By Jim O’Donnell / Published October 2019
Association managers are often faced with boards that focus on assessments. In these associations, the focus year after year is to keep from increasing the assessments. It is not unusual to hear annual meeting reports from board officers proudly declaring that the assessment has remained the same for three, five, or eight-plus years. What they will never say is that they have a ticking time bomb within the association that will likely cost the owners thousands of dollars in the future.
In small single-family associations with limited common areas, flat assessment levels may be possible without a significant threat of large deferred maintenance costs. However, in condominiums and larger HOAs with significant common elements, amenities, and infrastructure to maintain, focusing on assessment levels instead of adequate budgeting often results in large unplanned capital expenses. Unfortunately, unexpected expenses of this nature are usually funded by large special assessments.
In the case of association budgeting, a penny saved is not a penny earned. In fact, it is usually penny wise and pound foolish. Not budgeting for a roof maintenance contract will likely result in higher replacement costs in the future and a shorter roof life. Not having the HVAC system serviced on a regular basis will result in more frequent repairs and a shorter useful life. Not painting your building or addressing water intrusion problems will cost more for concrete restoration in the future. We see it too often in our industry. Owners are content with their flat assessment levels only to be surprised that a multi-million-dollar restoration project is now needed to repair all the building’s crumbling lanai decks. When this revelation is made, owners ask, how could this happen? Why do we not have money to fix these problems? Often, the records find that ownership has waived the full funding of reserves every year. Some owners joke about not being around when the roof is replaced, and others apparently do not notice the large disclaimer required by the state which reads “WAIVING OF RESERVES, IN WHOLE OR IN PART, OR ALLOWING ALTERNATIVE USES OF EXISTING RESERVES MAY RESULT IN UNIT OWNER LIABILITY FOR PAYMENT OF UNANTICIPATED SPECIAL ASSESSMENTS REGARDING THOSE ITEMS.”
Whatever the circumstances, surprises of this nature often cause great upheaval in communities. Sometimes this unrest causes a large turnover in the board for new members who intend to see that this never happens again. The new board begins to review their maintenance practices to ensure all major assets are proactively maintained to ensure optimal performance and longevity. The board reviews the association’s maintenance and repair obligations and engages a company to complete a comprehensive reserve study, which will provide important information on expected repair and replacement costs in the future.
After studying the operation of their association with the help of their licensed community association manager, they set out to secure maintenance contract proposals from licensed and insured service providers. These providers include HVAC contractors, roofing contractors, fire and generator service companies, plumbers, pool equipment service companies, gate companies, and many others who are trained to service all the equipment in the community.
Now, with a new reserve study and real pricing for maintenance, the board—with the help of their community association manager—approaches the budget process with the goal to adequately fund for the maintenance and future replacement of the association’s common property. After all, this is a primary responsibility for the board of directors of any association. Good fiscal management and sound preventative maintenance practices are the only ways to avoid excessive repair costs and most unexpected surprises.
The tales of excessive repairs and surprises resulting from penny wise and pound-foolish fiscal management are numerous, but the results are always the same. There is the story about the condominium that has never wanted to spend money on a roof maintenance program but discovers that its 20-year-old roof, which should have lasted 30 years, now needs to be replaced. Additionally, the lightweight concrete under the membrane is also deteriorating, resulting in a 30 percent or more increase in the cost of the project. Another story is of a condominium that paints its building every ten years instead of seven, always uses the low bid contractor, and never elected to seal hairline stucco cracks. It now has stucco delamination problems and spalling concrete that will cost hundreds of thousands to repair. There is also the beachfront condo/hotel which can see the cracks by all the lanais, the stucco is chipping off in some areas, and there is evidence suggesting that one section is failing. However, they don’t want to stop taking reservations for more than a week and elect not to complete an engineering study because they were told by an owner who retired from the construction business that the board did not need to worry about that right now. This ending has yet to be written.
Boards are expected to act prudently under the law. Florida Statute 617.0830 outlines general standards for directors. In summary, the statutes state an officer, director, or agent shall discharge his or her duties in good faith, with the care an ordinarily prudent person in a like position would exercise under similar circumstances, and in a manner he or she reasonably believes to be in the interest of the association. The board has a fiduciary relationship with the owners of the association. As such, their duty is to act in the best interest of the owners. With this understanding, any officer, director, or agent who focuses on assessment levels and ignores clear maintenance needs and upcoming capital expenses risks a breach of his or her fiduciary duty to the owners.
To fulfill their fiduciary duty, board members should adopt an operating budget that includes all necessary expenses to operate the association for one year and a reserve budget that fully funds the annual savings necessary to fund the replacement of association common property in the future. Only owners can elect to waive full funding of reserves. Any board that is not budgeting for the adequate maintenance and reserve savings risks more than just an angry mob when the special assessment notices go out.
So, the next time your association budget is ready for review or your directors proudly boast their track record of unchanged assessments, ask yourself if your personal expenses have gone unchanged for that same amount of time. No prudent person expects the cost of living to stay flat for years. Likewise, no prudent director, officer, agent, or owner should accept, as fact, that their association assessments have remained the same for years without possible future consequences.
Regional Vice President, Vesta Property Services
Jim O’Donnell is Regional Vice President with Vesta Property Services responsible for the operation of all offices from Naples to St. Petersburg. He is a licensed community association manager (CAM), Certified Manager of Community Associations (CMCA), and Association Management Specialist (AMS). O’Donnell has also earned a Master of Business Administration and is pursuing his PCAM designation. His career includes more than 20 years in association/amenity management and residential development. He has lived in Southwest Florida for 18 years.