 Think Tech Hawaii, civil engagement lives here. Welcome to Kondo Insider, Hawaii's show about association living. I was looking at the historical file the other day and I believe this is the 105th episode of Kondo Insider, our show about trying to help owners and board members alike understand the law and the various opportunities and having a very successful association. We started last week with, I should say two weeks ago, we took a little short interlude to talk about Bill 69, which was front page news and the newspaper on fire sprinkler and the ability of an association to opt out. We started a kind of a general review of 514B and I asked Nalan, prominent local attorney, a very, very good friend of mine, much smarter than me, to come back and we're kind of going through over the next three or four weeks a review of 514B at kind of an overview level. So in the end it's always best you check with your property manager or your attorney on some specific issues versus just taking everything we say that applies exactly the way you may think it applies. So welcome back. Thank you. Good afternoon everyone. So we're going to talk about 514B and last week we talked about the governing documents and basic governance issue and we didn't quite finish on one thing. We were talking about were HRS 514B-154 mandates documents were provided to owners within 30 days. But the thing we didn't get any chance to cover is whether that's a free ride for the owners or not. Because you know, I often, like this week, got an email from my owner saying, I would like the last 20 years records and highlighted every single document that existed in the association's file and they thought they could get that for free. Is that true? Can they get it for free? That's a misunderstanding. Yeah. So you will need to give them a written notice about that, an estimated cost for that then the owner can make a decision as to whether he wants to proceed ahead to do that. So and when they do charge what kind of things can they charge for? Like administrative handling, you know, like copying. So there is a maximum like a $1 per page that's like a ceiling charge amount. In addition to that, if you have a file stored at like a, you know, offside storage space, there may be additional charges to like how to retrieve it back, transporting back, then you may have to have another person if they want to do the inspection to sort of, you know, oversight, like a sit there, accompany them. I know there is a, there is a free amount like up to one year, it's like eight hours I think for all the owners in the project if, you know, more than that, then someone has to pay for it. So I think that's a common misunderstanding because I think management companies and boards, they don't have objection to providing the documents people are entitled to by statute. But owners, maybe some of them slightly lazy, just take the statute and I want to see everything. And the problem is they don't realize that older records are stored in a warehouse. And so they pay that warehouse for storage and they have to pay someone to pull it out of the storage file, then they have to pay someone to truck it to the management company to be reviewed. So you put that box in a conference room. If there's potential litigation, you wouldn't want a person to be left unattended because you wouldn't want them to be able to take or add to the file something that may have been there in the beginning. And then you throw on top of that, people may want copies and we're allowed to charge up to a dollar per page. So my suggestion has always been the owners to think through what you really want versus just they can ease you out and say I want everything and because there's going to be a cost and most management companies will ask you to provide a deposit to cover the estimated costs and return any excess if there is any after the request is done. It's also more efficient for the owner. Just get what you want instead of getting a bunch of stuff you have to read through to find what you want. Yeah. And I think the other thing is it says within 30 days, well I had a request this week on a Wednesday in the annual meeting of Saturday that they wanted to come into our office on Friday and review the last 10 years of records. Well sadly we had to say no, we would make an appointment for them, but again we need to identify the records again because of where they might be in storage, not in storage. You know there's got to be some reason on us upon an owner's request because we're not just sitting there all day waiting for someone to come in and see these records which probably if they're over a year old aren't even in our office. Yeah. That's always the guideline. So anyway we know in summary that there's a cost and generally speaking owners have to be, records have to be provided within 30 days and we know the statute defines for the owner what they're entitled to which means there's going to be many things that you'll probably be declined to receive. So let's go on to the purpose of today's show is a talk, I'm going to call it chapter or part two of 514B which I'm going to call as financial fiscal matters and let's talk about some basic things, some definitions. So define, we hear the word maintenance fees and we hear the word assessments kind of tell us what the real term is and what we're talking about. So basically as you know you are, if you are a member of the association then you're subject to a common assessment means the association can charge you a certain amount of fees in order to fund the association's general operation. It's generally according to the percentage of the common interest your unit is subject to then maintenance fee usually refers to the regular monthly amount that's a set amount like according to each year according to a budget and then the assessment is more broader term it could mean like a special assessment it could also mean like assessment of late fees fines or legal fees and costs. So if you talk about maintenance fee sometimes some association call it association dues that's a narrow term just the regular monthly for the common assessment portion for the maintaining the building but at the top of that if your project allows there may be you know some other charges which could fall into the category of general or special assessments. You know my experience has been that we all use the word maintenance fees we all know the maintenance fees includes more than maintenance it'll have insurance