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Blog, Budget, Condominiums, Construction Defect, Development, Engineering, Fannie Mae, High-Rise Buildings, HOA, Homeowner Asociation, Legislation, Special Assessments, Uncategorized

Photo by: M.O. Stevens

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The HOA Detective and his team have been sitting on this story for well over a year, as a result of an agreement with our original source that we would not make public what we know about this latest condominium debacle. Now that the cat is out of the bag, there is no reason to not jump in.

Regular readers of the HOA Detective blog already know what yours truly thinks about highrise condominiums in general, and the sorry statutory state of affairs that engenders lawsuits such as Multnomah County Circuit Cout case 23CV09917, AKA: 

“Cosmopolitan on the Park, a Condominium Owners’ Association vs American Heating, Inc., Andersen Construction Company of Oregon, LLC, Block 15, LLC, Hoyt Street Properties LLC, Johnson Barrow, Inc.et al.”

To say nothing about the inexcusable conditions that allow shoddily built, cheap condominium properties to be developed in the first place.

For those readers who are not familiar with the setting, the 25-story “luxury” condominium building which is the focus of the aforementioned lawsuit is located in the inner city urban renewal area known as The Pearl District, or simply “The Pearl,” by some in-the-know locals.  

The Pearl consists of an 18 x 9 block city block area totaling .78 square miles which is located at the north end of the central business district (CBD) of Portland Oregon. Along with the Old Town area to the east of The Pearl, the general location has a long, colorful and worthy history. Unfortunately, the most recent history of The Pearl itself has been tainted with cheap new condominium developments, along with a handful of repurposed buildings that have been converted to the condominium form of ownership, some of which were almost 100 years old when they were converted. In total there are 35 named condominium developments which have been completed in The Pearl since the mid-1990s.

This combination of cheaply built new and older converted condominium buildings in The Pearl have provided an ongoing source of work for the local attorneys, and litigation support “experts” that specialize in construction defect litigation. Even in those instances where a lawsuit is never filed, the rattling of the legal sword typically sets in motion a flurry of activity by various technical experts, attorneys, insurance companies, managers, etc., ad infinitum. As my later father would have said: “All makes work for the working man.”

In the case of the Cosmopolitan the situation was elevated to the level of a Multnomah County Circuit Court proceeding in March of 2023. A search of the Trellis.law legal intelligence database https://trellis.law/search has revealed the following details about Case Number 23CV09917:   

  • Filing Date of case 23CV09917 was 3/7/2023.
  • The case is categorized as a Tort – Products Liability claim.
  • The case is being heard by Honorable Christopher J. Marshall, of the Multnomah County, OR 4th Judicial District Circuit Court. 
  • The plaintiffs are being represented by the law firm of Sokol Larkin.
  • The nine defendants in the case are being represented by no less than twelve attorneys of record.
  • Among the defendants are Hoyt Street Properties, LLC, and Block 15, LLC, developers of the Cosmopolitan; Andersen Construction Company of Oregon, LLC, and legal entity called Shoestring Valley Holdings, Inc. (I kid you not), which appears to be a closely held sub-entity of the general contractor (ACC of Oregon).

Meanwhile, OregonLive.com reporter Jeff Manning’s reports in Cosmopolitan residents battle over Pearl District condo tower’s $31 million repair bill that “Hoyt Street Properties did not return phone calls. Andersen Construction, the general contractor on the project, could not be reached. No one from the Cosmopolitan’s condo board would speak to a reporter on the record.”

Now you know why we say: Because You’re Buying More Than a Home!

