By Aaron J. Goodlock, Orten Cavanagh Holmes & Hunt, LLC
Among the lessons to be learned in the wake of Champlain Towers is the importance of financial and project planning. Owners and residents expect certain returns on their investment and, as a general rule, associations have a duty to protect, preserve and enhance property in the community. Besides avoiding catastrophes, planning for maintenance, repair, and infrastructure enhancements provides numerous additional benefits such as increasing marketability and value of homes and mitigating liability risks.
Prudent planning presents both opportunities and challenges as communities approach a new post-pandemic era and continue to navigate evolving housing markets, adapting to changes in technology, and managing aging infrastructure. Community associations that embrace proactive long-term planning are poised to be much more successful.
Financial and project planning requires involvement and participation by various stakeholders, including board members, management, and homeowners. It requires knowledge and a commitment to invest in the future of the community through:
- identifying needs
- performing regular maintenance and repairs
- preparing and updating reserve studies
- establishing long-term goals and objectives
- creating and implementing long-term financial plans
- educating members about the need for, and benefits of, investing in the community
Planning to address long-term maintenance, repair, and replacement of aging infrastructure is a fundamental element of fulfilling the association’s legal duties and responsibilities. Boards of directors owe fiduciary duties to the association and owners to exercise sound business judgment in meeting and fulfilling maintenance obligations, including adequately budgeting for routine maintenance and operating expenses, as well as funding reserves for future capital repairs, replacements, and improvements.
In conjunction with maintaining and updating infrastructure, investing in modern technology and capital projects to incorporate contemporary amenities, facilities, and services is a great way to revitalize and add value to communities. Modernizing and/or repurposing antiquated or obsolete facilities can add substantial value to communities for current and future residents. For example, instead of repairing old, outdated equipment, consider replacing it with more modern energy-efficient, sustainable equipment. Modern equipment may be more expensive to purchase and install, but it could substantially reduce future maintenance and energy costs.
Balancing competing needs and interests such as addressing infrastructure versus investing in modern facilities can be challenging and difficult. Boards of directors and management must be cognizant of the community’s needs and desires, as well as the financial constraints and limitations. Most associations do not have sufficient funds to invest in every project or idea, so prioritization is key. Associations should solicit input and feedback from owners, in addition to engaging experts who can assist with improvement analysis and planning.
Whether your community is addressing aging infrastructure, investing in new technology, or both, boards of directors should rely on the advice of qualified professionals to assist in developing long-term plans, strategies, and analysis. Associations are encouraged to seek assistance from professional community association managers, reserve specialists, financial advisors, engineers, and sustainability experts. By engaging specialists to assist the community, associations and boards can develop better, more sustainable and cost-effective solutions, while simultaneously limiting risks to the association for lack of due diligence or informed decision making.
In June, 2022, Colorado Governor Jared Polis vetoed House Bill 1387, which would have required mandatory periodic reserve studies. However, despite any mandatory statutory obligation, performing regular reserve studies serves as a critical planning tool. Conducting reserve studies enables associations to anticipate large capital expenditures and evaluate areas of risk. Reserve studies help to determine what projects need to be done, as well as when they need to be done and how the association should be planning to fund those projects. For example, reserve studies may identify structural building components with significant deferred maintenance or conditions that pose an imminent safety threat. Issues involving significantly deferred maintenance (e.g., structural water damage) or conditions likely to result in physical injury (e.g., cracked or broken sidewalks) should be considered “high-priority” projects. Reserve studies can also help plan for lesser-priority projects in the future by estimating the remaining useful life of capital assets and major shared components (e.g., utilities, roofs, siding, water and sewer pipes, HVAC and boiler equipment, recreational facilities, drainage facilities, landscaping, etc.).
As a board member or manager, determining which projects to prioritize can seem daunting or overwhelming, but it can also be very rewarding and valuable. By identifying and prioritizing projects in advance, associations can significantly reduce the level of financial and legal risks, and substantially increase the value and desirability of the community.
Associations are encouraged to consult with their professional advisors to develop long-term financial and capital improvement plans.
Aaron J. Goodlock is an attorney at Orten Cavanagh Holmes & Hunt, LLC. He provides general counsel and transactional services to community associations throughout Colorado.