 and everybody and thank you for joining us for another segment of Condo Insider. We're so happy to have you here and we hope everybody had a really good Thanksgiving and is looking forward to the Christmas holidays. So today I have with me as my guest who is also one of our Condo Insider hosts is Richard Emery and we're going to talk about the RR105C that is done by property management companies. They're provided to realtors or provided to lenders as well and we're going to talk about the importance of the accuracy of that document. So to start off Richard, so give us a little bit about yourself because I've known you for a long time but I don't know how much everybody else knows about you. Well I've been in the industry, condo industry for 30 years. I used to own my own property management company, been very engaged in the community by being on the Hawaii Council Community Association Board as well as CAI Legislative Action Committee. Sold my business in 2011 but still retained interest in the industry and primarily do consulting and expert witness work on real state matters before the condo industry and other parts of real estate as well. Okay great, I've known you since I was a child. So we're going to talk about the RR105C. It's a document with a lot of disclosures on it, very important disclosures that is used by everyone to the party of a real estate transaction. So explain to me what exactly is the RR105C? Well let me share with you a little bit of history. Take you back to approximately 1995 and the Hawaii Association Realtors set up a committee to deform the first RR105C which was called a Managing Agents Disclosure and I was on that very first committee of the Hawaii Association Realtors when the very first form was designed. The idea behind it is on real estate transactions it's very important to provide sellers and buyers with accurate information so they can make an informed decision. It has always been a seller's disclosure meaning the owner of the apartment or the unit had a disclosure but there was the issue of the common elements and all the things related to the common property run by the Board of Directors that there was really no form at that time in 1995. They really addressed telling a potential buyer other factors about the common property that they were buying into. So the first RR105C was formed by the Hawaii Association Realtors in about 1995. It's been amended several times since then but the concept importance of it is is to give the buyers of a piece of real estate an honest disclosure on a whole bunch of aspects within RR105C so they're informed when they make a decision to purchase the unit. Oh great that was in 1995 when it first started. Wow. So who actually completes the information and who has a legal obligation for the information that is completed in that form? Well that's an interesting question because you see if you look at the condominium statute we have certain obligations that produce financial statements and minutes and under the purchase and sale agreements section Amazon Mary those things are standard disclosures given by the seller to the potential buyer. When you look at the RR105C itself nowhere in the statute does it require the managing agent to complete that form. It's done on a voluntary basis for the good of the industry for the payment of a fee. What people don't seem to realize is that the RR105C is not a static document you can pair it once and just click a copy and send it to somebody because requirements are has to be dated at the time of this transaction. It has to reference a specific unit so the managing agent because it's called a managing agent disclosure is the one who completes that form or a fee and what they do is then go in because if you look at some of the questions it's like is the maintenance fee increase contemplated? Well they could have last night at a meeting voted to have a maintenance fee increase so someone within the managing agent should look at these documents to make sure all the information provided is accurate and if they don't know there's plenty of blank spots where they can write something to disclose fully what the exact circumstances are. Because I know that form also covers like leasehold because I've heard complaints about that not being completed correctly when it comes to you know most of the commas were leasehold way back when but now they've been converted but there's still pockets of existing leasehold and then you have the other ones that bought the fee. So from a lender perspective I know there's been some complaints that the probably management companies didn't complete that part correctly which kind of held up the transaction as well because it has to it's all regarding the subject property being purchased right? Right well to get to expand on what you said first of all there are questions in the RO105C that are not finite answers for example the most common one is what percent is owner occupied. You know managing agents don't traditionally keep that information they've got to look at the database and addresses and try to come up with their best estimate of what the number is but it's not perfect or pure. The same's true in the leasehold issue they should be able to tell whether the apartment is leasehold or not just because more it's more common that the association bills to the leasehold portion they can very easily figure that out but there are condos out there that the less or bills the owner directly the association is not involved in collecting the lease rent they don't know who bought or didn't buy the fee so it's not always an easy chore for the managing agent to give 100% reliable information. Well that's true that's why you have the realtor going over it the RO105C because they can tell from the preliminary title report that it'll say if he's in more leasehold right and then so let's talk about the money involved to get that document so why does it cost you know that amount of money. Well you know realtors and buyers and sellers and their purchase and sale agreement