How to Discover Problems in Your Condominium or HOA

Evidence of problems with a property may be revealed in a variety of ways, including:

1. Reports by Owners.  Owners will generally report big or emergency problems promptly.  Reports should be made in writing to the Board or property manager.  The Board should also encourage owners to report “smaller” problems.
2. Maintenance Inspection Reports.  Regular maintenance inspections can lead to the identification of problems.  It is important to have a proper inspection and maintenance program in place.  There are often “early warning signs” that a professional will see.
3. Emergency Situations.  When an owner experiences a problem that makes their living conditions unsafe or uninhabitable, it needs to be reported immediately.  In all cases, once the Board has knowledge of a problem, or possible problem, they are obligated to make reasonable inquiry to determine the cause and find a lasting solution.

At some point, the Board will most likely recognize that there is a serious problem.  It may be through an emergency of a magnitude that leaves no doubt that there is a serious problem; an accumulation of small problems; or recognition of a pattern of problems, indicating a major problem.

Successful Projects Begin with Good Planning

Projects such as roofing, siding, deck restoration, plumbing, asphalt paving, even exterior painting require proper planning to ensure a successful outcome.  During the planning phase critical decisions need to be made, including:

1. Hire a Construction Manager.  The construction manager can provide sound guidance and assistance through all phases of the construction process.
2. Develop a clearly defined scope of repair.  Typically, an investigation, whether visual or intrusive, will occur to determine the extent of the damages as well as the cause.  The construction professionals can then aid in determining the repair options, the expected life span of each option, an estimate of repair costs, the expected annual maintenance costs of the repairs, and a schedule for the repairs.
3. Create a budget.  The budget for the major repairs needs to include all expenses associated with the major repair, including such things as legal costs, construction professional fees, construction costs, and miscellaneous expenses such as owner elected upgrades.
4. Determine how the association will finance the project.  This may include, obtaining a loan from a financial institution, utilizing replacement reserve funds, specially assessing the homeowner,  insurance settlement funds, recovery from the developer, or a combination of the afore mentioned.
5. Obtain contractor bids and hire a qualified contractor.  Interview several qualified registered contractors and solicit written bids.  Evaluate all aspects of the bids, including the scope of work, warranties, references, time frames, and price.   
6. Conduct an informational meeting with homeowners.  This meeting is to allow the homeowners to meet the construction professionals, detail how the association has reached the point of repair, and what can be expected once the project begins.
7. Commence the project.

Following these steps can help in ensuring a successful project.

Helping Ensure Reserve Study Accuracy

In order for the Reserve Study to be as accurate as possible, the Board of Directors should plan on the following:

• Review the Reserve Component List compiled by the Reserve Study provider to ensure all major components are included.  For Condominiums, RCW 64.34.382(a) provides a list of components which are to be included.  Any of these required items that are not included need to be listed and a basis for their exclusion needs to be provided.
• Provide information on the condition of major components, including maintenance records.
• Direct the Reserve Study provider as to any desired changes or additions (i.e., new items) in the Reserve Component List.
• Provide a copy of as-built construction drawings, if they exist.
• Provide maintenance records, component warranties, or other documentation.
• Provide the current year’s starting reserve account balance.
• Provide the current monthly contribution to reserves.
• Provide the rate of return on the invested reserve funds.
• Provide information on whether any special assessments are in place or anticipated for that year.
• Provide what reserve expenditures are anticipated for the current year.

New Budget Disclosure Requirements

For both Condominium and Homeowner Associations, effective January 1, 2012, per RCW 64.34.308 and 64.38.025, there is a new requirement that Reserve Study information be disclosed along with the summary of the budget.  Specifically, as part of the summary of the budget provided to all unit owners, the Board of Directors shall disclose to the unit owners:

• Current amount of regular assessments budgeted for contribution to the reserve account, the recommended contribution rate from the Reserve Study, and the funding plan upon which the recommended contribution rate is based;
• If additional regular or special assessments are scheduled to be imposed, the date the assessments are due, the amount of the assessments per each unit per month or year, and the purpose of the assessments;
• Based upon the most recent Reserve Study and other information, whether currently projected reserve account balances will be sufficient at the end of each year to meet the association’s obligation for major maintenance, repair, or replacement of reserve components during the next thirty years;
• If reserve account balances are not projected to be sufficient, what additional assessments may be necessary to ensure that sufficient reserve account funds will be available each year during the next thirty years, the approximate dates assessments may be due, and the amount of the assessments per unit per month or year;
• The estimated amount recommended in the reserve account at the end of the current fiscal year based on the most recent reserve study, the projected reserve account cash balance at the end of the current fiscal year, and the percent funded at the date of the latest reserve study;
• The estimated amount recommended in the reserve account based upon the most recent reserve study at the end of each of the next five budget years, the projected reserve account cash balance in each of those years, and the projected percent funded for each of those years; and
• If the funding plan approved by the association is implemented, the projected reserve account cash balance in each of the next five budget years and the percent funded for each of those years.

