Of all the challenges confronting HOAs and boards, deferred maintenance has emerged as the single greatest cause of increased insurance and legal costs, declining property values, and resident complaints. Owners pour dues into their HOAs year after year but find that even in an upward trending real estate market, property values remain flat for properties that defer maintenance.
Condo living is one of the greatest sociological experiments of our time. Run by a handful of board residents who often have little or no experience in finance, construction, or HOA management, boards are tasked with the welfare of a multi-million-dollar asset. With results of the experiment in, HOA boards are having to become much more savvy in how they manage the decades-old problem.
In a San Diego Union Tribune article published almost a decade ago, reporter Lori Weisberg quoted experts who warned (erroneously, in our opinion) that, “After years of deferred maintenance, compounded by tightfisted members’ unwillingness to pay higher monthly fees, condominium associations are facing a looming financial crisis…” Ms. Weisberg’s article served to alert the industry of a growing concern, but what we’ve discovered is that far from tightfisted members being the cause, most residents are clamoring for boards to address overdue maintenance.
Board members have a tough and thankless job, and there are factors that make it harder than it needs to be.
The Banks. According to national statistics published by the California Associations Institute for 2016, roughly 69 million residents poured more than $88 billion dollars into their HOAs, with some $25 billion of those dollars parked in reserve accounts. Despite the billions of dollars in cash reserves, HOAs are still unable to get in front of maintenance before it becomes catastrophically prohibitive.
Aging Properties. Much of what we see in San Diego now are aging neighborhoods bearing little resemblance to the communities of 45 years ago. HOA properties have fallen so far behind in maintenance that boards don’t know how to even begin the process of reversing the trend.
Beth A. Grimm, an HOA law attorney for over 25 years, warns that “[A]n association that falls apart at the seams will drag you down on a larger scale. At some point the repairs will need to be made. The more deferred maintenance there is, the higher the cost…”
After decades of deferring maintenance, every board of an HOA is in the crucible of keeping reserves funded while avoiding unpopular assessments for repairs. Remarkably, we’ve found that boards representing a $50 million-dollar property often spend less per year on their HOA’s maintenance than an owner of a million-dollar single-family residence.
The Board-Manager Challenge. Choosing a company to manage a multi-million-dollar asset from an HOA management industry that is unregulated and unlicensed takes a leap of faith and can be a daunting, if not dicey, proposition for boards. The board will either let the manager manage the property or, all too often, a board will manage the property around the manager. Unsurprisingly, the relationship deteriorates until it finally ends, sometimes badly.
Infighting among board members begins with defining the HOA’s priorities, and opinions collide over which options will provide the quickest (read, convenient) and least painful (read, lowest cost) solutions. There are three stereotypes serving on most every board. One type is the retiree who lives on a fixed income at the end of his means and who can’t afford extra expense. The second type is the first-time home buyer who is younger and upwardly mobile and wants to spend money to increase value and enhance their living experience. The third type is the investor who is renting out their property and doesn’t want to spend money that will reduce rental income.
The anti-spend board members are usually driving the deferred maintenance bus and, in fairness, may be encouraged by managers who don’t want to do the extra work anyway. While some managers will often choose to end a relationship when boards fail to act in the best interests of the HOA – such as deliberately failing to address maintenance, by the time deferred maintenance has become physically and financially burdensome, solutions that were once convenient and low cost may no longer be options.
The Board-Resident Challenge – and Boards in Denial.
Residents take a leap of faith as well in electing their board members. The relationship is like that of the board and manager in that the board doesn’t want to be the property manager, just as most residents don’t want to serve on the board. Most trouble arises from the property not being maintained, caused in part by the lack of any scalable practices or standards for boards and managers to follow in managing maintenance. Residents try to micromanage the board and the board tries to micromanage the manager, and both residents and board members usually deliver their angst on the manager.
A significant factor in a property’s decline is the number of boards that are in denial that the HOA even has a deferred maintenance challenge, despite residents’ complaints that repairs aren’t being made. Predictably, these attitudes evolve into an Us vs. Them mentality that creates adversity and the opportunity for mismanagement. When the HOA finally must get loans and levy assessments to catch up on overdue repairs, the board circles the wagons and the manager becomes the front line between board members and irate homeowners upset that boards allowed the problem to get out of hand.
Property-Serving Industries. As well as lowering property values in the real estate market, accrued maintenance impacts law, insurance, banking, construction, reserve funding protocol, and just about every other industry that serves real estate. While these are not actively exploiting HOAs, neither are they offering any special accommodation to help boards restore the health of their properties.
The HOA Management Industry. Instead of guiding clients toward fiscal and physical security and increased ROI, managers often encourage boards to save money by not spending to keep reserves funded and sometimes, to avoid doing the extra work. While most managers typically lack a construction background or a degree in Economics and Finance, they have enough experience to alert boards when deferred maintenance impacts the health of the community. An HOA manager has an implied obligation to educate boards on balancing maintenance needs against unnecessary reserve funding, and they must be willing to part ways with boards who ignore their advice. If boards don’t evolve, there’s nowhere for the HOA to go but down, and managers don’t want residents or the industry to blame them for a recalcitrant board’s bad decisions.
