Should Condos Purchase Property? A Tough Decision for Boards to Make

April 16th, 2010

First, sorry for the slight delay since my last post, we had a naming for our new baby and I had family in town for most of last week. Affairs of state preceed the affairs of state, or some such thing… :D

I wanted to write today about an issue that many condo boards face at least once in the lifetime of most communities–whether or not the association should purchase property. We’ve already touched a bit in other blogs about the decision to foreclose on non-paying owners and own their property, but the decision I’m talking about today is a bit different–should condo associations ever purchase auxiliary property to expand the common elements for the benefit of the owners?

Now, based on my discussions with owners, I can assure you that there are a significant number of readers who already think they know the answer to this question, and each is as certain of their polar-opposite conclusion to the other. Some owners are currently thinking “of course the association can buy property, how else could we expand our parking, or build a tennis court or a clubhouse?” And then there are a significant number of owners who are saying “Are you crazy? Why would we want to take on the responsibility of owning more property, especially with times being so tough financially?” As is always the case, the truth to the situation probably lies somewhere in the middle.

With most condominiums (and I’m specifically leaving out HOAs on this one, because they operate differently and frequently the association does own its own property), the initial common elements are owned by all the owners, collectively, and they are managed by the association. But any property bought after the creation of the association would have to be purchased by the association (ie, the corporation or trust that counts every owner among its members), and it is actually owned by the association itself; not by the owners. So to try to explain this step by step:

Every owner in a condominium is a member of a mandatory membership association (the “association”), run by a board of directors elected by owners;
Every owner in a condominium jointly owns an undivided share of the common elements;
In addition, the association may, depending on its documents, purchase property for the benefit of owners. That property would be owned by the association, not directly owned by the owners.

I know, it’s extremely confusing, but it makes sense legally, which is really what matters. And yes, in a totally unrelated vein, I know that a lot of people would like legal issues to be instantly understandable to laypersons, but frankly that’s as unrealistic as asking doctors to stop using medical terminology and latin words. But that’s a different blog for a different day.

Suffice it to say that your association may be able to purchase property, and just like any corporate decision, there are a lot of times when such a decision will make sense. For example, what if your community has run out of parking? It may be that the developer simply didn’t plan well, or perhaps you simply have more guests than were anticipated. But parking is a basic need of our modern, transportation-oriented and car-obsessed society, and a lack of parking can severely depreciate property values. So if a neighboring lot is sitting empty, and if the price is at or below market value, it would often be in the best interest of the association to purchase the lot for its own use (of course, there are zoning considerations involved as well, but that’s why you should always get an attorney involved in property purchases).

Or, what if a maturing community, with an aging population, would like to spend more time socializing without going off-property? The owners of such a community might be well served by purchasing property to build a clubhouse. In the same vein, it might enhance the property values in a community to add recreational facilities, such as a pool, park, tennis court, skateboard park or whatever might be in vogue in their particular area. The point simply being that there are perfectly good reasons that a condominium might want to expand beyond it’s original borders and mandate. And often, the only way to do so is by having the association purchase the land.

But there are significant concerns that need to be addressed by any board that considers this issue. First, can the association purchase property? Usually, this basic issue will be addressed in the documents, and not every association has the power to make land purchases and own property.

Second, is the purchase a good business deal? Is the property really needed, and will it enhance the lives of owners and maintain or increase property values? Is the property selling for a fair price, or is the premium justified by the needs of the community? For example, it’s possible that a community’s parking needs are so acute that it would make sense to even overpay for a piece of land just to ease the burden. These are decisions that need to be discussed by the board and owners, at an open board meeting.

Third, how will the association pay for the property? The easiest manner, if allowed by the documents, would be for the association to simply assess owners for the cost of the property. Even a million-dollar piece of land may be affordable if split 300 ways ($3333 a unit, in that case, not a pittance, but also not insurmountable if paid over time and in installments). Plus, the association may be able to recoup the money and pay back owners if it intends to profit off of the land use, for example by selling the parking spaces created, or charging for use of the clubhouse. For that matter, many associations might have a war chest of funds stored for just such a purpose, and may not have to impact owners at all.

If an assessment is not practical, just like any individual or business, the association may finance the purchase (either through a line of credit against assessments or through a traditional mortgage). Again, an association’s documents will often spell out whether the association can take on debt, and if so how much and under what circumstances. Sometimes, an owner vote is required to approve debt, and other times owners must vote if the debt is over a certain percentage of the budget. Either way, using debt to purchase property is no less valid a business decision than your own decision to use a mortgage to purchase your unit–it’s just in a different environment.

Finally, is there a definite plan for how the property will be used? The property across the street may be a great deal, but the board should consider in advance whether it intends to hold and sell the property (using it for investment purposes), or whether there’s a pre-determined use.

No matter what, the purchase of property is a decision that should always involve consultation with the ownership. That doesn’t mean that the board must do whatever the loudest owners demand, or even what the majority demand (as, just like in our government, the opinion of the majority does not always benefit the community as a whole, and decisions must always be informed and well-purposed). But making such a big decision by way of illegal, closed board meetings, or even through the command of one or two dictatorial board members, is a recipe for disaster. Purchasing property is a big decision, whether it’s an individual or an organization, so make sure that your board does its research and considers all the variables. If you’re not on the board make sure that you attend the meeting where such an issue is discussed, and if the board makes a decision that’s contrary to law, don’t be afraid to band together with other owners and file a lawsuit! Often, it just takes a concerted and well-organized opposition to enforce your rights as an owner.

That said, if the board has the power to purchase property, has discussed the issue at an open board meeting and followed all laws and regulations involving the issue, just because you think it’s an invalid decision doesn’t make it illegal. You need to be a strong advocate, but also accept that sometimes decisions will simply not go your way. Living in a shared ownership community like a condominium involves give and take, and you can’t always be on the winning end of an argument. So no matter which side of the argument you’re on, be informed, speak up, insist that your board follow the law (or, if you’re on the board, insist that your fellow board members do), and then support your community with whichever decision it makes.

Good luck!

Keeping to Your Swim Lanes—Roles of the Board and Officers in Condos, Co-ops and HOAs

April 6th, 2010

Last week, we talked a bit about qualities to look for in a property manager. This week, I thought I would talk about serving your community as a board member or officer, and how that process can be as painless and efficient as possible. As you will see, a lot of it comes down to basic, good corporate management techniques, which should come as no surprise if you realize that Shared Ownership Communities (SOCs—condos, co-ops and HOAs) are essentially large, commonly owned corporations.

