 I'm Richard Emory, your host today for Kondo Insider. We talk about on this show association Living in Hawaii. And as I've said many times before, almost 40% of our population lives in some form of an association. And so understanding Kondo is probably important to some of you. And the best news yet is this is going to give you a break from all the drama of the presidential election. We can talk about Kondo's a mini form of democracy where Kondo board members get elected and serve their community. I would like to say without all the drama of the presidential election, certainly without the budget they have for the presidential election, but I can assure you that there's a lot of drama in being elected to a Kondo board in some associations here in Hawaii. Every year we probably have 30 to 40 removals of boards of directors because owners or some percentage of owners are unhappy with their Kondo board. So today I decided I would review what I call the seven deadly sins by an elected Kondo board. Because if you look at all the legislation, excuse me, all the legal lawsuits on Kondo boards, there's some common characteristics would get people into being sued or striped for drama with the owners regarding a Kondo board. And it narrowed into what I call the seven deadly sins and actually attorney Richard Ecomodo came up with a similar presentation many years ago and my sins are a little different than his sins, but I like the title anyway, so I'll give Richard Ecomodo credit for the title and say maybe some of the content overlaps, but probably some new content as well. So let's just talk about what I see are the basic mistakes that Kondo boards make once they're elected and we'll go through them in simple terms. The number one and biggest mistake always forevermore is the first sin, which is know your authority. The fact you've been elected and you have a mini form of government, meaning you have a Kondo board of an association that's really represented by the legal instruments called the declaration and the bylaws, although you have house rules and some other things, but for the practical sense, the bylaws of the association. The declaration kind of defines what you own and what you own, what an apartment is, what a common element is, what your obligation to pay maintenance fees are, but the bylaws, which is established by the declaration gives the board written authority to do certain things. So they can't do whatever they want. They're limited in what they can do by their authority as defined in the bylaws of an association. Too many times boards think, well, we're elected. It's our association. We can do whatever we want and no, that's not true. You can't do whatever you want. You're limited to what you can do by the bylaws. Let me give you an example of a lawsuit I recently was engaged. Some of you may know I do a lot of expert witness work, but let me give you the example that a master association, which had seven condo associations within it, had a 30-year-old association, so well established their rules and how it worked. So what happened was in this association, the current board said, you know, we don't like the rule that says not less than 30-day rentals. They wanted to change it to not less than 180-day rentals. So they wanted to make it more difficult to rent short term like 30 days and make it 180 days. Now, understand this association had been operating for 30 years and people bought their saying these are the rules of the association and certainly rules can be changed by a vote of the owners, but then you have issues of grandfathering because people who bought under the original understanding like getting on a cruise ship and we're all going to Tahiti and we get into the on our way and and half or more of the people on the ship vote to go to San Francisco. Wouldn't be fair with it. So the reality of it is you you have this association to want to change their rules with regard to rentals. So they went out to the owners. They said we'd like permission to change this to 180 days. Really didn't define grandfather anything else, but let's keep it simple. They want to change it to 180 days and you know what? It failed. Not enough owners voted for it. So the board in its infinite wisdom said, you know, I think it's with our authority to tell our board members who were appointed by their condo to serve on the master board. It's another authority to say you were appointed by your condo. So everybody who did not vote you get to vote for them and we're going to change the rules because you're going to vote based on your personal preference for every condo owner who didn't vote in the original association master vote solicitation to change the rules. And so they did. And so all of a sudden now the board is saying it's within their authority to have these condo board representatives vote for the board member or the owners within the condo who didn't vote at all. And so it passed. And so then they set a notice to all the owners saying you no longer can rent less than 180 days and we're going to find you $500 a day if you rent less than 180 days. Well the story goes on and one of the owners who have lived there forever and each are very expensive homes and condos said you can't do that. And the board said yes, we can. It's within our authority and we decided that that's how we're going to vote. And in enforcement of that they decided to go hire a enforcer and they gave the enforcer the title of sheriff. And so in their wisdom the board said okay enforcer, sheriff, we want you to go out and enforce these rules and go knock on doors of people staying there and and ask to see their rental agreement. And you know what the first person they decided to do it to was the owner who objected and filed a lawsuit against them saying you can't do that. So anyway the sheriff goes up knocks on the door. Nice young lady answers the door