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WHY BE
CAUTIOUS?
QUESTION: While it appears most
large nonprofit charities, universities, foundations, and pension plans all use
some sort of balanced portfolio investing policy to earn higher than CD interest
rates, and often higher than market average incomes, all attorneys and CPAs seem
to advise against this proven strategy. Why
are you and others not advising condo boards to recognize the risks of all
investments, set a written plan to deal with them, and hire appropriate
advisors to manage them?
 ANSWER:
Attorneys and CPAs recommend conservative investment strategies because
directors will not get sued for giving up potential investment gains but they
can get sued over losing principal. A small unrealized gain has very little
consequence. A special assessment to replace funds squandered by the board is another matter
entirely. It
will significantly impact cash-strapped members, who will demand that directors
personally pay for the lost funds. The next story is a good example.
INVESTING
IN THE STOCK MARKET
 A homeowners association
in Northern California recently received millions from a construction defect
claim. The board paid a fellow director $75,000 to manage the funds.
In addition, he was allowed to receive commissions and trading fees
on the funds.
Conflict of Interest. The director did
not resign from the board--he continued as a board member and voted on matters
directly affecting his control of the funds. Because he financially benefitted from
the use, management and spending of the settlement
monies, his votes ceased to be arm’s length. This created a glaring
conflict of interest.
Accountability. Another problem with the
arrangement was the director's unwillingness to follow the board's instructions. While an independent, third party financial manager will follow instructions (or
face liability and loss of business), benefitted directors often do not feel such constraints.
They sometimes think they are the smartest person in the room. Moreover, benefited directors feel it is "their" money and
will act outside the scope of their authority both as a director and a money
manager. That occurred in this case.
Large Losses. Without board approval,
the director invested $3 million in the stock market. His investments resulted in
losses of $400,000 before the board took control of the situation.
RECOMMENDATION:
First, boards should NEVER pay fellow directors to manage their association's money;
they should use outside professionals. Second, boards should NOT invest in the stock market--they court disaster when
they do.
FDIC LIMITS
INCREASED
 On
Friday, President Bush signed into law the Emergency Economic Stabilization Act.
The benefit to homeowners associations is a provision
raising FDIC insurance from $100,000 per depositor to $250,000. This means
boards can purchase jumbo CDs up to that
amount without fear of losing principal if the bank becomes insolvent.
PRIVATE BANK
INSURANCE
If an association's governing documents do not
require FDIC insured investments, boards should still make certain the
association's monies are insured. Some banks carry private insurance to cover
deposits, including deposits that exceed FDIC limits. One program (www.bancinsure.com)
will issue an insurance policy in the association's name. If the bank fails, the
deposit is covered by the insurance. If boards elect to use non-FDIC insured
accounts, they should have the insurance reviewed by legal counsel to make sure
there are no loopholes in the policy.
FORECLOSING
ON BANKS
 QUESTION: I've been hearing that HOAs are taking a hit when banks take over properties but do not pay their monthly
dues.
ANSWER:
Yes, it’s a problem for associations in areas suffering from high
foreclosure rates. Some banks foreclose and then
do nothing to pay their monthly assessments. This increases the burden on other
owners who are forced to pay special assessments and/or higher dues to cover the lost income.
When a bank forecloses, boards should
immediately contact the bank, find out who is in charge of
paying the association's dues, and make sure that monthly statements are sent to that person.
Otherwise, the billing statements will get lost in the bank's bureaucracy. If the bank becomes
delinquent, boards should immediately lien the property. When the dues reach $1,800 or one
year, boards should promptly initiate foreclosure proceedings against the bank.
HALLOWEEN
QUESTION: Our community is gated. Traditionally, Halloween was practiced by allowing
the gates to be opened during Halloween evening. Most new residents are opposed
to opening our gates to the public since our governing documents dictate
privacy 365 days of the year. Is there any case law regarding opening up a
community to Halloween celebrants?
ANSWER: I'm
not aware of any law on this issue. If your CC&Rs actually dictate that the
gates never be opened to the public, then you need to follow your CC&Rs. If they
are silent, then it’s up to your board of directors, weighing celebration of the holiday against the
security concerns of your members. The board should consider surveying the membership for input.
Very truly yours,
Adrian Adams, Esq.
Adams Kessler PLC |
