Many of us have read and watched the news stories about the recent tragic collapse of the condominium building in Surfside, Florida. As rescue workers continue to look for missing residents, the questions on everyone’s mind are:
- How did this happen?
- Who is to blame?
Current information reveals that the condo association’s board was aware of potentially serious structural problems with the building since at least 2018 and that they were in the process of approving a $15M project and special assessment to address the various repair issues when the collapse happened. Clearly, the board knew that there were problems that needed to be addressed, but did they know that it was this bad or that a building collapse could be the result? Whether they did or not remains to be seen, and the investigation process will take some time before we have any answers as to what actually caused the collapse. Yet, lawsuits have already been filed against the association and its board seeking to hold them responsible for the damage, injuries and loss of life that resulted.
Champlain Towers South is not the first nor the last association to deal with deferred maintenance or the negative consequences of a failure to timely address maintenance issues. While this tragic event is an extreme example of what can happen when a property is not properly maintained and repaired, deferred maintenance and inadequate savings are common issues that we see quite often. While it is sometimes the case that an association’s board is unaware of maintenance issues, due to homeowners not reporting them or the board not having the right kind of inspections done, it is more common that the board is aware of the problems, at least to some extent, but that they are not being addressed, usually for financial reasons.
The vast majority of associations that I have dealt with over my career are not adequately funded to pay for the maintenance, repair and replacement of all portions of the property for which they are responsible. Very few associations are truly fully funded in their replacement reserve account. This is often due to a failure of the developer to pay or collect assessments or to fix the assessments in an amount that is sufficient to cover both the operating and reserve needs, but can also result from a failure of subsequent boards to understand how much is needed and/or to increase the assessments over the years to cover the rising cost of maintenance and repairs as well as saving for future needs, or a combination of the above. Some well-meaning but short-sighted boards will even proudly announce that they have not increased the assessment amount in many years, even though this failure to do so is likely a breach of their fiduciary duty to the association and its members. In general, annual assessments should increase every year by at least enough to cover the increase in the cost of the products and services that the association needs to keep operating. If the board finds itself with an operating surplus at the end of the year because the expenses were less than budgeted, that surplus should be put in the replacement reserve account to help cover future replacement costs. After all, nobody has ever complained that an association’s reserve account balance was too high. But owners will complain when the association has a budget deficit and/or has to cut out needed repair and maintenance projects or push them down the road because there are not sufficient funds to pay for them.
While the board of directors is the body responsible for ensuring the association’s financial health, the members of the Association often play a large role in the Association’s financial condition. Obviously, if members are not paying their assessments, that can have a negative impact on the financial health of the association. But members can have an impact in other ways as well. Many association documents require a vote of the owners in order to increase the annual assessments at all or more than a small percentage over the prior year and may also require a vote of the members to approve a special assessment. If the members are either apathetic and do not respond, or they intentionally vote down an increase or special assessment because they don’t want to pay more, not only are they allowing their own selfish needs to get in the way of the betterment of the entire community, but they are putting themselves and all their neighbors at risk when they tie the association’s hands and prevent it from being able to properly maintain the property.
An association facing a huge repair bill may be able to obtain a loan from a bank to pay the construction costs up front. However, the association must be able to provide the lender adequate security for the loan. Many lenders will require the association to levy a special assessment specifically for the repayment of the loan. If the assessment payments are spread out over the loan term, this might be a more viable option for many owners as opposed to having to come up with a large sum in a short period of time, but if an association’s governing documents require owner approval for a special assessment, it can run into the same problems with owners not approving the assessment that is a requirement under the loan terms.
Another option might be for the association to amend its documents to change the approval requirements for an increase in assessments and/or a special assessment. Recent changes in the Minnesota Common Interest Ownership Act (“MCIOA”) have made it easier for associations to amend their documents despite owner apathy, but owners can still vote against and defeat a proposed amendment if they are inclined to do so.
So, what can associations do to ensure that this kind of tragedy does not happen at their properties?
- First and foremost, boards need to make preventative maintenance a high priority. Buildings that are properly maintained and repaired on a regular basis will last longer and require fewer major unexpected repairs.
- Secondly, but just as important, is the need to be properly funding the replacement reserve account and ensuring that sufficient funds are available to pay for repairs and replacements when they are needed. Having a professional reserve study done and updated regularly is a great tool to use in this regard, but boards need to follow the recommendations in the reserve study and do what is necessary to plan for the long-term health and safety of the property and the residents.
- Education is also key here to make sure both the board and the owners understand the association’s responsibility as well as what could happen if the property is allowed to fall into a state of disrepair. If the board is running into road blocks because owners will not approve assessments or other changes that are needed in order to ensure that the association is able to properly maintain the property, they should consult with an attorney who can advise them of their options and help them navigate this difficult situation.
If you have any questions about dealing with deferred maintenance or any other matter affecting your association, please feel free to contact Phaedra Howard at [email protected]