Reserve Study Terminology

Richard Thompson, President
Association of Professional Reserve Analysts

• COMPONENT: The elements which form the foundation for the reserve study. Reserve components consist of those that are maintained and repaired by the association.
• COMPONENT INVENTORY: The task of identifying and measuring reserve components by visual observation, review of association files and blueprints, and input from knowledgeable experts.
• CONDITION ASSESSMENT: The task of evaluating the current condition of the component based on observed or reported characteristics.
• DEFICIT: An actual (or projected) reserve balance less than the fully funded balance. The opposite would be a surplus.
• FINANCIAL ANALYSIS: The portion of a reserve study where current status of the reserves (measured as cash or percent funded) and a recommended reserve contribution rate (Reserve Funding Plan) are derived, and the projected reserve income and expense over time is presented.
• FULLY FUNDED: When the actual or projected reserve balance is 100 percent funded.
• FULLY FUNDED BALANCE: An indicator against which the actual or projected reserve balance can be compared. This number is calculated for each component, then totaled.
• FUNDING GOALS: There are several approaches to reserve funding:
• BASELINE FUNDING: Establishing a reserve funding goal of keeping the reserve cash balance above zero.
• FULLY FUNDING: Setting a reserve funding goal of attaining and maintaining reserves at or near 100 percent funded.
• STATUTORY FUNDING: Establishing a reserve funding goal of setting aside the specific minimum amount of reserves required by local statues.
• THRESHOLD FUNDING: Establishing a reserve funding goal of keeping the reserve balance above a specified dollar or percent funded amount. Depending on the threshold, this may be more or less conservative than “fully funding”.
• FUNDING PLAN: The savings plan followed to funds adequate to pay for anticipated reserve expenditures.
• FUNDING PRINCIPLES: In the development of a funding plan, the following principles are to be considered:

* Sufficient funds when required
* Evenly distributed contributions over the years
* Fiscally responsible

• PERCENT FUNDED: The ratio at a particular point of time of the actual reserve balance to the fully funded balance expressed as a percentage.
• PHYSICAL ANALYSIS: The portion of the reserve study where the component inventory, condition assessment, and life and valuation estimate tasks are performed.
• REMAINING USEFUL LIFE: The estimated number of years that a reserve component will serve its intended function.
• REPLACEMENT COST: The cost of replacing, repairing, or restoring a Reserve Component to its original functional condition. The current replacement cost would be the cost to replace, repair, or restore the component during that particular year.
• RESERVE BALANCE: Actual or projected funds as of a particular point in time that the association has identified for use to defray the future repair or replacement of those major components which the association is obligated to maintain. Also known as reserves, reserve accounts, cash reserves.
• RESERVE STUDY ANALYST: A professional that prepares reserve studies.
• RESERVE STUDY: A reserve study identifies the major components for which the association has maintenance responsibility that have a useful life of 3 to 30 years. Each component is assessed for condition, useful life, and cost of replacement. With this information, a 30-year maintenance schedule and funding plan is produced. This 30-year plan provides current and future boards with a roadmap to responsibly maintain the community’s assets. Following the plan ensures that all members pay their fair share of these major expenses. Special assessments become a thing of the past!
• SPECIAL ASSESSMENT: An assessment levied on the members of an association in addition to regular assessments. Special assessments are often regulated by governing documents or local statutes.
• SURPLUS: An actual or projected reserve balance greater than the fully funded balance. See deficit.
• USEFUL LIFE: The estimated time in years that a reserve component can be expected to serve its intended function when new if properly installed and maintained.

The Reserve Study Process—A Snapshot

One of the most valuable planning processes a homeowner association can use is the reserve study, yet many condominium and HOA boards overlook this important tool. A reserve study charts a long-range course for the board to follow to best manage the assets in its care. Since the community’s assets drive the value of the members’ homes, this is no small matter. If the board fails to adequately plan for maintenance of the community’s assets, members will suffer both financially and aesthetically.

A reserve study analyzes repair and replacement needs like roofing, concrete repair, and painting that happen periodically and provides a funding plan for accumulating money to perform this work when it is needed. It is more a budgeting function than a construction or building analysis, although there is an element of that. The study is usually based on visual observations, as opposed to forensic testing (tearing walls and roofs apart to see what’s underneath). The reserve study assumes that regular and adequate maintenance is being done to prevent premature repairs or replacements.

There are several parts to the reserve study process:

1. All building and grounds components that are maintained by the community and have useful lives of 3 to 30 years, the recommended projection period for a reserve study, are identified,

2. The condition of each component is carefully evaluated and an estimated remaining useful life applied to each plus the useful life when the asset is new.

3. The repair or replacement cost of each component is estimated based on current bids or reliable construction cost estimating sources (available from RS Means, Craftsman Book Company, and other similar sources). The information for each component is applied to the formula: Cost ÷ Remaining Useful Life = Money Needed Yearly for Reserve Fund. Totaling the results for each component will produce how much money should be reserved yearly. For example, if roof replacement costs $100,000 and the remaining useful life is 25 years, then $4,000 is required yearly to pay for the work when it’s needed. Doing this procedure for each component will show the total money needed yearly to fund reserves. Each year, the reserve fund needs to be adjusted by area inflation and the interest earned on the invested reserve funds.