common water or a bunch of additional charges electricity for the common areas and more commonly under the statute that's a regular assessment and then you have other assessments special assessment maybe something surprise has happened they needed some additional cash where you might have an assessment because you violated the house rule and you might have late fees and other types of assessments as well. So how about reserves what is reserves? A reserve usually sometimes also called like a replacement reserves because some components of your building is going to have a shorter lifespan they will you know wear out sooner you will have to come up with money to try to get money ready to replace them sometimes down the road so you got to do like a you know like a the useful life remaining like how many years projected you will need to replace them and how much money you need to put in something like that. You know the reserve contribution that's interesting because if you look at the administrative rules that support the statute the quote reserve contribution the amount of money that every owner on a monthly basis either in their maintenance fee or as a separate line item as some association choose to do it is really called estimated replacement reserves on the administrative rules were in the national standards it's called reserve contribution it's really one in the same thing but this is essentially the money that is paid by the owner and somewhat of a quote savings account for a future capital expense that is projected based on a reserve study and so it's different because a lot of people don't understand that when association does a budget it's what I call a zero based budget you're collecting just enough money to pay the bills estimated and just enough money to fund based on a reserve study your future capital expenses and it may not be perfect there may be times that electricity goes up or insurance goes up it's a very difficult thing to do because most boards run up pretty tight they don't want to charge too much in maintenance fees so they're ultra conservative and looking at those things but since I mentioned the word budget what is the budget budget basically it's like your own personal budget or family budget for association you order for you to have enough money to operate you have to sort of estimate you know for the next upcoming fiscal year how much revenue do you have how much expenses you will have and then you order to fund the basic reserve then how much money you need to put aside and then you sort of you know calculate the numbers and then you will calculate for each unit how much money you will need to assess for the next fiscal year does the board of directors have to do a budget oh yeah that the annual budget is required by the statute yeah a lot of things that are not understood about the budget if you read the statute carefully it says the budget shall include a reserve study so if you think about that when they do their annual budget they have to update their annual reserve study as a part of that budget process it doesn't mean they go hire an expert it may be well we said we're going to do the roof this year we didn't do we're going to do it next year so we'll adjust our planning accordingly or yes we did the roof we budgeted a hundred thousand but it really costs us a hundred and fifty thousand which means the amount of cash they had in reserves was probably depleted by fifty thousand more than they had budgeted and it affects their future contributions so a lot of people don't realize that yes it's an annual requirement to do a budget and the budget says must include a reserve study and so then that means you have to look at your reserve study every year and make sure that you made adjustments accordingly with respect to it yeah because you can be really too much off like other if it's within twenty percent of the difference that's okay if you are overspending according to a budget you will need to go to your members for approval like a majority approval or unless there's an emergency situation of course you know I wish my home budget work that way because my wife has a budget and she always tells me I'm over budget I never know what the budget is she doesn't tell me but I don't know what it is I'm always over budget at home so I wish I kind of work better than my home budget system does so anyway let's go back and make some more definitions with respect to that so you have to do a budget but the law really says the components they have to be included in the budget you remember what they are or what some of them are you know there are you know different items if it's like the asset is over ten thousand dollars you got to separate them each have a different one in the reserve study and the rest of them if it's lower than ten thousand dollars you can actually aggregate them into one item that's usually how it works of course you know you think about it for a condo building the most expensive items will be like a roof elevator you know like you have parking lot resurfacing you know if you have AC system you have replumbing stuff then you know naturally you will know the expensive lie items will be and then you know before anyone buys into a condo you definitely want to take a look at those financial documents so with regard to the reserve study it's interesting to point out that national standards define a reserve study as a budgeting tool so again the word budget surfaces in a tool basically signals that this is not science you're estimating the cost the useful life how much of the remaining life there is a whole bunch of variables which you really don't know if it's accurate or not you're making a business judgment on trying to set up enough savings through the reserve contribution that you have enough money so when that expense comes to realizing again it's a tool and actual circumstances as you go down the road may vary from the on the budget yes and that's why the statue says as long as you make a good efforts trying to calculate them right if they won't punish you or you know make you liable if the estimate turns out to be not correct but I've had you know I sometimes those that may not know who are watching the show I'm a CAI reserve specialist I was integral in writing parts of the law back in 1997 when reserve study obligations were put into effect but I've also seen over the years national standards and the way reserve study thinking has changed because it'll become more knowledgeable