March 25, 2011 - "How Did This Happen?"

Why are things the way they are and how is it that a HOA gets to the place it is, be that the fee level, reserves, overall finances, community makeup, number of delinquencies, number of foreclosures, number of rentals, etc. Is it all simply an accident, or did the owners and the boards get the HOA to this place?  This is one in an ongoing series on "reality checks." From my archives. An email dated March 25, 2011:

"[Ms. President, Communications Director] and the Board;

Several times during recent association workshops, and board meetings, the question was asked “how did this [reserve study] happen.” [The board member who was most responsible for this process] has asked that question three times, while I have been present.

[I wasn't a member of the board that made the decision. I was the principal cleanup guy and janitor.] 

The answer is somewhat complex. It is the result of both action and inaction by the board. It is a fact that we can do everything properly and yet, at times, things will go wrong. This [study] is not, however, one of those times.  The reserve study was solely the consequence of board decisions.

My purpose in providing this is as a teaching aid. It is also a response to the question posed by [the communications director], which I take as genuine.

If we can learn from these situations, we can avoid them in the future. Last year, this was one of several that I have become somewhat involved in, as a board member. Not in an active, decision making role, but as the “cleanup guy.” I have another situation which I will conclude and report on at another time.

My purpose in providing this is also not to spread blame or guilt. It is necessary to be honest and frank. If that is intolerable, then I suggest that we are not functioning as unbiased individuals with the best interests of the association, but rather from personal bias. We all want to look good. However, as fiduciaries, it’s not appropriate to sacrifice the association in the course of attempting to do so. At times, we will all “look bad” or make mistakes. The issue then becomes, “what are we really committed to” and are we willing to take responsibility for our actions and be accountable? I do realize that I’ll be told “I’m biased” so I’m going to use language which carries as little charge as possible. How each of you takes this is your personal issue.

Here are some circumstances which set the stage [for the failed study]:

1. In the period 2008-2010, the entire experienced board was replaced.
2. In 2010 a vacancy was created on the board. The sitting board decided that the position should go to [the newly appointed landscaping director], who was apparently considered by the board to be the most qualified [and had no previous board experience and seldom attended association meetings].
3. [A long term board member] was treasurer and was the only member on the board with prior experience, at the time of the reserve study bid award process.
4. The board in place at the time the reserve study was commissioned was at that time a relatively inexperienced one. One individual had no specific duties or assignments. His sole purpose was to give advice and to vote. On October 14, during a budget workshop, while I was present, he advised the board that he was pursuing a [foreclosure......]. He has since resigned.
5. The board, from my perspective in the audience from 2008 - 2010, was distrustful of the professionals, sometimes exhibited an unwillingness to ask questions or follow guidance. At it’s worst, this at times seemed to be an adversarial relationship by the board. During the above period, member(s) of the board also had issues with BLMH’s maintenance contractor.
6. In 2010, the board, under [the president, the rules director, the architectural director, the non-assigned board member, etc.] made the decision to evaluate vendors for a reserve study.

So, a somewhat inexperienced board, apparently distrustful of management, took on the selection of a vendor for a reserve study. How was that process handled by the board?

1. The board divided up vendors between several board members. These were to be interviewed, and the results then combined. Or so this was stated to the owners during an association meeting.
2. It appears that each vendor interview was attended by a single board member. 
3. The lack of formal procedures, including a pre-printed questionnaire, implies that the discussions between board members and vendors were not structured and consistent, and were informal. Such an approach is flawed and permits personal bias and inconsistencies to occur. It may allow the vendor to control any interviews.
4. Results were discussed during association meetings, but there was no discussion of a “bid evaluation form” or formal procedures used for the evaluation. An opinion was rendered by each board member who conducted any interview, and those opinions were then compared.
5. During the discussion of the findings of the various board members, extra weight was given to the vendor who was ultimately selected on the basis of his “quality advice” concerning the staining of limestone sills, etc. Such information did not have any relevance to the qualifications of the vendor or the skills required to provide a reserve study. The vendor who was selected, was given high marks by a board member because of his alleged skills as a contractor.
6. The architectural director’s participation was minimal.
7. The opinion of Management was not requested during the open meetings. Specifically, I did not see these question asked of management: 1) Who do you think is most qualified? 2) Who do you think is least qualified? 3) What would be your recommendation to the board? 4) Why or Why not?
8. There was no discussion, with owners present, of the qualifications or lack of qualifications of the various bidders.
9. The landscaping director objected, but a higher cost bidder was promoted and ultimately selected.