4. Since the recommended projection is 30 years, the inflation rate and yield on invested funds at the time of the study need to be factored in to ensure the fund keeps pace with reality. Adding inflation will increase future year costs and interest yield on invested funds will reduce the amount of owner contributions.

Funding

A reserve study with no funds is a car with no gas: It will go nowhere! The reserve study should provide a recommended funding plan, which calls for regular and adequate contributions to pay for future repairs without the need of special assessments. For condominium communities, this is accomplished monthly. For HOAs with few assets, reserve contributions can be quarterly or annual, whatever the regular assessment (fees, dues) schedule is. If each member contributes a portion monthly, all members that own there along the 30-year timeline will only contribute an amount attributable to their time of ownership. And all members will pay. This is the fair approach to reserve funding.

How much does a Reserve Study Cost?

If the HOA has a qualified volunteer experienced in construction cost estimating, the cost is nothing. However, there are clear advantages to having a knowledgeable reserve study professional perform the work. Aside from the expertise, knowledge of local contractors, and current costs, there is no conflict of interest that HOA members have. Costs to perform a reserve study vary based on the size of the HOA, the number of components, and the time needed for field work and report compilation. The initial reserve study costs the most since it involves time to gather the component data. Reserve study costs range from $1500 to $4000 for HOAs up to 100 units (although extraordinary circumstances, number of components, or high cost locations can drive cost higher). Large communities with many reserve assets can expect to pay tens of thousands of dollars. If there are particular problems like dry rot, structural, soil, or drainage, an engineering study should be incorporated with the reserve study. Recommended annual updates are much less costly since they involve only tweaking the initial study.

Reserves – The Experts Speak

by FLCAJ Editorial Staff

Reserves are part of your investment in your community. When you buy a home in a condominium or HOA, there is an expectation that the common property is adequately maintained and in usable condition. One expects that the walls, roofing, pavement, and wooden structures are sound and that there will be no large special assessment in the initial phase of ownership. Conversely, when a home is sold, part of the sale price is the appropriate share of the reserve pool that will be used for future repairs.

Reserves are a very important consideration in community association living in Florida because the sun and salt work together to require a significant amount of maintenance and repairs. When you consider large communities comprised of hundreds of units housed in many buildings, the necessary support funds can be staggering.

There are legal considerations as well. The State of Florida requires annual budgets and that “the budget shall include reserve accounts for capital expenditures and deferred maintenance. These accounts shall include, but are not limited to, roof replacement, building painting, and pavement resurfacing, regardless of the amount of deferred maintenance expense or replacement cost, and for any other item for which the deferred maintenance expense or replacement cost exceeds $10,000,” FL Statute §718.112(2)(f). (See sidebar)

In an effort to provide answers for commonly asked questions, FLCAJ recently spoke with three reserve specialists in Florida and invited them to share their insights on this important topic. Those who accepted the offer were John R. Frazer, RS, J.R. Frazer Reserves & Appraisal Services; Stephen F. Brubaker, RS, CCI, CAI, Brubaker Robins North America; and Bob Hassol, PCAM, Florida Regional Director, Reserve Advisor’s, Inc.

1) Funding Reserves: What information needs to be considered in developing a funding plan?

Frazer: The first step in developing a reserve study funding plan is to create a needs analysis. It is important to determine a complete and accurate inventory of all association property that requires reserve funding. The inventory list should include all components needed to comply with state statutes. It is necessary to quantify the number of units for each component and their estimated replacement cost. It is also essential to conduct a physical inspection to detail the useful life and remaining useful life for each component. These steps are the first part in creating a funding plan and are essential to develop the needs analysis portion of a reserve study.

Part two in developing a funding plan is the financial analysis. This includes examination of the association’s existing reserve fund balances and a comparison of the existing fund levels to the financial fund levels established in the needs analysis portion of a reserve study. During the financial analysis it is important to create a funding plan that will cover all anticipated reserve fund expenditures over a 20 to 30 year funding plan. The analysis must include funding any deficits and establishing the new annual reserve budget dollar amount needed to meet future reserve expenditures.

Brubaker: A reserve analysis is designed to provide a recommended funding plan, including regular and adequate contribution levels to fund future expenses. First and foremost, the legal requirements regarding reserve analysis and funding for the particular property type must be established. These requirements may be statutory, detailed within the property’s specific documents, or both. Next, an accurate reserve analysis and reserve funding plan must consider the actual reserve funds in hand at the beginning of the fiscal year under consideration. Actual historical installation/replacement dates are also necessary before a proper reserve analysis can be completed. This background information must be provided to the reserve analyst by the association. It is then the reserve analyst’s responsibility to determine the factual physical counts (squares of roof, square yards of pavement, linear feet of fencing, furniture inventories, etc.) so that accurate repair and/or replacement costs can be estimated. Applying market supported useful life parameters and $/unit repair and/or replacement costs to a property’s factual physical counts forms the basis for the funding plan. The condition of each reserve component must be carefully evaluated to determine a realistic remaining useful life. Particular attention should also be paid by the reserve analyst to recognize each association’s individual reserve funding goals, so that the study is not only compliant with applicable legal requirements, but that it also serves the association’s needs as an important management tool.

