How often do you hear the question “why do we need
reserves? After all, this association is only a few years old?”
It became very clear to me how important it is to
put reserve funds aside from the moment an association is established
when a few years ago, while working as a General Manager of a 1300
unit condominium conversion in Northern California, major repairs
became necessary. The 32 buildings were approximately 25 years
old. There was almost $2,000,000.00 in the reserve fund and the
budget allowed for continual funding on a monthly basis. However,
this funding did not begin until years after construction was completed
when California law made it mandatory. The state law declared that
an association must have reserve funds and that they are to be “adequately” funded.
Following is a brief 2½ year history regarding
this association: It began when 13 units were flooded out due to
a sewer backup. A meeting was arranged for all of the displaced
residents, the insurance adjuster, and a contractor, for 10:00
A.M. Saturday morning. As expected, the residents were quite upset
and could not understand why they were not being allowed access
to their own homes. The necessary treatment of “black water”, as
prescribed by California health statutes, was explained to the
residents along with the fact that they would not be able to return
to their homes for six to eight weeks. As you can imagine, tempers
flared once the Board, after reviewing the association's governing
documents, informed the residents that they (the residents) would
not only have to leave their homes, but also have to pay for their
own lodging throughout the completion of the renovation process.
After a considerable amount of upset among the residents,
the Board of Directors made the decision to advance the necessary
lodging costs. The Board of Directors hoped that the insurance
would cover the cost of remediation, the reconstruction and also
the lodging. Funds to commence immediate repair were withdrawn
from the Reserve Fund, which meant there would be less money available
for any other repair or replacement of capital items in the near
future.
A few months later, three units in a totally different
area were flooded out with “gray water.” Immediately, the contractors
who were still working on the original 13 units were called in
to dry out the flooded areas and start additional remediation.
The insurance company was once again contacted and the entire claim
process began on these three additional units.
Within six more weeks, a main water line burst and
44 units were flooded with approximately 12” of water in each unit.
This included the last three units that were still displaced from
the sewer backup. This time, fortunately, the main water lines
actually belonged to the City and the City was called in to repair
the line that ruptured. The city's insurance company, as well as
the Association's insurance company, were contacted. The same contractor,
who was still working “on-site,” as well as two other general contractors,
were brought in to dry the units. This time all of the units were
taken completely down to the framing, including removal of all
cabinets, carpets and flooring. Once again there was concern as
to whether or not some of the water was either “gray” or “black.” After
testing, it was found that several of the 44 units were in fact,
affected by “gray” water. These were not the same 3 units but several
others.
Although the Association was fortunate to have adequate
insurance to cover a major portion of each of these emergencies,
a great deal of the expense was not covered and the Association's
reserve funds declined rapidly.
While doing my weekly “walk through” of the Association,
which consisted of inspecting halls, balconies, walls, pools, landscaping,
etc., holes were noted that appeared in the exterior stucco walls
that seemed to be the result of vandalism. The holes showed some
mysterious black substance inside the structure between the outside
of the building and the inside of the wall. The walls also showed
signs of apparent dry rot and deterioration. Additionally, reports
from residents were coming into the office regarding some of the
cantilevered balconies that were reportedly beginning to drop an
inch or two.
The Board of Directors decided to bring in experts
to study both the walls and the balconies, to make recommendations
for repair, and to write the specifications from which bids could
be obtained. At this point, the health and safety of those affected
residents was of great concern.
Bids were obtained from four different engineering/architectural
companies to investigate these issues, as well as any related problems.
A contract was awarded to the low bidder at $56,000. Arrangements
were made for the engineers to have access to all 2nd and 3rd story
balconies for inspection purposes. A detailed description of the
condition of each balcony was noted, including a rating system
to determine the priority in which these balconies would be repaired/replaced.
Over a dozen balconies were immediately closed off from the units
and residents were told not to use their balconies due to unsafe
conditions.
The study revealed dry rot and possible mold behind
the walls where the small holes had been made. It was thought that
some of the water was from leaks in the roofs, bad drainage from
the roofs, and holes in the walls where the local cable company
had tacked cable going into the individual units. The exterior
walls were covered with an elastomeric paint, which did not allow
water to evaporate when it got behind stucco. Adding to the problems,
the buildings were built in such a method that the weep holes had
been covered.
Because of all of the dampness, termites were having
a picnic at the expense of the Association. A termite specialist
was brought in and the treatment of all buildings began at a cost
of just over $100,000. Tree roots were also coming up through the
commodes, which created a need to remove commodes, flooring, and
in some cases, required drilling of the foundations. The sewer
laterals were found to contain roots and many of them could not
be cleared - - so new lines were needed to replace the old ones.
When the Board finally received the completed report
from the engineers/architects, it was found that the Association's
property was in need of repairs totaling an estimated $18,000,000.00,
none of which was covered by insurance.
The homeowners were very divided on how these expenses
should be paid for – perhaps a special assessment, maybe a building
loan. Some even questioned whether such an enormous repair process
was practical to undertake.
Had previous Boards of Directors had the foresight
to know that something like this could happen, they might have
begun putting reserve funds away much earlier over the course of
the Association's existence. Many associations do not put reserve
funds aside at all because, in many states, it is not mandatory.
And in many other associations, the Boards do not plan ahead – no
long range planning whatsoever!
It took this association four long years before the
repairs actually commenced. The lack of reserve funds, the work
not beginning promptly, and the disclosure that needed to be made
each time a unit sold adversely affected the value of the units
and the reputation of the association as a whole.
This true story illustrates that a Board should always
be encouraged and advised to start a reserve account as quickly
as possible, especially if the association contains amenities,
private streets and gates, or is a condominium association where
the association is responsible for walls and roofs. It is my hope
that no manager will ever have to experience so many emergencies
in so short a time. To help avoid some of the issues I have shared,
my advice is simple: Plan ahead and fund reserves!
