Most community associations that were established 30 years ago or more have been forced in recent decades to face the costly task of replacing their private streets. While all associations have numerous responsibilities for the replacement of very expensive common area infrastructure, typically including roof replacements, the private street replacement responsibility is perhaps different and more problematic.
During the early decades, developers, cities, and the California State Department of Real Estate established and approved budgets for each reserve line item associations were required to fund out of the property owner’s monthly dues. However, this mandate only applied to items with a life expectancy of less than 30 years (which is generally still the standard today). That interesting guideline likely made sense when associations were initially formed, but as the decades passed, problems and confusion frequently resulted.
The creators of the budgets and guidelines for associations formed in the late ’60s and early ’70s required a reserve line item for roof replacements to be budgeted for from their inception. In addition, most associations were required to establish a private street slurry coating reserve. However, few if any associations were required or encouraged to establish a street replacement reserve, even though asphalt experts were aware that asphalt streets seldom have a life expectancy beyond 20 years.
Another unanswered question awaits many associations in the future because of the likely circumstance that they will have to replace large common-area structures such as clubhouses and cabana buildings. Most professionals within the community association industry consider common-area structures are exempted from reserve funding because they believe such structures have a 50-year life expectancy or beyond. Nevertheless, if at the time of an association’s inception a clubhouse building has a 50-year expected life, what action if any should a board take to establish a reserve once the association becomes 21 years of age? At that time, the remaining life expectancy of the clubhouse would then become merely 29 years, thus falling within the existing guideline that a reserve replacement fund is required.
Most CPAs with the community association industry share mixed opinions on this troubling topic. Some contend that in practical terms a building will never require a complete replacement. Others disagree. No action on this topic has originated from the legislators or courts, and it remains an enigma to boards and managers. The homeowners are likely content too, since most are not supportive of paying higher fees or special assessments to save vast sums of money in reserves for such a large unknown expense that may never occur during their membership.
Perhaps the creators of the original association documents determined that eventually association boards would declare a special assessment for street replacements and other similarly expensive items, and they included language authorizing such action within the governing documents. Yet they failed to adequately address what action could be employed in the event a needed special assessment is never approved by the membership.
As the decades passed, some associations chose to ignore the impending likelihood of street replacements, while others took notice early and established a street replacement reserve fund. However, while the concept of funding reserves for large, costly future replacements was a worthy one, the whole process is flawed in many ways. One of the most notable flaws concerns the fact that with most construction-related work such as roofing and street replacements, there is a much higher inflation rate than many indexes such as CPI (Consumer Price Index/cost of living index) typically indicate. Coupled with the high inflation rate on these large construction-related projects is the problem that securing valid price quotes on a regular basis every three years is a difficult task. How many times are contractors willing to expend their time and resources to continue bidding repeatedly over a two- or three-decade period when they are never awarded a project? Finally, the yearly cost increases for some large construction-related projects such as roof and street replacements typically experience unimaginable cost increases due to the huge cost increases of other key products used to manufacture the roof and street materials. During recent years, the high cost of traded commodities like oil increased the cost of roofing asphalt and street asphalt, causing their cost to double and beyond.
Boards and managers are often relegated to exclaim, “It’s not our fault!” Similarly, property owners that ponder this disconcerting circumstance seldom find solace in their deliberations.
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Author Name: Robert Sacket, CMCA, CCAM
Robert Sackett, CMCA, CCAM, on-site operations/property manager/comptroller, Country Road Homeowners Association, Brea, Calif. Mr. Sackett personally holds many licenses, including California State License #351682, general contractor B1, roofing contractor C39, landscape contractor C27, pool and spa contractor D35.
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