By Lindsay Smith, Winzenburg, Leff, Purvis & Payne, LLP
Many communities choose to undertake self-management in an attempt to minimize costs and assessment levels. This structure can make a lot of sense for certain communities, but if you’re new to the Board, or unfamiliar with your obligations to your community as a Board member, you may quickly find yourself in over your head. Communities that are currently self-managed, and communities that are exploring self-management, should consider the following when making the decision to go it alone.
Is it Permitted?
Your governing documents may actually require that you retain professional management. Particularly for condominiums, the Declaration might require you to provide notice to lenders before establishing self-management if you’ve been professionally managed in the past. If your community has historically been professionally managed, review your documents and check with legal counsel to make sure you don’t run afoul of any management or notification requirements. If you are obligated to provide notice of this change to all the lenders in the community, your lawyer can help you navigate the process.
Who’s in Charge?
The Board typically acts as the executive branch of the community, and management implements the Board’s policy decisions. When you undertake self-management, you need to decide who is responsible for actually completing the work. If the Board decides to retain a snow removal vendor, who reaches out to vendors to request proposals? Who reviews and communicates with the vendors? Who calls the vendor when a problem occurs? And when that person is on vacation? Your vendors don’t want to hear from a dozen different people. Keep your lines of communication and chain of command clear.
While the President typically acts as the chief executive officer, you can’t expect the President to do all the leg work. Clearly allocate responsibility amongst other Board members, or where appropriate, to a duly-designated committee. If you have a committee in charge of vendors, make sure you have clear boundaries for what the committee can, and cannot do. A thorough committee charter will help set expectations. Similarly, if your liaison is a Board member, make sure the Board member understands their boundaries. Major decisions, such as selecting a vendor and approving a contract, need to be made by the Board to protect individuals from personal liability. However, day-to-day decisions, such as approving the landscaper’s reduction of irrigation in a location that is receiving too much water, are appropriately delegated to the representative.
Dollars and Sense
Financial management and transparency are crucial for community associations. If you do not have competent financial management, don’t undertake self-management. Your treasurer needs to be experienced and able to account for Association funds using generally accepted accounting principles. The treasurer should know the numbers forwards and backwards and be able to explain everything to curious homeowners at a moment’s notice. In addition, your financials need to be properly maintained to ensure your legal counsel can take necessary steps to collect. Keep in mind that if your ledgers are wrong, and the attorneys take action on those incorrect ledgers, the attorneys and the Association can face legal liability.
Many communities will retain professionals for “accounting-only” services. This is a good balance between the financial risks of self-management and the financial costs of full-service management. If you’re considering self-management but are worried about accounting, ask your management company if they provide different service levels.
Insurance
When you are self-managed, you need to rely more on the professionals who advise your community. Make sure you have a good insurance agent who truly understands your community’s needs, risks, and how insurance works in your HOA. If your community was formed on or after July 1, 1992, or if it is required by the governing documents, you will have to carry property and liability coverage for the common elements and in most condominiums, on the units themselves. Even if your governing documents are silent on insurance, you should still talk to a broker and protect yourselves. Not all insurance is the same!
Don’t look solely to the bottom line when selecting an insurance policy. Ask your broker whether the property policy will actually cover everything that needs to be covered if the community is destroyed. As we are seeing with the Marshall Fire, many homeowners are underinsured, whether due to a general misunderstanding of actual replacement cost, or due to a failure to carry sufficient coverage to address building code changes and the costs of removing debris.
Similarly, the cheapest Directors and Officers Liability policy isn’t necessarily the one you want in place when the Association is sued. Ask your broker whether the policy covers all prior acts, what is included and what is excluded, and how much the insurer will pay in a worst-case scenario lawsuit. Will the policy cover discrimination? What about a judgment if you lose? Your policy will include a date for “prior and pending litigation.” Make sure this date stays the same across new policies to avoid a gap related to when a claim is filed. You want to make sure your D&O policy will cover all prior acts.
Finally, management companies can do a lot of good when it comes to vetting vendors and avoiding unscrupulous contractors. Many management companies require vendors submit proof of insurance before the manager will even entertain work by the vendor. When you’re self-managed, you may miss this step or not think about it until problems crop up. If a bad vendor has forged a certificate of insurance or allowed a policy to lapse (and this can happen regardless of management’s diligence), the Association can be left holding the bag. Carry worker’s compensation insurance to protect against the risk of an injured worker, and consider checking on the Colorado Department of Labor and Employment website to verify the vendor’s worker’s compensation policy is not lapsed.
Reliance, Business Judgment, and Blame
The Colorado Revised Nonprofit Corporation Act provides the general standards of conduct for directors. These standards apply whether you are self-managed or professionally managed. Directors need to discharge their duties in good faith, with the care an ordinarily prudent person in similar circumstances would exercise, and in a manner the director reasonably believes to be in the best interests of the corporation. Directors are entitled to rely on the advice and opinions of professionals in discharging their duties, so relying on the advice of a seasoned manager can help a Board that finds itself in litigation establish its reasonable business judgment. Of course, managers cannot provide you with legal advice and are not engineers, but they can help spot issues that you might not even recognize – such as changes in the law – which can help you avoid unseen dangers.
If you are self-managed, you may find yourselves reaching out to your accountants, engineers, and attorneys more often for advice to help ensure you are acting reasonably and prudently. Make sure you consider these additional needs as you budget your time and money. You should also plan to take educational classes that may be offered by CAI or other industry partners.
One underappreciated aspect of professional management is that a manager’s actions help to insulate a Board from angry neighbors. No one likes being towed, or receiving a violation letter, and if a Board member has to tow someone from a fire lane, that Board member might receive a knock on the door late at night. Management can help redirect this improper anger (don’t park in fire lanes!), and protect the Board member from personal conflict. Board members have to wear multiple hats when a community is self-managed, and when one of those hats is labeled “Enforcement,” heavy is the head that wears the crown. While no one has the right to abuse or make personal attacks as a result of proper enforcement activities, angry homeowners may still act irrationally. If you’re considering self-management, ask yourselves whether you are likely to face this kind of interaction, and whether you and your community would be better off with the homeowner leaving a message for a professional who is trained in this sort of interaction – and who isn’t a next-door neighbor.
Is it Worth It?
If your community has minimal maintenance obligations, is reasonably harmonious, and has owners who are willing to follow the rules, you can probably undertake self-management. At the end of the day, however, Boards are full of volunteers who have other obligations that are almost certainly more compelling than comparing different insurance policies and preparing letters to owners with pink houses. Legal requirements for community association governance require more sophistication every year. While you may be able to undertake self-management with your current Board and existing challenges, it’s common for the additional workload to burn out volunteers more frequently. If something goes wrong – a major insurance claim, a lawsuit, an unexpected move – you may find yourselves scrambling to retain professional assistance. Be realistic in evaluating your capabilities and your community’s needs, both now and in the future. While everyone wants to save money, the costs associated with self-management may exceed the dollars saved.
Lindsay Smith is a partner at Winzenburg, Leff, Purvis & Payne, LLP, where she focuses on general community association law, enforcement, and governance. She is also a volunteer for and the current Chair of the CAI – Colorado Legislative Action Committee. Many thanks to Wendy Weigler, Brad Henderson, and Marci Achenbach for their assistance in this article.
