Resort Board Issues

Originally published as "It's Your Property. Get Involved" by Byron Wiegand. From TimeSharing Today, MAY/JUNE 2006

The acceptance of timesharing as a desirable alternate to "paying through the nose" for a vacation is widely endorsed by the public. So what's the problem with timesharing? The very real problem is the one of management of the timeshare association by the owners themselves.

Most states have required that these associations, toward the end of the initial selling phase by the deveoper, become self-governing — and with good reason. They don't want the association to become a permanent hostage of the developer. So state laws insist that the operations power be transferred from the developer to the owners themselves. The problem arises when the owners do not take over control of the property, but abdicate that power back to the developer or to a management company that then takes over the board of directors of the association by causing the owners to vote in a majority of the management company's own people. This puts the weasel firmly in charge of guarding the hen house.

Picture this: The management company (by virtue of controlling the owner's association board) now controls its own customer! There is no more perfect example of a total conflict of interest. How do you suppose this works? How about if the management company really makes a major mistake? Does the board censure the management company when it is really themselves? Yeah! Sure! Right! How about when it is time to review the yearly budget? Do you think they might be inclined to give the management company a big raise? Can you picture them in a board meeting saying, "Should we give us, er...the management company a big raise? Nah, they are already making too much." Not too likely. The chance that a management company-controlled board will "do the right thing" is non-existent. They will do what is in their own best interest every time (or at least almost every time.)

If you have an entrenched board of directors where the management company is in control, your association is in serious trouble. The state did not set it up for owners to take control, only to have you give it back to the people they were trying to protect you against. If your association is full of "Sheeple," you will get fleeced every year as long as you own. It is your property! You must take control! Do you really know who is in charge of your association? You better. A great help is board member term limits. It at least allows for someone new to be taking a look every so often.

How about when the developer is gone, a good arm's length management company is in place and does not attempt to pack the board? Are you completely out of trouble? Not necessarily. An unknowledgeable board or even a single board member can also cause problems. How can you protect against that?

Well, you know how once a year you get a ballot that looks a little bit like this:

Vote for three candidates only:

• Everett Esquire, Esq. (Incumbent) - Retired Attorney; specialized in criminal law
• Heather Homemaker - Wife; mother of four grown children
• Sam Mallton (Incumbent) - Retired Corporate CEO of Mall-Mart
• Keller Seller - Part of the original sales team during the developer sales
• Sally Sincere - Retired grammar school teacher. Active in the Garden Club. Running on a platform of reducing the dues and championing for "the little people."
• Sherry Shopkeeper (Incumbent) - Operates a small gift shop in Sawyersville

So whom are you going to vote for? Many owners are likely to say, "Who cares?" but that is a huge, huge mistake. As a timeshare owner, you are a relatively large stockholder of a medium to large sized corporation (even though it is a non-profit one). The budget for such an organization is invariably over a million dollars a year and the cash-in-the-bank reserves can add up to hundreds of thousands of dollars. You don't care to whom you entrust that responsibility? You are going to hand that money and responsibility over to someone you don't even know? You must agree that this makes no sense.

You might say, "I don't have the time to get involved in this," but the fact is that you don't have the option if you want to protect your investment. Don't just figure that "everything will turn out all right." If too many owners at your resort do that, you are in deep trouble. After thirty-five years, I have seen the creation of a number of unnecessary association problems. Not many, but even one is too many.

So what's the answer? You must get involved, even if on a casual basis. This doesn't have to require much of your time. You do need to follow the newsletters, even though many make the big mistake of throwing them out with the junk mail without even opening them. Attend some meetings, at least the owner's general meeting. You can learn a lot just from the other owners. Meet the board members. What do you think of them? Would you hire them to run your own corporation? Ask questions. How do they see the future for your property? Is the budget being met? Who would they prefer to see on the board? If a professional property manager is a part of your management team, you are normally better off. At least you have a potential check and balance system in place. Although that manager must report to the board, he can answer your questions directly and is likely to tip you off to any problems. So let's say that you will plan to get involved and oversee your investment better than you have in the past, but your ballot is due now. How will you vote for the above slate today?

