Will mandating Condo HOA Reserve funds help preserve safe Housing?

By Deborah Goonan, Independent American Communities deborahgoonan@gmail.com

Key points

  • Saving money for future building repair and replacement of worn-out components is prudent and wise, but it’s not the single answer to all that ails condo and homeowner associations.
  • For several decades, government’s “hands-off” attitude toward HOA decisions and dysfunction has mirrored government’s own kick-the-can-down-the-road approach to maintenance of public infrastructure.
  • The insurance industry is increasingly less willing to underwrite condo and HOA policies with affordable premiums and reasonable deductibles.
  • For better or worse, the catastrophic collapse of a Miami-area condo tower, resulting in the loss of 98 lives, will likely prompt new government regulations.
  • Owners of HOA-governed property need more than Reserve Fund Mandates — they need accountable HOA boards and managers, strict enforcement against conflicts of interest, checks and balances to prevent theft and embezzlement, and trustworthy governments and HOAs that work in tandem to provide reliable essential services

In the wake of the catastrophic collapse of the Champlain Towers South condominium near Miami in June of 2021, property owners, housing advocates, and HOA-industry pros are not only speculating about the cause of the disaster. They’re also proposing solutions to prevent another building collapse in the future.

The HOA industry trade group, and many of its member attorneys and management CEOs have already begun to push for legally-required full funding of HOA reserve accounts.

But demanding that HOAs save money for the future is just one part of the solution. And in practice, a fully-funded reserve account is a solution that may be impractical or impossible to implement for the vast majority of existing HOA-governed communities.

Obstacles to planning for the future

Most HOA boards face nearly insurmountable obstacles to establishing a reserve fund. There are several reasons for this hesitancy to plan for the future.

As pointed out many times here on IAC, members of condominium and homeowners associations generally lack shared values, as well as a collective commitment to preserving the commons for the future.

A typical HOA-governed community, of any type or size, is divided between members interested in their short-term investment (5 years or less) vs. members interested in long-term investment (people committed to their ‘forever home.’) These conflicting interests undermine the social cohesion that is necessary to preserve housing communities for generations.

Government at all levels takes a “hands-off” approach to HOA-governed communities.

Government rarely regulates management of HOAs, and delays offering financial or administrative support until the matter is urgent, or after a disaster has already occurred.

At Champlain Towers South, Surfside city officials do require a 40-year building inspection and recertification, something that is rare for local governments. But the city also downplayed the warnings in a 2018 engineering report citing major structural deficiencies. And it didn’t rush to insist that repairs be made.

Government has a poor track record of planning for the future

It’s no secret that government, including the Department of Housing and Urban Development (HUD), have failed miserably at maintaining and preserving “affordable” public housing. For more than 5 decades, HUD has attempted to maintain low-income housing on income-adjusted rent payments, combined with woefully inadequate tax subsidies. Decades of deficit spending on public housing has led to its negative stigma and its demise as pest and mold-infested “ghettos.”

But government hasn’t just failed at managing housing. Across the nation, Americans deal with the overall decline of infrastructure in the U.S., fueled by a lack of political will to funnel our hard-earned tax dollars to essential services vs. pork projects and discretionary spending.

At the same time, local government has, in fact, enabled or even mandated HOAs as the primary governance-management model for residential housing since the 1970s. Its goal was to offload public service to private Owners’ Associations, and it has done so with little to no public or administrative support for owners of HOA-governed property. That’s why it’s no surprise that HOA common property and condominium buildings are crumbling and failing (literally!) even more miserably than public infrastructure.

However, the collapse of Surfside’s upscale beachside condominium, a primary or secondary home for well-to-do business owners, religious leaders from the U.S., and foreign owners from South and Central America, is serving as a wake-up call. Government suddenly seems less inclined to continue its “no interference” approach to HOAs, and especially condominium buildings.

No money empty pockets poor

Would adequate reserve funding have saved Champlain Towers South?

Although it might have helped avert a catastrophic collapse, it’s unlikely that funding the reserves would have fully resolved the condominium’s serious structural problems.

First of all, enacting laws requiring our habitually deficit-spending government to oversee full HOA reserve funding is unlikely to result in better management and maintenance of privately-owned infrastructure.