in this new field you know a lot of the thinking has changed with regard to how to do reserve study but what I've seen from the expert witness work I've done the key is a good faith effort and I've had clients say to me you know we have a great reserve study if we just pretend the central air conditioning doesn't exist so if we take the central air conditioning out of the reserve study and this pretend it's not there we have a perfectly funded reserve study you think that passes the good faith test I think probably not that's intentional you know you you already know it's out there you're trying to pretend as if that's a pretty much you know a red flag that you know it's not a good fit and before we take the break I'll just make one more comment about reserves my experience is when you get professional help to guide you still a board decision you will find that if you have deferred maintenance or big items coming up down the road like the common wastewater pipe we see today by having a person who understands how this is calculated and with the things you can do to help mitigate the problem it'll have a the least impact on your maintenance fees you'll still do a right job and a proper job but if you was a novice try to do some of this you're going to make some fundamental mistakes and probably cost a lot more money and Richard's little note about that we're going to take a little one minute break we'll be right back talking about more fiscal matters on associations this crazy thing going on today I was just walking by and all these DJs and producers are set up all around the city welcome back to condo insider I'm Richard Emory your host and what I'd like to do is tell you where we are we're talking about by 14b it's gonna be a multi-series show just reviewing the basics and we're talking with not on association lawyer about the legal requirements with regard to the fiscal side budgets financial statements those types of issues and we were just finishing up on talking about a reserve study and what the issues are there so you have any feelings about you know we have under the current law and reserves I hear this everywhere I go 50% funded or fully funded balances and I tell everybody when I give my talks if I could give you an animal of the mind so you never heard the word percent funded ever again I would have you take an animal of the mind do you have any feelings about percent funded versus cash flow or that's really some language from the statue it's pretty confusing for people not familiar with this you know they're actually different methods of funding your reserve you know one way is the component or decoy street line method the other one is the cash flow or decoy pooling so basically for a component you would pick out each you know component that needs you know you to save money for replacement you do that according to like on for the fiscal year you do that and then the statue requires you the minimum percent you have to fund it that's 50% if you're doing the cash flow that's really you're like a pooling all of the stuff you project it over like a minimum 20 years you know how much it will take you to be fully funded you know in within 20 years so really it's two different methods and it could give you some really different numbers depending on the project let me give you some historical background on that because I happen to know a lot about this of course you're the expert you know this when the state decided they wanted to have some reserve and contribution requirement primarily because it's believed that developers were underestimating that amount of money and maintenance fees were artificially low they passed the law providing for what we call component method percent funded and because they're afraid that put too much burden on the owners they said well you only have to be 50% funded by January 1 2000 the problem is is that that method is used probably by less than 1% of the associations in the United States everybody uses is like cash in a cool accounting the ways you do this are very different the pooling method or where you pool the money and look at this as bundles of money needed at a given year versus by a single component was needed is what everybody else uses because it gives you more level and historically accurate balances to project that so that's why I said I wish people could take an end of the mind because they get confused because think about this way if if you did percent funded changes every year it's a single-year plan yes what message are you sending the people I'm 50% funded you're underfunded you're 50% sure what the message is right where you can take that same data and put it into a 20-year cash flow which looks at this is a pool of money right and see you're fully funded you have balances every year you're collecting enough money so you have to be very careful understand the differences but I think most people would say that we use a 20-year cash flow or pooling method they they call out the cash flow method in simple terms but it's the funding method is for what they're looking at but I don't recommend the percent funded you know yeah so actually my understanding is it's like not every component is gonna fail at the same time right there's always probably like the some may be lasting longer than the useful life some maybe like even shorter so you pulling them together it will make more sense instead of you do it like each item right and if you look at this projections and what happens in the real world you have all these projections for a hundred components they're all gonna be off a little bit higher low shorter or longer in life or whatever may be so you want to take the best economic advantage and say well if in fact the roof costs a little more you're in theory borrowing money from another component when cash flow you're just using your pool of money to your best advantage under cash flow you're borrowing money for another component which puts a demand on to get more money and also gives you a lower percentage funded so it can be very confusing the people and I think that we've tried for 1997 is when they they added the cash flow method as a legal method to to do that because I wrote that language and it's probably the still greatly misunderstood in the industry and we want people to realize that again you want to look at what best opportunities you have to do the budget to make sure the reserves are done so let's just say I don't fund the reserves let's just say I'm short am