 Anyway, I'm sure you all know Kondo Insiders, a weekly show brought to you to talk story with board members and owners and people who live in an association, but what the Hawaii requirements are and kind of give you some education since it's a big part of our community. I think it's been estimated that 35% of our population lives in some form of an association meaning they have a board of directors and some self-governance and some issues. A couple of weeks ago, I talked about the Champlain Towers South often called by everybody Surfside that collapsed in that condominium building in Florida. And what I wanted to do today is kind of tell you that my thoughts back then look like they may be coming true and that this would create a tidal wave of legislation and issues and problems for associations because of everybody looking at we know if the associations are being maintained or not and are people safe and those kinds of issues. So today is called off the press because I'm going to talk about a letter that was issued by FHA which is Fannie Mae Freddie back dated October 13, 2021, which is yesterday. And it begins and kind of brings to the surface the issues of what was being said at we said a couple of weeks ago about the surfside collapse and what it might do to future governance of condominiums. So let me just begin by reminding everybody that one of the major mortgage markets for buyers in a condo is Fannie Mae and Freddie Mac and you might add a VHA on top of that but the government backed mortgage programs most banks who offer these programs basically sell the mortgage to the government so they're getting a fee for processing and making some money. But it's all dictated the rules the underwriting the regulations are by Fannie Mae Freddie Mac and raises the question. What if you want to sell your condo you couldn't get a buyer because nobody qualified for FHA Fannie Mae Freddie Mac mortgage because your condo isn't approved by them to to grant that type of a mortgage and up to now it hasn't been too much of a problem. But this letter that came out yesterday, primarily because of the surfside condominium collapse and the letter actually addresses that saying that because of the surfside condominium collapse, they are issuing a lender letter LL-2021-14 that takes effect January 1, 2022 and shall be continued indefinitely. Why this is important again is this is where buyers of condominiums typically go to get their mortgage for condominium. Random banks do offer portfolio loans and some other choices but the dominant part of the market particularly for young buyers is the Fannie Mae Freddie Mac type mortgages. So what did this lender letter say was issued yesterday that's effective January 1? First of all it said to be qualified as a condominium for a loan. There is new criteria and I'm going to look down at the letter because I haven't had a chance to memorize all this yet. But first of all that if you have a building that is going to require a repair in the future that will require, I'm going to use the word evacuation, people to move out while the repair is made because it's a large repair of substantial damage, you're no longer eligible for a Fannie Mae Freddie Mac mortgage. The mere fact that you have, and you're going to find out later as I go through this, they've got the checks and balances on this, you're going to find out that if you have a major repair being made that's going to require people to move out, you're no longer eligible for a Fannie Mae Freddie Mac mortgage. Number two, I'm going to read this. If improvements need substantial repairs and rehabilitation particularly the major components that impede the safe or sound functioning of the building's major structural and mechanical elements not limited to the foundation, roof, load bearing structures, electrical system, HVAC, air conditioning or plumbing. If you have a building that's going to require major repairs, you're no longer eligible for a Fannie Mae Freddie Mac mortgage, you are just excluded. So you have a deficiency that is not remedied. Now, the question resolves itself as if it's in the reserve study itself, how is that going to work out and I'll get to that in a minute. But the other thing it says that if you have a special assessment, a part of your existing budget for the major repair and replacement, you've already fixed the things, but all the owners are paying a special assessment because of that loan to fix everything. It requires a specific review of the facts and circumstances around that special assessment to see if it has a negative impact on the building. Randomness somewhat speculative, but the reality of it is they're saying, hey, look, we want to know that the building, they're taking the building as collateral, let's give them credit. They want to know that the building is safe and sound and functioning. They want to know there's a reserve study in place. If you had to do a special assessment because of the third maintenance, they want to know why it occurred. And they want to know what the plan is so that they can do that. That leads me into the reserves because that's the next part of this. And this is interesting because in my discussion today, we're going to talk about first FHA, then we're going to talk about CAI and national standards. And then we're going to talk about our