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SHOULD RESERVES BE MANDATORY?

SHOULD RESERVES BE MANDATORY?

  • Posted: Sep 10, 2021
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I hate beating around the bush, so I want to get to the point. A financial crisis is coming and it’s
going to be a big one. It’s also going to hit those that can least afford it. It’s going to result in massive
amounts of foreclosures. It’s going to result in countless cases of elderly persons being displaced
from their homes. The worst part is, it’s absolutely avoidable but I don’t believe any legislator would
ever have the courage to float a bill to save the pending disaster.
I was at a meeting last night in a 55 and over condominium. Elderly owners were complaining that the pipes are getting
old, there are leaks, and they sometimes have to come out of pocket a few hundred bucks in order to clean up the mess in their unit
and/or repair that broken pipe. They are complaining about bills for a few hundred bucks and find it difficult to pay them because
their sole income is social security.
To state the obvious, there is no reserve account. There never will be. Generally, senior citizens don’t believe in reserving
funds for repairs that may be necessary a decade or two from now because they believe they won’t be here anyway. So, year after
year goes by, decade after decade goes by and there is never a reserve fund to fall back on should a major repair become necessary.
Think of how much building has gone on in the past 50 years. It is staggering. But the buildings are getting older. As the buildings
start to approach the 40 year mark or more, things start to break down and repairs become unavoidable. Concrete restoration is
incredibly expensive, and unavoidable. Replacement of pipes is incredibly expensive, and unavoidable. And the same goes for
electrical renovations and roof replacements. All unavoidable. Yet, so many people, especially seniors, are rolling the dice thinking
that none of these repairs will be necessary while they own the property. That may be true for now, but eventually, everyone rolls
a 7.
Like it or not, some form of reserves should be mandatory
and not subject to being waived. There, I said it. Let’s get rid of the
“life expectancy” formula the state says you should follow but nobody
does. It’s a joke anyway. We all know the truth that the life
expectancy of the roof somehow gets longer, the closer you get to the
original estimate of how long it was going to last. Five years ago it
had a five year life expectancy. Money is tight, so today it has a new
10 year life expectancy. Somehow, like fine wine, the roof got better
with age. We all know that happens, and it happens every day. So
how about we make things simple. Let’s just say every condominium
must contribute 10% of its annual budget to reserves for roof,
plumbing, electrical, structural and painting. It all goes into one pot
and it can be used for any repair necessary for those categories. It
can’t be waived. If however an association wants to contribute more,
they can.
If we implemented this, I’m guessing the average monthly
increase for most condominiums that are not already reserving funds
would be anywhere from $25.00 to $75.00 per month per unit. I know
that for some that increase is not easy. However, it’s going to be a lot
more expensive if any one of these inevitable repairs become
necessary and it’s time to pass a special assessment in the thousands
or tens of thousands of dollars. What do you think?

 

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Learn Everything about Reserve Funds For Homeowners Associations

Learn Everything about Reserve Funds For Homeowners Associations

  • Posted: Aug 12, 2021
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Although reserve funds are often not mandatory, an ample reserve can play a big role in protecting a community’s long-term financial health.

 

To function as intended, a homeowners’ association (HOA) must rely on assessment revenue from its members.  Most communities calculate assessments, at least in part, based on an annual budget of anticipated expenses.  These typically include the costs involved in performing all of the HOA’s maintenance duties, procuring necessary insurance, and covering overhead, along with any other fixed or reasonably foreseeable outlays.  The resulting gross budget is then divided among the members of the association, and homeowners are assessed accordingly.

When creating an annual budget in this manner, it’s generally a good idea to be as precise, analytical, and transparent as practically possible.  However, a budgeting approach that relies exclusively on predetermined, repeating, line-item expenses doesn’t leave much room for error.  After all, what if an essential common element is unforeseeably damaged—resulting in significant repair or replacement costs—and there’s no money in the budget or insurance to cover the loss?  Or it may be that the association has some legal issues arise and incurs attorney’s fees much higher than could have been reasonably anticipated.  And, of course, some common elements don’t need maintenance every year, but, when maintenance time comes, it’s costly.

Rather than get caught scrambling for cash when an unexpected contingency or major maintenance need arises, many communities maintain “reserve accounts” or “reserve funds,” as a sort of back-up savings slated for emergencies, long-term upkeep costs, and irregular expenditures. Although reserve funds are often not mandatory, an ample reserve can play a big role in protecting a community’s long-term financial health.

 

What are Reserve Funds?

We’re all familiar with the differences between checking and savings accounts.  Aside from cash itself, a checking account is as liquid as assets get.  You use it to pay bills, buy groceries—the sort of everyday expenditures it takes to run a household.  A savings account, on the other hand, serves as a rainy-day fund you can tap when something unexpected arises—like, say, your vehicle needs a new catalytic converter.

Most homeowners’ associations have an operating account or similarly designated checking account to cover the routine expenses.  Office supplies and regular maintenance of common elements, for instance, are typically paid from the operating fund.

