 Welcome to the Condo Insiders show today, the show that talks about condo living. And today I'm your host, Cheryl Franklin, and we will be talking about the seven deadly sins of a condo board of directors. And I'm honored because with us today we have an industry expert who has been on the scene in this industry for quite a long time. That's Richard Emory, and Richard is normally a regular on the show. We haven't seen you for a while, Richard. What have you been up to? Well, I think when you introduce that, I think you're trying to tell everybody I'm old because I've been around so long, but that's okay. And as you know, I've been a co-host on the show, and we brought you in a few months ago because we're planning for the future. And between Jane Sugermur and I, it's a lot to do to prepare one of these shows. We've done about 160 plus shows trying to educate condo boards and owners alike as well as any association. But what I've been up to is that for some reason I got busy in my part-time work and was retained to be an expert witness in several association-type litigation matters and began teaching continued education courses for real estate agents on condo management, which I was asked to do to help educate real estate licensees. So I got really busy because we wanted to give you a chance to kind of work your way into this. So I guess I'd say, well, I don't work there, I would say I'm back. Well, thank you for that. And that certainly sounds extremely busy. And that's one of the things that makes you an expert. You're in demand. So let's just jump right in and let's start with what are some of the common mistakes or sins, if you will. I should give credit to, originally, the Seven Deadly Sins was a seminar given by a local condo attorney named Richard Acomodo. And it gave me the thought about what he had to say, which was very insightful. But because of my expert witness work, I had a different take on what the Seven Deadly Sins were, although there's some kind of overlap on the issues. So I guess the title of the Seven Deadly Sins began with him and I've kind of expanded it. And I would say the first deadly sin is, as a board, know what authority you have under your governing documents. The fact you've been elected to a board does not give you infinite authority to do whatever you want to do. Your authority is vested in your governing documents and the definition of boards authority. Let me give you an example of a case I'm working on right now. I'll try to keep it simple as these get quite complex at the time. Imagine an association that was founded 30 years ago and the association governing documents provide for short-term vacation rentals. Very popular topic today. And so then the board gets elected. A new board, as it happens every year, always kind of shifts. They say, I don't like vacation rentals, short-term vacation rentals. I'm going to amend the governing documents to make it rentals of not less than 180 days, six months. Well, the issue becomes, I tend this to being on a cruise ship. You bought a ticket on your cruise ship to go to Tahiti, and meanwhile you get on board the ship and you depart. The majority or supermajority of the passengers say, no, I want to go to San Francisco instead. Is that really fair to the minority members who bought a ticket to go to Tahiti? When an association is founded under its governing documents with a purpose, it's not easy to make wholesale overall changes that affect the rights of minorities or what the original intention was because mortgage companies and lenders have loaned money based on that. Owners have bought, figuring they'll have some vacation rental income. And all of a sudden the board is saying, does that create an issue because they're taking their personal preferences and applying it to I want to change the documents when in fact they have a duty to the entire association and a duty to including the minority members in their conduct. So I think the most critical thing I would say to you is the number one, they got to know what authority they have in their governing documents. And then number two, they have to realize that under that authority, they have an obligation to the association as a whole and obligation to all of the members including minority members with regard to the intent of what that association is about. They are not government. Right, right. And so I would say the first thing is they've always got to do is have loyalty to all the owners, have loyalty to the association, even though their personal views might be different. And they have to know what authority is bested in them and be able to follow that authority and not interject their own personal views into that authority. Right, within the guidelines of their governing documents there are ways to change the status quo, if you will. Right. But you have to adhere, like you said, boards are not the, they cannot just change things on their own. They have to, yeah. What's interesting in that concept when you think about it is that when you have that, even the right of a super majority to say, okay, we want to change it. Like we see it with smoking and condos. You commend the bylaws making it a non-smoking building. What typically happens, the board of the studio of loyalty has to recognize that there are some smokers and or people who do short-term vacation rentals in my example and look at grandfathering. They can say, we want to make this change for the good, maybe they get the super majority, but they can't ignore the original rights under vested under the original governing documents and make wholesale changes and say, tough luck, you can't vacation rent anymore and take punitive action when in fact that was not the original intent of the association in the first place. Right, good point, good point. Would you say that in the majority of these type of cases, it's always advisable when you are in a situation where you have differences in terms of how the association should be governed, you should always, outside of the governing documents, seek professional advice. That's deadly sin number two. You're reading my mind, that's deadly sin number two. Let's think of it this way, board members are volunteers, they're