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HOA Fees Going Up?

How to Sell the Results of a Reserve Study Without a Revolt

While the importance of associations building a strong reserve fund is no mystery to you, raising fees or assessments is often a sensitive subject with homeowners. Every association needs a long-term planning goal, and a reserve study creates an accurate timetable for all major improvements. Learn how to address those sensitivities and sell the results of a reserve study with a revolt.

FIDUCIARY DUTY

One of the primary business duties of community associations is maintaining and preserving property values of the associations’ common property. To do this properly, associations must develop funding plans for future repair or replacement of major common-area components.

A reserve study is a budget-planning tool that identifies the current status of the reserve fund and establishes a stable and equitable funding plan to offset the anticipated future major common-area expenditures. Being prepared for non-annual expenses allows your association to change the unexpected to the expected. Reserve studies are one of the best strategies for financial and physical health at the association’s disposal. In order to keep the replacement costs current, the reserve study should be updated (with a site visit) every three to four years.

COMMUNICATION AND RELATIONSHIPS

It is our belief that fundamental to the accomplishment of any of these objectives is two basic premises: communication and relationships. Communication is multi-faceted – between the board and the owners, between the board (and/or subcommittee) and the consultant, and between the consultant and the owners. To ignore these opportunities for effective communication will result in diluting the effectiveness and ultimate success of the implementation of any reserve study on the books for your association.

Relationship nurtures trust and confidence. Through effective communication, greater trust and confidence can be developed between the various parties involved. As a result, it is more likely (although certainly not guaranteed) that the recommendations of a reserve fund study can be effectively implemented.

AN OUTLINE FOR SUCCESS

It is imperative that the scope of a reserve study be clearly defined before even seeking proposals from consultants. The following are a variety of options to be included in the scope of any Request for Proposals:

  • Define the project – From the table above, define exactly what is expected of the consultant. This should be as a result of discussion by the board and/or building subcommittee to determine what is needed. It is particularly important to decide whether the reserve study is to be based on simply replacing existing components or if upgrades and improvements should be considered.
  • Interview the consultant – The RFP should include a paragraph such as follows below. Getting to know the consultant, the people involved on your project and their approach to the project is imperative to a successful relationship.
    The board will select two to three consultants it believes to be qualified for the work and then conduct interviews. The objective of the interview is to meet the people who will be specifically working on our project, discuss a variety of questions, and generally understand the procedures the consultant intends to use for the project. A final choice will be made within one week following the interviews.
    A reserve provider’s objectives are threefold: to provide a broader perspective on reserve studies; to assist property managers with a successful presentation of reserve fund studies; and to create opportunities for more meaningful reserve studies and effective implementation of recommendations.
  • Pre-project meeting – The board (or building subcommittee) should meet with the consultant before actual work starts. The objective is to refine and finalize the scope of the project. This is also an opportunity to determine what will be expected of the association (or management company) and what will be expected of the consultant throughout the project. Suggested language for the RFP is as follows:
    The first step after selection is a meeting with the board (building subcommittee) to review, refine, and finalize the scope of this project. At that time, the items to be covered, the procedures involved, the on-site protocol to be used by the consultant, and any special concerns of the board (building subcommittee) will be discussed.
  • Conduct an owner survey – The intent is to give all of the owners the opportunity to express any particular concerns they might have about the project. While this may seem risky, it has been our experience that it is actually quite effective. Such a survey would be accompanied by a letter from the association providing all of the owners with the scope and limitations of the reserve study to be conducted and encouraging them to respond to the survey. It has been our experience that there is a very high percentage of response. Often the response to these surveys will reveal patterns that relate to association responsibilities as well as giving owners the opportunity to note areas of concern. The following is text for the RFP relative to this point:
    The consultant is expected to participate in at least one meeting with the board (building subcommittee) prior to commencement of the project.
    The consultant is expected to distribute a survey for use by all unit owners and compile the results of that survey as a part of the reserve fund study.
    The content of the survey should be reviewed and modified for each specific project. Also, a letter should be distributed to the unit owners, along with the survey, explaining the purpose and logistics of the reserve study and the survey. That letter should be on the association stationery. The survey would be on the consultant’s stationery.
    The final report would include a summary of the survey findings as well as any specific recommendations or observations related to the survey.
  • Follow-up meetings – It is important that the consultant be willing to discuss the findings of the study with the directors, building subcommittee, and unit owners. This is especially important if the study includes an evaluation of upgrades and improvements. Ideally, there will have been ongoing communication with the directors (building subcommittee) throughout the study process. A meeting with the unit owners will be a logical extension of that process. The following is language to be used in an RFP for that purpose:
    The consultant is expected to attend at least one meeting to which all of the unit owners are invited. This will occur after submittal and acceptance of the final report. The consultant will be expected to provide an overview of their findings and to respond to questions from the unit owners.
  • Report format – Effective communication means effective distribution of information. In larger associations (more than thirty to fifty unit owners), distributing the complete report is impractical, cumbersome, and usually unnecessary. However, a condensed “owners’ report” is a valuable tool to distribute information. Typically, the owners’ report would include an executive summary and the financial projections that are part of the master report. To achieve this purpose, the following language is suggested for the RFP:
    The consultant will provide (enough for the board or building subcommittee) copies of the complete final report. This will include photographs highlighting areas of concern and/or special interest. In addition, the consultant will provide a single reproducible copy of an owners’ report which will include a brief (two to three pages) overview of the findings of the study and the reserve fund projections.
  • Review draft report – For the association, directors, and building subcommittee to be comfortable with the work of the consultant, it is important that there be interaction throughout the process. Generally, we recommend that the consultants meet with the directors/building subcommittee regularly throughout the process of developing the study and submit a draft report for review and comment by the directors/building subcommittee. Recommended RFP language is as follows:
    The consultant will provide a draft report for review by the board (building subcommittee). The board (building subcommittee) will provide comments within two weeks of receipt of the draft report. Following that, the consultant will provide its final report.

