Jane Sugimura: Legal Matters

Budgeting During the COVID-19 Pandemic Planning—and paying—for 2021 is complicated with many condo owners out of work

In August and September, many condominium boards of directors will begin working on their 2021 budget, which needs to be approved before November 30—so that notice of any annual increase in maintenance fee can be provided to unit owners in the association at least 30 days prior to the effective date of increase, Jan. 1, 2021.

The challenge for condominium boards this year will be to develop and approve a 2021 budget after experiencing at least three and a half months—or longer in some cases—of an economic shutdown due to COVID-19 emergency orders and the uncertainty of how that economic shutdown will impact the unit owners’ ability to pay any substantial increase in maintenance fees.

For many associations, the fallout from the COVID-19 emergency orders may not become known for months because the local economy has just begun to open as of June 1, and no one knows how quickly the public will begin to shop at malls, dine at restaurants, go to movies, patronize bars, work out at gyms or fitness centers, get haircuts or tattoos, or travel inter-island.

Moreover, right now we don’t know when trans-Pacific travel will be allowed to occur so that unit owners who are part of the tourism industry can return to work and begin earning wages.

The budgeting process will determine the maintenance fees that will be paid to the association by unit owners in 2021. The process includes determining operating expenses, i.e., the expense to administer the day-to-day operations of the condominium, which include employee compensation and benefits, contracts for out-sourcing services such as landscaping, security guards, site management, property management, insurance coverage for fire, liability, officer and directors liability, common electricity and water and sewer, repairs and maintenance. Due to wages continuing to rise and thereby affecting the cost of goods and services, it is unlikely that operating expenses can or will be less than what was spent in 2020.

For many associations, the fallout from the COVID-19 emergency orders may not become known for months because the local economy has just begun to open as of June 1.

The budgeting process also includes establishing and funding building reserves for long-term projects that are not re-occurring—replacement of plumbing, elevator upgrades, spall repairs and painting, roofing repairs and replacement. As buildings age, these projects, which are generally very costly, need to be addressed and funding has to be planned and implemented so as avoid special assessments to owners to make up the shortfall. If a special assessment needs to be implemented, the association should contact association counsel for instructions as to how to impose and collect that assessment.

Condominium associations are facing challenges from many fronts. Many were built in the 1970s or earlier and face a multitude of repairs that will be expensive and time consuming due to the age of their buildings. For example, spall repairs and painting, replacement of plumbing, repairing or replacing roofing, repairing or replacing asphalt on parking lots, submetering of electricity, upgrading elevators. Add to that, as a result of Ordinance 18-14 that was passed on May 3, 2018, all high-rise residential buildings on Oahu unless exempt will have to complete a Life Safety Evaluation Evaluation (“LSE”) by May 3, 2021 and have to be in compliance (i.e., do repairs to get a passing score in their LSE) by May 3, 2024.

Further, because unit owners may have been affected by COVID-19 economic shutdowns, some associations may not be able to raise sufficient funds to pay for 2021 operating expenses and set aside sufficient reserves to address the repairs required to get a passing score on their LSE by May 3, 2024.

Accordingly, I suggest that condo boards review their reserve studies and, if they have not had one done in the last year or two, that they update their reserve study and meet with their reserve expert to discuss how they can pay for 2021 operating expenses and comply with Ordinance 18-14. ❖

Jane Sugimura is a Honolulu attorney specializing in condo law. Reach her at ysugimura@paclawteam.com.