5 similar HOA & condo building safety bills yield mixed results for housing consumers

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

As detailed in my previous post, Florida’s Governor signed a controversial condo safety bill following a special 2022 legislative session. Legislators had faced steep political pressure to take action to prevent another tragedy, after the horrific collapse of Surfside condominium building on June 24, 2021. By now, most everyone knows that Surfside, Florida was Ground Zero for the disastrous failure of Champlain Towers South, a 13-story structure was built in the 1980s.

However, the partial collapse and subsequent demolition of the remaining condominium has also triggered a nationwide response to the unthinkable disaster. What happened to Champlain Towers South was unusual: it was a catastrophic sudden building failure that could not be linked to a fire, natural disaster, or act of war or terrorism. The consensus among experts investigating the cause — or causes — of the collapse seem to agree that deferred maintenance and the condo owners’ delayed action to make repairs were key factors in the fate of the building.

That’s why several other state Legislatures have already considered similar bills aimed at improving the safety of HOA-governed condo and co-op buildings. This post addresses the national scope of the problem and legislative efforts to prevent another disaster. Five bills are summarized for the following states: Colorado, Hawaii, Maryland, New Jersey, and Virginia.


GSEs, lenders respond to the Surfside condominium collapse


Let’s begin with a reminder that the institutions that finance construction of HOA-governed properties, including condominiums and cooperatives, have already signaled their unwillingness to risk investing in unsafe multistory buildings.

Of course, the initial response to the demise of Champlain Towers South — resulting in the deaths of 98 residents — was typical. Former condo owners, residents, and family members blamed the condo board, managing agents, attorneys, and the structural engineers for downplaying the seriousness of structural defects, and dragging their feet on making safety repairs.

Surfside town authorities were also blamed for their failure to enforce local building codes, allowing the condo owners to delay taking action for three years after, in 2018, the condo board was made aware of the need for critical repairs of the pool deck and support columns in the underground parking garage.

Not surprisingly, numerous lawsuits were filed. Federal investigators were called to the site to determine the cause or causes of the sudden collapse.

But, within a few months, U.S. institutions that finance development and resale condominium and cooperative real estate took decisive action to reduce their portfolio of loans for units in high risk buildings across the nation.

Most notably, Fannie Mae and Freddie Mac quickly responded to the catastrophe with new lender questionnaires for condominium and cooperative buildings. In December 2021 and January 2022, both GSEs issued new “temporary guidance” for sellers of units in condominium and cooperative housing projects in the U.S.

On behalf of any buyer that’s planning to get a mortgage to purchase a unit, all condominium and cooperative HOAs must now disclose to lenders any major deficiencies in their community. Additionally, HOAs are required to report any current or pending special assessments intended to pay for major repair and reconstruction projects to ensure the safety and structural integrity of buildings three or more stories high. 

That guidance is proving to be a game changer in the market for condos and co-ops. Under new lending standards, if a condominium or cooperative structure with 5 or more units is in need of “critical repair,” neither Fannie nor Freddie will purchase unit-owner/shareholder mortgages. 

Common sense analysis follows. If Fannie and Freddie won’t buy your mortgage, your lender probably won’t underwrite the loan. If you still want to invest in a unit in a distressed condominium or cooperative project, you’ll probably have to accept less favorable loan terms, or make an all-cash purchase. Likewise, if you already own property in an affected community, it will be difficult, in not impossible, to refinance your mortgage or tap any equity you have in the unit to help pay special assessments necessary for long-deferred maintenance and repairs.


Fully funded reserves: the controversial “solution” for preventing another building collapse


As financial backing for condos and co-ops becomes more elusive, Governors and state Legislators are feeling pressure to ensure that owners take responsibility for the upkeep of their buildings.

HOA-industry advocates and property owner advocates alike want solutions to the chronic problems of deferred maintenance and the inability or unwillingness of owners to accept the high cost of keeping their communities structurally safe and sound.

The two primary ”solutions” proposed: mandating more frequent building safety inspections and mandating that owners fully fund “reserve” accounts to pay for essential maintenance and repairs. While industry and homeowner advocates generally agree on the need for more frequent and more thorough building inspections, the idea of mandating fully-funded reserves remains controversial.

