Crown Harbor Homeowner Association

Roofs are intended to last 35 years, yet in 1996 an overlay was installed after only 17 years of service for the original roof. Now another roof install is being proposed for 2014 which is only 16 years since the overlay was installed. Homeowners are surprised that we need roof replacement as the roofs look in good condition, and there's a backup roof underneath in the event of any point leaks. It seems to me that with their being double roofing material rather than single layers, the probability of leaking is significantly mitigated, and the scheduled timing of roof replacement may be extended without actual realistic impact. What is the basis for immediate roof replacement?
The basis for the Board believing that new roofs are needed are the recommendations from multiple sources that we need new roofs. According to six roofing companies and one independent inspector, we have shingles that were not installed to manufacturer specifications.

Enlarge

This picture shows the 1" by 6" strips boards and original shake shingles. You can see how they are water-soaked and deteriorated. The composite roof was applied over the top of this layer. Nails that penetrate the strip board are secure. Nails that only penetrate the deteriorated shake shingles have the potential to not be secure. Actually each shingle has 8 nails, 4 of which penetrate solid wood when we have strip boards, and 8 nails penetrate the solid plywood. Our Maintenance Committee believes this should prevent any blow offs.

Enlarge

This picture shows that plywood is present over some garages. This implies that some portions of the old shake have plywood underneath them. In these sections, all 4 of the nails should be secure as they penetrate the shake and make contact with the plywood.

Since the Reserve Study is such an important component of what money we collect and accumulate in the Reserve Account, the Board commissioned a second Reserve Study to validate the condition of our roofs and the other items that make up our physical plant. A walk-through for that new Reserve Study was completed with Richard Fabbri and Dave Eck in attendance. In addition, the Board hired A‑One Roof Management & Construction, an independent inspector, to provide a professional assessment of our roofs. Though the Maintenance Committee notes that our leakage and roof repair data does not indicate that roof replacement is required before 2021, this independent assessment categorized two thirds of our roofs to need replacement in 0-5 years (replace by 2017) and the other third in 5-10 years (replace by 2022).

Is the problem we are having a material problem or a workmanship problem?
Neither. The material was good; it was installed correctly by the installer. The biggest potential issue is that the Association directed they be installed over the existing wood shingle. This did not meet manufacturers recommendations.

Do we have any recourse against the manufacturer of the material or the installer?
No. Manufacturer is out of business, and the installer did what they were told. It was acceptable practice at that time. This practice has since been banned by the City of Alameda.

What is the maintenance schedule for roof replacement in terms of when the current roofs were installed, and what is the projected useful life of the current roofing materials?
Shingled roofs were done in 1996 and 1997. Material was 30 year life if installed per manufacturers specifications. We voided any warranties when we installed over wood shingles.

Per the 2011 and 2012 budgets, the Association has estimated a requirement for roof repair in the amount of $1200 per year. How much did we spend for sloped roof repair in 2009? Which addresses and how much? How much for sloped roof repair in 2010? How much for sloped roof repair in 2011?
Our historical records don't have a breakdown of sloped vs flat or listing of which units; however, we spent $850 in 2009, $1,692 in 2010, and $2,380 in 2011. Notice this is from Operating Budget, not the reserves.

I read nothing about an impending special assessment of this magnitude. Where has this topic been covered?
The possibility of an assessment was discussed at last year's annual meeting. It has been mentioned in a few issues of The Clarion as well.

• January 2011 issue
• August 2011 issue
• September 2011 issue
• October 2011 issue
• November 2011 issue

The exact magnitude of the assessment was not determined until detailed spreadsheets were created and pored over for many hours. As an example, the January 2011 issue of The Clarion provided a ballpark estimate of $10,000 per unit. The full shortfall had not been calculated, and the ratios had not been applied yet.

How could the HOA and management suddenly be so far off the mark ($1,000,000+) in planning for roof maintenance?
The way our association works is that we get a reserve study, collect dues to fund replacements based on that reserve study, and then actually spend the money when the time is required to do the work. The most recent reserve study estimates the roof replacement at $1.1M. The previous reserve study had this cost at $500K. Perhaps the previous reserve study did not consider that the existing roof must be completely removed before the new roof can be applied. The prior roof replacement in 1996-1997 was done as an overlay on top of the existing roof. Building codes do not allow for three layers. The old roof must come off. The company that provided the old reserve study is no longer in business.