Now That You Have the Results, Where Do You Go From Here?

In the first half of this article, we discussed reserve studies and selling the results of the report to your association (without a revolt!). Now that you have the association on board with the report, how do you go about implementing the actual findings?

Click here to download the full article and a complete look at next steps…

 

Note: these resources are provided for consumer guidance only. To have a licensed, Professional Engineer inspect your deck, contact Criterium-Hardy Engineers.

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How Safe Is Your Deck?

May is National Deck Safety Month® and your spring maintenance checklist should include a thorough inspection of your deck and railings. It’s important to ensure their safety before the outdoor entertainment season begins with family gatherings and neighborhood barbecues taking place on your deck.

Here are a few items to consider as you check your deck:

  • Check Connections: make sure all railing connections are secure. Anchorage points for wood railings often rot and may fail. Perform a stress test by cautiously pushing on the railing to make sure it doesn’t give at any point.
  • Stair Railings: stairs with two or more stair risers should have a railing.
  • Guardrails (railings): are required on “open-sided walking surfaces” higher than 30 inches from the ground, including decks. On single family homes, guardrails must be 36 inches high for decks (measured from the deck surface to the top of the rail) and 34 inches for stairs, measured vertically from the tread nosing.
  • Strength & Spacing: both guardrails and handrails must be able to withstand at least 200 pounds of force applied at any point and in any direction. The balusters should withstand 50 pounds of pressure exerted over a one-square-foot area. Spaces between balusters cannot exceed 4 inches to prevent children from getting their heads stuck in the openings or falling through them.
  • Benches: a bench installed around the perimeter does not serve also as a guardrail. The bench may be the required distance from the ground (36 inches), but without a guardrail behind it, which both the building code and common sense require, there is nothing to prevent someone from toppling backwards off the deck.
  • Touchup with Paint: repaint or stain the wood, if necessary (the experts suggest at least every five years). Consider using paint with slip-resistant additives for the deck and stairway riser surfaces.

With regular inspections of handrails and guardrails, you can identify and correct problems before they become an accident you could have prevented. Ensuring that your deck, handrails and guardrails are safe will help to ensure the safety of all who use them from toddlers to seniors.

Related Resources:

  • Your Home – a Criterium Engineers publication “Stairways and Decks Aren’t Safe Unless their Railings are Secure.” This document outlines building code requirements for guardrails and handrails, as well as design elements that may cause problems such as rail height and benches along the perimeter.
  • The State of California has a new extensive law that went into effect January 1, 2019, requiring the inspection of Exterior Elevated Elements (Decks and Balconies) and waterproofing elements for buildings with 3 or more multifamily dwelling units. Information on this bill and its history may be found on CA.gov.
  • The North American Deck and Railing Association (NADRA) provides tools for consumers to Check Your Deck® for the upcoming season.

Note: these resources are provided for consumer guidance only. To have a licensed, Professional Engineer inspect your deck, contact Criterium-Hardy Engineers.

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Fire-Rated Assemblies

Welcome to Criterium Engineers’ educational Building Science webinar series. In this episode, Scott Forbes discusses fire-rated assemblies as part of construction basics. We’ll look at high-risk conditions in attached and detached residential construction and other important topics associated with fire-rated assemblies. If you have questions about this presentation, contact us.

Presented by: Scott Forbes, Vice President of Operations, Criterium Engineers

Other info:

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Water, Water, Everywhere

Typically when I am discussing water problems with the condo’s property manager or the board, the focus is on leaking roofs, foundations, windows, or other building envelope points of water infiltration.  Instead, this article’s focus will be on water damage problems from inside sources and their prevention.

It is hard to talk about inside water damage without also considering a lengthy discussion of insurance matters, but I’ll try.  The short answer is both the board and the unit owner should confirm the correct policies are in place.  The association’s master insurance policy review should determine if the policy covers both as-built and upgrades (i.e. betterments and improvement clause) or just the walls, floors, and ceiling.  The unit owners should consider sewer/ drain back-up coverage, if the policy does not.  Keep in mind, insurance adjusters are looking for ways to avoid claim payouts.  They will look for the source of the water and whether it was caused by accidental reasons or old age wear and tear; lack of maintenance; or your negligence.