Here’s why.

Supporters of fully-funded reserves point out that it’s easier for owners to pay for future maintenance costs by setting aside money over many years. They say most owners can handle gradual annual increases in HOA fees. On the other hand, many owners cannot afford to pay 5- and 6-figure special assessments, when major repairs can no longer be delayed.

If owners of HOA-governed property were to set up reserve funds during the construction phase, and start saving money when the buildings and units were still new, there should be plenty of money set aside when it comes time to make inevitable repairs and replacement of structural components. Examples would include roof and siding replacements, concrete reconstruction or resurfacing, new plumbing or wastewater lines, replacement of faulty electrical wires or circuit breakers, etc.

On the face of it, this approach seems to make sense.

But, typically, that’s just not how HOAs work. Historically, the HOA industry has never required community developers or property owners to plan for the future.

Critics of enacting new legal requirements to fully fund reserves, after most buildings are now 20-50 years old, say that forcing current unit owners to now build up their reserve funds will easily double or triple monthly HOA fees. The alternative is for condo boards to impose pay-now, all-at-once special assessments. That could mean that each unit owner needs to come up with tens of thousands of dollars to ”catch up” after many years of waiving contributions to their reserve funds.

Either way, many owners who cannot afford to pay higher HOA assessments will end up losing their properties. Either the HOA will place liens on the units and then foreclosure, or, to avoid foreclosure, desperate owners will sell — probably well below market value — to cash-buying investors.


No trust in the HOA reserve study – reserve fund process


But there are other compelling reasons for opposition to mandated reserve funds.

First, many homeowners don’t have confidence in the accuracy of reserve studies. That’s because the vast majority of these inspections and financial analyses are completed by members of the HOA-industry, who maintain close professional connections to construction companies and contractors that will eventually be hired to make repairs or provide materials for construction projects.

In other words, many homeowners are savvy enough to recognize a clear conflict of interest on the part of the reserve specialist, the management agent, and possibly even a few of their HOA board members. Since they don’t trust the reserve study, a significant number unit owners aren’t willing to fund reserves, unless forced to do so.

Another common complaint of property owners, is that they don’t trust their HOA board’s financial judgment. Some owners would rather hold onto their own money as long as possible, investing as they see fit, then pay the HOA special assessments as necessary.

Other owners feel that, if they’re going to be forced to pay money into reserve funds, their HOA should invest that money to earn a decent rate of return. Understandably, on the opposite side of the fence, there are a substantial number of owners who don’t want to risk losing a huge chunk of their collective money on investments at uninsured financial institutions.

Another common concern is that HOAs tend to lack adequate safeguards to prevent theft and embezzlement of cash from their operating and reserve accounts. And hiring a professional community association manager doesn’t necessarily guarantee that the HOA’s money is safe. (Check out this section of this website for examples of HOA Corruption, Fraud, & Theft.)

Considering the wide variation of opinions and valid concerns of housing consumers, it’s no surprise that some of the recent safety and reserve fund bill proposals have become law, while others have not. A summary follows.

COLORADO


House Bill 1387, sponsored by Reps. Brianna Titone, D-Arvada and Mary Bradfield, R-Colorado Springs; and Sens. Rhonda Fields, D-Aurora and Kevin Priola, R-Henderson, on homeowners’ associations.

Colorado’s bill set forth amended requirements for reserve studies and full funding of reserves for all common property serving two or more housing units, applicable to three types of HOA-governed common interest communities: condominiums, co-ops, and planned communities. It passed both chambers of the Legislature, only to be vetoed by Governor Jared Polis.

Gov. Polis vetoed the bill, because, he said, it would result in much higher fees for homeowners at a time when many are already struggling with inflation. Gov. Polis favored the improved consumer disclosure requirements in the bill, and encouraged lawmakers to “try again” next year.

