The High Cost of Deferred Capital Repairs – A Primer for Community Association Board Members of Condos, Townhomes, HOA’s and Cooperatives
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Proactively Plan Capital Improvements Or Deal with Deferred Maintenance Disasters
A Primer for Community Association Board Members and Property Management Professionals
One of the most typical scenarios that board members face while serving on the board is the issue of deferred maintenance and capital repairs. Since capital repairs often cost large sums of money, it is understandable why many board members are more willing to defer the repairs versus spending the large amounts of money necessary to make the proper repairs.
By deferring the maintenance and repairs of capital projects, the board members are creating larger problems for the future board members and the association. The costs of these projects typically go up every year and in some cases the cost go up exponentially as is typically the case with tuckpointing and masonry repairs.
Below are the best ways to address capital projects whether they are deferred or not and avoid causing larger future problems for the association.
- Get a reserve study/capital plan in place. The first step is always to get a clearer picture of the types of projects that need to take place and how much they will cost. If the association has the budget for it, it is best to obtain a reserve study. For associations that can’t afford a reserve study, the board should get a capital plan put together.
- Identify an action plan. Once the board has the information at hand, the board and/or capital plan committee should sit down and create a plan of action. The plan should identify which projects will be addressed short term (within the next 12-24 months) and those that can be addressed in the long term. The reserve study and capital plan should provide that information. However, the board ultimately decides on the prioritization of the capital projects as well as when they want the projects to be completed.
- Put in Place a Funding Plan. This is probably the most difficult part of the process. How will the association pay for the capital projects? Funding is generally the reason why capital projects are deferred. However, the fact of the matter is that deferring the capital projects will only make matters worse and it never makes the situation better. So, the best scenario is for the board members to roll up their sleeves and decide how to pay for the projects. The funds will typically come from reserves, a special assessment, a loan/special assessment or a combination of these funding sources.
- Special Assessment or Loan/Special Assessment. Should the association raise the funds through a straight special assessment, or should the association obtain a loan and approve a special assessment? The answer depends on how quickly the projects need to take place and how fast the funds need to be available to pay for the projects. For example, if the roof of a 15- unit association is in extremely bad shape (the roof needs to be replaced within 12 months) and the replacement cost is $200,000, the answer is to get a bank loan.
This will allow the association to obtain the funds quickly and have the roof replaced before there is more damaged to the upper floor units. In this scenario, the association could likely have the roof replaced within 6 months of starting the process. The alternative would be to pass a special assessment that could take several years to collect and in this scenario the damage to upper floor units would end up costing the association much more money and create many more headaches. - Discuss the Options in a Townhall Meeting. Once the board has come up with a few scenarios, the board should call a “townhall” or community wide meeting and discuss this situation with all the homeowners. It is obviously extremely important for the board to present the information to the homeowners and get their feedback and opinions. Ultimately, the board makes the final decision but politically speaking it is best for the board to attempt to gain some consensus among all residents.
- Approve the Funding Plans at a Board Meeting. The next step in the process is for the board to approve the funding plans whether it is passing a special assessment or obtaining a loan and passing a special assessment.
- Vet and Hire the Qualified Vendors. This is one of the most critical steps in the process of undertaking capital improvements and has the highest risk of failure. Should the board hire the least expensive vendor in an effort to save money? Should the board hire one of the vendors who is related to one of the homeowners? Should the board hire a vendor that the management company recommends or should the board shop independently of the management company’s recommendations? Regardless of the approach, the only vendors that should be hired are the ones that will provide the best value for the best price that have a proven reputation.
- Assign a Project Manager. This is a vital step in the process that is often overlooked and creates big problems once the project(s) is underway. Make sure a qualified person is identified to act as the project manager and communicates between the vendors, the board and the homeowners. This person should also ensure that the project(s) is completed properly and should have the ability to identify and punch list items that needs to be resolved by the vendor(s) before they are issued final payments.
- Start and Complete the Projects. The time has now come for the capital project(s) to take place. The funding is in place. The project manager has been identified and the vendors are ready to perform the work. Make sure the homeowners and board members are kept up to date with the progress of the project(s) and let them know that their feedback is important.
- Don’t Defer Capital Planning and Capital Funding Going Forward. The best way to avoid deferred maintenance and capital improvement headaches is to make sure that the association strictly follows a reserve study or a capital plan. One way to ensure this is to add a capital planning line item to every board meeting agenda and discuss these issues during each board meeting.
SUMMARY
Capital planning and capital funding is not an easy task. These types of projects are typically very expensive, and some board members are uneasy with the duties involved in passing special assessments, raising the assessments or approving loans to fund the capital projects. Unfortunately, avoiding the necessary obligations necessary to address capital improvements in a timely manner creates future problems that often makes the situation much worse for the homeowners and the association.
