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By Michele Molnar
AS SURELY AS the clock ticks and the calendar marches forward, our country's housing stock—and the infrastructure that connects and supports it—is slowly failing. Community associations confront routine maintenance issues on a regular basis, but what about the potential surprises that lurk beneath roads, within walls, under roofs and under ground? That's the challenge facing hundreds of boards as their properties age—some more predictably and gracefully than others.
ONE OF THE EARLY condominium associations in Los Angeles is confronting this issue now, says Clifford J. Treese, CIRMS, founder and president of Association Information Services in Pleasanton, Calif. Built in the mid-1970s, the property is experiencing some plumbing problems, and Treese was consulted about risk management and insurance. Many homeowners there are in their mid-70s, which only exacerbates the problem. It's an older population dealing with aging buildings and infrastructure.
“You could tell these owners were deathly afraid of what having to repipe that building would mean—taking out bathrooms and kitchens and staying elsewhere while the work was done," says Treese, past president of CAI and the Foundation for Community Association Research.
Paying an average assessment of $1,500 to $3,000 a month, they were perhaps less concerned about the cost and more concerned about the disruption. Still, the price of putting off action would be high and disruption perhaps inevitable. “It's a cascading issue. If you have water damage— even in single-family detached homes—it's a major problem for insurers. Your premium goes up, deductibles go up and a separate high deductible can be established for water damage," explains Treese.
No matter what, aging infrastructure translates into additional, often unanticipated costs, and not everyone can afford the consequences as well as a wealthy L.A. crowd. Managers and professionals who have grappled with the challenges of such surprises advise boards to expect infrastructure issues, prepare for them and be proactive and transparent about communicating them to your community.
Associations also should plan to finance infrastructure improvements in a way everyone can tolerate. Reserve studies, which associations use to anticipate longer-term major repairs or replacement of assets, should be updated annually. “People hate bad news, but they despise surprises," says Marshall Fant, CMCA, president of The Management Trust- Northwest in Portland, Ore.
Even with the best planning, communities can be almost unavoidably blindsided by an infrastructure inadequacy. Such was the case of a New Jersey association that discovered its common chimneys, which had been built to code, actually posed a carbon monoxide hazard. Alarmed by this potential health threat, a homeowner within the development contacted the state Department of Community Affairs.
Now the association is juggling the need to make the necessary safety repairs to line the chimneys while working to satisfy state officials, says Jennifer A. Loheac, esq., a shareholder for Becker & Poliakoff in Morristown, N.J., who is handling the matter.
Clearly, what was considered an acceptable construction practice or product in one era can prove inadequate in another, like the evolution from lead and steel pipes to copper and polyvinyl chloride, or PVC. The effects of living with outdated materials become more apparent as structures age.
Updating and renovating aging infrastructure isn't easy, but there are many success stories, including one at Peachtree Lofts condominiums in midtown Atlanta.
The eight-story former federal office building that dates back to 1952 was converted in the mid-1990s to accommodate visiting Olympic teams. It then became 210 residential units above two commercial properties. Over time, the building's deteriorating brick façade posed a safety hazard, the roof needed attention, the windows and frames required replacement, concrete sunshades had to be sealed and two new HVAC systems needed to be installed, among other things.
As a result, in 2009, owners at the 57-year-old condominium needed to decide whether to self-assess an average of $25,000 per unit to achieve a $5.4 million renovation. Surprisingly, the special assessment passed on the first try—a credit to the board's outstanding leadership, says David Hill, CMCA, AMS, PCAM, director of management development for Access Management Group in Roswell, Ga.
Hill explains the vote was especially surprising because previous boards had a contentious history. “The way boards are supposed to work, it's not like Jerry Springer," says Hill.
In the past, an obstructionist group fought changes, partially on the grounds that they would jeopardize the building's chance of being listed on the National Register of Historic Places. Beyond that, “people (did not want) to spend more money; some were resentful of the situation they found themselves in and felt, 'Why should we have to pay for something that future residents will benefit from?' " Hill says.
But this board used a different strategy from others at Peachtree. Soon after elections, it issued a one-page document that set boundaries and expectations about how homeowners would successfully interact with managers and the concierge service.
The board's professional approach helped gain buy-in from the 30-somethings who make up the majority of the building's residents. The board brought attorneys and insurance specialists to monthly meetings to explain to residents what would happen if, for instance, a brick fell off the façade and hit someone. Hill says it helped for homeowners to hear messages like: “It's $2 million if (the brick) hits just one person, and $5 million to fix the problem." Engineers also created visuals to help homeowners see what the building could look like.
“There was a certain vibe, a theme, a consistency. A third-party expert came in delivering messages. The new board took on $100,000 projects here and there to prove they could be trusted to handle things, and people began to see actual improvements that hadn't happened in years," Hill says. “The board was respectful and transparent."
Finding a carrot helped gain approval for the project. When the board held a meeting with designers to discuss ideas for changing the industrial-looking lobby into something more welcoming for visitors and prospective buyers, 30 people attended. “The biggie was the lobby," explains Hill. “We couldn't be all utilitarian, or we would have failed."
