Stucco Blues: How One Condominium Deals With a Construction Emergency, Part 2

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Posted on August 7, 2011 by Ryan Poliakoff

First, I have to apologize for the delay between columns–I had been dealing with a family emergency, but now I should be back on schedule.  Today’s entry is nice and long to make up for things.

In my last column, I discussed how the board at my own condominium has been dealing with a construction defect that has allowed pieces of stucco to fall from the building, some large enough to badly injure a resident if anyone were to be hit.  So of course, we have been treating this as a true building emergency.  As a result our pool, a key asset of any resort-style condominium, has been closed as we sought expert advice on the falling stucco, and commissioned an engineering report detailing the problem and the recommended solution (in this case, removing all of the stucco from the building and re-do the work properly).

Once we had determined that we had no choice but to tackle this huge construction project, it was time to solicit and select a contractor to do the work.  While we had worked with a stucco contractor in the past on small projects, there is a big difference between patching some stucco and re-stuccoing an entire 40 story building.  We wanted this contractor to bid on the project, but we had a responsibility to bring in other bidders and analyze their capacities.

The first step when sending a large project out to bid is preparing a detailed Specification of Work, or “SOW”.  This SOW is usually attached to an RFP, a Request For Proposal.  Having a rock-solid SOW for large contracts is absolutely essential.  There is no way to determine contractor pricing unless all contractors are bidding on the exact same services.  Otherwise, the numbers don’t mean anything.  One contractor may bid on an entire project in a lump sum that seems low, but on closer inspection you may find that they don’t include essential costs like permitting (in many cases amounting to tens of thousands of dollars on a large construction project), or perhaps they backload the contract with high prices for change orders.

An SOW could be prepared by a knowledgeable board or management company, but in the case of a construction project it’s best to have an engineer prepare the specification.  They will be able to really lock down the specifics that contractors understand and care about, and help to guide the bid competition into an apples-to-apples comparison (which is the only way to compare bids accurately).

Once the SOW is complete the board should review it thoroughly to make sure that the specification matches the work that the board is planning on completing.  For example, in our case we wanted the specification to very clearly split the project into four phases, one for each side of the building.  Our key priority to start was to repair the east side, facing the pool.  Once we deconstructed that side we felt we would have more information about the overall condition of the building, and could make a more accurate decision about whether to proceed with the entire project.  We also wanted to make sure that the contractor we hired bid work for our post-tension cables, as well.  In a post-tension cable construction, long cables of steel are run through the concrete and are tightened to give additional support and structure to the building (especially on balconies).  In the case of our property, some of the caps that covered the PT cables were never closed or sealed properly, and the ends of some cables had been left longer than specified.  PT cable work is fairly specialized, and often requires a sub-contractor, but we knew there was no way to properly analyze the bids unless pricing for them was included.

Once we had settled on our SOW, we called a half-dozen contractors to the building for a pre-bid meeting with the engineer.  At this meeting the engineer, under the supervision of our property manager and two board members, instructed the potential bidders on the scope of the project and the specifics of the SOW.  After inspecting the property they were sent off to prepare individual, sealed bids for the project.

A week or so later all bids had been submitted, and they were opened by the property manager and board.  Not a single contractor had bid the project properly.  Now, this might seem incredible, but I can assure you from experience that it’s quite common for contractors to ignore an SOW.  The only step to take if this happens is to have the engineer reinstruct the contractors on the SOW and have them reproduce their bids accordingly.  It’s an annoyance that you should expect to deal with in any large project.

Finally, a few days later we received accurate bids that were all on the same playing field (or, close enough that it was now possible to analyze their proposals).  The next step was to hold a dog-and-pony show–an in-person meeting between the board (open to residents, of course) and several of the top bidders.  At this meeting the board questioned the contractors on their qualifications, the number of other large projects they had recently completed, their capacity for doing the work in a timely manner, their use of subcontractors on the project and anything else that we felt was relevant based on their proposal.  After discussing all of the contractors, the board was able to narrow down our choices to two favorites–one the contractor who had done stucco work for the building in the past, and one who was a large, high-capacity stucco specialist.  There were a few oranges spread between the apples in these two proposals, so we sent them back for some revisions and asked for final proposals within a few days.  At the next board meeting (and note, at this point we had been meeting twice a week, every week for a month) the board selected it’s top bidder and began negotiating a final contract.

This last phase of the process can’t be ignored.  Just because a contractor has prepared an attractive proposal does not mean that the legal contract to be signed by the board satisfies its needs.  In the case of large construction projects there is generally a standard contract that has been approved by an association of engineers, but even so there are often changes or riders that must be added, depending on the work to be done.

Any large contract should be reviewed by the association’s attorney before it is signed.  A lot of associations  skip this step, thinking to save money, but you do not want to save $1000 of legal review on a contract worth tens of thousands, or even millions, of dollars.  Protect yourself and let your lawyer do the job you pay him or her for.

Finally, after nearly three months of investigation, destructive testing, bid preparation and negotiation we were ready to begin our reconstruction project.  Now, if you are a board member facing this kind of reconstruction, and especially if it’s a construction problem that has affected unit owners’ use of the common elements, you can guarantee that a large number of residents are going to be angry with board members.  There will be some who don’t want to spend money on the building, no matter the problem.  There will be those who feel that it should take no more than a week or two to chose a contractor for a seven-figure expenditure, despite that they have never actually personally completed such a project.  Some owners will simply disagree with the direction taken by the board of directors (perhaps they want the board to pursue a repair strategy that they feel would be cheaper, for example).  You will have private contractors who have built a small building or two who feel that they know exactly what the building needs, regardless of the advice of the paid engineering consultant.  In our building, we even had a number of residents who doubted the severity of the issue, and questioned why we could not open a portion of the pool to residents (in our county, the law doesn’t allow a pool to be only partially opened).  Just understand at the outset that this is one of those prototypical “no-win” situations for boards, and you will not be popular for the decisions you make, even if they are the right ones for the building.  Simply do your job to the best of your judgement and ability, and try to roll with the punches.

