Advising Your HOA Board Your BOD and the Law

High on the list of priorities for your HOA is staying on top of legal issues facing the day-to-day operations of your property. We recently interviewed two attorneys with experience in advising resort Boards.

W. John Funk is a shareholder/director with Gallagher, Callahan and Gartrell, and he told us that the number one issue every HOA board should focus on is sustainability – whether the resort has a long term plan to survive.

“To make that determination, the board should consult with experts in the field to learn whether the resort is competitive with other offerings in the marketplace, what improvements need to be made to continue to be competitive, how much that will cost, whether the products the resort is offering are what consumers want and need, the marketability of its products for resale, the involvement of its owners, their delinquency rates and trends, whether the HOA has a process to recapture delinquent inventory, whether the resort has been a victim to timeshare transfer company scams, ratings with exchange companies, among many other things,” Funk explained.

If the facts support a conclusion that a resort is sustainable, according to Funk, the HOA should develop a strategic plan to achieve that goal, and work to get the financial support from owners and financial institutions. If a resort is sustainable, then it should consider converting to a trust regime to have better flexibility in product offerings.

“If the conclusion is that it is not sustainable, then the HOA should consider other options – merger with another resort or termination of the timeshare plan and sale of the resort, hopefully returning some money to the owners in the process,” Funk explained.

We also asked Funk to explain the Sunset provisions in Florida, and how Boards are affected. “Many resorts in Florida have a sunset provision in their timeshare plans that states by a specified date if the owners have not voted to continue the plan, it will automatically terminate and the owners will become tenants in common with respect to the property. The concern is that because of low voter turnout, it is difficult to get the required voted. If a plan terminates, most legal experts agree that it would cause a legal nightmare – all owners would share in the legal title and it is unclear what their rights and responsibilities would be. The best course of action is to review the sunset provision with counsel and get the approval to continue the plan as soon as possible to avoid termination,” said Funk.

Skip Gaskill, with the Law Office of Raymond J. Gaskill, told us that management companies are a great resource of information and advice from talented, experienced professionals. However, he said, board members should use their independent judgment when making decisions.

“When a management company recommends a particular course of action, always ask yourself, ‘Who benefits from that course of action?’ Board members who are employed by the developer or its affiliates must exercise their fiduciary duty to the association, independent of the position taken by their employer. Developer employees who are asked to serve on an HOA board should make it clear to their employer that they intend to act in what they believe in good faith to be in the best interests of the association,” said Gaskill.

When choosing a management company, Gaskill told us, before making a decision, insist on backup and references as to any claims the management company makes that it is especially good at resales or rentals. “Don’t count on the management company to solve your delinquency problem unless they can prove to you that they have done so for other associations.”

He went on to say that Board members should have directors and officers insurance, not to be confused with errors and omissions insurance. “If the management company says they have D&O insurance, ask for a copy of the entire policy, not just the certificate. Then, read the policy to make sure it has at least a $1,000,000 policy limit per claim, and that it doesn’t have any exclusions that apply to you, such as exclusions for developer representatives on the board.”

Gaskill also advised that keeping the dues as low as possible is usually not the most prudent way to operate a resort. “Kicking the can down the road usually leads to deferred maintenance, inadequate reserves, and a lower-quality guest experience, which itself results in increased delinquencies.”

And on the topic of delinquencies and foreclosures, HOAs that actively continue to re-educate owners and help them realize the value of timeshare, and take a proactive stance on rental and resale assistance, can work toward reducing those delinquencies and foreclosures.

According to Fitch ratings, U.S. timeshare delinquencies were stable in the first quarter and remain within normal levels. Total delinquencies for first quarter-2015 were 2.90 percent, consistent with 2.89 percent in fourth quarter-2014, but below the 3.19 percent observed in first quarter-2014. Fitch has reported consistent improvement since 2012.