This in an anxious time in which to sit on the board of directors. With defaults and foreclosures accounting for some 20 percent or more of the units at some condominiums, frustration among board and association members is off the charts.

“In this difficult economic environment,” observes attorney William S. Singer of Singer & Fedun, LLC, based in Belle Mead, New Jersey, “people are looking much more carefully at every cent coming out of their own personal budget and therefore questioning increases by the associations in their monthly or quarterly assessments.”

More than ever, echoes attorney Scott Piekarsky, principal of the law firm of Piekarsky & Associates in Wyckoff, “because everybody’s cost of living has increased and incomes are not keeping pace.” Owners, he adds, are making demands of their board members asking them to ‘show us why is it that we have to pay that. Justify it to us.’

“When everything’s good, nobody seems to care,” notes attorney David Hartwell of Penland & Hartwell LLC, a real estate law firm based in Chicago. “But when things go bad, suddenly, they ask, ‘why aren’t you telling us what’s going on? Who’s running the joint?’”

“I think that’s why transparency has become such a big issue,” concludes Hartwell.

While it is next to impossible for those running the joint to completely forestall accusations of lack of transparency, board members and management can make the bitter pill of cost increases easier to swallow by paying scrupulous attention to the way they communicate with owners.

The Letter of the Law

For starters, they need to adhere to the letter of the law prescribing the records boards must keep and the rules on their disclosure. New Jersey has several pieces of legislation governing condominium and homeowners associations and the rights of owners to access the board’s records.

The New Jersey Condominium Act (enforced by the New Jersey Department of Community Affairs, acting through the Bureau of Homeowners Protection) stipulates that boards of directors “shall be responsible for the maintenance of accounting records, in accordance with generally accepted accounting principles (GAAP),” which “shall be open to inspection at reasonable times by unit owners. Such records shall include a record of all receipts and expenditures and an account for each unit setting forth any shares of common expenses or other charges due.”

Board members are required to issue annual financial audits produced by independent auditors, not by the Condominium Act, but by the Non-Profit Corporation Act, which also says, according to Singer, “members have the right to see books and records and are able to copy them. Most associations have developed their own resolutions about them—what charges they would make for copies and how much notice has to be given.”

According to a publication addressed to association members by the New Jersey Department of Community Affairs, “A unit owner should keep in mind that except for the records of receipts and expenditures and unit payment records, the law does not establish specific records as GAAP records.” The Condo Act leaves it to individual associations to identify which other financial records should fall within GAAP criteria and therefore be open to inspection under the Act.

Records are kept at the property’s on-site office, if it has one, or in the case of smaller associations, at management’s office. In self-managed condominiums, says Singer, “the governing documents of the association set forth that, say, the duty of the secretary is to keep the minutes and the duty of the treasurer is to keep the financial records.”

Management, adds Singer, “is just the agent of the board and there is nothing that management is doing that a board member cannot see.” Indeed, all of the members of the board of directors, entrusted as they are by owners to run the business of the corporation, have the right to examine and even copy all of the records on file, with the exception of those regarding any litigation involving that member.

Because the Condominium Act requires condo boards to produce some records for examination by owners, boards should keep close tabs on how good a job their manager is doing in storing the property’s documents. And there is another cogent reason: some records could be essential for an association’s defense in a lawsuit.

Lost in Transition

“There’s a litigation matter I’m consulting on where it is important to have old records concerning monthly charges, rental agreements and the like,” says New York real estate attorney C. Jaye Berger, “and they seem to have gotten lost in the transition from one management company to another. The loss may cause a real weakness in the case [which is pending]."

“Boards might assume when they say, ‘please transfer the files,’ that everything will be transferred in an orderly fashion,” says Berger. “But sometimes when there is a transition, like when the board fires a management company and hires a new one, documents are lost in the process. That is a scary thought.”