I hope that our experience helps other boards that have to go through this very difficult and contentious project.  Good luck!

Posted in Condo Associations, Developers / Construction, HOAs, Homeowner's Association Tagged , , ,

Stucco Blues: How One Condominium Deals With A Construction Emergency, Part 1

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Posted on July 5, 2011 by Ryan Poliakoff

Some of you may remember months ago that I wrote a series of articles about how the board of directors of my condominium handled a black water (ie, sewage) leak that destroyed 2 units in our building and required a complex and expensive emergency response effort.  Today I’m going to begin a series of articles dealing with another type of emergency–a construction defect that has threatened the safety of our residents and has required the board to take a host of unpopular steps to protect our residents, including the temporary closure of our pool and pool deck.  I hope that this story helps if you or the board members of your community ever find yourselves in a similar situation because, well, stuff happens, and this is part of the job of being a board member.

Like many new properties, our building is currently embroiled in a lawsuit against our developer, the general contractor and certain subcontractors concerning various construction defects on the property.  Most of these defects are long term issues that will require remediation, but have not yet required emergency action.

That changed a few months ago, when a large piece of stucco fell off of the side of the building and landed on the pool deck.  At least one piece of stucco landed directly in the pool, and the rest scattered onto various areas of the deck.

Now, if you’re like me, your first thought upon hearing that a piece of stucco fell from the building is to assume that we’re talking about a paper-thin coating of cosmetic material, one that would be unlikely to harm a resident or affect the safety of owners.  But stucco is essentially cement and sand, and it can be quite thick and heavy–the pieces that fell were several inches thick and could be measured in pounds, not ounces.  A piece of stucco that big could clearly hurt or even kill someone if it fell from a great enough height–and in our case the building is nearly 40 stories tall.

The first line of response to the situation was the management office.  After notifying the board, the manager, consulting with our insurance agent, determined that the best course of action would be to temporarily close the pool and the deck while we determined the various courses of action available to the board.  The insurance company then sent out risk management experts who confirmed that the only prudent course of action would be to close the area until an examination of the stucco on the building could be conducted.

Even at this very early stage, a number of residents were apoplectic at the thought of the pool being closed.  And I can certainly sympathize–we are a resort-type property, and our pool and beach are certainly essential elements of the property.  This anger was compounded with the general lack of understanding of the nature of the danger posed by falling stucco.  The board was quickly accused of being overly cautious.

This is always the first hurdle when a board of directors has to make decisions that are not popular with residents.  It’s hard to stand in front of your neighbors and explain why you are taking away one of their key amenities.  But luckily our entire board recognized that our duty, as directors, is to protect the common elements of the property and the life and safety of residents, even when doing so requires unpopular action.

Still, we as a board also knew that this was an emergency situation, both because of the possibility of damage to the building (water intrusion, more falling stucco) as well as the affect on our owner’s ability to use the premises.  So we immediately brought in an engineering firm to examine the stucco on the building, knowing that it would cost us several thousand dollars to test and sound even a portion of the property.  We chose to test the area of the building that directly faces the pool, as that would be our first target of repair should there prove to be a larger construction issue.

The news given to us by our engineers was not promising.  In their opinion, the stucco was improperly mixed, applied and bonded.  They removed a number of areas of stucco from the facade that were hanging on by a thread (literally, there were large chunks of concrete held to the side of the building by caulk), and found other areas that sounded hollow, and in their opinion could delaminate at any time.  Their recommendation was our worst-case scenario–remove the stucco from the building and re-do the job.  We knew this would be a large, expensive and time consuming process, and that nothing we could do as a board would assuage the concerns of owners who were quickly loosing their summer usage of the pool.

In my next article, we’ll discuss the search for a contractor, as well as discuss how to pay for such a large emergency remediation project.

Posted in Condo Associations, Emergency Planning, HOAs, Homeowner's Association Tagged , ,

Shared Ownership Security–Greeters, Gatehouses and Front Desks at Condos and HOAs

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Posted on June 15, 2011 by Ryan Poliakoff

In many of the larger shared ownership communities around the country, some type of “security” contract is a necessity.  But what exactly does such security entail?  And is it really “security”, at least the way most of us view the word?

There are hundreds of security guard companies around the United States, and they make a thriving business on SOCs.  Guard companies provide attendants to control access in gatehouses for HOAs, and they provide both front desk officers and rovers for condominiums.  Some large communities have an entire team of officers, with multiple guards on staff at any given moment, to patrol what are, essentially, small cities.  Some even have community watches that patrol in vehicles owned by the community, operating like a private police department.

However, I think it’s very important for board members and residents to be realistic about security companies and the services they offer, and to understand the purpose of having guards on the property.  Now, some readers may be thinking that’s simple–they are guards, and their job is to “guard”.  But guard what?  Is it to prevent crime?  Is it to respond to a crime if it occurs?  Or is a “guard” really just a first response observer–someone to contact the police if a serious issue occurs?

