Navigating Large-Scale Repairs, Special Assessments and Loans

Ken Strauss

As a community association ages, one of the most difficult and important tasks facing a board of directors and their community association manager is performing large-scale repairs as major building components reach the end of their expected useful life. These projects can often result in a significant amount of disagreement in a community as to how to best approach the repairs, and may require large special assessments to fund a complete project. Having a clear plan, consistent communication with owners and proper use of professionals can help to smooth the way to a successful project.

Understand and Plan for Your Needs With proper planning, a large repair project should not come as a surprise to an association or its members. Thorough reserve studies should identify when a community will be scheduled to perform significant repairs. Working with a reserve consultant and management, a board of directors should be budgeting in an intentional and responsible manner toward funding necessary repairs. In reality, many associations are underfunded and cannot afford to perform large repairs without a special assessment or a loan. Proper planning will minimize the impact of these issues and allow an association to perform necessary work when the time arises, even where a special assessment and/or a loan is necessary to fund the project.

If an association intends to borrow funds to complete repairs, it will need to establish credibility with a lender. The association should be able to show that it has consulted with professionals, considered alternatives for repairs, and identified the proper scope of repair. The lender will want to understand that the association has a proper team of qualified professionals in place to complete the project.

Lenders will also require that the association meet underwriting criteria, which may include a maximum level of delinquencies and an acceptable level of reserve funding and cash flow. Well before beginning a repair process, an association should be working toward these goals so that when the time to begin the project comes, it is in a position to qualify for necessary funding.

Build a Team Once an association determines that it will need to perform large- scale repairs, the first task is to identify the team of professionals that will be necessary to implement a plan. A community association manager, including an accounting manager, will typically be the lynchpin of this group, coordinating the efforts of the consultants and professionals and facilitating communication with the board, the consultants and the members.

A community association attorney should be engaged to review the governing documents and determine the association’s rights and obligations relating to the project, as well as to review contracts and ensure that the association is fulfilling its legal obligations to the members as well as under state law. For multi- family rehabilitative projects involving building envelope repairs, the association may need to comply with RCW 64.55, which requires waterproofing design documents, course of construction inspections, and certification that the project was completed according to the design requirements. Typically such compliance is necessary when the cost of the repairs is five percent or more of the aggregate tax-assessed value of the units.

16 Community Associations Journal | April 2017

A design professional, such as an architect or engineer, will develop a scope of work and the design documents and bid packages for contractors. In many cases, the same design professional will provide the course of construction inspections. Some design professionals will also provide construction management services; in some cases an association may wish to retain a separate construction manager.

If the association will be borrowing funds for the project, a community association lender should be involved from the outset to make sure that the association has the right team in place to meet its underwriting requirements.

Review Your Governing Documents One of the first steps in the process is to review your association’s governing documents to understand what requirements the association may have for levying a special assessment, obtaining a loan, and conducting significant repairs. The governing documents may require separate votes for budget ratification, special assessments, capital improvements, and repair of damage and destruction (each with a different threshold for approval). These provisions can be confusing and it may be difficult to understand when provisions relating to damage and destruction or capital improvements apply. A community association attorney can assist an association in determining which approvals may be necessary for any particular project.

In most cases, replacement or repair of the building envelope system will not represent a capital improvement. This issue has been a point of contention in many large projects, and courts in many jurisdictions have ruled on the applicability of a capital improvement provision to a repair project. Generally, repair or replacement of existing common elements or limited common elements is not considered a capital improvement. In unpublished cases, Washington courts have ruled that replacement of existing building components, even where the replacement represents a different or better system, do not represent capital improvements. This is generally consistent with the rulings in other states.

Damage and destruction provisions may also be confusing. Again, generally a damage and destruction provision should not apply to the regularly scheduled maintenance, repair or replacement of existing common elements. However some are so broadly written that they may raise questions as to whether they need to be followed for a repair project.

In order to obtain a loan, most lenders will require express authority to borrow funds be stated in the Declaration of Condominium. If your governing documents do not include such a provision, the association may need to amend its governing documents early in the process, as the approval necessary for amendment may be difficult to achieve. Lenders may also require an acceptable delinquency and collections policy.

Communicate with the Owners It should come as no surprise that embarking on a large project funded by a special assessment will cause many owners a great deal of concern. Misunderstandings, rumors and doubts about the process can make the approval process extremely difficult. A successful project includes consistent and accurate communication with the owners from the outset.

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