 Good afternoon and thank you for joining us for another episode of condo insider. My name is Jane Sugimura and I'm your host for the show today. And my guest today is Dana Bergman from Bergman group. Hi, Dana. Aloha. How are you today, Jane? Thank you for joining us. And we're going to be talking about, you know, something that's been in the news for the last couple of weeks. And that's the surf side condo collapse. And thank you for being with us and sharing your expertise with us. Sure. First of all, tell us about Bergman Group. So Bergman Group, we're a consulting firm, construction management consulting firm. We specialize in restoration work and in particular, our team specializes in repair work on association projects, kind of many of projects and the like. So we're a multidisciplinary firm. My personal background is in construction management, but we've got people on our team here that are different engineers and architects, construction managers, project managers and the like. But we focus on repair of older buildings and heavy focus on association projects. OK, well, good to know. And you're also a condo owner, right? We do own a condo. My wife and I do own a condo. Yes, we do. And you did tell me in previous conversations that you have served on board. I have I have served on boards many a day in the past. They don't currently, but I certainly have in the past. So you can speak from the position of board members because a lot of board members are watching this. Absolutely, I know how it feels to sit on both sides of that table, both as a consultant trying to help boards and as a board member trying to make decisions. OK, good, because we I think we I think for this show, we need that perspective because, you know, the audience, at least I the way I contemplate is that the people who are listening to the show, you know, are board members or unit owners. And, you know, both of them, you know, are the decision makers. You know, when it comes to repair and maintenance of the building, I think that, you know, after what happened in Florida, I mean, that's what people are concerned about. They want to know if their building is safe and if not, what can they do about it? And and well, why don't we talk about the Florida building collapse? Are there any similarities between what happened in Florida and what happened and can it happen here in Hawaii? Well, a couple of things are that, first of all, you know, it's too soon to to tell, you know, we have to wait for the engineering experts and forensic experts that they're going to bring in to to analyze that scenario to arrive at a conclusion and a judgment as to what they think happened. So it's a little too soon to know for sure what happened. You know, there are some some theories and some kind of leading indicators that we can talk about, but, you know, we all need to just kind of let the engineers and the forensic folks do their work and and they will come up with with what they think happened, you know, could it happen here in Hawaii? Sure, it's it definitely could. The good news is that that kind of an event is so extraordinarily rare that it is highly unlikely. That said, you know, when we when we look at the deferred maintenance aspects of some of the theories of why that building collapsed in Florida, we do see deferred maintenance here in Hawaii with regularity, sometimes quite severe. So although the event in Florida is a kind of a doomsday worst case scenario that's extraordinarily remote in terms of its possibility, smaller accidents and smaller events are actually a lot more likely because of deferred maintenance here and in many other places. When you talk about deferred maintenance to a layperson, can you explain to them what what you mean by deferred maintenance? Sure. So, you know, I'm very fond of analogies and expressions. And, you know, I think sometimes people need to think about buildings like people, you know, as people age, and I know you've heard me say this in the past, you know, as people age, we we all have more health care needs and things creak and don't work as well as they used to. And buildings are the same way. You know, I think there's a mis a misperception and a misunderstanding amongst condo owners and boards that, you know, things made of concrete and steel will last forever. And that's not necessarily the case. So what we see is that there is either a lack of understanding or a lack of will to tackle difficult, expensive issues because they can be, you know, politically toxic within the community. So, you know, what are some of the things that we see here at home that that we deal with on a regular basis? One of the first ones we see with regularity is concrete spalling that has not been repaired and has been deferred. And spalling can can lead to significant safety concerns and risks. Railing problems, you know, railings that have aged are 40, 50, 60 years old that need to be replaced, you know, glass falling out of windows. Those are, you know, those are some of the things we see with regularity in terms of kind of the exterior of the building. Another big one we see here locally is is, you know, swimming pool recreation decks and parking structure decks with some sort of, you know, tennis courts or rec deck on the surface of the parking structure. You know, we see deferred maintenance on those kinds of things all the time. So those are just kind of some of the things we see with more regularity that answers the question. Right. Well, let's talk about spalling because, you know, until I served on the board, I, you know, and I know one of the first things that happened maybe after I was on the board for about five or six years is they talked about spalling. I didn't know what it was. You know, tell the people what spalling is. Sure. So concrete spalling is is essentially concrete pieces of concrete that come loose from the building and they spall. They spall off of the building. Sometimes they can be rather