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$31M special assessment bug bites luxury condo

Blog, Budget, Condominiums, Construction Defect, Development, Engineering, Florida Condo Crisis, High-Rise Buildings, HOA, Homeowner Asociation, Special Assessments

Photo by Miami-Dade Fire Rescue Department

Sunday, August 11, 2024 – Ormond Beach, FL – Retired school teacher and administrator Janet Stone of Las Vegas, NV could have avoided this misfortune by conducting proper homeowner association due diligence BEFORE she made the mistake of investing $400K in a 53-year-old Ormond Beach, FL condominium.

https://news.yahoo.com/news/reckoning-coming-floridas-condo-owners-120000653.html

Better yet, she should have purchased a CIDA REPORT™ from CIDAnalytics. If she had, I can assure everyone that Stone would have known what she was getting herself into back in 2021. Furthermore, there is a high probability that she would NOT have purchased a condominium in a 53-year-old, concrete-reinforced building that is within shouting distance of the Atlantic Ocean.

Inquiring minds want to know if Ms. Stone made the fateful decision to purchase her condo by the beach before the collapse of Champlain Tower South Condominium on June 24, 2021, or AFTER.

As bad as things may seem for Janet Stone, the reality is that her predicament is becoming more commonplace, especially in states such as Florida. In an era when more than 70% of the HOA housing inventory is well on the way to being 30 years old (or older), $100K in special assessments are not all that uncommon.  

This is why we say Because You’re Buying MORE Than a Home!

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Photo by Miami-Dade Fire Rescue Department Sunday, August

Blog, Budget, Business, Companies, Condominiums, Development, Florida Condo Crisis, HOA, Homeowner Asociation

With all due respect to the thousands of condominium owners in the state of Florida who may find themselves financially burdened because of Florida’s HB 1021 there is one small voice in the wilderness that has been trying to warn people of the pitfalls of owning a condominium in a “vertical community:” 

DeSantis signs condo bill. Some unit owners are threatening to sue.

That one small voice is CIDAnalytics, the very same small voice that has been trying to warn the home-buying public, and the real estate sales profession that the U.S. would reach a chaotic tipping point in or around the year 2020 at which time a high percentage of the HOAs, and by logical extension, the homes within those HOAs, would be at least 20 years of age. And like a hanging Chad left over from the 2000 Florida election, a high percentage of the homes and HOAs that are at least 20 years, are much older than that!

Inquiring Minds Want to Know

So, what’s the rumpus, inquiring minds want to know? Consider the following:

  • 20 years of age is a significant milestone in the lifecycle of any building, especially buildings that contain residential living space that is oriented in a vertical fashion such as a mid or high-rise condominium building.
  • If that 20-year-old building is located next to salt water, or even reasonably close to a saltwater environment, the issues presented by long-term maintenance, repair, and replacement of certain building elements are magnified exponentially. 
  • If that 20-year-old building is cheaply built, or poorly maintained, these issues are magnified again. 
  • If that building is not 20 years old, but 30 or 40 years old, as was the case with the Champlain Tower South Condominium (CTSC), the situation could become catastrophic overnight, as the world saw with its own eyes in the early morning of June 24, 2021.

A Day of Infamy

Not unlike FDR’s Day of Infamy almost 80 years before it, the dramatic collapse of the CTSC on June 24, 2021, was precipitated by warnings that could have easily prevented the death of 98 people and countless MILLIONS in economic losses, if anyone had been paying attention,

Not unlike the warning signs that precipitated the collapse of the CTSC, the controversial Florida HB 1021, recently signed into law by Gov. Rick DeSantis, is not the first time the state of Florida has attempted to regulate condominiums or the owners of high-rise buildings.  

Nor is the June 2021 CTSC collapse the first time a multi-story building in Florida has collapsed under its own weight! At least one occupied multi-story building in Florida, owned by the USGOV no less, collapsed on August 5, 1974, killing 7 DEA employees in the process, 49 YEARS before the ill-fated CTSC!

After A DEA Building Collapsed In 1974, Engineer Created Recertification Program To Prevent Future Disasters

Continuing this pattern of inaction and ineptitude the Florida legislature DID attempt to regulate multi-story building owners with the passage of a 2008 law that required mandatory inspections of existing buildings greater than 3-stories in height by a licensed structural engineer or architect, but the law was quickly repealed after pressure from developers, condominium associations, and other interested parties that have come to be known as the “condo lobby.”

