 Think Tech-A-Yay, Civil Engagement Lives Here. And good afternoon, and thank you for joining us today for another episode of Condo Insider. My name is Jane Sugimura, and I'm your host today. And I have with me Lorie McGuire from the law firm of Porta McGuire, Kiyakona and Chow. Hi, Lorie. Hello, Jane. Thanks for being with us on this show where we talk about condo living and issues that affect people who live in condos. And today we're talking about an issue that's near and dear to the heart of all board members and residents, and that's repairs. And repairs are an issue with most of the high-rise and townhouse buildings in the state. Is that true? Yes, that's true. And as most people know in the state, I would say probably many, if not the majority of our condominium and townhomes were constructed in the 60s and the 70s and the 80s. And so now you have all of these capital improvements that need to be either repaired or replaced, and it's a real problem. Okay, when you say capital improvements, what are you talking about for the layperson? Sure. Sure. The unit owner sitting out there or the first-time board member, what are you talking about when you talk about capital improvements? Okay, well, in terms of capital improvements, I'm talking about the components of the common elements that the board has a duty to maintain and repair when necessary. Examples would be spalling, spa repair, or the replacement of windows. The replacement, a big item now is the replacement of the wastewater mint pipes. The cast iron, the old cast iron pipes are now corroding and sprouting leaks all over the place. You've got the installation of energy devices. You've got elevator modernizations. You've got the replacement of roofs. And some of these condos, you've got escalators that now have to be replaced. So things of that nature that are components of the common elements. And you said spalled repairs. What is spalling? Okay, a spalled repair, as I understand it, is when the concrete on the side of the building starts to corrode, the rebarb that goes into the building begins to corrode and collapse. The rebarb is what has held the cement, the concrete up. And so when that starts to corrode, your building literally starts to crumble down the face. And so you've got to go in and do that repair over the entire building. It's a very costly, very lengthy repair. And pretty much every building has to go through it here in Hawaii. Right. And what is the board's responsibility with respect to these repairs? Okay, that's a great question. You know, the board, their primary responsibility is to increase and maintain the value of the property. Well, one of the ways they're going to do that is they've got to stay on top of these capital improvements. So if they find out that there is a problem with one of these capital improvements, then they've got to address it. It's their responsibility, their fiduciary duty. They have a duty of loyalty to all of the owners to maintain that property. And so how do they do this? Okay. Well, a great example would be, let's talk in terms of a particular project. So let's look at a pipe replacement, a waste pipe replacement. One of the first thing a board wants to do is they want to go into a fact-finding mission, if you will, where they put together a committee. When the committee comes together and they go around to the owners who've experienced these leaks to find out what is the scope of the problem, how many leaks have we had, where are the leaks located, what's causing the leaks. So they basically enter into a fact-finding mission to determine the scope of the problem. Once they have a better idea of what the problem is, then they want to retain an expert in that particular field. And that expert can then help them also look at the scope of the problem and determine the specifications for repairing or replacing that particular problem. Okay. So how do you go about finding this expert and what does the expert, I mean, besides looking at the situation, trying to figure out how to repair, what does the expert do? Well, the expert is going to help the association draft a request for proposal, a request for a bid proposal. And so what he or she will do is draft, along with the association, a scope of the work to be completed and the specifications. And this request for proposal can be as simple as a one-page proposal. Let's say if it's a very simple project, such as a tree-terming project or a sign installation, that may be a one-page RFP. But if you've got a huge construction project like the pipe replacement, then that request may be 35 to 50 pages long. And as the association, you're going to want to put in as much information in that request as possible. For example, if you've got certain material specifications that you know you want these particular materials in your building, then that's what you're going to put in that request or the types of materials. If you have insurance requirements that you want your license contractor to have, then you need to put what those insurance requirements are in there. If you have certain time deadlines, for example, the work needs to be completed by this particular date, then that needs to go in there. In terms of where is the contractor going to park? Where is he going to put all, he or she going to put all of the equipment that they will be using for this repair? What do you want at the end of the day? Do you want your project cleaned up? In other words, you don't want rubbish all over the place. So you've got to lay out your demands, your requirements, so that that contractor knows exactly what's required at the end of each day and at the end of the project. The more detail you have, the less problems you will have in the long run. You want it to be as specific as possible. And that way, it assists you with obtaining competitive bids. So you're comparing apples to apples. So every contractor who bids on this particular project is going to be looking at the same parameters and giving you a bid based on those same parameters. And so you're talking about this request for proposal. Is this something that a property manager or a resident manager can prepare? No. No. I highly recommend they do not. Don't have your property manager or resident manager do your RFP, thinking you're saving money. You could end up in litigation in the long run because your request is going to be too vague. And then the board would get upset because the work that's being done is not what they expected. And that is a result of the vague request that's been drafted. So no, you do not want to have the manager or property manager to do that kind of thing unless, of course, they happen by chance to be an expert in that particular field. And so what kind of information does an RFP usually contain? All right. It would, for example, contain, well, there's a fiscal component, and then there is also a physical component. So for example, the types of materials that you want, and then the cost. How much are you willing to spend? Do