Conflict of Interest Should Be Revealed

QUESTION: I am the property manager for a large homeowner association in Orange County. One of the board members is related to a contractor who has done some large projects for the association. The contractor keeps on submitting bids for a great deal of work and in some cases these bids are being accepted without getting competitive bids from other contractors.

The board is responsible for these decisions, but I feel that there is a conflict of interest. What is my obligation to disclose information to the rest of the board members? Is the board member the only one that is responsible for the disclosure? Should the rest of the board members require that the relative of the contractor refrain from discussing and voting on any pending projects?

ANSWER: In my opinion, the property manager has an obligation to disclose the possibility of a conflict of interest to the rest of the board members. You could contact the board member and ask him or her to disclose the relationship with the contractor. By giving the board member the opportunity to tell the others, you will avoid the appearance of being the tattler.

If the board member fails to do so, you should bring it up at the next board meeting or write a short memo to the board members. In order to protect the board member from future criticism, the information about a potential conflict of interest should be noted in the minutes and the minutes should reflect that the board member refrained from voting on any bid from this particular contractor.

Conflict of interest can be a very negative influence on the association’s board of directors. All board members have an obligation to make decisions based on the best interests of the association as a whole.

However, some board members who are concerned about harmony may go ahead and approve the bid that would directly or indirectly benefit the non-voting member with the conflict of interest.

The property manager and the board members should make sure that competitive bids are documented in the minutes to show that the board is properly researching and comparing bids prior to voting on contracts.

How Big Can Midyear Budget Increase Be?

Q: In January, the beginning of our condominium association’s fiscal year, the board of directors increased this year’s budget by about 5%. The person who was the treasurer at that time influenced the rest of the board members and kept them from adopting a realistic budget.

I was recently elected to the board. Most of the other board members feel that our monthly assessments need to be increased. We have had our reserve study updated and we should be allocating more funds to the reserve funds for future repair and replacements.

I have read in your column that the association’s budget can be increased as much as 20% above the previous year’s amount. Since the increase this year was only 5%, can the board now revise our budget and increase it by an additional 10% for the remainder of the fiscal year?

A: The budget that took effect on Jan. 1 should have been distributed to all of the owners between 45 and 60 days before the beginning of the fiscal year.

If this was done properly, then the board of directors has the authority to increase the budget up to 20% above last year’s budget, in accordance with the California Civil Code.

Since the board only increased the budget by 5%, they could increase the additional 15% at this point as long as the total increase over last year is not more than 20%.

Some owners may question the board’s authority to approve a midyear budget increase; however, the board can send out a revised budget explaining the reserve study update and providing the actual numbers that justify the additional funds.

California Civil Code requires that the owners be given 30-day notice before an increase or special assessment going into effect, so give adequate notice with a full explanation and attach a revised budget showing which line items in the budget need to be increased.

Before approving the second increase, inform the owners that the board is considering another increase because of the recent reserve study.

Invite the owners’ attendance at the next board meeting and get their feedback and answer their questions before approving the new budget. This is a good way to build consensus if you feel that some owners will be angry about another increase. Remind the owners that the board has a duty to adopt a budget that will fulfill the present and future needs of the association.