As a result, the building officials in sleepy little Surfside, FL had little in the way of leverage to force the CTCS Board of Directors to spend the $16M experts had estimated it would cost to repair the building. Instead, foot-dragging ensued after structural engineering firm Morabito Consultants delivered their Structural Field Survey Report to the CTSC Board AND local building officials in October of 2018 – 2-1/2 years before the collapse. 

Subsidence, You Say?

On June 24, 2021, at 3:44 pm, within hours of the collapse, a controversial report was released in which Florida International University (FIU) Professor Shimon Wdowinski confirmed that his research had detected subsidence of the land around the CTSC building between 1993 and 1999.

FIU professor: Collapsed Surfside building showed signs of subsidence in ‘90s

In others, a recognized expert had conducted research 31 years before the collapse that confirmed the land around the CTSC was sinking, and potentially at risk of caving in. 

Again, no action was taken for 31 years regarding the CTSC building itself or any comprehensive regulatory reform designed to prevent such a calamity anywhere in the state of Florida. 

A Hell of a State of Affairs

As my long-since departed grandfather would have said, “That’s a hell of a state of affairs!” And indeed, the old man would have been right. Not only for the events precipitating the CTSC collapse but the current state of the condominium market in the state of Florida. Even worse, is that the same issues will be confronted by condominium owners throughout the U.S., Canada, Mexico, or EVERYWHERE that mid and high-rise condominiums are built. 

BOTTOM LINE

Housing people with limited financial means in high-rise buildings is a VERY bad idea, especially when those same people with limited financial resources are also the stewards of the organization that is responsible for maintaining the building. 

If you are Warren Buffet, Jeff Bezos or an NBA star with a hundred million dollar contract, buy all the condos you want because you CAN afford the true cost of owning this ridiculous form of housing! For everybody else a condo in a mid or high-rise building is a ticking financial time bomb! ESPECIALLY if the building is sitting next to a beach!

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With all due respect to the thousands

Blog, Business, Fannie Mae, Federal Housing Finance Agency Office of the Inspector General, High-Rise Buildings, HOA, Legislation, Special Assessments, Uncategorized

Fannie Mae Condo Blacklist to Be Made Available*

*But not until the bewildered herd is preoccupied with the 2024 Presidential Campaign

The Boston Globe on December 7, 2023: According to this report, Fannie Mae’s so-called Condo Black List will be made “public” sometime in Q3 2024.

More formally known as the “Condo Unavailable Projects and Phases Report,” the list consists of condominium projects in which mortgages secured by units within the development are ineligible for sale to the Federal National Mortgage Association (Fannie Mae).

Although specifics were not provided, the Globe article suggests the Federal Home Loan Mortgage Corporation (Freddie Mac) may well have a list of their own stating only that, “Freddie Mac announced something very similar on Wednesday.”

Inquiring minds can only assume that “something very similar” must be a list of blacklisted condominiums that are not eligible for purchase by Freddie Mac?

For those in the dark about “Fannie and Freddie” or how the residential mortgage market works in the U.S., it is estimated by the National Association of Realtors (NAR) that 70% of all mortgages are resold to investors, with Fannie and Freddie being by far the two most active purchasers of residential mortgages in this secondary mortgage market.

These two 800-lb gorillas are purported to be investor-owned corporations “sponsored” by the USGOV. However, as a result of the Housing and Economic Recovery Act of 2008 both Fannie and Freddie are now under the regulatory eye of the Federal Housing Finance Agency (FHFA) which is a federal agency of the U.S. Government. This translates directly into your hard-earned tax dollars being used to support the activities of Fannie and Freddie to one degree or another.

In our book, that makes Fannie and Freddie agents or subagents of the USGOV, and in turn, organizations that should be subject to the Freedom of Information Act (FOIA).

