Resort law

Responsibilities of Board Members of
Owners Associations

May 2003

By W. John Funk*
for Developments Magazine

Boards of directors of owners associations play a critical role in managing interval ownership resorts. This is especially true in mature resorts that are past the development stage and are being run solely by the associations. Boards frequently contract with management companies to handle the day to day operations of the resorts and may rely on their expertise so long as all is going well. But even then, they must monitor and review the performance of the manager, resolve policy issues and engage in the long range planning that is essential for a resort to remain healthy.

A primary challenge for interval ownership regimes is attracting qualified people to serve on boards of directors of owners’ associations. Because interval owners usually own only one week at a resort and don’t reside in the local area, their interest in participating in the management of the resort is not a high priority. In fact, many owners just want to visit and have fun. To participate in board functions takes time and effort that few are willing to expend. That being said, there seems to be, in most cases, people who are willing to step forward, either because they like to be involved or have a sense of duty or, in the case of a troubled resort, to protect their interests.

Selection of Board Members

The key to success begins with the composition of the board. Because a board of directors needs able people to function, one of its important responsibilities is to attract new members.

First, an association should have a board of only five members, certainly no more than seven. Larger boards tend to be unwieldy and aggravate the problem of filling slots.

Second, if an association is having a hard time recruiting board members, it should consider paying them a reasonable fee for their time and effort. Most resorts don’t find the need to do so because they have a sufficient number of volunteers. However, if an association is in trouble or dealing with difficult issues, it may need to provide some incentive for members to serve. Frankly speaking, being a board member in those circumstances can entail a great deal of work. To ask people to serve without pay will not encourage participation. Also their mileage, meals and lodging expense should be covered and directors’ and officers’ liability insurance should be provided to protect them from legal suits. Whatever expenses an association chooses to cover for its directors, it must take care that systems are in place to prevent abuses.

Third, board membership should have staggered terms so that new members are coming on and old ones are going off regularly. This keeps your board fresh and open to new ideas while keeping some continuity.

Fourth, there should be consideration of whether term limits are appropriate. On the pro side, limits on time of service encourage turn over and discourage burn-out. A limit of two terms of three years each might be appropriate. On the con side, once a member has experience, he or she may be very valuable and the loss may not be easily replaced. Most resorts do not have limits because there are not a lot of people wanting to serve. But if one does have the luxury of an abundance of members who are interested and qualified, term limits may be desirable, especially when paired with staggered terms.

Fifth, it is important to know the qualifications of your owners and recruit people who can help with the management of the resort. Boards should look for people with diverse business skills to help.

Finally, directors should be elected by the owners. A description of board candidate qualifications and reasons for why they want to serve as directors should be published to the owners prior to the election. This encourages participation and may attract new members. On occasion there may be contests. This is positive because it will make owners aware of issues affecting the resort.

Selection of Manager

Another important responsibility is to pick a competent manager. Practically speaking, no part time board of directors can manage the day to day operations. A manager must be appointed to undertake that job. The board may decide to hire a person to serve as a manager as a full time employee or it may decide to contract with an independent management company. In any event, it is a critical decision that will play a major role in the success of the resort. In effect, the manager can make or break the owners’ experience. So what steps should a board take to pick a manager?

First, the board should consider the pros and cons of hiring an employee manager or a management company. Is there a qualified individual available to serve in the role of a manager? Will the association have to invest in equipment or systems to support the resort operations if an individual is chosen as manager? Does a management company have the experience of managing other resorts or have equipment and systems already in place to support the resort? Does it have the capability to adequately service your resort? Which alternative will be more costly? What back up exists in the event that key personnel become available?

These alternatives must be carefully evaluated before deciding how to proceed. In general, the management of resorts is extremely complex and requires a great deal of skill and experience, and financial institutions and exchange services are uncomfortable with unsophisticated operations. This reality moves most resorts in the direction of hiring a management company.

Second, the process of selecting a manager should be a competitive process. The board should encourage bids from several management companies, and, if it is considering individuals, as many candidates as possible.

Third, management agreements should be in writing and clearly delineate the manager’s responsibilities. Areas reserved for board approval should be expressly stated. The agreements should be of a limited duration, no longer than three years, and subject to renewal only at the option of the association.

Fourth, performance should be regularly reviewed and if not satisfactory remedies should be available to the association, including the right to terminate.

Fifth, careful attention should be paid to how and what the manager will be paid. There must be an understanding of what work is performed for normal compensation and what is extra.
Review of Manager

Once a manager is selected, a board must make certain that the manager is performing in a satisfactory manner. The board should get regular reports on whether the budget is on track, what cash is on hand, what is the delinquency rate, what maintenance and repairs are being performed, whether housekeeping is timely and satisfactory, whether the resort continues to meet the standards of the exchange program, whether assessments are going out on time and so forth. In other words, the board should be fully informed as to the operations of the resort by the manager. A process should be set up so that if there are any complaints by interval owners or guests the board will have an opportunity to review the complaints and determine whether they have been dealt with properly. The board then should formally review the manager’s performance at least on an annual basis to evaluate whether it is satisfactory and whether improvements need to be made. In the latter case, clear goals and time tables should be established.

Establishment of Policies and
Long Range Planning

Boards have the responsibility of establishing all policies for the resort. These policies have to be consistent with the documents governing the interval ownership regime. Boards should work with their managers to develop sound and sensible policies to regulate the conduct of interval owners, guests and staff. Policies may involve liability to the associations, such as fire and safety matters. Some may involve the ease and efficiency of management, such as check in and check out issues, payment of bills and assessments, and resale and transfer procedures. Others may involve how employees are treated and how to avoid claims of harassment or discrimination. Once policies are adopted, the board must make certain that the manager is enforcing them. A good manager will assist the board in developing appropriate policies that are consistent with industry norms and tailored to the resort. Likewise, boards must think about the future of their resorts and plan ahead for maintenance, repairs and renovations so that the vacation experience continues to meet owners’ expectations. The resort environment is continually changing, and boards must work with their managers to make certain their resorts keep up with their competition to maintain the value of the interval owners’ interests.

Relations with Interval Owners

Boards are the representatives of the interval owners and have a fiduciary responsibility to them. Boards should regularly inform the owners about their resorts through newsletters or other publications and let them know what issues are priorities and how they are being addressed. Budget areas are always sensitive and owners need assurance that their resorts are being managed in an efficient and cost effective manner. Experience has shown that if owners are kept apprised of why expenditures are necessary and how management is working to keep them at reasonable levels consistent with the quality of the resort, owners will tend to be supportive and understanding. Annual meetings are critically important to this process because owners are given a forum to present ideas and challenge the decisions of a board. Care should be taken to organize the meetings so that they are informative, open and democratic.

Conclusion

Serving on a board of directors of an association is a serious responsibility. Interval owners make a significant investment in vacations and expect that the management team will protect that investment so that their experiences in the future will be as good as those that led them to buy in the first place. Board members are the leaders of the team and establish the standards by which resorts will be measured. It is an important job and needs the best talent that each resort can muster.

*W. John Funk is admitted in New Hampshire, Vermont and Massachusetts.

This article originally appeared in the May 2003 issue of Developments magazine, The Voice of the Time Share Industry. Reprinted by permission of the American Resort Development Association.

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W. John Funk
You may contact
John Funk at 603-545-3607.

Related practice area:
Resort Law