local legislature and kind of wrap this all together, what we see coming down the road here. The road has a lot of potholes, let me assure you. Anyway, so what the reserve requirements is, is you have to have a reserve study. And whether you used to have this provision that so long as the maintenance fees included reserve contributions of at least 10% of the maintenance fees, then in fact you would qualify. That's gone. That doesn't exist anymore. Because in fact the reserve study in its own right has to have sufficient contributions based on a reserve study and not some arbitrary 10% of the maintenance fees. Now I want to point out, footnote by the way that I used to lecture on this, that you really read the FHA rules to stop 10% of the maintenance fees, this 10% of income. So those people who sub meter electricity and do always other things would have to include that and calculate the 10%. But in some ways who cares anymore because it's all been thrown out because that's not a valid method to determine you have an adequate reserve study, reminding everybody here that again, these rules take effect January 1, 2022. You're in the middle of budget season, you have a chance to take a look at these things and rectify some of this so that when your current owners want to sell, they're not suing you because nobody can get a mortgage because you've probably entered federal rules on getting a mortgage for the most common mortgage market FHA. I think that's kind of interesting because developers often on new projects just took 10% of a number, I'm going to say maintenance fees, but it should be all income and use that number to say this is what the reserves are, but under the current statute in Hawaii, the developer didn't have to do a reserve study. They could just use some other statistical method and in some shows it's 10% method, which I've always opposed because there's nowhere in the statute to provide that number be an adequate number for reserves. They could have used 20 other buildings or like then their average, they could have used other things that are available to them, but the 10% has never been an adequate number to fund reserves, no matter how you look at it. And all the data statistics I have in my database show that the 10% is about 20% of what they really need to put into the reserves, but they like to eat the maintenance fees low so they can sell units I guess, but that's that are kind of based on how our Hawaii developer has done it so far. So kind of circling back on the FHA, Fannie Mae, on January 1, 2022 is to be hardly getting a mortgage for your sellers and your buyers who want to transact the real estate transaction, and they're going to have to have a reserve study in place, and they're going to have to ignore the 10% concept, they're going to have to they got an existing budget special assessments, they better have an explanation and it better show that the reserve study doesn't let this happen again. And then you got to have a building that's in good shape and the reserve study will be looked at again. So if they have major components coming down the road, some of them so major they may require you to move out, you don't have the availability of an FHA mortgage anyway. So this is serious stuff. This is very serious stuff. And it's going to have a dramatic impact in the future because of that one collapse. And I said in my last show, you know, Hawaii probably has one of the most robust laws. The surfside condominium failure had a lot to do with not just ignored maintenance and and their walls are required owner approval and the board couldn't get the owner approval to borrow the money and but it also had issues and the structural design was quite unique, exposing it to a more likely problem if they didn't maintain the building where our building for your more stacked theoretically probably have less rest of that type of a tragedy. But at the end of the day, who cares because the government say they're not going to loan money anymore unless you meet this new criteria, which leads me in to Community Association Institute CAI. And I may have mentioned to you that I'm on the National Task Force with regard to reserve studies. And because again, a surfside, they're looking at what the national policy for CAI should be with regard to reserve studies. And I have the draft reserve study funding plan public policy in front of me. And I'm going to give you a little bit of, this isn't approved yet, it's not final yet, but it again dovetails into where reserves are going. And my call to arms on this is that if condominiums don't start taking us into consideration in the budget process, they're going to have serious problems because they won't be able to sell units and, you know, have serious problems with regard to the market value of condominiums. So anyway, what does CAI say? Because of surfside. Ignoring, of course, they wrote this policy before the Fannie Mae, Freddie Mac came out with this letter yesterday. But everybody's looking at this. So let's look at what CAI supports. Number one, all homeowner and condo associations have to do a reserve study. It has to be compliant with national reserve study standards. There are standards that were established on how to do a reserve study. So you just can't, you know, Mark Twain said there's lies, damn lies and statistics. You