Take, for example, the issue of guards being armed or unarmed.  At the vast majority of communities the guards, and certainly the gatehouse staff and front desk staff, are unarmed.  Would you really want a moderately trained, armed civilian making $12.00 an hour roaming around your property?  No, unless you’re really going all out and hiring serious security personnel having armed guards is not recommended and probably creates more trouble than the possible protection an armed officer would provide.  An armed guard could accidentally shoot a resident or an owner, or their gun could discharge, or could even be accessed by a child on the property.

So assuming that you are in the majority of communities who hire unarmed guards, you can’t expect those guards to be true first responders when a crime is being committed.  It’s extremely dangerous for the guard, and not fair to put them in that type of position.  Instead, the guard is really there to be an extra set of eyes; one who has very specific instructions about how to handle emergencies, whether they be crimes, fires, floods or health emergencies (which are particularly common in condominiums).  But they’re not really “guards” in the way that you would think of the people who protect banks and jewelry stores.

Now, consider the majority of gated HOAs.  These communities typically have a “guard” who will sit in their gatehouse and greet visitors, ask for identification, notify owners that they have a guest and possibly record the visitor’s personal information.  But again, none of these tasks have the end result of preventing crime from happening in a community.  Experience proves time and time again that gated communities suffer from crimes just like ungated communities, including robberies and other violent crimes.  It’s just not possible for a single guard sitting in a gatehouse to serve as a failproof valve against violent acts by uninvited guests.

My point in providing this illustration is not to suggest that security is unneeded, but rather to suggest that board members and owners should rethink what they are looking for out of their security staff, and to create realistic expectations of the results they can expect.  Because if you live in a gated HOA and believe that you are immune from crime, you have unrealistic expectations about what a single gatehouse attendant can do for your community.

First, in HOAs, gate attendants should really be viewed as greeters, hospitality employees, who provide a limited but useful amount of access control.  They present a friendly face for visitors, can scare away casual criminals by checking identification and make sure that owners know when they are receiving a guest.  They record information so that, if something bad should happen in the community, the police can have some record of possible suspects.  But they don’t prevent crime.  They work hand-in-hand with solid and strict access policies and a well-designed camera system to help deter and identify unwanted visitors.  They’re great at providing that function, but poor at providing the type of “security” that some people believe they are buying when they purchase a home in an HOA.

In a condominium, front desk staff provide a very similar function–it’s access control, but not crime prevention.  A roaming guard can be effective in helping to deter crime a bit if they’re visible enough, but more often than not a single guard is left to patrol a large property alone, and they rarely hit all corners more than once every hour or so.  That leaves plenty of time for a wrongdoer to find an opening into the property.  Again, a quality security and camera system goes a long way to helping to shore up access control in most properties and provide the guards with advance notice of breaches in security.

Even more important, perhaps, is that roving guards in condominiums are usually the first line of defense against disasters, such as fires and floods.  The first person to notice water dripping from a hallway ceiling is often the security personnel, and they will generally be the staff members to respond to fire alarms and check other security concerns.  What they should not do, especially if they are unarmed, is to walk into potentially dangerous situations without calling proper authorities.  Security guards at HOAs and condos are not police officers.  They’re not hired to be heroes–they’re hired to be visible, roaming deterrents.  But if a crime is actually occurring, or if a fire alarm proves to be a real emergency, their first reaction should be to call the police or fire departments, not to rush in to battle in a heroic frenzy.

If you view your security guards and gatehouse guards for what they really are: hospitality greeters, access control assistants and extra eyes on the ground, you’ll be much better prepared to analyze their performance accurately and create reasonable expectations for owners and residents.

Posted in Condo Associations, HOAs, Homeowner's Association, Security Tagged , , ,

HOAs and Violations–Is There a Better Way?

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Posted on May 28, 2011 by Ryan Poliakoff

Property management for homeowner’s associations and condominiums can differ substantially, and perhaps the biggest difference is the process of recording and implementing letters and fines for violations of the covenants, conditions and restrictions of the community. For most communities it is the biggest time commitment for any manager–driving through the entire property, noting variations from what might be dozens of different restrictions and architectural controls, then processing violation letters and keeping track of compliance. Eventually, some of those violators may need to be referred to the board or a code enforcement committee for application of a fine or other remedial action.

The problem is that fines alone are, at best, a variably successful motivator for owners who are recalcitrant, and in many jurisdictions fines remain largely uncollectable, because liens as a result of fines may not be subject to foreclosure. So the question becomes, is there a better way to motivate owners to comply with the covenants of the association, and to possibly put less emphasis on fines as a motivating solution?

In my opinion, part of the problem with the violations process, the way that they are done by many communities, is that the ebbs and flows of owners and the various seasons aren’t always taken into account. Instead, every single violation is reviewed on each trip the manager takes through the property, and owners are expected to keep up with every covenant at every moment. The problem, however, is that there are often different times that it’s appropriate to spruce up your property. For example, an owner might not want to trim their trees during the winter, when they are mostly dormant, and knowing that they will need to be re-trimmed in the spring before storm season. Or perhaps up north a homeowner might not be interested in power washing their roof in November, knowing that it’s going to get inundated with snow and sludge for the next 6 months.