So why is internal water damage such a big deal?  It is because it is the number ONE insurance claim in the nation beating out other high profile claims including tornadoes, hurricanes, and wildfires.  And it is growing.  1 in 50 homes experienced an internal water claim in the five year period of 2013 to 2017 per Verish Analytics ISO who provides insurance industry statistical data.  This 5-year claim rate of 2.05% per dwelling is up from the prior 5-year statistical period rate of 1.44%.  This equates to an average $10,000 per claim and $13 billion in total claims for 2017.  It’s a big deal.

So why is this happening?  The short answer is the trends in condo and HOA development and the aging of residential building inventory across the country.  The burst in condo development in the 1980’s and 2000’s have resulted in many more water sourced appliances in risky locations.  Many homes built in the last 20 to 30 years have laundries on the second floor instead of the more traditional basement location where a leaking hose could be dealt with a mop and bucket.

Some homes can have more than 40 water connections including washing machines; water sourced heat pumps; ice makers; wet bars; filtration systems; extra bathrooms; dishwashers; garbage disposals; indirect hydronic floor heat; and the list goes on.  This partially explains why fire damage claims in the US have declined while water claims have increased, not only in numbers but in amount.  High-end properties are the worst for this increase in water claims.  For homes valued greater than $500,000 the claim sizes have doubled since 2015 while homes valued greater than $1 million have tripled in size according to the Wall Street Journal.

So what’s a property manager, board, or unit owner to do?  Protect the home.  Needless to say, each condo or HOA complex has its own factors of importance.  These factors must be considered and a plan should be established to minimize the potential problems each type of complex should address.  One place to start is the creation of a central maintenance log to record all reported internal water events to determine if there is a trend or pattern.  An aging condo may have experienced a rash of washing machine hose leaks.  This may prompt the property manage to notify unit owners to inspect their own hoses for wear or even hire a plumber to inspect all of the units’ water sourced appliances.  Another HOA may have a population of ‘snow birds’ who should be cautioned to maintain their unit thermostats at a certain level to avoid pipe freeze up while they are vacationing in warmer climates.  Sometimes a global reminder to all unit owners of the location of their central water shut off valve for future water emergencies is a good ounce of prevention.

Needless to say, no matter how much a property manager or board thinks about internal water damage, it often comes down to the individual unit owner being responsible to maintain the unit.  Investing in water sensors at some risky or perennial problem locations may be money well spent.  Educating the unit owners through the association’s newsletter or web site is also a step in the right direction.  Reminders of the importance of maintaining caulk in the tubs and showers; hose connections for all appliances; and periodic observations around the home looking for developing rust; drywall damage; and pooling water can go a long way in preventing a trickle becoming a sea of trouble.

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Article written by Jack Carr, P.E., R.S., LEED-AP, Criterium Engineers

Published in Condo Media May 2019 edition

Download a PDF copy of this Condo Media Article

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Cost Segregation Studies

Taxpayers who spent at least $500,000 to purchase, build or renovate a building in the last 15 years may be sitting on a huge tax benefit. How do they find out? They do a cost segregation study.

Depreciation enters significantly into the financial performance of commercial buildings. Typically, property, exclusive of land, is depreciated over 39 years. Certain improvements or renewable materials (e.g., carpets) may be depreciated more quickly. These calculations have been part of the financial landscape for years.

What is not as generally known is that many of the costs embedded in a new, or even an existing, building can be segregated into categories that also allow for more rapid depreciation. This tax benefit is not new but is often overlooked by building owners and even many of their accountants.

If you own a commercial or apartment building that has been bought, built or reonovated recently without a Cost Segregation Study (CSS), you may have missed a significant opportunity for cash savings.  the good news is, you still may be able to utilize this modern tax planning tool.  CSS is the latest element added to the typical due diligence process of having a consulting engineer perform a building inspection with an optional environmental site assessment.

Whereas due diligence focuses on reducing future liabilities of physical or environmental problems with a property, a CSS focuses on impriving the project’s cash flow through reclassifcation of the property’s asset lives with the purpose of accelerating depreciation expenses, and thus lowering federal taxes.

The benefit of a CSS can be substantial, with potential net present value savings of more than $50,000 for every $1 million of property value.

Even if years have passed since purchasing the property, the IRS allows the taxpayer to recapture lost depreciation all in one year without having to file amended returns by simply filing Form 3115 to notify the IRS of the change in accounting after the retroactive CSS.

Though the advantages of improved cash flow in the early years of a real estate investment are obvious, many side benefits of a CSS are realized in multi-tenant properties.

When a tenant prematurely vacates a space, a CSS can be used as the basis to document the value of the space’s assets to be written-off and to use the tax savings to fund marketing of the space or future tenant fit-up.

All real estate investors have different tax circumstances, therefore, it is very prudent to obtain the advice of your tax consultant before initiating a CSS.

Most of the area’s commercial brokers and accounting firms are becoming familiar with this powerful tool.  After a little research, the rewards can be very worthwhile.

