Look Closer. Or Else!

         Older Community Associations Need Better Inspections to Avoid Financial Failure

         Community Associations are not financially prepared for potentially ruinous renovations. Period. Newer communities don’t know it yet. Older ones have found out the hard way—their cash is tight for even routine repairs and for major renovations? Only bank loans and special assessments will dig them out of a very expensive hole if they are lucky. Some will never dig themselves out. Many projects 25 years and older will not have enough money to do the repairs that will eventually be identified. Reserve studies intended to equip homeowner associations with sufficient cash to do repairs are fine as far as they go. But they don’t go far enough. That’s not the fault of the board, management, or the reserve study company.

Blame it on the law. California Civil Code Section 1365.5 requires that community associations conduct a survey every three years to determine which components belong in their reserve-funding program. The statute requires that components found to have a service life of less than 30 years be included. So far, so good. But the statute is flawed. It limits the survey to just those components that are visible and accessible.

The statute reads in part: “At least once every three years, the board of directors shall cause to be conducted a reasonably competent and diligent visual inspection of the accessible areas of the major components that the association is obligated to repair, replace, restore, or maintain…” There is no requirement for inspecting beyond what a simple walking tour of the project will reveal. Nothing mandates invasive testing into components such as wall cavities or roof underlayment that in many cases will exhibit substantial decay.

I don’t need to provide examples. Any good construction manager, contractor, or architect who has been involved in the restoration of older multi-housing projects will attest that hidden damage is the single most budget-busting surprise that can befall a board of directors. Balconies and staircases collapse, interior walls rot, and a roof replacement can find underlayment so badly decayed that the cost of the roof replacement job will go up by 50 to 100% and the reserve account will be wholly inadequate to pay for it.

So you can do a visual survey of the accessible areas of the buildings all day long and you won’t see what is potentially the most costly element of repair that the association will encounter, and if that’s true, what good is the present reserve study to older associations? Rather than equip them with the cash necessary to maintain the buildings, it misleads them into thinking that a surface inspection is all that is necessary and that the results of that inspection identify the outside limits of their liability. Worse, given the age of most associations when these hidden disasters are discovered, they have no time to save for their repair. Damage of this type usually makes itself known during the course of a less extensive repair, or when there is a catastrophic failure of an essential component like a balcony or a staircase.

To remedy this situation, at least for those associations that still have time to accumulate long-term reserves, we propose the following amendment to California Civil Code Section 1365.5 (e):

At least once every three years, the board of directors shall cause to be conducted a reasonably competent and diligent visual inspection of the accessible areas of the major components that the association is obligated to repair, replace, restore, or maintain as part of a study of the reserve account requirements of the common interest development, if the current replacement value of the major components is equal to or greater than one-half of the gross budget of the association, excluding the association's reserve account for that period. For associations that are older than ten years from the date of the close of the first escrow of a lot or unit in the project, this inspection shall also include random testing using investigative methods designed to detect deterioration or decay that is not normally visible or accessible. (New material in red)

The proposed testing is neither especially complicated nor costly but it would absolutely revolutionize reserve studies and render apparent that which is now largely unknown or invisible.  And just like with cancer, early detection will allow not only treatment—i.e. repairing the source of the decay—but will also provide an early warning system that will allow an association to prepare itself financially for the cost of restoration.

The benefit is two-fold, catch it early enough so proper waterproofing or decay prevention can be done as well as identify potential trouble spots in time to save for their repair. Without it, we will invariably wait until it is far too late for these otherwise sensible and timely measures. The language is simple; the potential impact is huge.  Can we wait much longer?