Decks and Doors and Windows and Walls… Decks and Doors and Windows and Walls… Decks and Doors and Windows and Walls…
Who is responsible for the maintenance and replacement of items such as decks, doors, windows and walls?
Condo Limited Common Elements - Owners vs. Association
It’s common in a Condo Association that Limited Common Elements such as these come into question. My favorites are Decks and Doors.
When looking through the Declarations of a Condo or Townhome Association it may be clearly spelled out that either the Owner or Association is the responsible party. Sometimes it’s not so clear.
Usually when situations like this come up, it seems to be when the Declarations state that the Owner is responsible, but the Association has been taking the responsibility anyway. Not so much the other way around, but it may occur if the Association has either fallen apart due to financial reasons, or the management has been negligent in its duty to deal with an increasing amount of deferred maintenance.
Sometimes the Association may have quite a bit of pushback ahead when they proclaim that it’s the Owner’s responsibility to rebuild or build a completely new deck, window, door, etc. Even though the CCRs may state that all Owner Improvements must be pre-approved, if an Owner or two start doing things their way, it can create a mish-mash of design and quality and end up looking like a “hobo village.” And it may be hard to stop them. A lot of heated arguments may ensue along with the arrival of THE ATTORNEYS. Ha!
This sort of situation seems to happen more often in older HOAs than in newer ones with attentive management.
What to do???????
Despite what the Declarations may say, it’s almost always wise for the Association to do what is needed to clearly amend and take responsibility for these issues, whether funding as a new Capital Improvement or a Reserve Fund item. The outcome is general adherence to the quality and conformity that makes the Association attractive and raises the value of the Owners’ units.
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Is it a good idea to borrow from Reserve Funds?
By: Gary Porter, CPA, RS, FMP, Facilities Advisors International
The entire country is now experiencing an unprecedented challenge where the Covid-19 pandemic has completely shut down major sectors of the economy and is affecting the entire economy. The impact for associations is significant uncertainties related to collection of assessments, vendor service levels, ability to pay or retain employees, and potentially even the continuity of the organization. The economic severity will depend on the duration of the “shelter in place” rules for the short term, and for the longer term, the public’s comfort level with returning to “normal,” a future “normal” that will be different from the “normal” of the past.
The unprecedented spike in unemployment caused by the coronavirus has created a volatile economic climate placing association assessment revenue cash flow at risk. In addition, uncertainty remains regarding associations qualifying for the PPP loan program under the CARES Act and there are bureaucratic delays in the SBA’s EIDL loan program. As a result, several associations have inquired about their ability to support operations by “internally financing” in this time of crisis by gaining access to their reserve funds.
As a reserve preparer our company is dedicated to helping guide associations towards the goal of having sufficient funds to pay for their future major repairs and replacements – the reserve fund. Since 1982, we’ve counseled associations to avoid underfunding reserves and to never, except in extreme emergency, borrow reserve funds to use for operations.
Three possible ways to access reserve funds are to
(1) decrease future reserve funding (maximum of three years),
(2) eliminate future reserve funding (three years), or
(3) borrow from existing reserve balance.
It’s also possible to combine the three activities over the short term (three years). This action should never be considered unless all other avenues of funding have failed.
As a CPA with 40 years of experience working with associations, I recognize that an association's operating budget takes precedence over the reserve budget, particularly in time of crisis. As a reserve professional I also recognize that failing to adequately fund reserves to at least a baseline level can result in increased future costs and potentially a complete failure of the association over the long term.
Budgets for 2020 were developed in an atmosphere that did not contemplate the global pandemic we are currently experiencing. Now that this new reality is here, associations should consider ALL means of adequately funding the operating budget at an emergency level sufficient to continue the vital operations of the Association.
The reserve fund is not a slush fund
But for most associations it does represent a large amount of cash set aside for future major repairs and replacements some of which may be decades in the future. This gives the Association an opportunity to evaluate the reserve funds to see if any portion of it may be used on an emergency basis to fund day-to- day operations. It’s difficult to justify setting aside funding for a roof replacement twenty years from now when you can’t pay utility bills today. The Association must proceed very carefully here as there are many potential risks.