Hassol: In addition to listing the items to be included, consideration has to be given to their remaining useful life, replacement cost in local labor and material as well as the rates of inflation rates of return on invested dollars.

2) Investment of Reserve Funds: What are the investment options? What are the advantages and disadvantages of each option?

Brubaker: Most associations place their reserve funds in fairly conservative investments, such as certificates of deposit and/or mutual funds. It is not uncommon for larger associations to use the services of professional investment advisors to insure the maximum yield for their reserve funds.

Frazer: All associations must be careful in selecting reserve fund investment options and should consider only conservative investments that will not put their reserve funds at risk.

Hassol: While investment options are infinite, the prudent association errs on the side of fiscal conservatism. Laddered CD’s and Government Bonds are probably the only logical choices and have the advantage of safety without downside risk. Any other option while potentially higher in reward, has the problem of downside risk.

3) Problems of Inadequate Reserves: What financial problems can come about as a result of inadequate reserve funds? What is the effect of misuse of reserve funds on the community association?

Frazer: Inadequate reserve funds can be the result of lack of any reserve contributions, or less than 100 percent reserve funding contributions, misuse of existing reserve funds, or inaccurate information in establishing the needs analysis. Many unit owners are reluctant to see their monthly association fees rise and do not fully understand the necessity for reserve funding. As a result, often, the association board feels pressured and does not collect adequate reserve funds. This is not an uncommon situation, but it does produce long term serious problems. In most cases where inadequate reserves are being collected, the owners will also have to pay substantial special assessments to subsidize the reserve funds in order to pay the bills for reserve expenditures. These scenarios lead to collecting reserves and collecting special assessments.

Brubaker: Improper funding of reserves will almost certainly result in the need to levy a special assessment(s), or require the borrowing of funds from an outside lender. In addition, a prudent buyer will want to know the status of an association’s reserve funds prior to purchase. If there are inadequate reserve funds, the market value of the units may be negatively affected. Misuse of funds earmarked for specific reserve expenses will eventually lead to problems with inadequate reserves, and the possibility of legal liabilities.

Hassol: The simple financial problem of lack of funds and consequent special assessments are the problem from both of these activities. The non-financial risk is delay in doing necessary work which will result in a community with a deteriorating infrastructure. It should be added that misuse carries the additional risk of lawsuits, controversy, and loss of faith towards their board of directors by the homeowners

4) Qualification of a reserve study provider: What qualifications should a good reserve study provider have? What are the advantages of having a professional do the work versus having one of the board members prepare the study? How can we protect ourselves against fraudulent people who claim to be reserve study providers but are not? Is there a website we can visit or a department we can call that gives accreditation to reserve study providers?

Frazer: Every association should seek the services of a professional reserve study provider. The reserve providers qualifications should include a professional affiliation which actively seeks to provide high levels of performance with continuous inspection of the providers work product, quality reports, and integrity of the reserve specialist.

One advantage of selecting a professional reserve provider versus the board members will be the objective point of view, which means a lot when determining financial demands on an association. The professional will be better equipped to establish accurate long term financial planning, which is an essential component of the study.

Any association seeking a professional reserve study provider should start with a professional organization. I would recommend Community Association Institute, a nationally recognized group which provides education to owners of residential property, association board members, property managers, reserve specialists, attorneys, accountants, and management companies. You can access their web site at www.caionline.org.

Brubaker: To ensure a professionally prepared reserve analysis, make sure that the reserve study provider carries a professional designation(s) recognizing his or her proficiency in preparing reserve studies. The Reserve Specialist (RS) designation, awarded by the Community Associations Institute (www.caionline.com), is one such designation. These designations are awarded to reserve study professionals, who, through years of specialized experience, can help ensure that your association prepares its reserve budget as accurately as possible. Designated reserve study providers are bound by professional codes of ethics to provide unbiased reserve analyses. Having an unbiased reserve analysis completed by a professional reserve study provider ensures that the fiduciary responsibility of the property manager, board of directors, etc. has been met and insulates the association from potential liability if their reserve figures are deemed fraudulent or misleading. As is with any service professional, exercise due diligence in choosing a reserve study provider; a designated reserve study professional will provide proof of their professional affiliations, have a lengthy business history, samples of their products, as well as local references with contacts and phone numbers.

Hassol: With all due respect to the well meaning board member, the only advantage I can think of would be a present day cost savings versus a potential future liability. Industry standards have been established by both CAI and APRA (Association of Professional Reserve Analysts). Both have professional designations—RS (Reserve Specialist) for CAI and PRA (Professional Reserve Analyst) by APRA. Reserve Advisor’s is proud to say that more of our staff members hold the RS and PRA designations than any other firm. The CAI website is caionline.org and APRA is apra-usa.com

5) The Reserve Study: What are the elements to the Reserve Study? What makes a Reserve Study a Reserve Study?