And, let’s be honest, inadequate reserve funds aren’t the only factor that led to the Surfsde condominium collapse. Nor are low reserve funds solely responsible for the overall decline in condition and financial status of common interest housing.

The New York Times recently published a graphic summary and expert analysis of the causes of the condominium collapse on June 24, 2021.

In to the NYT analysis, several notable structural engineers point to the likelihood of faulty design and construction of the building in 1981. Among the factors which probably contributed to the failure of the building: undersized support beams in the garage foundation; too much or too little rebar used in major support columns and structural slabs; inadequate slope of the ground level pool deck; inappropriate installation of moisture barriers; and the addition of decorative planters and palm trees on the pool deck.

Ideally, a reserve fund is designed to fund maintenance, repair, and replacement of major components of a building, due to normal wear and tear. In practice, a poorly designed or constructed building makes maintenance difficult or impossible, leaving owners with the heavy financial burden of redesigning and rebuilding infrastructure from scratch.

In some cases, the owners’ association may be able to recover a portion of costs through litigation against developers, architects, and various contractors. But, in the case of Champlain Towers South, structural defects were not discovered within the legal statute of limitations. Theoretically, owners could have created a reserve fund to help them plan for reconstruction, had they been made aware of the problems early enough to allow ample time to gradually save the money they needed.

In reality, that didn’t happen. And it rarely does.

Like many condo and homeowners associations, Champlain Towers South started out with an insufficient and inappropriate maintenance plan. It fell further behind on their reserve fund as time passed. The cost of repairs kept increasing exponentially, compounded by the owners’ collective failure to address known structural deficiencies.

Even if Champlain Towers South condo association had set aside reserve funds for “normal wear and tear” over the past 40 years, it’s doubtful that the reserve fund would have accumulated to the estimated cost to rebuild the parking garage and pool deck — nearly 17 million dollars.

It should be noted that owners and residents of housing in all price ranges pay for the consequences of less than stellar construction quality. This is no longer a problem limited to low-income property owners, tenants, and landlords.

But the challenges for HOA-governed housing don’t end there.

Condo owners face uninsured losses, uninsurable disasters

Another challenge for many condominium and homeowner associations: unpredictable hardships and disasters, many of them not covered by insurance.

Condo owners the U.S., Canada, and Australia, continue to see rapidly rising insurance premiums and higher deductibles. In many cases, an HOA cannot find any insurance company willing to underwrite a policy for their association.

To protects its interest, in recent decades, the U.S. HOA management industry has created its own spinoff insurance industry to provide limited coverage for certain losses. For example, industry-sponsored insurance companies that cater to condo and homeowner associations provide policies that purport to cover property damage due to certain storm events or structure fires, or policies that reimburse the HOA for adverse court awards or penalties due to litigation.

Many owners are now becoming aware that HOA-governed planned communities, and particularly condominium associations, are considered high risk insurance clients, that often require coverage from “last resort” insurers such as Lloyds of London. (As seen in this example.)

Generally, in order to keep premium costs as low as possible, many Association boards will opt for policies with relatively low coverage limits and high deductibles. Any excess costs become the obligation of property owners in the Association.

It’s wise to keep in mind that HOA or condo association master insurance policies won’t cover many losses. Some financial hardships, such as construction defects, are uninsurable. In other cases, cost of insurance premiums can be prohibitively high and downright unaffordable for co-owners. Two common examples: flood insurance and earthquake insurance.

As a minimum hedge against economic disaster, a condo HOA reserve fund should include an allowance for coverage of high insurance deductibles. Better yet, the reserves would ideally would “self-insure” for non-covered disasters, such as the wildfires in Western states, where many homeowners cannot obtain homeowners insurance.

To the extent that an Owners’ Association lacks reserves for these contingencies, state or federal law ought to require HOAs to disclose these relevant facts to purchasers and current owners in an annual financial report. To be an effective tool for housing consumers, this critical information should be made part of public record, easily accessible to all.

Other Public Policy and Legislative considerations:

HOA corruption vs. owner participation and trust

Many homeowners have told me that they object to Reserve Funds, but not only due to affordability concerns. Most home and condo owners simply don’t trust their HOA boards to safeguard HOA reserve funds and wisely spend their collective money on future projects, as planned.

