 And welcome to another edition of Kondo Insider, Hawaii's show about association living, whether you're a homeowner, I remember the board of directors who are just someone interested. Thank you for being at our show today. I do want to say this is a great day, May 4th, 2017, because something very important happened today. The legislature adjourned and no more harm can be done to the citizens of Hawaii. Not to be too cynical, but I think we've all read in the paper recently about all the in-fighting, which probably is not good for any of us. But today the legislature has additionally, has adjourned. At the beginning we had 157 bills introduced affecting association living. Only five were passed, having not been signed by the governor, but frankly all of them were pretty good with respect to what it's doing for the industry. One of the things that's come up quite a bit lately is somewhat in the price that a paradise article we've seen in the news is the incredible rising class and special assessments for associations. For a lot of reasons, sometimes blamed on the reserve studies. So I invited a very good friend of mine, Dana Bergman, from the Bergman Project Group, who spent a lot of time fixing aging buildings. So I welcome Dana to the show. Thank you, Richard. Pleasure to be here. Tell us a little bit about you and being in Hawaii. Like the rest of us, call Paradise Home. I originally grew up on the mainland, but I've been in Hawaii permanently now about 15 years. I enjoy spending time with my wife and my son. And when I can get time away from Condo World, I actually am an avid outrigger paddler. So that's a little bit about me. Yeah, and how to hold your son, though? Say again? How old is your son? My son is almost 16 months. Wow, I can't believe that. I remember when he was born. That's right. Time flies. Well, you're also a principal of the Bergman Project Group. Can you just tell us about your company, what your mission is, what kind of work you do so people understand your background? Sure. Bergman Project Group is a consulting firm. We do project management and consulting work, specializing in AOAO projects. So we do almost entirely retrofit work on AOAO projects. We do a little bit of other stuff from time to time, but our real core competency and the real backbone of my firm is helping AOAOs with their capital improvement projects. And you're licensed, I assume you have engineers or architectures. What kind of people do you have on stand? So construction managers, architects, engineers, and the like. So we've all seen in the news, newspapers, civil beat, all these different press about price data paradise and associations and huge assessments, which creates problems for homeowners because someone has to pay for the improvement. What's happened? Well, there's a couple of things going on. One, these buildings are getting older. You have to look back at Hawaii's history and the lion's share of the condo buildings were built in the 60s and 70s. And just like people, as buildings age, they have more needs and need more maintenance and they need greater care, just like people do. So that's one component of it. The other component of it is cost. And the construction market, as everyone knows, has been extremely busy. I would say arguably, particularly on the repair side, given the aging structures that we're dealing with here in Hawaii. And the combination of structures getting older and needing more care combined with rapidly rising construction costs has created a real problem. Well, I appreciate your example, but I'm not particularly fond of your example. As you're getting older, we're going to need more care. It's a sorry note for me who's aging. But I'll accept your example. But tell us some of the examples of buildings you've encountered and the general type of problems you have. So we see all kinds of different things on the various properties that we work on. Some of the larger things that we're seeing that are problematic these days, some of them people are familiar with, like concrete, small repair. That's something that's been around for a long time that most people know a lot about. We're seeing, in some cases, buildings have put it off, and these problems have gotten very severe. And then there's other things that are coming up that, in some sense, as people didn't foresee or are happening prematurely, examples would be the windows needing to be replaced in a high rise or railings. Arguably, the biggest problem that we are faced with here in Hawaii is the drain waste and vent piping. That is a problem that most reserve studies five years ago didn't have that as a line item. And today, as a community and as an industry, we know that there is a severe problem with waste piping in Hawaii. So is there a useful life of waste piping? Is it going to vary by project based on maybe some environmental or used or whatever? You know, that's a really interesting question. Let me phrase it this way. Different parts of the country see different problems. Here in Hawaii, here at home, we have a major problem with cast iron, with the drain waste vent piping. If you go to other parts of the country, they have different problems. So if you go, for example, to Florida or to the Northeast, they have the exact reverse problem. They have problems with their supply lines that supply fresh water to the units, but they're not having trouble with their waste lines. So it does tend to be regional based on geographic conditions and environmental