 Welcome to another episode of condo insider on think tech Hawaii. And today I'm your host, Jane sugi more up. And today, the, we're going to be discussing the aftermath of the surf side condo collapse, and what different jurisdictions are doing. And, you know, as my guest. I have Richard Emory, who's very active in CIA and the national organization. Welcome, Richard. Well, thank you for having me it's the, the surf side or the champagne towers South collapse have certainly created a lot of buzz in the industry about what to do about it and reserve studies and other issues. Somehow, and you're on the national, you're on one of the national boards that are dealing with this right. Well, Community Association Institute CAI establishes on many areas, not just reserve studies, public policy, the public policy helps guide boards of directors but also it's used with legislators to help promote better legislation. And after the surf side collapse they established a special task force of reserve specialists and, as you know I'm a reserve specialist I was one of the first in the country and, and help co author part of Hawaii's condominium wall. And they asked to be on the test the national task force. So I've been attending meetings and it's been quite interesting because you're hearing from many jurisdictions many states and, and the different approaches and different thoughts and how this should impact reserve study policy. So different jurisdictions that are involved, can you tell us, you know, where they are and do they all do some or all of them have a reserve study law. Well you know if you look at the 50 American states is only 15 states that have any legislation that has to do with reserve studies. And when I say that Hawaii is very robust in its law where many states are very nominal what they have to say it doesn't have much content to the reserve study issues so we're hearing from those states that have nothing as well as those states that have certain laws, trying to determine what the best public policy should be for condominium and homeowner associations. So what has, what, what kind of discussions that have been going on. I mean are you talking about new legislation, or, or, or nationwide policy or Well this would be a nationwide public policy that each state could use to work with its legislature and its stakeholders to develop meaningful laws and basically the, I'm going to say there's six areas we've been discussing I'll just briefly give you each area. If you want we can go into each one. Number one is, should a reserve study be required. Of course that throws out the size of the condo versus a homeowner association versus the condo association. Then number two, should it be for all associations, co-op plan you to develop and so The number two issue is, who should the reserve study laws include. Number three, who should prepare it should be a mandatory that would be a licensed professional or credentialed professional to prepare it. And number four, and really the sticky wicket and all this, believe it or not in certain states like Florida where the surfside collapse occurred, they have a provision in their condo law that allows the homeowners to opt out of the reserve study obligation. So the question is, whether or not that should be part of the public policy, the opt out. Then finally, the last two are enforcement. What do you do about enforcing the law because certainly if it's too hard you may not get people to serve on boards of directors. And then finally, the everybody's kind of an agreement that the big issue is developers obligations on new projects. You may not know what there's something called a preliminary reserve study, which is differently structured than a reserve study established condos that is more designed towards developers and, and should that be mandatory developers a part of their public report in the wise case, have to have a preliminary reserve study. And those are the six areas that the task force is discussing. And so, what's going to come out of these discussions, hopefully some kind of policy that all states can use. Well, we certainly recognize it's hard to have a, well, there could be a national legislation on this no one really knows this. And I want to get more into the surfside a little later on in the show but, but what we've done surveys when the task force and, and we've done surveys as CAI, and, and the public policy is currently being, I've seen several drafts as being fine tuned but I would summarize it as follows that everybody agrees that a reserve study should be an obligation of a condominium association, and all associations mean homeowner association, and plan unit developments and and co ops, for example, that every association have to have to have to have a reserve study. The question on who prepares a reserve study. We all believe that associations of substance are better serve by having a licensed credential professional prepare the reserve study. So it will be a recommendation versus being a mandate. So therefore the two or four unit condominium in may not be forced with the cost of hiring a professional. I own in a 20 unit condominium and the way it's structured at the CPR and single family homes, the really only common element is the road should that 20 unit association, who has a reserve study with a single component, based on a vendors estimated cost, should they be forced with the cost of hiring a credential professional. So the idea, I think within the task force is to recommend credential for professionals, when the association size and scope is sufficient enough to warrant the expense. Of course that leaves open for someone's interpretation what they think that may be. Everybody's in agreement that you should not be able to opt out of the reserve study obligations that everybody should know owners are entitled to know what the costs are boards have a fiduciary duty to maintain the property. You shouldn't be able to opt out as what happened in surf side we'll get back into the specifics of surf side if you want. Then enforcement, you have to have a means of enforcement, but to try to put the obligation on to boards or board exchange every year. Reserves studies are a living document that goes year after year to try to put some kind of economic burden on board members who don't do the reserve study exactly correctly would open ourselves to huge amounts of litigation and problems. So people are more inclined to have an enforcement provision to make you do a reserve study, but not so much a penalty. So it turns out you're wrong unless you've done something