and he said I'm the sheriff of this association and I want to see your rental agreement. She says I don't have a rental agreement. He says well you you're supposed to have a rental agreement. How long are you staying here for? And she said three weeks. And he said oh you can't stay here for three weeks you have to leave. She says I'm not leaving and shut the door. So meanwhile the board then sent a demand letter to the owner and started finding him $500 a day and he said you can't do that and and they then started foreclosure on his house. Of course in that process they neglected to ask probably I considered an important question. Who was the person staying in the house? What happened to be the owner's daughter who is allowing to stay there for the purposes of her vacation? It was his family. He could let her stay. And so meanwhile this particular matter went to binding arbitration with an arbitration panel and two things happened well many things happened but two important things. Number one the arbitration panel said you don't have the authority to vote for somebody else and voided the amendment that said not less than 180 days. And the second thing they did was said you violated your authority within the bylaws and the $350,000 that this owner spent to fight you on this amendment you have to reimburse the owner that $350,000. That's an example simply put where the board says that we have the authority because we're the board of this association. We can do every one. We can make whatever laws you want. We can do things with everyone. No that's not true. You are granted specific authorities within the bylaws of what you can do and what you don't define what you can't do but it does define affirmatively what you can do. And you've got to be conscious of that because over and over again we see boards think that they can make rules change things because they're the board when in fact they may not have been invested at authority. They may have to go to the owners for approval. Some of them may be in violation of current federal or state laws. They have a process they have to go through when managing the association and they don't have the simple ability to do whatever they want to do and that goes on to claim after claim after claim from emotional support animals to putting in wood floors to how you handle a plumbing league, how do you handle a damage claim. These are all clearly defined not only in the statute but in your governing documents and you really don't have the authority to do that. What I hear often times by and I just heard this last week to be honest with you on another condo is that well I'm a board member now I have a fiduciary duty I have to do the things to protect the owners and I have to do things to protect what I believe is the best for the association and I have a fiduciary duty and that's why I'm doing these things. Well let me make sure you understand one thing about fiduciary duty because you're elected doesn't mean your fiduciary duty is to you yourself and your agenda. Your duty as an elected director is to the association so if the board majority votes on something let's say four to one on to do something paint the building blue and they have the authority in the bylaws to paint the building blue your fiduciary duty is to support the board. You're in breach of your fiduciary duty if you go out and you refuse to do what the board voted to do you go out and you go to the owners you still have a right to express your opinion you don't agree on something but if you interfere with the board's ability to enact a lawfully voted decision you're actually in breach of your fiduciary duty. You have a duty to the association and you have a duty to the lawful decision of the majority of the board of directors to support those lawful decisions to be enacted. So when people keep using this I have a fiduciary duty their fiduciary duty is to the association through its board of directors and so long as it's a lawful decision you have an obligation to support it even if you're on a losing side doesn't mean you can't express yourself and be totally transparent about how you feel but once the vote is taken and it's recorded your duty is to support the decision of the majority of the board because the majority of the board has an active decision but they feel is the best way for you to enact something so I don't like to hear that fiduciary duty I hear it all the time I have a fiduciary duty to do this screw you you don't have a fiduciary duty that you have your duties to the association and for the lawful decision for the board so the fact you have a personal agenda you don't agree is totally irrelevant to everything and that's interesting because we're about halfway through the program and we're on sin number one but the good news is sin number two through seven seven go much faster than this one this is the the one I want to spend the most time on so on that note we're going to take a one minute break and hustle through sins number two through seven and I can guarantee you one of them is not drinking red wine at a board meeting I think maybe drinking red wines are a good thing in a board meeting but either way we'll be right back and talk about sins two through seven in one minute hello I'm back and I'm sure you've had a chance to contemplate everything I said in sin number one but it's basically you know what your authority is you can't exceed it and number two your fiduciary duty is to the association if you're on the board not to your own individual agenda or to the owners of the whole your job is to enact the decisions that are well made by the board so that's kind of how sorry I wait through sins two through seven since being an old timer here in the industry and being an expert I could go on and on with case examples of every one of these things that have resulted in a problem for association two number two