just can't make up the numbers. There's got to be a basis for a support to the number to create the reserve study. So what they're saying is that number one, if you do a reserve study, it's got to be the national standards. Okay. It's a little different than Hawaii because, you know, Hawaii doesn't require you to hire a professional to do it. So I guess an amateur could do the national standards. If it's a small place with not a lot of components, but the reality is that if you're a bigger place, you probably are going to have to end up hiring someone to do this. And there's different sources from that there and all CAI people. Number two, which is related to this, what they said is if you're a developer with a new project, you have to do a reserve study. You know, we always talk about level one, level two, level three reserve studies, level three being kind of an update, level one, the most robust. Now whatever talks about the level four reserve study, because the level four reserve study is for new projects, new developer projects only. And because you haven't built the projects, you're doing the reserve study based on plans and industry experience. But still, the data must comply with national standards. So what they're saying at CAI is developers you in the future have to do a reserve study. Now Hawaii law doesn't require that, you know, Hawaii law gives them the right to say the first reserve study to be done by the new board once the association's formed. We've seen all over Hawaii lawsuits against developers because the numbers were severely understated and there are big maintenance fee increases within a year of the association being formed. But national CAI is recommending the legislatures. They adopt policies to mandate new developers do a level four reserve study. I think it's a good thing, by the way. Okay, number three, when you do a reserve study, you've got to identify what's a level one, level two, level three. It's got to be done for condos, homeowner association, plan, you know, development, you know, any other type of association that has a co-op that has common property to it. And you have to define all the components. And even if you're a small project, like I own in a project that has the only common elements of road under this policy, proposed policy, if the fact they only have one item of road, if that item is more than $10,000 to repair, which this case is probably a quarter of a million, you still have to do a reserve study by someone's capable of giving you the data to fund it. So they're maintaining, you know, you do reserve study and mandates that you must do a level one or level two, at least every three years. So the level three, which is the update where you kind of adjust the numbers from what you did do, what you didn't do with the new costs are more from phone calls, a few speculative ideas goes away because then they're level two and level one, you've got to go talk to somebody to get more specific information. So, you know, mandating level two updates of the site visit on a periodic basis, and then a level one thereafter is to be mandate. So next, they want mandatory disclosure. So they want a mandate. I understand this is true in Hawaii anyway, that they want a reserve study in the funding plan be made available to all owners and available to all future buyers. They want it to be a mandatory disclosure. And so they want a standardized disclosure form. They want the reserve study to be prepared by reserve specials, which is the CAI, a certified person, a reserve professional. There are other reserve organizations like Association Professional Reserve Analysts, or other qualified professionals like an engineer or architect. So they want the study to be prepared and conducted by them. It's interesting because you'll see, is there studies have two parts. They have the component part, which an architect engineer can do well on. And then you have the funding part, which is kind of a forecast of the money you need, when you need it, how much you need over what period of time. Most of those professionals don't have the skills where reserve specials and other reserve experts have that skill. So it's probably a blend of the rest of it. And they want the ability of the board. Are you ready for this? This would change Hawaii at all. They wanted the ability of the board to make structural repairs without the approval of the owners if it's a life safety issue involved. So where now, I know why, if you want to go borrow ten million dollars through your wastewater pipes, you have to get the loan of the owners. Approval, the approval to borrow the money from the owners. Under the CAI's proposed rules, that in fact, you would be able to, just as a board, make a business policy decision. Now, on that note, because we're a little past the halfway part, we're going to take a one minute break, and I'm going to then come back and talk about what we oppose and then what the Hawaii legislature has said to me as we prepare for 2022. We'll be right back. I am Christine Linders, physical therapist and board certified orthopedic clinical specialist, and I am the host of Movement Matters, a show that is designed to bring you the best physical therapy tips and exercises so that you can have your best body and do all the things that you love. You can watch my show