Brubaker: A reserve study has two primary analyses: the physical analysis and the financial analysis. The physical analysis consists of a component study that identifies the major repair and/or replacement components of a property, their estimated current and future repair and/or replacement costs and their actual, effective, and remaining useful lives. The financial analysis is a funding study that incorporates information from the component study into a budget plan to fund the anticipated future expenditures. This study is designed to insure that as planned reserve expenditures fall due, adequate monies have been accumulated to fund them.

Hassol: The elements are simply: Listing, quantifying, examining, analyzing, pricing and development of a spreadsheet that incorporates all of these elements. Professionalism and 20 to 30 year projections complete the picture. Specifically, the CAI standard defines Reserve Study as:

A. Physical Analysis

-Component Inventory

-Condition Assessment

-Estimated Useful Life, Remaining Useful Life and Replacement

Cost

B. Financial Analysis

-Fund Status

-Funding Plan

6) Percentage of Reserves Funded: What is the importance of this percentage? Should the goal be to get it to 100 percent—why or why not? How can I get it to 100 percent?

Hassol: Funding is always an issue and while 100 percent is desirable, it would depend on the community. Personally, I would rather say funding should be decided after full disclosure. A fully informed community will be able to decide what its comfort level is. I have seen communities that were very content with special assessments as the funding vehicle based on their circumstances. Others insist on 100 percent and still others are comfortable with some number in between. Full disclosure is the key.

Brubaker: In order to ensure that adequate monies are accumulated for planned reserve expenditures, the association should fund their reserve budgets at 100 percent. From association to association, the funding goal may change (sometimes widely). Some associations choose to aggressively fund reserves at or near 100 percent funding, while others choose to waive reserve funding altogether. Others choose to fund at some predetermined percentage (50%, 75%, etc.). Unfortunately, some associations choose to fund their reserves based on a palatable monthly, quarterly, or annual dues increase, rather than on a professional prepared reserve analysis. This shortsighted philosophy will eventually come back to bite the association. A reserve budget funded at less than 100 percent means that at some point, additional monies will be required to either “catch up” to 100 percent funding or pay for an under-funded reserve component that is due at that time. You can pay now, or pay later…This is where the services of a professional reserve study provider can be so valuable.

7) How do we (community association) update our reserve plan? Comments on preventive maintenance and adjusting for the rate of inflation. Should the reserve plan be updated annually or not?

Frazer:Every community association goes through an annual budget process. The process includes budgeting for the normal every day expenses in the operations budget plus the non-annual occurring expenses associated with reserves in the reserve budget. It is important to update both the operations and the reserve budget annually. By preparing a proper budget with adequate funding levels, the association can enjoy a healthy financial position to meet most association financial needs.

Brubaker: The reserve budget should be updated on an annual basis, reflecting current replacement costs for all included reserve components, adjusted remaining useful life estimates, and the new fiscal year’s beginning reserve fund balances. Each year, careful consideration must be given to all facets of the reserve analysis. While the factual data (size of the roofs, linear feet of balcony railings, number of elevators, etc.), may remain the same, it is still the fiduciary responsibility of the association to provide its members with a proper look at the status of their reserves so that informed decisions can be made.

Hassol: Updates are the key but annually is overkill. A fully built out community with no additions to the list of reserve items should consider a review of the numbers for cost and inflation every three years and a site visit is usually not necessary. I would suggest a site visit every other update to be sure there have not been changes to remaining useful life figures.

8) Line Item Account vs. Pooled Account: What are the advantages and disadvantages of both types of accounts?

Brubaker: The Line Item Account (or Straight Line Method, or Component Funding Analysis Method) is preferable for some associations due to the fact that it is relatively easy to prepare and understand. Prior to December 2002, this type of analysis was mandated by the State of Florida for condominiums, cooperatives, and timeshare condominiums, and was also employed by homeowner’s associations, property owner’s associations, churches, clubs, etc. Many associations who continue to estimate their reserves using this methodology do so simply because it is the way they have always done it, which provides a level of comfort. It is still recognized as an acceptable means of estimating reserves and is still commonly utilized. In December 2002, changes in Florida Statute 718 allowed condominium associations to opt for the Cash Flow Analysis, or Pooled Account methodology for estimating full reserve funding in lieu of the Line Item Account method. The Cash Flow Analysis is a method of calculating reserve contributions where contributions to the reserve funds are designed to offset the variable annual expenditures from the reserve fund. Unlike the Component Funding Analysis, which is essentially a snapshot for one fiscal year, the Cash Flow Analysis is a long term reserve analysis that considers such factors as interest income, construction cost and/or inflationary increases for individual components, and an association’s preference with regard to minimum reserve fund balances during the study period. In many cases, conversion to the Cash Flow Analysis method provides full reserve funding at a lower annual contribution rate compared to the Component Funding Analysis method. More and more associations are adopting this methodology on that basis. Neither methodology is inherently “better” than the other, or more credible. The reserve study preparer still has to input proper current and future cost and remaining useful life parameters.