you have a range? So that's the kind of thing that goes into it. Again, like I said before, you want as many details in that RFP as possible. And so that means if you're doing a pipe project, then it would depend on the building. Let's say you've got a 10-story building. And so you need that expert to basically figure out how many pipe lengths you need, what kind of pipe you actually need to put into the building. And that expert, because of his training and experience, would probably know where to get these materials, whether they're available locally or whether they've got to be ordered from the mainland. Exactly. And he would also have the expertise to let you know whether or not the material that you're inquiring about installing would be good for Hawaii. For example, certain materials may be good in the mainland. They're not good in Hawaii. So your expert is going to be able to tell you that information, which is another reason why you want to hire an expert in that particular field. Other than maybe the supplies, what about the actual plans about what gets done first and where do the pipes go and what kind of workers do you have to install the pipes? Yes. So that would be in the scope of work and also in the specifications. So in terms of the specifications, he's going to determine exactly how much piping you need, the type of piping, the size of the piping, again, the materials. So all that is going to be in the scope of the work and in the specifications. Okay. And so once you have the RFP, what do you do with it? You would put it out to bid. So you basically have anyone bid on it that wants to, you know, they would advertise that all bids are due by this set time. So for example, anyone who's interested would get a copy of the RFP and then the bid, typically the expert will let the bidders know that your bids are due by this particular date. And then you get the bids and you review the bids and then make a determination as to which bid you want to select. And when you say you, you're talking about the board. I am, yes. The board in conjunction with the expert. Okay. So, who is the entity, is it the expert or is it the board who's actually going out and trying to solicit the bids? The expert. The expert. On behalf of the board. I see. And so, and then the expert can look at the bids as they come in and can, is it typical for that expert to then make recommendations and say, well, you know, I think this one is better because they've got 20 years of experience in the community or, you know, that type of thing. Is that what happens? Definitely. Because the board knows nothing. Typically, most board members know nothing about pipes or the replacement of pipes. They don't know much, if anything, about the various contractors unless they've had experience in working with these contractors in other projects or something. Or how to implement a construction schedule. Oh, definitely. Right? Definitely. And so that's why, and this expert that, you know, the board is hired to help them to make the specs and do the RFP, I mean, does he stay on after the board has selected a contractor? He might. He might. In other words, if they've selected that expert to also be the construction manager, then that expert would stay on and help manage the construction itself. And oftentimes they do. Yes. It would be like the project manager. Yes. Yes. Okay, well, why don't we take a break now and then when we come back, we'll talk about, you know, how, you know, the buildings actually go about getting the funds to pay for these repairs. All right. Sounds good. I'm Ethan Allen, your host on Pacific Partnerships in Education here on Fink Tech, Hawaii. Every other week, Tuesdays at 3 p.m., we have guests on and talk about the fascinating, interesting and unique partnerships in education that occur across the Pacific Islands with Hawaii, Micronesia, the Marshall Islands, Palau, Guam, all these places have really rich local education programs going on and the exchange among and between these programs is a wealth of great information helping the islands all learn how to survive and thrive in our ever-changing world. I hope you'll join us on Pacific Partnerships in Education. I'm going to the game and it's going to be great early arriving for a little tailgate. I usually drink but won't be drinking today because I'm the designated driver and that's okay. It's nice to be the guy that keeps his friends in line, keeps them from drinking too much so we can have a great time. A little responsibility can go a long way because it's all about having fun on game day. I'm the guy you want to be. I'm the guy saving money. Let's go. He's a service dog. Well, I could get a vest too. You're not even a service dog. He's trained to assist his owner. Well, I can do whatever he can do. Wow. Did he just open the door? Yep. From our break and I'm here with my guest, Larry McGuire and we're talking about repairs to aging condominiums and okay and we're talking about how the buildings would be financing. Why don't we talk about budgets and reserves? All right. How does that tie in with these reserves? Okay. Well, first of all, under Hawaii law, all condominium associations have to prepare an annual budget, an annual operating budget. And part of that budget is not just the estimated revenues and expenses for the day-to-day affairs, but also there are reserve requirements in the budget. So for example, in the budget, one of the things that's required is the amount of replacement reserves that you currently have on hand, as well as the amount of replacement reserves that are needed for that particular year. And that will be determined by the replacement reserves. There were three things that I was mentioning in terms of the things that are in the annual budget. And again, one of them is the total replacement reserves on hand. The other is the estimated reserves that the association will require to maintain the capital components based on a reserve study. And the third one is the amount that the association must collect in reserves for that fiscal year. So the reserve study is what will tell you what you need to fund in order to be able to replace these particular components when the time comes. And what are the kinds of things that are on a reserve study? Oh, my goodness. Well, first of all, let me just tell you a little bit about a reserve study. A reserve study is a forecast. And it includes all of the common element components. So for example, if you were to look at your governing documents and you were to look at the definition of common elements, everything listed in the common elements, as being the common elements, are divided in the reserve study into individual components. So you lay out all of those components, and then you look at the estimated remaining life for each of those components. And then the third thing you look at is the replacement cost at the end of that life. And based on that, you determine what your reserves, your required reserves will be. So for example, and these