What is the purpose of Cost Segregation Studies?

Cost Segregation Studies (CSS) are designed to provide a defensible document to support accelerated depreciation of real estate. The purpose is to reclassify 39-year assets to more tax-favorable asset classes with 5-, 7- or 15-year lives. By converting “brick and mortar” assets (depreciated in a straight-line method over 39 years) to “personal property” assets (depreciated on a double-declining basis over 5 years), the real estate owner receives earlier tax depreciation expenses, thereby improving the cashflow from the property. The benefits of a CSS are best measured in Net Present Value (NPV) savings. Typical examples of personal property include architectural millwork, electrical and plumbing supply to personal property, movable partitions, security systems, exhaust equipment, decorative lighting, emergency generators, land improvements, signage, wall and floor coverings and window treatments.

The table below provides an example of potential savings:

SHOPPING CENTER EXAMPLE

Personal Property 5 yr 200% db – 0% $600,000 12%
Personal Property 7 yr 200% db – 0% – 0%
Land Improvements 15 yr 150% db – 0% $1,000,000 20%
Real Property 39 yr sl $5,000,000 100% $3,400,000 68%
_________________ __________ _____ __________ _____
TOTAL $5,000,000 100% $5,000,000 100%
Deferred Taxes: $475,755                              NPV of Taxes Deferred: $253,127

What is the basis in law for CSS?

Cost Segregation Studies began to be performed in earnest following the IRS issuance of Rev. Proc. 96-31 in 1996, which allowed taxpayers to correct mistakes in the depreciation of their assets. After several minor tax court cases were found in favor of taxpayers using CSS methods, the IRS accepted this procedure. What gives the true strength to the taxpayer’s position is that the tax courts have ruled that the case law created for the Investment Tax Credit, before the ITC’s demise in 1986, is applicable to CSS methods. As a result, CPAs have felt comfortable with the estimating and asset life reclassification that occurs in a CSS report.

When should a CSS be performed?

A CSS is most applicable to buildings that are newly built, newly acquired, or about to be acquired. Newly constructed buildings are ready candidates because material and construction costs have generally been calculated already. Recently acquired existing buildings are also good candidates if a significant amount of depreciation has not already been taken. Even after a few years, assets that should have been reclassified can be recaptured in the current tax year. A CSS also makes excellent sense during the due diligence phase for new acquisitions. At the time that they perform a Property Condition Assessment (PCA), your consultant may also be able to perform a CSS. This approach not only saves times and money, and sets you up to depreciate your asset properly from the beginning, it also may factor into the purchase price, enabling buyers to be more competitive.

What types of properties benefit most from a CSS?

Real estate investments best suited to undergo a Cost Segregation Study include:

  • real estate construction valued at over $1 million
  • building acquisitions or improvements
  • new buildings under construction
  • existing buildings undergoing renovations or expansions

Properties with the best savings potential include:

  • office buildings
  • shopping centers
  • restaurants
  • hotels
  • warehouses and distribution centers
  • manufacturing and industrial plants
  • medical facilities

Who can perform a CSS?

The IRS requires a detailed study by “experts” to support claims for shorter recovery periods. These experts must be judged as independent (performing Cost Segregation Studies on your own is strongly discouraged) and have the credibility to be able to estimate costs reliably. That is why most Cost Segregation Studies are performed by engineering companies, often in concert with an accounting firm or the client’s CPA.

What is the process for performing a CSS?

The CSS can be conducted in parallel with a Property Condition Report, an Environmental Site Assessment, or done independently. An engineering firm reviews available site plans, construction drawings, purchase documents, and other information to assign values and classify the assets. Through site visits and document reviews, a determination of the value of the land and building is made. The CSS team then “dissects” the property to identify all personal property, reclassify the assets, and develop engineering estimates of their value. This includes estimating building systems that are not visible such as buried utility systems and those hidden behind walls, floors and ceilings. Soft costs that are capitalized are also considered in the reclassification analysis. All personal property assets are categorized as needed, and tabulated into summary statements for the client’s CPA to use for tax filing. Results for the current tax year for new purchases are entered per Rev. Proc. 2002-19. For a prior year’s purchase, there is no need to amend the prior year’s returns or K-1s. The CPA files an “automatic” Form 3115 to advise the IRS of the method change. Please call Criterium Engineers for a quote.

The Engineering Advisor is intended to enhance your knowledge of technical issues relating to buildings.  For additional information on any subject, please feel free to call us.  Our commitment is to provide you with timely, accurate information.

More information on CSS and you can check out our Cost Segregation Study services

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Basement Waterproofing – How do you keep water out of a basement?

Maintain proper drainage

Basement Waterproofing - How Do You Keep Water Out of a Basement

A cost effective approach to basement waterproofing is to maintain with perimeter surface drainage conditions.  The importance of proper drainage and landscaping (mature trees) around a foundation cannot be over emphasized.  Poor drainage around the foundation is the most common cause of foundation problems and basement moisture problems.  Drainage and moisture control around the home include proper ground slopes away from the foundation.  It also includes keeping your gutters clean and the downspouts functional.  Not doing so, allows the water from the roof to overflow the gutters.  This water then runs along the foundation and in turn can cause basement seepage or foundation movement.