An HOA’s reserve fund, in contrast, is an account dedicated to unanticipated and deferred expenditures, particularly large ones.  The association allocates money toward its reserve account over time so that, when a costly repair or comparable outlay becomes necessary, cash reserves are available to handle the expense without sacrificing day-to-day functions.

By way of example, an HOA might pay out the costs of routine snow removal from its operating account.  If the community expects to need plowing a few times each winter, the board will build the costs into the annual budget.  But when all the plowing over the years leaves a significant portion of the development’s roads in need of repaving, the money is more likely to come from a reserve fund.

Reserve requirements are not addressed under every state’s HOA laws.  And some states that do address them, leave a lot to the board’s discretion.  More commonly, reserve account standards are found in a community’s declaration or bylaws.  Statutes governing condominiums are usually more explicit in setting forth precisely what is required of an association with regard to reserves.

 

The Purpose of Reserve Funds

An association’s annual budget takes into account reasonably foreseeable expenses like landscaping, equipment upkeep, and payroll if the HOA has employees.  But when an association-owned building needs a new roof, the community pool requires a major repair, or all the equipment in the fitness center starts breaking down, the unbudgeted costs will need to be paid from reserves.

A reserve fund can also be used to cover expenses that are not necessarily unforeseen, but arise infrequently enough that it wouldn’t make sense to include them within annual budgets.  If the community’s tennis courts need to be resurfaced every ten years, the board might hold back in reserve around ten percent of the cost each year so that, when the time comes, the resurfacing costs can be paid outright.  Of course, it’s not always so easy to predict precisely how much money will be needed.

 

Boards and Reserve Accounts

For the most part, deciding just how much cash a community needs to hold in reserve is the responsibility of an association’s board.  Under state HOA and condominium statutes, board members owe a “fiduciary duty” to the association. See, e.g., Fla. Stat. §§720.303(1), 718.111(1); 765 ILCS 605/18.4.  The obligations of a fiduciary are among the highest recognized by the law.  In carrying out their responsibilities, a board and its members must act in good-faith, prudently and loyally, and always in furtherance of the association’s best interests.  Id.

“Board members must avoid conflicts of interest when budgeting and allocating reserves.”

The duty of good-faith loyalty includes not wasting or misappropriating an association’s money, including reserves.  HOA funds should only be used for their intended purposes and in the best interests of the community.  Anything less potentially breaches the board’s fiduciary obligation.  Condo associations in Florida, for instance, can only expend reserve funds for authorized reserve expenditures or if a specific outlay is approved in advance by majority vote of the association.  Fla. Stat. §718.112(2)(f)(3).

In furtherance of their fiduciary duties, board members must avoid conflicts of interest when budgeting and allocating reserves.  If a board member, family member, or related business could potentially bid on or otherwise benefit from an association contract, that board member should recuse him or herself from any discussion or voting related to that contract.  See, Tex. Prop. Code § 209.0052.

The duty of prudence means taking reasonable steps to avoid a scenario where a cash-strapped HOA is unprepared for a major expense it should have seen coming.  This means budgeting realistically and ensuring the association has sufficient reserves.  Deciding what is “sufficient,” though, can be difficult because, by definition, reserves pay for expenses that are irregular and not reasonably foreseeable.  Even a board making a good-faith effort to act prudently might not recognize all potential expenses a reserve fund needs to cover.

When setting reserve requirements, the key questions board members need to ask are (1) what unbudgeted expenses are likely to arise over an extended timeline; (2) how much are those expenses likely to cost; and (3) how much additional savings will that necessitate per year.   Most board members are volunteers just trying to help keep their communities running on all cylinders, so it’s probably unrealistic to expect them to know the answers without some professional assistance—especially in large communities with substantial common elements.  Fortunately, though, there are accounting professionals who specialize in “reserve studies” designed to calculate the cash-reserve needs of HOAs and similarly situated organizations.

 

Reserve Studies for Homeowners’ Associations

Reserve funds present something of a conundrum for HOA boards.  If you maintain reserves for the express purpose of paying expenses that are unanticipated and infrequent, then how does the board decide how much it needs to hold in reserve?  If the association holds back too much, it is essentially over-taxing its members.  But if reserves are inadequate, then the HOA might find itself insufficiently liquid to meet its obligations without imposing a costly special assessment or taking out a loan—neither of which is likely to be popular with homeowners.

Reserve studies are intended to help Goldilocks (i.e., the HOA board) find the porridge (i.e., the reserve amount) that’s just right.  A reserve study is an examination conducted by a consultant or accounting firm for the purpose of analyzing probable long-term expenses.  The idea is to use the analysis to estimate the community’s reserve needs as scientifically as possible.

Along with reviewing the association’s assets (including current reserves), budget, and anticipated revenue, the auditor will survey community equipment, buildings, and other common elements.  Based on all available information, the auditor comes up with a long-term schedule of expected repairs, replacements, major maintenance, and any other relevant liabilities likely to affect the HOA’s bottom line.

