COMMUNITY ASSOCIATION MANAGMENT ISSUES ABOUND

Community Association Management Company - Issues, Observations and Recommendations

A deep-rooted consumer protection problem has resulted from questionable Declarant/Developer control, self-serving business practices, and the mismanagement of community associations (A.K.A. HOAs & Condos). Exacerbating the process is weak nonprofit code, the state’s complicit actions, or lack thereof, and the inability to mitigate major existing community association issues. Special interest groups have a longstanding chokehold on legislative change that would require accountability of nonprofit associations without having to resort to civil remedy. However, for the purpose of this paper, this discussion will follow mismanagement, lack of regulation and nonexistent accountability of community associations, specifically by Community Association Management companies/individuals and or Declarant/Developers representing the nonprofit community association while representing their for-profit business, a direct conflict of interest. It is also troubling that information is starting to surface indicating that volunteer resident owner non-profit board members have started paying themselves, family members or business associates as managers of their own communities. Declarant/Developers sometime pay themselves from association funds to manage associations. 


A common assumption and misperception exists that Management of Community Associations (nonprofit corporations/businesses) have a contemporaneous relationship to real estate related activities such as management of homeowner rental of single-family and condominium property and are under the jurisdiction of the Alabama Real Estate Commission…quite the contrary. Simply put, Community Association Management Companies manage nonprofit businesses vs. real property, etc. under the jurisdiction or the Commission. Of course, Community Associations perform their fiduciary duties under the direction of an association’s Board of Directors, or at least they should. 

  

Community Association Management Companies and Managers are popping up all over the state and, with no regulation or oversight, are placing the public at risk. Most management companies and their employees have no subject matter experience, training or continuing education requirement. They certainly have no oversight or audit requirement making them ripe for mismanagement of funds and fraud. It is disturbing that the Alabama Real Estate Commission has no jurisdiction over licensees who appear to misrepresent their license as an endorsement of their qualifications to manage community associations, etc. You do not have to search very hard for community management companies to find them listed on a real estate webpage intimating their qualifications as a professional service, even under the same business name. Accordingly, it is easy to assume these services are part of their real estate company’s service, along with listing, sale, and rental management, governed by the Alabama Real Estate Commission, adding a false legitimacy to their services. Including community association management in this venue is a gross misrepresentation, even though the commission and some boards have steered away from involvement. The mission and vision of the Alabama Real Estate Commission is to "protect the public through the licensing & regulating of Real Estate licensees and insure public confidence in real estate transactions". Buyers, sellers and renters rely on their licensed real estate professional... Unfortunately, so do nonprofit community associations at times.


The following points represent concerns, problems and areas for discussion for possible change


  • Misrepresentation through association with real estate activities, especially on a real estate webpage, on promotional material of the real estate company or presenting themselves additionally as licensed agents/REALTORS®.
  • No professional oversite, regulation, inspection, enforcement or penalties…
  • Lack of a requirement for initial training and continuing education.
  • No business code of ethics.
  • Clearly separate licensing from real estate.
  • Require companies to register with the Secretary of State, or appropriate entity, identifying a Supervising Manager and contact information (Fee). Time limit on updating the site information with penalty for noncompliance.
  • Require licensing of a Community Association Management Company, Supervising Management Agent and employees (by separate licensing) for those handling association funds, interacting with owners and/or dealing with vendors.
  • Prohibition of “kickbacks” from service vendors or using companies where the management company or managing agent is a principal or in a fractional financial position, with an associated fine and enforcement arm.
  • Require separate business insurance and fidelity bond for individuals with access to association funds.
  • Requirement to show all financial and association records to owner members, including receipts.
  • Yearly audits by a CPA.
  • Contracts with community associations and venders cancelable with 90-days’ notice; no automatic renewals. 
  • Requirement to respond to lender inquiries. *
  • Requirement to provide requested YES and NO answers and a synopsis of other potential purchaser requested information. * 
  • No comingling funds; funds should be in separate bank accounts held in the association’s name. Management companies should not have sole signatory authority for checks or contracts. 
  • Two signatures should be required on every check written, one of which should be an Officer’s. 
  • Prohibit or discouraged the use of credit and bank cards. There is no 2-person checks and balances with cards. 
  • No exemption for developer/declarants, their designees, family or extended members, business partners, etc. Require arm’s-length management with no perception of/or conflict of interest. Use of an independent licensed management company or trustee with shared control of association funds operating as a fiduciary. Exemption for attorneys operating as a trustee, but not for accountants or licensed real estate companies, brokers, salespersons, etc. The Manager can’t serve two masters and will invariably make decisions in favor of the Developer/Declarant’s for-profit business vs. the nonprofit association if there is an association with the for-profit Developer/Declarant operating as an association manager. 
  • Prohibition against a licensee contracting with an association if they have any business, familial or other perception or conflict of interest with a Board Member(s) or Developer/Declarant.
  • Should be entirely separate from real estate (see above “A common assumption and misperception exists that...).
  • Self-funding regulatory through licensure ($ TBD) per door of community managed, fines, etc.). This will undoubtedly be passed on to the association/community, a small price to pay. 
  • No exclusion of the licensing requirement for those in business prior to the act or exclusion of professions except for attorneys, as noted above.
  • No reciprocity.
  • Cover moral and other acts that might put the general public at risk.
  • Reimbursement for legal costs for noncompliance by the Manager. 


   * Prospective lender requirement.