Friday, March 16, 2012

Conflicts of Interest and Conflicting Interest Transactions. What Homeowner Association HOA Boards of Directors Don't Often Know.

For some, the stories I am about to tell could never have happened. However, what I am about to say is real and nothing was ever made up. Several years ago, 2003 to be exact, the homeowner association in which I reside ran into some difficulties with our Property Manager. As Treasurer, I was responsible for making materials disbursements to our roofing company from whom we had contracted to install a stone-coated steel roof. The arrangement with the roofing company called for our association to be invoiced for the cost of materials, and the roofing company would invoice for the labor once each building had been completed.

Things were moving along well enough, however, at some point in time our owners began to notice that the project had stopped. We inquired of our Property Manager at the time and she assured us it was because the crew had to be pulled from our project to complete another. After approximately 90 days, as Treasurer, I personally contacted the roofing company to ascertain as to the status of the project. It was at this time that I was informed that the crews had been pulled due to lack of payment.
If your a homeowner association board member this story may be starting to sound all too familiar.

Ironically, I had been routinely stopping by our management company's offices to sign checks. What I learned is that there wasn't enough funds available so the checks were being voided to pay operating expenses. These expenses included the monthly management fees. As such, the Board of Directors elected to place the company (in accordance with our governing documents) out to bid. As a result, they merely quit.

Shortly thereafter, I was approached by our electrician regarding a bid which had been submitted for replacing approximately 16 wooden light poles with aluminum and metal halide lighting. During a walk-thru of the property he informed me that he would decrease his bid by 20%. I inquired as to why he could do that. He responded by stating that "Since your association is now self-managed, the 20% represents the fees that I would have to pay to the management company for receiving the contract."  It wasn't long thereafter that the Board of Directors sought bids from three (3) separate painting contractors. All three stated that they had been trying to procure business with our association for nearly 20 years and were always out bid by our previous management company's preferred provider.

In 2005, the state of Colorado legislature was in the process of drafting and enacting Senate Bill 100. It was at this point in time that our landscaping contractor had inquired if Senate Bill 100 would have any effect upon his business. I explained that it mainly dealt with specific issues surrounding the Homeowner Association's Board of Directors and governance policies. I stated to him that I thought that the legislation did not go far enough to protect homeowner rights. In particular, I would have liked to have seen legislation regarding "Conflicts of Interest" and "Conflicting Interest Transactions" as they relate to the relationships between management companies and individual contractors.

During this time, our landscaping contractor serviced approximately 12 individual properties for our previous management company. In return, he indicated that he had performed a wide range of "Free Landscaping" services for the management company and its owner. I would later learn that the "preferred" roofing company provided "FREE" roofing services to the owner. Likewise, the "preferred" painter provided "FREE" and/or reduced painting services. As a property manager, I routinely hear stories regarding just how this relationship actually works. In some cases, the property manager works diligently to insure that the Board of Directors is led in such a direction as to insure that the "preferred provider" receives the contract.

In some cases the bid is increased 20 -30%. Then, when it comes to paying the invoices, a master invoice is then sub-divided into two separate payments with the contractor receiving 20-30% less. In other situations, the Board of Directors authorizes the payment, and the contractor immediately forwards a separate payment to the management company. Some management companies will tell you that they do not make their money off of managing the properties. If this is the case, then just how do they make their money?  In many cases, its has very little to do with governance as much as it does with often "undisclosed" business relationships.

If nothing else, the Colorado Common Interest Ownership Act (CCIOA) should incorporate some form of governance guidelines for property managers. At the present time, none actually exist. Thus, the homeowner association Board of Directors is often left in the dark. This makes them, and the residents they represent, the victims. It is one thing to utilize tools such as reserve studies, dues increases, or special assessments to hide much of this activity, it is another to do so knowing that the associations are spending far more than they should.  At this rate, the homeowner associations will always be behind the proverbial "eight ball".

Thus, as many homeowner association Boards of Directors are reviewing their balance sheets, maybe they should ask that their property managers and/or management companies fully disclose their working relationships with the various contractors. Especially if the association is expecting to venture into a major capital improvement project. This is stuff that one cannot make up. Board of Director members have a fiduciary duty to their associations. If the management company will not willingly disclose these relationships the Board of Directors should actively seek bids from other competing companies, regardless of the number of years the current management company has been with the property.

Caveat Emptor - Buyer Beware.

In the mean time, if your Board of Directors is presently seeking new management they should ask for the following:
- Confidential Policy
- Privacy Policy
- Conflict of Interest Policy
- Full Disclosure Policy

If the candidates are reluctant to provide such information you may just want to move on.

For samples of the above policies visit our website at

Wednesday, March 7, 2012

Should HOA Managers in Colorado be licensed?

Do you support the licensing of individual Property Managers in the state of Colorado? The Colorado Springs Gazette is currently conducting an on-line survey. Visit the following link and make your voice heard.