Keep in mind that the minute you change one board member, you change the dynamics of the whole group. You don't have to throw out the whole existing board and, generally speaking, that is a bad idea anyway unless it is controlled by the developer or management company. If the resort has been running smoothly and most everyone (you won't get 'em all) is pleased, you should keep most of those responsible. I think making some changes on a regular basis is a good idea, although you run the risk of eliminating one of the "spark plugs." You also eliminate the potential formation of a "dynasty" that can cause problems in the other direction. Term limits are always a good idea, even in a stabilized environment with a permanent property manager.

Professional and business people are generally good to have. The attorney, the former CFO and the small business owner (Esquire, Mallton and Shopkeeper) bring a wealth of knowledge and business ability, even though the attorney's experience is in the criminal rather than civil sector. He still knows the law and if the association has been running smoothly he is still a good bet. In fact, all of these incumbents are good bets and if you kept them all you would probably be all right provided they hadn't been there forever. A phone call to the property manager for an opinion would be a good idea. Maybe one of them is causing chaos within the group and would best be eliminated. The on-site manager (who you should know anyway) could also provide some insight.

So what about the three non-incumbents? Who would be the best from this group? Heather Homemaker is not a bad choice as she has probably had her hands on the affairs of the family for many years and may have even had charge of the family checkbook. If there were no women on the board, I would definitely choose her. My experience (being the president of one timeshare association or another for over 22 years) would be to have at least one woman on the board. Their insight and sensitivity is an absolute plus. Why not pick up the phone and call her? See why she wants to run. Without the kids at home, she no doubt has the time. What about Keller Seller? If the property has been sold out for a while, he probably is a great believer in it and could provide more insight and sound judgment. He would likely be O.K.

That brings us to Sally Sincere and her giant red flag. Her background probably doesn't provide a good basis for running a medium sized corporation unless she had a small business going on the side. And her proposal to reduce the dues is really scary. Where will she reduce them? Is she going to cut back on services? Which ones? Is she going to ignore repairs, creating a huge deferred maintenance situation, substandard resort and huge future problem for you until she is kicked out? Or is she planning on just using up the reserves to provide a temporary relief to the dues bills? (Illegal by the way.) I would run like crazy from this one; she could cause some serious problems.

So what are some of these serious problems? There is one going on right now in a major property in the southeast. The developer is still the president of the association years after selling most of the weeks and benevolent he isn't. The conflict of interest is huge and absolutely against the best interests of the owners. It is going to take a major revolt to fix this, potentially a class-action suit or an injunction by the State Department of Real Estate and/or Corporations. This doesn't have to be the case.

In another case, the board would not open the books to the owners (probably against the law, but if no one calls them on it, they can slide by), would not divulge the results of any voting or allow inspectors of the election or even provide a list of the other owners (definitely against the law). They merely sent out frequent special assessments. Most probably they are stealing the owners' funds in a criminal activity that has continued for many years.

Although these situations are rare, it is a lot easier to avoid such problems than it is to fix them. One thing I have always incorporated into the associations I have chaired is a prohibition of any compensation to the board members. The minute you do that, you have set up a political system that is almost certain to cause you problems later. The exception to that is compensation for travel expenses to board members that live a long distance from the board meetings. Recently an owner from across the country was elected to a board. Her first act with the association was to save them over $80,000 in unnecessary furnishing expense by virtue of her practical common sense and knowledge of interior design. Was that worth the four $300 airplane tickets a year for two years?

Most associations do have a wealth of talent. Just make sure you elect those instead of the ones that will cause problems. Better yet, if you have the time and background, why don't you put your hat in the ring as a potential board member? The insight you will gain into your property will be immense and you can make a difference.