Who did the calculations on roof contributions for the assessments? Do some roofs really have nearly twice the square footage as that of others? How were these calculations made?
The ratios that owners pay for siding and roofing are in the CC&Rs. See page 21 of the CC&Rs. These ratios have been in effect since the association was founded 31 years ago. The assessment is designated solely for the roofs. The existing funds in the Reserve Account can be used to cover other items (e.g., siding and painting) that are also computed using the same formulas as the roof costs. The assessment is an estimate. In the event that the assessment is not sufficient to cover the total cost, additional steps can be taken (e.g., small additional assessment or dues increase). In the event that the assessment is too large, the excess funds can be returned to the owners or used for other items that are also funded using the same formulas as the roofs.

It appears that the estimated cost for the roof replacement that is the basis for the new assessments is the total cost for the job. I notice that the budget and reserve categories provided in the Crown Harbor website include a line item for roof replacement, and a strategy to include funding in monthly dues over years that is deposited in the reserve account for this purpose. The earlier estimate to replace roofs was about $500,000 before the discovery of the double roof removal issue. Was there a line item included in past and current dues for roof replacement based on the estimate of $500,000 or a like amount? If yes, what is the amount already in reserves for this purpose? Was this amount taken into account in the calculation of the assessments? In other words, why is the total cost of the roof replacement passed on in the new assessment, rather than the total cost being reduced by the roof replacement funds already in the reserve account?
The dollars in the reserve account are fungible. We have an operating account for monthly expenses and a reserve account for long-term expenses. What items are associated with what can be found on Reserve Study Committee page. So there really isn't a separate roofing account just like there isn't a separate siding account. There are only 2 accounts. In theory, the dues we collect each month do accurately reflect the ratios of what we spend from both accounts in terms of what costs should be evenly split and what costs should be collected for using the formulas. Simply put, our reserve account has always been underfunded. Each year the Board puts together a balanced budget. We collect enough to pay all of the operational expenses plus put some money into the reserve account. Last year we transferred $11,074 a month to the reserves ($132,888 for the year). This year we will transfer $12,181 a month ($146,172 for the year). If you add up all of the expenses targeted by the reserve account through 2040, you get $8,033,273. Although you wouldn't spend it evenly over that time period, let's say you wanted to collect one 29th of those expenses each year for the next 29 years. You would need to fund the reserve account at $277,009 ($8,033,273 / 29) for the next 29 years. The effect that this would have on the dues would be:

So why didn't the Board just raise the dues to these levels as soon as we got the Reserve Study Report? First we needed to study the data. Second, what if all of the items don't come true? For example, the study projects that we will spend $10,206 repairing the bike path in 2013 and another $11,856 repairing the bike path in 2018. What if that second $11,856 expense never comes true? It would be a shame to accumulate for that expense by increased dues if we don't need to. The Board has tried to strike a balance between putting some money aside and keeping the dues low. In the case of the roof work, we have real bids from real construction companies to do real work. The job was put out to bid, and bids were received from:

• Signature Painting and Construction
• A‑One Roof Management and Construction
• Empire Painting and Construction
• CB Group
• Procraft
• Sykes

Though the bidding process prevents the Association from posting who bid what (since one contractor would see another's bid), lowest bid was used in calculating the assessment.

Didn't the funding for the recently completed flat roof repairs come out of a common funding source, even though not so many units do not have them? If so, why is there differentiation on paying for the main roofs?
The association puts money aside each month. Last year, we put $11,074 aside each month. This year we are putting aside $12,181 per month. The reserve account is not just for roofs and siding. It covers everything not covered by the operating account. What accounts are used for is spelled out on the Reserve Study Committee page of the website. There was sufficient funding in the reserve account to cover the flat roofs. The sloped roofs are a much larger expense. There is not enough money in the account to cover the sloped roofs.

I find it hard to swallow that people who have lived for decades are going to be contributing the same amount or, in some cases, less. If the Board is concerned about fairness and equity, how does one account for the number of years people have lived here without paying an adequate amount into reserves for roof maintenance?
There are one or two residents who moved in recently who and split the cost of the assessment as part of their escrow packages; however, the association has no recourse against former owners. Per the CC&Rs, liabilities transfer as part of the transfer of the property. What we are paying for now is roof replacement that will last many years going forward. According to a local realtor, current owners, not previous owners, will see their property values rise based on new roofs.