In New Neighborhoods we devote a significant amount of time to talking about the trials and tribulations of serving your community, especially on a board of directors. The main problem is that your average person hasn’t had to deal with elections or politics since high school, and the process of electing a community representative brings up a lot of odd personality traits—inflated self-worth, deal making, just general politicking. And so once the excitement is over, the people who have been elected tend to feel like they have been crowned, rather than simply elected. It’s basic human nature—it happens in all politics. But while strong leaders are important to any SOC, kings and queens are not.

I read a lot of condo/hoa blogs around the web, and the most frequent comments that I see posted are from readers who lament that their board members are sequestered dictators, making decisions without any community input and ignoring basic laws and rules that govern their behavior. Now, there’s no question that a percentage of those complaints come from people who are upset that an exception hasn’t been made for them on a particular rule—I’ve seen this happen first-hand numerous times in my own condominium. But it’s also certain that some boards in some communities have directors who have allowed the power of representation to go to their heads, and have begun to operate well outside the reasonable bounds of elected service.

First and foremost, serving as a director of an SOC is an elected, representative position. You are not anointed–you have been chosen among your neighbors because of your ideas or judgment, or maybe even just your smile (because, let’s be honest, that’s how politics works). But once you are a representative of your community, you owe it to the community to actually hear their comments and concerns, even the wackiest. As president, I never encountered a situation where I felt I needed to completely prevent a resident from speaking at a board meeting, unless he or she was being abusive or slanderous. Alternate ideas are never bad! If your thoughts make more logical sense than those shared by the resident, just explain why. Often, the owner may simply not be aware of the background of the issue, and may end up agreeing with you. But if you can’t support your position at a board meeting, maybe it’s not that strong a position. Simply blocking owners from speaking their mind just creates bitter and legitimately angry owners who then become the people who complain that their board members are know-nothing dictators. If your direction is strong and well-reasoned, you never have to fear it being challenged, and if it’s not, well, go back to the drawing board and listen to what someone else has to say about the issue.

Now backing up a bit, condo and HOA corporations are run just like any large corporation—there is a board of directors, who collectively make policy decisions at board meetings, and then officers like the president, vice president, treasurer, etc., who may also be board members, but not always. The officers are tasked with the “day-to-day” implementation of the board’s policies.

In the corporate world, directors and officers generally have years of management experience and training, and they know exactly how to do their jobs effectively and efficiently. But in the SOC world, board members and officers often have zero corporate experience, and many have never managed anything larger than their own personal budgets. But a good-sized SOC may be as big as many medium-sized corporations—budgets in the millions are common. Overall, this is where the biggest disconnect comes between being an effective director or officer. People with no corporate experience tend to believe that they are personally responsible for every action taken by the corporation, and they direct or preside accordingly.

Consider this—what would happen to a corporation like Apple if Steve Jobs personally and directly managed 21,000 employees? Obviously, that’s a little extreme, but even smaller corporations, with dozens of employees, can’t be managed by their directors or officers. Directors are visionaries—they are supposed to be making decisions about the direction of a corporation, approving large projects and guiding policy. The officers of that corporation then take the direction of the directors and translate it to the day-to-day managers, who are responsible for instructing employees underneath them. Sometimes, there are multiple levels of managers. Good managers delegate work to competent employees—they don’t insist on doing the work for themselves, and they don’t interfere with lower level managers’ ability to manage their employees.

Let’s then bring this into the condominium context. Say we have a condominium of 200 units with a $4,000,000 budget—a medium sized corporation. The condo has 20 or 30 employees, spread between office staff, valet, security, front desk and maintenance. There are various managers—the big chief Property Manager, an Office Manager, a Maintenance Supervisor, and even a Chief of Security.

Let’s forget about the board entirely for a moment. Let’s assume that the Property Manager is a dreaded “micro-manager”. He spends his days going from employee to employee instructing them on exactly what tasks they should be doing. He tells each individual housekeeper which room to clean. He tells the maintenance lowbie which garbage to change first. He even tells the office secretary to clean up his rolodex, instead of making the phone calls she had been assigned by the Office Manager.

This Property Manager is, straight and simple, a very bad corporate manager. For one thing, he has completely undercut all of his sub-managers, effectively removing them from their jobs and destroying any possible accountability for their work. In addition, he’s not doing HIS job properly either, as he certainly doesn’t have time to concentrate on the big-picture management items, like walking the property, coordinating with contractors, preparing projects for board approval, meeting with vendors, etc. He is doing the jobs of 10 or more people, but not doing any one of them particularly well.

Instead, imagine a Property Manager who comes in first thing in the morning and walks the property. She makes a list of items that need to be addressed, and then assigns that work to her various sub-managers in her daily meetings. She instructs the Maintenance Supervisor to attend to a broken door, she instructs the Office Manager to make sure the board packets are prepared by the next evening. Then, with those projects completely off her plate, she can turn to more important items, like negotiating a new contract with the pool maintenance company or discussing a rule violation with an owner. She has allowed her employees to do their jobs. If they don’t do them properly, she can evaluate and take action, but not without allowing them to NOT do their jobs properly first!

The exact same dynamic is true of board members and officers. Let’s say that the president of the same condo association insists on personally directing all employees. He switches maintenance employees from one job to another without any consideration of prioritization, he gives projects to the office staff without consulting with the property manager, he even directs security while on their rounds. This person is a prototypical “Condo Commando,” and he is doing the same disservice to the staff at the condominium that the micro-manager did just one level below.

Instead, the president of the association should be taking the policies and directives of the board and discussing them with the property manager, allowing the manager to make decisions about which employees engage in which tasks to get those projects accomplished. This way, if something isn’t done properly, the manager can be held accountable. Otherwise the president would simply be an unpaid and totally unaccountable property manager who has no training or experience. Would you hire such a person to manage your property?

And ultimately, that really is the important question when it comes to micro-managing officers—if you submitted your own resume to your community as a property manager, would you hire yourself? Are you qualified to do the job? Do you have any training whatsoever in managing a business, much less an SOC? 99.9% of the time that answer will be no, and that’s exactly why officers should never manage their properties—they should only guide and direct the manager to accomplish the priorities of the board.

Officers and directors frequently interfere with one-another, as well. The treasurer of an association is tasked with overseeing financials, the budget making process, and sometimes chairing a financial or budget committee. He or she generally is the point person who communicates with the association’s CFO or accountant, and then is responsible for communicating financial issues to the board. But what happens when another officer of the association feels that they need to be involved in every decision made on every issue, and goes off on their own tangent? Perhaps this person adjusts budget items after the budget committee has prepared them, or gives separate, inconsistent direction to the financial personnel. Who are they to follow? Having two bosses in a corporation is a recipe for disaster. Officers need to stay in their own swim lanes! The directors, at a board meeting, should clearly delineate the responsibilities of every officer (it’s already done for you in a lot of association documents) and then those officers should stick to their jobs. It’s efficient, it ensures that mixed messages aren’t given and it keeps individual officers from accidentally or intentionally subverting the will of the board. Because ultimately, it’s up to the board, as a whole, to determine the direction of an association, and the officers are simply intermediaries who make sure that vision becomes reality.