Predictably, the no-spend-less-work philosophy has evolved into a whole new business model for some top HOA management companies. They have reshaped their portfolios to now include only buildings with 500 or more units and exclude any properties older than fifteen years that might have maintenance challenges. With gradual aging and deterioration, and once overdue maintenance becomes a challenge, contracts for these now older properties are terminated and replaced with newer communities.
Construction Award Management. Construction defect awards led to essentially two practices by HOA managers: one, managers with little understanding of how to administer these funds or oversee major construction were put in charge; or, two, managers terminated the relationship, leaving the board to fumble through repairs as best they could. After prematurely depleting construction funds, deferred maintenance once again became the order of the day.
Thus, HOAs with several years of accrued maintenance, with their properties in decay and real estate values in decline, not only find it difficult to retain a good, basic manager, but find they now require a super manager who has some level of construction expertise and creative budgeting skills, someone who has enough experience to guide the HOA through a large-scale repair project, and who has the experience to strategically assess, budget for, and devise an aggressive maintenance plan, and then hold the board to strict adherence to a preventive regimen. A promising trend is that most boards are adopting a solution-oriented approach once they are provided with key knowledge about how to reverse the cycle of disrepair.
A board in solution mode is best illustrated in our construction management of the Porto Siena community in Little Italy in 2014. The board threw the dice when they hired us, hoping that our skillset would improve the potential for success with a one-time multi-million-dollar construction award that had to resolve all defects. Tasked with complex, large-scale repairs the board needed its manager to have several disciplines to competently oversee vendor workmanship, as well as ensure the project was completed on time and within budget. Our general contractor’s license, strong maintenance philosophy, and budgeting skills helped us meet this need, and the board later implemented a sustainable maintenance plan to ensure the HOA stayed in top-notch condition. The Porto Siena board’s teamwork approach was crucial in making our partnership and the project’s goals successful.
Strategic Solutions to Reverse the Cycle of Disrepair.
The most basic solutions to addressing deferred maintenance are often overlooked simply because boards are in so much pain. A board must first begin administering their HOA away from a reactive stance and into a proactive one. There are strategies boards can adopt that will put an HOA back on the path to fiscal and physical health.
Boards must strive for consensus on HOA priorities. Board members represent the collective interests of all the HOA owners. By improving and maintaining the property, all residents will enjoy higher property values and better quality of life, eliminating most of the adversarial relationship between boards, managers, and residents.
Boards must adopt a new approach to funding maintenance and reserves. Even if a property is not in acute physical distress, a regular maintenance plan should be included in the HOA’s operating budget. In balancing reserve funding against maintenance needs, San Diego Reserve Study Specialist Brian McCaffery of McCaffery Reserve Consulting, advises that, “While it is ideal for associations to be 100% funded, with a current, accurate reserve study associations can plan for future expenses using a cash flow funding plan and still be fiscally responsible at a level below 100% funded.”
An HOA can still be 100 percent funded if, for example, painting maintenance costs are managed as a budget item instead of a reserve allocation. Once addressed in the operating budget as regular maintenance, painting is no longer a necessary component of reserve funding. Saving funds to be spent at some later date are not in the property’s best interest as paint begins to fade or peel from age and exposure, leaving a property looking aged and deteriorated. Why wait to paint? The work can be done piecemeal, as a budget expense, and begin again once the whole property has been painted to keep the community looking consistently fresh and well-maintained.
Choose an experienced, maintenance-friendly HOA management company. Ensure that the company’s skills and types of services offered are commensurate with the HOA’s specific needs. The company should be able to demonstrate a proven record of success and provide the board samples of what its comprehensive property maintenance evaluation looks like, combined with a scalable, budgeted plan. The company should have adequate resources and skill in budgeting and personnel, strategic oversight, and accountability standards to achieve an HOA’s goals. One of the best ways to gauge how well a management company performs is to compare its online reviews on, say, Google or Yelp, with those of other candidates.
In comparing pricing after narrowing the search to two or three companies, frequently a company charging the least may lack the resources or skills necessary to meet an HOA’s financial and physical needs, particularly when deferred maintenance is a challenge. If a board expects higher quality service or additional services, it must be willing to spend money in order to save money over time and preserve value between repair projects.
Industry-wide Legislation, and Standardized, Scalable Practices.
Beyond an HOA board changing the way it approaches maintenance, much more needs to be done to improve the way industries that serve property owners operate.
All HOA industry partners agree that deferred maintenance is a big problem. Industry-wide solution begins with enacting and enforcing regulations and requiring professional licensing to standardize practices and protect the integrity of the HOA management industry. While continuing education is required for individuals, this is not a substitute for standards and legislation that hold individuals and companies accountable for the services they provide.
Legislative changes could also more equitably address how HOA reserves are managed. Banks could favorably treat HOAs that save money instead of penalizing them through higher interest loans for the use of an HOA’s reserve funds, and insurance companies could offer incentivized programs that encourage HOAs to stay on top of maintenance, particularly for disrepair that poses a potential safety hazard to residents, visitors, and employees.
At the very least, legislators, property related industries, and HOA boards, need to fully buy in to deferred maintenance as a systemic problem and embrace affordable solutions. It may take another 30 years to appreciate meaningful change but reversing the downward spiral of failing communities in San Diego is a goal worthy of our collective efforts.