Tuesday, January 13, 2015

Association Reserve Analysis

2014 Community Association Financial Survey

In 1996, Berding|Weil published “Latent Liabilities” a treatise which explored the long-term impact of underfunding of the reserve accounts of community associations. Some of the data came from our clients, and some from Levy, Erlanger & Company. We predicted that most multi-family community associations were severely underfunded for long-term maintenance and repairs and we opined this issue could lead to serious deferral of maintenance obligations and ultimately a shortened service life for these projects. Subsequent financial surveys by Levy, Erlanger & Company, with our assistance, have shown this problem to be systemic—affecting most community associations. This year’s survey finds community associations to have only 57% of the funds on hand they should have. This shows that the problem is not getting better—in 1993 that figure was 60%.
Since “Latent Liabilities” was published, we  further documented this problem in “The Uncertain Future of Community Associations” and similar treatises.   Community associations are slowly running out of cash. Borrowing from reserves for regular, and newly discovered maintenance issues has trended upward, and when the reserves run out, special assessments and borrowing from banks increase. The fundamental cause of this cash shortage is the inability or unwillingness of boards of directors to increase assessments sufficiently to keep up with inflation coupled with the discovery of needed repairs not anticipated by the reserve budget.

Thursday, August 14, 2014

A Property Manager's Guide to Construction Defect Claims

A New Publication for Property Managers and Boards of Directors!

I'm pleased to announce the publication of this brand new guide to construction defect claims. Each month we will publish another chapter here. The publication will be available in hard copy shortly and we will tell you how to obtain a copy.

A Property Manager's Guide to Construction Defect Claims


By Tyler P. Berding, J.D., Ph.D. and Julia Hunting, J.D., P.E., S.E. and Anna P. Fabiano, J.D.
For decades, litigation over the defective construction of multi-family projects has been a frequent component of a property manager's portfolio. Low-rise, wood frame condominiums, apartments, and townhouses have long been susceptible to construction mistakes which lead to disputes with contractors and developers. High-rise projects can also exhibit poor construction. Community associations and owners of apartment buildings have found many reasons to sue builders. What leads to construction defects? Often it is a shortage of skilled labor in times of high real estate prices and demand. When there is strong sales potential, builders are eager to supply inventory, but good construction takes time and talent; when time and talent are in short supply, substitutions are made, which can lead to poor quality and subsequent claims.
Construction defects may be noticed almost immediately by new buyers, or they may lurk within a building for years before the damage they cause is detected. These problems can be as obvious as an actively leaking roof, or they can be as subtle as cracking caused by soil problems that develop several years after purchase. They can be easy to fix or potentially catastrophic, and their severity will strongly influence whether or not the builder or contractor will make repairs without the compelling force of litigation.
Here we cover construction defects in new construction. Defective repairs in new and older buildings are a topic covered in our companion book: “A Property Manager's Guide to Reconstruction Projects.”1 Property managers must have a basic understanding of the elements of a construction claim, so they can adequately advise their clients, retain or recommend appropriate professionals, and monitor the claims process. That information follows. We hope this resource will be useful to both you and your clients.
Next month: Chapter One--What are Your Client's Objectives?
1  Tyler P. Berding. J.D., Ph.D., Paul W. Windust, J.D., and Julia Hunting, J.D., P.E., S.E., A Property Manager's Guide to Reconstruction (2013).

Monday, February 10, 2014

When are Community Association Reserves like Public Employee Pensions?

The following excerpts appeared in a 
February 9, 2014 newspaper editorial:

       Kudos to Gov. Jerry Brown for demanding last week that they stop kicking debt further down the road. “…they have shortfalls -- debt we are now passing on to future generations because of past failures to properly fund the system. …The longer we postpone paying it off, the greater the cost, as anyone with a credit card should understand. "No one likes to pay more …but ignoring their true costs for...years will only burden the system and cost more in the long run." That means the money…previously collected was insufficient. Fixing the actuarial assumptions creates new unfunded liabilities -- debt that must now be paid off with increased (assessments.) It also means they should be collecting larger payments in the future to cover  (future needs.) The board has tried to keep (assessments) low, leaving more funds available for other (expenses.) But at each step, the board has softened the landing by minimizing or postponing the impact of the changes. As a result, (associations) continue to under fund (reserves) and stare at more (assessment) increases -- and greater interest payments -- in years to come. As the Governor notes, it’s pay now or pay more later.

              Sound familiar? Maybe the community association reserve funding crisis is finally getting noticed by California? Not quite. These excerpts are from an article on the public employee pension crisis with a few edits. You can see the entire article at this link. But the similarity between these two funding crisis is striking. Artificially keeping owner assessments lower than necessary to adequately fund reserves is largely political and is gradually creating an enormous funding gap that will devastate future generations of homeowners. Reserve accounts that rely on static funding and incomplete investigations will encounter significant shortfalls that can only be made up by large special assessments from those owners unlucky enough to be the last ones standing when the debt comes due.

Wednesday, August 14, 2013

A Property Manager's Guide to ReConstruction Projects

      Every manager of multifamily projects will encounter a large re-construction project several times in his or her career. These may be planned projects or the result of an emergency. Planned projects include those that are routinely projected by building inspectors, architects, and other building professionals—re-painting; new roof coverings; re-paving of parking lots and streets. Emergencies usually involve previously unknown problems discovered in a forensic investigation or as the consequences of age.