conditions. Here at home, the biggest thing that we're dealing with right now is that cast iron failure. Well, you know, it's interesting from my experience, being in property management for 25 years or so, is that when you get down to this problem, it's always about the money. Yep. And so what's happened? Why don't we have the money? Maybe I should ask you. I know that it's passed the budget for the state. Are they giving us any money to fix our problems? Well, if you can find some in there, I think everybody would be very happy, but I highly doubt it. Yes. You know, a lot of this comes down to major capital improvement items that either were significantly underfunded in reserve studies or just simply were missing. So, you know, referencing back to a couple of the examples that I gave with concrete spall repair, you typically see that in reserve studies. It's not something that's uncommon. It's fairly common, and so you do see it, but often it's woefully underfunded. You look at something like the waste piping or perhaps another example that we're just starting to see is fire alarms, where you see fire alarms are completely missing from reserve studies and they have to be replaced as they age and fail. Piping, like I said, is completely missing from reserve studies. And when you don't have it in your reserve study, that means you haven't reserved funding for that problem when it comes up. I think probably one of the common issues, you know, the declaration of a condominium defines who's responsible for what. That's correct. And so oftentimes, like the supply line for water within the apartment itself is the owner's responsibility, where there's going to be, I don't know the exact word, but a major supply line to the apartment, which is the association's responsibility. And so how you put that in reserve and what you think through what you should put in has to be carefully thought through. That's absolutely correct. And I would say navigating the intricacies of how declarations were put together decades ago can be really problematic because what we as man and as a society have said on paper and who owns what may not necessarily coincide exactly with the way buildings function or with the way mother nature works. So as an example, we'll stick with the two things I've been talking about, the concrete spa repair. Maybe you say anything outside the railing is the association's responsibility, but inside the railing is the homeowner's responsibility. But the way corrosion works and spa repair works, it's not going to magically, mother nature's not going to magically stop at the railing line and say, oh, I'm going to stop corroding here. With piping, same thing. Delineating who is responsible for what can often be very difficult because sometimes lines serve as an individual unit, and sometimes they serve as multiple units. And so it can be a tricky thing to unravel. Yeah, but one of the things to declare in the statute that the board can take a component and declare it a high-risk item. So if part of that repair is the owner's responsibility, they can force that owner to participate in a solution by declaring it a high-risk component. And that may just be because it has liability for someone to get hurt. It could be because it's affecting their insurance. It could be a lot of reason. The boards have the ability to navigate that because they can make resolutions saying the piping or the supply line or the spalling is a high-risk component on LNI deck. We saw the problem in Alamoana with the railing filling. And so they can really not stand behind what's really the owner's responsibility. They have the ability within their documents to state law to force a resolution to protect the building and the safety for everybody. That is true. It is very specific from building to building as to what each component, who is responsible for each component. So one thing I would say to the associations or board members and owners that may be listening is, especially board members, is please consult with your attorney. Your attorney is necessary to help unravel some of this and help delineate who may on paper be responsible for what. But secondary to that, you're absolutely correct. There are mechanisms that the statute allows where boards can do high-risk resolutions, as you suggest, or other things to get different components included in a larger project. Perfect example. Very frequently, we'll see where maybe the riser piping in a waste piping replacement project is delineated as a common element. So the association is responsible for it. But maybe an individual branch line that services a unit is depicted as being an individual unit owner's responsibility. The problem is that all of that pipe was put in at the same time and it's of the same vintage. And you have to cut open the walls to get to all of that pipe at the same time and in the same location. So from not only a point of just simple logic, but also from a point of being financially prudent and good stewards of association's funds, it actually makes more sense to go ahead and replace all of those components while you're there rather than saying, well, we're only going to do the stuff that's not responsible, the responsibility of the association, patch the walls back up, put the cabinets back in place. And if you have to tear it all apart later on, that's your problem. It doesn't necessarily benefit the owner, nor does it benefit the association. Now do you see a difference in aging with