2014 Community Association Financial Survey
Introduction
In 1996, Berding|Weil published “Latent
Liabilities” a treatise which explored the long-term impact of underfunding
of the reserve accounts of community associations. Some of the data came from
our clients, and some from Levy, Erlanger & Company. We predicted that most
multi-family community associations were severely underfunded for long-term
maintenance and repairs and we opined this issue could lead to serious deferral
of maintenance obligations and ultimately a shortened service life for these
projects. Subsequent financial surveys by Levy, Erlanger & Company, with
our assistance, have shown this problem to be systemic—affecting most community
associations. This year’s survey finds community associations to have only 57%
of the funds on hand they should have. This shows that the problem is not
getting better—in 1993 that figure was 60%.
Since “Latent Liabilities” was
published, we further documented this problem in “The Uncertain Future of Community Associations” and similar
treatises. Community associations are slowly running out
of cash. Borrowing from reserves for regular, and newly discovered maintenance
issues has trended upward, and when the reserves run out, special assessments
and borrowing from banks increase. The fundamental cause of this cash shortage
is the inability or unwillingness of boards of directors to increase
assessments sufficiently to keep up with inflation coupled with the discovery
of needed repairs not anticipated by the reserve budget.
Discovery of “hidden damage” has pushed many older associations to the financial edge. Too many older
associations suffer from long-term deterioration which, when discovered, carries
a price tag that greatly exceeds the resources of the membership. Dry rot in
balconies, entry structures, roof underlayment, and wall framing, and
deterioration of utilities like electrical lines and plumbing, is becoming more
common and are rarely the subject of any reserve budget line item. We have
documented this problem in another treatise: “The Perils of Hidden Damage” which describes how these problems
lie undetected for years. All publications above can be found on our website: www.berding-weil.com.
Boards of Directors in older
associations cannot rely entirely on a reserve study to predict their future
funding. By statute in California, as in many other states, reserve studies are
required only for those components which are visible and accessible—siding,
roofs, streets, etc. The components hidden under the outer skin of a building
are not included. This is where most dry rot, corrosion, and other structural
deterioration can be found, but not usually computed as part of the study. More
intrusive inspections are necessary but almost never done.
Years of underfunding of reserves
coupled with the late discovery of previously hidden damage places a heavy
financial burden on the owners of attached housing. This burden is heavy enough, sometimes, to question
whether many have reached the end of their service lives—are they actually obsolete? Compare the resources and
expenses of your community association to other, similar associations[1], and
investigate beyond the parameters of a typical reserve study—especially in
older associations. Review the data in this survey and compare it to your own. Then ask yourself, are the components now in your
reserve study the only areas of concern, or could there be others? If your
reserves have less than 100% of the funding required by your reserve study and
if your association was built over 20 years ago, it’s time to undertake a sober
review of the association’s financial and physical condition.
The 2014 Survey Background
This survey, while not the first of a kind, is probably one of the
largest and most recent. It includes data from over 1,500 Northern California
community association financial statements. This is the product not only of
many hours of work, but the cooperation of nearly two hundred management
companies and self-managed associations, and the association of two leading
California professional organizations: Berding|Weil, LLP., California’s largest
construction and community association law firm, and Levy, Erlanger &
Company, CPAs, community association accountants and consultants. The data has
been taken from the 2013 and 2014 year-end balance sheets and income statements
of 1,569 community associations representing 191,976 individual units. Comparative data was also taken from three
prior surveys done by Levy, Erlanger & Company, CPAs in 1993, and with the
assistance of Berding|Weil in 2006, 2008 and 2013.
The 2014 Survey Results
Percent Funded
2014 Survey
Replacement reserve cash $ 3,748 average
per unit (1,529 surveyed associations)
Replacement reserve obligation $
6,576 average per unit (1,529 surveyed associations)
Replacement Reserve Deficit $ (2,828)
average per unit
2014 Percent
Funded 57%
1993
Survey
Replacement reserve cash $ 1,708 average per unit (813 surveyed associations)
Replacement reserve obligation $ 2,864
average per unit (813
surveyed associations)
Replacement Reserve Deficit $
(1,156) average per unit
1993 Percent
Funded 60%
In the roughly 20 years from 1993 to 2014, the percentage reserves are
funded has declined by approximately 3% and the Replacement Reserve Deficit has
more than doubled!
Average Income and Expenses
2014 Survey
Assessments, operations $ 178 (72%) (1,565 assns. reported data)
Assessments, replacement $ 71
(28%) (1,521 assns. reported data)
2014 Average Assessments * $
258 monthly average per unit (based on 1,569 surveyed
assns.)