It’s hard being a director or officer of an SOC—something that can really only be fully understood by those of us who have served. But that doesn’t mean that we, as officers or directors, have the right to present ourselves as latter-day Napoleons. Serve your community honorably, listen to your neighbors and respect your fellow board members and officers—that’s the recipe for a happy, healthy Shared Ownership Community.

Choosing a Manager for a Condominium, HOA or Co-op—What Are The Qualifications?

March 25th, 2010

This week I’d like to discuss an issue that can be a difficult burden for board members—choosing an appropriate property manager. While small properties of only a few units may be able to be managed by an owner or two, most larger properties will require a manager of some kind, whether that person is part of a management company or an independent manager. While I don’t intend to go into the pros and cons of hiring a management company (an issue we discuss in detail in New Neighborhoods), I would like to discuss qualifications that you should look for in your actual management candidates.

Licensing: First realize that, in many states, managers of associations that are larger than a certain number of units are required to be managed by a person who has obtained a state license. This may be true even if an owner is willing to manage the property herself. For example in Florida, if you are managing a property of greater than 10 units, and you are getting paid, you must have a Community Association Management license. These licensing procedures are intended to protect associations by ensuring that anyone managing your property has at least some minimum knowledge of the laws that govern shared ownership communities (SOCs). There are plenty of arguments that such licensing has no effect—nevertheless, in many states it’s a primary requirement.

Education: Based on years of interviews, I can say that a large number of SOC manager candidates tend to have no more than a high school education or a GED, and for some properties that may be all that’s required. Other candidates may bring with them different types of community college or correspondence degrees, and a few will be college educated, or even have advanced degrees in accounting, engineering or business management. But how much education is really needed, especially for smaller properties? Well, start by imagining the types of duties handled by a typical manager. At the very least, they must communicate with owners, employees and contractors (repair people, service people, etc.). Some of that communication will be in writing. So, in my opinion, a bare minimum for the job of manager is an ability to write clearly and understandably, with a minimum of grammatical errors, and to speak in whatever language is appropriate for your community. The problem is that a college education doesn’t guarantee literacy these days, nor does lack of a degree preclude a person from being able to write quite well. So I’d recommend that, along with a resume, you request a writing sample from every candidate. Such samples can be letters written to owners at other properties, demand letters, contracts, etc. Proper communication absolutely is the number one responsibility of any manager.

In larger properties, especially properties with budgets that reach into the millions, a manager with an advanced degree can be very helpful. Managers with accounting or business training are often better equipped to handle complex budgeting issues and collections problems. A candidate with an engineering background may be appropriate for a property where physical plant issues are common, and upkeep and maintenance are a constant daily battle. Either way, remember that a degree does not guarantee competence. Consider whether the degree is a correspondence or online course, as opposed to a degree from a more established institution, like a university or vocational school.

At some properties, especially those in vacation communities, a hospitality degree may be extremely helpful. Owners and guests at condos in resort areas often expect their buildings to operate like hotels, and a manager with some training in hospitality may be able to smooth the transition between a true hotel and an SOC that is trying to provide hotel-style services.

Experience: Your candidates for manager will often run the gamut from greenhorns just stepping up from an assistant manager position, to managers with 20 years of experience in properties all over the world. The amount of experience you require is going to depend in large measure on the size of your property and it’s specific needs. For example, if you live in a small condominium with only a dozen or so units, it would be quite acceptable to hire a manager who has never had their own property, especially if that person has solid experience as an assistant at other, larger communities. Often you can get a quality, up-and-coming candidate at a lower salary who will do an excellent job. In contrast, if you are looking for a manager at a top resort property with hundreds of units, frequent rentals, hotel-like services and a delinquency problem, hiring an inexperienced manager, even at a reduced cost, can end up being a nightmare for the board of directors. If you are on the board, insist that you hire an appropriately experienced person at a reasonable market price (and realize in advance that many of the owners may be shocked by the salaries and demand for quality association managers).

Also consider the special skills that the candidate brings to the table. Are you having problems with employees? Look for a manager who may have worked in those positions (valet, security, front desk) and worked her way up through the system. She may be better able to relate to your employees. Or, alternatively, is your building plagued by seasonal residents who spend countless hours of office time demanding hospitality services? Look for a manager who has worked at hotels, especially one who is an experienced hotel manager. Are your common areas falling to bits due to neglect or developer negligence? Consider a manager with a broad maintenance/engineering background, especially one who has served as a property’s chief engineer. Managing a large, complex property is not a job that can be done by just anybody—it’s often a daunting task (far more involved than understood by people who have never volunteered or served on the board) and requires a lot of specialty training. You owe it to your community to find a manager that suits your needs, rather than settling for the first licensed resume that passes across your email in-box.

Personality: A manager’s personality is also a large aspect of their ability to do a quality job, and is a good reason that at least one board member should interview every candidate, even if a management company is in charge of the property (if your contract with the management company gives the association zero control over the manager placed at the building, and if the manager is a full time employee, you may want to consider adding the right to oversee the position in your next contract). Neighborhoods that have been running smoothly for years, where disagreements are uncommon, may find that a mild, laid back manager is the perfect fit. But such a person would be quickly overwhelmed at a community where owner disputes are a daily occurrence, the staff is disrespectful and lazy and the engineer is allowing the common elements to dissolve. That type of SOC should be looking for a general, a manager with a strong hand who can whip employees into shape, take charge of staff and deal politely but firmly with difficult residents. There’s a huge spectrum between these two extremes, and the only way to tell how a manager will behave is to ask them questions that are designed to evoke thoughtful and complete answers. Consider questions like “describe one situation where you had to deal with an angry owner,” or “have you ever had to manage an employee who wasn’t doing their job properly.” Questions like these can provide insight into the manager’s style and personality, and can give the board a good indication of how that person will handle disputes at the community (or if the person is even competent to handle disputes). Developing good interview skills will go a long way towards avoiding the revolving door of unqualified or inappropriate managers.

Still, even armed with all this information, finding the right manager is often a difficult task that may take several attempts to get right. Don’t be afraid to insist that your management and staff perform at a high professional level, and if your owners and board are unhappy, insist that a change be made. Even more than the management company you may hire, your on-site manager is the most important aspect of any community, and the quality and competence of that single employee will often make or break the experience of living in your neighborhood. So be prepared, make good choices, and good luck!