And who can blame them? With so many examples of HOA corruption, theft, and embezzlement, in addition to HOA board and management practices that often discourage transparency and active owner participation, these are valid concerns.

To gain the trust of owners in condominium and HOA-governed communities, public policy reform must include requirements for best practices that will prevent criminal or negligent misappropriation of HOA assessments and reserves.

What would those best practices look like?

First and foremost, the HOA Professional Community Manager’s role must be limited to administrative support, and board-directed implementation of maintenance, repair, and renovation.

Specifically, management agents or corporations should not be permitted to open or manage bank accounts for HOAs. This is a job for HOA boards, with at least two members authorized to write checks or make withdrawals.

Likewise, a manager should never be solely responsible for collecting and depositing ordinary HOA fees and reserve assessments from owners, and then creating a monthly report without any oversight. This system creates ample opportunity for cooking the books, while funneling HOA cash to a secret bank account that benefits an opportunistic manager.

State law also needs to require that all board members review HOA bank statements monthly, and compare them with the books and records to ensure there are no discrepancies. If this duty is left to a single board member, especially in a self-managed Association, it’s an invitation for embezzlement.

To eliminate conflicts of interest, management companies should not be referring or selling insurance policies to the Association. Nor should the management company play a direct role in referral of professional engineers for community safety inspections, Association reserve study specialists, and licensed financial auditors. The best way to build trust from housing consumers is to eliminate potential conflicts of interest from the management of HOA-governed communities.

And, most importantly, lawmakers should strive to eliminate conflicts of interest in Declarant (developer or investor) controlled condo and homeowner associations. At all times, direct contributions of owners (not affiliated with the Declarant) to the HOA must remain designated as the property of the lot or unit owners — not the Declarant. Property owners, city and county officials, and the general home-buying public should have the absolute right to know where HOA fees are deposited, and how those dollars are spent.

What about Self-managed HOAS?

Most condo/HOAs are relatively small, and are not professionally managed. And even some larger condominium associations have chosen to manage on their own. (This was the reportedly case with Champlain Towers South at the time of its collapse.) Professionally managed or not, the HOA board must establish a layered system of checks and balances, including at least two signers on checks, and several board members and a professional CPA reviewing records and bank statements to ensure that money collected from co-owners is properly deposited, and is ultimately used for its intended purposes.

What role should Government play in condo, homeowner association reform?

Focus on delivery of essential services

At a minimum, local, state, and federal government should ensure that all its constituents are adequately funding essential housing and community services. In HOA-governed communities, essential services would include maintenance that upholds the structural integrity of the commons, whether that be a multi-story condominium building or community infrastructure such as private roads, stormwater management systems, community utility services, street lighting, fire hydrants, conservation easements, and similar “must have” services.

There are two ways government can help ensure that residential buildings and planned neighborhoods are not only well-preserved, but continuously improved to serve future generations.

  1. By requiring 100% funding of reserves for ESSENTIAL services (as noted above), with significant tax, legal, and financial liabilities for failure to comply with this basic responsibility of common ownership associations, and/or
  2. By de-privatizing essential services that can be provided more efficiently or economically by the public sector, by way of adequate funding through a combination of taxes, use fees, and municipal investments.

By contrast, co-owners in common interest associations should be free to decide, by vote or consensus, whether to establish and maintain reserve funds for their community’s discretionary expenses: things like aesthetic enhancements, recreational amenities such as swimming pools, community roof decks, fitness facilities, etc.

Simply put, there ought to be a clear distinction between condo HOA assessments that pay for essential vs. discretionary expenses, with public policy squarely focused on ensuring reliable delivery of essential services.


Prevent design and construction defects

By now it’s plainly obvious. Government needs to set higher safety standards for building construction and community infrastructure. And, in order to enforce building codes, state and local governments need to hire a sufficient number of competent construction, structural, and professional engineers to inspect work in progress and upon completion.

At no time should the government allow the developer or home builder to hire their own inspectors to sign off on their own construction projects. (Unfortunately, this is a common practice in growing cities with a shortage of building inspectors.)

Require periodic building and infrastructure inspections, and make them part of public records

Local, state, and federal policy makers must require periodic structural inspections and maintenance reports for multifamily housing structures, as well as essential neighborhood infrastructure. As recommended by several legal experts, all inspection and maintenance reports must be filed as public records, providing free digital access to all consumers, taxpayers, constituents, and members of the media.