components have to have a cost of $10,000 or more to repair. And then you also have a miscellaneous reserve fund that contains the components that are less than $10,000. So they combine them into a miscellaneous fund. But for example, in the reserve study, which is done by a reserve specialist, this is not something that's done by the board. It's not something. Or the site manager. Or the site manager. Or the resident manager. And oftentimes not even the property manager, unless the property manager is a reserve specialist, and many are. But you want to rely on a reserve specialist. They will then look at your building and make a determination of what are all the components that need to go in the reserve study, the estimated life of each component, and the cost to replace them at the designated time. So for example, all of these capital improvements we talked about previously, in order to fund that at the end of the life of that particular component, you need to have the proper amount in reserves in order to fund it. Because if you don't have that money in your account, in your reserve account, when the time comes to do the repairs, how do you pay for it? Well, that's a great question. And it's often a problem for many boards, especially in this day and time where you've got so many of these large components are needing to be replaced now because the building has aged. So you have three main sources of funding. You've got a loan. You've got a special assessment. And then lately, people are starting to use a lease as a source of funding as well. And then sometimes you have a combination of these things, depending. So what would be a special assessment? So I'm a unit owner, and I'm paying my maintenance fees. And all of a sudden, it turns out we have to do these spa repairs. And they have a certain sum of money set aside. But because of inflation and the construction that's going on, now everything's twice as much. So even though we did our job and we set aside money over time, and it's in the reserve, we don't have enough money. And now we've got maybe half a million dollars set aside for this ball, and the job is not going to cost double that. It's going to cost a million dollars. So how do we get the extra 500,000? So you're saying looking at a special assessment. If you issued a special assessment, the board is the one that makes this determination, not the owners. The owners don't vote on a special assessment. The board will make a determination of whether or not to issue a special assessment to cover this particular expense, and it will be paid off over a period of time. So it's an assessment much like the maintenance fees or the regular assessment. But this is now on top of what I would be paying. Now I've got to pay a special assessment. Yes. And you have to pay it within a set period of time. So typically owners have the option of paying it in a lump sum, because some owners don't want to pay it. They just want to get it paid off and forget about it. Others, especially those on a fixed income, this is a real burden for them. So they will have to pay it out over the allotted amount of time. But some owners can't pay that, and consequently they end up risking foreclosure if they can't pay it. Even if you foreclose on them, you're not going to get that money from them. You may get their unit and be able to rent that out, but it doesn't necessarily solve your problem. So as a board, you have to make a determination of what is the best source of funding for your ownership. And so a special assessment may not be that. Moreover, if you sell your unit, you've got to pay off that special assessment before closing. It can't go with you. Take a loan. If you were to do a loan where you obtain a lump sum from a lender, a lending institution, and then you pay that lump sum back over a period of time, which in a large capital improvement it could be 10, 20, 30 years. So that's much easier on all of the owners, certainly those with a fixed income. And especially now when interest rates are so low. Yes. Definitely. When you want to sell your unit, that loan gets passed on to the new buyer. So a loan is a wonderful option. And what kinds of things to do that does a lender look at when they're going to be making a loan to an association? Because usually I think the lenders are saying, well, an association is a pretty good credit risk because they've got cash flow, they've got maintenance fees coming in. So are there other things that the lender looks at before they decide that your particular association is a good credit risk? Yes. Well, one of the things, one of the key things is they want to know what your delinquency rate is. So they want to know basically how many of these owners are delinquent for two months or more. If you have a high delinquency rate, which could be a problem if you've had special assessments that people couldn't pay, then the lender may not loan you the money. So that's a real problem. And owner occupancy rates too are a factor. Yes, exactly. Exactly. If you've got vacation rentals versus owner occupancy, they're going to look at that as well. And you mentioned the third option, leases. Yes. Yes. Leases are a fairly new source of funding that has arisen lately. And it's a great opportunity for these associations because they don't have to take the money out of the reserves. So basically, a lease is a rental agreement for a particular type of equipment. So for example, if equipment can be removed, then it can be leased. We recently, as you know, met with some representatives from Bank of Hawaii. And they were telling us that they've started doing more and more leases of equipment, such as heat pumps. Heat pumps. They've done chillers. They did an elevator modernization, an escalator modernization, solar, water heating. So if it can be removed, then it can be leased. Because under, I believe it's 514D105E, a lease is not alone. So long as at the end of the lease, the association has the option to purchase the particular equipment at fair market value. So if they choose not to purchase it, then the lender has the option to come in and remove that particular equipment or they can roll it over into a new term and carry it out for another term. It's very affordable and in many cases, the lender will maintain that piece of property because you are basically renting the property from that particular. And so this gives them an option at the end of the lease to just pay a small nominal sum and they would own the equipment. Yes, yes. Exactly. You know, we're running out of time and so whoever that was who was trying to call us, if you will call us, I promise you we will respond to your questions. So please give us another call. And for the audience out there, please join us next week. I understand Richard's going to have a very interesting program about insurance, insurance. So please tune in to Condo Insider. This is your program regarding condo living. Thank you very much for joining us and thank you, Larie. Oh, my pleasure. Thank you.