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Funding Reserves & Scheduling Repairs With Oversight Inconsistent, Boards Must Do Right on Their Own

In the eight months since the deadly collapse at Champlain Towers South in Surfside, Florida, many states and municipalities are reviewing their policies around reserve funds, inspections, and maintenance projects for high rise apartment buildings. This trend has a particular impact on owned communities like co-ops and condominiums. While the governing documents of virtually all such communities mandate the establishment and management of reserve funds to pay for major maintenance projects and to protect the safety of residents, few governing authorities at any level have oversight or enforcement power over how associations handle maintenance at their properties.


A National Problem


Karen Sackstein is a CPA with Jilleba & Libeck, located in Westwood, New Jersey. She specializes in condominium and cooperative communities, and says that broadly speaking, “Associations with shared common elements are required by their governing documents to maintain reserve accounts for [the repair of] structural issues. When regular maintenance and major capital projects are not completed regularly and when necessary, there can be degradation of the structure and the building can collapse, as happened in Surfside. Associations need to put money aside on an ongoing basis for maintenance, and not use those funds for other things.” 

The only catch here is that these communities are self-policing, and often the physical well-being of the property becomes secondary to any financial issues facing the community. Boards struggle with balancing short-term financial goals - keeping carrying costs low, for example - with the long-term physical health of the property.

In rental properties, landlords have a vested interest in keeping their buildings in good, if not top, condition. They may be subject to fines from local authorities for neglecting the physical health of their properties, and run the risk of lawsuits from residents. They also are subject to a built-in oversight mechanism through their mortgagees. Regularly scheduled inspections of the property by bank inspectors will usually result in necessary maintenance being taken care of in a timely fashion.

Large condominium buildings are a different beast - in their case, there isn’t that oversight guardrail, because there aren’t any long-term mortgagees on the property. That was one of the inciting factors in the Surfside collapse. While reserve studies had been completed, there was no authority to compel the board to actually do the necessary work. Conflict between unit owners overruled common sense.

And the problem isn’t limited to just Florida. “In New Jersey, most associations have a requirement in their governing documents to put away money for reserves,” says Sackstein. “But there are no specific state-level legal requirements in New Jersey that explain how to calculate those reserves and or allocate them properly. There aren’t any regulations to make sure work is done or not done, and no fines for negligence. No oversight. No fines. No enforcement. Because there’s no law.”


What the Law Says Now


Mark Hakim, an attorney with Schwartz Sladkus Reich Greenberg Atlas, a law firm based in Manhattan explains the situation in New York: “A reserve fund is a savings account maintained by cooperative and condominium buildings intended to serve as a cushion for future work and projects,” he says. “In New York however, with the general exception of rental buildings being converted to condominium ownership (Local Law 70 of 1982, now Title 26, Chapter 8 of the New York City Administrative Code, otherwise known as the “Reserve Fund Law”), there are no current laws or regulations requiring existing cooperative or condominium buildings to establish or maintain a reserve fund.”

“That said,: Hakim continues, “although each building is different, it is prudent to establish and maintain a reserve fund to offset the maintenance costs and future needs of your building. It’s challenging to determine the correct amount - and although reserve studies are not mandated either, boards should endeavor to identify all the areas of their building that may need work, or are about to become outdated, and then work from there to establish their reserve requirements. We often recommend that older buildings follow the Fannie Mae requirements - that is, setting aside and maintaining at least 10% of the annual maintenance as a reserve. Again, each building is different, and circumstances will dictate whether this needs to be increased or decreased.  But boards should certainly be focusing on the long term physical and financial health of the building, thus ensuring that the building is or will be adequately funded for the near future - especially in light of the horrific Surfside disaster.”

Scott Piekarsky, an attorney with Hackensack, New Jersey-based law firm Phillips Nizer stresses that in New Jersey at this time, “When it comes to reserves, there really are no strict requirements or strict enforcement mechanisms. [Only] the regulations that apply to the developers of new sites dictate that there should be ‘adequate reserves,’ but I would say that associations should also maintain adequate reserves. How do we do that? Reserve studies should be done about every five years. We hire engineers and experts who are trained and accredited by the Community Associations Institute (CAI) as reserve specialists. There’s a philosophy that about 10 % of revenue should be put into reserves on a regular basis - but again, unfortunately there are no strict legal requirements or enforcement arms. If a board or association refuses to share financial information like this, one can file a complaint with the New Jersey Department of Community Affairs (DCA). They are pretty good about getting compliance. Owners can also seek relief in superior court chancery division, but that can be costly.” 

Clearly, in light of the terrible events in Florida last year, and absent actions on the part of local and state governments to take a more proactive role in oversight and enforcement, it is imperative that condominium and cooperative owners take a more long-term view of the costs associated with maintaining their physical plants. The alternative is unthinkable - or at least it was before June 24, 2021, in Surfside, Florida.

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Comments

  • AJ- well said. Deterioration is insidious and ongoing, it never takes a day off. Associations who ignore it, failing to fund Reserves do so at their own peril. They are dooming their association's future to one of deterioration, special assessments, and property values that lag behind more well-maintained properties.