Instead of following the “every violation, every time” philosophy, consider the following alternative. Four or five times per year, have your management company send a letter to all homeowners with a friendly reminder about certain key issues in the association that need to be addressed in the upcoming months. For example, you might send a letter at the beginning of spring reminding owners to fertilize their grass, clean their roofs and check the paint on the fascia of the house for winter damage. Let them know that in 30 days the property manager will be doing an inspection of those issues. From experience, this reminder, and the more limited scope of the review, will dramatically increase the number of homeowners who comply with the applicable covenants and will avoid the need to apply as many fines. In summer you can send a similar letter for summer-type issues, such as people leaving outdoor furniture in their front yards or leaving barbecue propane tanks in unsafe areas. The general concept of this type of violations work is to give owners a heads-up of the general issues that need to be addressed during that time of year and notify them that an inspection will be conducted–in many cases, that is all the motivation needed to encourage them to keep up their homes.
The alternative, more typical procedure described at the beginning of the article frequently suffers from lower compliance and hurt feelings, as owners are often learning about a violation for the first time when they receive their warning letter (and warning letters of any kind are apt to be received hostilely by at least some homeowners). Then the owners may dig their feet in and choose not to comply out of spite, forcing the HOA to issue a fine that, many times, is not practically collectible.

The key to good property management, whether by board members or a management company, is to find creative ways to allow owners to reasonably and easily comply with the various conditions and covenants that they’ve agreed to when they bought their homes, while minimizing conflict, discontent and hurt feelings. It’s impossible to satisfy every owner, some of whom oppose any restrictions on their homes as a matter of principle, but by applying this alternative, more holistic approach to violations processing your community may be able to increase both neighborhood harmony and rules compliance with a single swipe, while greatly reducing the costs of processing fines. So give it a shot, and see if it works for you!

Posted in Back to Basics, HOAs, Homeowner's Association, How To, Rule Enforement and Fines, Shared Ownership Guide Tagged , , ,

Audit Season–What Condos and HOAs Need to Know

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Posted on May 14, 2011 by Ryan Poliakoff

For most associations, basic accounting and bookkeeping is handled either by a property manager, a management company, or, in the case of some smaller communities, the treasurer him or herself.

But once a year, most moderately-sized communities hire an outside accountant to provide at least some form of accounting review, to provide a check and balance against the work done by the day-to-day bookkeeper. That can mean uncovering fraud, but it doesn’t have to–sometimes small errors are made that can be easily corrected, or a bookkeeper may have simply made an entry that is not in sync with generally accepted accounting principles (or GAAP). Some managers and management companies do exceptional accounting work, and for some it’s not their strongest suit–but either way, it’s always a good idea to invest in the cost of a second look by a CPA.

Many state statutes and documents mandate that communities hire an accountant to conduct an accounting overview. There are three different types of overview, and the type conducted often depends on the annual budget of the association. For example, in Florida condominiums, associations with an annual budget under $100,000 are not required to do any review; those between $100,000 and $199,000 are required to conduct a compilation; those between $200,000 and $399,000 are required to conduct a review, and any community with an annual budget over $400,000 is required to perform a full audit. But what exactly are the differences between the different types of accounting services?

A compilation is the most basic form of accounting service performed by a CPA. In a compilation, the accountant assists the manager or bookkeeper to present the financial information, but he or she will provide no specific assurance that those stateements are free of material errors. Basically, the accountant reads the financial statements and uses his or her best judgment to determine whether the statements appear free of errors. the accountant does not perform any analysis of the association’s internal controls or assess the risk of fraud.

The next level of review, in fact called a review, has the CPA performing an analysis and inquiry into the financial statements that allows him or her to provide limited assurance that there are no material modifications to the financials required. The CPA will ask questions about procedures, but again a review does not contemplate testing the accounting output provided by the association and it does not assess the risk of fraud. Instead, the CPA performs a limited analysis of the financial data and makes inquiries of management when necessary.

An audit is the big enchilada, the highest level of financial review provided by a CPA. In an audit, the accountant will use generally accepted auditing standards (GAAS) to analyze the practices and procedures used by the principal bookkeeper of the association and analyze the risk of fraud. The auditor must confirm the financial statements by examining records and using specialized procedures that allow the professional to confirm the audited financial results. The CPA will then provide the association with an opinion letter certifying that the financial statements are materially correct, the books have been kept properly, and, where appropriate, state where the auditor has a concern about the finances.

Now, as you can imagine, the costs of these reviews differ dramatically. A compilation is thousands of dollars less expensive than a full audit. However, it does not provide nearly the comfort or level of service, and even in smaller communities it may be worth the investment to perform a full audit, especially if the board has any concerns that the finances of the community are not being properly kept, or if there is any suspicion of fraud by a manager or board member.

Whether or not your community is required by documents or statute to perform an accounting review, it’s a good, healthy practice for every association to hire a CPA annually to do at least some form of analysis. The more eyes on the finances of the association, the better off the association will be, and the less room for errors or bad acts.

Posted in Shared Ownership Guide

Enforcing Covenants, Rules and Regulations in Condos and HOAs–The Concepts of Waiver and Selective Enforcement

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Posted on April 30, 2011 by Ryan Poliakoff

I wanted to talk a bit this week about two concepts that are pretty universal throughout the country–those of waiver and selective enforcement of covenants and rules.  I am going to concentrate a bit on the way Florida handles these issues, but readers from everywhere should find the concepts similar.

Every shared ownership community (a condo, co-op or HOA) has covenants and rules that must be followed by the unit owners and residents–this is part and parcel of living in an SOC.  Those rules are either found in the declaration of condominium, the declaration of covenants, conditions and restrictions, or in the rules and regulations promulgated by the board.

The issue that arises in every community, however, is do those rules need to be applied to everyone, equally?  Board members are understandably reluctant to enforce a relatively minor rule against a neighbor who is otherwise perfect when it comes to other important aspects of community living (such as paying their fair share of the maintenance and contributing to the neighborhood).  And if the rules aren’t applied equally, what happens to them?

