Lack of regulation makes condo regimes easy targets for fraud

A swarm of FBI agents.

Computers, hard drives and financial records seized.

Reports of missing money.

The scene last month at Property Administrators Inc. -- a management company that oversaw day-to-day operations and finances for condominium regimes -- seemed out of place on Hilton Head Island.

But the Shelter Cove company's abrupt closure, which left scores of condo owners racing to account for hundreds of thousands of dollars, is not that unusual.

Property Administrators is the third such company in the past decade to be accused of stealing at least $100,000, according to court records and interviews with Centre Court condo owners, who allege Property Administrators took money.

And some business officials say those are only the publicly reported cases.

Other management firms have misused condominium and homeowners' associations money but quietly returned the money after embarrassed board members found out.

"Boards want to keep it private," said Hilton Head accountant Greg Bennett. "A lot of times they don't pursue it legally, so there's no proof it ever existed."

The issue boils down to a lack of local and state oversight, industry experts say.

On Hilton Head Island, many condo boards of directors -- owners elected to govern a condo association -- do a poor job of supervising management companies.

Statewide, an absence of regulations allow companies that manage millions to operate unchecked. A bill proposed this legislative session would add rules to make it harder for management companies to go unnoticed. Other states have found such measures to be successful.

"South Carolina is in the Stone Age when it comes to association management," said Ron Fenstermaker, president of IMC Resort Services, one of the largest management companies on Hilton Head. "You could be me tomorrow. There is no licensing. There is no education requirement. It's the Wild West."

'TOO MUCH TRUST'

For as long as Deb Bernsten can remember, Property Administrators Inc. made sure her Sea Pines condominium regime ran smoothly.

The company collected fees and paid the bills. It contracted to have the grass mowed, the sidewalks swept and the trash picked up.

When the Lighthouse Road Villas I board decided to add new sun rooms and screened porches in 2009, there was enough money in its bank account -- managed by Property Administrators -- for a nearly $1 million overhaul.

"Nothing was ever out of the ordinary," said Bernsten, president of the condo board for nine years.

But last year, when the board wanted to appraise its property after renovations were completed, something felt wrong, said Bernsten, a former anthropology professor at the University of South Carolina-Beaufort.

The company told her there wasn't enough money to pay for the appraisal. When she demanded to see financial records, she was met with silence. She realized she couldn't search the bank accounts because Property Administrators had the passwords. For years, she had relied on financial statements produced by the company.

"Unfortunately we had kind of given them carte blanche," Bernsten said. "We trusted them. Perhaps we gave them too much trust."

Lighthouse Road Villas I was one of 21 condo or homeowners associations that worked with Property Administrators. The business abruptly closed last month without alerting its clients in advance.

Federal investigators are pouring over its financial data. More than $1 million is believed to be missing from at least three condo associations, and board leaders fear that number will grow as the regimes regain control of their financial records in the next few weeks. The property owners have sued the company and its owner, Don Christy, in civil court. No criminal charges have been filed against Christy or his company.

The dispute has caused several regime leaders to wonder if Hilton Head is particularly vulnerable for condo-management problems.

A few acknowledged the demographics of their boards make it difficult to properly supervise companies.

For example, at Inverness Village, which has about 100 units, the five-member board has only one full-time resident. That means board members simply aren't around to keep a close eye.

Moreover, most of the board members are retired and volunteers. They don't want to spend all of their free time policing a management company, said president Ray Pfeiffer, a full-time resident.

"There is only so much time you're willing to spend," he said. "When you're a volunteer group, it's not the same as being as diligent as you would normally be when you're getting paid to do it. So there's a bit of trust involved with the companies we work with."

Inverness is one of the larger regimes that Property Administrators managed.

For smaller regimes, it's much cheaper to hire do-it-all management company such as Property Administrators to take care of landscaping, collections and finances.

Lighthouse Road Villas I and II -- which total 27 units -- hired Property Administrators because it was less expensive than hiring individual firms for each task, board members said.

But those arrangements can give the companies too much power, critics say. Some fraud investigators urge regimes to "segregate" the duties or hire one firm for accounting and one for maintenance.

"A lack of segregation of duties, accountability and oversight are what allow fraud to occur in any setting," said Bennett, the accountant. "It does not matter if we are talking about a small island property manager or a Fortune 500 organization."

However, that practice might be costly for some regimes.

Other experts recommend easier-to-implement financial controls, such as requiring statements directly from the bank and obtaining signatures from two board members when large amounts of money are withdrawn.

"That way you see everything right in front of you," said Chip Beverly, a Myrtle Beach attorney who represents more than 600 homeowners associations in the Carolinas. "It establishes a set of checks and balances."

Bernsten, the Lighthouse Villas regime president, said her board had none of those measures in place. In fact, unless she specifically asked, the board never received financial information from Property Administrators.

"We were guilty of naivete ... The old checks-and-balances system wasn't there," she said.

WEAK STATE LAWS

The federal investigation into Property Administrators comes during a statewide debate over proposed laws to monitor homeowners' and condominium associations.

The state has long grappled with complaints from residents who say there is little recourse when dealing with an problem condo associations. Most complaints revolve around bizarre bylaws or feuds between association board members.

While primarily focused on owners associations, the bill also has big implications for management companies.

It would establish a regulatory body -- similar to the state Real Estate Commission -- to oversee management companies.

The regulatory body could force company employees to earn certifications and take industry-related classes, according to the bill.

It also could require that the companies be licensed.

Under current law, no license is needed to manage associations.

Fenstermaker, whose Hilton Head company manages about $20 million for more than 70 regimes, called the lack of licensing "ridiculous."

"You need a license to cut hair. You need a license to give a massage," he said. "But I manage millions of dollars worth of assets and I don't need a license?"

The regulatory body would likely handle ethical complaints.

Local supporters say that while most Hilton Head companies act ethically, having a regulatory agency would stop the bad players who now can fly under the radar.

"You'd have an agency to go to, so that person could lose their ability to practice," said Peter Kristian, general manager of Hilton Head Plantation. "Hopefully that will be a deterrent to bad behavior and improper practices."

Dawn Bauman, government affairs director for Community Associations Institute, a national group that advocates on behalf of association management companies, said South Carolina is behind other states such as Florida and Virginia when it comes to such regulations.

Florida requires independent audits of companies. It also requires companies to be licensed and employees to take classes every year.

"There's rigor in these programs established to protect consumers," Bauman said.

Still, some South Carolina business owners aren't convinced.

MJS Inc. in Columbia manages more than 150 homeowners associations.

Owner Jud Smith said licensing requirements are "nothing more than a piece of paper."

And forcing his property managers to take classes -- ones that could cost $200 each -- amounts to an unneeded expense, he said.

He argued such controls would not deter someone looking to commit fraud.

"If you have a thief in your midst, he'll steal, certified or not," Smith said. "He'll come in, pay his money, get his piece of paper and go back and keep stealing."

But for regime leaders such as Bernsten, more regulations would be welcome.

She says it could have helped prevent the mess in which she finds herself.

"This was a wake-up call for us," she said. "The way this is operated, the way the system is in place is not a good idea. Fraud is easy when there is no one around to question it."

Follow reporter Dan Burley on Twitter at twitter.com/IPBG_Dan.

Related content:

• Judge orders Property Administrators to turn over all money, documents, March 6, 2015
• Property Administrators took $94,000 from Centre Court villas, regime says, Feb. 27, 2015

This story was originally published March 27, 2015 at 4:00 PM with the headline "Lack of regulation makes condo regimes easy targets for fraud."