not way skilled for the most part, probably 99% in condo management, the laws, the standards of care, the practices, and so if they're going to make major changes, the business judgment rule would say they should get professional advice. Let's go back to the example I gave you that this particular association wanted to amend this document to do every short term vacation rentals, which by then, by their documents were 30 days or more by the way, not 7 and 14 days we typically think of, and they wanted to make it 180 days. Well, they might have thought about getting professional advice on how to do that because in this case, this association had seven subassociations. And so the subassociations each would elect one director to the master association. So they went out to the owners of the seven subassociations, they needed a 67% to approve the governing documents, and they got 25%. Well, then the board decided, you know, we're reading our governing document, it didn't ask the lawyer, I think we can vote for all those people who didn't vote at all because when they elected you, they really elected you to represent them. So all those people who didn't vote, you can go ahead and vote for them, you seven elected directors for those people who didn't vote at all. Yeah, deadly sin. Now if they'd had professional advice because their own lawyer ultimately said you can't do that, but meanwhile, they went ahead and implemented it anyway and started finding those people who were doing vacation rentals for decades, $10,000 a day, and basically took the position that even their professional was wrong. That was overruled by an arbitration panel by the way, but you can imagine the destruction it does to the community, the people, when in fact if they had said, look, changing the governing documents is a major change to the entity. We should have a discussion of pros and cons. We should have interest to make sure this is thoroughly vetted by all the owners. So the true will of the owners is achieved. And even if the supermajority wanted the 180 day rule in effect, they would have to say in loyalty to the people in the history, okay, well how do we work our way into that and take care of those people who've done this for years who got mortgages and based their income and their platform and that because they have some obligation of loyalty to all, not just those people. So another deadly thing is not going to be professional advice. Maybe professional advice on a contract, maybe on what kind of fix there is to the stairways that were, there may be falling down that need an engineering study, but they should realize that they don't necessarily have the skills to do that. They should hire professionals, whether it be lawyers or architects or engineers to help identify these greater problems and to try to work their way through it and save a few bucks and create this problem. Right. It's their fiduciary duty to do so, to do all due diligence and make sure they invite the experts in to give them sound advice to protect them. I see often times, particularly in foreclosures, they don't want to spend the money, so they read and interpret the documents themselves as laypeople and make a decision and then start taking action, which only subjects the association of litigation and other problems. In this one particular case on the voting, the owners who ultimately did file and got into arbitration were awarded $350,000 on legal fees because the arbitrators thought it was so egregious that the people voted for somebody else that was clear in their documents and subsequently they had legal opinions saying, no, you can't do that. They continued to fight that they could do it anyway. Yeah. Yeah, but it's never a good ending when you go against sound legal advice. Your advice is what protects you. I think we're all, in some way, prejudice by our life experiences and maybe what we want and what we want the outcome to be and we could read things one of two ways, but there's a lot of court practice, a lot of court history, a lot of experience out there, what the clear meaning of shell and will and all these things mean, and it really isn't incumbent upon a volunteer board to be afraid to spend a few bucks with their old counsel or with an architect or engineer or some qualified professional to guide them through these major issues. So tell me, send number one, know what your authority is. Tell me, send number two, is one of the professionals to get advice before you make the decision. Great. Deadly sends. So we're down two, we have five to go, but we're just in time for a break. So please come back to hear the other five deadly sends and join us. Thank you. Hi, I'm Rusty Komori, host of Beyond the Lines. I was the head coach for the Punahou Boys Varsity Tennis Team for 22 years and we're fortunate to win 22 consecutive state championship. This show is based on my book, which is also titled Beyond the Lines and it's about leadership, creating a superior culture of excellence, achieving and sustaining success and finding greatness. If you're a student, parent, sports or business person and want to improve your life and the lives of people around you, tune in and join me on Mondays at 11 a.m. as we go Beyond the Lines on Think Tech Hawaii. Aloha. Aloha. I'm Keisha King, host of At the Crossroads where we have conversations that are real and relevant. We have spoken with community leaders from right here locally in Hawaii and all around the world. Won't you join us on thinktechhawaii.com or on YouTube on the Think Tech Hawaii channel. Conversations are real, relevant and lots of fun. I'll see you at the Crossroads. Aloha. Welcome back. We're going to continue our discussion on the seven deadly sins of a condo board of directors. I think we left off at two and we'll let you kind of continue going down that path of sharing with us some of the deadly sins. Okay, and the first two probably had the most discussion and explanation, number three is boards are elected to make a decision. And I go to board meeting after board meeting where they continue to talk about it, defer it, one person objects to it, and they're trying to get unanimity where a hundred percent agree on