usually check they want the documents in schedule M which is going to be the budget the reserve study the financials the last three minutes the last annual meeting minutes RO105C and a bunch of other documents house rules etc some of those are static documents and easy to produce they don't weigh change that often like the declaration of the bylaws not always true but somebody's true but when you start then saying to the managing agent you're going to have because remember all managing agents are real estate brokers under the laws in the state of Hawaii so they have obligations and potential license issues with misrepresentation so it's very important that I'm not saying all management companies do a good job at this but they need to take that RO105C and put attention to it to make sure the information is timely and accurate with regard what they're telling people and they always have as I said the ability and these open block areas to explain something such as we don't maintain records on the lease fee interest because the relationship is directly between the lessor and the owner and we have not totally reliable information. Same thing goes for owner occupancy because I remember of one where the owner occupancy was incorrect so we actually provided the information to the property manager because some people use PO boxes but they live on property you know so sometimes going through the addresses is always the best thing so you kind of have to rely on the on-site people to help provide that accurate information if you can. Well the bigger problem to be honest with you is that times have changed in the early days having been an ascendancy medium old that the you know people would just look at what the lender had a minimum requirement of at least 50 percent owner occupied and they would just plug the number to make sure that the person would be qualified. Well times have changed now liability has become much greater with litigation coming all over the place on all sorts of aspects of buying and selling real estate and the RO-105C and actually the budget reserve study issues are primarily the biggest areas you see litigation now on this matter which is litigation against the association. And from a lender standpoint I know the document RO-105C has a time limit so especially now after the Florida collapse they're requiring it to be no later than 30 days old you know so it's a constant update which I know is you know it's arduous for busy property managers they got other things to do too but but still they got to take the time to fill it out accurately. So I know you've been involved in some as an expert witness in some lawsuits so tell me about some of the those kind of claims that come about with errors in RO-105Cs. Well I thought about that question you were going to ask and I have three or four examples that are all a little different let me begin by saying that more and more litigation is happening because of disclosures and whether it be disclosures in the reserve study not being accurate whether it be disclosures in the RO-105C being inaccurate and a lot of times it's from the buyer who buys in a unit who relied on that information to make a decision to buy it and I can give you let me give you the first example a owner I'm not going to mention names of projects by the way an owner new owner buys in a project gets the RO-105C and the RO-105C does not include information with regard to an upcoming special assessment for seawall repair and that would mean that hypothetically that every unit is being assessed 15, 20, 25,000 because of the need to have a seawall repair but it's not included in the RO-105C that there are even discussions about I mean it'd be very easy to say that there are seawall issues that are being evaluated by an engineer that may result in an assessment the information is unknown at this time there's ways you can deal with it based on whatever the factual truth is at that moment what happens is everybody just checks not to my knowledge not to my knowledge not to my knowledge and then the lawsuit gets filed and it says well you're at the board meeting how can you say you don't have any knowledge on this matter you know and so they fight that issue and so if they disclosed it in the beginning they wouldn't have the litigation that they were they this owner has been harmed because they wouldn't have paid as much money if they knew again I make up the number there's a $20,000 assessment for the seawall so completing that RO-105C whether it's litigation or not what common elements need repair all of those things are just critical and that's example number one the offset that one example just briefly is they also claim that the seawall was not in the reserve study which is an interesting argument because reserve studies include items with a finite life and a predictable useful life and cost where seawall doesn't have that so it wouldn't have been in the reserve study no matter what however they had knowledge because of the board meetings and they're out getting bids and they're hiring engineers to fix the seawall that there was an issue with a common element property and the fact was yes that didn't need to be in the reserve study however it did need to be in the RO-105C so with that so are some of the condos now that have seawalls and as you said they weren't required so now are some people updating their reserves to include some of these seawalls that you know especially with with the rising tides and everything like that that wasn't really relevant like 15 you know 10 15 years ago but now it's becoming more important well it's interesting how I would recommend they handle that because first of all as I said if you had national standards of writing reserve studies you would not include the seawall but the standards don't preclude you from including the seawall but why would you not want to have a disclosure in your reserve study saying hypothetically seawalls are not normally included in a reserve study because it doesn't have a finite useful life but this association