Friday, November 18, 2011

Be Prepared!

Natural Disasters aren’t the Only Reason for Major Reconstruction of a Community Association

Big Surprises

    Every community association will face a major reconstruction project several times in the life of the development. This may occur because of clearly anticipated problems, such as re-roofing or re-painting, but it can also occur because of completely unanticipated (and unreserved-for) problems such as dry rot repair, soil subsidence, and leaks in windows, siding, and foundations. And yes, it can occur because of a natural disaster. The Davis-Stirling Act only requires that a community association reserve study include those components that visual inspections of accessible areas reveal have a useful life of 30 years or less, and makes no allowance whatsoever for reconstruction after major natural disasters or because of hidden deterioration.

    Even with expected deterioration, surprises can occur with building components that are not “visible or accessible.” What about areas under staircases that sponsor dry rot due to long-term intrusion of water? Framing components under siding that have allowed water to enter slowly for years without any way to get it out except evaporation? Deteriorating concrete walkways or driveways due to the invasion of roots, or soil subsidence due to unconsolidated fill? Failures that occur when balcony railings rot off of their supports? Three people in Antioch, California were severely injured recently when such a railing collapsed.

    None of these building components would be included in the usual reserve study and unless detected by some other means, would not appear in the maintenance budget, yet the association in a typical condominium and in many planned developments, is nevertheless responsible for necessary repairs. This scenario has played out in many associations. Unexpected repairs for which there was no reserve funding. So now you have a collapsed balcony or maybe a lot of rotted siding--something that involves more than just the one failed area--what do you do?

Finding the Right Expert

    The first thing to do is retain the services of someone who can advise the association on the proper means of repair. A general contractor, architect, engineer, or construction manager, each has specific expertise. Which expert will you need? A lot depends on the complexity and extent of the problem. If, for example, you have a failed balcony support beam—something that has rotted due to years of water intrusion—just replacing the failed beam may not be enough. You don't want it to happen again. And, just because only one balcony failed this time doesn’t mean that there aren’t others in the same condition.

    In the example above, you should retain someone who is a pro with waterproofing. Would you choose a building consultant, a contractor, or an architect? Architects are more expensive, but for a very complex waterproofing issue you want someone who has enough skill and understanding to re-design the system to make it watertight. You would not want to simply replace a system that didn’t work. On the other hand, if the basic design is sound, but the materials have failed to do their job, a materials consultant who specializes in waterproof membranes may be the right choice. In our practice, we would start with the architect or an engineer because this particular balcony railing example involves a life-safety issue and because a re-design and/or strength calculations may be necessary.

    If their opinion is that the problem is relatively straightforward such that a re-design of the waterproofing system or a re-calculation of the strength of the system isn't required, and the project simply requires a re-build of the original design, then a building consultant or a general contractor might provide the necessary specifications.     But if the basic structure has proven inadequate for other reasons, such as deflection over time, or failed joists or columns due to inadequately sized beams, for example, a structural engineer might be necessary to do the proper calculations and provide a re-design of the structural components. A few hours of an architect's time will usually be enough to determine the level of expertise required for the project, so if in doubt, hire an architect first. And in any case, if the job is big enough, it may also be wise to consider retaining a construction manager to represent the board throughout the process.

    Bidding the Job

    Once the problem has been analyzed and the plans and specifications for repair have been drawn, the bidding process can start. Normally a list of preferred bidders is prepared. This preference usually comes from past experience or specialty. For political, as well as good business reasons several bids should be obtained. Even if the board or management favors a particular contractor—perhaps because of a successful project performed earlier—it is advisable to obtain at least three bids to demonstrate due diligence in the bidding process. When the bids are opened it is up to the board, with management's recommendations, to choose the right contractor. Price may not be everything. Past performance, specialty, and availability may have important roles to play. All of those factors should be considered before the final choice is made.

    Drafting the Contract

    Your attorney can assist in reviewing and negotiating the contract. There are a lot of considerations, and good contract drafting is a skill and topic all its own. But some of the considerations are: (1) is this a cost-plus or a lump sum contract? (2) Does the owner furnish all plans and specifications (and except responsibility for them) or is there an element of “design-build” in the contract? (3) Are there unconscionable provisions—a provision buried in fine print, or a disclaimer of all express or implied warranties? Courts will often not enforce such provisions. (4) What are the payment provisions? Will there be progress payments or a lump sum at the end of the job? Will the owner hold back (retain) a portion of the payment to be sure that all mechanics liens are cleared? (5) What if the project is delayed? Should there be penalties for that? What about incentives for bringing in the job sooner? (6) How are we to deal with changes--an especially important topic for big jobs where the extent of dry rot, for example, can’t be known at the beginning of the job? (7) Who bears the responsibility for misleading drawings or specifications (see 2 above)? (8) What insurance will the contractor carry? (8) What warranties or indemnity will the contractor be required to provide? (9) What licenses must the contractor have? (10) Will the owner have the right to stop the work and under what circumstances? (11) What dispute resolution provisions will be included in the contract?

     We could go on, but you get the idea. There are many questions that must be asked and which can only be answered in the context of the particular job. Your attorney working with your architect or engineer can fashion a contract that is appropriate for the job.

    Funding the Project

    How will the association pay for all of this, especially if it is a job that no one expected to have to do? Generally speaking there are only a few options. If the job is one for which funds are immediately available, then there is no problem. But what about those surprise projects--or normal projects where hidden damage is discovered mid-way through the job? We discuss natural disaster repair funding elsewhere, but for surprise repairs the association can borrow the money—either from a bank or from itself. It can go to its reserves, but generally funds borrowed from reserves must be repaid within a year. Or it can go to the members for a special, or increased monthly, assessments to pay for it.

    If the proposed special assessment is no more than 5% of the existing budgeted expenses, or the job requires no more than a 20% increase in the regular monthly assessment, the board can simply impose it; otherwise it will have to go to a vote of the members, not usually an easy thing to win. But a big job can quickly outdistance those statutory maximums and if the member vote does not approve the new assessment, recourse to a bank may be the only option. But banks usually don’t lend without adequate security, and in most cases that security will be the association’s income stream. A bank is not likely to take a deed of trust on the club house! And if the income stream is not big enough to service the loan, then we’re back to raising member assessments and a vote if more than a 20% increase is needed.

    If all goes well and the job is funded and completed on time and on budget, terrific! But if the contractor is in breach of his or her contract, because they does not complete the job; or is proceeding so slowly that it will not be completed on time; or because work is poor and has been rejected by the inspectors or the construction manager, it may be time to consider termination of the contract. But before that happens, consult with the association's attorney to be sure that the contract provisions are followed so that the association will not itself be in breach.

    Next to damage from a natural disaster, a big, unexpected construction job is probably one of the most disruptive events in an association's life. Some associations never recover. This can be avoided with early inspections of all building components, whether visible and accessible or not, so that failure can be anticipated in enough time to adequately reserve for the costs of repair. Like cancer, early detection offers the best chance for a cure.

1 comment:

  1. Great post, with some great information. Be sure to include green facility management in your next contract as well!