Protecting the Homeowners Association's Nest Egg


Article Courtesy of The Washington Post

By Elizabeth Razzi
Posted on February 22, 2008 

How much is it worth for your condo or homeowners association to keep its money safe?

Lawmakers in Virginia and Maryland are considering legislation that would beef up the accountability standards for professionals hired to manage homeowners' money. It could increase the cost of hiring those companies, but additional consumer protection is overdue for this lightly regulated industry.

Many thousands of dollars of homeowners' dues flow through these management companies each month. There are even larger sums that accrue in association reserve funds. These pots of other people's money have occasionally been tempting targets for embezzlement.

Virginia's General Assembly is considering legislation that would create a regulatory board to license professional management companies. Now, regulation of management companies falls to the department of real estate, which devotes most of its time and resources to regulating brokers. The proposed law would establish a certification system for employees of management companies and require annual independent audits of company books. Perhaps most importantly, the legislation would require management companies to buy fidelity bonds or insurance that would cover losses caused by theft or dishonesty by officers or employees. Bond requirements for board members would be increased as well.

The Virginia proposal is in reaction to the reported theft of at least $2 million from condo and homeowners associations that were managed by Fairfax-based Koger Management Group. As reported last summer by The Washington Post's Bill Turque, a complaint filed by Virginia's Real Estate Board and the Department of Professional and Occupational Regulation named Jeff Koger, the company's former chief financial officer and son of its president, Robert A. Koger, as "the likely primary culprit responsible for embezzling the funds."

No charges have been filed in the Koger Management incident, although investigations continue, said Mary Broz-Vaughan, a spokeswoman for the professional regulation department. Koger Management is now doing business under the name Tri-State Management, and the company continues to operate after filing for Chapter 11 bankruptcy protection in July. That bankruptcy filing has delayed other legal proceedings.

Company officials did not return calls requesting comment.

State Sen. Mary Margaret Whipple (D-Arlington) introduced the measure on behalf of the bipartisan Virginia Housing Commission. She said it was in response to the Koger incident. "We were very concerned," she said.

She noted that the legislation would establish an ombudsman system for handling complaints and would require homeowners associations to set up a system for handling complaints. "I do think it provides better protection," Whipple said.

Similar measures are expected to be introduced in the Maryland General Assembly this week, said Steven A. Silverman, chief of the consumer protection division of the Maryland attorney general's office. The legislation would require management companies to register with the office and would require that bonds be posted by management companies, their employees and association officers who have authority over community money. Currently, there is no registration requirement for management companies in Maryland.

"In light of what has happened in Virginia, and it has also happened in Maryland in the past, not recently but a few years ago, there needs to be a guarantee to homeowners that their accounts and reserves are protected," Silverman said.

In the District, community managers are licensed as real estate agents or brokers.

Toni Brown is president of the Falls Run Community Association, an active-adult community in Fredericksburg that is among the associations that say they lost money to Koger Management. All together, the Falls Run association and a related condominium association lost about $300,000, Brown said in an interview. "It is a lot of money, and as I understand it, there is no recourse yet," she said. The association has filed a claim as a creditor in Koger's bankruptcy case for unauthorized withdrawals by the company, and it has filed a claim with its own insurance company. At this point, however, residents have not recovered any money.

Falls Run consists of 585 single-family houses and 199 condo units and has indoor and outdoor pools, a spa and a community center. Each household pays $140 in association dues per month, with condo owners paying a bit extra to take care of their buildings. Not counting the condo fees, association residents send nearly $110,000 in cash in to their management company month after month. It's not a bad idea to require that a company handling that kind of money--for multiple clients--be licensed and post a bond or insurance.

So far, Brown said, they have not had to increase dues or levy a special assessment to cover the loss. But residents are still angry over the incident, she said.

Brown said the residents who serve on their board began to notice problems in 2006, when, over a span of months, control of the association transitioned from the developer, Del Webb/Pulte Homes, to homeowners. They continued to use the same management company, Koger, that the developer had been using. She said the management company would fail to respond to requests for information about their accounts, or send partial information. "It was constantly clouding the situation," she said, adding that board members found bank accounts that they could not access.

Brown said the board members have learned important lessons and have changed the way they do business. They have a different management company now.

"We monitor. We're really quite diligent, in fact," Brown said. And they make sure they have access to any account that is in their name.

As one might expect, she's in favor of greater accountability for management companies. "Associations like ours are ripe for being ripped off," she said. "The management companies have a great deal of latitude with our money."

She said boards must put checks and balances in their systems to make sure their money is handled properly. Now, nothing gets paid on behalf of the association unless it has gone through an approval process. "We also increased our insurance to cover fraud and errors and omissions," she said.

Pia Trigiani, a lawyer with Mercer Trigiani, an Alexandria firm that represents community associations, has lobbied on behalf of the Virginia measure. She said the industry has tried to regulate itself, but as the business has grown, the amount of money at risk and the responsibility entrusted to management companies have increased. Even with increased supervision at the state level, she said association board members will need to be vigilant. "You need to protect your own assets," Trigiani said.

Third-party audits, careful oversight by board members and insurance against embezzlement or theft are still the order of the day. "You've got to be careful in thinking regulation is a foolproof protection," Trigiani said.

Even small homeowners associations, including those that don't pay for professional management, need to be diligent in handling money on behalf of their neighbors. Tom Xander is treasurer of Westwood Estates, a neighborhood of 48 single-family houses near Tysons Corner. Dues are just $101 per household each year, generating an annual budget of about $5,000. Expenses don't extend much beyond snow removal and a bit of lawn mowing. Westwood spends about $380 annually year for an insurance policy that provides liability coverage for the association's directors and for the association if someone were to be injured on the neighborhood's common property. The association hasn't felt a need to hire a professional management company. "It's expensive, and we are so small and our issues are so few, the financial burden seemed more imposing than justified given the scope of our operations," Xander said.

If oversight measures pass in Richmond and Annapolis, the cost of professional management will probably increase, if only to pay for bonding and insurance. But if the requirements help keep homeowners' money safe, it would be well worth the cost.