Disaster!

No Reserves. No Insurance.  

What’s Left if a Natural Disaster Destroys a Community Association?

       Hurricane Sandy attacks the East Coast of the United States. We have  seen horrific earthquake disasters in New Zealand and Japan. There has been widespread loss of life and destruction of infrastructure and buildings. California has a history of devastating earthquakes as well—the San Francisco, San Fernando, Northridge, and Loma Prieta earthquakes, among others. Heavy rains have created landslides, mudslides and shoreline erosion all over California, damaging homes and property, some of it in community associations. Wildfires in the past decade have destroyed hundreds of homes. Rising sea levels are threatening to flood low-lying developments, including many common interest developments. 

Hate Rules Enforcement by your Community Association?

 Get your Neighbors to Vote it out!

Read any pundit’s blog about homeowner associations and you will see a recurring theme: boards of directors over-zealously enforce the rules. True or not, I’m calling the pundits’ bluff: If you don’t like rules enforcement by your homeowner’s association then round up your neighbors and vote it out. I don’t mean dissolve the association entirely, just limit its authority to enforce certain rules and leave that enforcement to the individual owners who care the most. This has two benefits: it leaves certain disputes between individual owners to be resolved just by those owners; and it relieves the board of directors and the association from having to act as a cop.

Berkeley Proposes Tougher Balcony Standards

PROPOSED STANDARDS INCLUDE DISCLOSURES BY COMMUNITY ASSOCIATIONS

Inside Bay Area reports:

BERKELEY -- City planning and building officials are proposing a package of safety-related urgency ordinances in response to the June 16 collapse of a fifth-floor balcony at a downtown apartment complex that killed six young adults and injured seven more. A city councilman, meanwhile, is proposing tougher building and inspection standards for balconies.

The City Council is scheduled to consider the proposals on July 14.

An inspection by Berkeley building official Alex Roshal and Senior Building Inspector Steve Messinger on June 16 found the cantilevered joists of the balcony, at the Library Gardens at 2020 Kittredge St., completely shorn off about 16 to 20 inches from the exterior building face, with a torn waterproofing membrane hanging over the joist ends, according to a report from Roshal. The deck joist ends protruding from the exterior wall appeared to be severely dry-rotted, the report stated.

The rotted wood beams that held a balcony jut out from side of the residential apartment building on Kittredge Street in Berkeley on June 17, 2015. Six people died and seven others were seriously injured when the balcony collapsed. (Laura A. Oda/Bay Area News Group)

Planning and Development Director Eric Angstadt proposes adding several sections to the city Building Code.

Death in Staircase Collapse--Dry Rot Suspected

One man was killed on July 3, 2015 when a staircase at an apartment building in Folsom, Ca collapsed due to dry rot in the structure.

http://www.sacbee.com/news/local/article26678224.html

 Read: The Perils of Hidden Damage...Click Here to Download

   

The Berkeley Balcony Tragedy: More Inspections Aren't Enough

In the early morning of June 16, 2015, in Berkeley, California, the lives of 6 young people were snuffed out because the balcony they were standing on collapsed. Building failures happen all the time, but the press and government largely ignore them because nobody died.  With these six tragic deaths (and serious injury to seven others) the press is now all over it. We have daily reports of experts opining on the cause (rot caused by moisture intrusion into the wood beams supporting the balcony.) We have interviews with Berkeley city officials (there were numerous inspections of this 8-year old building but none of the waterproofing.) The opinions page trumpets that inspections must increase to prevent another tragic event. Yes there should be more inspections by municipalities and building owners, but it won’t be enough.

Association Reserve Analysis

2014 Community Association Financial Survey

Introduction

In 1996, Berding|Weil published “Latent Liabilities” a treatise which explored the long-term impact of underfunding of the reserve accounts of community associations. Some of the data came from our clients, and some from Levy, Erlanger & Company. We predicted that most multi-family community associations were severely underfunded for long-term maintenance and repairs and we opined this issue could lead to serious deferral of maintenance obligations and ultimately a shortened service life for these projects. Subsequent financial surveys by Levy, Erlanger & Company, with our assistance, have shown this problem to be systemic—affecting most community associations. This year’s survey finds community associations to have only 57% of the funds on hand they should have. This shows that the problem is not getting better—in 1993 that figure was 60%.

Since “Latent Liabilities” was published, we  further documented this problem in “The Uncertain Future of Community Associations” and similar treatises.   Community associations are slowly running out of cash. Borrowing from reserves for regular, and newly discovered maintenance issues has trended upward, and when the reserves run out, special assessments and borrowing from banks increase. The fundamental cause of this cash shortage is the inability or unwillingness of boards of directors to increase assessments sufficiently to keep up with inflation coupled with the discovery of needed repairs not anticipated by the reserve budget.

When are Community Association Reserves like Public Employee Pensions?

The following excerpts appeared in a 
February 9, 2014 newspaper editorial:

       Kudos to Gov. Jerry Brown for demanding last week that they stop kicking debt further down the road. “…they have shortfalls -- debt we are now passing on to future generations because of past failures to properly fund the system. …The longer we postpone paying it off, the greater the cost, as anyone with a credit card should understand. "No one likes to pay more …but ignoring their true costs for...years will only burden the system and cost more in the long run." That means the money…previously collected was insufficient. Fixing the actuarial assumptions creates new unfunded liabilities -- debt that must now be paid off with increased (assessments.) It also means they should be collecting larger payments in the future to cover  (future needs.) The board has tried to keep (assessments) low, leaving more funds available for other (expenses.) But at each step, the board has softened the landing by minimizing or postponing the impact of the changes. As a result, (associations) continue to under fund (reserves) and stare at more (assessment) increases -- and greater interest payments -- in years to come. As the Governor notes, it’s pay now or pay more later.

              Sound familiar? Maybe the community association reserve funding crisis is finally getting noticed by California? Not quite. These excerpts are from an article on the public employee pension crisis with a few edits. You can see the entire article at this link. But the similarity between these two funding crisis is striking. Artificially keeping owner assessments lower than necessary to adequately fund reserves is largely political and is gradually creating an enormous funding gap that will devastate future generations of homeowners. Reserve accounts that rely on static funding and incomplete investigations will encounter significant shortfalls that can only be made up by large special assessments from those owners unlucky enough to be the last ones standing when the debt comes due.