in bad faith or something along that line. And then everybody's in agreement that the developer should have to do a preliminary reserve study it's called a different than the working document we use the condos for example the very reserve study recognizing it's a new development. The amount of detail and some of that work is quite different than, than a regular reserve study for an active ongoing project so that's kind of the, just what the public policy will finally say, it will address those specific issues. Okay, and when do you think that there's going to this policy is going to be completed, or agreements going to be reached and as to what the policy is going to be. I would suggest that the final draft will be done by mid September at the latest if not earlier. Then we will go out to the stakeholders to see a I for comments. And then it'll be presented to the their board for approval and adoption by years and I would suspect. But in this context, is it contemplated that this policy will then be used to initiate new legislation. Yes, one of the primary purposes of public policy is to help the local chapter, like we have a Hawaii chapter of CAI. I think it will promote positive legislation and I hate to say it but in Hawaii, you know we don't have the problems the other states that we have a robust program which I can go into but the reality is I'm going to suspect that our legislature you're going to have people throwing out this year, trying to address a problem they don't understand. And by having public policy that gives us a working document to talk to the legislature about. So they don't go off. They're wrongful tangent because personally I don't think we need more legislation on this topic in Hawaii. And, you know, with respect to what happened in Florida and I understand that the legislators there are looking at their state laws. And, and trying to figure out, you know what they can do to avoid another situation, like what happened at the surfside condo. So what's what what's happening in Florida that's different than what's happening in the rest of the country. Well, let's let's talk about the surf side for a second. And let's talk about reserve studies from this perspective. Let's remember what the national definition of reserve study is. It is a budgeting tool to tool to use our boards to collect money for future maintenance and repairs. What it is not is a quality inspection of the project. You may hire an engineer, because you have a problem with spalling and cracking, but that's nearly the only part of that that becomes a part of the reserve study. It would be funding it and putting in the reserve study when you're going to replace it. So the reserve study law, we have to keep it in the context, but the reserve study law is designed as a budgeting tool to allow boards to plan for the future. They don't have to have a special assessment or alone to deal with things that are defined in the component inventory of the reserve study. The problem you have with surf side is they had structural engineering reports saying that they had problems and the problem was a over $15 million repair, as you remember. Well, that's really not a part of the reserve study. I mean, reserve specialists are not qualified to do quality inspections of the project. When you see you have problems in a condo, you should hire an engineer or an architect or someone who's skilled at that particular field. And so that and funding, they're kind of like two different issues and we don't want to see that the reserve study budgeting tool get mixed up with when you have a problem and you have to hire the building doctor to fix it, that's what you're going to do. The county next to surfside County, what they recently adopted was an ordinance that said the following, that if you are a condo and you do a building inspection by a licensed engineer, when you get your report, you have to give a copy to the building department. And I guess the idea behind that is that that would allow the county to see if you have problems and to the extent that they want to send their inspectors out, whatever it may be. So that was the county next door with what they chose to do, the kind of address this issue. So I think we're going to see a whole lot of approaches from different states and different counties on how to address this. But as an industry we want to keep a clear in the legislators mind the difference between a budgeting tool and kind of planning for raising money to pay for this versus making it that we have some kind of obligation. Because you know we had a bill maybe two years ago three years ago, they were trying to force condos. I want to say it was every five years to do engineering inspection. That was the building envelope inspection at the city and county was have the ordinance. We basically believe in self governance that associations need to look at this, every building is different in a way, and the boards are, if they choose to think they have a problem should hire a licensed professional to deal with it and address it appropriately. If they have a knowledge through that inspection or through that credential person, then they need to include in the reserve study, because if they have that problem they've got to start looking at how they're going to fund it. So, I think you're going to see a whole lot of legislation doesn't really fully understand the problem. I'm going to try to impose all sorts of preventive measures, which are mean it's going to be expensive as a cost everybody a lot of money and I think in Hawaii the ordinance on the fire sprinkler systems a perfect example of one that really hasn't gone that well the best intentions but it really hasn't gone that well. I think one has resulted in unintended consequences that have made it more expensive for condominiums who have to do these repairs to bring their buildings up to stuff. If you look at the surf side from another issue. From my perspective of what went wrong with the surf side. I think we would all agree we don't have a national problem where buildings are falling down all over the place. I think this is the first one I've heard of a being in an industry for almost 30 years. So when you when you look at the surf side first of all, you have a design problem. The building that was designed where the pool was located how is supported makes it more vulnerable than the average condominium to fall down. If you don't attend to its, it's spalling and structural issues. So that you had a building that had a unique design that in some ways could argue that if you had started to