HB 22-1137 contained the following provisions:

  • A requirement that the Declarant (Developer and/or Investment Group) conduct a pre-construction reserve study of the major shared components based upon architectural and construction plans, then update with a new reserve study every five years. However, the bill contains no apparent requirement that the Declarant actually fund the reserve. Presumably, a buyer would be less likely to purchase property with under-funded reserves.
  • Mandatory disclosure of Declarant reserve study reports to home buyers.
  • Defined ”major shared components” as any common property that would cost at least $30,000 to repair or replace, or any common expense exceeding 50% of the HOA’s operating budget, whichever is less.
  • At the time of turnover of the association, the Declarant would have been required to pay for a full reserve study of all major components, with a visual inspection.
  • As of July 1, 2024, HOA boards would have been required to conduct a reserve study by the time the community reaches the age of 30 years, then every five years thereafter.
  • Boards would have been required to implement a budget to fund reserves for major common components of the community. The required level of reserves could have been funded by increases to regular assessments (monthly, quarterly, or annual HOA fees) or unspecified ”other” financing methods (presumably to include HOA loans).
  • However, HOA boards could have also imposed special assessments to fund reserves to pay for either government-required repairs or ”emergent life circumstances.”
  • Would have allowed HOAs to invest up to 25% of reserves in a fund that is not federally insured.



Source: Gov. Jared Polis gets out veto pen for three bills By MARIANNE GOODLAND marianne.goodland@coloradopolitics.comMay 27, 2022 Updated Jun 8, 2022

HAWAII

House Bill 1784 RELATING TO BUILDING INSPECTIONS. Official summary, ”Requires periodic inspections of certain walls and appurtenances of buildings five or more stories in height.
Sponsored by Representative Aaron Johanson [D], Representative Della au Belatti [D], Representative Linda Ichiyama [D], Representative Scott Nishimoto [D], Representative Adrian Tam [D].

Although this bill passed in the House, it died in Senate committee, shortly after the effective date of the bill was changed to Jan. 1, 2050, “to encourage further discussion.” Expect the bill to be reconsidered next legislative session.

Here’s what’s in Hawaii HB 1784:

  • Requires owners of all buildings of 5 or more stories, including but not limited to condominium associations, to conduct an initial exterior structural inspection by 2026, then every 7 years thereafter. However, if the owner’ association has completed a full renovation of the building’s exterior within the 7-year timeframe, a waiver of the next scheduled inspection can be requested of state council, with regular inspections to resume thereafter. Note that Hawaii’s bill encompasses apartment buildings or commercial buildings, as well as condominiums.
  • The bill includes specific and clear requirements for a building inspector’s professional qualifications, what must be included in the inspection report, and timeframes for notifying building owners and the State Building Code Council of any unsafe conditions in need of immediate attention.
  • All owners, including condo associations, would be required to begin the process of correcting unsafe conditions within ten days, and the professional engineer or architect would reinspect the building in two weeks.
  • Building owners, including condo associations, could apply for an extension of up to 90 days to complete repairs, if needed, due to certain uncontrollable circumstances. 
  • This bill does not address reserve studies or reserve funding requirements for condominiums. 

Additional source on LegiScan

MARYLAND

Maryland: HB0107 – Cooperative Housing Corporations, Condominiums, and Homeowners Associations – Reserve Studies – Statewide, Delegates HolmesFoleyHealeyLehman, and Terrasa

Maryland’s bill was recently enacted as law, and it applies to three types of HOA-governed common interest communities: residential condominiums, co-ops, and planned communities throughout the state. Filed under Chapter 664, effective October 1, 2022, the Act expands provisions in state laws enacted in 2020 and 2021, which applied only to Prince George’s and Montgomery Counties.

