Most homeowners association board members know they should avoid conflicts of interest. Here, our experts give us three real–life examples of conflicts of interest that they had to explain were improper to unwitting board members.
1. Pushing for a family member to be hired. “A board president’s son is out of work,” explains Duane McPherson, president of the western region and Dallas⁄Ft. Worth divisions of RealManage, an association management firm that oversees properties in Arizona, California, Colorado, Florida, Louisiana, Nevada, and Texas.
“He’s a general contractor. The association has work it needs done worth tens of thousands of dollars, and the board president wants to hire his son to do all the work. Not only that, but the board member is an investor–owner in several other associations, so he’s pushing to get his son to do all the work for all these associations.”
“The board member didn’t understand that’s a conflict of interest,” adds McPherson. “When that was pointed out, the board member became angry and talked the rest of the board members into hiring the son anyway! That’s an example of an extreme conflict of interest.”
“Most times, you can talk boards out of it by saying, ‘Hey, you need to excuse yourself from voting because you’re related to this person who has a vendor company, ‘” says McPherson. “Usually, board members will understand, even if the involved board member gets mad. But sometimes I as the manager get to the point where I can advise all I want, but I have to know sometimes boards will make the wrong decision.”
2. Loans and personal business. McPherson says he’s also seen a board member ask for a loan from the association and a board member who owned an insurance company who wanted to write the association’s insurance.
3. Getting paid for HOA work. This conflict is nuanced, but it’s creating an issue for a client of Nathaniel Abbate Jr., a partner at Makower Abbate & Associates PLLC in Farmington Hills, Mich., who represents associations. “We have a board president in an association that doesn’t have a professional property manager,” explains Abbate. “He said, ‘I spend a lot of my time and money and have one room in my house devoted to HOA activities, so maybe I can and should be reimbursed and take a home-office tax deduction.’ The board had been talking about reimbursing him for the time and effort he put in, but nobody had discussed that it might be a conflict for him to be involved in that decision.”
“The association’s documents say board members serve without compensation,” adds Abbate. “I see that it’s costing him electricity and a portion of his property taxes to have one room dedicated to board business. So it’s not improper for the board to consider compensating him for his activities outside of his board role. But it’s improper for him to be part of that decision. Sometimes to make everything kosher, you have to have the interested person be separated from the decision making process.”
“The board is now thinking this problem through,” says Abbate. “They’ll have to consider what their membership would say if they were part of decision. And if they want to compensate him for his time, they’ll have to amend their governing documents. And though he’s not really asking for compensation but reimbursement of his expenses, where it starts to step over the line is where you can’t really figure out whether funds are compensation, reimbursement, or a perk of the job.”
Most Boards Eventually “Get” It
The bad news is sometimes when boards try to resolve conflicts, transactions can still look questionable. “Sometimes a board member says to me, ‘This is my friend who owns a landscape company,'” explains Robert White, managing director of KW Property Management & Consulting in Miami, which oversees about 125 associations totaling 30,000–35,000 units. “I have to tell them that’s a conflict of interest, but I also have to say, ‘You know this person on a personal level, and even if you’re not getting kickbacks or other perks for recommending him, it looks like there’s a problem.’ We also explain the importance of bidding out projects and that even if the board bids out a project and the board member’s guy comes in at a good price, there’s still the appearance of a conflict. Whether it’s happening or not is irrelevant.’ That type of stuff happens all the time.”
White also has a warning for boards in self–managed buildings. “This is one of the big concerns,” he says. “The majority of the fraud that happens in self–managed buildings occurs because boards can impose these situations without someone looking over their shoulders.”
But the good news is that most boards want to do the right thing. When they’re informed of a potential conflict, they work to remove it. “I’ve had a lot of situations where I’ve spoken to boards about conflicts,” says White. “For the most part, they recognize it when I explain it.”
Matt Humphrey is president of the Alameda, California-based HOAleader.com, from which this article was adapted.