Failure to complete required inspections and written evaluations should result in enforcement through fines and/or court order.

Ensure that repairs get done promptly

State and federal laws must not only require condo and homeowner associations to promptly repair deficiencies, it must also impose meaningful penalties for the failure of a privately-governed association or a publicly-administered special assessment district to address life safety issues in a timely manner.

But here’s the grim reality. In many cases, a substantial number of owners in the community won’t be able to afford a huge special assessment or significant HOA dues increase.

Therefore, in order to facilitate timely repairs, government must also be willing to offer assistance to owners’ associations that lack the resources to get the job done. Assistance may include low-interest financing of construction projects; low-cost mediation or arbitration of disputes among members of the owners’ association; offering services of local or state government professional and structural engineers, to evaluate damages and deficiencies; or simply offering consultations to help the board review its remediation options and competitive bids.

Why should government get involved in HOA construction projects? Two important reasons.

First, very few board members have the knowledge and experience to make prudent decisions on construction projects, and the best way to finance them. Unlike HOA management companies, local governments are in a unique position to offer disinterested guidance to volunteer-led condo and homeowners association boards. While the government isn’t poised to profit from major renovations and retrofits — management companies and their preferred vendor are motivated to score a big, fat contract.

Second, condo and homeowners associations need a strong nudge to commit to taking care of deferred maintenance and major projects. Owners need to understand that, in an emergency situation, the time for debate and arguing about the scope of work is over.

When local government is serious about enforcement of safety ordinances, and stands ready to order evacuation of a building or to impose costly fines against the Association, it takes the heat off condo and HOA boards. Board members are then free to inform co-owners that, due to local building codes and ordinances, the Association must begin necessary repairs, for which all owners must pay.

Notably, the earlier government gets involved, the more likely forceful mandates can be avoided. Although, given the complex social nature of some HOA-governed communities, local government must be prepared to act decisively when owners cannot reconcile their differences.

Positive reinforcement — incentives for continuous improvement

Rewards and financial incentives are another way to motivate owners to cooperate in maintaining and preserving their condominium building or planned community.

After all, public policy must not only enforce laws, codes, and ordinances with regard to life, health, and safety issues. It must also encourage reinvestment in housing and community services.

For example, policymakers should consider instituting a personal income tax deduction for all HOA, condo and special assessment district fees that are allocated for essential services.

Additionally, local and state governments should consider property tax deductions or credits equal to the value of otherwise public services that they do not provide to HOA members. For example, local government could choose to offset property taxes for owners who pay HOA fees for waste removal or maintaining street lights in the community.

Cities could also allow HOA-governed communities to compete for grants to use toward projects to save energy, improve stormwater quality, or plant low-maintenance turf or shade trees. The possibilities are endless.

Bottom Line:

Policymakers would better serve housing consumers by crafting an effective combination of legislation and regulatory authority that goes well beyond unfunded mandates to fully fund condo and homeowner association reserves.

Government at all levels, but particularly at the local and state level, must be willing to provide administrative and financial guidance and assistance to condo and homeowners’ associations.

In the short term, owners’ associations will require a combination of “carrots and sticks” to push them toward timely repair and preservation of building envelopes, structural integrity of buildings, and essential community infrastructure. In some cases, shifting responsibility from the private (HOA) to public (city or county) realm may be the property owners’ best, most affordable solution.

Over the long term, legislative reform must focus on prevention of deferred maintenance, inferior construction and design standards, and chronic under-funding of reserves for essential services provided by HOAs.

Several key factors must be addressed, including condo-HOA insurance reform, meaningful regulation of management companies, and greater oversight of condominium and planned community developers (eliminating multiple conflicts of interest).

Above all, these should be the primary goals of legal reform: to increase affordability of HOA fees, as well as ensuring widespread public transparency of the true financial and physical condition of each and every HOA-governed common interest community.

Further reading:

Deborah Goonan

Author of Independent American Communities (IAC), a Housing Consumer Education blog. IAC documents legal, social, and economic challenges in U.S. association-governed common interest communities, commonly known as homeowner associations (HOAs). 

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