Liabilities and Risks of Ignoring Issues: An Engineer’s Perspective

Question:

A recent reserve study identified a number of repairs/replacements that should be addressed in the community. However, while the reserve is being funded on a monthly basis, there isn’t enough in the current reserve fund for the repairs/replacements. With inflation and knowing that owners won’t be happy, the board decided not to increase condo fees or approve a special assessment and instead will wait to make the repairs/replacements when the money is available in the reserve fund.

Since the reserve study has indicated that these repairs/replacements should be addressed, how might the board’s decision impact our liability should one of these items fail and/or cause damage to the community or someone is injured by our failure to address the repair/replacement?

Answer:

Unfortunately, underfunded condo or Home Owners Association (HOA) reserves are a common occurrence in New England, especially in communities with buildings greater than 25 years old. Most New England states do not have specific requirements for the level of needed reserves nor even a requirement for a full reserve study. States’ HOA and condo statues do place an obligation of fiduciary duty on boards and their members. They must act in good faith and be prudent and faithful in furthering the association’s best interests. A current reserve study and a properly funded reserve fund are often key to protecting a community’s long term financial health and provide good risk management.

Commissioning a reserve study by the board is a good first step in planning for the future. Problems can arise when the reserve study reports underfunding the correction of current common asset deficiencies. In an ideal world, the board recognizes the importance of these reported deficiencies, initiates a plan to raise the needed funds, and orders repairs. But in reality, circumstances may occur when the board feels the community cannot afford an increase in assessments or will oppose a special assessment to fund the needed improvements. It is at this point the board should be aware it may be incurring significant known and unknown risks and liabilities.

Reputation and Building Risks

Some of these risks and liabilities fall in the “legal” category while others in the “quality of life” or “financial” category. That is, if a member of the community or visitor were to be harmed by tripping on an unrepaired sidewalk hazard or a broken deck component, litigation could ensue. Leaving aside the potential success of this type of litigation or the protection of board of directors by liability insurance, the long-term effect could be damage to the community’s reputation. One of the most important duties of the board is the protection of the owners’ net worth. If the community is seen by the real estate market as a dangerous or risky place to live, its future average unit sale value will be reduced. This situation will signal two red flags to potential buyers: First, it will raise doubts about the latent condition of other community assets; and second, it will underscore the significance of the underfunding and future need of special assessments or other emergency measures for future owners. These circumstances could impact the timing of future unit sales.

Most professional property managers will agree ignoring important repairs or putting off needed improvements typically will only increase the damage and costs over time. Not only will the community’s curb appeal be diminished but so will the desirability of banks providing unit loans or refinancing. Responsible communities recognize it is in their own best interests and will not kick the can down the road but face their current and future fiscal needs. Banks and real estate agents often review reserve studies to understand their investment risks. Having the need for future repairs and improvement projects is not the problem. The problem is not having a plan to carry out or fund the repairs and improvements.

Written by Jack Carr, P.E., R.S., LEED-AP, Senior Consultant Criterium Engineers
Published in Condo Media