Summary of Maryland HB 0107, enacted as state law in Chapter 664:

  • Mandates that common interest communities (residential condominium, cooperative, and homeowners associations) established on or after October 1, 2022, conduct an initial reserve study prior to its first unit owners’ board meeting, and conduct updated reserve studies every five years thereafter. Note: Maryland is not waiting until a community is at least 25 or 30 years old to conduct its first reserve study.
  • The developer / Declarant must transfer sufficient reserve funds to the HOA, as recommended in the initial reserve study, at the time of turnover of control to the homeowners.
  • Pre-existing HOA-governed community associations must complete their initial reserve study no later than October 1, 2023. (Regardless of the age of the community.)
  • Authorizes the board of a residential condominium, cooperative or planned community homeowners association to levy assessments required to fund the reserves, as recommended in the reserve study. This provision overrides any language to the contrary in the governing documents, such as covenants that give owners the right to vote on assessment increases or special assessments.
  • The person preparing the reserve study must meet the following requirements:
    • Has prepared at least 30 reserve studies within the prior 3 calendar years
    • Must be licensed by the State Board of Architects or the State Board for Professional Engineers, OR
    • Must be currently designated as a reserve specialist by the Community Association Institute (CAI) or as a professional reserve analyst by the Association of Professional Reserve Analysts (ARPA)
  • Following an initial reserve study, allows the HOA-governed community three years to catch up to required reserve levels.

Astute readers will notice that HOA trade group CAI had significant input on this legislation, as their own Reserve Specialists stand to personally profit from these new requirements.

NEW JERSEY

New Jersey: SB 580 – Building safety inspection program for older buildings-establish; Senator Samuel Thompson

This carry-over bill from a previous legislative session would have established a state building safety program under the Department of Community Affairs. After its introduction, the bill did not progress in the Senate. A companion bill, introduced in the House, also died without further consideration.

Proposals in the NJ SB 580 included:

  • The DCA (Dept. of Community Affairs) would have been required to conduct a basic structural safety inspection for all 40-year old non-federal multifamily buildings, including condominiums and cooperatives, and provide a report to building owners.
  • Notably, and in contrast to the new Maryland law, New Jersey’s bill did not delegate the inspection process to private entities such as CAI or ARPA-certified Reserve Study specialists.
  • Building safety standards would have been established by a newly-appointed Commissioner of Community Affairs.
  • In the bill as drafted, building owners would have been required to make modifications or repairs within 150 days of receipt of any inspection report. Older buildings would have also required new safety inspections every five years.

Additional source on LegiSCAN

VIRGINIA

Virginia: SB 740 Department of Professional and Occupational Regulation; common interest communities; standards for structural integrity and reserves for capital components; work group; report; Introduced by: Scott A. Surovell 

Virginia’s bill formally establishes a work group to study HOA-governed communities. It has passed both chambers of Legislature, and was signed by Governor Glenn Youngkin in April 2022. Official summary: An Act to direct the Department of Professional and Occupational Regulation to establish a work group to study the adequacy of current laws addressing standards for structural integrity and for maintaining reserves to repair, replace, or restore capital components in common interest communities; report.

According to the Act, “B. The work group shall be composed of representatives of (i) the Common Interest Community Board, (ii) local governments, (iii) local and state building officials, (iv) common interest community property owners, (v) developers and builders, (vi) common interest community managers, (vii) community association attorneys, (viii) reserve specialists, (ix) professional engineers, (x) auditors, (xi) representatives of financial institutions, (xii) insurance professionals, (xiii) attorneys with experience representing individuals with property or personal injury claims; (xiv) the Office of the Common Interest Community Ombudsman; and (xv) volunteer community leaders.

Although the work group will be dominated by members of the HOA industry, It’s a slightly encouraging sign to see that the work group will include property owners and attorneys who have represented property owners. The Governor’s work group is tasked with investigating needs and priorities for legislative reform.

The topics this work group will address include:

  • Initial reserve funding by developers and Declarants
  • Increasing requirements for certificates of occupancy
  • Reserve study requirements and qualifications of persons conducting the study
  • Budget requirements for funding reserves
  • HOA board powers and authorities to impose special assessments and regular assessment increases
  • Disclosure of governing documents, including reserve studies
  • Insurance coverage availability for HOA-governed community associations
  • Management options for HOAs, qualifications of HOA managers

Once established, the newly approved work group is assigned with providing legislative findings and recommendations to both chambers of the state Legislature by April 1, 2023. Expect bill proposals in 2023 and/or 2024.

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