Due to these new requirements, associations will need to assemble more information before the budget delivery deadlines outlined in the governing documents.  Because of this, we would recommend associations have their Reserve Studies prepared earlier than they would in years past so there is plenty of time to assemble everything for the annual meeting.

Shortcomings of Declarant prepared Reserve Studies

Declarants, per RCW 64.34.410, are to include in the Public Offering Statement a copy of the current Reserve Study, or, the following disclaimer:

“This association does not have a current reserve study. The lack of a current reserve study poses certain risks to you, the purchaser. Insufficient reserves may, under some circumstances, require you to pay on demand as a special assessment your share of common expenses for the cost of major maintenance, repair, or replacement of a common element.”

Many associations assume, once the Declarant transfers control, that they are adequately funding their reserves because they are following the Reserve Study that was prepared by the Declarant.  However, this is not necessarily the case and there are several possible shortcomings to a Reserve Study prepared as a part of the Public Offering Statement.  Typically, the Declarant prepared Reserve Study:

• Is used primarily as a means to estimate the monthly reserve contributions in the association’s first year budget.
• Was likely prepared significantly before the project was actually completed.  As a result, the estimates may be dated by the time the first unit is sold.
• Will typically show the allocation of reserve expenses in constant dollars and not inflation adjusted dollars.
• May have maintenance/repair/replacement costs provided by the same contractors and sub-contractors used during the construction.  Costs for new construction are often times significantly different from repair/replacement costs.  These contractors may not take into consideration any cost adjustment for owner occupied buildings, tear-off and disposal of materials, etc.
• May not accurately reflect local conditions when showing the estimated useful life of components.
• May not have an accurate list of components the association is responsible for maintaining.  Only certain major components (e.g., roofing, painting, paving, etc.) may be included.  Some components that are commonly excluded include: Alarm systems, fire and intrusion; Antenna, satellite dish and other; Display cases; Docks; Drainage systems; Electrical transformers; Electrical wiring and related fixtures in common area; Fans, exhaust, garage and other; Fire sprinklers and related equipment; Fountains; Garage doors and hardware; Garbage enclosures; Gutters and downspouts; Irrigation system, piping, valves and sprinkler heads; Kiosks and message/communication centers; Lakes, ponds and waterways; Landscaping, replacement of major trees and plants; Mailboxes and centers; Monitoring system, carbon monoxide; Planter boxes; Plumbing fixtures, exterior; Plumbing, water piping system; Posts, deck, lamp, etc.; Pumps, lakes, ponds and waterways; Racquetball courts; Security gates, gate operator and motor; Septic tanks; Sewage ejector equipment; Skylights; Slopes; Stairs; Stucco, sandblasting and resurfacing; Sump pump equipment; Trellises; Ventilation systems, garage; and Walkways, wood, brick, tile, etc.

Therefore, it is highly recommended that once the Declarant transfers control of the association, the association conduct its own reserve study.

Top 10 Reasons to have a Reserve Study Completed:

If you have not heard by now, per RCW 64.34.380 and 64.38.065, Condominium and Homeowner Associations In Washington are required to establish a reserve account as well as prepare and update a Reserve Study.  But, aside from being a legal requirement, what is the importance of a Reserve Study?

The following are the top ten reasons to have a Reserve Study completed:

1. Comply with statutory requirements.
2. A Reserve Study reduces the risk of special assessments and borrowing.
3. A Reserve Study assists the Board of Directors with its fiduciary responsibility to protect the association from financial hardship.
4. A Reserve Study assists the Board of Directors with its fiduciary responsibility to maintain the community in a good state of repair.
5. A Reserve Study enables major repairs to be scheduled during more convenient times.
6. A Reserve Study establishes a fair contribution for both current and future owners.
7. A proper Reserve Study will comply with the American Institute of Certified Public Accountant’s annual audit requirements.
8. Reserve Planning allows time for the Board of Directors to solicit competitive bids and to evaluate contractors.
9. Reserve Planning helps protect against declining property values due to deferred maintenance and inability to keep up with aging components.
10. A Reserve Study enhances an association’s ability to obtain loans.

Congratulations Patrick!

We are proud to announce that Patrick Bach has earned CAI’s Reserve Specialist (RS) designation.  The RS designation is the only national credential for community association reserve study providers and is only awarded to experienced, qualified professionals who help condominium, cooperative and homeowner associations plan for the long-term repair and replacement of major components.   In order to apply for the RS designation, CAI demands applicants demonstrate years of specialized experience and meet comprehensive requirements.  Patrick’s credentials help demonstrate to our clients we are nationally recognized as reserve study experts.  Please help us in congratulating Patrick on this professional accomplishment!