is experiencing issues with the seawalls and has hired an engineer to help in my made-up example determine the cost to repair the seawall in the future I mean they could do something so let's talk about errors or emissions you know so we know the liability is on the part of the person preparing that document you know and and some um some managing agents have those documents being held by by an outside third party so really who has the liability for the accuracy of the information that's continued managing agents and agents they represent the association so the association they get sued no matter what and probably the managing agent but going back to my example of the one litigation I just want to mention two other things briefly I had another case for example where a new owner bought in there was a hundred unit condominium the top floor I had the two penthouses there's four units per floor so for 12 floors there's 48 units and the top floor I had two units because they were double units for the penthouse the owner bought in to that unit and found out that he was going to have a hundred thousand dollar assessment because the air conditioning had to be replaced it had central air conditioning and his share of that was a hundred thousand he took that to binding arbitration and the judge the arbitrator ruled against him because even though it wasn't in the reserve study all of the board minutes for months and if not a year disclose the problem with the air conditioning not sick working and that there was going to be an assessment and they had higher mechanical engineers to evaluate the need so if you're a buyer you would see this quote red flag did you not have some obligation to investigate it you can't just come back and and and and hold it against them because the other kind of quick examples is realtor puts down that the floors in the unit are wood floors but they're not wood floors they're engineered wood floors and there's a difference in how you can repair an engineered wood floor so I see litigation when they're suing and saying I didn't know I didn't I couldn't just sand my floor and fix it that I had to replacement and then I go into the one where the realtor and I be an example got sued because their argument was that the R105C said there was no asbestos well the asbestos was there was none in the common elements but the old unit in the there was being sold had asbestos in the ceiling so they'll turn you tried to sue the managing agent saying that they had some obligation for disclosure within the unit so you can see it's it's not an easy thing everyone's going to have its own case but I when I teach this class on this subject and avoiding liability I tell everybody the same thing disclosure disclosure disclosure the more you put in and disclose the truth you don't have to have all the answers but you do have to tell what you know and that's what it's all about okay so um we talked about that it has an age to it um the incorrect information um and then the um the documents related to the purchase so you like you said in your in your example the um the issue for that one repair was covered in the meeting minutes so it's fire beware you have to read those sit there for whatever time period to read those disclosures or that those that packet that's given to you because it includes the decorations bylaws house rules um your seller disclosure contains a lot and then you have um so many months of minutes and financials in those packages I mean the buyer needs to sit and and look at those and review them along with the realtor should help actually help them if they need to um any thoughts about that well you know I teach the CE class continue education for real estate licensees I teach one called condo governance and the other is called understanding condo financial statements and basically what we teach realtors are is to disclose the documents make sure they get everything because uh in the one case I was briefly mentioning uh where they uh got sued the managing agent got sued he didn't prepare the RO105C they bought it from a company that scrubs old RO105Cs so the person who had signed it died two years earlier you know and so and so people I'm putting enough attention to this so realtors need to be telling buyers you need to review these documents number two if you have questions I will help you find a person who's qualified to answer it whether it be the association's lawyer accountant depending on what they answer and the RO105C but real estate licensees are not really qualified to interpret the financial statement of the association or to interpret the reserve study so I think we're nearing our time limit so just to recap the importance of the RO105C there is a time limit it ages you know generally because now with a lot of new things that have come up um for lenders sometimes they won't take it if it's past 30 days um and the property manager has to complete it with the best accuracy possible um to the date that he um prepared the document um and they have to make sure it's done it correctly um otherwise it could be result in some kind of legal action and they can't rely on errors on emissions for you know like well we carry on so you know we can do a mistake you know it doesn't kind of work that way right um well errors emissions will defend them but if there's a claim and they and they're found to be uh negligent in their representations uh and they have to pay the owner their share to say the 20 000 for the seawall that they weren't advised of that's not going to come from insurance that's going to come from the owner's pockets and it could come from the board if they uh intentionally and willfully gross negligently and deceive people by it and the managing agent who's a broker has all these requirements under chapter 467 a misrepresentation they have an actual obligation to make sure what's presented is correct remember it's the managing agents disclosure they're signing it so it's just the future of the world that we need to put more time and energy into making sure what