flat, like a delamination. Sometimes they can be big chunks. They're largely driven by damage to the concrete through exposure to the elements, you know, our hot, salty air here carries a lot of chlorides and moisture. And, you know, the UV index here in Hawaii is very high. And these these elements are just relentlessly, you know, buffeting and pummeling our buildings day after day after day. So what happens sometimes with age and exposure is that you'll get cracks in the concrete and water get in the cracks and causes steel components inside the concrete to rust. And once that corrosion process starts, it advances itself rather rather handily like cancer. And so what what happens is until that damage is is treated, it's going to continue to advance itself. So the sooner that concrete damages is addressed and repaired, the less the chance that the corrosion will spread and the worse it will get. OK, let me tell you how it was explained to me because I've seen it. I've seen some pretty bad spalling in our building when we had to get it repaired years ago. And they told me, well, concrete is porous. And so you've got this salt air that comes in through the concrete and it goes after the the the the the the rebars, the steel that holds the building together. Correct, that salt air hits that that's that that the metal it rusts. And when it gets all rusted and corroded, like you say, the concrete starts to fall off the building. Is that what happens? That's correct. So what happens is salty, wet air gets into the concrete and even liquid water gets into cracks and crevices. And it gets down to the steel just as you used as you describe. And the steel of the reinforcing bars or the rebar for short can it causes it to rust. What happens is, you know, metal rebar as it rusts, it expands. So it's actually getting bigger in size and it puts pressure on the concrete, which causes the concrete to crack and fall off. That's that's what causes spalling. And it can it can happen with, you know, big pieces of rebar. It can happen with small pieces of steel that are holding railing pockets or railing posts into place. So it can happen on large, large components and small alike. But you're exactly correct. It's essentially where metal components inside are corroding. It causes the concrete to fall and spalling eventually is dangerous enough that it can fall off the building or cause a major collapse like they saw in Florida. And with with with spalling, it's not if it happens. It's when it happens, right? Absolutely. Every concrete building in Hawaii is going to fall. Absolutely. I'm fond of saying that, you know, concrete buildings will fall forever. The severity and the frequency with which you have to address the spalling depend on how well you take care of your building. And once you do your spa repair, and I know the first time we did it and the first you notice I said first time because we've had a second time. That's true. Yes. So the first time we did it, it ran us over a million dollars. Yeah, it's 23 story building and it can be expensive. And, you know, the longer you let it go, the worse it gets. I'm again, back to analogies. It's kind of like cancer. The the longer that you let that concrete damage and that that corrosion continue to advance, the worse it's going to be, the worse it gets, the more expensive it is to fix. So the the better thing to do is be proactive about treating and repairing concrete damage and spa repair and keeping your buildings painted and keeping your pool decks and your wreck decks waterproofed properly. All those things will help reduce the severity and the frequency of spalling. But the longer you let it go, the more it's going to cost to fix. And you just answered my question, too. Once you do the spa repair, that doesn't mean it's you're finished. It means that you just you're finished for now. But that means that maybe 10 years from now, you're going to have more spalling, right? That's absolutely true. So again, a concrete building is going to fall forever. You're going to do it on a certain interval. And the better job you do of taking care of your building and protecting it, the less frequently you're going to have to do spa repair and the less severe it's going to be. So, you know, people think about paint as something that's just pretty. Well, it's not just pretty. You know, paint is actually there for a reason. You know, many of these paints and waterproof coatings and other things protect the building from the elements. So some of those things are just as important as the underlying concrete and steel inside. And for for for painting the building, I think most of us know who live in high rise buildings. You paint your building about every 10 to 15 years. It depends on the paint. You know, paint last anywhere between five and 20 years, depending on what kind of paint you use. But yeah, a good a good interval is every, you know, we have five to 10 years, 15 on the outside, you're probably repainting your building. Right. And so before you paint your building, you've got to make sure you have no spalling. Well, that is true. It would be it would be advantageous to do the spalling in the painting at the same time. It's an interesting point, Jane, and maybe a good pivot. Frequently, when we look at reserve studies, we'll see spalling in one year and painting in another. And it makes a lot more sense to put those together because if you do spall repair and don't paint your building, it's going to look like it's got some sort of disease. And you also don't want to be wasting the money on painting your building if you're going to turn right around a year or two later and do spall repair. So it's better off to do those two those two things in concert with with each other, not just for economic purposes, but also because they really do belong together because they work together. Right. And right now, you know, in Florida, they had, you know, we learned that they have this