New Construction Basement Waterproofing

In new construction, cast-in-place concrete foundations are more resistant to water penetration than concrete block. Bituminous waterproofing should be used, at a minimum, to seal the outside of any foundation wall, however. An effective perimeter drain system should be installed to collect water from around the foundation and under the slab.

The National Association of Home Builder’s booklet on dry basements entitled, “Basement Water Leakage – Causes, Prevention, and Correction,” recommends perimeter drains on the inside and outside of the foundation. These drains should either flow downward to a gravity outlet (natural drainage) or to a sump where the water can be discharged with a sump pump.

A building built in a wet site should take advantage of additional waterproofing; a membrane system. One example of a membrane system consists of multiple layers of impervious material applied in a hot tar mopped system to the outside of the foundation. Special attention should be paid to the joint between the wall and the footing. The concrete floor and walls (whether block or concrete) should be reinforced to minimize cracking.

Existing Construction Basement Waterproofing

A water problem in an existing basement can only effectively be dealt with by:

  • rewaterproofing the outside of the foundation walls and/or
  • upgrading the exterior foundation drainage system

Both approaches require excavation around the outside of the foundation.

There are alternatives which will intercept the water using a channel-like system around the interior of the foundation wall to collect and guide the water into a sump and discharge it using a sump pump. These systems do not correct the water problem but they do control the water once it has entered the basement in a way that minimizes problems related to water entry. Such systems, while dealing more with the symptom than the cause, are typically less expensive because they can be accomplished from the inside.

Ultimately, when dealing with a basement water problem, the tried and true conventional methods working from the outside are still the most reliable.

Basement waterproofing and existing building, or rewaterproofing, the outside of a basement wall requires excavation to the full depth of the wall, careful cleaning of the wall surface and proper application of bituminous waterproofing. A multi-layered membrane system should be used if the surrounding water conditions are severe. At the same time, a perimeter drain system should be installed, similar to the recommendations noted above for a new foundation. If there are cracks in a wall, the cracks should be chipped out to form a V-groove along the length of the crack approximately one inch deep. The V-groove should then be sealed with a good quality epoxy or silicone caulking, filled with mortar and covered with bituminous waterproofing.

Epoxy injection

An effective, but sometimes expensive alternative, is epoxy injection into the crack. This can be done from the inside. The epoxy bonds with the concrete and creates a somewhat permanent seal against water penetration. The limitations to this system are cost and effectiveness, depending on the size of the crack. The smaller the crack, the less likely it is that full penetration injection is possible. However, before undertaking expensive excavation around the outside of a foundation, you may want to get proposals from local epoxy companies to compare the cost and potential effectiveness.

Basement water is controllable but there is no easy answer. Only the more complex and sometimes expensive approaches are truly reliable.

Peaceful Coexistence

Peaceful coexistence is sometimes an appropriate resolution to a basement water problem. While keeping water out of a basement may seem ideal, there are risks. Preventing water from entering an older stone or concrete block foundation can cause water to accumulate on the outside of the foundation walls increasing water pressure on the walls themselves. The result can and has been total failure of the foundation wall. Where the construction of the foundation wall is marginal or questionable, the better approach to water control is to permit the water to enter, collect it into an interior drainage system, guide it to a sump and pump it away.

Check out our Residential Services to learn more about how we can help!

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Commercial Building Inspection – PCA Due Diligence

Buyers of commercial real estate are concerned with the financing and economics of their acquisition.  Until recently, the condition of the building was only a relatively minor concern.  That is changing with PCA due diligence.

The initial impetus for carefully evaluating the condition of the building were the failures and foreclosures at the start of the decade.  Financial institutions were forced to deal with buildings that were not maintained and needed substantial work.

Next, regulations such as The Americans with Disabilities Act (ADA) created certain imperatives for building owners to upgrade facilities.  Seismic codes were, and continue to be re-written.  New environmental and ecological concerns surfaced.

Then, changes in the way buildings are financed created a need for a more formal and complete look at the condition of the building and the capital reserves required to maintain it.  As more commercial mortgages are securitized, the rating agencies on Wall Street – Moody’s, Standard & Poor’s, etc. – now require that property condition surveys be part of the due diligence process.

 

The Evolution of a Practice

The first type of engineering service to be almost universally required was the Phase I Environmental Site Assessment.  Initially, there was no standard for the service.  Vague requirements made it difficult for commercial developers, owners, and financial institutions to be confident that their environmental due diligence would be defensible in court.  Enter the American Society for Testing and Materials (ASTM) and the development of E1527: Practice for Environmental Site Assessments.

Property condition surveys and reserve studies have not yet become so standardized.  Firms in the business, each have their own format.  Each financial institution has their own scope.  FannieMae and FreddieMac individually created their own guidelines for multifamily properties.

Appropriate qualifications have not been defined.  Financial institutions require firms are acceptable to the rating companies.  The rating companies look to the financial institutions to select qualified firms.  Finding the best firm for the job can be difficult.