The fact that Fannie Mae has refused a request from CIDAnalytics to release the blacklist in a letter dated 12/6/2023 after CIDA filed a FOIA request on 11/11/2023, suggests that Fannie Mae is not acting in the best interest of the public; to say nothing of the hapless homeowners who find themselves owning a condominium in one the tainted developments.

Meanwhile, according to the law firm Allcock & Marcus (A&M), a FOIA request was sent to the FHFA and the Office of the Inspector General (OIG) has resulted in a denial from the FHFA and OIG claiming that they have “no record of the list,” suggesting (at the very least) that the oversight by the two mortgage giants FHFA / OIG may be lacking? To summarize:

  • A list of tainted condominium developments that are NOT eligible for secondary mortgages (conventional financing) is maintained by Fannie Mae, and quite likely by Freddie Mac.
  • The list has been kept secret from the public at large since it was created and has only been made available to a select group of law firms, government officials, and lenders.
  • The owners of the condominiums in these developments may or may not have been informed of the fact that their HOA is blacklisted unless they have taken action by asking whether their HOA is on the list.
  • Nor are the Boards that govern these organizations been advised about the situation, as a standard policy of Fannie or Freddie.
  • No evidence suggests that Fannie or Freddie have offered any guidance to Boards impacted by the list regarding how to rectify the situation, and have their Association removed from the list.
  • While the federal watchdogs drag their feet acknowledging that the timeline for releasing the list is in the midst of the 2024 presidential campaign (Q3 2024), the number of HOAs on the list continues to grow.

Consider these sobering facts from The Globe article:

  • There were 1,770 developments on the blacklist when the existence of the same was confirmed in May of 2023.
  • By August of 2023, the number had increased to 2,001 (13% increase).
  • By October of this year, the number totaled 2,306, or an increase of 30% since May 2023.
  • The Sunshine State has earned the dubious “honor” of being first on the list with 34.5% of the 2,306 developments on the list (796 HOAs in total) located in Florida.
  • Tailing up the rear is CA with a distant 10.3% of the developments on the list.
  • Interestingly enough, the sleepy lowland country of South Carolina has posted an embarrassing ranking of 4.6%.

To put the SC percentage in perspective, the state has 12% of the population of CA while the number of black-listed condominiums in the state is 44% of the number in the Golden State.

To put this story in a perspective that makes sense to the average workaday citizen:

  • The fact that there is a blacklist of condominiums should not be a surprise to anyone close to the industry.
  • This includes mortgage lenders such as Fannie and Freddie, RE professionals, the HOA management industry, or the various ancillary service providers that engage the 350K HOA in pursuit of business opportunities.
  • The fact that an influential organization such as Fannie Mae has finally acknowledged the added risks associated with investing in a condominium in certain circumstances, should be viewed as a very positive development.
  • The fact that the existing list has only been shared with a very small handful of industry insiders and well-connected individuals is a very bad thing!
  • The fact that Fannie Mae and/or Freddie Mac is not being forced to disclose the list to anyone who requests a copy immediately, is an unconscionable breach of public duty which raises the issue of a lack of transparency at the highest levels of one of the most important institutions of the USGOV.

What can we learn from this saga?

Answer: Do not buy any condominium without undertaking a comprehensive due diligence inquiry into the operational history and financial condition of the organization.

Why? Because You’re Buying More Than a Home!

FOOTNOTE: If you want to confirm whether your HOA is on the Fannie Mae or Freddie Mac blacklist, please contact the HOA Detective at info@cidanalytics.com or using the Contact form on the HOA Detective website.

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Fannie Mae Condo Blacklist to Be Made

Uncategorized

If you are like most people, you were probably shocked when the Champlain Tower collapsed under its own weight on June 24, 2021, killing 98 people while leading to $1BILLION+ in civil liability damages that are likely to grow before this story is over.