something where, you know, boards are kind of a democratic policy. You may have a vote of four to three or five to four at some point in time. You can't push the can down the road forever because I remember association that the board was looking at an issue where they had it's a four story walk up. They had no elevator, there were stairs. The engineer and architect said your stairs about to fall down and kill somebody and the board were looking at well how do we fix them and they talked to people and they needed to borrow some money it was going to raise maintenance fees $15 a month, but we don't want to raise $15 a month, is there anything else we can do? And they spent months kicking the can to. At some point in time they were elected to make decisions they have to make a decision and you can't just kick the can down the road forever and they can't be under the belief that they can only make a decision if the entire board agrees in unanimity that's what it's going to take. So I see the biggest problem and a lot of times boards refuse to make a decision they just keep deferring deferring as either the members, the owners or another board member has some objection to it, but we got to study it some more at some point in time you got to make a decision yep you're never going to satisfy everyone so make a decision and move on and get these things taken care of in a timely fashion. And number four which leads into that is the decision on budgets and increasing maintenance fees and what to do about reserves I don't know what it is I was just working with one of our staff at the company today and I saw the letter on the board to the owners and it basically said good news we're going to not raise maintenance fees this year, but we're going to reduce our contributions from $5,000 a month to $4,000 a month because we're just going to adopt last year's reserve study as our reserve study and so good news is we're not raising maintenance fees. So I'm hearing not raising maintenance fees and did I hear reduction in the reserve study reserve contribution which is never a good practice and everything around us is going up. I understand that's four budgets and reserves, basically the budgets are based on a zero sum budget you figure out the cost and based on your percentage of expenditures you pay your share so if the budget is well done it's going to be pretty accurate but if it's wrong and you push down the cost then in fact you don't have enough money to pay your bills or fund the reserves when that duty becomes and when you look at a zero sum budget if you take the pure truth that water bills are going up electric bills are going up you're looking at your manager wants more money medical insurance bills for your manager is going up and then on top of that insurance, particularly director and also liability insurance is going up et cetera et cetera et cetera there's going to be inflationary pressure every year and even though you want to be judicious and responsible in doing a budget reserve study to ignore that and say my job is I've been elected to keep the maintenance fees from going up I never liked the word maintenance fees because they're really an operating fee because it pays more than maintenance operational expenses if you take that position and then you ask yourself if you reduce the reserve contributions are you waiting for the surprise five, ten years from now and you don't have enough money that you're going to kick the can down the road and I can tell you now because I'm on two cases now that are on reserve study preparation where the owners who are getting assessments now are blaming the board for improperly doing their reserve study saying that because what happens is if you sold between now and the time that assessment occurs that owner who sold lucked out he didn't have to pay for his share has contemplated on the reserve study so I would just say that boards have to realize that they have their number one public obligation is the financial stability of the association and nobody wants to raise maintenance fees but that's probably an unrealistic goal and are they better off acknowledging every year with a one or two or three percent increase based on what the circumstances are or are they better off kicking the can down the road and I used to joke about it until someone else gets elected and asked to make the decision to raise the maintenance fees and are 20 percent but the reality of it is you've been elected to create financial stability you've been elected to make sure you have enough money of reserves to pay for these things or have the best chance to pay for them and you can't take the mindset of your job has been not to raise maintenance fees nobody wants to increase costs but if you go to the supermarket you have increased cost if you go to the fuel pump you've got to increase cost it'd be the same in your condo association definitely in my mind one of the biggest of the SINs if you will and so often we see some board members they get on the board just to keep the maintenance fees low and then like you said they're kicking the can down the road and then down the line it becomes more problematic and costly yeah now these in the deadliest in number five which is a part of the budget which has maintained the property you know your primary role under the government dock which is to maintain the property or roof leak you have to fix the roof leak if you have a problem in the building and starting to wear out in the painting because all these deferrals potentially could raise the cost in the future to maintain them you might have dry wats spalling you might have increased cost because your road paving is worse now because the water has gotten into the sub layer of the of the paving your job is to maintain the property not only from a point of view of safety but from the property as a quality property because lenders loan money to people to buy there based on the fact they're believing it's being maintained so you have some obligation deadly sin look at these things that need to be done and not kick the can down the road build it into the budget and actually properly take care of the property when it comes to yeah now I couldn't