every other Tuesday at 11 a.m. on ThinkTechHawaii.com where I show you instructional videos from the top of your head to the bottom of your toes to get your body feeling its best. Remember, life is better when you listen to your physical therapist. I'll see you on Thursday. I'm back. That was a quick minute. I catch my breath here. We went a little longer past the midway point because I didn't want to break what I was telling you what CAI supports. Basically what they oppose is two things and it's driven a lot by other states and other laws. I should look and give you this information if I have it here. It's interesting statistic but essentially what it says is that most states here in Hawaii in the U.S. don't have a mandatory reserve law. So looking at that number just to give it to you. Reserve studies are required in nine states which includes Hawaii. Reserve funding is required. That is not a reserve study and funding but some kind of disclosure in another 11 states. So you can see out of the U.S. there's 20 or 50 states that address this issue in some form or another. But it's coming. Let me tell you it's coming everywhere. So what does CAI oppose? It's a reserve study that allows owners to opt out of the reserve study. Interesting because you see when you look at our sprinkler system that was mandated by our city council in Honolulu the owners had the right with a 50% vote to opt out of funding the sprinkler system. You can get in the technical argument whether the sprinkler system is required or not. But ignoring that they don't want owners to be able to opt out of funding reserve requirements. That is if in fact you have a need you have to fund that need and it's going to either be through borrowing and that's why they propose that the boards can borrow without owner approval. Because if you have a short-term need for something you have no money the calculations could be a whole automata you have to pay in. That's it. Number two believe it or not there are certain bylaws of certain associations on the mainland that prohibit inspections by structural and architectural engineers without the owners being able to opt out of funding or not. There are places that prohibit structural and engineering inspections of the building by appropriate professionals. That's an integral part to doing a reserve plan. A person who is planning and designing the new wastewater system is not going to be able to opt out of funding or not. It's not going to be as structural and engineering inspections as necessary in the preparation of the reserve study. The best practice is to have a reserve study and have it done by a professional opinion not less than three years. It might be a little less. That's kind of that. Now I know you won't be surprised but now the Hawaii legislators are calling CAI calling people like myself who do this saying we want to introduce laws in the state of Hawaii this year to prevent the surfside disaster in the state of Hawaii. I think it's important to understand that believe it or not because of all these major increases in new projects of maintenance fees. They want to stop developers from being able to not adequately provide information with respect to the cost when you buy in. I can tell you now because I'm involved in several cases, the horror stories of people who believe the public report and found out the numbers weren't accurate and had to get second and third jobs or sell or do things and the penalties are just sad. You can be assured our legislature is going to have to do a reserve study. A lot of CAI lines that developers have to do a reserve study a level four. If you're a certain size or certain conditions exist, have to be done by a person qualified to do a reserve study. Number three, if you have a reserve study, it's going to be a change this year in my opinion. I think there will be enough pressure because of the history and what's going on in Hawaii that we're going to see the legislature tackle. I know several legislators now who are writing bills and some of them are pretty onerous. They're going to have to do a reserve study and sadly in the following the pandemic and people are struggling with their budgets, there's going to be pressure on condo and to have a proper reserve study and there's going to be pressure on homeowner associations and other association to do a reserve study and be mandated to do it. Number three, if you have a reserve study, it's going to be a change. Number four, if you have a reserve study and given you the bad news and something to ponder and think about, know that CAI legislative action committee will do its best to have reasonable legislation with respect to any changes to our reserve study law. Number five, if you have a reserve study, it's going to be a change. Not address in some form or another or some changes to the reserve law this year. I may not pass because of the political pressure and everything else but I can see that train coming down the track and it's got a full boiler of wood and steam and heading down that track pretty join me in the next couple of weeks to talk about this from their perspective. So tune in and think about your research study and put a little more energy in time and it's going to become a bigger issue for all condos throughout the state of Hawaii and throughout the United States. Aloha.