Editor’s note: This is the third installment of a three-part series on requirements for managers of homeowners associations and how to protect communities from fraud. Last week, I discussed the flaws in board election laws. This week, I’ll look at how new state laws might protect HOAs from scams.
The media continues its coverage on the federal investigation of Southern Nevada homeowners associations. The focus has been on the HOA board of directors of about 12 communities. It is obvious the boards were central in the operation, as they awarded construction defect contracts to at least one attorney and to at least one construction company.
What has not been widely reported is the depth of this scam. There really had to be a mastermind who constructed this complex organization that required the expertise of several different professionals. All had specific roles to play, and had to play them in concert with each other. Some of these included individuals within the police fraud department, mortgage lenders, notaries, real estate sales agents, attorneys, construction contractors, political consultants, bookkeepers, board members and community managers.
State law should have penalties for all involved in board voter fraud
During the 2009 legislative session, Nevada Revised Statutes 116.31107 was passed, making it a class D felony crime to interfere with the election process of an HOA board of directors. This covered changing or falsifying a voter’s ballot, forging signatures on a ballot, fraudulently casting a vote for another person, submitting counterfeit ballots and rejecting, failing to count, destroying, defacing or invalidating a valid ballot.
My question to state legislators: Does this statute only apply to HOA board members, managers and homeowners, or does it apply to anyone?
If it, as lawyers will argue, applies only to those who fall under NRS 116, then the Legislature needs to address this omission by passing a broader law to include anyone.
We know there were attorneys involved in the HOA scandal who allowed the destruction or the miscounting of ballots, and there were nonassociation members who sent fraudulent ballots.
HOA management companies need supervision from state
As mentioned in my first article, which pertained to the licensing of individuals to manage community associations, I indicated that there was no direct state law that sanctioned a management company, as opposed to direct laws that sanctioned community managers.
I believe we already have a legal template the Nevada Real Estate Division, Commission for Common-Interest Communities and Condominium Hotels and the Legislature can implement to address this omission in NRS 116 and NRS 116 A.
First, every HOA management company should have either a licensed designated supervisory community manager or a community manager, which would be comparable to a broker in a real estate agency or a property manager company owner that doesn’t manage HOAs.
Currently, the law states that if there are multiple community managers within a company, it would need a supervisory community manager as opposed to a community manager.
Right now, the law allows individual community managers or supervisory community managers to enter into independent contracts with HOAs where these managers are not associated with a management company.
That means there is no supervision of these managers, with the exception of the Real Estate Division and the CCICCH when there is an alleged violation. Unless a manager is a direct HOA employee, the law should require these independent community managers to be associated with a management company, based on the assumption that the state would pass a new law requiring the management company to have a designated community manager. The proposed law would require the independent manager to become associated with a management company within a two-year transition period.
Again, the Real Estate Division has a template for this kind of business relationship.
Currently, an out-of-state real estate licensee could be associated with a Nevada broker if he or she wanted to conduct real estate activity in Nevada. In essence, the Nevada broker would be liable for his or her actions.
Now, I know that would be a controversial change in the law, and independent community managers would say this proposed change would be self-serving to management companies. Let’s assume that such a proposed law would never get off the ground. There are two other proposed laws that would at least protect association members across the board.
HOA Boards should have to report financial statements yearly
Now, I need to discuss a related topic. NRS 116.31144 pertains to the requirement of audits and financial statements. Unfortunately, the Legislature has greatly erred in watering down what was originally a prudent law that protected HOA membership. If an association’s annual assessments are between $45,000 and $75,000, it does not need to produce any financial statement, except for once every five years prior to the obtaining a new reserve study. The law should be changed. The law should require these associations to have at least an annual financial review.
As noted in various media reports, there have been allegations of association funds that have been improperly mismanaged or intentionally misused.
Think about it. An association that had annual assessments of less than $75,000 is currently not required to obtain any financial statements within four years. This makes it easier to hide a large construction defect settlement in the millions of dollars. Thus the proposed change in NRS 116.31144 is necessary.
There is another option that would bring some supervision to the independent community managers, as well as to management companies with associations that choose not to have annual financial statements. Again, there is a template from the Nevada Real Estate Division.
If you are managing an income-producing property, such as an apartment building or a shopping center, your company has to yearly complete a special financial form, which is prepared by the division and requires financial information as well as bank statements for each custodial and trust account.
I propose HOA associations be included in this requirement. At least this proposed law would allow an outside organization, in this case the Real Estate Division, to review financial information.
Board member candidates must disclose information
Last week’s article addressed what I consider flaws in HOA election laws specifically relating to the eligibility of association members. NRS 116.31034, which pertains to elections of directors, needs revision.
If a homeowner refuses to complete the disclosure form as to conflicts of interests, or refuses to complete a disclosure form showing he or she is a member in good standing, the association should have the right to reject his or her candidate application. If the homeowner omits details or fraudulently submits information, the association should be able to reject the candidate, or have the right to inform the homeowners (the voters) that the candidate, if elected, could not participate in HOA hearings.
Finally if the homeowner was delinquent with his assessments, or had construction penalties or was in violation of its governing documents, the association should have right to reject the candidate. Obviously, the straw buyers in the HOA scandal became board members who definitely had conflicts of interests.
These proposed changes also address other issues that have been raised by many of my readers over the years. For example, the husband and wive who were elected to the HOA board when their marriage was not disclosed to the membership; and elected board members who were delinquent in their assessments.
I would invite suggestions from my readers as to what laws they think need to be changed to keep things like this current HOA scandal from happening again. We need to present effective proposed laws to the legislature so that good laws are passed.
NOTE: HOA associations have been hit with unfair higher water bills. The Southern Nevada Water Authority will meet at 9 a.m. July 19 in Suite 700, Molasky Corp. Center, 100 City Parkway. Bring documents of your community’s dollar and percent rate increase. You will get a chance to distribute them to the SNWA board.
Barbara Holland, certified property manager, broker and supervisory certified association manager, is president and owner of H&L Realty and Management Co. Questions may be sent to Association Q&A, P.O. Box 7440, Las Vegas, NV 89125. Her fax number is 385-3759, or she can be reached by email at email@example.com. Holland is also available to speak at your organization or company.