Meetings of the board of directors are covered by the Planned Real Estate Development Full Disclosure Act (PREDFDA), which requires that all meetings at which the board takes a binding vote be open to owners, although the owners are not guaranteed the right to participate—just observe. Written notice must be posted in a prominent place within the community at least 48 hours in advance of an impending open meeting. The minutes of that meeting must be produced prior to the next open meeting.

The board may hold meetings closed to the general population when dealing with litigation, personnel actions or to protect the invasion of an owner’s privacy. But in practice, closed meetings often called by the board to get through the business of the corporation in an efficient manner—perhaps even hold a vote, which they ratify in an open meeting. “They are like workshop meetings,” explains Piekarsky, “where the board says let’s get together and discuss things—to get ready for the open meeting.”

While PREDFDA requires the board to record and hold the minutes of open meetings, it has little to say about its contents.

“As a general rule,” advises Hartwell, “they should be prepared in such a way that somebody reading the minutes who did not attend the meeting can reasonably ascertain what business was performed by the board of directors at that meeting.” The minutes, suggests Singer, “should reflect any significant action and votes taken. It doesn’t have to reflect the give and take.”

A Policy of Openness

In most of the other affairs of the property, managers and consulting attorneys encourage abundant disclosure, a policy of openness, in the board’s communications with their association. “A higher level of disclosure cuts down on suspicions and lack of trust and keeps people satisfied,” observes Pierkarsky.

An appearance of any less than full disclosure, cautions Hartwell, “simply raises in the mind of the unit owners, rightfully or wrongfully, that information is being hidden, or maybe the decision process wasn’t really consistent with business principles, or that somebody has been involved in self-dealing.”

At the same time, experienced board members come to understand that no amount of disclosure can prevent some, often intense, resistance.

“People don’t read agendas,” says Hartwell. “So if the board comes up with an idea that all of them believes would be good, it may not generate much interest—until all of a sudden somebody shows up to a meeting and says, ‘have you heard so-and-so wants to spend $2 million to put a gym in the building? [Hartwell represents some very high-end residences]’—and it flies around like wildfire.”

Singer recalls “situations where boards have been turned out because people felt they didn’t like the decision they were making. They had done their due diligence but people hadn’t been attending the meetings. Then, all of a sudden, when there is notice of an increase they started to attend the meetings.”

It’s human nature, explains Hartwell: “It’s much easier to generate interest based on negativity than on a positive, especially with special assessments. People don’t see all the behind-the-scenes work, so they imagine that work never took place.”

Don’t Get Crazy

Board members themselves exhibit bad behavior on occasion, observes attorney Stuart Halper, principal of the New York-based Impact Real Estate Management. “Some boards get crazy and want to publish people in arrears—post them on the bulletin board, to embarrass them into paying. It’s not illegal, it’s totally truthful and it’s not confidential. But do you really need to people getting into fisticuffs over it?”

Transparency, explains Halper, “is a balancing act. The more disclosure you have, the better you can run the business. It is the business concept of ‘perfect information.’ The more you have, the better the decision you can make. But you can create problems with information that you put out there that you should not put out there.”

A Successful Dissclosure Program

Robert Ferrara, director of management at Hartsdale, New York-based Anker Management, describes an example of a disclosure program regarding a major project—and subsequent assessment—that worked well. Anker helped guide the board of a huge, 39-building homeowner’s association in White Plains, New York through the approval of an expensive, multi-year roof-replacement project.

First, the board commissioned a roof consultant to write an exhaustive report, an abridged version of which they distributed to unit owners. After leaving the owners some time to review the plan, the board held a special meeting featuring a presentation by the consultant, who explained his report in detail and took questions. They followed up right away with a letter to all the unit owners with a summary of the meeting. They allowed any of the owners to visit the management office to review all the records related to the project. Once the project and special assessment were approved by the board, they notified owners about the decision and gave them a building-by-building construction schedule.

Taking pains to be transparent paid off, observes Ferrara. “While the unit owners may not be thrilled with having the assessment, they have been positive with how they have been kept informed along the way.”

Steven Cutler is a freelance writer and a frequent contributor to The New Jersey Cooperator.