This is where the concepts of waiver and selective enforcement come into play, and you will usually find them in your state statutes or in the case law that has been developed by the courts.  Selective enforcement means that you cannot selectively enforce a rule against one resident and ignore the same violation by another resident, or the enforcement is invalid.  That is, if your board has ignored a beautiful parrot that is owned by a sweet retiree who lives alone, they can’t then attempt to enforce the same “no bird” rule against another owner, just because that other owner is a less attractive violator.  If they try, the second violator may challenge the enforcement, claiming that it was “selective”–that the board selected certain residents to enforce the rule against, and not others.  In most legal systems, that’s not allowed.  It’s even a defense against many of our state and federal laws.

The second concept, waiver, is more universal.  If a board ignores a rule violation that is open and obvious for a significant amount of time, they have then “waived” the right to enforce the rule against that unit owner, and then, by extension, against anyone in the community.  So if the retiree with the parrot has been regularly seen with her bird walking around the grounds, and if the board has never cited the person with a rule violation, they cannot then enforce that rule against another owner, as they have waived the right to enforce that rule. And even if the violation is not open and obvious, most states have a limitation (called a “statute of limitations”) that says that, after a certain amount of time, covenant violations that have been ignored cannot be enforced for any reason, even if they were not open and obvious (in Florida, that time period is 5 years).

So what’s a board to do?  First of all, these principles are exactly why, even though it is not always the most pleasant task, it is a board’s responsibility to enforce every rule against every violator every time–or risk waiving the right to enforce the rule.  If the board has any interest in enforcing a rule against any owners or residents, it must enforce that same rule every time against everyone who violates it.  Only if the board absolutely knows that it NEVER wants to enforce a rule can it ignore it entirely.  And, even if a board were to do so, it would arguably be violating it’s duty to the association to follow and enforce the covenants of the community (although, it’s interesting to note that there is a movement in certain states to allow some flexibility in this practice–essentially, to allow a board to legally ignore a rule it does not want to enforce).

So let’s assume, then, that a board has accidentally selectively enforced a rule, or waived enforcement of that rule, and that the board (or an entirely new board) wants to begin enforcing it again.  Well, there’s a procedure for doing exactly that.  The board would have to announce to the entire membership that, from a point in time forward, they intend to begin strictly enforcing the rule–and then they need to start doing so.  But what happens to all of the current and past violators?  They would then be “grandfathered” into the rule, and allowed to violate it–at least as to the specific violation that has been occurring (but not new violations that occur in the future).

Let’s look at a couple of examples of this principle.  Say that a new board were to be elected in the community we discussed above, where a resident had been keeping a bird openly for many years.  This new board wants to begin strictly enforcing it’s no-bird policy.  The board would send a letter to all owners notifying them of their intention to enforce the rule, and asking anyone currently violating the rule to register their “violation” (in this case, ownership of a bird) so that it can be grandfathered.  Then those people would be allowed to keep the birds they already have in their homes–but they would NOT be allowed to keep new birds, or to replace a bird that passes away.  The grandfathering is only good for that specific, currently occurring violation.  And people have tried to get around this rule in creative ways–in one property, a woman whose grandfathered dog passed away purchased a new dog and dyed its hair to match that of the older dog, to try to pass it off as the same dog.  Didn’t work.

Now, this policy applies to other types of violations as well.  Let’s assume that a resident has screened in his patio, in violation of the covenants of his HOA.  The board ignores this violation, and it is eventually waived (and, by the way, we’re assuming that the violation is not a local code violation, which raises other issues).  When the board later decides to cure their waiver, this screened in porch would be grandfathered into the rule, and would be allowed to remain.  However, if the owner ever wanted to screen in his back porch, that would not have to be allowed–it is only the specific violation that is being grandfathered in.

So the concepts of waiver and selective enforcement are critical for every board member to understand–if you, as a board, intend to enforce the rules of your community, you must enforce them consistently, against every person, no matter the situation or any extenuating circumstances (absent, of course, federal or state legal issues, such as a requirement to allow owners to keep support animals).  As a board member, I regularly hear from owners who are surprised and annoyed to find that our board is not willing to make exceptions for them, even when those exceptions are reasonable–but the law doesn’t allow exceptions.  It’s sometimes hard to understand, and harder to accept, but that’s just the way it works.  The rules are designed to prevent boards from playing favorites, but it also has the negative consequence of making enforcement of the rules completely inflexible.

Posted in Shared Ownership Guide

Portfolio Management–How it Works for HOAs

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Posted on April 16, 2011 by Ryan Poliakoff

One of the most consistently misunderstood concepts in property management that I see is the basic understanding of so-called “portfolio management”–the use of a single property manager to manage a number of different communities, usually unrelated to one another.  For many small communities, and especially HOAs, this is the only affordable way to secure a professional property manager.  But it’s important that board members understand the concept of portfolio management, and how it’s intended to work.

Many smaller communities do not have enough day-t0-day work to justify the use of a full-time, on site property manager.  So the alternative option that has been developed by management companies is the portfolio manager–a professional manager who handles multiple properties, spending her days juggling multiple issues of multiple clients.  But for many neighborhoods, this is the only affordable way to have a professional property manager service their community.

The problem that occurs most frequently is that HOA boards sign a contract for portfolio management, but then expect the same level of service they would get from a full-time manager, including instantaneous response to questions or issues.  But a quick lesson in management economics will explain why this type of response isn’t always possible, and demonstrate exactly what boards can expect when they enter into a portfolio management arrangement (regardless of what is promised by the management company).

