FHA Releases Updated Condo Guidelines

The Federal Housing Administration released a long-awaited revision of its condominium project approval guidelines today, September 13, 2012.  Please see the link, FHA Releases Updated Condo Guidelines, regarding FHA’s release of the
condominium project approval guidelines that the Community Association Institute has put together.

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3 Main Steps in Preparing a Reserve Study

The preparation of a Level I Reserve Study can be broken down into three main steps:

1.  Component Analysis

All components the Association has an obligation to maintain are identified and inventoried.  Per RCW 64.34.382(2)(a), this list includes the following: roofing, painting, paving, decks, siding, plumbing, windows, and any other reserve component that would cost more than 1% of the annual budget for major maintenance, repair, or replacement.

An onsite visit is scheduled to visually inspect all common area components.  This inspection is limited to components that are normally visible without destructive or intrusive means of inspection or testing, or concealed mechanical, electrical, structural, or other components.

The Useful Life, Remaining Useful Life, and Current Replacement Cost of each component appropriate for reserve funding is established using information entered into a Commercial Cost & Useful Life Database.  The data is based upon industry standards, manufacturer’s specifications, and/or the actual repair and replacement costs to similar residential and commercial properties.  Costs of repairing or replacing components can vary greatly depending on current labor costs, material costs, and the conditions of the component.  Wherever possible, actual quotes from local contractors are used as a comparison.

Financial Analysis

The Association provides the following financial information:

  • The Association’s current Reserve Balance.
  • Current rate of investment on Reserve Fund.
  • Special Assessments already implemented or planned.
  • Tax rate applied to interest or dividends earned on the invested Reserve Funds.
  • Interest and Inflation assumptions.
  • Current Reserve Account Contribution Rate.
  • Date of Fiscal Year End (FYE).

3.  Reserve Study

The information obtained during the Component Analysis and Financial Analysis is entered into a Reserve Study Funding Plan computer program.  The program calculates the necessary monthly and annual reserve contribution, projected annual expenditures for repair and replacement of identified components, percent funded, and reserve account balances for the analysis period.

Per RCW 64.34.382(i) and 64.38.070(i) the following Reserve Study Funding Plans are created:

  • A recommended reserve account contribution rate.
  • A contribution rate for a full funding plan to achieve 100% fully funded reserves by the end of the 30 year study period.
  • A baseline funding plan to maintain the reserve balance above 0 throughout the 30 year study period without special assessments.
  • A  Reserve Study Professional recommended reserve account contribution rate.

The computer program provides a projected reserve account balance for 30 years and a funding plan to pay for projected costs from those reserves without reliance on future unplanned special assessments.

Open Lines of Communication

During the course of the construction project, communication channels with the homeowners need to be set-up.  The homeowners should be informed on a regular basis exactly of what is happening, who is on-site, what they are working on, and how work is progressing.  These channels of communication may include:

  • Scheduling information meetings.  These meetings should allow an information exchange between the construction professionals and allow for a question and answer period.
  • Sending a newsletter to the homeowners in regular intervals.
  • Having the construction professionals available for direct communication with the homeowners during general meetings
  • Providing good minutes that adequately summarize information exchanges and decisions following general meetings.
  • The General Contractor may have a full time liaison assigned to the project, a dedicated website for owner updates, or other systems in place to facilitate clear lines of communication.

Resolving Construction Disputes

Situations may occur that lead to disagreements between the homeowners and the contractor.  When and/if this does happen, it is important to have a mechanism in place to solve these problems and avoid costly construction delays.  In many cases, a construction manager can handle conflict resolution.  However, a construction attorney should be consulted during the drafting of the contract in order to ensure there is a clause that provides a streamlined dispute resolution procedure.  This will save time and money.  The clause will typically have three elements:

1. The parties will agree to attempt to negotiate in good faith.

2. If that does not work, the parties agree to mediation.

3. If that does not work, the parties agree to arbitration.

Unforeseen Costs

Unexpected damage may be discovered during the repair work.  When and if this does occur, it is important to have a procedure in place to authorize work and ensure costs are controlled.  The construction contract will detail one of two ways to pay for the unexpected work:

Unit Pricing:  A price to remove and replace each unit of “unexpected work” is agreed upon by the parties.  Examples of units are a square foot of stucco, a linear foot of lumber.  The number of damaged units is multiplied by the unit price.

Time and Materials:  The unexpected work is charged at the cost of materials plus the time to remove the damaged materials and install the new material.

To ensure that the association has control over the work, the construction contract should have a procedure in place that requires authorization by the   association.  This procedure may be:

  1. The contractor submits an estimate to the construction manager.
  2. The construction manager reviews the estimate and passes it on to the Board.
  3. The Board reviews the estimate, and if they agree that the work is necessary, will authorize the request.

At the time the construction contract is being prepared, the association needs to review the provisions for approving unexpected work, and the pricing method.  This is an area where some associations have gone way over budget.  A 20% to 30% contingency in the budget is not uncommon for major projects and should be included.

Project Finances

For many associations, repair costs are often in excess of $1 million.  Therefore, extra care needs to be taken in handling the accounting of these funds.  An Association should not assume that the money is safe because it is in a “trust account.”  The safety of the money is largely dependent on the withdrawal procedures that are set up.  The following tips may be helpful:

  • The funds should be held in a separate account and not combined in an account with other association funds.
  • Two board members should be required to sign every check.
  • Guidelines for signing the checks should be established by the board.  For example, there should be documentation such as invoices approved by the construction manager, which are then forwarded for payment.  The two board members should then review the invoice before signing the check.
  •  The funds should be kept in an account at a major financial institution.
  • It is wise to maximize interest earned from the funds, but the interest-bearing vehicle should be low risk.  Large financial institutions have commercial account, and in some instances association account advisors who can assist in placing the funds where they are safe, accessible when required and interest is optimal for a low level of risk.
  • The funds should be audited annually, and a final audit performed at the end of the major repair.  It is important to be able to precisely account for all the funds and provide a report to the association.

Major Construction Project: Who’s Who

Typically, winter is the time many associations plan for a major construction project to begin in the spring.  These steps may include, among other things: hiring a construction manager; developing a clearly defined scope of repair; creating a realistic budget for the project; determining how the association will finance the project; obtaining contractor bids and hiring a qualified contractor; and conducting an information meeting with the homeowners.  For many associations, a major repair project will be individual members’ first encounter with a construction project.  The following are the key participants in a major repair project: 

Architect:  Responsible for design work, preparing the scope of work and plans, and bidding documents.

General Contractor:  Provides the materials, labor, and other resources to perform the repairs.

Construction Manager:  Acts as the owner’s agent and coordinates design and construction issues with the architect and general contractor.  Controls the scope of work, considers optimum use of funds throughout the project, offers assistance in avoiding delays, changes, disputes, and cost over-runs, communicates directly with owners, and documents compliance with project specifications.