Once the study is concluded, the board uses the estimates to calculate the level of regular homeowner assessments needed to maintain the optimal reserve account balance.  For instance, if the study estimates that a parking lot within the community will need new asphalt in ten years, and that the cost will be around $20,000, the board might adjust the budget and assessments to hold back $2,000 in additional reserves each year.  That additional $2,000 is divided among all members’ annual dues so that, when the time comes for new asphalt, the funds are already available in the reserve account.

Of course, a study will in all likelihood identify numerous potential expenditures over the relevant period, and the reserve recommendation will be based on the aggregate anticipated long-term cash needs—not just any single item.  But the principle is still the same.

Reserve studies cost money, so they don’t make sense in every situation.  In a small association with only minimal commons and simple maintenance duties, a reserve study would probably cost more than the value it could reasonably be expected to provide.  At the same time, a large association with elaborate commons and extensive duties would be imprudent not to use a reserve study or other means of scientifically calculating reserve needs.

 

Reserve Funding Requirements

The appropriate dollar balance for any given community’s reserve fund depends in large part on the size of the association, the nature of the common elements, and the extent of the HOA’s obligations.  Some state HOA and condo laws establish specific reserve requirements, but funding needs are more commonly set by the board in accordance with standards detailed in the association’s governing documents.  A reserve account is “fully funded” if it covers 100% of the community’s reasonably foreseeable expenses.  Many communities choose to set reserve requirements at a percentage of anticipated expenses, as estimated by the board or identified in a reserve study.  So, for example, an association might require the board to hold in reserve at least 75% of anticipated expenses at any given time, adjusted based on the schedule for deferred maintenance.

A few states establish specific funding requirements for reserves stated as a percentage of the association’s overall budget.  See, e.g., Ohio Rev. Code §5311.081(A)(1) (requiring annual reserve contributions of at least 10% of budget, but allowing waiver by majority vote).  More commonly, states adopt statutory principles for reserves but leave the specifics to the discretion of the board or community as a whole.  Generally, condo laws go into much more detail when it comes to reserve requirements.

Florida’s condo statute requires an association’s annual budget to include reserves for “capital expenditures and deferred maintenance … [including but not limited to] roof replacement, building painting, and pavement resurfacing,” and any other deferred maintenance or replacement cost exceeding $10,000.  Fla. Stat. §718.112(f)2a.  For each included item, the calculation must be based on the “estimated remaining useful life and estimated replacement cost or deferred maintenance expense.”  Id.

Though Florida’s condo statute requires reserves by default, it also allows a condo association to waive reserve requirements, or require a lesser amount, by majority vote.  Id.  Florida’s HOA statute likewise makes reserves optional.  If a community opts for reserves, the reserve account funding must be calculated based on each asset’s estimated deferred maintenance or replacement cost divided by its predicted useful life remaining.  Fla. Stat. §720.303(6)(g).

California requires associations to maintain reserve balances based on reserve studies conducted at least once every three years and including diligent, on-site inspections.  Civil Code §5550.   The study must, at a minimum, identify all major components the HOA is obligated to maintain, the estimated costs and useful life associated with each, and the annual reserve contribution necessary to defray the costs.  Id.

Similarly, Washington requires calculation of reserve contributions in communities with “significant assets” (defined as assets valued at 50% or more of the association’s gross budget) based on regular reserve studies.  Wash. Code §64.34.020.  At least every three years, the study must be conducted by an independent professional who visually inspects the relevant assets.  Notably, though, the Washington statute merely “encourage[s]” HOAs “to establish a reserve account… to fund major maintenance, repair, and replacement of common elements.”  Wash. Code §64.34.380.

State legislation routinely recognizes the importance of reserve funds to homeowners’ associations but doesn’t make them mandatory. However, deferred maintenance, repair and replacement of major elements, and surprise expenses will inevitably come up.  When adequate reserves aren’t available, a community will need to employ alternate means of paying for these significant costs.

 

Alternatives to Reserve Funds

Boards often face a temptation to underfund reserves—or even dip into reserves to pay for what would normally be regular operating expenses—to cover increasing operating costs without raising assessments.  Homeowners often object to additional assessments or reject them altogether.  But paying a little extra up front to make sure sufficient cash-flow is available for adequate reserves can actually save money over time.  And, the alternatives—special assessments, loans, and putting off repairs and replacements—are not particularly attractive options.

“The duty of prudence means taking reasonable steps to avoid a scenario where a cash-strapped HOA is unprepared for a major expense it should have seen coming.”

With a special assessment, the community is paying all-at-once what it could have paid over time.  In effect, current owners are footing the bill for costs that were rightfully the responsibility of prior owners.  And, of course, special assessments often require member approval.  A rejected special assessment is just as helpful to a board facing a major expense as an unfunded reserve account.

If an HOA can’t cover unexpected expenses and long-term maintenance directly from member assessments, there’s also the option of taking out a loan in the name of the HOA.  Obtaining a loan probably won’t be too difficult for an association with regular revenue and relatively little debt, but it may require the use of community assets as collateral.  And, just as significantly, loans require interest.

