...and what happens if they do?

We worry a lot on these pages about whether or not a community association’s reserve budget includes all of the components that are wearing out. If the budget preparer or the board of directors misses something, it can mean that the association will not have the funds necessary for all of the long term repair and maintenance that it might need. But what if the entire project, buildings and infrastructure, are found to have a limited life? Nothing lasts forever, it is often said, but most buyers of an interest in a common interest development nevertheless assume that the project will remain habitable for many years to come. And that could be true, or not, depending upon a number of factors.

First, has the association identified and adequately projected the lifespan of all of the building and infrastructure components that will require repair or replacement in the years to come? California law requires that any component that has a service life of less than 30 years must be included in the association’s reserve budget. Unfortunately, the same statute only requires that the required inspection for such components be to just those portions of the buildings that are “visible” and “accessible” meaning that any hidden components (framing, plumbing, sewer lines, etc.) will not be part of a typical inspection report. Setting the obvious inconsistency in the law aside, many components that clearly will not have a perpetual life will be missing from the association’s reserve funding plan.[1]

Second, if components are missing, or if their service life has been understated, where does the association find the funding to repair them? An increase in regular assessments might provide funding if the missing component is identified early enough to adequately save for its eventual repair. After that, special assessments are an option. But if the association cannot raise the necessary additional funding to provide for repair and replacement of all components that need it, the condition of the project will begin to deteriorate. With deterioration comes loss of value, and eventually, loss of habitability. We’ve written about associations that have already reached that stage in their useful lives, and the picture isn’t pretty.[2]

Is it possible that an entire association can reach the point where no one can say with certainty that it will last more than 30 more years? If so, then an argument could be made that the entire project should, at least theoretically, be the subject of a replacement line item in the budget. It’s not likely, however, that the physical condition of the buildings will deteriorate to that point before the association runs out of money and if it does, will it matter how much longer the buildings will last? A failed funding plan means eventual obsolescence--it’s only a question of time before the lack of maintenance and repair funds impacts basically habitability. But if a previously unknown but critical major component fails and the owners cannot afford a special assessment to repair it, perhaps both of these circumstances will occur simultaneously.

No building will last in a habitable condition forever, regardless of how much maintenance it receives, because economic conditions will impose obsolescence on everything but those few structures with perhaps historical significance. A community association is especially vulnerable to the ravages of obsolescence because in most cases, the funding mechanism is essentially voluntary. So when you couple that factor with the failure to project funding for all critical components and hence underfund maintenance and repairs, it becomes pretty obvious that a community association, as a project, as a parcel of real estate, and as a personal investment will eventually reach the end of its service life. Understanding this may help owners and investors better evaluate and investigate the strength of their investment.
[1] California Civil Code Section 1365.5
[2] Berding, “The Uncertain Future of Community Associations” 1999, 2005