have failures and didn't attend to these things early we say did not. That in fact, you're more likely to have a problem like this and other building would have. So you look at the fact that the board identified this several years ago, but the Florida laws allow owners to opt out of it. So, you know, here they're suing the board or suing the association is all these lawsuits but I'm sure the board of the fence is going to be we tried to get the owners to approve it. And they voted to opt out of it under Florida law we don't have the ability to shove it down their throat. We base that we have they shove it down your throat method, they have a legal obligation to do it, and they can assess everybody whether they like it or not. Yeah if they went alone they have to get their consent, but we don't have this opt out provision that exists in Florida. So here you have residents suing the board saying you didn't do the job. But meanwhile the owners wouldn't let them do the job, and then the law allows you to opt out of it. And then finally, you may remember the newspaper reports saying that the building department came and looked at it and said, not that bad. So it's going to be a mess but I don't think we should overreact to a single incident that had all these extraneous parts that particularly in Hawaii because our law is much more robust than any law. And in fact, I sent to the task force our law our administrative rules. You may not know it when our law first came out I think it was adopted 1995 back to date January 1 2000. The DCCA put out 1992 the condominium reserve reference manual. It's probably about 200 pages thick if I remember correctly. We've had a lot more experience than most of these other locales on dealing with reserve study issues. And we have a much more robust law you have to address these issues you can't opt out of it. And yeah I would be less than honest but I didn't tell you I see reserve studies that are marginal in my opinion, the reserves of the boards don't want to look at this thing seriously. But I've never seen a board. It's a structural problem not addressing. But you know the problem with surf side and, and probably with in Hawaii to. Even if you have the best reserve study. And you know you have a board who's willing ready willing and able to do, you know make those hard decisions. You've got a group of owner. They just really don't want to pay, or they claim that they have financial issues and don't want to support the recommendations of the board regarding, you know this expensive repair, like spalling. Yeah, because I have a case, you know I do some expert witness work. I have a case right now where a condominium has these exterior decks with drains, and the system is failing. If you saw the pictures you'd see it's failing. And so the board, frankly reserve the money and have the money to fix it in cash. And one of the owners on the first floor has followed a lawsuit against the association, trying to prevent them from being able to fix it, saying it's unfair that she pays for the waterproofing on an upper floor deck, because she doesn't the first floor and she doesn't have a deck. And as well, the leak goes into her apartment right there are leaks in this particular project, but she's saying, no the way the governing documents are written. It's really the deck is a finished flooring not a waterproofing membrane and as found a suit because, and the odd thing about that is, there is no special assessment. The board has been collecting money for the deck replacement for years, and we're dealing with an owner just says I'm being treated unfairly and it's involved in litigation so you have a good point. I think part of the problem is, we kind of don't message this well to the members and the owners, you know we don't talk enough about it. We serve side will be the catalyst to get us to talk more about it, that we have these obligations we have to undertake and it's not just structural issues of building falling down. You have the issues of all these wastewater pipes failing, for example, you may have windows falling out that creates problems for your insurance the liability, and you can't keep sticking your head in the sand at some point in time. So I realize you have a common interest in a common share and the structural integrity and integrity of that building and I think we have the message of better to all the condo owners and boards. And, and so that means, you know, educating them like condo insider is trying to do with the show. You know I'm an expert about three or four lawsuits against developers, where you know developers by statute have to put out a public report. The public report the simple word says they have to give you an accurate estimate of maintenance fees, but then within the condo law and a why it says that developers don't have to do a research study. The first full year after this association been turned over to the owners. So the question becomes how does the developer estimate the maintenance fees that they don't know what the reserves are. Well a lot of them fall back on the FHA mortgage lending requirements and just say, I'm going to use 10% of maintenance fees. The FHA lending requirements don't quite say that is 10% of income so if there's some meeting electricity for example, they'd have to have 10% of that to us. The FHA is 10% of all income not just maintenance fees which can be moved around depending on how you structure the master association do whatever you could manipulate that number. The problem with that concept in Hawaii is administrative rules that a statute provide for that as a means to do reserve calculations. So it's a false number that really reduces the true number that you need for reserve study. In the cases I've seen, we've seen the reserve obligations go up 300% from the public report because they just use this low ball 10% number of the FHA lending requirements. And so I think we need to go out to the developers and we need to educate them as well. You know that then maybe some revisions to the law with regard to doing a preliminary reserve study versus they don't have to do it because they would you recommend that as as as something that the state legislature would would be required, you know require the developers of new condominiums to do this preliminary reserve study. Yeah, so if you think about a public report that takes us honest innocent public. And you're a buyer for the first time let's say you want to know what you have to pay you have a budget you have kids in school and everything else. You should have a right to know what the