How much is in the reserve fund?
The Balance Sheet Report of December 31, 2011 lists the reserve account balance at $252,179.48. In prior years, this was built up by transferring $11,074 per month from the operating account minus whatever expenses were incurred (e.g., sewer pump replacement). Our 2012 budget calls for transferring $12,181 from the operating account to the reserve account each month. If we had absolutely no expenditures (unlikely) from the reserve account for the next 2 years, by some estimates, at the start of 2014, when need to do the roof work, we would have $252,179.48 + ($12,181 * 24) = $544,523.48. The current reserve study and Treasurer's analysis lists the roof replacement at $1.1M. This means we would need $1.1M in the reserve account, yet we would only have $544,523.48. This is why a special assessment is needed.

Proper maintenance will extend the life of many items, be it a car or a roof. Could we implement a maintenance program to extend the life of our roofs instead of immediate replacement?
We have contracted with A‑One Roof Maintenance & Construction to tune-up the roofs until 2017. This tune-up includes a warranty for responding to incidents between now and 2017. There is a limit on the number of incidents we can use under the warranty. The warranty does not cover dramatic circumstances that could not have been anticipated

Based on inspection of the current roofing, what is the actual condition of the roofing material? Is the actual condition of the material deteriorated to the point where leaking is likely? If not, can the schedule for replacement be extended by a few years that would enable the assessment to be allocated over more than a three year period?
Rather than deteriorating, the shingles are detaching. Once an assessment is approved, we can collect the assessment and perform the repairs with money in hand.

What are the pro's and cons of doing the entire roofing job all at once?

Pro's

• The inconvenience of the job (e.g., noise, job debris) occur only once and are over with.
• A single bid for all of the work may be less expensive than the sum of three smaller bids.
• A single bid avoids the cost of inflation for the second and third portions of the job.
• The savings from a single bid could offset the additional costs of acquiring a loan.

Cons

• The upheaval to the community may be more significant than three smaller jobs.
• All of the money is required up front.

If we were to extend the date for roof replacement we would at times have water damage. The Association also has insurance which I believe covers water damage. Has our insurance paid for our past water damage?
We do have insurance but it has a $5,000 deductible per occurrence. They have paid for water damage in the past for whatever is above the deductible at the contracted rate.

What are the pro's and cons of having the association take out a loan for the roof replacement?

Pro's

• The entire roofing project could be done as one job.
• The cost of the roofing project could be spread out over a longer period.
• The job could happen sooner and lessen the impact of inflation.

Cons

• A loan includes interest in addition to the money necessary for the roofing project.
• A loan includes administration fees in addition to the money necessary for the roofing project.
• The cost associated with repaying the loan would come from the operating account which means there would need to be a dues increase.
• Higher monthly dues can have a negative effect on the value and resale ability of our units.
• An HOA with a $1.1 million dollar debt could have a similar negative effect.
• "Such a loan would place the HOA in position of debtor and debt collector. Failure of unit owners to make timely payments to the association could put it in a complicated position. These are difficult economic times. Sadly there have been liens and foreclosures in the community. At such a time it might be better to have individual homeowners deal directly with commercial banks and lending institutions to minimize the risk to the HOA."
  - community member

Though rates and costs would have to be negotiated with a lending institution, as a rough estimate, using just the interest on for a 3 year loan at 4.125%, the amount of the assessment increases by $68,112. As a result, the new assessment totals (spread over 3 years) with a loan would be:

To consider getting a loan, the Association must have a passed assessment as collateral for the loan.

What happens if the assessment does not pass?
If the assessment does not pass, if the Board wished to keep to the proposed roofing replacement schedule, the Board would need to recommend raising the dues. The maximum amount that the Board can raise the dues is 20%. Since these amounts below are larger, this dues increase would also require a community vote.

It is the opinion of the Board, that raising the dues this high would hurt the resale values of our units. The expected drop in property values could exceed the amount of the assessment. Though painful, the assessment addresses the shortfall and allows Crown Harbor to keep its dues where they are today. Another option would be to:

• Tune up the roofs.
• Delay the actual roof replacement to allow more time to accumulate funds in the reserve account.
• Work to cut as much as possible (target of 30%) from the operating budget.
• Propose a smaller assessment to make up the remainder from these other measures.

All options are on the table. Some residents have expressed quality of life concerns about living in a community with such drastic cuts.

I was wondering if the Board has considered offering the option of individual homeowners voluntarily contributing to an escrow fund on a monthly basis to build up a nest egg to apply to their personal assessment. For some people monthly contributions would be less painful than a single lump sum. Certainly anyone could start saving via conventional methods, but this might be an easier way to maintain discipline.
This is a possibility. According to page 25 of the CC&Rs, the Board may adopt an Installment Plan for the payment of large assessments. Any member in Good Standing has the right to participate in an approved Installment Plan. Owners who do not wish to participate in the Installment Plan shall not be charged with costs for administering the Installment Plan.

