Tuesday, June 22, 2010

What you don’t know about your CCRs, your Budget, and your Buildings

The responsibility for building maintenance and repairs in a community association most often falls to the Board of Directors of the association as assisted by the community association manager. It’s an awesome responsibility in that the economic well-being of the owners is often co-extensive with the health of the building. But maintaining any building properly requires a very sophisticated understanding of building components. Maintaining a community association building also requires a thorough understanding of the association’s governing and budget documents.

But buildings, budgets and governing documents are not always what they seem—they can contain traps for the unwary. Community associations are prisoners of their budgets. Nothing can be repaired without adequate funding. Proper funding, in turn, is dependent upon a proper analysis of the maintenance and repair requirements of a particular building. If the conditions of the building are not properly reflected in the budget, the association will not be able to adequately maintain the project.

The “traps” in buildings can be placed there accidently or intentionally. The “traps” in governing documents are almost always intentional. In either case it is essential for boards and managers to be aware of them and to know how to avoid the pitfalls they present.

Trap # 1: Buildings. As stated above, community associations are responsible for the maintenance and repair of the buildings in the project. With condominiums that can include the entirety of the structure. With planned developments that responsibility is usually confined to the waterproof envelope of the buildings. But even where the responsibility extends only to the skin of the buildings, a failure to properly maintain that component can result in damage to other components regardless of the association’s assigned responsibility.

Most community association budgets include a reserve program for a given list of standard components linked to the association’s responsibilities. These usually include things such as painting and roof repair. But unplanned repairs, issues that are not usually visible to the naked eye can be even more extensive (read expensive) than the planned repairs.

Community association reserve budgets are typically based upon the requirements of Section 1365.5 (e) of the California Civil Code which requires a reserve study of all “visible and accessible” components with a service life of 30 years or less and a plan to fund necessary repairs accordingly. This “visual and accessible” limitation, however, ignores those problems which occur beneath the skin of the building or with such components as plumbing and electrical lines. Without a reserve fund, problems which are hidden and discovered only later in the building’s life must be funded from some other source—either borrowing from the reserves for other components, special assessments, or bank loans. And these problems are not just a threat to the association’s funding plans—they can be life threatening as well. On April 1, 2010 two people were seriously injured, almost fatally, when a rotted second-story balcony railing collapsed. The incident was described in the article, “A Wakeup Call.”

These hidden issues are not insubstantial. When the stucco or wood outer skin of a building is removed, or a walking surface taken up, we often find serious damage to the interior framing. Here are some examples:

Rotted sheathing under a balcony deck

With the balcony deck framing removed, the rotted face of a glulam beam can be seen.

Rotted framing and another rotted glulam beam in a different project--visible with the siding removed.

Condominium conversions can be worse. Their components come with 20 or 30+ years of expended service life already built in, with essentially a “new project” reserve budget. In other words, the damage is already there, but the budget is built on the notion that everything is new. Hidden issues are not only invisible in the reserve budget, but the budget itself has had no time to accumulate reserve funds which might otherwise be borrowed to fix hidden damage. This is a serious trap and one that can only be recognized by a diligent, internal inspection early in the building’s life as a community association. You can read more about the hidden problems in condominium conversions in the article, "Condominium conversions--old apartment or new development?”

Trap # 2: Statutes of Limitation. Title 7 of the California Civil Code, also referred to as SB800, was an attempt to re-write the rules of construction defect litigation to give builders a right to do necessary repairs. As such it added a number of amendments to the Civil Code including a long list of construction “standards” that would measure the fitness of specific building components. Inserted into those “standards” however, were the seeds of another “trap.”

Limitations on actions, also known as statutes of repose, were inserted along with certain of the standards and shortened from what would otherwise be a ten-year period to bring an action for construction defects down to as short as 1 year, depending upon the component.

But that was not all. The important question to ask about a statutory time period on the right to bring an action is not just how long is the period, but “when does it begin to run?" In the case of Title 7, this is very complicated and any board member or manager would be excused for not understanding it. The problem is that by not understanding it, you run a very real danger of blowing the statute of limitations. This issue is discussed at length in the article: “What you don’t know—when do statutes of limitation begin to run on construction defect claims?”

Trap # 3: The Governing Documents. The governing documents of a new community association are prepared by attorneys for the developer of the project. Modern CCRs and Bylaws contain a number of potential pitfalls inserted by the developer to protect itself from litigation by the association. Some of these pitfalls key to provisions of Title 7 as we have already explained. But there are other provisions that can trap a community association. Such things as mandatory inspection provisions that will serve as a defense to a developer if a board of directors of a community association does not follow its onerous requirements to the letter.

These and other provisions of an association’s governing documents can trap an association if ignored. They are described more fully in the article: “Why your CCRs hate you.” Traps in governing documents are put there to provide the declarant developer with a defense against claims by the association. There is no other valid reason for their presence in an association’s governing documents.

Whether it is buildings, statutes, or governing documents, community associations must negotiate a minefield to protect itself against large, unexpected costs of repair. This is true whether the association seeks to bring a claim against a builder or converter, or simply make the repairs itself. Reading the literature and consulting with experts can give the association a fighting chance.

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