But things are changing, just as they did for environmental inspections.  The effort at standardization is being driven by the rating companies themselves.  Standard formats have been developed.  Most engineers in the field are aware of these formats and can provide them in a timely fashion.

Such consistency enables the engineer to understand the scope of services requested, and makes it easier for all to review the reports.  Some of the key features of the engineering study are:

  • A review of documents, interviews with owners and occupants, and a site visit
  • The development of a list of current deficiencies and a list and schedule of repair/replacement costs for building components, and a projection of these costs during the life of the mortgage plus two years.
  • Commentary on the condition of the building and any observed or recorded code violations or safety hazards.

 

What to Expect in the Future of PCA Due Diligence

With PCA Due Diligence, clear expectations for both environmental and engineering services, commercial building owners, buyers, and financial institutions can expect to see some significant changes in the way service is provided.

First, necessary services are being consolidated under one roof.  Buyers can now purchase both engineering surveys and environmental assessments from the same company.  Consolidation simplifies the process, reduces costs, and shortens the time frame in which services are provided.  Criterium Engineers has offered both services for a number of years.  Firms are looking to consolidate other services as well, such as appraisals and surveys.

The second trend is to provide broad geographic coverage.  Firms experienced in this work have tended to have only one or a very few offices.  That required that they send people all over the region or country.  The result was higher cost and lower quality since the engineer was not necessarily familiar with local conditions.  Companies that specialize in this work are now trying to build networks to cover broader geographic areas.  The Criterium network of 65 national offices – 6 in northern New England – is a perfect vehicle for providing high quality, rapid and consistent service, at an affordable rate.

 

How Can I Be Sure of Getting the Best Service?

There are a number of things that owners and buyers can do to ensure the best and most expedient service.

  1. Ask whether the engineering firm is familiar with the due diligence requirements for Commercial Mortgage Backed Securities (CMBS), Real Estate Investment Trusts (REITs) and the like.  Even if you are not going this route, the financial institution may use the standards of the rating agencies when reviewing your application.
  2. Inquire as to the qualifications of the individual doing the work; the person on site. Some firms, in trying to provide broad geographic coverage, may use poorly qualified or inexperienced individuals.  The eyes and ears of the engineer are the most valuable part of the service.  And be sure to inquire if licensed engineers or architects are being used.  There is a difference.
  3. Be sure to provide accurate and reliable information to the engineer. Construction drawings, maintenance records, and access to maintenance staff should all be readily available during the site visit.

Learn more about our PCA services.

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Hidden Dangers of Dryer Vents

Who would think venting a unit’s clothes dryer was so complicated?  When was the last time the cleanliness of dryer vents was on your Board’s meeting agenda?  Yet, clothes dryers may be one of the most dangerous appliances in the home.  The U.S. Consumer Product Safety Commission reports there are more than 15,000 home fires each year directly related to dryer maintenance and overheating with blocked exhaust venting contributing to half of those fires.  Dryer venting falls in the category of what you can’t see, can hurt you.

 

 

Just as condo units and their buildings come in many shapes and sizes, so does dryer vent systems.  It is not unusual for new Boards not only not understand the exact nature of their condo’s in-unit dryer vent system but they also are not certain who is responsible for its maintenance.  Most dryer vent ducts pass through common space, except for HOA unit owners who are responsible for their own building envelope and everything within.  Some condo dryer vent ducts are dedicated to a given unit while others are shared with other units.  Many dryers vent pass through an exterior wall while mid-rise and high-rise condo buildings share a vertical rooftop vent system.

With these different types of systems and variances often found in the governing condo documents, it is not always well understood by the Board members who is responsible for maintenance and repair of dryer duct systems.  This includes basic routine cleaning even if it is clear maintaining the in-unit dryer is part of the unit owner’s responsibility.  This is an important issue to resolve with the assistance of your legal counsel, as it is the first step in meeting the Board’s responsibility to oversee the safety of the units’ venting system and its occupants.

Once dryer vent system maintenance responsibilities are understood, a policy should be put in place.  This policy should provide authority for unit access and performing maintenance and repairs when owners fail to comply with the dryer policy including assessing charges to the unit owner incurred by the association in providing the required dryer maintenance.  The policy should specify the required maintenance including cleaning of the dryer vents and ducts on a scheduled basis, typically every two years.  Often communities will engage a dryer maintenance contractor at a bulk rate to provide a cost effective and consistent maintenance program.  Should a unit owner opt out of this service they would be required to provide proof of compliance of the required maintenance being conducted by others.

Before the dryer maintenance program can be implemented, the Board must understand their system.  This may require the assistance of a maintenance repair contractor or the association’s building engineer who will need to inspect the present system.  This inspection may reveal common and shared duct systems; long duct runs with booster in-line fans; improper duct materials.  As an example, any vent duct found to be vinyl, PVC, or flexible is a problem.  Most of these types of vent ducts are violations of the local and national building codes, as their interior surfaces collect lint creating a build up of highly flammable material as well as a medium to collect water whose weight can bend duct pipe and create an environment susceptible to mildew and mold.  Improper duct should be removed and replaced with smooth-walled metal ductwork.  If flexible duct is found forming an elbow at the rear of the dryer, it should be replaced with non-flexible metal elbow duct so as not to be crushed when the dryer is pushed against the wall.