I as a board member liable for that oh yeah I think you do have a fiduciary duty as a board director if the owners after they reveal that they think that a reasonable board director you know by making business judgment should have done that then they definitely have a cause of action against you and we've actually saw losses before filed in arbitration and owners won a big you know arbitration award against the board against the association yeah I don't think board members personally are liable thus there's yeah some really nefarious thing that went along that would be the exception under rule and certainly under the statute owners can force the board to do a proper reserve study in the sense they can force that and I've seen lawsuits and arguments both ways that have gone both ways when owners have filed a suit against the association about not properly implementing a reserve study and in a binding arbitration I saw a ward where the arbitrator maintained control and put standards on when the association had to complete these corrections to the capital components as a part of the arbitration award but I've never seen an award against a board member individually for saying we didn't do the reserve study properly so the fact we're short now to put a new roof on yeah you're personally liable for it I mean it's more like an injunctive relief though because the goal is really you have to you know make sure the association has the correct reserve down there and maybe the owner would get some recovery for legal fees and costs you know he or she incurs in order to enforce that I think that's what we were saying earlier that about good faith because the basic law says if if you've done good faith you don't have a personal liability and so if in fact in my example where they deleted the air conditioning system and now there's a special assessment that owner wasn't counting on you intentionally deceive the buyer or the owner of the circumstances there could be some potential liability because you fail the good theoretically you fail the good faith argument definitely I see the exposure to personal liability there yeah well I've been involved in a lot of litigation of reserves from different perspectives and and they got to do a whole show about that sometime there's some learning curve out of the case study with regard to the reserves I think it is important to emphasize what you said earlier and that is that you have to identify all the components of a value of greater than $1,000 if they're greater than $10,000 you have to have a separate line item on the reserve study if they're less than $10,000 say pool equipment the pump the filter you can call it pool equipment and bundle together those items less than $10,000 and greater than $1,000 to a a common situation a good example would be doors if the doors are a common element of the apartment the individual door is over $1,000 but less than $10,000 you could call it apartment doors of $100,000 and filter it in either in stages or phases or the lump sum based on your circumstances so my point in the reserves is it's a it's a real obligation of the board to do a conscientious job those who do will have less problems down the road and those that think they have larger issues maybe you ought to look just like we always advise business judgment get experts someone who might be qualified in the skill to help them but I like to think a minute and go back we have a couple minutes left I like to take a minute and just go back to the budget requirements and because there are certain statutory obligations that have to be in the budget yes like for example how much the expenses are the revenues estimate I get what kind of are you going to use cash basis or crew basis of accounting and then like the total in your reserve account how much contribution will be needed to fund it and like also what method of funding you're you're going to be using there are definitely those requirements it's ironic to me I've done a lot of budgets and I can't speak for everybody and even our company I can say in general terms when I used to do budgets I had a standard disclosure page and all the things the statute said you had to do I had in the summary page at the top this budget was prepared on the cruel basis of accounting the initial reserve balance starting the fiscal year is one million dollars the amount of money our reserve study says we should collect is a hundred thousand dollars a year the statute goes on to say you have to disclose whether or not you're collecting that the board of directors budget collects a hundred thousand dollars a year and the easiest way to protect yourself is to know what the disclosures are and have a cover page you know because a lot of people frankly I'd say generally speaking industry not very many people do that and it's a really good second balance if you do those disclosures you can say what did I just say is this something we should do now real quick because we're down about a minute can people withhold assessments if they don't like the budget or the plan no they cannot you have the statute obligation to pay your assessment and if you don't pay your assessment you know associations have the power to you know impose late charges if the the board has adopted a policy or they can also put liens on your property if you are delinquent assessments of course they also have the power to foreclose on the statutory lien well I think that would tell owners they should be very careful and not paying because yeah we'll discuss we've discussed on a show a couple weeks ago what priority of payment is but boards need to understand our homeowners need to understand that it's a zero-based budget we're depending on everybody to pay what's owed so we can pay our bills if someone doesn't pay we're short money and it's either going to affect the reserves your ability to pay your operating expenses so this is why we have a pay first dispute later provision although we'll discuss in another show coming up the bill that just passed out of the conference committee 1873 which gives some short-term minor relief if the outstanding balance is only a fine but on that note there's never enough time to discuss all of this I want to thank Nalan again for coming you know and I'm gonna get you back for the next part of 514b we hope you enjoy our show when you're finding educational and informative feel free to email us at any time if you have a specific question and thank you for watching condo insider