Adequately funding a reserve account can be a challenging task to say the least. Boards and the membership obviously like to keep the dues as low as possible and more often than not this results in underfunding the reserve account; these larger project expenses are infrequent enough that it's easy to put off saving for them for many years. The result… many years of underfunding a reserve account eventually leads to a point in time where the reality of the situation will come to light. Perhaps it’s when the roof needs replacement – when bids are obtained and there isn’t enough money in the reserve account to cover the expenses the finger pointing begins.
At this point in time many communities will have to implement a special assessment or secure a loan to pay for large imminent project expenses. Without fail one of these options, or a mix of the two, are implemented - however the real issue has still not been addressed, even after the project is completed and paid for.
Any ideas on what the real issue here is?
It’s that the community is still not adequately funding their reserve account. The cycle of underfunding the reserve account, then placing the costs (special assessment / loan) on the very few members that happen to be living in the community at the time of the project just starts over. In fact it not only starts over but typically just gets worse as now the community will have an extremely difficult time raising dues (remember membership just paid a special assessment) and/or now also have to pay back a loan plus interest. With a loan specifically, the community is now trying to fund for reserves and pay back an interest bearing loan – a double whammy – not great when even a single whammy was too much before.
Do you have any ideas on which communities we see relying on special assessments and loans the most?
That’s right… communities that have implemented prior special assessments and loans. It’s because rarely have they addressed the real issue of needing to allocate more money to the reserve account. During a time of financial turmoil when loans are secured and special assessments are implemented good luck in also raising the dues any significant degree. Most often we see an increase of the dues at this point just to appease the Lender and pay off the loan plus interest – again not addressing the issue of an underfunded reserve account.
Communities can absolutely decide to rely on special assessments and loans of they wish but there is little argument about the fairness of these options. The additional costs of special assessments and loans are taken on by only the current members of a community.
Example - A roof which may last 25 years and is paid for from a special assessment is being paid by those members who actually paying the special assessment. There could be twenty fours years worth of owners that pay nothing into the reserve account even though they utilized 96% of the roof. Is this fair – absolutely not – but 24 years of Boards and Membership may not argue with that at all as they kept the dues artificially low for 24 years before there was any negative consequence - most of them are not even in the community any longer so they have zero negative consequences for making these decisions.
So what is a community to do?
Boards are elected to make fiscally responsible decisions for a community membership (current and future) – this in part means relaying and disclosing the real numbers to the community and working to adequately budgeting for them. With relation to the reserve account this is best addressed by having a reserve study completed and determining the best course of action to address how to more adequately budget for reserve expenses.
If a community has gone many years or decades underfunding their reserve account there are rarely any easy answers or one size fits all solutions. We have found the communities that consistently rely on special assessments/loans are also communities which most often also have deferred maintenance issues, marketability issues (specifically during economic downturns), very high levels of stress and political turmoil. Special assessments and loans absolutely have their place for a community that has no other options but rarely does either address the real issue of dues that are artificially low.