Let’s assume that a competent portfolio manager can make $60,000 per year, a reasonable number in many markets.  The cost to the property management business is far higher–they have to pay taxes like fica, insurances (liability, worker’s compensation), health insurance, and office overhead.  That $60,000 per year manager is really costing the business at least $100,000.

So let’s assume that your community has signed a portfolio management contract with a management company, and you are paying $20,000 per year for that service, which also includes full accounting support and collections.  How much of that manager’s time can you reasonably expect to be getting, and still allow the management company to make money?  No more than a fifth, certainly, and that’s totally ignoring the cost of accounting functions.  If a typical manager works a 50 hour week, you should expect to be getting 8-10 hours of property management service, at most, per week to allow the management company to, frankly, operate without going out of business.

Now, many, if not most, management companies will never bother to explain these economics to their clients.  They sell portfolio management because it’s affordable, and because it’s appropriate for a large percentage of small communities, but they never bother to temper expectations in any amount.  So boards often enter into these contracts assuming that they are essentially getting full-time, full-service property management for a tiny fraction of the price of hiring a full-time, on site manager.  But basic logic tells us that such a system can’t possibly be sustainable for the company.  So whether or not they’re telling you that the manager’s time will not exclusively be spent on your property, it won’t.  It can’t, or the management company will simply go out of business, unable to sustain its costs of operations.

Unfortunately, management companies are put in a very difficult double bind.  If they are the honest one that, up front and in the contract, admits that they are not providing full-time service, their contract will often be passed over for a contract that ignores this truism.  But the fact that another management company has failed to expressly limit the client’s expectations to full-time service does not change the basic economics–you cannot get a full-time property manager and full accounting services for $20,000 per year.  It doesn’t matter what the contract says, it doesn’t matter what the company promises–it’s basic math.

So what can a board expect, and how can a board make portfolio management work for them?  A good portfolio manager (which is it’s own specialty, really) is an expert juggler.  He or she should be able to prioritize every issue that comes in from every property, and make sure that they are all handled in a reasonable timeframe–emergencies are treated as emergencies, longer term projects might be put on the burner to simmer for a while.  But there’s no reason that a portfolio manager can’t complete all of the work needed for a smaller community or HOA in a competent and timely manner.  It does, however, require some understanding and reason on the part of the board.  It’s not fair to call your portfolio manager and ask them to drop everything they are doing for every client and deal with a whim of the board that has no actual time pressure.  It’s all a question of communication.  If something is genuinely an emergency, then tell the manager it’s an emergency.  But if it’s not, trust your manager to use her best judgment to determine when and how to complete the project, within a reasonable time frame.  It’s important to accept that, without a full-time manager, projects may take slightly longer to complete, but they will get done–it just takes a little patience.

Portfolio management can be an excellent solution for a large percentage of properties–it reduces the cost of professional management dramatically, and in communities where issues are sporadic it’s really the only economically feasible way to afford a manager.  But don’t be fooled by management companies who promise full-time, on demand management for a fifth of the price of having someone on-site.  There is just no possible economic way to make that work, and you can be assured that, if you expect to get this kind of service, you’re simply going to end up disappointed.  Accept portfolio managers for what they are–competent, professional property managers who are experts at prioritizing the needs of multiple clients and making sure that your property is managed properly and effectively at a very reasonable cost.

Posted in Back to Basics, Condo Associations, Condo Management, HOAs, Homeowner's Association, Shared Ownership Guide Tagged , , ,

Protecting the Earth and Sending Wall-E Home–A Lesson in HOA Activism

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Posted on April 9, 2011 by Ryan Poliakoff

This week we have a guest blog from my brother, Keith Poliakoff.  Keith is a government lobbyist, and the below article describes his fight against a concrete, construction and demolition recycling plant planned near a number of HOAs.  It’s a good lesson in what HOAs can do when they band together.

Indian River Commission Unanimously Rejects Application
to Place a Construction Debris Processing Facility Nearby Residential Communities

Although Wall-E was incredibly popular Pixar film, when a developer attempted to use the name for his concrete crushing, mulch, general construction, and demolition recycling plant (A-1 Walee), he received much more than a day at the movies.  Instead, his under the radar application was met head on by more than 1,200 homeowners who discovered only two weeks earlier that a nine acre construction debris processing facility had been slated to be built less than a half mile from their homes, and get this, on land owned by the family of the Indian River County Tax Collector.

After the Planning and Zoning Board approved the item without any notice, in just 14 short days the community leaders banned together, created their own website, and hired the Becker & Poliakoff (B&P) Government Team to devise a full blown stellar attack to oppose the item at the County Commission’s quasi-judicial hearing.

First, B&P suggested that a new corporation be formed to allow all of the communities to be heard under one voice.  Although the name Eve, Wall-E’s counterpart, had been taken, B&P formed the South County Preservation Society, LLC, and the presidents of all of the neighboring HOA’s became the new company’s board of directors.  Thereafter, B&P reviewed the application, the code, and hired the necessary experts to defeat the application.

On March 22, 2011, Wall-E’s seedling grew into one of the largest grass roots efforts in Indian River County history.  More than four hundred residents, who were seeing and wearing red flooded the Commission chambers in opposition to the project.

The Applicant and County staff testified that this use is harmonious with its agricultural land use and zoning.  In essence, the Applicant argued, with a straight face, that because the concrete or wood to be processed at its factory could come from or could be used in agriculture, that it was certainly an agricultural use.  Ironically, this argument could have been taken directly from Wall-E’s Captain who stated “Earth is amazing! These are called “farms”. Humans would put seeds in the ground, pour water on them, and they grow food – like, pizza!”