Even assuming the HOA can secure a loan with a competitive interest rate, the cost of repaying the loan still ultimately comes from assessments, but members end up paying a lot more than the actual expense cost due to interest and transaction costs.  By contrast, an adequately funded reserve account itself earns interest, leading to the opposite result—members pay less out of pocket because money applied to reserves is earning interest up until the expenses become necessary.

And there’s also the option of simply not paying for maintenance, repairs, and replacements that aren’t included in the annual budget.  In this scenario, homeowners lose access to benefits of the community.  If the pool needs an overhaul, but there’s no money to pay for it, members and their families no longer have a neighborhood pool to swim in.  Not to mention, property values may decrease, as the allure of living in a community with a pool is reduced when the pool is inaccessible.

Kicking the can down the road by underfunding reserves almost always leads to losses in the end.  With this in mind, Florida’s HOA statute requires associations without reserves to notify members annually that no reserves are held and that special assessments may be enacted to pay for capital expenditures and deferred maintenance.  Fla. Stat. §720.303(6)(c).

Inadequate funding can lead to safety concerns as well.  Association-owned equipment or facilities that are not receiving scheduled maintenance due to insufficient reserve funding can increase the risk of injury and create unnecessary liability exposure.

Under the right circumstances, insurance coverage can help defray some of the costs caused by underfunded reserves.  Many states mandate that HOAs carry insurance coverage.  Arizona requires property damage coverage for at least 80% of the value of common elements and liability insurance with coverage limits decided by the board.  A.R.S. §33-1253A(1) – (2).   Eight states (Alaska, Colorado, Connecticut, Delaware, Minnesota, Nevada, Vermont, and West Virginia) have adopted the Uniform Common Interest Ownership Act (“UCIOA”), which has requirements similar to Arizona’s, along with mandatory fidelity insurance.  See, e.g., Conn. Gen. Stat. §47-255.

Insurance, though, isn’t foolproof.  A policy won’t cover every major expense that comes up.  A property policy might cover losses due to accident but not if damage results from inadequate maintenance.  A major expense like a new roof might be needed as a result or ordinary wear and tear that a regular property damage policy excludes from coverage.

And for insurance to help, you have to actually procure a policy.  State condo association laws often require insurance, but it’s frequently optional for HOAs.  Even in states that ostensibly require insurance like Arizona and the eight UCIOA states, there’s a limitation—a policy must be obtained “to the extent reasonably available.”  Id.

HOA insurance is generally a good thing to have; it’s just not a foolproof substitute for reserves.  Ideally, it’s more of a supplement, avoiding a scenario in which a catastrophe like a fire or major storm completely saps a community’s reserve funds or forces the association to write off common elements that were once valuable community resources.

Reserve Disclosure Requirements

Most state HOA laws require associations to make regular budgetary disclosures to members, usually including the status of reserve funding.  Florida HOAs, for instance, must prepare yearly budgets estimating anticipated expenses and revenue and identifying any reserve accounts or funds set aside for deferred expenditures.  Fla. Stat. §702.303(6)

In Washington, the statutorily mandated annual budget report must state amounts currently held in reserve, estimate year-end reserve balances, propose a plan for funding reserves, and project future reserve balances if the plan is adopted.  Wash. Code. §64.38.025.  Colorado requires a similar disclosure of present reserve balances, along with the board’s proposal to ensure the community’s reserve needs are adequately funded.  Col. Rev. Stat. §38-33.3-209.5.

California requires a detailed reserve report based on the most recent reserve study, including the remaining useful life of each major component, estimated repair or replacement costs, and the amount of reserve money held by the HOA.  Civil Code §5565.  California HOA members also have a right to notice of “the mechanism or mechanisms by which the board of directors will fund reserves … including assessments, borrowing, use of other assets, deferral of selected replacements or repairs, or alternative mechanism.”  Civil Code §5300.

Particularly in condo associations, prospective purchasers often have a right to receive notice of current reserve balances.  Tex. Prop. Code § 82.157; A.R.S. §33-1260.  Absent an affirmative disclosure requirement, homeowners have a right to request inspection of association records.  See, e.g., Fla. Code §720.303(4).  Records subject to an inspection typically include financial records and budgets.

 

Homeowner Recourse

A homeowner who believes an association’s board is mishandling or underfunding reserves has a few options.  First, the homeowner can bring up reserve issues at the next homeowners’ or open board meeting, or informally discuss concerns with a board member.  A formal records request can also help provide detailed information about how reserves are being maintained and used and whether there is in fact a problem.

Because of the democratic character of community associations, there’s also the option of running for the board in the next election or organizing a campaign to amend the association’s declaration to include more stringent or specific reserve requirements. If misconduct or fiduciary lapses are involved, an individual homeowner or group of homeowners usually have standing to pursue legal claims against the board or its members, depending upon the specifics of the situation and whether actual damages have been incurred.  It’s almost always a good idea to consult with an experienced attorney before asserting or pursuing legal claims.

In situations involving outright fraud or embezzlement, homeowners should bring the matter to the attention of local law enforcement agencies.  Misappropriation of funds entrusted to an individual is criminal conduct in every state, though, of course, the precise standards vary by jurisdiction.