What do we know about the vendor who was selected by the board?

1. His disclaimer states, in part that “[XYZ, Incorporated] is an independent Consulting Firm and as such is not licensed nor engaged in the practice of Engineering, Architecture, Life Safety Monitoring, Hazardous Material Identification, Air Quality Monitoring or any other regulated or licensed practice.”
2. Competitors who were not selected did include professionals who did have certifications for providing reserve studies, which the selected vendor did not.
3. The selected vendor is involved in a company which replaces stucco panels of the type installed on the buildings at BLMH. This means that it is possible that he is both qualified to replace them, but he may be biased in his opinions; his company would benefit by promoting the replacement of such panels. It is conjecture, but his goal in convincing the board of his “quality” as a contractor could have been an attempt to sell his services. In fact, his study stated “it is recommended that the majority of these systems be completely removed and replaced with an alternative exterior siding or cladding system…… The exposed "Masonite" (or similar) hardboard siding exhibits significant deterioration and may no longer provide an effective waterproofing barrier for the structure(s).” However, management and our maintenance company does not share that opinion and the association has evidence to back up their contrasting opinion.

What occurred after the selection of the vendor and contract award?

1. According to several statements by [Ms. President], it was difficult to get a completed reserve study in a timely manner from the vendor.
2. The study, when it arrived, was found to be fatally flawed; it was based on the wrong reserve numbers.
3. The study was returned to the vendor for re-work. The vendor did so and re-issued the study. The latest study has a “July 1, 2010 analysis date.”
4. After review by the board, further discussion with the vendor was not possible, because the vendor used the re-working to include the proper baseline financial information, as the association’s one and only possible opportunity for comment. It has been stated by [our president] that further changes would be on a fee basis.
5. To my knowledge, there has been no formal letter to the vendor at any time after the issuing of the revised study. Contact has been verbal or via email.

What can be done to avoid a reoccurrence of this situation in the future? Here’s a list of some, but not all of the procedures, checks and balances. These are for discussion.

1. Use a formal evaluation process. That includes the preparation of procedures, and written bid specifications and evaluation documents for all contracts of consequence.
2. Use improved screening of potential vendors. Vendors should be qualified and if not, that should be a very important piece of information, and treated as such.
3. Include association experience with a vendor, as a consequence of prior work at BLMH or nearby associations under management, as a factor.
4. Have specific guidelines, objectives, and expected results for any bid process, and the project it involves.
5. Consider the use of sealed bid documents and where appropriate, open them simultaneously and in the presence of management, at least two board members and if possible, a witness.
6. Use management to provide professional guidance. Where appropriate, also use our maintenance company for their professional opinion.
7. Conduct any bidder interviews in accordance with pre-printed forms and questionnaires. At least two board members should be in attendance.
8. Provide a summary for each interview of bidder supplied references.
9. Evaluate bidders on the basis of the skills necessary and services required.
10. Solicit management’s opinion and get that opinion in writing.
11. Prepare a written analysis of the various bids, using the data from the various forms and interviews.
12. Using the written analysis, each board member will then be involved in the discussion and selection. However, each board member should also be familiar with the specifications and the bids, having at least read them once.
13. If a board member cannot do the above, then they should formally recuse themselves from voting.
14. If the board cannot perform the above services for the association, then most should be deferred to paid professionals, who will then be accountable and responsible.

If you have any questions or comments, please advise me."

Note:
This is one of a continuing series of posts which provide additional information on the realities and problems faced in HOAs. These posts are not fiction and will carry the label "Reality Check." If you are interested in such matters, use the label "Reality Check" to find these posts, which will add to the publicized documentation of my life in a HOA.   These posts are in part a consequence of comments I receive from time to time. Some anonymous commenters wonder why it is the way it is, or argue that the boards should "do more." It's reminiscent of that resident who called me and told me "I'm a customer and I demand service from you."