Is an $11-million termite job a scam?
In a complex where many owners are seniors, board needs to find an alternative way to proceed.
Question: A few weeks after hiring a new property management company, about a dozen different termite vendors began walking our grounds and digging holes into woodwork on all balconies, walkways and stairs. They also gouged holes into our mailbox islands, common-area patio covers and beams holding up walkways. Virtually all woodwork in our complex of nearly 1,000 units now has holes. Chalk marks with the letters “DR” for “dry rot” appeared on all woodwork shortly thereafter.
When residents asked these vendors what they were doing, they replied “all wood in the complex needs to be replaced.” I asked a relative who is a licensed contractor to look at what they were doing. He explained that much of the wood these vendors chopped up was not termite damaged, nor did there appear to be much dry rot if any. He found a few instances of prior termite damage and recommended that those few areas be treated and patched rather than replaced.
I took that information to the board meeting where a termite company representative was present along with some guy who was introduced as our new homeowner association “consultant.” The board ignored my information. The consultant said “all walkways, balconies and stairways need to be replaced” and “the HOA needs to take out a loan for at least $11 million to fix what needs to be fixed.” Then the board president announced that each titleholder would be specially assessed several thousand dollars for the repairs, which isn’t even enough to cover the “consultant’s” fee of several hundred thousand dollars.
We have a large senior population and there are concerns this will be unaffordable. Is there anything I can do to stop this scam?
Answer: Alleging a scam and proving a scam are different matters. The board needs to perform due diligence and conduct an investigation that is commensurate to the gravity of the situation. If there’s a scam in the making, the goal is to stop it now.
Unless stated in your CC&Rs, there is no specific requirement that a board consider bids from multiple vendors before making such decisions. However, boards must act “reasonably” in their decision-making processes. Committing the association to an $11-million loan, a several hundred thousand dollar “consultant’s fee” and specially assessing all owners for thousands of dollars is not reasonable.
As fiduciaries, the board has a fiscal responsibility to the titleholders and association to first obtain expert advice regarding the loan; second, to understand the effect that the special assessments will have on its titleholders; and lastly, to explain what effect encumbering the association with $11 million in debt will have on property values, sales and owners trying to obtain mortgages.
There is another element to this. Each year seniors lose billions of dollars nationwide to elder financial abuse. If the majority of owners in your association are seniors who will not be able to afford these exorbitant assessments, your board needs to find an alternative way to proceed.
The association does not want to be accused of financial abuse of its elders for failing to protect their interests.
The owners, meanwhile, should take their own actions.
Form a group to challenge the board’s one-contractor-fits-all mentality; get your own estimates and expert advice regarding the scope of the problem and costs; and obtain proof that this work is necessary and actually costs $11 million.
Make requests for reports and opinions from all board experts and meeting minutes during which contractor interviews were conducted or options discussed.
Ask for all documentation regarding the proposed loan, including the application, terms, agent commissions, proposed interest rate charges and the identity of the bank and loan agents.
Request that your experts be allowed to speak at the next regular board meeting and present your own views during the open forum. Be certain to request that all comments be included in the official minutes. The board and its “consultant” should be ready to answer questions from owners and other professionals.
If the board fails to further investigate this situation before committing the association to such an exorbitant expenditure, the group can and should, circulate a petition to remove the board.
If the board will not listen and board removal is not an option, consider taking legal action to block these transactions until an in-depth investigation can be conducted.
At this stage, allowing a project of this magnitude to proceed is nothing short of reckless.
Zachary Levine, a partner at Wolk & Levine, a business and intellectual property law firm, co-wrote this column. Vanitzian is an arbitrator and mediator. Send questions to Donie Vanitzian, JD, P.O. Box 10490, Marina del Rey, CA 90295 or noexit@mindspring.com.