       As residential housing gets older, construction projects become more complex and difficult. This complexity often results from those unplanned and unexpected discoveries. Age brings deterioration of components that years before would not have been considered at risk. A routine roof project, for example, may only require replacement of the roof covering when the project is say, 15 years old. But in an older project, where moisture has had years to accumulate in concealed wood components, not only the covering, but also the wood substrate may have to be replaced. The same is true with other components largely built of wood—balconies, staircases, entry decks, and framing under siding and stucco. These components may actually leak, but not enough to alert the occupants. Instead the moisture remains in the wood or in wall cavities and supports gradual decay over time. These issues add to the challenge of preparing an adequate scope of work because a good portion of the damage is concealed.

          As projects become more difficult, property managers find that they are responsible for a wider range of tasks--not only obtaining bids to do the work, but also for determining what experts to retain to investigate and determine the scope of that work; deciding who manages the contract; negotiation over the terms; and finding the funds to pay the contractor. This guide is intended to offer community and apartment managers assistance in managing a complex construction project including recommending and retaining appropriate professionals to determine the scope of work; construction contract and bid package essentials; administering the project; and handling disputes.


Monday, August 12, 2013

Disaster! Florida Sinkhole Causes Condo Collapse

The Associated Press has reported that a 48-unit condo building at a resort in florida has collapsed into a sinkhole. We can now add sinkholes to the list of disasters that condominium associations are ill-prepared to deal with. Read more about what a community association can do when faced with a natural disaster for which there are no reserves and no insurance. 

Thursday, May 23, 2013

Survey: Condos Still Short of Funds

          Community Associations are going broke. They are running out of cash. Borrowing from reserves to pay operating expenses has left reserve accounts severely underfunded.  There will not be enough money to do necessary repairs when the time comes.  As a consequence, associations are resorting to bank loans and special assessments to fill the gap. How do we know this? Check the survey below.
In 1996, Berding|Weil published “Latent Liabilities” a treatise which explored the long-term impact of underfunding the reserve accounts of community associations. Some of our data came from our clients, and some from Levy, Erlanger and Company. We suggested that most community associations, and principally condominiums, were severely underfunded for long-term maintenance and repair and predicted that this issue could lead to large-scale deferral of necessary maintenance or re-construction and ultimately a shortened service life for these projects. Subsequent financial surveys by Levy, Erlanger and Company, with our assistance, have shown this problem to be endemic—this year’s survey finds community associations now have only 54% of the funds on hand that their reserve studies say they should have at this point in time. And the problem is obviously getting worse—in 1993 that figure was 60%! The present survey numbers support those earlier predictions.

          Borrowing from reserves for regular and newly discovered maintenance problems has trended upward, and when the reserves run out, borrowing increases. The fundamental cause of this cash shortage is the inability or unwillingness of boards of directors to increase assessments sufficiently to stay ahead of both inflation and the cost of anticipated repairs, often coupled with the discovery of unplanned-for maintenance and repair problems which are not anticipated by the reserve budget at all. 

          These instances of “hidden damage” have pushed many associations to the financial edge. Too many older associations have discovered hidden damage resulting from long-term deferred maintenance which, when discovered, carries a price tag that greatly exceeds the resources of the membership. Dry rot in balconies, entry structures, roof under layment, and wall framing; and deterioration of utilities like electrical lines and plumbing, are becoming common but are rarely included in any reserve budget.[1]

          Long-term underfunding of reserves coupled with the late discovery of unanticipated damage to buildings places a heavy financial burden on the owners of attached housing units.  This financial burden is enough in some cases to raise the question: have many of these projects reached the end of their service lives—are they, in fact, obsolete? It is important to compare the resources and expenses of a community association to other, similar associations, and it is also important to investigate beyond the parameters of a typical reserve study—especially in older associations. Review the data in this survey and compare it to your own.[2]  Then ask yourself, are the components listed in your reserve study the only areas of concern, or could there be others? If your reserves have less than 100% of the funding called for by your reserve study and if your association was built more than 20 years ago, it’s time to undertake a sober review of the association’s financial and physical condition.

Wednesday, April 3, 2013

Are California Community Managers Required to have a Contractor's License?

By Tyler Berding and Julia Hunting

Legislative Update!

The Governor of California has signed SB 822 which clarifies AB 2237, discussed below, and confirms the legislative intent that Community Managers are not required to have a contractor's license in the course of their regular duties. SB 822 amends California B&P Code Section 7026.1 to add the following section: 

(b) The term “contractor” or “consultant” does not include a common interest development manager, as defined in Section 11501, and a common interest development manager is not required to have a contractor's license when performing management services, as defined in subdivision (d) of Section 11500.

                 The blogosphere has been burning up lately over a new California law that some commentators say might require community association managers to have a General Contractor’s license to perform their jobs.  Since property managers can be said to “oversee” bids for construction projects it has been suggested that they might fall within the expanded definition of “consultant” which was added to the basic contractor’s licensing statute by Assembly Bill 2237.[1]                           
                California Business and Professions Code Section 7026.1(b)(1) defines who must have a General Contractor’s “B” license as follows: 
                “Any person, consultant to an owner-builder, firm, association, organization, partnership, business trust, corporation, or company, who or which undertakes, offers to undertake, purports to undertake, purports to have the capacity to undertake, or submits a bid to construct any building or home improvement project, or part thereof.” 
                AB 2237 added subsection (2) which states that a “consultant” is someone who: (A) Provides or oversees a bid for a construction project; or (B) Arranges for and sets up work schedules for contractors and subcontractors and maintains oversight of a construction project.” 

                Question:These sound like tasks that a community manager might perform for their client associations during construction projects so why don’t they need to be licensed under the new law?”

                Answer: The new subsection modifies 7026.1(b)(1) by adding a further definition of “consultant,”[2] but it does not remove or change the other qualifying language in that same section which defines a “contractor” as someone offering to construct a building or part of a building.