners and their pets walk in these main streets, which because this is a PUD, are narrower than the usual, and cannot readily accommodate pedestrian traffic and two-way vehicular traffic).  A member of the board must weigh the possible benefits to all unit owners, as well as all costs both direct and indirect, as for example "wear and tear" on association property, and any and all possible liabilities. The personal position of the board member is of no relevance. Members of the board must  actually transcend the issues and view everything from the perspective of their fiduciary duty on one hand and the Illinois Condominium Act, the Bylaws and Rule and Regulations of the Association on the other.

What's best for the association is not necessarily the result of formal or informal polls. As an example, what if the majority of this association, as the result of a poll, decided they wanted no reserves and that all monies paid should be returned? This is an extreme example, but I think some of our board would be inclined to say "return the money" because that's what they believe the "majority of us" want! That’s one of the dangers inherent in an HOA in which a member or members of the Board of Managers are unfamiliar with their true “duties and responsibilities”.  If any member of the board assumes they have a broad political or  “social mandate” and their duties encompass ambiguous “change” and their specific tasks are the administration of  the Landscaping contractor, Maintenance contractor or even simply preparation of our Newsletter, then they are operating out of a personal perspective, not a fiduciary one.

To look at this a little closer, it is perfectly appropriate for me, as a unit owner, to express my "outrage" over what I perceive as "injustice" or infringement upon my personal “rights” or the rights of others, and I can threaten, cajole, or solicit agreement to change the rules which don't work for me. And in so doing I can ignore all or most of  my neighbors. However, as a member of the board, I must publicly and privately uphold the current rules and regulations and see that they are applied fairly and impartially to all unit owners. The board may openly discuss the issues inherent in the current Rule and Regulations, but is bound to uphold those rules fairly, impartially for all unit owners, no matter what their personal situation, relationship to the member(s) of the board or even their proximity as neighbors.  There is a method for altering the rules and regulations, but again that method not only encompasses open discussion but it also requires the members of the board of managers to view this from the perspective of their “fiduciary duties”, which includes the rights and privileges of all unit owners.

To overstate this, I can also, as a unit owner, operate from the perspective that I want to be as popular as possible. I can schmooze and "ooh and ahh" and express "oh, you poor dears" to my heart's content. However, as a member of the board of managers I must remain somewhat aloof and avoid entanglements and promises. I can only promise that I will always be objective, will do my best to use sound business judgment and common sense to guide this association in such a way that divisiveness is reduced, that the property (common elements) is well maintained, and that I will evaluate budgets encompassing both current and future needs when preparing and voting for assessments, fees, promoting capital projects and the funding of current operations and maintenance. 

It is unfortunate but in the real world, not all of us operate from integrity and it is also true that individuals seek seats on boards for personal esteem, personal reward and to promote personal agendas. If you doubt me, then you are truly naive. I recommend that you spend about $100 and talk to a good lawyer who specializes in condominiums and HOA law in Illinois. I can recommend one.

As individuals and unit owners, we may perceive our duties and obligations as the member of a board of managers of an HOA in a certain way, and there are many possible interpretations, but only one is of any significance, and that is the legal interpretation as it applies to our HOA. Winning a seat on the board of managers is nothing more than an opportunity to be a steward. Some say it is to work for the good of the association. But what truly is the "good of the association"? That is an area of mischief. Only by becoming intimately familiar with the concept and realities of one's "fiduciary duties" and by using that as a beacon to guide a board member's actions, is it possible for the board members of an HOA to navigate through the problems which face them.  If the board member is capable of exercising common sense and good business judgment, it is then a possibility that the board member will successfully complete his or her tasks, but will most likely not be universally popular.  

Actions by a board to put the board first is not putting the association first; power in a democracy does not give one the power to do whatever one pleases. It does provide the opportunity and that can be coupled with private agendas; ergo the need for the Illinois Condominium Property Act, for observers, and for point of law. Of course, what does one do in an association when members of the board have the unflagging opinion or belief that their position always conforms and aligns with the "right" position? That is, of course, in accordance with their personal beliefs, standards, judgments and evaluations.  It may also be aligned with those of a group of unit owners which is forever promoting and reinforcing these unshakable beliefs, to the benefit of course, of that particular group. In such a situation the board member occupies the center of the universe, and we the unit owners, in particular the "silent majority" of us are, I suppose, simply dust and detritus orbiting around them!