 

 

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Florida’s condominium laws will undergo a top-to-bottom review by a task force established by the Florida Bar Association after the deadly collapse of the Champlain Towers South condo building in Surfside.

Florida’s condominium laws will undergo a top-to-bottom review by a task force established by the Florida Bar Association after the deadly collapse of the Champlain Towers South condo building in Surfside.

  • Posted: Jul 08, 2021
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Florida’s condominium laws will undergo a top-to-bottom review by a task force established by the Florida Bar Association after the deadly collapse of the Champlain Towers South condo building in Surfside.

Members of the task force who confirmed its existence to The Washington Post on Tuesday said their goal is to review state laws and regulations that govern condo developments, board operations and maintenance rules, and recommend potential changes to the governor and the state legislature.

Condo regulations in Florida have come under close scrutiny since the tragedy in Surfside on June 24, with at least 46 people confirmed dead and 94 still unaccounted for as of midday Wednesday. While investigators warn it could be months before a cause of the collapse is known, attention has turned to the decisions made — or not made — by city officials, consultants, developers and the residents and board members of Champlain Towers South.

“What we’re looking at are specific changes to prevent that from happening again,” William Sklar, an adjunct faculty member of the University of Miami’s law school and task force chair told The Post. “We also want to be realistic relative to the needs of unit owners, and we don’t want to dissuade [board members] from service.” Navigating those competing interests, Sklar and others acknowledged, is a complex mission. What lures many to condos in the first place is precisely what can eventually undermine them: Shared responsibility for maintenance with the perks of private ownership.

‘I anticipate a lot of push-pull’

Despite the detailed, extensive condo laws in Florida, several real estate experts said the rules are often easy to manipulate or have toothless enforcement.

“Condos are so critical to our local economy, but the state does nothing to bring clarity to it because it’s a cash cow,” said Peter Zalewski, a Florida condo industry analyst. “No one wants to kill the market prices.”

Condo owners and developers aren’t the only ones who may be skittish of changes: Politicians eager to enact tougher oversight in the wake of Surfside are still responsive to the will of voters, said Peggy Rolando, a Miami-based real estate lawyer and co-chair of the Florida Bar Association’s Condominium and Planned Development Committee.

“In Florida, condo owners are a hugely powerful political force,” Rolando said. Board meetings of well-heeled condo associations warrant campaign stops, and some buildings are even large enough to be their own voting precinct, she said.

Even tightening regulations in the name of building safety is likely to face resistance. Experts agreed the current rules that give condo owners significant leeway to defer costly maintenance can lead to a worst-case scenario in which a building becomes too unsafe to inhabit and too expensive to repair.

At the same time, they recognized putting off pricey fixes is sometimes a matter of short-term economic survival. In a place like South Florida, affordable housing is scarce, and many residents are fixed-income retirees who can’t easily absorb sudden spikes in homeowner fees.

“I anticipate a lot of push-pull,” Rolando said. “There’s an expression in South Florida that ‘you’re throwing grandma off the balcony’: If you’re passing laws saying ‘you must fully fund reserves for the entire building’ and price people out of their homes, you’re going to have a very unhappy constituency.”

Scrutiny on volunteer condo boards

After the collapse in Surfside, attention — and blame — quickly settled on the Champlain Towers South Condominium Association.

The association is the subject of at least 10 lawsuits filed since the building fell. In each of the complaints, residents detail what they say are oversights and failures of the condo board to act on crucial maintenance they argue contributed to the building’s structural instability.

But a Washington Post investigation found that while plans for repairs dragged on for years even as the building’s 40-year safety certification was coming due, dozens of unit owners in the condo balked at the estimated repair costs, which eventually tallied $15 million. In April 2019, dozens of owners signed a letter raising last-minute objections to the repair plans and asked for a lower assessment. A few months later, five of the seven board members quit.

The tension exhibited by the fallen tower’s condo association underscores why a condo building’s troubles don’t start and end with its board of directors, said Peter M. Dunbar, a longtime legal expert in Florida real estate who has written several reference books on Florida condominium law and management used by the state.

Florida condo board seats are volunteer roles in which elected members are not required to have any specialized training or vetting, even in buildings where board members are responsible for reserve accounts worth hundreds of thousands or even millions of dollars and approve maintenance for complex amenities like elevators and swimming pools.

New board members have 90 days to take an elective course approved by the Division of Florida Condominiums, Timeshares, and Mobile Homes Complaints/​Investigations or simply file a statement saying they have read the condominium’s rules and legal documents and understand their duties as a board member, Dunbar said.

“The lack of knowledge is not often where I find the biggest concerns,” Dunbar said. “You may know what you’re supposed to be doing, but are you doing it in a timely fashion, and are you doing it to the extent it’s required? To me, that’s a bigger issue.”

Anyone who serves as a director of an association has what Florida law states is a “fiduciary duty” to the association, or an obligation to act in the association’s best interests where maintenance, finances, quality of life and property value are concerned. In other words, Dunbar said, board members don’t have to know how to fix everything; they just need to hire the right people to assess what needs fixing and then act on those recommendations.

