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Reserve funds and deferred maintenance

Dennis,
I’ve been concerned since the dreadful collapse of a condo building in Florida about deferred maintenance that may have contributed to that collapse along with other factors. It’s a concern that affects my community as well. As a current board member there is a backlog of deferred maintenance left by previous boards. It’s been especially difficult for me to get other board members and homeowners to understand that some of the deferred maintenance issues are about infrastructure and those issues must be addressed not just the cosmetic issues. A reserve study was commissioned in 2014 and it was recommended that there be at least $600,000 in the reserves by 2018. Currently we have only $80,000. This is a small104 unit condo complex and we are currently contributing to our reserves monthly, but we are nowhere near where we should be in reserves to address our infrastructure issues. My question is, does Arizona have a law regarding contributing to HOA reserves to protect homeowners, especially from having to levy special assessments to cover those costs? I read that Florida did have a statute on the books doing just that, but it was repealed in 2018 at the behest of the real estate industry and community manager’s association. Your thoughts would be appreciated.

florida

1 Response

  1. dennisl

    Carol,

    Let me first answer your direct question. Arizona Laws are weak at best relative to any assessment requirements and do not have any provision relative to level of funding for reserve accounts.

    I would like to take this opportunity to now discuss your particular situation and the issue this brings up for all Condo owners.

    You association’s past boards have grossly failed in their fiduciary duty to their community owners. Any Condo no matter how big should never have a reserve fund as low as $80,000 simply because so much of the structure is common property. The facts are that long term building maintenance and upgrades are real and unavoidable and it is always a situation of pay me now or pay me latter but if you pay me latter it will cost you twice as much. Buildings age and hiding your heads in the sand and hoping that nothing happens is totally irresponsible. Yes no-one likes increased assessments but the responsibility of the board is to ensure that the association has the money available to deal with inevitable long term maintenance when you need it. Banking on a special assessment at the time of the need without planning is equally irresponsible. What would you prefer $20 per month assessment increase for 10 years or a $25,000 special assessment. How many people would be able to come up with an unexpected $20,000 special assessment? How many lawsuits will result from a sudden $20,000 assessment, who will pay for addressing those law suits?

    While it is not well understood by most Condo owners, the association owns no part of the condominium property. The unit owners own it all either individually or collectively. And when you buy a condo unit you are also buying a share of all the property and buildings of the Condo complex. With that ownership comes the responsibility to maintain that property over time. The Boards responsibility is to establish annual budgets that address the annual operating cost of the association including routine maintenance and a long term reserve fund that will meet the reasonably anticipated long term maintenance and upgrade needs for all the common property. Association boards that fail to do so fail in their responsibilities to the unit owners. Reserve studies are meant as a guide for boards and are based on recommendations from a vendor. Boards are not bound in any way to comply with the recommendations documents in a reserve study but they must establish a reasonable long term maintenance plan that establishes the projected cost and projected timing of long term maintenance needs and then funds that plan in a manner that ensures that when every need identified in the plan comes up that sufficient money is available to pay for that expense. The HOA industry likes to use terms like percent funded relative to reserve funds but that is a totally meaningless term, because it simply states that if all the maintenance cost were to happen today how must money do you have in the reserve as a percentage of that all in cost. It is meaningless because the real world does not happen like that.

    What your association should do is establish what you want for your long term maintenance plan and develop a funding plan today to ensure that you have the necessary money that will be needed for your identified issues. Because of the hole that your past boards created you have a lot of catching up to do, and you will have to decide how best to accomplish that either by increased monthly assessments or by a special assessment now to get a catch up contribution from which to build your reserve fund. Look carefully at your CC&R’s and see what limitations are placed on assessment increases and work within those limitations. If you would like more specific guidance let me know.

    Final thoughts, events like Florida will bring to light neglected maintenance on these condo’s across the country. You can expect insurance companies to get much more demanding on getting some kind of assessment on the general health and ongoing maintenance that has been performed on Condo’s before the underwrite any policy. Policy cost will go up significantly if adequate maintenance has not been performed even if they decide to write a policy at all. The end result is the cost of not doing maintenance will double in the future or more for Condo association but not HOA’s.

    Developing a long term plan and a funding strategy that meet the needs of that long term plan is only the first step the association must then implement that plan and actually get the maintenance done.

    Dennis

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