Deadbeats, Revisited–Further Options for Dealing With Non-Paying Owners in a Co-op, Condo or HOA

March 11th, 2010

In an earlier blog I reviewed some of the options available to shared ownership communities (SOCs–condos, cooperatives and HOAs) when owners aren’t paying their maintenance dues. In that article I dealt mostly with Florida law, because the question came to me from a Florida homeowner, although the concepts are universally applicable. This time, however, I want to look at the Uniform Code (the Common Interest Ownership Act), which is law in about 25 states, and also touch on a couple of other options that are available to SOC boards.

First, here’s some information on uniform laws. Uniform laws are model statutes written, generally, by the National Conference of Commissioners on Uniform State Laws, in an attempt to standardize laws across the United States. The idea is that it makes laws more stable and understandable to more people, and it also ensures that court decisions between jurisdictions have some relevance to other states.

You can skip to the next paragraph if you’re not interested in the nitty-gritty of the legal issue, but this might interest some: there are two main court systems in the US–the federal system, which governs laws created by the federal government, and the 50+ state systems, which govern laws created by the states. This, by the way, is a huge oversimplification, but civil procedure is a year-long class in law school, so we have to make do. Only certain activities are governed by the federal government, usually those that are specifically laid out in the Constitution, and most often those issues which affect “interstate commerce”. Everything else is reserved to the states. Most crimes, for example, are state law issues–only certain larger crimes which cross state lines become federal issues for a federal court (ie, when a kidnapper drives from Kansas to Missouri). When a court makes a decision interpreting a law (and that’s what courts do–interpret laws written by elected representatives) that decision becomes precedent which is used by future courts in making their own rulings. But courts give a lot more weight to decisions within their own system–a court in Florida will consider a decision from a court in California, but it won’t be totally determinative, particularly because their laws are often so different. So the idea of Uniform Laws, overall, is to ensure that laws between the states are very similar, so that court decisions are far more consistent and precedents in other jurisdictions can be used by various courts.

In any event, in this case the laws we’re discussing are the Uniform Common Interest Ownership Act (UCOIA), an attempt to standardize laws for condos, co-ops and HOAs among the states. New Neighborhoods co-author Gary Poliakoff is one of the writers of this law. We deal with the uniform code quite a bit in the book, and it pulls ideas from laws in various states around the country to attempt to produce a uniform, go-to legal system for SOCs.

So what does UCIOA say about dealing with deadbeat owners?

Section 3-116 of the Act states that the association has a statutory lien on a unit for any assessment levied against the unit OR fines imposed against the unit owner. This is a significant change from many state laws which do not include fines among lienable offenses. Now, some of you may be worried that a board could simply levy unreasonable or unfair fines against any owner they don’t like, putting a lien on their unit when they don’t pay, but most state laws prevent this type of action, requiring fines to be approved by a committee of owners that are totally unrelated to the board. And also realize that if an association cannot file a lien over a fine, fines then have very limited value. Why would anyone pay a $100 fine if the association can’t effectuate the fine? Is the association going to sue the owner in small-claims court? (The answer–yes, your association certainly should, for exactly this reason, and that’s discussed a bit below). In any event, UCIOA allows liens for unpaid assessments and unpaid fines.

Under UCIOA, liens are automatic. The association doesn’t have to pay an attorney to file a lien–the fact that the declaration of the association is publicly recorded constitutes notice and perfection of the lien. If you don’t pay your bills, there is automatically a lien on your property. A boon to associations, making the job of collections dramatically easier, which is critical for the health of SOCs. The lien is superior to every other lien except primary mortgages, tax liens or liens recorded before the documents were recorded (which would be extremely rare in non-converted communities). The association must enforce the lien within 3 years, or it goes away.

Next the Act talks about enforcement of liens. It essentially says that liens are to be foreclosed upon just like any other real estate lien, subject to the laws of the particular state. Interestingly, it also allows that, in co-ops, if an owner doesn’t pay their assessment that owner may be evicted. The statute also specifies that the debtor is liable for any deficiency in the ultimate foreclosure sale (ie, if the debtor owes $100,000, and the property sells for $50,000, the owner still owes the association 50 grand).

So the intent of the UCOIA committee was to take the experience of some of the top SOC practitioners in the country and provide tools to solve collection issues faced by today’s communities. These tools are extremely strong–instant liens, liability for all deficiencies and even eviction in certain cases. This acknowledges the reality that shared ownership communities are based on the concept of shared expenses, and any owners that don’t share those expenses are not only letting down their neighbors but putting the entire neighborhood at risk.

Also important to understand is the concept that, even if the association forecloses on a unit and sells the property, the owner is still liable for any assessments that remain. How does the association collect? Through a lawsuit. This is where collections can get extremely expensive, and where boards need to make decisions that balance collections with financial realities, as well as the deterrence value provided by such lawsuits. Note that this principle holds even when a bank forecloses on a property. Many states have a safe-harbor provision stating that a bank is only liable for a tiny percentage of unpaid maintenance. However, even if the bank forecloses on a property because that owner hasn’t been paying their mortgage, the debt to the association is still valid! Any maintenance left unpaid by the owner may be collected by the association, through a traditional lawsuit.

Now, here’s the catch. Lawsuits are extremely expensive. Most assume they’re expensive because lawyers are crooks, but that’s not really accurate, as anyone who has tried to file a lawsuit on their own can attest. To file a lawsuit, you have to write a complaint against the defendant. A complaint is a document that lays out, in detail, why you believe you are owed money, and the exact specifics of the harm caused to you. Complaints are usually 5-10 page documents, and then they need to be filed at the courthouse in person. How long does it take you to write a 5-10 page document? I’m a professional writer, and writing a complaint takes me a minimum of a few hours, because the facts need to be exact. So let’s assume an average of 10 hours to write a complaint against an owner for non-payment of dues. Let’s also assume an average attorney charges $150 per hour (think that’s robbery? Do you have $100,000 of debt from law school? Lawyers charge a lot for the same reason doctors do, and in fact for the same reason IT professionals do–their training is costly and difficult).

So just filing a basic complaint against an owner is going to cost the association around $1500, at a minimum. That’s just to get the complaint written, filed and served. But to do anything else with that complaint requires many, many hours of the lawyer’s time, going to court, filing “memoranda of law” (memos) that argue the case and the law to the judge, and eventually fighting the complaint at a trial. This basic procedure has been around for centuries. You can expect any lawsuit to collect maintenance to cost the association $25,000 at a minimum.