The board mounted a winning education campaign. Communications were frequent, detailed and professional. Owners' opinions were solicited via online surveys, which gave residents choices and helped the board refine its plans to maximize the likelihood of a successful special assessment vote.
One of the challenges of any aging infrastructure project is what happens when the “unseen" becomes seen as construction begins. At Peachtree, construction contingencies were allotted at 10 percent for the roof, where conditions were best known, to 20 percent for the brick façade, where conditions were least known. Another 17 percent was set aside as overhead. This amount covered independent oversight, testing by third parties and a homeowner nonpayment contingency based on prevailing delinquency rates at the time.
The project was successfully completed in 2011.
In 2008, The March Group asked more than 1,000 community associations about their infrastructure and reserve study use. Ninety percent said they don't have funds for infrastructure repairs or replacement.
“It's going to be a very grim picture for a lot of associations out there that have neglected to (set aside) a penny a day, a dime a week. Either somebody didn't inform them in the early stages that they should be doing it, or the board decided not to because they didn't know that their fiduciary duty was eventually going to force them to repair, replace and refurbish these items," says Nico F. March, senior vice president of The March Group of Wells Fargo Advisors in San Diego.
“Too many boards still rob Peter to pay Paul," he says. “They will not put reserves away for a rainy day. (They're) hoping that the inevitable never happens."
That admonition is reverberating around the country with some boards better equipped than others to withstand the financial concussion. Fant in Portland says the recession and slow recovery led to more delinquencies and foreclosures, creating shortages of discretionary funds. One of The Management Trust clients, for instance, has reduced annual budget increases from 10 percent to 4 percent, deferring almost all reserve projects.
The upside of the downturn is that “contractors and vendors are hungry and give better pricing, so it can be a good time to get work done at lower costs," says Fant.
When Stephen Wright, cmca, ams, pcam, took the general manager post for Watergate at Landmark in Alexandria, Va., close to five years ago, he discovered a unit on the top floor of one of the four 18-story high rises, constructed in 1976, had pieces of concrete roof falling through the ceiling.
“The general philosophy had been, 'The leak isn't that bad ... let's patch it, and we'll talk about doing the roof next year.' That perpetuates itself. Next year never comes. What originally probably would have been a $400,000 roof replacement wound up costing $1.5 million," says Wright.
By the time the association actually got to it, the concrete underneath the roof membrane had deteriorated so badly that holes had to be cut in the roof of the units—complete, full-depth patches that were 15 feet by 25 feet, skylight size, in some cases. Beyond that, the community needed brick and mortar work on the façade, HVAC equipment replacement for all hallways, waterproofing of expansion joints and numerous garage repairs.
“The problem that was most evident was, with all that had to be done, there was no money in the reserves to do the work. There was a couple of million in reserves for $20 million worth of work," Wright says.
The board briefly considered a special assessment, but decided residents wouldn't be able to afford it. It then pursued a $26 million loan, which was approved by members in August 2008—just as the economic downturn hit.
The association consulted five lending institutions, all of which wanted to do business with the community but declined. Finally, one bank agreed to lend Watergate at Landmark $17 million for 15 years until the community proved it could handle the full loan. A second $5 million, 10-year loan has been approved, and the vote authorizes another $4 million if needed. Wright explains assessments have increased only minimally each of the past four years to pay for the principal and interest on the loan.
LIVING WITH DISRUPTION
Most of the 4,000 residents in the 36-acre gated Watergate at Landmark understand and appreciate the need for the disruptions to daily life caused by ongoing construction, although virtually everyone is weary. “Euphemistically, we refer to it as 'the war zone,' with cranes, trucks and concrete mixers on the property constantly and parking restrictions because of space requirements," says Wright.
At Palmetto Dunes Property Owners Association in Hilton Head Island, S.C., accounting for potential disruption has been a must. The community is studying whether to replace or overlay 23 miles of road—built in the early 1960s without the 4-to-8 inch stone base most roads have for drainage. Overlaying the road would cost about $600,000 and rebuilding $1.3 million.
Bob Sharp, CMCA, LSM, PCAM, chief operating officer, believes the community's finance and infrastructure committees will recommend to the board that it rebuild the roads, a project that would last 25 to 30 years, compared to 15 for the overlay. Funding will come from reserves.
Sharp says the first priority is the nearly 2-mile, two-lane main corridor into the community—traveled by 200,000 visitors each summer. This first phase of the project, set to begin this year, can't be done during the high season.
Despite the size and scope of the association's roads, which cost $50,000 to $100,000 a year to patch, Sharp says paying for a more permanent solution will be easily tolerated. “We have a very active reserve study. We've done two of those and taken it in-house and have our own software. We look at it every year," he says. “And we have a very forward- thinking board."
A strong board is key to success.
“It knows how to make decisions that the community will support because it has nothing to hide from the owners. A strong board will be totally honest about the status of the community's assets and what will be done to protect the future of everyone's investments," says Sharp. cg
Michele Molnar is a freelance writer in the Washington, D.C., area.