What You See is (Not Necessarily) What You Get!

“Visual and Accessible” is not enough: Let’s amend the Davis-Stirling Act to delete Limitations on Reserve Study Inspections

It’s the responsibility of every California community association to commission a reserve study every three years. These studies are used to calculate the amount that each association will need to save for future building maintenance and repairs. It is critical to the financial health of every association that this funding projection be as accurate as possible. The Davis-Stirling Act governs these studies. California Civil Code Section 1365.5(e) states 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 as part of a study of the reserve account requirements of the common interest development...”

Note that this requirement is limited to a “visual” inspection of the “accessible areas of the major components.” But the assessment responsibility of the board of directors is not similarly limited. Civil Code Section 1366(a) says that the board of directors shall assess as necessary to meet the requirements of the governing documents and the Civil Code. But what are those requirements exactly? And how does a board know for sure, if only the visible and accessible areas of the project are investigated?

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Predictions of the Future in an Uncertain Present

Common interest developments are reliant on member assessments to provide long-term maintenance and repair. Since the association’s governing documents and state statutes give directors and members control over the amounts raised, funding decisions tend to be more political than practical with the result being that critical funding is often deferred to future residents and boards who are unable or unwilling to handle this unexpected obligation. If the problem isn't solved, many communities will be unable to discharge their responsibilities and will become obsolete in the coming decades. With that in mind, just what does the future hold for common interest communities? What do prospective buyers need to know about the state of the association's funding? What options are available to attorneys, association leaders and legislators? Read this new publication to find out.

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What Happens When a Community Association Fails?

Does the experience in Florida presage the future for California?

We have written many times about the difficult future of the housing industry and that of common interest developments in particular.[1] Underfunded reserves have given way to underfunded operating budgets as the economic crisis deepens and community associations are finding layoffs and foreclosures beginning to impact their ability to pay for even daily operations as assessment payments dry up. What we once predicted as a future problem has been escalated to the present by the economic downturn.

This problem is not confined to California. Other states are experiencing the effects of the economy on community associations. In Florida, the problem is epidemic. In a recent article Jim Loney, writing for Reuters.com, tells the story like this:

“Florida's condominium and homeowners' associations are facing what experts call a trickle-down disaster from the property crisis. Dozens and perhaps hundreds of condo buildings have budget shortfalls as thousands of owners, under water on their mortgages or in foreclosure, stop paying monthly fees.

"I call it a death spiral," Miami Beach city commissioner Jerry Libbin said. "It's a catastrophe in the making." [2]

Community associations rely on the monthly cash flow from assessments to pay virtually all of their expenses. In most cases, they have no other source of income. When that income is seriously curtailed, the ability of the board of directors to protect and maintain the project is in jeopardy. Borrowing from reserves works for a while, assuming there are reserves in the first place. But that lasts only so long as does the available cash, and then what? We’ve written about this situation recently, and it leaves boards in the position of making some very tough decisions.[3] Landscape or pool maintenance? Painting or insurance premiums? Management or the water bill? When we get down to life-safety issues, like paying for electricity, security guards or the sewer bill, its time to re-evaluate the very survival of the association. Loney shows us that the problems in Florida are similar: “Rust pokes through the peeling paint on the railings, pest control has been curtailed and the palm trees are no longer being fertilized at the 1940s-era Miami Modern condominium building in Miami Beach.”

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[1] Berding, “The Uncertain Future of Community Associations,” 1999; 2005.

[2] Loney, Jim, “U.S. property bust threatens condo ‘death spiral;’” Reuters.com, April 3, 2009.

[3] Berding, “Your Association is Broke—Who do you pay when the cash runs out?” CondoIssues.com, December 3, 2008.