So how can the association possibly file such an action in any but the most egregious cases of delinquency? Some don’t bother, and that’s certainly a valid decision. But consider the very important deterrence value of a lawsuit. If an association never files a lawsuit against an owner to collect dues, why would any delinquent bother to pay? Out of their respect for goodness and humanity? We already know they don’t care about their neighbors, so that certainly won’t work. Consider that, in a very large association, delinquencies can total hundreds of thousands of dollars. If a single $25,000 lawsuit, even over a small amount of money, can convince other owners to avoid the fight and pay their dues, that lawsuit has paid for itself tenfold. So the decision to file a collection lawsuit is not only guided by the amount of money owed, but by the deterrence value of suing the owner. Of course, in a small community with few delinquencies, filing a lawsuit probably won’t make sense. But for big properties, the board needs to consider the big picture.

Realize also that the association may be able to file a lawsuit in small claims court if the amount due is small enough, and that is almost always worthwhile. Small claims courts are the only courts in most states where a corporation may represent itself (without a lawyer), and the costs, other than time, are minimal. Small claims lawsuits to collect maintenance are a great option for smaller properties or when only a small amount is owed. Small claims lawsuits are also a great solution to collect fines, which are nearly always limited to small amounts by statute.

Whew! That’s a lot of information in one blog, I hope you found it useful. As always, please send any questions or blog ideas to info@newneighborhoodspublishing.com.

Seasons Change–Dealing with Transient Owners or Renters in a Condo, Co-Op or HOA

March 2nd, 2010

I wanted to take a few moments this week to talk about a question that comes up in almost every resort-area shared ownership community (condo, co-op or HOA)–how do you deal with the influx of new or transient residents in your community? While renters can be very nice people, and many make great neighbors, it’s also true that, unlike owners, renters have no skin in the game, and therefore typically are much less careful about the rules and taking care of community property. So in every “new neighborhood”, having a plan in place for dealing with seasonal residents is crucial.

First off, it’s critical that any association, no matter how small, has appropriate security rules in place to manage entry into the property. If your community is completely open to the public, with no doors or gates of any kind, you really have to expect to have no ability to manage this issue. While totally open communities are a nice concept, in my opinion they are not worth the loss of security for your residents (except perhaps in very remote, quiet areas of the country where security concerns are a complete non-issue). In most resort communities, however, security is paramount, as you’ll find that visitors who have nothing to do with your neighborhood frequently try to use the facilities by sneaking onto the property. Why should you care? Well for one, having strangers on your property poses a danger to residents, as even the nicest-looking group of people may contain criminals. Second, anyone who is injured on the property is going to become a problem for the association, whether or not they were allowed to be there. Third, complete strangers have absolutely NO concern for the integrity of the property they are using, and are much more likely to damage that property than even a renter (who at least knows that they have to live with their neighbor/owners for an extended period of time).

In my own beach condominium, we have had many strangers from the beach attempt to enter our property. We have found people using our pool chairs and beach chairs, and even just wandering around the deck. I hope everyone reading understands why that’s a serious safety and liability concern, and why we’ve cracked down on our own access rules (including requiring all authorized guests or owners to wear brightly-colored wristbands at the pool for easy verification).

The second issue, and this again is an issue of basic security, is knowing which residents are authorized to be on your property. While it’s unrelated to the seasonal issue, we have had situations where jilted lovers/ex-wives have attempted to enter an owner’s unit, many times with an express threat of harm. We also had a terrible domestic violence issue in our building, a double murder that, while not a security issue in itself (the murderer was a renter who was authorized to be in the unit, and had access keys), clearly highlights the critical nature of controlling ingress and egress into a neighborhood. Ultimately, this is an issue that needs to be handled by management and the board. Not only do they need specific procedures at entry points to check for access authority, and to make sure that new residents are properly registered and vetted when appropriate, but every employee needs to keep their eyes open for anything strange going on in a unit or home. And every neighbor, for that matter. On the night of the murder in our building, the shots were reported by unit owners in neighboring units, which allowed our security staff to respond as quickly as possible.

Third, if at all possible according to your documents, limit the number of rentals allowed in any property during the year. Long-term renters are far more likely to be good neighbors than short-term renters who are essentially using the property as a hotel. It’s true that in the current economic environment many investor-owners may need constant rental turnover to keep their heads above water, but the potential for long-term damage to the community is significant, both in terms of reputation, wear and tear and overall safety. That, in turn, reduces property values and makes long-term success for owners impossible. So despite the natural thirst for short-term gain, a prudent investor should support attempts to limit the volume of renters in a community whenever practical.

Last, don’t be afraid, as a board, to take action against owners who are violating your access and rental rules! You may feel uncomfortable confronting your neighbors, but I guarantee you’ll feel a lot less comfortable if something terrible happens to one of them as a result of an unauthorized trespasser. Have consistent, strong rules, and instruct your management to enforce them every single time they’re violated. That’s the only way to insure the integrity of the community.

Again, anyone who has any questions about condos, co-ops or HOAs please email me at info@newneighborhoodspublishing.com–I’d love to answer some more questions in my future blogs.

Dealing With Deadbeat Owners in a Shared Ownership Community–What Are Your Options?

February 18th, 2010

I was recently forwarded the following question from a reporter, and I thought it was so timely and relevant that I would answer the question in my blog. It goes to the issue of deadbeat owners–how can you motivate them to pay, and what can you do when they don’t?

I read your article with interest as our HOA is in a similar position with an owner not paying his dues.  We are slightly in a different position as the owner in our building is renting the place out.  We were going to change our HOA rules to include an addendum along the lines of:

“When a unit owner is more than one calendar monthly behind on its monthly and/or any other outstanding fees such as insurance but not restricted to those items. The HOA will have a right to seek reimbursement of those funds through other means. Such as where rent is being received on the unit the HOA will have a right to contact both the management company and the renters directly to seek reimbursement of funds from rental income. In the event that such outstanding funds are not available the HOA will have a right to disconnect any services it is providing to the default unit owners such as but not restricted to water”. 

Have you heard of any HOA doing such a thing and in your experience do you think it would work?

I would be grateful for your advice

Regards, Perplexed

The short quick answer is that you may be able to collect rent, but you certainly cannot cut off their water. But why? How did I come to that conclusion?

I’m going to start at the very beginning (always a very good place to start). The rights granted to any shared ownership community, whether a condo, co-op or HOA, are granted to them either by state statute or the Covenants, Conditions and Restrictions (CC&Rs) on the property. This is a very important concept for people to understand–it doesn’t matter how creative you get, if you’re trying to do something that is not at least generally allowed by the powers granted by state law or your documents, it’s not going to fly. So then the first place for the reader above to look is the state statute, and, because he’s in an HOA, his CC&Rs.

