By Aaron J. Goodlock, Orten Cavanagh Holmes & Hunt, LLC
In the wake of the Surfside condominium catastrophe, many communities are grappling with how to address risks associated with aging and deteriorating infrastructure. Among the many lessons learned, the importance of deliberate and long-term financial planning and the avoidance of deferred maintenance may be one of the most paramount.
Boards of directors are routinely faced with prioritizing and balancing various interests when it comes to utilization and preservation of association funds and resources. A variety of factors, including pressure from owners, can influence the decisions that boards make in terms of establishing and maintaining adequate reserve funds, the frequency of conducting reserve studies, and undertaking (or deferring) capital maintenance and repairs.
The magnitude of the Surfside tragedy underscores the importance of commissioning regular, comprehensive reserve studies. Prudence dictates that such reserve studies must necessarily include an inspection and analysis of the physical structures/components as well as major mechanical equipment and systems (e.g., building foundation and structural elements, HVAC and boiler equipment, drainage facilities, utilities, elevators, fire suppression systems, etc.). Engaging professional reserve specialists, engineers, and others to regularly inspect the various structural components and central mechanical systems helps to protect associations and communities from experiencing disasters similar to Surfside.
However, simply having a reserve study performed is not sufficient. Associations must be proactive in addressing and correcting problems and concerns identified in the reserve report and setting aside necessary funds for future replacement and repairs. Associations would be remiss not to heed the professional advice of reserve specialists, engineers, etc., with respect to repairing and replacing aging, deteriorating, or damaged infrastructure. Boards that ignore or fail to adhere to such advice can put the association and the community at significantly greater risk. Alternatively, boards of directors that engage professional advisors and listen to and follow their advice substantially reduces the risk of liability.
The healthiest and safest communities (i.e., those least likely to experience disaster, get hit with large special assessments, or face significant potential liability) are also those that actively plan for the repair and replacement of aging infrastructure by: (1) establishing and maintaining fully-funded reserves (commencing after the initial construction by the developer/builder is complete); (2) periodically conducting and updating reserve studies (ideally annually); (3) budgeting for and performing regular maintenance to preserve (and possibly extend) the remaining useful life of capital assets; and (4) avoiding deferred maintenance.
The current regulatory framework in Colorado is extremely lax in terms of physical inspection requirements and/or mandatory reserve funding. There are no statutes in Colorado that require associations to undertake regular inspections or put aside funds for future repairs or replacement. Accordingly, it’s incumbent on boards of directors, as fiduciaries, to assume such responsibility and ensure that the property is regularly inspected and adequately maintained.
Despite the lack of statutory requirements, associations and boards should strive to maintain fully-funded reserves, continuously assess maintenance needs, and diligently perform regular and routine maintenance. To accomplish these objectives requires active board member engagement and owner communication regarding community needs and expectations. The association’s reserve study report, reserve specialist recommendations, and budgets are useful tools to educate owners about the importance of maintenance and financial planning.
A crucial element with respect to maintenance is to avoid unnecessary or prolonged delay. If damage is identified during an inspection or otherwise, the association should take prompt steps to fix the problem and make any necessary repairs. Depending on the nature of the problem, repairs can be funded and paid for from the association’s operating or reserve funds. If there are significant structural concerns and the association does not have adequate funds to pay for the repairs, the association should consider alternative funding options such as a special assessment or obtaining a loan, and increasing the association’s budget to meet ongoing operating and maintenance expenditures, as well as replenishing and funding future reserves.
Lastly, safety – not frugality – is key. The safety and integrity of the community’s buildings and infrastructure must take precedence over any contrary desire to minimize assessments. Sacrificing maintenance and repairs puts associations at substantial legal and financial risk. Conversely, investing in regular upkeep and improvements will have numerous positive impacts, such as increasing the marketability and property values in the community, which is both advantageous to owners and desirable to future, prospective buyers.
Aaron J. Goodlock is an attorney at Orten Cavanagh Holmes & Hunt, LLC. He provides general counsel and transactional services to community associations throughout Colorado.