Expenses, administration $
63 (22%) (1,566 assns. reported data)
Expenses, maintenance $ 88 (30%) (1,561 assns. reported data)
Expenses, utilities $ 54 (18%) (1,541 assns. reported data)
Expenses, replacement $ 93 (30%) (1,414 assns. reported data)
2014 Average Total Expenses * $ 288
monthly average per unit (based on 1,569 surveyed assns.)
2014 Implied Monthly Deficit $ 30 monthly average per unit, or
approximately 12% of revenues
1993
Survey
Assessments, operations $ 128 (80%) (875 assns. reported data)
Assessments, replacement $ 33
(20%) (781 assns. reported data)
1993 Average Assessments * $ 161 monthly average per unit (based
on 875 surveyed assns.)
Expenses, administration $
46
(20%) (921 assns. reported data)
Expenses, maintenance $ 59 (26%) (921 assns. reported data)
Expenses, utilities $ 31 (15%)
(921 assns. reported data)
Expenses, replacement $ 47 (25%)
(921 assns. reported data)
Expenses, other $ 10 (14%)
(921 assns. reported data)
1993 Average Total Expenses * $ 193
monthly average per unit (based on 921 surveyed assns.)
1993 Implied Monthly Deficit $ 32 monthly average per unit, or
approximately 20% of revenues
Comparison of 2014 and 1993 Survey Results (Per Unit per Month - PUPM)
2014 1993 Percent
Increase
Assessments,
average $ 258 $ 161 60%
Expenses
Administration $
63 22% $ 46 20% 37%
Maintenance $ 88 30% $ 59 26% 49%
Utilities $ 54 18% $ 31 15% 74%
Replacement $ 93 30% $ 47 25% 98%
Total expenses, average *
$ 288 $ 193 49%
Implied Monthly (Deficit) $
(30) $ (32)
* Totals may NOT equal positive values in the above detail line items because the detail line items only reflect the average per unit per month (PUPM) for those associations which report the income or expenses. Not all associations had or reported each line of income or expenses.
* Totals may NOT equal positive values in the above detail line items because the detail line items only reflect the average per unit per month (PUPM) for those associations which report the income or expenses. Not all associations had or reported each line of income or expenses.
The annual increase in administrative expenses over the last 20 years
has been approximately 2% per year, maintenance expenses 2-1/2% per year,
utilities 3-1/2% per year, and replacement reserve expenses 5% per year. While monthly
assessments have increased by approximately 3% per year since 1993, total
expenses have increased by approximately 2-1/2% per year during the same
period. While this last represents a
positive trend, after 20 years the average association is still operating at a
loss when reserve expenditures are included. These losses are cumulative and
reflect the growing imbalance of the reserve account.
Conclusion
When we look at the actual dollars being expended, the average common
interest development has a continuing monthly deficit of $30 per unit in 2014
compared to approximately the same in 1993.
It is troubling to note that association obligations continue to
outdistance income. This is due in part to the increasing demands on replacement
reserves in aging California community associations.
Next, look at the status of replacement reserve funding. Since operating expenses (insurance, water,
management, etc.) must be paid, how is the monthly deficit funded? Funds which should go to reserves are increasingly
subsidizing operating expenses: $2,828
per unit in 2014 versus $1,156 per unit in 1993. After adjusting for inflation,
the accumulated replacement reserve account deficit increased approximately 22%,
or about 1% per year. Similarly, the
accumulated reserve liability increased from $2,864 per unit in 1993 to $6,576
per unit in 2014 – an increase of approximately 230% or about 4% per year
before inflation!
This trend, which we noted in 2006, 2008, and 2013 and in various
articles and treatises over the past 20 years, continues eroding the ability of
community associations to maintain their infrastructure. The average
association has only about half of the funds it needs to have on hand for the known long-term repair of the buildings
and nothing on hand for any unknown
or unexpected repair. What is the
long-term solution? Voluntary digging
deeper into the pockets of aging owners who do not believe that they will still
be here when the next roof goes on?
Mandatory funding of reserves as required in some other states, such as
Florida and Hawaii? The solution is more intense investigation of aging infrastructure
coupled with a rational review of the true cost of ownership, and developing
the political will to meet that cost with the additional dollars necessary to
protect owner equity. That’s a lot to ask and it will fail often. But
continued education of Boards of Directors and owners can make inroads. We hope
that happens before it’s too late.
Tyler Berding, J.D.; Ph.D.
David
Levy, MBA, CPA
[1] Levy,
Erlanger & Company, CPAs offers a comparison of your association’s
income and expenses with up to five similar associations, based upon the
parameters of size, age, geographic location and subdivision type (condominium
v. planned unit development) for a modest fee. They can be contacted at info@hoa-cpa.com for
a cost estimate.
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