Frazer: Recently, Florida statutes have given condominium associations an option to the restricted category reserve funding. The restricted category funding does not allow the association to use funds from one restricted reserve fund category, for any line item component in a different restricted reserve fund category. This sometimes creates a problem when dollars may be needed to make necessary repairs to a vital component when there are insufficient funds available in that reserve category to pay for the expense.

The new pool of funds account still has all the same reserve components and reserve categories as in the past, but instead of having dedicated roof dollars or painting dollars or paving dollars or any category dollars all of the reserve funds are contained in a single pool of funds. This allows great flexibility in the way the association can use the funds should a sudden unexpected expense arise such as elevator failure or hurricane damage. All reserve funds in a pool account are available for any of the reserve components in any reserve category.

Hassol: Leaving out all the confusion and misunderstanding that exist, the simple fact is that pooling will result in lower annual contributions and a lower initial cost for a proper reserve study.

9) What if we need to borrow from our reserve fund to pay for a shortfall in our operating budget?

Hassol: This is a no-no in Florida and should not be considered without a meeting with a homeowner vote.

Frazer: I recommend an association consult with an attorney if they are considering borrowing from the reserve funds.

Brubaker: Be sure that prior to borrowing monies from any fund to pay for a shortfall in any other fund, whether it be from reserve funds to operating funds, etc., that you consult with a professional property manager, accountant, and/or attorney to be sure that proper legal protocol has been observed

10) What are the applicable laws and recent changes in Florida concerning reserves?

Hassol: When we come to law, I leave comments to the attorneys.

Frazer: One statute that most associations can take advantage of is the way the state allows associations to invest association funds. Community associations in Florida can commingle operating dollars and reserve dollars together for investment purposes. This would allow the association to enter into a larger certificate of deposit with a better rate of interest than if invested in two smaller individual certificates.

An attorney or reserve professional should always be consulted if there is a question or doubt, as there are many laws concerning reserves, and they can change fairly frequently.

by Kathy Danforth

The standard Florida forecast of sun is facing its annual potential interruption by extreme wind and water events. Being spared a major hurricane for a period of years, plus the reading of statistics and probabilities with a little weariness thrown in, can lull associations and homeowners into thinking, “Sure, I’m still ready.” However, if you are in the hurricane’s path, you may have to deal with a full-force storm—before, during, and after—and that means that preparation must be 100 percent each year. The consolation that statistically it is unlikely that you will have to deal with devastation each year, unfortunately, will not diminish the effects when a tropical cyclone does hit.

The National Oceanic and Atmospheric Administration (NOAA) has recorded patterns over the last century, which give us the advantage of seeing the big picture. For the Atlantic Basin, the peak of hurricane season is mid-August until late October. The estimated return period of a category three or greater hurricane is highest, at five to seven years, for most of South Florida. The northeast coast of the state and the northeast coast of the Panhandle can expect to see the least frequent coastal landfalls, averaging 12–16 years apart.

Using this year’s conditions with modeling developed from prior years’ data, Colorado State University meteorologists, in April, issued their prognostication for this coming season (with updates available June 3 and August 2 at hurricane.atmos.colostate.edu/Forecasts). “We anticipate an above average Atlantic basin hurricane season due to the combination of an anomalously warm tropical Atlantic and a relatively low likelihood of El Niño,” concludes Philip Klotzback and William Gray. The probability for at least one major hurricane rated category three or higher reaching land is predicted to be 48 percent for the U.S. East Coast, including the Florida peninsula, compared to an average chance of 31 percent over the last 100 years. The chance of a major hurricane making landfall on the Gulf Coast from the Panhandle to Brownsville is 47 percent, compared to a 30-percent average chance. The probability for hurricane landfall by county is available at www.e-transit.org/hurricane/welcome.html by following the first listed link and selecting your county. While probabilities are dealing with the uncertainty in when a hurricane will come, the certainty is that preparation is essential.

The hazards presented by a hurricane include storm surge, inland flooding, sustained high winds, tornadoes, and rip currents…occurring primarily in a downpour. Storm surge can combine with high tide to raise water levels by 20 feet, and with the pounding wave action can be the most destructive part of a storm. Multiple variables determine how the wind and pressure build storm surge, but the relatively shallow continental shelf off the Louisiana shoreline contributed to the 25–28 foot water levels brought about by Katrina in that deadly 2005 storm. Inland flooding is highly variable depending on storm size and movement, as well as rate of rainfall and other conditions, making a lack of flooding in the past no guarantee that a site is immune. A majority of hurricanes also spawn at least one tornado, in addition to the pummeling winds that are expected.

With these prospects, looking at the possible end results can help a community decide what policies, requirements, and preparation they want in place to prevent damage and facilitate recovery. How can water and wind damage be minimized? If buildings are damaged, utilities are out, roads are impassable, water has risen, and general assistance is unlikely, if not impossible, because everyone is also in distress, how will residents live, communicate, and rebuild? Boards are responsible for the common areas and matters of mutual concern and find that their guidance is vital to all members of the community, especially those with special needs.