sort of building certification every 40 years. Yes. Right. We do we have similar legislation here in Hawaii? We do not. We do not have any building inspection laws like that. The one thing we have here in Hawaii that some other states don't have are really more on the economic side of things where associations are supposed to be reserving funds following the reserve study laws that I think were championed by Bayesian Hirono back, you know, a number of years ago. But on the inspection side or the more construction and engineering side of things. No, we do not really have any any laws here in Hawaii like they do in other parts of the country, including in Florida. OK, well, let's talk about the reserve study because the reserve laws because, you know, and you did mention, you know, Congressman Macy Hirono. And back then, she was chair of the state. She was a representative and she was chair of the consulate section. And she was the one and I can remember her calling me and griping that, you know, she was getting these calls from her constituents about getting specially assessed for a roof when they just bought into the building. Right. And she she she complained that it wasn't just one or two calls. I mean, she was getting several of these calls every year. And she told me one year she says, you know, if you guys don't educate your people to set up mandatory reserves, I'm going to pass the law. And she did. I think it was 1992, she passed the law. And so since 1999 and then even after she passed it, it took us maybe four or five years to get it implemented because I think it was the Board of Realtors Association, the Realtors Association. But we went in there every year because they wanted to delay the implementation of the budget and reserves because the way the law was written in the beginning, you had to be 100 percent funded, which is kind of hard to do. Right. So so the legislature said fine. And then but I think the first one was they wanted only 10 percent and the legislature said no. And I think they went back and forth. I think it ended up with 50, but it took like three or four years. And we would be back in the legislature every year before they finally hit on a number and then they implemented the bill. So what the bill does is it requires buildings when they do their budget to determine what they have to do for the operating to run the operations for a year. Plus, they have to set aside some amount for deferred maintenance. Right. And each building is different, right, because they have different components. Can you explain to the the the the listers what the components of a of a reserve study would include? Sure. So just one point of clarification. The reserve study is not for deferred maintenance. It's actually for ongoing capital improvements and and regularly scheduled maintenance. What happens is associations don't do the maintenance. They defer it for for whatever reason, usually economic. And then they end up with a bigger problem, just like we were talking about the concrete fair. You know, they they kick that down the road and kick that down the road either because they don't have the money or don't want to have to face the pain and difficulty of swallowing that that really big pill to swallow. And so the damage gets worse and worse and worse because it was either not in the reserve study or not funded. So, you know, your reserve study is going to have if you look at them, they they will have frequently everything you can possibly think of that you may need to replace or service on a regular interval. So your major things like roofing concrete, spa repair, repainting the building, replacing your pool pumps. You know, those kinds of things are are all things that you see in reserve studies with regularity. A really, really good example of what's happened here in Hawaii. And I will say in a strange way, we're leading the nation in in this category. And that is with re piping. You know, when we looked at reserve studies 10 years ago, nobody had re piping of the building in their reserve studies. You know, everybody why pipes were supposed to last more than 20 exactly. Exactly. So it's just going to say everybody assumed that pipes were going to last forever and they don't. So now fast forward 10 years and we now see re piping of a building in the reserve study. But there's a lot of other things that people don't think about that need to be included. You know, a good one that we see omitted with regularity is repairing the waterproofing on parking structures or redoing your pool deck. You know, you look out on your pool deck and you've got that nice tile and it looks great and the swimming pools off in the far corner. But people don't realize that the waterproofing assemblies and the and the things that protect the structure underneath, they don't last forever. And so things like that still need to get budgeted and they still need to be written into reserve studies. So your reserve study should have everything in it from soup to nuts that you think you're going to need to replace. And the reserve study specialists will help you assign a value in terms of frequency. So maybe it's in your example, Jane, maybe, you know, you've got spa repair every 10 years and roof replacement every 20. Maybe you need to have your pipes replaced every 40. All these things need to go in a reserve study. The second thing that has to happen is you have to make sure you put the correct dollar amounts. And that's the other thing that we see all the time is maybe concrete, spa repair, excuse me, maybe concrete, spa repair or roofing or whatever else are in there. But the dollar amounts assigned are just woefully inadequate for where the market sits today. So that's the other variable. And what I see more often than not is either it's a big ticket item like redoing the entire pool deck that was never thought about and it's not in the reserve study or, you know, let's take concrete, spa repair. It's often