Maybe you asked yourself the question: Is this the first time such a thing has happened in an industrialized country like the United States?

After all, the U.S. is a “civilized” country where we have robust buildings codes, expensive and time-consuming building permit processes, after-construction inspection requirements, and dutiful state and local regulators all operating under the ever-watchful eye of insurance underwriters, whose job is to mitigate the financial risk of insuring the hundreds of thousands of buildings like the Champlain Tower South Condominium.

If you have been thinking along these lines for the last 2-1/2 years, it might surprise you to know that the Champlain Tower debacle is NOT the first or the second such instance of a complete and catastrophic structural failure of a major building in the state of Florida.

According to this report from the international consulting firm [JS Held], the Champlain Tower collapse was at least the THIRD such calamity in Florida since 1974. This doesn’t count buildings that failed due to natural disasters.

These are just the buildings that fell down because they were old, poorly maintained, and irresponsibly supervised by regulators

Even worse is that the state of Florida is not the only place where similar catastrophic building failures have occurred. What makes the Florida situation stand out is that prior to 2021 there had been some attempts to regulate the management of buildings in the form of state-mandated inspections. According to the Held report, in 2008 the Florida legislature enacted a law that would have required the owners of condominium buildings like Champlain Tower to undergo an inspection by a licensed engineer or architect for the specific purpose of assessing the structural integrity of the building.

According to JS Held, the 2008 law was “repealed shortly after enactment.”

Industry sources that I was in contact with back in 2008 have reported that the law was repealed as a result of pressure brought by the so-called “condo lobby” in Florida. A group that was described to me as a “very powerful” force in the Florida state legislature. In the aftermath of the collapse, it has come to light that the ill-fated building had in fact been inspected by a prominent, respected engineering consultant Morabito Consultants almost 20 months before the June 2021 failure of the building.

In our next installment, The HOA Detective™ will revisit the timeline leading up to the Champlain Tower tragedy. In future installments, we examine the history of catastrophic building failures in the

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If you are like most people, you

Blog, Budget, Development, High-Rise Buildings, HOA, Special Assessments, Uncategorized

https://www.thedenverchannel.com/news/local-news/hoa-forecloses-on-more-than-50-green-valley-ranch-homes?_amp=true

For more than a decade the marketing tag-line for CID Analytics (CIDA), the company behind the CIDA REPORT™, has been Because You Are Buying More Than a Home!

The phrase is not intended to be a casual or catchy reference that misleads or incites the audience. When we say Because You Are Buying More Than a Home, we mean it!

Case in point is this story by Micah Smith, a morning reporter for Denver Colorado’s ABC affiliate, Channel 7. If you are a casual reader who has not been initiated into the microcosm of society known as a homeowner association (HOA), you might think this unfortunate situation is an aberration, but the fact is the same story is repeated over and over again in metropolitan areas throughout the United States and even in some semi-rural settings.

It must be stated that neither CIDA or the HOA DETECTIVE™ are attorneys and hence we are not purporting to offer legal advice. That said, anyone who purchases a home in a HOA would be well-advised to become as knowledgeable about the laws in their state as is possible, in an effort not to end up in a situation such as those hapless homeowners featured in Micah Smith’s report.

A good place to start would be to visit a website such as nonlo.com and do some research on the subject of judicial vs. nonjudicial foreclosures and which type of legal process applies in your state.

According to Nolo.com 20 states and the District of Columbia “predominately” use judicial foreclosures, which means a lender, in most instances, will have to file a lawsuit and go through a civil proceeding before the lender may foreclosure on a home. Conversely, in the other 29 states nonjudicial foreclosures are allowed, at least in some instances.

https://www.nolo.com/legal-encyclopedia/chart-judicial-v-nonjudicial-foreclosures.html

As a you might expect, foreclosure laws are not cut and dried whether we are talking about judicial or nonjudicial foreclosures, which speaks to the issue of the importance of buyers becoming educated before they purchase a home in a HOA. Once a buyer becomes a homeowner, the need for education is imperative if you are going to avoid the misfortune of having your dream home subjected to a foreclosure proceeding as a result of a few hundred dollars in unpaid HOA fines.