A Community Emergency Response Team is a huge asset in planning, preparing, and responding to a disaster such as a hurricane. Training usually includes seven sessions, one evening per week, addressing disaster preparedness, fire suppression, medical response (two parts), light search and rescue, disaster psychology and team organization, and a concluding course review and disaster simulation. The concept of training civilians to meet immediate needs was introduced by the Los Angeles Fire Department in 1985. Federal Emergency Management Agency (FEMA) explains, “Following a major disaster, first responders who provide fire and medical services will not be able to meet the demand for these services. Factors such as number of victims, communication failures, and road blockages will prevent people from accessing emergency services they have come to expect at a moment’s notice through 911. People will have to rely on each other for help in order to meet their immediate life-saving and life-sustaining needs.”

Pre-hurricane season events will include many of the following:

Plan for people: Obtain keys to units, secure contact information for updates and ensuring owners are safe, and identify vulnerable persons who may need assistance in evacuation.

Evacuation: Determine emergency shelters and evacuation routes, taking into account changes, roadwork, and the increase in traffic. Identify where pets may go.

Grounds: Trim landscaping to minimize wind damage. Ensure pumps and drainage are in good condition.

Power: Obtain or check generator if you will want that capability to recharge phones, run computers, and run water removal operations before power is restored. Stock fuel, as degraded fuel can damage equipment, and determine if you have a supplier that has their own generator and will be operational when needed.

Insurance: Review your policy and photograph or video the property with date identification. Let all residents know that they should maintain all receipts for any additional living expenses to include in an insurance claim.

Records: Secure all important papers/copies in waterproof containers off site. This will include financial records, employee records, insurance policies, all association-related documents, contact information for residents and all vendors, and contracts. Computer records should have hard drive back-up.

Finances: Establish a line of credit or emergency reserves to begin remediation before insurance funds are available. Checks should be available to use if banks or credit systems are not functional.

Restoration contracts: Establish contracts for significant anticipated needs. The need will be urgent, the contractors busy, and scammers or inexperienced opportunists on the move. Kia Ricchi, aka the contractress, advises, “Ideally, managers should work with contractors who are familiar with their buildings. To respond effectively after a disaster, these parties should have a response plan that details how the systems—electric, HVAC, etc.—will be brought back online and in what order. The plan should also address how the parties will communicate after a disaster. Once all the details are ironed out, the parties may want to draft and sign a maintenance agreement, which provides for (a) response time to outages, (b) clear identification of overtime and emergency service billing costs, and (c) overall mission to keep service interruption to a minimum.”

Develop plans for preparation: Identify and assign tasks and a timeline to prepare the property. Everyone, including employees, will have personal responsibilities to attend to as well as association concerns. Community Advocacy Network (CAN) guidelines (www.canfl.com/documents/KGBHG2011.pdf) advise, “If the association has employees, the association’s policies and procedures with regard to those employees’ duties regarding storm preparation and storm clean-up need to be reviewed with legal counsel to ensure compliance with all local and federal ordinances.” Plans should include securing items, which could become airborne, shutters and window protection, diagrams of all utility shut-off points, etc., plus final clearing of gutters, adjustment of any water levels if applicable, and clearing/marking of drains. Note any changes from previous years: does the new pool furniture actually fit in the old location? Are there new employees, new equipment, or any residents/employees that are no longer serving that adjustments need to be made for? Residents should develop plans for their responsibilities.

Emergency Supplies: Prepare a list and gather or re-stock supplies using emergency kit lists as a basis. Sources such as www.ready.gov/basic-disaster-supplies-kit or the Hurricane Survival Guide at www.pbcgov.com/dem/hurricane/ can prod one’s memory. General needs will be food—non-perishable, with necessary opening/serving gadgetry—water for consumption and sanitation, communication items, vital paperwork, money, first aid supplies and medicines, clothing, bedding, tools, personal hygiene items—including moist towelettes—cleaning supplies, flashlight with batteries, and special supplies for pets or children. If you stockpile your emergency supplies, verify that no one has absconded with the batteries or desirable food items during the year, and replenish any food, fuel, etc. that have passed their expiration date. The question as to what happens after the “Best By” date is best saved for another time—though except for infant formula, quality rather than safety is generally the issue.

As a storm begins its approach, the time to implement personal and community preparation kicks in—recharging of electronics, filling gas tanks, laundry, filling the bathtub with water, setting refrigeration to the lowest setting, and other tasks. No one wants to waste time doing and undoing jobs, but to prepare and evacuate in a timely manner, starting early is essential. Roads will fill, store shelves will empty, and others will be pre-occupied with their own concerns.

After the storm, the first matter of business is attending to people: ascertaining their location and attending to any injured or needy. Damage should be documented by photographs and video prior to any remediation. Prevent further damage from water, erosion, mold growth, or looting as much as possible; this is where the keys to all homes are a must.

CAN advises, “The Florida Legislature wisely recognized that volunteer boards could benefit from some guidance and the relaxing of certain procedures in order to better handle a storm situation. Unfortunately, those ‘emergency powers’ were conferred only to condominium boards and not HOA boards.” Section 718.1265 of the Condominium Act provides for variation from normal procedures in response to damage caused by an event for which the Governor has declared a state of emergency.

