How realistically do you develop your association’s budget? 

Our High-Rise Insiders: Structural Integrity webinar was well-received and we had board member questions come in both during the webinar and afterward.  We're sure many of these questions may have crossed your mind and we wanted to share these additional insights with you.  Read on, or watch our recorded FAQ video below!
Let’s get started:

High-Rise Insiders: The Experts Answer Your Questions on Structural Integrity

How do you balance between using/reducing reserves and doing a special assessment?

Karla Chung, Vice President, FirstService Financial:
In my opinion, associations need to review their reserve study and determine what their liquidity needs will be on a forward-looking basis.  They’ll want to budget to be able to cover at least 3-5 years needs between reserves and expected contributions.  Depending on the size of a given project in a given year, they would need to determine if it’s better to issue a special assessment vs increasing regular assessments vs taking out a loan. 

Regular assessments should not be too high relative to other similar associations in the market or it will impact property values.  However, issuing frequent special assessments is not viewed favorably either.  Associations should take care not to deplete their reserves either as this could impact their ability to borrow funds should a large, unexpected expense materialize.

What if it's the board, not homeowners, who is the barrier to proper building maintenance?

FirstService Residential:
This is a hard question to answer because the unique circumstances at each building are different. We also don’t know the extent of board-to-owner communication around the day-to-day operations of preventative maintenance, reserve study review and analysis of vendor proposals for major repairs and replacement. For several reasons, sometimes the members are not in possession of all the relevant data: it could be that the board is in the middle of gathering expert opinions or repair quotes and taking steps to later present at a future board meeting or may be prevented from sharing certain information immediately due to legal reasons, et cetera.
In the opinion of our operations teams, our recommendation would be for the management company to reach out to the individual who has brought a concern to their attention and discuss the person’s perspective, research the issue to gather evidence and substantiate the claim and bring the member’s elevated concerns to the association board for their consideration. As a management partner, FirstService Residential strives to provide the best possible guidance and education to our boards based on best practices across our vertical market nationwide, making sure to point out and offer options to resolve issues that may pose risk to the association and its members and linking such solutions to benefits for both boards and owners that come from that resolution.  The intended outcome is to point out to the board how preventative maintenance can benefit the community to reduce risk and liability as much as possible, ultimately increasing resident satisfaction and safety.

Our Association has structural and drainage issues with our building and parking garage? Where should we begin to address these? 

Rodney Riepenhoff: Properties will all eventually experience issues with water leaks or mechanical systems.  The first step is to identify the issue and source a third-party expert for opinions on the severity of the issue.  Your management company should be bringing serious matters to the board and educating them on the issue, the expert advice and presenting options for resolution.
Karim Allana: A solution might be different for new builds versus older builds where repairs might include retrofitting.  In instances like drainage leaks, an existing build will not give the opportunity to re-slope the garage floors, install slot drains or get access to certain infrastructure, etc. Sometimes you have to engineer the solution first, then source the experts you need to solve the issue.
Damian Esparza: To jump in here, the next question boards inevitably ask is, “How are we going to fund this?”  It’s important to engage your reserve funding specialist to give the board financial options, whether that’s a special assessment, financing, increases to reserve contributions.  Consider the reserve as a financial planning tool to make sure your funding strategy is solid.

Do engineering firms like ABB review cost estimates of specialty items like roofing, waterproofing, windows, and façade elements?

Karim Allana:  Our firm constantly solicits bids from a variety of contractors, subcontractors and materials suppliers because we have many ongoing projects at any given time.  Prices certainly vary by region, trade and by mechanical systems so it’s important that when an issue is identified, your board reaches out to experts that can work with your reserve advisor to funnel real-time data into the scope of the project to give a more accurate basis for funding the project.

Most developers offer only a 1-year warranty. How long does a COA have to bring litigation after a developer for selling units in a building with construction defects?

Heidi Storz: There are different warranties that are offered so it’s true that most builders only offer a one-year workmanship warranty. But, that warranty may also be augmented by a statutory warranty in Texas for structural issues.  This means that depending on the warranties offered, your coverage may be longer for some components than others.
One thing to keep in mind when you’re thinking of an issue as “breach of warranty” is that the warranty is actually just a contract.  So in Texas, we can think of this as another kind of “breach of contract”, and in Texas you have four years from the discovery of a breach of contract to hold someone accountable on that breach.  
This means that even though a component may only have a one-year warranty, your association could have up to four years from that breach of contract to hold a vendor, builder or developer liable.  Additional options may be to seek restitution from protections under tort law or a negligence plan that would give you up to ten years to hold a party liable.  I suggest that your association consult with an experienced attorney that can really look at that and give you the correct answer on how long you have to file a claim.

Our building is only a year old, and we are having numerous issues with the mechanical systems. Who should we contact to get an assessment to help us understand our options? Should we contact a law firm right away? 

Heidi Storz:  So if you’re within one year of the life of a building and you’re having problems you don’t necessarily have to contact an attorney right away.  You could contact someone like ABB or other third-party experts on the issue who can help you evaluate and understand the problem first before going to an attorney.
On the other hand, most attorneys who do construction defect litigation do that work on a contingency basis and advance those expert costs to the association; so if you want to involve an attorney that may be a better option for you and might allow the association to get a better quality expert evaluation because it wouldn’t be coming out-of-pocket.  Instead, the law firm is advancing those costs.
Rodney Riepenhoff:  I would like to piggyback on what Heidi is saying.  One of the things we do [as a management company] many times when it comes to new buildings that we acquire and begin management on is during the commissioning process and startup.  Once that building is handed over to the association and management company, we often see numerous issues come up.  Many times, those issues don’t require legal action. Instead, many of those are a result of systems not being dialed in and calibrated for a fully operational building.  Often we find that simply tailoring the systems load and output can help us determine whether the issue is really a warranty issue. 
If so, many times we [the management company] can simply request the contractor come back out to the building to repair it. If they don’t then we go to the next step and contact the association attorney. That vendor/contractor relationship with the management company is critical in the life of a high-rise building.
Karim Allana: I think it’s also important for a firm like ours to be involved early in the process of inspecting an issue that comes up.  We can help identify if this is stemming from a construction defect that perhaps would need to be directed to an attorney like Heidi or is simply a fixable problem like Rodney mentioned. But, it’s helpful to have an experienced third-party look at the issue to make sure that the problem is addressed correctly.