In this state, Florida, the relevant statute, FS 720, happens to be pretty broad, saying that “The powers and duties of an association include those set forth in this chapter and, except as expressly limited or restricted in this chapter, those set forth in the governing documents.” When you read through 720, there is no provision that precludes associations from regulating renters, so the general concept would appear to be safe.

Now, let’s look for a moment at the specific proposed language in the covenant above. The real kicker, the teeth in the rule, is the right to suspend services from the unit. This issue is directly addressed by the HOA act, which says:

If the governing documents so provide, an association may suspend, for a reasonable period of time, the rights of a member or a member’s tenants, guests, or invitees, or both, to use common areas and facilities and may levy reasonable fines, not to exceed $100 per violation, against any member or any tenant, guest, or invitee.

Note very carefully what it allows–it allows associations to suspend the right to use common areas and facilities, and that’s it. You can’t turn off their water, or electric, or block access to the property, or remove their gate key (while the roads may be a common element, the statue specifically states that residents much have the right to enter and exit, and the right to park).

So the general concept of the rule proposed above, that of collecting rents from owners, would seem to be safe, but the right to turn off their water is not. But this is only the beginning of the investigation. After determining what rights are granted by the statute, a board considering such a rule must next look to their own laws, the governing documents. As mentioned above, in the case of an HOA this is usually called the Covenants, Conditions and Restrictions (CCRs). So to Perplexed, the question would be: do your documents allow the association to approve or regulate leases in any manner? Because if so, a clause governing collection of rent should probably be attached or amended to that section, and if not, the association has a lot more work to do.

Again, this is an issue that a lot of people don’t understand, especially those who tend to rail against the sweeping powers of community associations–they’re not so sweeping! Associations can only take actions that are allowed by state statute or their governing documents.

If the HOA has no power of any kind to regulate rentals, it’s going to be very difficult to pass a new rule governing them, as renting one’s unit is arguably a vested right that would require approval of 100% of the owners to pass. However, if the governing documents do give the association the right to regulate rentals, there are some options. One would be to require a standard form of lease to be signed by every new renter, and then to include a clause in that lease stating that the association may collect monies directly from the renter if the owner is deficient on his or her maintenance. Another option, if the documents allow, would be to do something more similar to that suggested by Perplexed–specifically write a rule into the documents that allows the association to collect rent directly from renters if the owner is in arrears. It’s really going to depend on the language of the documents, and this is where a good attorney can be worth the cost. Paying a few thousand dollars for a competent lawyer is a drop in the bucket compared to the many thousands you may lose over the years to deadbeat owners.

Now, as stated above, in an HOA in Florida you do have the right to suspend certain use rights, such as the right to use the pool, the clubhouse, or other facilities. And this can certainly give teeth to any regulation yoy write into your documents. But what Perplexed is really asking, and what we all ask ourselves, is whether you can make life so uncomfortable for a renter that they are constructively evicted from the unit, creating hardship for the owner and forcing them to pay their dues. And the answer to that, largely, is no.

So how in the world do you force an owner to pay maintenance? Why would they ever pay? The answer to that question is the same for condos as it is for HOAs, and it’s foreclosure. The Florida acts give associations the ultimate power over deadbeat owners–the power to own their homes. If an owner does not pay maintenance, you can put a lien on their property, and after 30 days you can foreclose on that lien and force sale of the property (in which case, the association can sometimes take possession for themselves, but this is a topic that’s too complex for a single blog). But what if the owner has a huge mortgage on the property? Won’t the association be subject to that mortgage?

No they won’t. The property is still subject to that mortgage, and the bank can come in and retake the property if they foreclose on their own lien, but the association has no contract with the bank and will never owe the bank any funds directly. So what’s the negative of foreclosing on a property? The main negatives include the cost of a foreclosure action (usually a few thousand dollars) and the fact that, once the association owns the property, any back-due maintenance ultimately owed by the foreclosing bank will be wiped out (as the association, the new owner, is now responsible for any unpaid maintenance, although they can always collect back maintenance from the original owner, if he or she is solvent). Despite this, the huge benefit is that you’ve just removed a home from a deadbeat, opening the door to an owner who may actually be able to pay their dues! In the meantime, the association may be able to rent out the home and make enough money to cover the assessments that weren’t being paid until the bank forecloses on their own lien (which could take years) or the association is able to find a new buyer for the home. Foreclosure is the gold standard for dealing with deadbeat owners, it’s a power available to every SOC, and it’s in every board’s best interest to establish a clear, strong collections policy that includes foreclosure when appropriate.

Now don’t despair yet, because there is a light on the horizon. A number of Florida legislators are proposing laws during the upcoming session that will both specifically allow associations to collect money from renters when owners are delinquent, and that will grant greater rights to suspend use of common elements, such as cable television. These laws would make the situation at Perplexed’s HOA much easier to manage, and if they’re important to you I recommend that you send a letter to your Florida legislator urging them to support such laws.

In any event, Perplexed, good luck, find a good lawyer, and let me know how it turns out! I’ll keep everyone posted through my blog. And please feel free to send me questions through the website–I’ll try to answer as many as possible. The forums are a great place to ask questions as well, and to get advice from SOC owners all over the nation! Let’s start those posts!

Update on this question:

Later today I spoke with the gentleman who asked this question, and he confirmed that his community is actually a condominium, not a planned development governed by a Homeowner’s Association (an HOA). This is an important distinction, and it brings up two points. First, condos, co-ops and HOAs are all different, and they are not interchangeable. They are often guided by totally different laws and statutes. Like the writer, many in the general public use the term HOA to cover any shared ownership community, but the only way you can know exactly what kind of association you have is by reading the documents.

Now, on to condominiums. The reason it’s important is because, unlike HOAs, condominiums are a construction of state statutes. They don’t exist without the law–in this case, Florida Statute 718. Because FS 718 lays out the rights and duties of condominiums, if a right is not granted under that statute, it doesn’t exist (the legal explanation of this is a bit more complex, but for laypeople it’s enough to understand that they only rights associations have flow from the statutes).

Unlike FS 720, FS 718 does not give condominiums the right to restrict access to the property in any manner, or to restrict use of the common elements. In fact, it specifically says that those rights can’t be restricted. So, under Florida law, condominiums cannot prevent owners from using the pool, or cut off their cable TV, or water, or turn off their gate keys–all of this is prohibited by law. While it is still allowable to collect money from renters (subject to that power existing in the documents), the only other power available is to foreclose. Now, that doesn’t mean that these restrictions aren’t tried in many communities, and some lawyers probably sanction them–but they’re almost certainly not legal. That’s why it’s so important, if you live in a condominium in Florida, to contact your legislators and urge them to support legislation to allow condominium associations to pass use restrictions for deadbeat owners.