To bolster its proposition, the applicant presented some of the most interesting expert testimony we have ever heard.  They called up a property appraiser who testified that this use would not devalue the neighboring residential lots.  His evidence was not based on comparable values, but solely on “what he heard” at the Commission meeting.  The applicant also called up a geologist, who presented two kitchen glasses filled with concrete rock, which upon closer examination actually contained contaminants.  I am sad to say that none of the experts, when asked, agreed to smell the rocks to see if they contained harmful chemicals.

The best expert award for 2011, will undoubtedly go to the gentleman who claimed to be a “Certified Visual Examiner Expert”.  Apparently, he had such good eyesight that he could see particulates that no one else could see.  When asked if he had x-ray vision that could see if the particulates were contaminating the ground water he responded “no”, but he proudly answered “yes”, when asked if he would be able to determine if someone is blowing smoke.  Although unintended by the applicant, this line of testimony gave a much needed fodder after six hours of straight testimony.

After concluding a barrage of cross-examination questions to discredit the applicant’s witnesses, B&P,  began to present its case, which the applicant’s attorney referred to as a “shock and awe” campaign.

The B&P team presented unrefuted evidence that this use was incompatible with the surrounding area.  Expert after expert, including a civil engineer, environmental engineer, general contractor, medical doctor and even an organic farmer, presented hard evidence that this type of use would be incompatible and potentially dangerous to the surrounding community.

After two more hours of testimony, eight hours in total, it took the Commission less than 5 minutes to deliberate and to unanimously conclude that this use was not compatible with surrounding land uses, that it would create adverse impacts on public health, safety and general welfare, and that it would not promote orderly development.

As for the result, it is best expressed by the client who wrote:

“Your firm has always been professional, efficient, and has done a great job whenever called upon by our board of directors (foreclosures, covenant/restriction enforcement, etc).

We had a major issue arise here in Indian River County 3-4 weeks ago. The Planning & Zoning Commission of IRC had already passed and recommended to have a recycling/debris crushing facility be built in an agriculture/residential area where over 1,200 homes would be within .07 mile away from this “heavy industrial” type of facility (special exception).

Once I found out about their intention, we quickly gathered 13 HOA presidents from our area together to see if we could stop this project from being built so close to our homes.

On March 8th I contacted Keith Poliakoff of your Land Use and Zoning division and briefed him of our issue here in Vero Beach. Keith Poliakoff along Marcie Nolan and Michelle Klymko from that day forward took on our challenge and in only 14 days put together an amazing “presentation” in court on March 22 that was so overwhelming to the five IRC commissioners that they voted 5-0 to not allow this A1 Walee Recycling Plant to be built.

Keith and Marcie’s presentation (video attached below) is “beyond words.”  They made quite an impact on the commissioners and the over 400 homeowners (dressed in red) who were present in court that day.  Over 4,000 residents in this south county area of Vero Beach owe a great deal of gratitude to your attorneys who represented us. They preserved our property values from dropping, our quality of life, and let IRC staff realize that we would just not roll over and let this facility be built without a fight.

Below is the website that also has a lot of information that kept homeowners informed all along the way the last 3-4 weeks of our fight. There are also comments posted.

http://saynowaytowalee.wordpress.com/”

Congratulations to the residents of South County, who united and made a difference.  As stated by Wall-E’s Captain “We’ll see who’s powerless now!”

If you are interested in watching any part of the hearing, go to http://www.ircgov.com/ and click on the March 22, 2011 meeting link.

Posted in HOAs, Homeowner's Association, Politics Tagged , , ,

Can a Condo or HOA File for Bankruptcy? A Primer.

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Posted on April 2, 2011 by Ryan Poliakoff

Bankruptcy!  We all tend to view bankruptcy as the bottom of the well–the worst possible financial outcome for any business or person.  But how many of us know what bankruptcy really means, and can a condo or HOA declare itself bankrupt?

Years ago, the idea of a shared ownership community filing for bankruptcy was nearly unheard of–now, it’s become an almost regular occurrence.  As an SOC is essentially a taxing authority, so the idea that they would be unable to pay their bills wasn’t really a prominent concern.  But as the market, and the economy, has regressed, more and more communities are unable to pay their bills at a maintenance level that can be supported by owners.  An increasing percentage of condos and HOAs are finding themselves scrambling for options, with the ghost of bankruptcy looming overhead.

First, a basic question–what is bankruptcy?  Bankruptcy is a legal process whereby an individual or business files for protection from paying some or all of its debts with a federal bankruptcy court, who then determines which debts get paid, how much, and when.  Basically, it’s a surrender.  The business or individual, overloaded with debt that it cannot repay, asks the court to step in and help it pay its bills.  It’s really that simple.

There are two types of bankruptcy–liquidation and reorganization.  You’ve probably heard them referred to as Chapter 7 and Chapter 13, but there are other types as well.  A Chapter 7 bankruptcy, a liquidation, occurs when the business is really in dire straits, and the court needs to sell off some of the company assets to pay off debtors.  A Chapter 13 bankruptcy, which is one of several types of reorganizations, requires that the individual or business has at least some source of income that would allow it to pay off its debts over time.  The debtor proposes a repayment plan to the court of how it intends to pay off its debt over a period of 3 to 5 years.  Basically, it’s a court-ordered renegotiation of all of the debt held by a business.

Now of course, bankruptcy is a pretty extreme measure, and it’s not looked upon favorably by lenders.  But sometimes bankruptcy is the only option that would allow a business to survive financially under the weight of overwhelming debt.  So the question becomes, is it ever appropriate for an SOC to file for bankruptcy protection, and what happens to the association’s assets?