“But because they’re elected, they also have the pressures of their constituents,” Dunbar said. “The difference for the volunteer board is, you can do your best, and a resident can still say, ‘I don’t want to pay,’ and recall you.”

Public battles over personal budgets

Condo board members face personal liability if they’re found to have acted negligently or criminally in an individual capacity. But most problems that befall condo associations are not from nefarious board members or tightfisted unit owners, said Rolando, the Florida Bar Association’s Condominium and Planned Development Committee co-chair.

More often, personal circumstances or simple human nature cloud decision-making.

“There are very, very few associations that have really extensive, comprehensive reserve structures,” she said. “But if you know your neighbor just lost their job, or just sent their kid off to college, what are you going to do? You have an obligation to do the right thing for the association. But you have people who don’t want to or can’t afford to do the right thing.”

Documents from the Champlain Towers South Condo Association revealed infighting among neighbors as building repairs grew more urgent and more costly; one neighbor recounted toxic board meetings that would devolve into “screaming and yelling.”

The tension can erode the quality of life in a building where board members and condo owners pass one another every day in the lobby, by the pool or walking the dog, Rolando said.

“I have a lot of sympathy for board members because I think it’s rewarding that you can do something that improves your community and has a direct impact,” she added. “But it’s also enormously demanding, unpaid and thankless. I guess it’s like being a mom or something.”

The Florida legislature requires condo associations to have financial reserves for painting, roof repair, paving and any item of deferred maintenance that exceeds $10,000, Rolando said.

Rolando said she sympathizes with unit owners who face unmanageable costs that can balloon from years of neglected or delayed maintenance.

“Mandatory reserves are probably the right thing to do fiscally. But when you’re dealing with human beings with myriad financial issues, do you want to force people into a situation where they can’t afford to pay and will have to sell their unit?” Rolando said. “There are no good answers.”

Transparency and tougher rules

Members of the new safety task force hinted that changes to safety certifications and inspection schedules are likely to meet the least resistance.

Sklar, the task force co-chair, suggested that South Florida’s 40-year safety recertification program could be significantly narrowed to 10, 25 or 30 years and that it could be applied uniformly statewide; right now, it applies only to Miami-Dade and Broward counties.

Other considerations include expanding inspections to include geological and hydrological factors affecting building stability and structure, and periodic and comprehensive reviews of specific building elements such as concrete, rebar and electrical.

Sklar said the law allowing condo owners to hold an annual vote and waive fully funding the association’s reserves will need to be re-examined as well.

The task force will also consider ways the government can help residents who can’t afford the reserves or maybe bought into a lower-cost building or live on a fixed income.

“We may review if there’s a low-cost, government-backed, subsidized financing available,” he told The Post.

Zalewski, the condo industry analyst, said he hopes the task force also considers making real estate transactions more transparent and favorable to buyers. Under Florida law, a prospective condo buyer has a 15-day right of rescission, or ability to pull out of a pending condo purchase, if they are buying directly from a developer; if the purchase is made from an existing condo owner, the period shrinks to three days.

Zalewski, who is critical of the three-day rescission period, said that amount of time does not give a prospective buyer an adequate period to do the research and inspections that could prevent them from buying into a condo building that has hidden costs lurking down the road.

“The three days doesn’t make sense if you’re worried about the buyer,” he said. “It would change the market overnight because it would force everyone to be on the up and up.”

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If a 2008 Florida law that required condos to plan for repairs had still been in place, “this never would have happened,” said the legislator who sponsored the law.

If a 2008 Florida law that required condos to plan for repairs had still been in place, “this never would have happened,” said the legislator who sponsored the law.

  • Posted: Jul 08, 2021
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If a 2008 Florida law that required condos to plan for repairs had still been in place, “this never would have happened,” said the legislator who sponsored the law.

 

SURFSIDE, Fla. — Late last year, after years of delays and disputes, the Champlain Towers South Condominium Association began a desperate search for $16.2 million to fix major structural damage that was slowly threatening the Surfside high-rise — and that may have contributed to the building’s partial collapse June 24.

The obvious place to look was the building’s reserve fund — extra money socked away to cover the cost of future repairs. But the account held just $777,000, according to condo board documents — nowhere near enough to soften the blow.

The collapse, which killed at least 64 people and left 76 others missing, occurred before the condo board could collect the needed money from residents and begin repairs. The cause of the collapse is unknown, and investigators, experts and advocates are trying to determine whether the uncompleted repairs played a role, whether the board could have seen the problem coming earlier — and whether a Florida law regulating condo repairs that was repealed a decade ago could have made a difference.

 

One way to keep track of needed repairs is a “reserve study,” in which condo boards bring in experts like engineers or certified specialists every few years to inspect buildings and estimate how much the boards should collect from residents to prepare for future fixes. The building’s financial documents, obtained by NBC News and NBC 6 South Florida, show that Champlain Towers South had not done a professional reserve study since at least 2016. That decision was legal, but it meant that planning was left to the board, a shifting group of volunteers with little training in building maintenance.

“If the owners would have had a reserve study, if the board was proactive and had funded its reserves, this never would have happened,” said Julio Robaina, a former Republican state legislator.

