The math may be in store for condominium councils ignoring needed repairs
Some landlords will find it difficult to afford the assessment increases. If an association does a study on the reserve and the council does not act on all or some of the recommendations, do the members of the council have a potential liability?
A: In his representation of buyers and sellers in condominium sales, Sam frequently comes across reserve studies. What’s interesting about these studies is that they don’t usually indicate that anything that’s wrong with the property should be fixed right away. These studies detail the many components of the common elements of an associative building, estimate the remaining useful life and detail the estimated costs involved in repairing and replacing the various components.
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Let’s say you live in a high-rise building. There could be dozens of components listed in a reserve study. The report would detail everything from roof replacement, plumbing pipe replacement, facade repairs, window replacements and hallway carpet replacement. Reserve studies do an amazing job of breaking down the many components of a building and letting the association know what the study authors think the timeline will be for repairs and replacements for each.
For example, if an association recently replaced its roof, the reserve study will note this and indicate that the association should plan to replace a 25-year-old roof in approximately 25 years. They will also indicate what the current cost of replacement would be and what they think it might cost in 25 years.
With this type of information, an association can start saving money today for future expenses. If the association chooses not to assess the funds for future expenses, it will need to pass a special assessment in the future for any remedial work that needs to be done.
We believe it is prudent for an association to have a clear understanding of what needs to be done to maintain their property, regardless of size. But size matters when it comes to how much a reserve study costs. Granted, a 350-unit multi-story building will spend more money to get a detailed report of what needs to be done compared to a three-unit association.
That said, it may not be cost effective for a small association to spend $5,000 to $10,000 on a study on a reserve. This money could be better spent on making repairs or funding reserves. Also, in a small building, the owners can hire contractors to come and assess the condition of the various elements of the building, whereas it is much more difficult for individuals to do so in a 20-storey building.
Your building has 60 apartments. It is a good sized building. An important question to ask is whether the building has undertaken necessary repairs and replacements diligently over the years. You should then ask the board or management company how much money is in the association’s reserve accounts.
Based on your question, we suspect that your building has deferred maintenance and may not have many reserves. But turning a blind eye to the building’s problems is not the solution. We believe that it is essential to have good information on the question of what needs to be repaired and replaced in a building. If the association knows what needs to be done and deals with these issues in a timely manner, you may not need to undertake a study on the reserve. But if the association’s board of directors doesn’t really understand what needs to be fixed and simply deals with problems (or not) as they arise, this can be a source of liability for those administrators.
When landlords sit on the board of directors of a homeowners association, they owe a duty of care to all owners of the building. We believe duty of care would involve ensuring that repairs and replacements are made in a timely manner. What the time frame means could be open to interpretation, but the board should recognize that repairs and replacements need to be made and have a plan for dealing with those repairs. One way or another, these repairs and replacements will have to be made.
The board may defer these repairs to the future. But if they know that certain repairs need to be done and push those repairs too far into the future, it can put those council members at risk if something happens that harms a homeowner or visitor. Understand that board members could be held accountable whether or not they fund a reserve study.
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Your homeowners association board should consult with reserve study consultants and their attorneys to understand the specific risks and liability they may face. Each property is quite different. But if your association’s board of directors has a reserve study in hand that indicates repairs are imminent, and it ignores the warning and does not move forward with repairs, it could cause a much bigger problem down the line.
Associations that turn a blind eye to much-needed repairs because they don’t want to raise ratings will likely face a settling of scores at some point. At that time, homeowners will face significant expenses to make up for the many years of low assessments and the many repairs and replacements that have been postponed. All of this could make the property much less attractive to future buyers, leading to lower values.
And that will make everyone unhappy.
If you have long-time owners who can’t afford higher appraisals, that’s unfortunate. But you can’t allow these owners to prevent a property from making necessary repairs. It’s unfair to everyone.
Ilyce Glink is the author of “100 questions every first-time home buyer should ask(Fourth Edition). She is also the Managing Director of Best Money Moves, an app employers provide to employees to measure and reduce financial stress. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact them via the website, BestMoneyMoves.com.