legitimate costs are going to be. And to that extent you know the public report today the law says, you have to give an accurate estimate. Well how does the developer give an accurate estimate without doing some kind of due diligence. And you can look at. I have a database of a lot of condominium a huge number of condominiums in Hawaii, and what they're paying for per reserve contribution per unit based on certain size and other criteria. I can tell you now that for high rise condo in Hawaii over 10 stories. The average is between 150 and $200 a month is the reserve contribution. So I would look at a republic report that shows $35 a month. It makes me wonder how they came with that number then you look at how they, they kind of calculated the estimate the speed. It was steered in my opinion to low maintenance fees and didn't actually describe it so I would certainly welcome legislation or changing into rules to address that so that buyers have a better understanding what they're what they're getting into and they buy a project. But you know Richard you know earlier you you you indicated that you would not make any recommendation to local legislators to make any changes because of the surf side condominium collapse. And I kind of agree with you because we had an ordinance in the city and county of Honolulu. That was passed. Basically because we had a fire we had a horrific fire at the Marco Polo. And because of that, we ended up with this ordinance that basically said, you shall install fire sprinklers in high rise building the other words we had to retrofit, or you could do the alternative and pass a life safety evaluation. And what happened, I mean, I, and I know that the mayor passed, you know, one of the that law passed because of the, the injuries and the death that occurred in the Marco Polo fire. And, and I, I agreed with him to that extent but I disagreed with the law. That's why we went and asked for an alternative to installing fire sprinklers but now we have a situation where the insurance for all the condominiums in, in the state have gone up, and the people who have to comply now with the alternative the life safety evaluation, they got a scramble for millions of dollars to pay for those repairs. And so I guess that's what the concern is with, with the with this condo collapse in Florida. What, what, what, and I've had calls from legislators saying what can we do what can we do. And I basically told them, right now, let's not do anything, because we have a reserve, and budgetary reserves law that has been in effect for 30 years and we just, and we've been educating the associations, and we just got to do a better job and make sure that word gets out. Do you agree with that. I do agree with that I would say this about this fire sprinkler because I was on that task force to that. And so my whole thing was okay we want to protect the people right just mandate everybody meet the current code on fire alarm systems, then they can get out not. You may have a fire but I don't know how you put in some of these buildings a 10 by 10 room for the fire pump, it gets to be $20 30,000 a unit, the building that was built through the building code at that time so I was never a big fan of providing fire sprinklers, I was kind of a fan of providing tax benefits and tax relief if you did do it. But I think you've opened up a box of something that will that will never get resolved I don't think the buildings will do it. They have the right to opt out of the fire sprinkler thing here in Hawaii, and I agree with that, because I think it's too burdensome and and really ask yourself and I've lived here in Hawaii 41 years I haven't seen that many big high rise condo fires I've seen more residential fires. So why don't we have every residential home has to a fire sprinkler so I don't see the legislators have this thing sometimes that they have to save the day and give us all these things to protect the world in the public. I don't think we can allow that to happen I think we have to look. I certainly know we would agree that we can review our reserve law as to developers and some other things, and maybe clean it up a little bit. I don't think we have a big problem in Hawaii. Right and the people that I did get a call from the speaker I got calls from the city council when when when the kind of collapse happened. And I said you know, 30 years ago when they passed the budget and reserve. It was Maisie he wrote on she was she was in the House of Representatives she was a chair of the CPC concern protection, and she, she was the one who passed it. There's the state of Hawaii DCCA. They hired somebody at UH to prepare that manual that you spoke about. And in fact I went and looked for it and I found it, and I set copies of it to the legislators who were calling I said look, we got stuff. We just have to, you know, enforce it, you know, get people to get serious about it. I mean, and we don't need any more new laws. And so far I think there are people are the legislators are listening. So I'm glad to hear that you are on the same page. And hopefully when there's national policy with CAI finishes this national policy, we can drop that out and and circulated to the to the legislators and basically say, Hey, we got a very robust budget and reserves law, you guys should be, you know, grateful that you that somebody 30 years ago passed it. And we maybe we have to beef it up. But hey, we don't have to make major changes in the law to that that are going to affect existing association. And my testimony to them would be we have the most robust reserve law in the country. If there's any area we need to address will be the developers public reports. And that's basically how I look at it. And we just don't have the level and I listened to other states how weak some of their walls are and all these options. So when it's really strict, you have to provide a reserve study, and it has to meet this criteria, and the criteria matches national standards. So, when the public policy comes out other than maybe the developer issue we talked about, we're going to be able to say the legislature, we already meet or exceed that. That's good. Okay, well we've come to the end of our time. And thank you very much for being our guests. Thank you for joining us for today's show and you're going to be the host next week right. That's correct. So, for those listeners, you thank you for joining us for this episode, and please tune in next week, and Richard Emory will be your host for the next episode of kind of insider. Thank you for being with us today. Mahalo and Aloha.