Could this assessment have been avoided?
A $1.05M assessment could have been avoided if the association had been collecting higher dues:

There was no way to know that since previous Boards were acting on the reserve studies they had in hand. The time line presented by the Treasurer shows the variation in expected remaining roof life as well as the price increases.

How do we know this won't happen again?
The long term plan is to take each reserve study, determine how much money we need to fund the reserves, collect that amount, accumulate it in the reserve account over time, and then use it when we need it. The Board has actually requested a new reserve study that we can compare to our current one to do its best that are no other surprises, but there is no guarantee. All the Board can do is work with the information on hand.

How low can our reserve account go?
The Davis-Stirling act governs how HOAs manage their reserves. In November 2009, the FHA issued letters 2009-46A and 2009-46B outlining their certification requirements for condominium associations. To be a certified HOA places the following restrictions on Crown Harbor.

• At least 50% of the units must be owner-occupied.
  With 9 rentals and 1 bank-owned, 66 (87%) of the 76 Crown Harbor units are owner occupied.

• No entity may own more than 10% of the units.
  The 76 Crown Harbor units are owned by 75 different entities.

• Reserves must be at least 10% of the budget.
  The 2012 Crown Harbor budget is $381,096. This means the reserves cannot go below $38,110.

• No more than 15% of the units may be more than 30 days delinquent.
  Less than 4% of Crown Harbor units are delinquent more than 30 days.

• Must meet new insurance coverage and deductible requirements.
  The amount of Fidelity Bond coverage for Crown Harbor is $300,000.

• If in a flood plain, must meet new requirements established by FEMA.
  Crown Harbor is not located in a flood plain.

• No more than 25% of the development's floor space may be commercial.
  Crown Harbor has no commercial space.

• No more than 30% of the owners already have FHA insured loans.

Crown Harbor currently meets all of the FHA criteria.

How do we know this won't happen again?
The long term plan is to take each reserve study, determine how much money we need to fund the reserves, collect that amount, accumulate it in the reserve account over time, and then use it when we need it. The Board has actually requested a new reserve study that we can compare to our current one to do its best that are no other surprises, but there is no guarantee. All the Board can do is work with the information on hand.

The roof replacement project was originally scheduled for 2017. Why is it being pulled forward to 2015?
The heavy rains in 2015 exposed a few leaks. These leaks caused damage to the insides of 3 units. The Association bore the cost of repairing this damage. The Association Hazard Insurance policy does not cover these costs, because the leaks were the result of normal wear and tear instead of a catastrophic event like a wind storm. In addition, the roof at 1302/1304 Crown Drive is in need of immediate attention and cannot wait until 2017. The replacement project was pulled forward to avoid additional repair costs between 2015 and 2017 and to address the immediate need.

The roof replacement bids were received in 2012 — 3 years ago. Why was the project not put out for bid again in 2015?
Though this may be disappointing to some, the Board opted not to re-open the job for bid. A‑One agreed to honor their bid from 3 years ago. Opening the job up again would allow A‑One to rebid. Associa collected data that showed that since 2012, the cost of materials has gone up, and construction companies now have added healthcare costs. The probability is almost nil that another company would come in with a lower bid. The Board looked at the dollar amounts for the bids from the 5 different companies, and one board member remarked, "A‑One is the clear choice. The other bids were not even close." This is partially the result of the discount that A‑One offers to Associa-managed properties because they have ironed out a process for working together efficiently.

To date, A‑One has not been responsive to repairs. What gives us confidence that they can do the job properly?
Unfortunately the A‑One roof tune-up contract specified a 2 to 3 week start time after an incident was reported. In terms of why the 2015 leaks occurred, even though the roof tune-up was done in 2012 at a cost of $60,800, at least one of the leaks was due to a fault chimney spark arrestor which was not part of the roof tune-up. In 2012, the roof at 1302/1304 was identified as having been improperly installed decades ago. The 2015 roof replacement project includes tearing off 2 layers of existing roofing, repairing or new installation of missing plywood, and replacement of spark arrestors as well as gutters. In other words, everything up on the roof will be new and water tight. Dan Poe of Associa is our construction project manager who will oversee the project to our satisfaction. The Crown Harbor project specification used for the bidding process was very specific, e.g., specifying nails instead of staples, and Dan can hold A‑One to that specification. The work at 1302/1304 Crown can be used as a test case for Crown Harbor and A‑One to learn to work together.