For the uninitiated, we will say it again: The same level of urgency applies when a buyer is purchasing a condominium or a home in a Planned Development (PUD); whether the home is a detached or free-standing house located in a traditional residential development.  If there is a HOA or condominium association involved, You Are Buying More Than a Home, when you purchase a home in one of these developments.

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https://www.thedenverchannel.com/news/local-news/hoa-forecloses-on-more-than-50-green-valley-ranch-homes?_amp=true For more than a decade the marketing

Special Assessments

Bring up the subject of homeowner associations (HOAs) and the conversation is almost certain to lead to a discussion of special assessments.  

Special Assessment – What is a special assessment, anyway, and why is the subject ever-present when conversations turn to HOAs and condominiums?

The term “special assessment” refers to non-scheduled assessments that the HOA members are required to pay, which are in addition to the planned, regular assessments required to fund the HOA’s financial operations.

In this respect, the distinguishing feature of the special assessment, as opposed to regular HOA assessments, is that they are not planned or anticipated in advance.

For some homeowners a special assessment may or may not be an issue.  A small special assessment that requires the homeowner to make a one-time payment of a few hundred or even a few thousand dollars, may be an annoyance, but it is far from an unmanageable situation.

But what happens if the amount of the special levy (assessment) is large enough to have a significant impact on the personal finances of the homeowner(s)?

 Tipping Point – As of 2021, 75% of the HOAs in the United States are more than fifteen years of age while a high percentage of these aging communities have reached or surpassed the all-important tipping point of twenty years of age, which marks the beginning of the third decade in the lifecycle of the Association.

Year twenty to thirty (third decade) is an important period for any HOA that is responsible for maintaining the exterior of the homes within the community. In particular for many condominiums, which are also responsible for common elements other than the exterior of the building.

The third decade of the HOA lifecycle is important to buyers because at 20 to 25 years, the majority of the exterior building elements will require major maintenance, while some components may require outright replacement, at which point the Association’s reserve planning efforts and possibly the cash reserves will be put to the test, perhaps for the first time in the history of the organization.

It may also be a transformative period for planned developments in which the HOA is responsible for exterior building maintenance or major site improvements and/or recreational amenities.

Simply put, the twenty-year tipping point is the beginning of a transitional period for almost all large HOAs, in particular condominiums. The need for replacement reserves to pay for major maintenance, renewal and replacement of various common elements can no longer be ignored. Associations which have historically kicked the can down the road when it comes to reserve funding will soon find that they have reached the end of the proverbial road.

Special assessments that are required to supplement an underfunded reserve account are common once the HOA is twenty years of age or older. As second and third generation owners and buyers who purchase homes in older HOAs with underfunded reserves are at added risk for special assessments in the future. 

Special Serial Assessments – Buyers who purchase homes in HOAs that have already levied a special assessment may inherit a current liability in those instances where a special serial assessment has been levied and the terms of the board resolution authorizing the special assessment, do not include a due-on-sale clause.

The term “special serial assessment” refers to the fact that the homeowner(s) is allowed to pay the special levy in a series of installments, typically on a monthly basis, until the total assessment levied against the home has been paid. If the special assessment resolution does not require that the balance of the assessment is paid when the sale occurs, the new owner will automatically become liable for the remaining balance of the special assessment.

BOTTOM LINE: if you are going to buy a home located in a homeowner association, whether it is a planned development or a condominium, it is in your best interest to know where things stand before you make the decision to purchase a home in any HOA!  

Because you are buying more than a home!