What elements of the building are typically assumed to last the life of the building and usually don’t require maintenance?

Karim Allana: So I want to talk about strictly high-rise buildings. Systems and components intended to last the life of the building include the curtain wall system, exterior façade (metal, stucco, etc), fire life/safety items like 2-hour and 1-hour partitions to keep fire from spreading.  Those kinds of things are never designed to be repaired, replaced or inspected at a later time.  They’re supposed to built right the first time.
Another is below-grade waterproofing.  In the case of the Champlain tower in Florida that collapsed, it had no waterproofing and actually, that wasn’t surprising to me.  I can name several high-rises in San Franciso, for instance, that were built the last five to ten years that didn’t have any waterproofing.  I find that crazy, but sometimes developers do crazy things, so it’s really important that you as a board know your building and that it’s done right.   Lastly, the whole structure itself – concrete, steel, etc are designed to last the life of the building, while the mechanical systems usually have a finite life.
Rodney Riepenhoff: That’s correct, Karim – most mechanical systems do a have a “life”.  I often see that many boards have the idea that some systems like plumbing and sewer will last the life of the building, but this is in fact not the case.  As we talked about in the webinar, plumbing and water systems are almost never included in the reserve study, but they should be, because essentially they only have a 20 to 25-year life expectancy, and sometimes much less than that if they aren’t taken care of.   As you know, FirstService Residential was one of the first companies to implement a preventative maintenance program for building sewer stacks. In our system, we go in on a quarterly basis and run cameras down to look the condition of the pipes to determine if issues are arising and develop a game plan to address them – whether that’s an enzyme treatment or hydro-jetting to ensure we have good flow and not getting buildup that ruin a system too soon.
Again, I can’t recommend enough that plumbing systems be added as a line item on the reserve study.  It’s disruptive to not have the maintenance and then need to have a guy like Karim come in, need to redesign the build and potentially encounter a situation that’s destructive to an owner’s unit because the piping passes through their units. The longer we can extend the life of the plumbing system and then fund for that replacement cost the better. That’s the key to success in a high-rise.
Damian Esparza: That’s probably one of your greatest opportunities, and if you take anything away from this in terms of being able to save money for your nonprofit it’s having a preventative maintenance plan around plumbing.  I would say about 90% of high-rise reserve studies we do have nothing incorporated for plumbing and it will double your current replacement cost.  We’re seeing anywhere from $20-35K per unit as a budget number to be used in a reserve study.  At that price you can see how expensive it would be for your building per unit.
Incorporating this cost as part of the conversation in terms of how you set up your capital plan and when to bring in the experts at the right time and develop a maintenance plan would be critical to your success and meeting your fiduciary responsibility to maintain and protect the property values.

Our Association has always had problems getting owners to understand the need for assessment increases to fund reserves and asset maintenance. Do you have suggestions on how to get better owner “buy-in”? 

Susan Ward Freeman: Our experience is that communication and education is key. Maybe you hold a town hall meeting to review the reserve study and answer owner questions so that they have an understanding of the issue and resolution.
Rodney Riepenhoff: When a building has a reserve study, through our inspections and preventative maintenance program we review those findings and data against the study so that when the reserve study analyst comes in we know whether to do an update on the current study or if a new study is required.  We [management company] are able to provide a lot of real-time data that is going to be compared to the useful life and life expectancy of those components. By tracking the trends of our data, Damian could come in and give us more accurate timelines.
Damian Esparza: I’m going to go a bit higher-level on this one. As a board member, you’re overseeing a non-profit corporation. Ever corporation is a membership and this corporation has a culture and culture is predicated on values.  My question to boards is, “What are the values of your corporation?”  Are they values of trust, of transparency, of education?  How are you communicating?  Ultimately, this comes down to telling a financial story. It’s like any time we have to ask for or raise money for a capital contribution.  As with any non-profit, we need to get owner buy-in and we need to tell that story of why they’re funding the reserves and that the goal is about protecting their property values.  We [board members] want to make owner units marketable and we need to remember that we also have a fiduciary responsibility to do so.
It’s important to think about it from that context and then think about how we can share that information and keep it simple for the owners.  We want to build trust with the owners and with trust comes the ability to make that financial “ask”.  There will be increased buy-in for those contribution increases which we know are coming because everyone will share in the responsibility.
Karim Allana: If I can also say something on this, I think one way for the association to potentially avoid a special assessment in its entirety is that you forensically inspect your building before you lose the 10-year statute window. I’ve been doing this for 35 years, and every time there’s a special assessment and I look into it, I can predict that if our firm had been there during the first 10 years, we would likely have found these issues. If a special assessment becomes necessary 20 years later, then we’ve missed the window where that cost could have been passed to someone else.  Your highest fiduciary responsibility is to not lose out on the insurance that you have on this implied warranty that the state of Texas gives you.   

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Thursday September 30, 2021