agree more I couldn't agree more I've seen instances where the can was kicked down the road until there was a problem and to use the example you just said a moment ago regarding painting and painting can lead to spalling issues I can recall an instance where a spalling issue became a safety issue and someone was injured due to falling due to spalling it creates problems for your property values but deadly sin number six I know we have limited time this all falls apart if you fail to communicate regularly to your owners and in some cases your tennis it's very important for the board to have open transparent board meetings look at where necessary either e-blast or newsletters and telling owners upfront what they're dealing with they may not even have an answer they can say we're dealing with the spalling and building number two and we're looking at hiring a contractor we have issues with parking violations by the fire zone their failure to include the owners you get this kind of splash effect a problem of a sudden hit and there's water in the face and the owners like what happened and they start blaming in fact if they communicated along the line to the owners and keep them informed and at the same time take all the owners and treat them all with respect so that even though they may be varied opinions that they're treated as a part of the membership of the association they will be a lot better off and they've got to be always vigilant not to be sidetracked from their duties by a few vocal owners who maybe are against everything yeah and we certainly have those but I find your transparency is the best practice and probably for their own protection if they keep accurate records in the minutes of their decisions they'll be back to themselves against liability absolutely but the number of seven deadly sin I know you were going to ask about that one what is the seventh deadly sin and you know we see this every year in the legislature all this crazy legislation where all these accusations about boards are made that they have a conflict of interest in the decisions they make most people think of a conflict of interest as they have some financial gain out of something like I'm doing the roofing contract and they gave it to me and I'm on the board because I'm going to make more money and I'm kicking back something well you know you have an obligation not to vote my law I don't think you have a conflict of interest and to disclose it people don't understand about conflict of interest it's not only the conflict of interest but the perception of a conflict of interest is equally dangerous if that's what your membership thinks about how the board is operating but they overlook the conflict of interest going back to my first example if you really don't like vacation rentals and you don't like it because of the way you live your personal lifestyle is it a conflict of interest to change the entire direction of the association out of your personal belief that you don't want vacation rentals in your association when it's a personal belief contrary to the governing documents contract in this case contrary to 30 years of practice of the association because all of a sudden for whatever reason you don't like vacation rentals that's a personal issue you don't like vacation rentals when going back to your obligations of loyalty is to the association as a whole which includes the foundationing of the governing documents and it's also the loyalty of the owners that have a different opinion than you have now it's not saying they can't amend the governing documents but they do so by stuffing the ballot box they do so by preventing wrong information to the owners what the issues are and not having an open and honest dialogue as all the members that have the rights to hear transparent and hear what the issues truly are and what the risk-prose reward recons are that's the seventh that they send of not knowing what and allowing personal agendas to interfere with your loyalty due to the association and all of the members of the association and those for Richard's point of view are the seven deadly sins well said, well said and I couldn't agree more with all seven we've had experience I get the impression or I know being the expert that you've had experience in every scenario of the seven deadly sins that's why you can speak so passionately about them I'm trying to decide whether I should write a book or start a reality TV show because I don't think people would believe the things we see of misguided boards I'm not saying they're bad people with they just don't follow the business judgment rule and get experts look at their obligations look at this as a fundamental obligation to the association and its members and they start to engage in what they think is the best for the association don't raise the fees try to reduce the reserves in the end it only hurts the association as a whole hopefully those are the exceptions and not the rule I think that's important to note there are a lot of good associations out there it's not generally the rule I think our legislature hears the horror stories and doesn't realize that a very small percentage they really go over the top and some other stuff they speak the loudest now I couldn't agree more well I am sure we can speak on this all day or at least you can come up with seven more but I think these are the top seven and you being the industry expert are attending to these things on a regular basis so they haven't gone away but hopefully as we educate the boards and associations more they will at least reduce and we won't keep you so busy I am hoping that I can write my book and everybody out there will buy my book I know I will buy your book but I agree you can't write this stuff being a property manager myself for a number of years I have stories as well we all do but to your point but those tend to be the ones that speak the loudest yes that is absolutely true yeah good stuff I want to thank you for joining us today I always enjoy chatting with my favorite expert and mentor don't forget that and we will see more of him in the future hopefully and we will kind of go from there please come back and join us every week thank you