Considering the Real Estate Industry by statute requires full disclosure, and considering this is the Age of Information and Authenticity, how ironic that the powers that be here maintain the posture of stealth and spin on behalf of 111’s investor-owners. But that begs the question: Are our investor-owners vulnerable? Maybe more than we’re willing to admit. And maybe sooner than we think.
In case you missed it, a few weeks ago Tribune columnist Pam McKuen featured a new product/service being offered by Chicago-based real estate data-analysis firm, Association Evaluation, LLC. Called a “PARScore™, short for Private Association Rating, it’s a new method for evaluating the purchase of a condominium controlled by a homeowners’ association in advance of and during the home-shopping process.
According to Sara Benson, CEO of Association Evaluation, “It’s a fact-based, data-driven analytical process that evaluates the quality and credit worthiness of more than an estimated 324,000 homeowner associations across the United States.”
Like a credit score, PARScore™ provides a standardized rating between 400 and 900. The numbers are calculated using a proprietary algorithm that analyzes more than 140 data points. Association Evaluation collects data from association records, personal interviews, on-site inspections, public records, corporate filings and other databases. Criteria include lawsuits, house rules, bank balances, special assessments, renters, environmental influences, and the board’s policy on, and management of, conflicts of interest.
“Financially healthy and well-run associations will receive higher ratings while risky associations plagued with low bank balances, non-paying owners, special assessments and lawsuits will receive lower ratings,” Benson said.
Credit-score analogy aside, think of it as similar to other financial ratings developed for mutual funds and stocks. Bottom line: it can be assumed that investors have constant relative risk aversion. PARScore™ is used by home buyers, lenders, private mortgage insurance companies and insurance carriers in order to minimize loan-default and claims risks.
So, as a predominantly investor-owned condominium, should we be concerned? Maybe. MAYBE LOTS! In a recently released book by Benson and co-author former Sun-Times Real Estate Editor, Don DeBat titled “Escaping Condo Jail,” Benson and DeBat offer the “10 Hallmarks of a Healthy Association” (ECJ page 454). Using those criteria, we apparently have a serious problem. A quick survey of homeowners that included a few former board members yielded rather abysmal results. The following correlates the hallmarks with their responses.
HALLMARK #1: Well educated board members.
At 111: The Majority of our board are not full-time residents. While variously credential-ed in their own professional pursuits, they remain mostly ignorant of what’s happening here, our history, let alone our governing documents, our rules and especially the law. Says one current board member, “only a select few do their homework.” Another former board member said, “We were given briefing packets sometimes a day before board meetings. Few if then came to a meeting having even read it.” Said another, “Regrettably, our lawsuit status is a testament of ignorance backed by defense attorneys and enmeshed sycophants.”
HALLMARK #2: 100% transparent communication.
At 111: There is no transparency from our board to owners. What is provided is spin and milazzo-isms designed to appease (read fool) investor owners.
HALLMARK #3. Open records.
At 111: Said one former board member, “Until the Palm decision we couldn’t get anything, now only select information is released.” Another responded, “Three words, ‘Liable by Plea.’ We spent good money paying a significant fine in the board’s effort to break the law and obfuscate information. That’s not including legal fees. That’s our posture.”
HALLMARK #4: Proactive member/owners.
At 111: Said a former board member, “Only 1/3 of the owners are full-time residents. There’s little or no participation as the board releases little information.” Said another, “Our board discourages everybody but select extensions of the Milazzo-Evans clique.”
HALLMARK #5: Experienced support team.
At 111: Said one insider, “We pay for some of the best brands in the condo management industry here… to defend Milazzo.” Said another former board member: “Property management works to maintain the account by favoring what the board president says only. Other than that, the management staff is for the most part ineffective.”
HALLMARK #6: Strong reserve balances.
At 111: “We use two lines of credit to make our reserves appear strong, i.e. it’s all funny money.” Said a former board officer: “And we’ve been in debt to the tune of over a million for over 3 years now. And even with that, we’ve been as low a $38,000 in our reserves. For a building this size, that’s absurd.”
HALLMARK #7: High owner-occupancy ratio.
At 111: “It is apparent the Board is encouraging investor ownership. Actual owner to rental ratio figures are based on an illogical formula.” Said another concerned homeowner, “But even with a few thick thumbs on the scale, our rentals still are approximately 40 percent. And the place shows it.” In the words of one current board members, “It’s like a high-end college dorm.”
HALLMARK #8: No special assessments.
At 111: “In lieu of special assessments, 111 uses huge loans that do not require owner review, but cost the association money.” Said another: “The credit scenario puts a huge surreptitious tax on homeowner value. It’s a special assessment without actually having to be honest about it.”
HALLMARK #9: No law suits.
At 111: “We’ve got five and our potential liability is well over $5 million. When you’ve already a million in the hole, that’s a huge problem.”
HALLMARK #10: Well-maintained common elements.
At 111: Said one owner: “Just look at this place. In the past 3 years it’s noticeably deteriorated.” Said one former board member, “111 leaves much to be desired, starting at the curb.”
So, how do we fare? What’s a good guesstimate as to our score? Hard to tell from an unscientific survey. But suffice to say, where the Milazzo & Friends might characterize the negatives as stemming from a few “naysayers,” the realities here overwhelm his casual dismissal. Said one former board member: “As compared to best practices, I say 111 fails on all points. I see no redeeming value from our leadership be it board or management company in the way they handle our Association. We’ve lost control and/or it’s been given away even on the most critical issues. Frightening.”
Bottom line: The imprimatur of a PARScore™ is only a matter of time. Ironically, now’s the time to take stock.
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