CAN advises, “Before making arrangements to remove storm debris other than life threatening or access obstructing, contact your city to see what plan of action it has for debris removal.”

However, Donna Berger, Esquire, Executive Director of CAN, has seen that associations may not receive equitable support. She notes, “While we fought with FEMA over its failure to assist community associations dealing with debris and other damages after Wilma, Sandy has proven that FEMA still has not received the message that people living in shared ownership communities should be as entitled to federal disaster relief as their neighbors living outside of associations. It is shameful that FEMA continues to make this harmful distinction in terms of who gets their help and who does not.”

As repair priorities are set and communication with residents and contractors proceeds, it is important to contact your attorney and insurance agent. CAN advises, “Resist the natural urge to use a public adjuster to shepherd your claim without first discussing advantages and disadvantages with legal counsel.” Contracts, releases, and financing should all be reviewed by your lawyer despite the urgent situation.

CAN guidelines also caution, “Be aware that most damage is not apparent to the eye or to anyone other than trained experts…[who] should be consulted to determine the extent of battering your community suffered.”

Berger observes, “Complacency is an enemy of effective preparation and successful recovery.” Let this hurricane season once again be a time to prepare more, and repair and regret less.

Whoever heard of such a thing? That a manager should inspect the trusses of a clubhouse roof or that a manager should know the condition of the trusses before its purchase by the association? Are you kidding? And you are going to sue me because the roof caved in, and you think it’s my fault? What the heck? How could I have known about the condition of the roof at closing? Are you serious? But as you know, just about anybody can sue anybody these days.

Thankfully, in this case, the lawsuit was dropped against this manager, in large part because of his detailed, monthly manager’s reports! Those reports revealed that month after month, the manager reported to the appropriate committees and board that there were issues with the walls, doors, and ceilings inside the clubhouse. Month after month, the various committees and board delayed in acting. Eventually, the roof caved in leaving the clubhouse unusable.

Other factors for the dismissal of the lawsuit against the manager were the facts that he was not a licensed general contractor, roofer, or structural engineer and was not qualified to make roof or truss inspections. Nor was the manager contractually obligated to make such inspections. A huge factor was the failure of the board of directors to require and receive a pre-purchase inspection report under seal of an architect or structural engineer.

The opposing counsel and court were apprised of the duties and responsibilities of a Florida community association manager by an expert witness, and the lawsuit was dismissed. So, let’s review some of the comments and observations in that expert witness report.

The expert witness’ report began with the definition of community association management as found in Chapter 468, Florida Statutes. It was followed by the Florida community association manager Code of Ethics contained in the Florida Administrative Code Rules.

License Requirements

A community association manager or a community association management firm is licensed to provide management services for associations. Section 468.431(2), Florida Statutes, states, “Community association management” means any of the following practices requiring substantial specialized knowledge, judgment, and managerial skill when done for remuneration and when the association or associations served contain more than 10 units or have an annual budget or budgets in excess of $100,000: controlling or disbursing funds of a community association, preparing budgets or other financial documents for a community association, assisting in the noticing or conduct of community association meetings, and coordinating maintenance for the residential development and other day-to-day services involved with the operation of a community association. A person who performs clerical or ministerial functions under the direct supervision and control of a licensed manager or who is charged only with performing the maintenance of a community association and who does not assist in any of the management services described in this subsection is not required to be licensed under this part.

Code of Ethics (as of 1/31/2014)

Community association managers must adhere to a code of ethics that is contained in Rule 61E14-2.001, Standards of Professional Conduct, the violations of which constitute gross misconduct or gross negligence and can be subject to disciplinary measures. Several relevant portions are as follows:

Rule 61E14-2.001(1)(a) states: The word “control” … shall specifically exclude a licensee’s relationship with a community association, its board of directors, any committee thereof or any member of any board or committee.

Rule 61E14-2.001(3), states: A licensee shall undertake to perform only those community association management services, which he or it can reasonably expect to complete with professional competence.

Rule 61E14-2.001(8)(b) states (in part): A licensee shall not perform, agree to perform, or hold himself or itself out as being qualified to perform any services, which, under the laws of the State of Florida or of the United States, are to be performed only by a person or entity holding the requisite license for same, unless the licensee also holds such license or registration….

Unauthorized Practice of Law

The 1996 Court decision, The Florida Bar re Advisory Opinion Activities of Community Association Managers, places certain limitations on managers’ duties. That Court found the following activities to be the unlicensed practice of law; particular emphasis is placed on items E and F in this case:

E.            Addressing questions asking for the application of law to specific matters being considered; and

F.            Advising community associations whether a course of action is authorized by law or rule.

Common Practices

There is no authority, administrative or otherwise, requiring community association managers to inspect trusses or other hidden structural components. Typically, each community has its own customized checklist for items such as air conditioning filters, testing smoke alarms, inspecting elevator rooms, pool decks and furniture, telephone rooms, outside stairwells, and roof access doors, etc., which would not include an inspection of trusses or other hidden structural components.