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Bring up the subject of homeowner associations

Blog, Condominiums, Florida Condo Crisis, High-Rise Buildings, Homeowner Asociation, Special Assessments

In previous posts we have talked about a tipping point for the U.S. housing market and subsequently, many of the homeowner associations in the country.  Back in 2009, when CIDA’s founders introduced the tipping point thesis to the industry dialogue we were referring to the year 2020, at which time the majority of the homeowner associations (HOA) in the United States would be at least 20 years of age.

Adding to the problem of an aging HOA housing inventory is the reality that over the last 25 years the number of “vertical communities” has also increased. The term “vertical communities” is an industry term that refers to residential housing developments in which the dwelling units are stacked on top of each other rather than being situated beside each other. This horizontal layout, either in an attached (common wall) configuration or detached houses as typical in the traditional single-family housing development, is the distinguishing feature between a vertical or a “horizontal community.”

The worst of the vertical living schemes are highrises, or as they are sometimes known in the architecture field (tall buildings.) Since 1980 the number of highrise condominium developments throughout the United States has grown exponentially. The exact definition of a highrise building depends on who you talk to, but in general it can be argued that any building more than 5 stories tall above ground level is unique in terms of more traditional housing schemes such as the 1 to 3 level single family home.

Modern buildings that contain more than 3 levels of enclosed, interior living space will typically contain fire suppression/alarm systems and lift equipment (elevators) that are less common in shorter buildings. Buildings that are taller than 3 levels above ground present maintenance challenges due to the height of the structure. Exterior maintenance of tall buildings is more complicated and expensive, with costs rising exponentially floor by floor.  

At 4 stories and above the issue of access to the exterior of the building will start to impact all forms of building maintenance. As the building increases in height, the cost of every element of facilities maintenance, operation and management becomes more expensive.

From a practical standpoint any building that stands 5 floors above ground or higher, is a unique and very expensive form of housing when it comes to maintenance and renewal of the building elements. In particular with respect to exterior building maintenance and replacement of long-lived building assets such as the roof, windows, rooftop equipment and sub-components of the building enclosure assembly.

The partial collapse of the Champlain Towers Condominium building in Surfside, Florida on June 24, 2021 has focused the world’s attention on the subject of highrise buildings in general and in particular the practice of housing people in tall buildings. Unfortunately, the Champlain Tower is not the only example of a tall building that has been called into question in terms of the stability of the structure or the stewardship of the facility.

As this is written the evacuation of a second multi-floor building in Florida has been ordered by local officials, due to concerns over the safety of the building occupants. Meanwhile, the 58-story Millennium Tower in San Francisco, CA, has been slowly sinking into the ground a mere four blocks from the San Francisco Bay, almost since the construction was completed in 2009.

Florida condo catastrophe raises concerns about San Francisco’s sinking Millennium Tower

In future installments of this series, we will examine the reasons why housing large numbers of people in highrise condominium buildings is a bad idea, and the ways in which the CIDA REPORT™ can help buyers in their due diligence efforts.

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In previous posts we have talked about

Blog, Budget

Budgeting for a homeowner association (HOA) typically involves two elements: 1) Annual operating expenses; 2) Intermittent or non-annual replacement reserve spending.

Annual operating spending in turn, typically includes spending on recurring maintenance that is expected to occur at least once of the course of the typical year.  “Operational” maintenance spending is a separate category of maintenance that differs from the maintenance expenses that are expected to be paid for with the replacement reserves.  Among the tests that is used to determine if a maintenance expense is operational, or a “reserve expense,” is whether the expenditure is a capital vs. non-capital expense.

In its simplest form capital spending is an expenditure of Association funds that is used to acquire or replace an asset that has a useful service life in excess of one year.  A more expanded definition of capital expenditure includes spending to pay for renovation of capital assets, spending that is expected to extend to service life of the asset; and lastly, spending that adds value to the underlying asset. *

Aside from operational maintenance, the annual budget may include any manner of expenditures that are required to effectively carry out the business of the Association.  On paper the budget process should be straightforward and no more difficult than any other annual budgeting exercise.