Foreclosures and Non-Paying Owners Creating Perfect Storm in Condos, Co-Ops and HOAs

January 25th, 2010

This recently published Op-Ed was written by myself and my father. Hopefully our representatives in government respond to the problem before the damage is too great to cure.

The worst housing crisis and economic crash since the Great Depression have created a dangerous financial storm that threatens to destroy thousands of Shared Ownership Communities (condos, co-ops and HOAs) throughout the United States. The danger is quiet, but staggering—over 60,000,000 Americans live in SOCs, or almost 20 percent of the population.

SOCs rely on maintenance payments from owners to pay for a host of municipal-type services provided to residents, including landscape maintenance, security, infrastructure improvements and even social services. But many owners, hit hard by the financial crisis, have chosen not to make these maintenance payments, pushing the responsibility for this “bad debt” onto their neighbors. As a result, maintenance costs in some neighborhoods have doubled or even tripled, forcing a small, hard-hit cadre of well meaning residents to cover the costs of operating an entire community.

This problem is being exponentially worsened by lax federal and state rules regulating bank foreclosures, which allow banks to sit on potential foreclosures, and even actual judgments, for years, during which time they have no obligation to help cover the costs of maintaining the community. And in many states, even once a foreclosure is finalized the bank is only responsible to pay a tiny fraction of past due assessments, again requiring other, more responsible neighbors to write off the debt and cover the difference. Court efforts to compel banks to expedite their foreclosures have largely failed, with most courts claiming they have no power to make such requirements.

Like their larger municipal cousins, shared ownership communities require funds to operate a host of essential life services, and these costs are often fixed, regardless of whether one or many owners choose not to pay their bill. As a result SOCs (and the community volunteers that serve on their boards) are scrambling to find ways to compel owners to pay their share of the common expenses. In desperation, many have investigated extreme solutions such as cutting off delinquent owners’ electricity or water, or preventing them from parking in the community, though many of these potentially effective motivations are blocked by state laws and court rulings.

Based on their total lack of movement on these issues, federal and state governments appear blissfully ignorant of the danger that this “SOC storm” presents to all citizens. The collapse of shared ownership communities, which currently provide a large percentage of common municipal services, will place a potentially insurmountable strain on the ability of state and local governments to provide these services to the millions of Americans who have been paying privately through their SOCs. As community associations dissolve their empty and abandoned homes will become large blights on even higher income municipalities, atrophying the property tax base and putting the government in further financial difficulty. It is critical that our legislators take immediate actions to prevent this collapse, beginning with tying bank bailouts to mandatory funding of assessments on units for which lenders hold mortgages, even while foreclosure proceedings are ongoing. Similarly, restructured mortgages should mandate that unit owners bring their assessments current to be eligible. To help heal the damage, small business loans should be made available to community associations suffering financial stress. And finally laws must be passed that give associations the authority to deny non-essential services, such as cable television, Internet and telephone services to non-paying owners, along with the right to restrict access to recreational and social amenities. Without this relief, scores of the nations SOCs will become blighted neighborhoods, hampering economic recovery for the entire nation.

To Foreclose, or not To Forclose–That is Always the Question for SOC Boards!

January 19th, 2010

In the current difficult financial market, every single shared ownership community is facing a common problem–owners who fail to pay their maintenance. Maintenance in SOCs is largely a fixed cost, and when one owner doesn’t pay, that cost is passed on to the other owners in the form of even more maintenance. It’s a constant, vicious cycle.

To combat this, state governments have generally given associations an extremely powerful “stick” to use to encourage payment–the risk of foreclosure. If a unit owner does not pay their maintenance, an association may generally place a lien on the unit (a notice to potential buyers that there is a debt due that must be made whole before the unit can be sold), and then after time has passed the association may foreclose on that lien–force a sale of the property, sometimes to the association itself.

However, the decision of whether or not to foreclose on a recalcitrant unit owner is not a simple one, especially in the past 5 years. When an association forecloses on a lien, that foreclosure is subject to any superior liens–ie, a first mortgage. That is, even if a condo or HOA forecloses on a unit, if the bank that provided the primary mortgage calls in their loan the association must turn over the property, or the value of the loan. Now, in a good market, when first mortgages are only for 70% or 80% of the value of the property, that decision is fairly simple–the association can resell the property for market value, pay off the bank, and even make a small profit. But today, that procedure has gotten turned on its head. Because of bad lending practices many loans were made on properties for nearly 100% of their then-market value, and after the crash those properties have become leveraged for far more than they are worth. Not only does this affect borrowers and banks, it affects shared ownership communities. Boards can no longer simply vote to foreclose on every unit where maintenance is unpaid. For example, let’s assume a unit in a property is worth $500,000 in the current market. However, that unit was bought for $750,000, and mortgaged for $700,000. Now assume that the owner has stopped paying maintenance (they may also not be paying their mortgage payments, which we’ll get to in a moment). If the board were to foreclose on the unit to collect, they would eventually own a property worth $500,000 at market, but they would never be able to repay the bank loan! As a result, when the bank comes calling, the association would lose the property, having paid the costs of foreclosure for nothing. Certainly, not a sustainable situation for any SOC, and not a good way to collect on debt.

Complicating this issue is the fact that recalcitrant owners are often not paying their mortgages, either, and the primary banks may file their own foreclosure proceedings. Now, if the banks were actually foreclosing, that would be fine–the bank would eventually own the property, and they would be responsible for maintenance payments just like any other owner. But what is currently happening, all around the country, is that banks are sitting on foreclosures, even foreclosure judgments, simply so that they do not have to pay maintenance to condo and HOA associations. If the bank has a judgment of foreclosure, and the association files their own foreclosure, the bank would simply effect the judgment and force the association to pay off the mortgage or turn over the property. It’s a no-win situation for SOC boards throughout the United States.

So what’s an association to do? Some difficult choices must be made. One strategy is to foreclose on every unit that is not paying maintenance, no matter the lending situation, to establish a precedent that encourages owners not to ignore their maintenance. This strategy, however, can get quite costly if foreclosures are high and if a large percentage of units have been improperly leveraged. Another strategy is to foreclose as early as possible, whenever possible, and try to rent out the units to recover as much maintenance as possible before the bank has a chance to file their own foreclosure. This strategy sometimes works well, as banks typically can take up to 2 years to push a foreclosure through the court system (mostly due to universal bank disinterest). A third strategy is to decide every foreclosure on a case-by-case basis, depending on the loan amounts owed to the primary mortgagee (as an aside, how do you remember that a mortgaGEE is the person who owes the money in a loan? Because the bank thinks “Gee, I hope they make their payments!”) The risk of this strategy is that any owner who is over-leveraged knows that the association will never foreclose on their unit, and it is essentially a free pass for them not to pay their maintenance.