When posing some of these questions, I have been told that a good paper trail is always a handy thing to have, and there are any number of organizations that provide "independent and objective evaluations of fiduciary compliance".

  In part II, I’ll take a closer look at what exactly are the “fiduciary duties” that guide our board and how they guide and enable a member to do “the right thing”, no matter what their personal viewpoint may be. 

Be Careful What You Wish For

Regarding the possibly new "activist" board, it reminds me of the stories my spouse's aunt has told us regarding her experiences.

She is a condominium unit owner. As she tells it, there have been expensive changes wrought at her condominium by a new board that was elected when some unit owner's were "dissatisfied". The result was higher assessments, and it turned out her new board had an agenda to make certain improvements that they felt were necessary, such as new windows on the units. My poor aunt was hit with a large assessment and she was convinced that new windows were not necessary. But that board has had it's way!

Now, we apparently have a group of owners who want to change the board but aren't telling us what they intend to ultimately achieve in doing so.

Look out BLMH! Here comes a new "activist" board that is all about "Change".

Residents of Change!

Board elections are fast approaching and this year “change” seems to be permeating the air. We have a self-appointed group call the “ROC” or “Residents of Change” which wants to be on the board. They have circulated a colorful (as in printed with a color laser printer) letter and profiles of several board candidates. I would have prefered that they be about "solutions" but I and my fellow unit owners are apparently not so lucky!

They summarize the candidate profiles with this statement:

“A grassroots movement to change the character and the attitude of the BLMH association board has been growing and is now organized as the Residents of Change (ROC). Our first order of business is to place a ROC team on the board and we have chosen three candidates to run for the positions open on the board in 2008. The ROC candidates are all successful professionals with backgrounds in project management, conflict resolution, team building, and interpersonal communications.”

The “ROC” is running with a series of objectives. These include:

1. We will be the voice of the residents, and will work with our management agents to be sure that our collective voice is heard.
2. We will champion forward thinking ideas over repressive measures.
3. We will seek ways to reduce expenses and keep our assessments as low as possible.
4. We will encourage open, two-way communications by:

• Creating an association website by posting news and bylaws.
• Establishing suggestion venues via email or written note.
• Publishing the minutes of the Board meetings.
• Notifying residents of agenda topics.
• Respecting residents opinions and concerns.

They also made the following statements in the letter mailed to all of the unit owners:

"As you know, we will be voting for association board members in the upcoming September 25th elections. For a long time now, a majority of us have been displeased with the current board for its lack of respect for the concerns and opinions of BLMH residents, as well as its failure to initiate or maintain any type of communication between us and the board."

I found a proxy instruction taped to my unit door this morning. This was apparently put there by someone else in the unit. However, no one was willing to take credit for this.

I have read all the material that the 'ROC' has given me and I have grave misgivings. I recall a story my spouse's 90 year old aunt told us a couple of years ago. That story was about the changes that were wrought on her condominium by a new board that was elected when some unit owner's were "dissatisfied". The result was higher assessments, and it turned out her new board had an agenda to make certain improvements that they felt were necessary, such as new windows on the units. My poor aunt was hit with a large assessment and she was convinced that new windows were not necessary. But that board had it's way!

As for the "ROC" I don't know if they can be trusted. I am unclear what their agenda really is. OK, I got it, they want to lower expenses and they are for everyone being heard. But what do they intend to accomplish? How will they accomplish this "lowering"? Will repairs be stopped or will they decide to allocate the funds to some "pet project" as occurred with Aunt "A"? I don't know because these people aren't talking.

One of the items they are promoting is a web site for the association. Great! But why haven't they put their agenda on a blog such as this one and promoted it to all of the residents?

They claim to be a majority. But until we received the letter requesting their vote, we had never been contacted by them. This leads me to question that statement. If it is false, then that leads me to surmise that these people cannot be trusted.

I suspect they are preying on peoples fears and are possibly making an end run at the board. But why? One possibility is to get to the cash reserves. I don't know how far they could go if elected. I suppose they could replace the management company with their own cronies. That would give them free reign.

I called our management company to discuss how far this can go, but the people I needed to speak to were not in. As this is not an "emergency" I'll wait.

In the mean time So I decided to formulate a letter to the three candidates and send a copy to the current board. I wonder if I'll even get a response from the "ROC"?