in the reserve study, but it's just woefully underfunded and therefore it just gets deferred. And, you know, one other thing, too, this reserve study that we all have to do in order to show us how much money to sell, it's a tool that the board of directors of an association are supposed to have available to them so that they can make their decisions, right? Absolutely. And I would encourage everybody listening to update your reserve study annually. You know, too often we see where reserve studies don't get updated, you know, every five, six, seven, eight years or longer, and that doesn't serve you well because the needs of the building may have changed and you need to make sure that you're adjusting your reserve study accordingly and certainly market conditions change. And so if you put something in your reserve study ten years ago and you then look at today's construction costs, you might be in trouble. So I would definitely encourage everybody listening and watching today to, you know, use that tool to your advantage. Jane, you're absolutely right. It's a tool to be used. It's a living and breathing document to be updated regularly, not just be done and put on a shelf. Right. And especially now with the pandemic, the pandemic created a lot of supply disruptions, right? I mean, we're hearing about all, especially Hawaii where everything, everything's got to come in by a ship or a plane. And so so the supply chain has been severely disrupted because of the pandemic. And so what that does is it makes everything more expensive. Absolutely. So a sheet of plywood that a year ago costs $20 today costs $120, you know, prices are stabilizing and coming down, but I don't think they're ever going to come down to where they were. You know, steel and pipe is, you know, 20 to 50 percent more expensive today than it was a year ago, depending on what kind of materials you're trying to get and get shipped in. And we are still having shortages. The supply chain is starting to stabilize and we are seeing prices start to stabilize some, but it's still inflated and we're still having trouble getting some products. And so, you know, so I guess a word to the the board members and the owners who probably don't know that the board what what what information the board has. This is all relevant information. This is information that is in their hands. It's not something that they have to go out and get. They are mandated to have a reserve study. So every association should have a reserve study if they don't have it, they're not in compliance with Hawaii law and they need to update it regularly. And I agree with you that it should be done annually, especially now, you know, where where the market conditions are changing and it was severely impacted by the pandemic that affected all phases of our economy and our and our lives. And, you know, we need to take that into consideration. Now, what happens? And you and I'm going to now let's let put on your board board hat. You were you used to sit on the board. So now you're sitting on the board and you're looking at this reserve study and your property manager says, you know, based on your reserve study, you've got to raise maintenance fees 15 percent. What is how are the other other board members going to react to that? Look, I will tell you, I feel for a lot of these boards, you know, construction costs have been climbing, climbing, climbing and in recent years, you know, in the last decade alone, we've seen, you know, huge increases in construction costs and the state bird is back, you know, the tower cranes are out and about and this influences the market. The shortage of labor and the cost of materials is a real factor. You know, it's difficult. It's really difficult to look your your fellow owners and constituents in the eye and tell them that you're going to have to raise their dues or you need to borrow money for for major projects. And the thing I would say to to the board members and and and owners that are out there is to the boards, I would say tell them the truth. I would say, you know, shoot straight with your owners and tell them where you really stand. The worst situations that we encounter are when things have been pushed off and kicked down the road for so long that you've just got a horrific repair that could have been hundreds of thousands or millions even millions of dollars less had it been addressed in a more timely manner. So don't put it off. Don't put it off. You know, have the courage to really look your constituents in the eye and tell them the truth. And to the condo owners that aren't on the board, I would I would tell them, you know, please don't crucify your boards for telling you the truth. You know, we see all too often where boards get recalled because that the the owners don't like the message that they're receiving. And I've seen numerous instances in my career where, you know, the board has been recalled and new boards come in and the new board has found out that, oh, guess what, there was no big conspiracy. There was no big shenanigans. The building really did need these repairs and repairs ultimately went forward. They just went forward a year later and were even more expensive. So, you know, to the owners, I would say, don't, you know, don't, you know, don't crucify your boards if they're being forthright about what the building really needs. That's kind of where these inspection laws come into, Jane. OK, and, you know, in Florida, we know from the news reports that the previous board had recommended some changes and, I guess, out of frustration and they don't tell us why, but the entire board quit. And so this board that was in place when the building collapsed, they went out and they had they did a special assessment. In fact, the association was collecting the money for the fifteen million dollar repairs, structural repairs that were somehow kicked down the road, like you said, that were finally going to be implemented. Yep. So, you