The current economic times have presented very difficult issues for all association boards, and SOCs will have to make due the best they can until the crisis passes. Encourage your legislators to pass laws that force banks to pursue foreclosures aggressively, or that require banks, after filing a foreclosure, to pay maintenance to the association, whether or not they have effected the judgement. There is no simple solution to this problem, and every SOC board will have difficult choices to make in the months, and perhaps years, to come.

Social Events Can Make for a Happy New Year in any Shared Ownership Community

January 7th, 2010

Like all blogs, I tend to spend a lot of time talking about various problems that Shared Ownership Community (condo, co-op and HOA) owners may have, and various ways of fixing them. But we all tend to forget that, for all the trials and tribulations of shared ownership, one of the biggest benefits of any SOC is the increased social interaction that we have with our neighbors. In fact, social events can often make or break a community, healing wounds and helping us to put aside neighborly differences. Here, then, are some ideas of things you can do with your community that will help everyone have a happy new year.

Have a Party! You don’t need a social budget to have social events. We have BYOB cocktail hours in our condominium every few weeks where owners can meet and simply enjoy each other’s company. Sometimes the condo will use a few dollars to buy some appies, but mostly people just bring what they’re in the mood to eat and drink. If we drink enough, we may even play some games (Jenga being a popular option). Nothing too brainy, just having fun with your neighbors. Now, if your association can afford it, a social budget may allow you to plan at least 2 or 3 large social events per year, complete with music, catering and drinks. We generally supplement those events with a modest entry fee, and they are always well attended. Pot-luck desserts are also a lot of fun, and if you get your children involved, you can even turn it into a pajama party. And while it may not be an obvious effect, well-planned and well-attended social events almost always have a positive effect on property values (really, who doesn’t want to live in a happy, friendly neighborhood?)

Play with your pets! Do you live in a pet friendly building or community? A great idea is to create a pet committee that is responsible for events where people can get together and have fun with their dogs (and perhaps very outgoing cats). Play dates in the dog run, Halloween costume parties, training sessions and more can all be sponsored by various local businesses. For example, many dog trainers or doggy day care centers would be happy to bring some treats and present a training seminar for even a handful of new potential clients. Pet people tend to be among the most outgoing in any community, so pet-themed events are often among the most popular and well-attended.

Play with your kids! Many of our favorite holidays throughout the year are best enjoyed with our children, and it’s easy to get people together for fun, well planned events with the kids. Halloween is a perfect opportunity for a neighborhood costume party or even a parent/child pumpkin carving contest. Even communities for older persons can enjoy and occasional planned event with the grandkids. Trim the community Christmas tree (and light the Menorah), have an Easter egg hunt or supervise sparklers and loud patriotic music on the 4th. Getting the kids involved is a great way to get the community together.

Get educated! Depending on the age and style of your community, educational events might be quite popular with residents. Authors are especially willing to visit communities to give speeches and presentations (and sell their books, which is only fair), but lots of others might be willing to speak at your community, including local politicians, or even professors. Or, consider bringing in an art fair where art students are able to display and sell their artwork at a significant discount from gallery prices (though, with any consumer event, make sure you get the pulse of the community first–some love these types of events, and some, not so much).

If you’re a board member, I hope these ideas stimulate you to brainstorm ways that you can get your community together and have fun. The goodwill you build throughout the year will result a lot less stress when contentious issues come up at meetings later on. As always, everything comes back to the same basic idea–just be neighborly!

Insuring your Condo, Co-op or HOA for “Full Replacement Value”–Should You Play with the Numbers?

December 18th, 2009

As the end of the year approaches, many associations around the country are dealing with the renewal of their insurance policies. Especially in coastal states, these policies can often amount to a quarter or more of the annual budget, so of course this is a tremendously contentious issue for board members. How much insurance is appropriate, and is any amount ever too much?

The vast majority of state statutes, not to mention almost every SOC document, provides that the association must insure the common elements for some large amount, anywhere from 75% to 80% of replacement value, all the way to full replacement value. Of course, the question of “full value” depends on an independent appraisal, and some of these may not be so independent. Is a higher number always better?

An insurance broker recently approached our association with a sure-fire way to save money on insurance. In Florida, every association is required to insure the property against hazards for “the replacement cost of the property to be insured.” Ordinarily, this means that the association gets a full appraisal of the property, and then purchases both hazard and windstorm (hurricane) insurance for that full amount. His argument, however, is that the damage that can be expected in a windstorm is far lower than other hazards (such as a fire, which could potentially destroy the building). So when this agent solicits appraisals from his “independent” appraiser, he asks for three different numbers–replacement cost for windstorm, flood, and then all other hazards. The windstorm appraisal is typically only a quarter of the total value of the property (using the theory that a windstorm is unlikely to damage the actual foundation of the property or make it uninhabitable), thereby saving many thousands of dollars in insurance premiums.

Certainly an attractive proposal to boards who are constantly pressured by owners to save money! However, it is my opinion that this strategy is extremely risky, and here’s why. This type of appraisal system, assuming that it is even legal (and it does clearly require some interpretation of the statute), requires a leap of faith that a windstorm event would NEVER result in a complete loss. If it ever did, the association would, in fact, be uninsured for that loss. The broker’s opinion was that, in fact, a windstorm could never result in a total loss of the property.

However, based on prior storms, this philosophy is simply not accurate. In fact, prior to Hurricane Andrew it was common to insure properties against windstorm damage for far less than other hazards, using exactly the above argument. However, anyone who was in South Florida for Andrew knows that many properties suffered a total loss, and not always in ways that were predicable. In one large condominium, the pressure created by the storm created a back flow in the water system that caused the pipes at the top of the building to burst, raining down a flood of water into the building that destroyed the property completely. There is absolutely no reason to assume that modern buildings, simply because they are built using post-Andrew construction standards, could NEVER suffer a complete loss in the case of a windstorm. So any board that would elect to use the above reasoning to secure insurance that is below full replacement value is taking a tremendous gamble. Further, many policies will not even pay out on an appraisal that is later found to have been incomplete or undervalued (even if the damage claimed is within policy limits.

So how does this story apply nationally? Every region of the country has different hazards that must be insured against, and the costs will vary significantly. Owners and board members should be careful that their passion for savings doesn’t overwhelm common sense and good business practices, because spending even thousands of dollars per unit each year in insurance is a drop in the bucket compared to the devastation of a total loss event. So make your insurance choices carefully!