One of the failings of the management industry over the 50-odd years that “professional” HOA management has evolved into an “industry” is in the lack of standardized from one budget to the next.   Throughout the industry there is lack of standardization in both form and content.  Budget “form” refers to the physical format that is utilized to present the budget data.  Budget “content” refers to the information presented in the budget document and the level of detail that is included in the budget.

In general, the more detailed the budget is, the more transparent the budgeting process will be.  Transparency is important not only for the HOA members, whose hard-earned dollars are required to finance operations, but also for prospective buyers who are not yet obligated to support the Association, and a s a result are free to move on down the road if they find the budgeting practices of a particular HOA to be unacceptable.

The subject of budget for HOAs is a complex subject that is worthy of a book at the very least.  A simple Google search on the topic of budgeting for HOAs will yield any number of titles. In future installments of this series we will review some of the more prominent books on the subject of budgeting for HOAs.  In the meantime, we will continue  to explore the subject from the perspective of buyers who are considering the purchases of a home located in a HOA.

*We will examine the subject of capital spending in a different series but for the purposes of the operational budgeting the discussion will be focused on non-capital operating spending.

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Budgeting for a homeowner association (HOA) typically

Blog

Most people who purchase a home in a homeowner association (HOA) have no idea what a reserve study is, or why it is important. In spite of the critical role reserve planning plays in the long-term sustainability of the organization, many HOAs have never conducted a reserve study and do not maintain a reserve account.

The trend among HOAs tends to follow state law, which seems logical? The problem is that there are less than ten states in which HOAs are required to conduct a reserve and perhaps an equal number that actually require the HOA to fund a replacement reserve account.

Adding to the problem is that most reserve study statutes do not include any enforcement language. As a result, the consequences of noncompliance are minimal. Similarly, the laws that exist in most states are full of loopholes in the form of the usual, “notwithstanding the foregoing” and “including, but limited to the following,” language.

The point is that the laws of most states are minimal in not existent and often times ignored or not enforced. None of this is a good thing if you are a buyer who is looking to purchases a home located in an older HOA because the long-term financial stability of the HOA is directly tied to the level of reserves that have been accumulated by the Association in the first 20-30 years of the HOA’s existence.

The good news is that if you choose to make your home west of the Rocky Mountains, there is a higher than average chance that you may end up residing in a state that does require your HOA to conduct a reserve study since the majority of the states which require a reserve study are located in the western half of the country.

Defining Reserves

Before we go any further, we need to establish exactly what we mean by the term “reserves.” In the lexicon of reserve planning professionals, the term “replacement reserves” refers to funds which are set aside to pay for the maintenance, repair and replacement of specific commonly-owned assets of the HOA. In this context the reserves are not a slush fund that may be used at random to pay for unexpected expenses when they occur.

The American Institute of Certified Public Accountants (AICPA) has taken the position that the use of the term “reserves” when referring to the funds that are earmarked for replacement of commonly owned assets is confusing and potentially misleading as the word has more than one meaning in the context of financial accounting (Audit & Accounting Guide for Common Interest Realty Associations – May 1, 2008).

In the opinion of the AICPA, the reserve fund is more appropriately titled the “fund for major repair and replacement expenses.” It is true that many HOAs maintain reserves for other purposes. As a result, it is a good practice to use the term “replacement reserves” to distinguish from “reserves” that may be set aside for other purposes.

The funds that are sequestered in the replacement reserve fund and reported on the balance sheet as such, should not be used to pay for any expenses other than those for which the reserves have been accumulated, regardless of any restrictions that may be placed on the use of the funds by state law or the governing documents.

The topic of borrowing from the replacement reserve account is a controversial subject that will be covered in a future post on this blog.

In future installments of this series will continue to examine the subject of reserve planning for common-interest developments and the importance of replacement reserves and the planning process for buyers who purchase homes in older HOAs.

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