when you're trying to make complex decisions seek professional advice ask your lawyer ask your architect ask your engineer don't try to guess it yourself you will be more in jeopardy if you have made decisions in the board and you don't have professional advice to back it up so if you think this is the proper fix for the building or the proper engineering or you can think that you can let's just use some ec 500 to fix the cracks which is shugu by the way you need to when you look at the association and then avoid risks for yourself is to use professional advice and yeah it's a cost to it but a lawyer or the architect engineer you're much better off relying your decisions based on experts and trying to just make it up yourself because you want to save a buck and not spend it on professional fees you know and sometimes you may get information that doesn't make sense to you for a professional we'll get a second professional opinion you know I just recently was in a condo that the professional said we need to fix these 400 square foot decks and it's $170,000 a deck well we went to another expert they said now we can do it for $10,000 a deck here's the reasons why you don't need to expend that much money but the key is the board made a decision based on professional advice so they have prevented any risk for themselves by relying on a expert not trying to say we know better than somebody else the third decision is make a decision in the first place I mean if you have these decks that are leaking and the cracks are there and you can't decide how much to spend or what expert to use you know the decks getting worse by the time when more water gets into the decks the more problems you have you can't continually to say well we can't make a decision until we get 100% of the board members to agree what the decision is going to be you've got to at some point in time make a decision that democracy takes place and certainly you can vote no and you can explain why you're voting no but at the end of the day at some point in time you have to make a decision for the for the association to be successful I know associations that had numerous irrigation leaks for years and they spend lots of money repairing them during the years but they don't want to get the major decision well how do we stop these leak what major expense do we have to kind of put this and dip it into bud so at some point then we're going to make a decision the fourth common sin is we can't raise the maintenance fees everybody said I don't want to raise the maintenance fees well first why don't I like the word maintenance fees it's an operating expense you got water sewer you got employee medical insurance you got all sorts of expenses but everybody goes into this say we can't raise the maintenance fees well you know this is called a zero-sum budget you collect enough money to pay your bills and save money for reserves so if in fact during the year HECO raises the electric rates the board of water supply raises the water rates HMSA raises the medical insurance rates for your employees meanwhile your insurance goes up because of all the fires in California yes they do affect insurance costs why do you think you can't raise maintenance fees so what do you do well let's just reduce the contributions to reserves let's pay now or pay me later you got to put the money in reserves if you've done a reasonable reserve study so you can't be afraid of having what I call inflationary increases of maintenance fees every year it's bound to happen and unless you have some safe money saving grace that the roof costs you more than you needed in the in the reserve studies who saves the money or you're able to manage your property with one less maintenance guy whatever it may be unless you have some significant change in your operating or reserve cost why would you not think maintenance fees can go up every year they are going to go up every year or for most places they're going to go up every year and they should be at an inflationary rate you know of course we see with new developer projects they seem to go up at a much larger rate and that's another day for another story why that happens but the reality is you can't go into a board most people will tell you most management tell you to say the first thing you do when you do a budget for next year is you do all the cost in the reserve study then you add that all up and that tells you how much the maintenance fee should be it shouldn't be this is the maintenance fees we can have a three percent increase let's make the numbers and plug them because what do you do if you don't plug it right you're short money so what do you do you don't fund your reserves and end up an assessment or a loan down the road so you can't go into this thinking you're never going to raise maintenance fees or your duty is never to raise maintenance fees because this is not going to happen that way another sin fifth sin is maintain the property i've seen more litigation arbitration where owners have followed a claim against the board that they're not maintaining the poor the tennis courts or the landscaper or the lawn because they don't want to spend the money or they don't have the money reserves they just simply don't do anything they don't maintain the property and then when there was a lawsuit arbitration and a kailua project where the arbitrator ruled that the board didn't maintain the property and forced the board to raise the maintenance fees and forced the board to allow the arbitrator to make sure that all the reserve components were fixed and think about this way these mortgage companies lenders take us collateral this apartment to use mortgage and they want their property guaranteed and protected and the values maintained and not fixing the water sewer pipes or not fixing the crack in the pool or not repairing the air conditioning system is not a good thing