we give is correct right so we can't you know like some people say well I have insurance for it I go what doesn't work that way you can't just rely on your insurance coverage to just be to not concentrate it on on completing it or doing it a hundred percent you know so it's you have to take the time out you know and to do it accurately and um as best as you can um so the reserve studies you know they go hand in hand with um some things are getting updated that never used to be included in reserves but now probably should be included like the C wall you mentioned um or anything else that could be a longer life um I think some boards need to think about some things that were never included or didn't have to be included in the reserves but they might want to now consider putting it into their reserves um like the C walls well I see a lot of manipulation on reserve studies because they don't want to raise maintenance fees and they want they don't want to address the true cost of maintaining the building when act 62 was signed in the law last year it was mandated that if you do your own reserve study that is you're not using a professional reserve preparer you have an obligation not less than every three years to have your internal reserve study reviewed by a professional which goes on an interesting argument because I as you may not know I wrote the original reserve amendments in 1997 I have the highest certifications in the country and so if someone comes to me and say we want you to review your reserve study so that's interesting questions well how can I review a reserve study if I haven't visited the project how can I review a reserve study what if I review it and say your roof estimate is way off it's going to fail sooner than later you gave it a 20 year life it's not reasonable what happens the board says well thank you for your opinion we have the professional opinion but we're still going to vote to heat the reserve study the way it is so I know in the industry that I'm a part of the CAI slash HCCA we're looking at putting more granular information in 514b 148 on reserve obligations and budget obligations on disclosure and things they have to do because we can't with you too many people cheat I would tell you there's going to be huge problems down the road with association because they haven't funded the reserves so with that new law that went into effect so it has to be done by an outside third party so um and you know a lot of ALS they were being done by their managing agents so now that no longer qualifies right they have to go outside that box is that true yes and yes and no some managing agents have a reserve department with certified fully certified people right yes they have that yeah and so they're using a reserve professional that's certified and who would know the building better but the managing agent theory well the ones who aren't using any kind of independent because if you look at the national standards even though it's owned by the management company that reserved us and they still have to comply with the national standards of independence and the rest of it but the ones who aren't doing that or doing it themselves or having a management company put it together like sell a spreadsheet are going to have to go get an independent analysis and what are they going to do if the independent analysis says it's incorrect incorrect meaning the one that they've been using all along is incorrect or or because that's what I'm kind of like thinking that's going to be hitting some people is in-house that does not have an in-house reserve specialist they've been using you know their own property manager excel spreadsheet style and then now when they get an independent outside independent they're going to be into an eye opening experience well maybe another show for another day but the three major things on reserve studies that I see where people make a mistake you begin with a beginning balance and do this forecast why have people who start to beginning balance at two and a half million when the truth is they only have one million in the bank so how how reliable is that forecast of future funds if you intentionally knock the million and a half dollars or put a million and a half dollars in it doesn't exist the second thing is what they do is a kick the can down the road and put long useful lives on these things and then the third thing they do is that they will show an increase to reserve contributions every year of 10 15 20 percent they never end up doing it but it gets them by this year by making it look like the cash flow plan meets the law and so there's too much fooling around with the reserve study it's a it's a fact of life and a condominium you need to reserve it properly yeah yeah okay so we are and we're actually near our time any useful thoughts you want to recap richard no i would just go back to the d word disclosure you need to type time in it look at it and disclose it accurately otherwise i can assure you you expose yourself to risk in the future of litigation and other problems i'm going to add in the word read disclosures and read them be careful you read them carefully um so that you can spot anything that sounds out of the ordinary um so richard i really want to thank you for being on the show with me today to talk about this um this um r o one of five c and the importance of it because i know a lot of people don't really understand the the real big importance of that document um and i really want to thank you for going over it and then the history of it i never knew so that stuff um and um i hope you and your wife have a really nice christmas yeah happy holidays to everyone yeah okay thank you everybody for joining us we'll see you again next week on another condo insider segment thank you thank you so much for watching think tech hawaii if you like what we do please like us and click the subscribe button on youtube and the follow button on vimeo you can also follow us on facebook instagram and linked in and donate to us at think tech hawaii dot com mahalo