Robaina sponsored a 2008 law requiring condo associations to hire engineers or architects to submit reports every five years about how much it would cost to keep up with repairs.

The law lasted just two years before it was repealed in 2010, after Robaina left office. Robaina blamed pushback from real estate lawyers and property managers, who he said claimed that the law was too burdensome for condo owners. The legislator who sponsored the repeal, former state Rep. Gary Aubuchon, a Republican real estate broker and homebuilder, did not reply to messages seeking comment.

 

The repeal left Florida’s condo residents less protected than those in nine states that legally require reserve studies, according to the Community Associations Institute, a nonprofit organization that advocates for condo associations. Thirty-one other states, including Florida, regulate reserves in some way — although Florida is one of three states with loopholes that enable owners to opt out of requirements, the nonprofit said. Ten states have no regulations about reserves at all.

“One of the steps that should be taken by a building, especially an aging building, is having adequate funds available so that when you have to face significant cost challenges there’s an appropriate amount of money available,” said Gary Mars, a South Florida lawyer who represents condo associations.

A survey last year by the Community Associations Institute found that most homeowners associations are hesitant to increase residents’ fees, anticipating opposition, and therefore fail to plan for long-term infrastructure fixes.

“In postponing inspections, reserve studies, and — ultimately — complete repairs or renovations, boards often end up facing an exponentially more comprehensive and expensive project in the long run,” the report said.

 

Maxwell Marcucci, a spokesman for the Champlain Towers South Condominium Association, declined to comment on reserve studies. In a previous statement to NBC News, he said the condo board was doing its best to ensure the building was safe. “They are not engineers and not building safety experts,” Marcucci said. “They hired experts, trusted experts, and at no point did the experts indicate that there was a threat of imminent collapse.”

The lack of a professional reserve study is a departure from what many experts say is best practice for condominiums, particularly older ones on the coast — like Champlain Towers South, built in 1981 — that have been exposed for decades to corrosive salt and water.

Robaina, who co-owns a property management company, said maintaining healthy reserves “is the single most important action that a condominium board needs to take.”

Florida law requires condo boards to maintain reserves for repairs over $10,000, but it does not say exactly how much to set aside. That means condo boards have some flexibility in avoiding saving for repairs that do not need to be made right away.

In addition, the law allows condo buildings to waive the reserve requirement altogether. Once it has passed its annual budget, a condo board can give residents the opportunity to opt out of collecting reserves by a vote of a majority of unit owners. The votes are common in Florida condo buildings, condo lawyers say.

That is what it appears Champlain Towers South did, lawyers and reserve experts said.

The experts pointed to the board’s reliance on special assessments — additional fees on top of residents’ normal monthly payments — to fund needed repairs. The board imposed a $1 million special assessment in 2016 for hallway renovations and a $350,000 special assessment in 2019 for work on a generator, a fuel pump and a fuel tank. Such lump-sum levies are indicative of a building whose owners have decided not to set aside enough reserves through regular monthly fees, choosing instead to wait until a big-ticket repair is needed to ask residents to pay for it, experts said. Many associations make that choice by repeatedly voting to waive or reduce the funding of their reserves.

“I can’t help but think that the building did that for years and years, which is why there was not enough funds available,” said Matthew Kuisle, Southeast regional director for Reserve Advisors, which prepares reserve studies. “Why would they do that? So they have lower fees. But in the long run, the fees are a small price to pay.”

The shortcomings of that approach started to become clear in 2018, when the board began inspecting the building before a checkup mandated by Miami-Dade County for buildings that reach 40 years old. In an October 2018 report, engineer Frank Morabito alerted the board to “major structural damage” to concrete slabs underneath the building’s pool deck and its entrance drive. He blamed a “major error” in the building’s construction and years of corrosion. He estimated the cost of repairs at $9 million.

Reeling from sticker shock, the board invited a Surfside building official to its November 2018 meeting. The official told the board that the building was “in very good shape,” according to minutes of the meeting. Some residents have said that led them to believe the situation was not dire.

Even so, the board began trying to find a way to repair the damage — and to pay for it.

Disagreements over the costs frustrated board members. Five members quit over two weeks in fall 2019. The condo association has had four presidents since 2018.

 

By late last year, the board had accepted that there was no safe way forward without doing the massive reconstruction Morabito recommended, along with repairs to a deteriorating roof. Morabito began preliminary work and found that the damage discovered in 2018 had gotten worse. The bill rose to more than $16 million.

The board scrambled for money. It found $707,000 left over from the previous special assessments and $777,000 more in reserves. But a quarter of the reserves were designated for insurance deductibles, leaving $556,000. The board chose not to tap the reserves just in case there was another emergency. That meant the building was short by $15.5 million, which the board voted in April to raise through a special assessment. The cost to residents would be $80,000 to $360,000 per unit.

“A lot of this work could have been done or planned for in years gone by. But this is where we are now,” board President Jean Wodnicki wrote to residents before the vote.

By last month, the board had started work on the roof, and it put other repairs out for bid. Responses were due July 7. Two weeks before the deadline, the building partly collapsed.