The policy may set specifications on the type of dryers to be allowed in units.  Not all dryers are the same.  Beyond the differences between electric and gas-fired dryers, some dryers have significantly different exhaust characteristics.  Building codes recognizes this by allowing the manufacturer to specify the maximum length of straight vent duct to be used.  This typically can range from 15 to 90 feet.  This duct length is further defined by reducing the allowable length by 5 feet for every 90 degree bend and 2 ½ feet for every 45 degree bend in the duct.  For this reason, the policy should provide specific direction to unit owners of the minimum type of dryer performance allowed as well as advising the unit owner of the length of duct the dryer will be connected.  Some associations even place a placard at the duct wall connection with this information for future dryer installations.

In hiring the dryer maintenance contractor the Board should take the normal insurance precautions as when hiring any contractor, including coverage for general liability; automobile liability; workers compensation and umbrella liability coverage with key required endorsements.  These are needed to protect the association from both having to defend itself as well as pay damages as a result  of the contractor’s activities while also including additional insured endorsements; waiver of subrogation endorsement; and primary/non-contributory wording.

The contract with the maintenance contractor should specify the method of cleaning the dryer duct.  Typically the cleaning is a combination of extendable brushes and vacuum cleaning.  The scope of work should include specific clarification of disposal of duct debris both inside and outside the building.  Safety issues should be addressed, particularly regarding movement of gas-fired dryers.

Dryer vents maintenance policy can include some preventative maintenance guidance to unit owners.  Unit owners should be advised to report unusual dryer performance including longer than normal drying times or the dryer surface or clothes feeling hotter than normal.  The owners should also report their observations of the outside louver on their dryer vents not opening as much as before.  Excessive humid or burnt smells in the laundry area are all signs of blocked exhaust vent duct.  The recognition of dryer malfunctions and a good preventive maintenance policy will ensure the common safety for all.

Dryer Vents are just one aspect we inspect in our Home Owners Association Services. 

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Transition Study, Reserve Study. What’s the Difference?

Most home owners association board members understand what a reserve study is and the beneficial role it plays in managing the financial future of the community association.  Another study that comes up for recently constructed associations and is equally as important is the transition study.

A reserve study analyzes the capital items that the association is responsible for maintaining, which typically includeCriterium-Hardy Engineers - HOA Home Owners Association Transition Study & Engineering Services roofs, siding, and concrete.  The reserve study provides information regarding each item, including its life expectancy, and the cost to replace it in the future.  Specifically, a reserve study is looking to see if and when the item will deteriorate due to ordinary wear and tear.  A transition study, on the other hand, has a narrower purpose.

This type of study identifies and documents potential construction or design deficiencies.  The key word with a transition study is “defect.”  For example, a transition report would reveal such items as roof leaks, water infiltration, or concrete settlement caused by poor craftsmanship or design.  A cost estimate to remedy the defect is normally provided as part of the analysis.

Each study is also different in purpose.  The purpose of a reserve study is to assist the association in future budgeting for the cost to repair its capital items.  Throughout the life of an association, maintenance and repair is an ongoing issue that the board continually needs to address.  For example, even if a roof was just replaced, the association should immediately begin to budget for future roofing repairs and costs based on the life expectancy of the new roof.  On the other hand, a transition study, ideally just occurs once at the time the property transitions over from the developer’s control to the homeowner board.  At this juncture, some high quality developers will even order the transition study so that they can turn over the property with a “clean bill of health.”

More frequently, the association’s board orders a transition study when it takes over control of the association from the developer.  When transition occurs, a transition study should immediately be ordered.  The study then serves a twofold purpose.  First, it can be forwarded to the developer along with a demand to address and repair any deficiencies or construction defects.  Since an independent, unbiased evaluator performs the study, it generally has more leverage in pressuring the developer to voluntarily comply with correcting the defects.  If the demand and further negotiations prove unsuccessful, the transition study can alternatively be used as evidence in litigation to force the developer to pay for needed repairs.

By requesting a transition study, the board also ensures that it has fulfilled its fiduciary duty.  The study serves as an independent, expert analysis that the board can use to make sound business decisions in terms of properly addressing construction defects.  Just like with reserve studies, a transition study takes the guess work out of identifying repairs, the cause for repairs, and the costs.

Although similar in some respects, the reserve study and transition study serve very different purposes.  The reserve study can and should be ordered and then updated in the future to accommodate the ordinary wear and tear that the common elements will suffer, whereas the transition study looks back in time to discover defects caused by the developer or its contractors.

Learn more about Criterium-Hardy’s Reserve Study services.

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Construction Specifications – Keys to a Successful Job

Managing a capital budget and expenditures for a community association involves greater responsibility and risk than it does for one’s own home – the key is construction specifications. This article addresses some of those differences and ways to control the process to assure a positive outcome and it starts with construction specifications.

