Q: In our 60-unit building, our
association board is reluctant to have a reserve study done
for two reasons. First, the board members feel that they may
have liability if they have a reserve study done and then
work does not get completed. Second, depending on what comes
up in the study, they don’t want to be forced to increase
assessments.
Some owners will have problems paying any assessment
increases. If an association does a reserve study and the
board does not follow through on all or some of the
recommendations, do the board members 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 state that everything wrong with the property
has to be fixed immediately. These studies detail the many
components of an association building’s common elements,
assess the remaining useful life and break down the
estimated costs involved for the repair and replacement for
various components.
Let’s say you live in a high-rise building. There might be
dozens of components listed in a reserve study. The report
would detail everything from roof replacement to plumbing
piping replacements, to facade repairs, to window
replacements, to hallway carpeting replacement. Reserve
studies do an amazing job breaking down the many components
of a building and letting the association know what the
authors of the study believe the timetable will be for
repairs and replacements for each.
For example, if an association recently replaced its roof,
the reserve study will note that and indicate that the
association should plan on replacing a 25-year-old roof in
about 25 years. They will also indicate what today’s cost
for the 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 it will incur. If the
association chooses not to assess funds for future expenses,
it will need to pass a special assessment in the future for
any repair work that will need to be done.
We believe it’s prudent for an association to clearly
understand what needs to be done to maintain their property,
no matter how big or small. But size matters when it comes
to how much a reserve study costs. Certainly a 350-unit,
multistory building will spend more money to get a detailed
report of what needs to be done vs. 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 reserve study.
That money might be better spent making the repairs or
funding reserves. Also, in a small building, the owners can
hire contractors to come out and evaluate the condition of
various elements of the building, whereas it’s much harder
for individuals to do that in a 20-story building.
Your building has 60 units. That’s a good-size building. An
important question to ask is whether the building has
undertaken necessary repairs and replacements in a diligent
manner over the years. You should then ask the board or
management company how much cash is in the association
reserve accounts.
Based on your question, we suspect your building has some
deferred maintenance and may not have much in reserves. But
turning a blind eye on the building’s problems is not the
answer. We think that having good information on the issue
of what needs repairs and replacements in a building is
critical. If the association knows what needs to be done and
is taking care of those issues in a timely manner, you might
not need to undertake a reserve study. But if the
association board doesn’t really understand what needs to be
repaired and simply takes care of issues (or not) as they
come along, that can be a source of liability for those
directors.
When owners serve on a homeowners association board, they
owe a duty of care to all owners of the building. We think
that duty of care would include making sure that repairs and
replacements are made in due time. What due time means could
be subject to interpretation, but the board should recognize
that repairs and replacements must be made and have a plan
for addressing those repairs. One way or another, those
repairs and replacements will need to be done.
The board may push those repairs into the future. But if
they know certain repairs need to be done and push those
repairs too far into the future, that may put those board
members at risk if something happens that harms an owner or
visitor. Understand that the board members could be held
liable whether they fund a reserve study or not.
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 board
has a reserve study in hand that states there are repairs
that must be made imminently, and they ignore the warning
and do not move forward with the repairs, that could cause a
much bigger problem down the line.
Associations that turn a blind eye to must-do repairs
because they don’t want to raise assessments will likely
face, at some point, a reckoning. At that time, unit owners
will face significant expenses to catch up with the many
years of low assessments and the many repairs and
replacements that were deferred. All of which could make the
property much less attractive to future buyers, causing
values to drop.
And that will make everyone unhappy.
If you have longtime owners who can’t afford higher
assessments, that’s unfortunate. But you can’t allow those
owners to keep a property from making necessary repairs.
That’s unfair to everyone else.