The board’s nearly three-year struggle to start work on the concrete replacement project has loomed over the catastrophe’s aftermath. Investigators have not determined what caused the failure; the deteriorating supports are among the possibilities.

Experts say the extent of disrepair documented in the 2018 report raises questions about how the damage went unnoticed previously.

“I read the report, and I wondered how long the building looked that way,” said Robert Nordlund, founder and CEO of Association Reserves, a reserve study firm based in California. “Did it look that way in 1998? 2008? Because clearly there was some significant deterioration in that 2018 report.”

 

Documents reviewed by NBC News and NBC 6 South Florida, including audits, budgets, financial statements and board meeting minutes, do not indicate when the structural issues noted by Morabito started, though the board did pay to replace leaking pipes in the building’s parking garage in 2016. But the documents do show that the board did not perform professional reserve studies and instead relied on board members to determine how much to set aside for repairs. In 2016, an accountant performing a year-end audit noted that “an independent study has not been conducted to determine the adequacy of the current funding” and that “the estimates for future replacement costs are based upon estimates provided by the budget committee.”

Audits conducted by the same accountant in 2017, 2018 and 2019 included the same language. Last year, a different accountant provided a similar disclaimer.

Mars, the lawyer who represents condo associations, said he believes that the note was “the CPA saying, ‘We don’t have any official documentation to rely on.'”

The accountants who conducted the audits did not respond to messages seeking comment.

 

Jeffrey Rembaum, another lawyer for condo associations, pointed to figures in the audits that showed that from 2016 to 2020, the board did not update the amount of money needed to replace balconies and concrete. Each year, the board estimated needing $320,000 for the work, even after Morabito’s report found that much more extensive and costly repairs were needed.

“We know the building had millions in concrete repairs on the horizon,” Rembaum said. “So how did it come up with $320,000 for their current needs? If they’d had a reserve study and an engineer looked at what they had, they would have come up with a higher number. That suggests the board wasn’t regularly updating it.”

He added: “This is the effect of the Florida Legislature not requiring a reserve study by qualified people.”

More than a decade since his short-lived law on reserve studies was repealed, Robaina said he hopes lawmakers will change course and reimpose the mandate.

“This is a window of opportunity,” he said, “and unfortunately it took a tragedy that could have been prevented.”

Jon Schuppe reported from New York; Phil Prazan reported from Surfside, Florida

By Jon Schuppe and Phil Prazan, NBC 6 South Florida

 

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Pros and Cons of Living in an HOA Community

Pros and Cons of Living in an HOA Community

  • Posted: May 29, 2018
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Pros and Cons of Living in an HOA Community

Pros:

  • The homeowners association pays for common areas like swimming pools, spas, tennis courts, parks, private roads, sidewalks and clubhouses you are able to enjoy a pool without having to maintain or clean it, or enjoy a playground or garden without the hassle of maintenance.
  • Some HOA’s also offer services like lawn maintenance to keep the neighborhood looking good all the time. You don’t have to hire someone yourself and your property always looks pristine.
  • Homes within HOA communities typically maintain their values better than non HOA deed restricted communities. By regulating the appearance of common areas your curb appeal and home price tend to be higher.
  • Often, HOAs promote a strong sense of community. Friends can gather at the clubhouse or common areas, people get to know their neighbors, and there are usually social functions planned year round.
  • Issues with neighbors like unwanted cars parked in front of your house are handled by the association, taking the pressure (and responsibility) off of residents.

 

Cons:

  • The price of your perfectly manicured lawns could be losing the freedom to choose your holiday decorations or the color of your house. There are rules and restrictions and the HOA documents can dictate what you can and cannot do in common areas.
  • A homeowner may encounter restrictions if they want to rent out their property. The association may require potential renters to be screened and approved by the HOA board, how much you charge for rent could also be regulated along with the duration of the rental. Some HOA’s ban rentals altogether.
  • The more amenities that are offered, the more the monthly dues can be. Sometimes the extra expense of monthly dues may more than some homeowners can afford.
  • Some HOAs are poorly managed by board members who don’t have enough time to devote to the community. Others too might be managed by a third party company (property manager) which can feel like giving up control of your neighborhood.

 

Before purchasing a property within an HOA or condo community it is very important that you find out how the association is run, how much the monthly association fees are, what the fees cover and how much money is in the reserve fund to cover any large expenses such as replacing a clubhouse roof. Always get a copy of the rules and regulations before you purchase so that you are completely aware of what you can and cannot do within the community. For example, if you purchase within a condo/townhouse community where there are zero lot lines, more than likely you won’t be able to touch the landscaping outside your home. If you are an avid gardener then this is definitely something you will want to consider before purchasing.

One thing that is a must is:  Education! Managers and Board Members can sign up via their Email Addresses we have Articles written by members that are sent weekly to our industry.

SFPMA and its members provide the industry with information, Events, Services, Forms, Legal for Condo and HOA’s, Our members are the Trusted Service Companies, Businesses and Management Professionals that help Condo & HOA’s all over Florida.

 

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