The first step is to determine the legal authority for taking such an action. The second step is to determine if there are available reserve funds that can be accessed for emergency operating purposes.
Evaluating legal authority - When attempting to determine legal authority for accessing reserve funds you should; (1) consider restrictions in state law, (2) consider restrictions in governing documents, and (3) consult with legal counsel – ALWAYS consult with legal counsel on a matter like this. Don’t even consider going down this road unless you can put all of these pieces together.
Evaluating the reserve fund – Evaluating the reserve fund means comparing the current balance and projected assessments to projected expenditures. Expenditures are the controlling factor, so look at them first. Are there any projected reserve projects presently scheduled during the next three year (maximum) period that can be postponed without creating further damage by the postponement. If so, consider alternate funding plans that postpone those expenditures and allow the association to reallocate the budget to decrease reserve assessments and increase operating assessments. The board must obtain a revised reserve study to document their due diligence in making this unprecedented decision.
Borrowing from Reserve Funds Means Paying it Back
The association must make sure there is adequate cash flow funding to cover the remaining projected reserve projects during the next three years AND also plan for a “make up” reserve assessment level for later years. The reserve funds diverted now should be repaid at a future date as economic conditions improve. Remember, the reserve expenses don’t go away, you’re just shifting the timing of when they occur.
In evaluating your reserve funding during this critical period cash flow is the ONLY thing that matters. Forget the concept of percent funded in this analysis - it doesn't matter. Percent funded is a crude tool that some use to evaluate the adequacy of the reserve balance, but it cannot take the place of the cash flow analysis and has NO place in a situation like we’re facing now.
The Reserve Study and Your Maintenance Plan
It’s important to understand the analysis that underlies the reserve study:
- The maintenance analysis is a process that recommends what maintenance activities should occur and when they should occur – example, the roof should be replaced in two
- The maintenance plan may follow the maintenance analysis exactly, or may modify the recommendations of the maintenance analysis – example, the roof replacement will be postponed for three years and temporary repairs (minor cost) will allow the deferral of the complete replacement (major cost)
- The reserve study is simply the financial plan based upon the maintenance plan as modified from the maintenance analysis.
Because it is rare for associations to actually create formal maintenance plans, too often the reserve study becomes the maintenance plan. What gets lost in this instance is that if there is not sufficient funding, the maintenance plan will contain too many deferred projects, meaning major repair and replacement activities that should have already occurred.
There are three common restraints that generally create the difference between the maintenance analysis and the final maintenance plan/reserve study funding plan – usually presented as a difference in timing of work performed:
- Financial constraints - meaning not enough money to fund all projects when they should be repaired or replaced. This results in deferred expenditures (not a good thing)
- Operational constraints – examples such as weather issues, unable to find qualified contractors or material, unable to obtain permits, or something as simple as “How do you shut down the swimming pool in a timeshare resort in Florida for four months for reconstruction when you’re at 100% occupancy year round?” (results in many unhappy members)
- Governance constraints – examples are restrictions in governing documents, requirement for member approval, or occasionally a weak board that just can’t make tough
We always recommend against “raiding” reserve funds for operating purposes, but in times of emergency exceptions can be made. Consult with your professionals to see if this is an option for your association.
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Gary Porter is CEO of Facilities Advisors, a reserve study company with offices nationwide and provides reserve study services and software in the US and several other countries. Mr. Porter holds the RS (Reserve Specialist) and FMP (Facilities Management Professional) credentials and is also a CPA. Porter & Lasiewicz CPAs has offices in California and Nevada and provides audit and tax services to associations in more than 30 states.
Mr. Porter has a long record of industry leadership. He is a past national president of CAI, coauthor of Reserve Studies – The Complete Guide, author of more than 300 articles and has been published or quoted in The Wall Street Journal, Money Magazine, and Kiplinger’s Personal Finance.