the piping, the wastewater piping, between the horizontal and the vertical lines? I mean, is it theoretically possible that the vertical lines, because of gravity, is much less corroded than the horizontal lines, which are the waste lines that feed into the sewer system probably? It's possible. Different buildings have different conditions. But I would not say that it's uniform. Some buildings have more problems with the laterals. Some buildings have more problems with the risers. But universally, we see problems with both. Another thing we hear is, well, we're just going to leave the existing vent lines in place and try to save money. But again, they're of the same vintage. And surprisingly, we see as many problems with the vent lines as we do with the drain and the waste lines. So collectively, the general consensus from the construction and engineering world is best practices to replace it all, not to piecemeal it and leave different parts of a 40 or 50-year-old system in place. Well, back to what I was saying earlier, kind of leading into my next question is that it's all about the money to me. Yes. People want to have their buildings safe and secure and well-managed and well-run. But obviously, it takes money to do that. And I remember at the legislature this year that I don't know if it passed or not, but there was a resolution to have the governor do an asset study of all the real estate that the government owns here in Hawaii to determine the condition of it and how much money they would need to fix it over time. And sounds like a reserve study in a way. I was just going to say the same thing. Sounds like a reserve study. But the problem is if anyone really saw the number, because remember there are 50, 75 million short at the University of Hawaii. There are hundreds of millions short at the airport and taking the county issues with their sewer lines or billions short. Then the road control, I'm afraid if they ever did that, they would say, wow, we have a lot of money over the next 20 years. And then there's the cost of how you pay for it. If you kind of took the reserve study that's kind of pure as form, they'd say, well, we have to triple the income taxes that are property taxes to save for this, which obviously would take away the affordability of home. So when you have this association that's got this, quote, $10 million problem or a big financial problem, what are their choices to pay for it? Well, let me back up a step and say, first of all, please spend time with your reserve studies. Your reserve studies are a living, breathing document that need to constantly be looked at and constantly be refreshed. It's not something that you should just look at once every five or 10 years and then put it away and blow the dust off of it later on. It really needs to be integral to an association's day-to-day and month-to-month planning. But what do they do if they don't have the funding in reserve because it hasn't been planned for? Basically, you're left with two possibilities. Essentially, they can either do an assessment or they can take out a loan. Now, assessments boards are able to do, without seeking the permission of the owners in most cases, there are some exceptions. And they would need to get legal advice from that, from their attorney for that. However, loans, of course, require the approval of the ownership in order to take them out. Most buildings, it's 50% plus one vote. Some buildings, it's a majority. Some buildings, it's 75%. It does vary from building to building, but most commonly, it's 50% plus one. Yeah, actually, I'm going to correct you about one thing. Please do. The loan is actually only 50%. Correct. It's not plus one. I mean, other provisions that have been documents are either 50% plus one or 67% depending on which you're doing some cases, 80% or 90%. But the reality of it is that a loan, it's an odd part of the statute. It's only exactly 50%. Correct. It requires to approve the loan. But you know what, we have more questions on this. And it's going to be long answers. So we're going to take a short one minute break to get our thoughts together. And then I'm going to ask you some more long questions about money. Sounds great. For the day of the big game, watching at home just doesn't feel the same. What on the list is who's going to drive? It's nice to know you're going to get home alive. Plan for fun and responsibility. Choose the GT. Captain of our team, it's the GT. For every game day, a sign at designated driver. Welcome back to Kondo Insider. We're sitting here talking with Dana Bergman, principal of the Bergman Project Group, about aging buildings and these surprise huge assessments and what's causing them and maybe who to blame or where we get the money from. And we left as we were talking about loans. But I just want to back up one step and just ask Dana to briefly review the most common things admitted from a reserve study. Good question, Richard. The most common things that we see that are admitted, excuse me, missing from a reserve study. Number one, hands down is all your piping components. You just don't see them, especially the drain waste and vent piping. I'm going to interrupt you one second because we have a phone call. Oh, good. And so we're going to take the phone call. So if everybody will bear with us a minute while I listen to the caller and then I'll repeat the question and we'll go back for an answer. I am a potential Kondo owner. Should I be concerned about a building's age? I