Construction Specifications - Keys to a Successful Project!

As homeowners, when there is a major capital expenditure, like a new roof, we call a few contractors to get some competitive bids. Then, we ask a few questions, maybe check some references, and hire the contractor with the lowest cost that we feel will meet our needs.

As board members or managers of community associations, however, the jobs are larger and the money involved is far greater. This also means that the risks and potential liability are increased as well.

For example, the simple task of obtaining competitive bids can result in quotes that are widely divergent. Because costs are greater, the variation can be significant. Criterium Engineers has often been called by property managers to help explain why contractor bids are so far apart. The answer most often is that the quotes are not truly comparable. In other words, it’s not apples to apples.  In order to compare bids, we require detailed construction specifications, without them a project is likely going to fall off track and budget.

Roof replacement is one good example. Different contractors may choose different materials. One may remove the old roof; another may not. One may include costs for permits, disposal, and cleanup; another may not.

The way to get comparable bids is through a specifications process. It is also the way to get a job that meets your needs and perhaps considers money-saving alternatives. A specification prepared by a licensed Professional Engineer is almost certain to include elements that you may never have thought of and ultimately protect your interests as a manager, board member, and as an owner.

What are Construction Specifications?

Construction Specifications are a set of documents that define the scope of the job and the expectations for the contractor. Among other things, it generally includes:

  • Drawings that illustrate construction details
  • Documentation of:
    • All things that must be covered by the quote
    • The manner and format in which the quote is to be provided
    • Methods and materials to be employed (see below)
    • Conditions under which the work is to be performed (e.g., not before 8AM or after 6PM)
    • Required insurances
    • Form of agreement to be used
    • Warranties to be provided
    • Responsibilities of the association vs. the contractor
    • Procedures for effecting changes
    • Construction schedule
    • Terms of payment
    • Site conditions that must be maintained before, during, and after the work is complete
    • Standards and regulations that may govern the work

There are two types of construction specifications, generally referred to as Performance Specs and Prescriptive Specs. In a Performance Specification, the engineer lays out the expectations for the job, that is, how the systems and materials are to perform now and over time, leaving it to the contractor to identify those systems, materials, and method of installation to accomplish the objectives of the specification. For example, a Performance Specification for a roof could be as theoretical as that it must keep the rain out under all conditions and must last 20 years. In more practical terms, the specification may state the type of roof (e.g., EPDM) but decline to name the manufacturer, method of adherence, etc.

A Prescriptive Specification, as the name implies, lays out much more specifically how the job is to be done, what materials are to be used, and the manner in which they are to be installed. For example, a Prescriptive Specification for a roof would most likely list the type AND manufacturer, all details and methods of fastening, etc.

Engineers generally rely on a variety of standard specifications from entities such as the Construction Specifications Institute (CSI) and MasterSpec (AIA). These documents serve as a framework, providing boilerplate and standard clauses, but a true and good specification starts with a field visit to observe actual conditions, and then continues with research to select the right approach.

Value Engineering and Construction Specifications

Developing a specification is the perfect time to consider alternative approaches for the repair or replacement of key systems. Sometimes, a new approach can result in cost savings over the original design. At other times, a different approach may result in greater durability or reliability, thereby reducing costs over time, even though the initial outlay may be more expensive now. Value is the relationship between cost and benefit. Value Engineering, when properly done, is more specifically about the relationship between cost and function. It is generally a “like for like” substitution that generates a cost savings, either initially or operationally, without sacrificing function, intent, or performance of the original design. When developing a specification, the engineer can either perform the Value Engineering himself (Prescriptive Specification) or ask the contractor to propose alternatives (Performance Specification). Either way, the association wins.
Liability for the Board and Property Manager

One of the key differences between owning your own home and sitting on a board representing a group of owners is that you now have a fiduciary responsibility to those owners.

While most board members would not think of awarding a contract to someone just because he was a friend, it can be just as risky to hire any contractor if proper care in the selection has not been exercised. The engineer that developed the specification is also able to assist with pre-bid meetings, contractor selection, and kick-off meetings.

To illustrate how serious this can become, we were recently subpoenaed to produce documents in a case that involved shoddy work by a contractor. While the contractor is the key defendant, so are previous board members and the property manager. Being able to demonstrate that contractor selection followed an industry-accepted, professional, and objective procedure is your best defense in such a case.

Conclusion

Developing a specification for any significant capital expenditure is the best way to ensure comparability of contractor bids, a quality job, and avoid exposure to liability. The best part is, it may actually save money on the overall job. Specifications are developed by engineers or architects who are familiar with the design and installation of building systems. If chosen properly, that person could well be the same engineer who originally developed your reserve study and is familiar with your specific property. We would also strongly recommend hiring that same engineer to monitor the actual construction, repair, or replacement to ensure compliance with the specification. That’s why a local, experienced engineer is the best choice “For the Life of Your Association.”

Learn more about our Construction Management and Monitoring services.

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