it doesn't protect your property values and your duty is under your documents is to maintain the property so not maintain the property and you know we're in a world that things are more expensive so you have to just get get used to it that way you have to do these things to maintain your values and and you can't simply not raise the maintenance fees so next which is going to be number six is most boards fail at all this and they get all these owners upset because they fail to communicate with them properly and often most owners the budget if you're waiting for 100% of the owners agree with everything you're doing forget it never going to happen but if in fact you correctly communicate to the owners the challenges you have with the budget with the enforcement of the rules and you go to the extent to not only communicate with them but include them in board meetings where they're entitled to speak to really present these pictures and let them be heard you're going to be much better off than if you don't put any energy into communicating with them with email today you don't need fancy newsletters and things like that but simply short concise regular email from the president or from the board and and and read your information with regard what's going on what the challenges are even before you've made a decision the challenge may be what are we going to do with the broken air conditioning system there's two theories one replace the cooling tower one replace the whole system we're hiring an engineer to evaluate that look for the most reasonable way to do it maybe spending a quarter million dollars to temporarily fix it and you get only one year life out of it before you have to spend a million dollars to replace them maybe that's a good this isn't bad this isn't probably a bad this spent a quarter million dollars to extend the life by one year but all that's back to use an expert but if you don't tell the owners what's going on what you're thinking in my my experience then most owners understand what the issues are and most owners are very capable of digesting even though they may not like the message that they we have to do something to protect our property and spend the money you can't measure yourself by the maintenance fees or and if you do that you just the property go to heck in a basket you know then you then you've reached your fiduciary duty because the I haven't seen any documents that doesn't say that your authority is includes the responsibility to maintain the property so the last one and this is where I see more at the legislature than people making all these accusations the seven sin is avoid conflicts of interest or the perception of a conflict of interest I hear in every legislative session someone say our board has a conflict of interest well the state law is very clear if you have a conflict of interest you can't vote you have to abstain so it's going to rely on the majority of the other directors without a conflict to vote but they say they have a conflict of interest because they voted for themselves in the annual meeting that's not a conflict of interest you know a conflict of interest is that they're going to award you the roofing contract and you're a roofer and you're on the board then you should abstain from that conflict doesn't prevent the six non-conflict of board members from voting and giving it a contract it just means you can't vote but all these people who are disgruntled seem to run out conflict of interest conflict of interest and it's not necessary to have the conflict just to perception of the conflict so if you do everything in open transparent board meetings then in fact and you don't vote when there is a conflict of interest then in fact you have you've done what they should do so quick review we're down to three minutes is number one sin one is know your authority sin two seek professional advice and your decision making three don't avoid making a decision make a decision and get things done for forget the mindset you can't raise maintenance fees you've got to make make sure your costs are covered and you're funding the reserves as appropriate next maintain the property don't let your property go to go to crap because in effect you have an obligation to maintain it and it affects your property values it affects the quiet enjoyment of you living there then communicate to owners often and intelligently don't wait for the last minute when you have an assessment you want to be able to tell them we're these the challenges we're facing and it's probable or it's possible that we may have to increase fees or or do a special assessment I can guarantee you this that'll get you people at a meeting if you tell them we're thinking of having a special assessment so if you want attendance at a meeting what a better way is there to to do that than to tell them the truth I mean there's nothing wrong with transparency or the truth and finally is avoid perceptions of a conflict of interest that they think that somehow because you know at the end of the day the board has to pay the same maintenance fees the same assessment as everybody else so avoid their parents in the perception of a conflict of interest and from my experience those are the seven deadly sins of a board of directors again pointing out to sin number one know your authority because you don't have the ability to do whatever you want and I probably could write another bunch of sins about don't retaliate against owners and don't do this and don't do that but we're down to a few seconds left on the show so I hope you were able to learn something about the seven deadly sins and if you're on the board for you an owner you've learned something to help make your association a better place we thank you for watching condo insider and wanting to learn more about condo living and we will have another show next week thursday at three o'clock and aloha