Professional Reserve Studies Required to Safeguard Condo Owners

Source: Coalition for Community Housing Policy in the Public Interest

Source: Coalition for Community Housing Policy in the Public Interest

Hiring outside professionals to assess the systems and structure of a condominium is often scoffed at by HOAs because of the expense.  It’s as shortsighted as complaining about the cost of toothpaste. Condominiums are larger and definitely more complex than single-family homes. It’s negligent not to have plans in place that understand the current condition of the overall building coupled with a plan for regular maintenance that stretches out as far as the longest-lived components.

It’s also critical that reserve studies are performed by outsiders.  HOAs and management companies may either lack the expertise required or want to soft-pedal the truth to avoid uncomfortable conversations with residents.  We are generally “shoot the messenger” kind of people.

Another reason for using an outsider can be managing companies that also have their own staff contracted to perform repairs.  If they’re the ones doing the capital reserve studies, isn’t that a whopping conflict of interest? Didn’t Fair Park teach us that competitive bidding is best?

In my Hawaii building, the reserve plan that’s mailed to each owner annually lists items requiring replacement anywhere from 7-to-55 years. Lobby furnishings are replaced every seven years while elevators, stairs and a pedestrian bridge are 40 years.  The lone 55-year item is the rip-and-replacement of the 21-story trash chute.  That plan tells owners precisely what items will be replaced in what years.

As an owner, I know that in 2017, the club room furniture will be replaced along with a resurfacing of half of the roof.  In 2018, the big ticket will be the replacement of the elevators and their interiors along with other smaller jobs.  At the bottom of the study it states, “The plan is prepared on a cash basis and indicates that the building will meet all anticipated financial requirements over the next 20 years without necessity of special assessments.” I have owned in that 1959 building for 17 years and there has not been a special assessment yet … and only one minor dues increase (to add building-wide internet). The building is in great shape.

That reserve plan is so detailed that is anticipates and plots the costs for the next three replacement events for each item. The 40-year elevators that will be replaced in 2018 for $723,000 are estimated to cost $1.9 million in 2058 and $5.2 million in 2098 … by which time … 80 years … HOA dues are projected have tripled.

Now that’s peace of mind.

And it should be the law. One that should carry consequences, unlike the myriad of other toothless condo regulations and laws in Texas.

The plan in my Dallas high-rise?  Let’s just say no one remembers the last time the building was painted. It’s not a blank sheet of paper, but it’s a far cry from the detail Hawaii regularly, willingly provides. I’ve been here four years and they’d just finished a special assessment and have already had one dues increase.

A reserve plan is what HOAs need to set the dues required to keep their building(s) well maintained.  It’s what owners need to plan their financial futures and to smooth their personal expenses as they age.  It’s also a selling point.  Being able to show … and tell … prospective buyers about the detailed reserve plan touting the assumption of 20 years of special assessment-free living is potent.

In the end, HOAs are doing no one a favor by not unflinchingly understanding the condition of building infrastructure and assessing dues appropriately.

Capital Reserve Funds

The one-two punch of reserve plans is seeing that they’re funded properly and followed.  I regularly read (and sometimes write) about condominium projects nationwide that do not keep adequate reserves to fund repairs and maintenance and usually wind up deferring maintenance until something’s crumbled to dust.  The results are always, always, always special assessments that are ultimately larger than they’d have been had the repair been completed before the wheels flew off.

Court documents from the ongoing Edgemere on the Parkway lawsuits state that as of October 2015, on the eve of a $3,000,000 special assessment, the complex “had assessed and maintained a capital reserve account in the amount of $54,468.58 or just $2,723.43 per condominium unit. The capital reserve represents just $226.95 per unit, per year since the condominiums were completed.” In other words the Edgemere on the Parkway’s reserve fund could barely fund a Park Cities Sweet 16 party.

Granted it’s a newer building, but that’s still an insanely low level of savings, and hardly limited to the Edgemere property.

Buildings that have been stuck passing large special assessments abound.  Between 2005 and 2008, The Warrington had three special assessments totaling $3.8 million.  Between 2000 and 2008, La Tour’s special assessments totaled nearly $3 million. Even newer buildings like Vendome have had $2 million in special assessments between 2005 and 2013.

I’m not saying all of these special assessments were all due to poor reserve studies or improper savings, sometimes special assessments are for “above and beyond” items … FYI, hallway renovation, is NOT “above and beyond.”

Take, for example, 3883 Turtle Creek’s (“21”) $2.5 million special assessment to install double-pane windows. Or The Centrum’s 2017 special assessment for $1 million (split between its 31 owners) to contribute to the de-1980s-ification of the building’s exterior. Neither would have necessarily been foreseen expenses.

Regardless, minimizing financial bumps in owner’s budgets requires accurate information on the repair and maintenance of an HOA-run property.  There is no substitute for accurate and comprehensive planning.  There is absolutely NO DOWNSIDE to having that information and in fact, it likely saves money.

Owners and buyers should demand it. As it is, buyers must pore over the books with a fine-toothed comb and walk away if they’re not comfortable … because government isn’t going to lift a finger … especially when many of our HOA regulations were written and lobbied for by the founder and CEO of Associa, a holding company for a nationwide chain of HOA management companies. Associa is currently lobbying against bills in Hawaii that would strengthen owners rights in HOA communities.

Ahh, politics.

Remember:  High-rises, HOAs and renovation are my beat. But I also appreciate modern and historical architecture balanced against the YIMBY movement.  If you’re interested in hosting a Candysdirt.com Staff Meeting event, I’m your guy. In 2016, my writing was recognized with Bronze and Silver awards from the National Association of Real Estate Editors.  Have a story to tell or a marriage proposal to make?  Shoot me an email sharewithjon@candysdirt.com.

3 Comment

  • Thank you for writing all these stories, Jon. I totally agree with you on the issue of reserves. We owned two condos behind the pink wall. One was run much like you describe with a plan and a purpose. The other needed major maintenance which appears to not have been done years later. Texas law is weak… but now is the legislative session and perhaps groups of owners could convince state legislators to fix TUCA. Frankly, we found most owners didn’t care and didn’t want to be bothered and with that attitude one is ripe to be taken advantage of.

  • As an owner at La Tour I am going to defend the special assessment, it was not for anything related to routine maintenance. Our reserves are very robust and we have a scheduled replacement plan.

    As I am sure you are very aware the special assessment was due to major architectural changes, everything from the purchase of custom carpet and wallpaper, new solid core doors with mortise locks for every unit, a complete reworking of lower lobby including expanding the gym (Those treadmills cost around $10,000. Each).

    La Tour’s special assessment was not the result of lack of maintenance, it was a decision that we were a full service building with one of the best locations in Dallas that was designed for early 80s Uptown when Uptown wasn’t even a thing competing with brand new buildings with less desirable locations and we to do things like take advantage of how much property we have by doing things like putting in a off leash dog park and replace perfectly functional and well maintained gym equipment with brand new state of the art arch trainers with touch screens, iPhone connections and HD TVs.

    La Tour’s special assessment was not about maintaining the status quo, it was about bringing more value to the building and I am sure you would agree that it did.

    • As I wrote, not all special assessments are the result of deferred maintenance or poor planning. Some are the result of building’s making the decision to “up their game.” And in any case, large special assessments for non-critical work are generally voted upon.