mean, what should potential owners like me look for when purchasing a Kondo? Well, my question is a potential buyer of a Kondo minimum. And what should they look for when evaluating whether or not to buy the Kondo? That's a great question. I'm not a real estate agent. So some of that might get a little bit outside my own expertise, but from my perspective, I would be looking at whether or not they have major, I would want to look at the reserve study. Look at the reserve study, see if they've got major components in the reserve study and see if they're funded correctly. Find out if they have loans on their books already or if they don't. And try to look at the financial health of the association. That would be my advice. What I have been hearing from the folks that are in the real estate community is that they actually like the buildings that have fixed most of their big problems because it looks like a stable investment as opposed to buildings that have not. And again, I'm not a realtor so I can't speak to those issues, but this is what we are starting to hear. Yeah, let me add two cents because I'm a real estate broker. There you go. All right. Is that not only do you want to look at the reserve study and see if it seems to be adequate and maybe even ask someone who understands it better than a potential novice buyer. But under the law, they have to have disclosures. The seller has to make disclosures and the Kondo Association has to make disclosures. It's an RO 105C for the association. On that form are real specific questions about deferred maintenance, lawsuits, loans, work that needs to be done. By simply carefully looking at the disclosures that are required by law, you'll learn a lot about what the potential problems are down the road. So I'd tell the listener to carefully look at the disclosure by the seller, carefully look at the disclosure by the Kondo Association. If necessary, it gets them help reviewing the reserve study to see if the funds that they're being contributed seem reasonable that what we know that the major components are listed and then make an informed decision realizing the world's not perfect and hidden conditions that surprises occasionally happen. I agree. And I would say that actually builds right back to the question you were asking me before the call came in, which is, what is missing? That's another thing I would say is look for the things that are big ticket items. If they're missing from the reserve study, that could be a red flag. And that's things like the fire alarm systems, waste piping, window replacement, if in fact that's a common element and the like. So back to the money again. So we now have a reserve study at the adequate. We've had our surprise conditions come up. We need to have $5 million. They don't have the money we were started talking about. They can special assess without homeowner approval or 50% approval of the owner, they can get a loan. Typically, yes. Yeah. So what's the pros and cons of that? It's a great question. One of the things that we wrestle with in trying to help homeowners associations is trying to make the cost palatable and affordable. And some people, it's amazing. Even in buildings that you may not think, this may be the case, you'll have buildings where somebody just wants to write a check for their portion of a major major repair. Let's just take an extreme example and say it's 50 or $60,000. There's some people in the building that are gonna wanna write a check and other people that that would put them into bankruptcy. So the major differences are this. With an assessment, typically the owners have to come up with their share, whether that's $1,000 or $50,000, whatever the amount happens to be for the scope that that particular association is embarking upon, they have to come up with that funding on their own in a certain amount of time and provide that back for their share of the project. And if they aren't able to do that, that presents a real dilemma. Often people that fall into that category would have a major problem with that scenario, or, you know, kupuna, retirees, people on fixed incomes. And so that's not a great option for them. With a loan, you don't have to put up any personal collateral, it's all done without the owners having to do that and it often gets financed out over a very long period of time. So take piping for an example. If you're going to be replacing your piping once every 40 or 50 years, it's not a bad thing necessarily to put that in a very long-term loan, say a 20-year loan, to keep the payment down for the owners. So loans are most often the best choice because it makes it more palatable for the people that cannot afford to write a check-out, but it also, depending on the association, gives people that can write a check-out the option to do so lowering the overall loan payment for the association. Yeah, let me put a different spin on that a little bit. Let's just say you need a million dollars that's 50 units, that's $20,000 in it. Yep. If you assess them and only 90% can pay and 10 can't, you're 200,000 is short from the million dollars you need to pay the contractor. That's correct. And then what's your choice? Foreclose on the owner who then has all sorts of rights under the statute to delay that, but you're still short $200,000 paying the contractor. That's correct. If, in fact, you do a loan, you have the best chance, and by the way, if you foreclose on that owner, the next buyer is not responsible for that $20,000. So