Based upon the documents reviewed, including sworn testimony of the manager, the manager maintained the clubhouse using good maintenance practices required of a community association manager.

It is common practice for the board of directors to require a pre-purchase inspection report (similar to the turnover inspection report required by statute for a condominium association) when real property is purchased such as the clubhouse at issue in this case or when a community is “turned over” from the developer. This practice fulfills the board’s fiduciary duty to the association.

The pre-purchase inspection report becomes part of the official records belonging to the association at turnover or purchase. The report is under seal of an architect or engineer authorized to practice in this state, attesting to required maintenance, useful life, and replacement costs of major structural components.

The reason this report is so necessary is because the board of directors needs a base line for calculating the reserves for future capital expenditures and deferred maintenance. Without the base line provided by the pre-purchase or turnover inspection report, the board will likely be guessing as to the adequate amount of reserve funds and the replacement timeframes. To underestimate the timeframe or miscalculate the reserve funds could be seen as a failure by the board of directors to perform its fiduciary duty.

It is incumbent upon the board of directors of a community association to act in the best interest of the homeowners association, including requiring a pre-purchase inspection report before purchase. Regardless of how the purchase came about and regardless of their history with the building or the management company, it is not the duty of a community association manager to require such report.

Management Contract

A manager reports maintenance and management issues through a chain of command as set forth by contract.

The chain of command for the manager was spelled out in the management contract. The manager reported to the chairperson of the clubhouse committee, or in his absence, the association president. The manager was in constant contact with the committee and appropriately reported the issues to that committee. Once reported, the duty shifted to the committee to report that issue and other issues to the board of directors, which then had the ultimate authority to act.

Pursuant to the management contract, the manager had no authority to make structural changes to the association’s property or to make major alterations or additions to the buildings or equipment. The manager could not make expenditures of more than $500 without the prior consent of the association.

Conclusion

Based upon the documents and facts, the manager acted in a manner that any reasonable CAM would be expected to act and within the scope of the community association management contract. The manager is not responsible for inspecting trusses. The manager through his chain of command reported obvious issues to the committee as documented month after month in his manager’s reports. The manager acted properly, within his role as CAM, by not holding himself out to be a roofing contractor, general contractor, or structural engineer. A CAM should not attempt to perform any of those services.

Importantly, because of the UPL issues, a Florida community association manager is not permitted to give certain advice to the board of directors, such as advising community associations whether a course of action is authorized by law. Furthermore, pursuant to the Florida Statutes and the Florida Administrative Code relating to Florida community association managers, as it is commonly understood in the industry, a manager is not responsible for the actions of a board of directors or any committees.

It is common within the community association industry in Florida to say “the buck stops with the board.” The board of directors appears to have failed in its fiduciary duty when it did not require a pre-purchase inspection report.

Moral of the story—managers, when you are tempted to skip that written monthly manager’s report to the board or shorten it with bulleted points, expecting to fill in the gaps verbally, don’t do it! In this case, the consistent, thorough, and written monthly manager’s report spelled victory for this manager!

By the way—Who remembers when this magazine was called Manager’s Report? Be the first to e-mail me, and I’ll send you a PDF of Boardmanship.

Author’s Bio: Betsy Barbieux, CAM, CFCAM, guides managers, board members, and service providers in handling daily operations of their communities while at the same time dealing with different communication styles, difficult personalities, and conflict. Effective communication and efficient management are her goals. For more than 15 years, Betsy has educated thousands of managers, directors, and service providers. She is your trainer for life!Betsy is the author of Boardmanship, a columnist in the Florida Community Association Journal, and member of the Regulatory Council for Community Association Managers. For more information, contact Betsy@FloridaCAMSchools.com, (352) 326-8365, or www.FloridaCAMSchools.com.

Occupancy outlooks are sunny in Florida markets this year, according to a newly released report. Three metro areas in the Sunshine State have occupancies greater than 95 percent, according to Axiometrics.  Naples, Fla. has 97.5 percent occupancy and leads the country’s top 90 largest metro areas.  North Port, Fla. and Miami, Fla. also made the top 10 with 96.4 percent and 95.8 percent, respectively.

The December report, which was released Tuesday by the Dallas-based research firm, notes the national occupancy rate has been above 94 percent since April 2012.

This year is expected to bring more growth to the top performing metro areas, but with less gusto than in 2013, according to the report.
Other notable metro areas with high occupancies include Lansing, Mich. at 97 percent and Santa Rosa, Calif. with 96.9 percent.

Top 10 Metros with Highest Occupancy Rates

1. Naples, Fla. 97.5 percent
2. Lansing, Mich. 97 percent
3. Santa Rosa, Calif. 96.9 percent
4. North Port, Fla. 96.4 percent
5. Providence, R.I. 96.3 percent
6. Nassau, N.Y. 96.3 percent
7. New York City 96.3 percent
8. Minneapolis, Minn. 96 percent
9. Nashville, Tenn. 95.8 percent
10. Miami, Fla. 95.8 percent

Lindsay Machak is an Associate Editor for Multifamily Executive.