know, a couple of things happen there. One is, you know, it's it's never an easy subject to talk about and people don't want to have to pay the funds. But the boards need to remember, you know, your job as board members is an elected body is not to keep dues as low as possible. Your your job is to to maintain the value of your asset and preserve your property values. And if you stop and think about it, you think about a building there or all the buildings here at home in Hawaii, you know, we have a board of late people in charge of an asset that's worth tens or hundreds of millions of dollars when you add up the value of all the condominiums and you have to keep that in perspective. Nobody likes that hundred dollar or two hundred dollar months of assessments or increase in dues. But, you know, the difference between that and having an accident or someone getting hurt or killed, it's you know, you'll pay that out in insurance or other things. So, you know, my advice is, again, to the boards, shoot straight with your owners and tell them where they really stand and to the owners, you have to be part of the community and understand that the boards have very, very difficult decisions to make. You know, we reference these inspection laws. That's where some of these inspection laws come from. You mentioned the 40 year law in Florida. There's some others, you know, New York City has many residential high rises, much like here at home in Honolulu. And, you know, they have what they call local law 11 where association buildings have to be inspected every so many years to make sure that there's not things that are dangerous to the occupants or to the public. Just last year in 2020, the state of California passed a statewide ordinance. It's called Senate Bill 326 where all lanais on association properties and in particular woodfame structures in this entire state of California have to be inspected. These laws come out of accidents because deferred maintenance resulted in things not being repaired in the timely basis. So, you know, we don't have those ordinances here in Hawaii. So it really is on the boards to be sure that you are proactive in maintaining your building because there are no ordinances to to really make sure that that happens. And also, I mean, they have to be diligent in in their obligation to make sure that the building is being cared for. And also it would probably be easier if they if they raise their maintenance fees a little bit every year so that they don't have to go back to their owners with a big chunk, a double digit increase. Absolutely. Back when I served as a board member, you know, what we used, we used to do a couple of things, you know, one thing. And of course, I have to be, you know, confessed that our board had the benefit of the benefit of having me on the board because I know a lot about buildings. But, you know, we put things in our reserve study that I knew were going to need be necessary. And we started saving for it. So when we, you know, an example from from our building when I was on the board, I knew we needed a new fire alarm. And so we put it in there. We put it in the reserve study and we saved for, you know, four or five, six years. And then when it came time to put it in, we had the funds. We didn't have to borrow money. And that's how it's supposed to work, right? That's exactly how it's that's exactly how it's supposed to work. So that when it comes time, you have the money and you don't have to do a special assessment. Absolutely. The other thing that we did as a board back when I was serving is we had an automatic dues increase every year of a very low percentage. And I can't remember the exact percentage off the top of my head, but it was, you know, three or four percent that we automatically increased every year because no matter what you do, your cost of operations goes up, your payroll costs go up, your insurance costs go up. So even if you're doing nothing more than trying to offset those basic operational costs, you still face an increase in costs every year, whether you'd like it or not. So, you know, what we used to do and I would encourage all boards to look at is you should be raising your dues annually because your costs go up annually. Right. And you have to set us, especially as buildings get older, you need to set aside money or, you know, or, you know, for these repairs that are going to, you know, and it's not if it happens, it's when it happens because the building's age, it will they will need repairs and they will cost money and people need to recognize that. That's right. You know, your roof will need to be replaced. Your windows will need to be replaced. Your railings will need to be replaced. The waterproofing on your parking structure will need to be replaced. The way you avoid these economic calamities for your owners is by making sure that all of these things, number one, go in your reserve study and number two, that you're honest with yourselves about what kind of money it's going to take to fix those items because if you have, if you have concrete spa repair as an example in your, in your reserve study and in your budget, but you only put $10,000 on a line item that needed half a million, you, you, maybe it's in your reserve study but you still have shot yourself in the foot. Yeah. And you know, we're running out of time, but thank you so much, you know, for, for joining us on Condo Insider and we'll probably, you know, have to go back and, and talk more about this subject after they finish your evaluation of what happened through the, the condominium at the insurfrider Florida. I'm sure we'll have more discussions on this at that time. And thank you very much for joining us today. My pleasure. I'm happy to come back anytime. Thank you, Dana. And thank you to our viewers for joining us and please tune in next week. Raylene Tennell will be here and she will be your host for the next episode of Condo Insider Mahalo and Aloha. Thank you.