the other people, the people who did pay are going to be slightly responsible for more payments again to make up the difference. That being said, if you do a loan, you've given that person the best chance to pay their share without losing their home. That's right. And a lot of associations develop what we call a present value payment strategy, which says to the owners, okay, we need a million dollars, 20,000 per unit. But let's say 20% don't want a loan, they don't want the interest. You allow them to pay their share in cash, and then you desess the amount you need, which would be 4,600,000 in my example, forgive me if my math is wrong out there, but whatever the residual balance of those are needed to support a loan, and only they pay for that cost. So you're kind of taking the hate to say it this way, because there's no disrespect. You have haves and have nots, people who might have the money who don't want to pay the interest, and those who need because they have health problems, divorce, business feelings, whatever, the cash flow, they don't want to lose their home. So boards have to kind of balance this need to take care of everybody. And so they need to be able to either have a loan, allow those who want the loan to pay in full to do it, and those want to pay monthly to do it. That's absolutely correct. So it does vary from association to association, and they should check with their property manager and their attorney on the specifics for their particular building, but you're exactly correct. The most palatable and the most sensitive way to go about these major capital improvements so that you're giving everybody a fighting chance is to take out these loans. You actually acute something else in my mind, which is an important point. With an assessment, if you wanted to sell your unit, that assessment has to be cleared either prior to sale or as part of the transaction, correct? Whereas with a loan, you just pay your share and if you sell your unit next year or five years from now, your portion of the loan payment just passes to the next owner. So that's an important consideration too. I think back to what I said about the present value that owners who want to pay cash do so up front and you borrow the residual, it's certainly feasible at closing that a contract between the buyer and seller that the buyer has assisted that the remaining present value be paid off, meaning the seller got credit for his existing payments in principle and interest. And it can be a part of the contract. Because I have to tell you, I've done probably or seen over $100 million in association loans in the last 10 years. And most of the ones that these 20 year long-term payouts were frankly fully paid off in 10 years or so, because what happened was people got their income tax refund or they inherited money or they sold their unit and the contract required to be paid off. I've never really seen one go 20 years, to be honest with you. You would know better than anyone. So do you think it affects property values having a loan on the books? I do not. I can tell you personally, I own in an old building in Waikiki and we have a loan on our books and it hasn't affected our property value one bit. Yeah, I own a condo in Waikiki as well. And we had, it's a new condo. We had a construction litigation lawsuit. And because the building needed to be repaired, we were looking at mitigating our damages first of all but making it more pleasant for people to live. We as an association borrowed the money, fixed the building, going through all the legal procedures where the defendants had a right to inspect. So all the things the lawyer would advise we certainly complied with. But at the end, we fixed the building, everybody was happy, but that lawsuit just settled and then they paid off the loan for the litigation proceeds. There you go. And that was their solution. So I think you're right. They need to check with their lawyer. They're going to need to study the reserve study carefully, but ignoring it is probably not a good idea. No, ignoring it's not a good idea. I would say that what I do see out there affecting sales and affecting values is buildings that are intentionally kind of bearing their hand, if you, bearing their head in the sand rather, if you pardon the expression and just kind of ignoring the problems. You know, these problems are only going to get worse and the longer you wait, the more it's going to cost. That's because we're at the end of the show. What's your final recommendation as to boards and owners? Get involved with your board, ask questions, be participatory. To boards, I would say spend a lot of time with that reserve study and fund it because that's the path of financial stability. Well, thank you for being on the show today. My pleasure. We are talking about a very hot topic on how to deal with aging buildings, but those of you who are hoping the legislature is going to give you the money to fix your building, you might think twice about that. But the reality of it is you've got to look at your reserve study, put the components in and look at funding ways to not only fund the reserves, but when the problem surfaces dealing with it because I can guarantee this. If you don't fix it, the problem will get worse and the actual replacement repair costs will be much higher. Again, Dana, thank you for being on the show today. My pleasure, Richard. Thank all of you for watching Condo Insider. We'll be back next Thursday at three o'clock and aloha.