First, an SOC cannot file for Chapter 7, liquidation bankruptcy.  They can, however, file for a reorganization, usually using Chapter 11 (similar to Chapter 13, but it has a higher debt ceiling).  The intent of the bankruptcy is to get an automatic stay on all debts while the association formulates a reorganization plan that will allow it to recover financially.

That said, bankruptcy is not a silver bullet.  For one thing, as it involves lawyers and courts, it is expensive to the association–easily mid-5 figures for a full process.  I know that’s a bit counter-intuitive, but the purpose of a bankruptcy of this type isn’t to simply swipe a wand and say “poof, you owe no money!”  It’s a genuine business reorganization.  As part of this process, there are new debts (legal fees and court costs) that will need to be paid.

Now, filing for bankruptcy puts a hundred different eyes on the board of directors that is running the association.  The court and all creditors will be closely watching every single act and expenditure to determine whether they are reasonable and fall within the reorganization plan.  The association will need to provide regular operating reports to the court to prove that it can carry itself forward, and any evidence of improper actions would subject the association to the control of a trustee appointed by the court.

If the bankruptcy goes smoothly, the association can come out of protection in as little as a year, and be back on its way to a healthier financial future.

So if you hear that your association is considering bankruptcy, don’t panic–it doesn’t mean that the entire world has been lost.  There is a light at the end of the tunnel, but remember that tunnel can be long and expensive.  So don’t jump into such a decision lightly, but understand that it exists to help associations who really are in dire straights and have no other financial options.

Posted in Bankruptcy, Condo Associations, Finance, HOAs, Homeowner's Association, Shared Ownership Guide Tagged , , ,

Contractor Workers’ Comp and Insurance Requirements for Condos and HOAs

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Posted on March 19, 2011 by Ryan Poliakoff

I wanted to talk a bit this week about protecting your association when you have contractors or vendors on the property.  There’s a lot of confusion in this area, especially when it comes to workers’ compensation insurance.  What proof of insurance should your association require of any contractor who works on the property?  Remember, rules that might work for you at a personal, home level do not necessarily work when you are concerned about protecting a large corporation.

First, and I hope this doesn’t come as a surprise to anyone, you should never hire any contractor who does not carry insurance.  A contractor’s lack of insurance is a guarantee that, if and when something goes wrong, that liability will fall on the association.  Instead, every single vendor who works on your property should be required to not only carry insurance (a million dollar liability policy is the gold standard, but the exact amount required should be determined by your local laws, your documents and prudent board policy depending on the size of your community and the scope of work involved), but also both the association and the management company should be listed as “additional insureds” on the contractors policy.  Additional insureds are those people who, despite not owning the policy, are protected if something goes wrong.  Now, this kind of protection isn’t hard for the contractors to get–it’s a simple as them calling their own insurance agent and asking for the two parties to be listed as additional insureds, and then providing copies of those certifications.

The more complex issue involves workers’ compensation insurance.  Workers’ compensation is an insurance program governed by state laws that mandate that certain employers carry insurance to protect workers if they are injured on the job.  Workers’ comp provides injured employees with wage protection and medical benefits, and in exchange for that the worker is precluded from suing their employer for negligence.  If you work for someone, you are probably covered by workers’ compensation.  Each state’s law varies a bit, but it is typically required that most employers carry workers’ compensation insurance.  In return, employees are precluded from suing their employer if they get injured–they must collect from the workers’ comp policy.

The very important quirk in workers’ compensation, at least as far as shared ownership communities are concerned, involves workers’ compensation exemptions.  Certain businesses, especially small businesses and independent contractors, are exempt from state requirements that they carry workers’ comp.  The important thing to understand, however, is that these exemptions are not protections for employers, clients or workers–they are simply rules that say that certain employers do not need to carry the insurance.

Now, there is a cost associated with workers’ compensation.  And so you’ll often find that small vendors and independent contractors are able to provide your association with cheaper bids on contracts, simply because they do not have to absorb the cost of the insurance.  But what does that mean for your community?

What it means is that, if you hire a vendor that does not carry workers’ compensation, and one of their employees is injured on their property, that worker is going to sue the association for damages.  So that lawsuit, and the increased insurance premiums that result, goes directly onto the association’s own liability insurance.  Basically, if you hire a vendor that does not carry workers’ compensation, you are saying that the reduced cost of the contract is worth increased liability for the association.  And honestly, it almost never is.  If your association gets sued, and if you have to refer that lawsuit to your insurance carrier, you can guarantee that your premiums for the next year will rise, and that it will create an ongoing issue for the association.  But if you instead had hired a contractor that carried the insurance, that injured worker would have been precluded from suing the association for negligence.  That’s why workers’ comp is so important.

So again, when you are considering vendors for your community, having a workers’ comp exemption does not mean that the association is protected in any way–it simply means that that employer is not mandated by the state to carry insurance.  But, as a responsible corporation, you should still insist that the association only hire vendors who carry the insurance, or understand that any accidents or problems that occur will go directly onto your liability policy.  My recommendation to associations is that they should always hire contractors who not only carry significant liability policies, and insist that they be named as additional insureds on that policy, but also that they should reject any vendors who do not carry workers’ compensation insurance, whether or not that vendor is exempt from state requirements to carry it.  The association’s concern is not whether or not the state requires insurance–it’s whether the vendor is actually insured.  Insist that you vendors all carry both types of insurance, and you will help to protect your association against costly and unnecessary lawsuits.

Posted in Condo Associations, Condo Management, HOAs, Homeowner's Association, Insurance, Liability Tagged , , , ,