Thursday, May 23, 2013

Survey: Condos Still Short of Funds

          Community Associations are going broke. They are running out of cash. Borrowing from reserves to pay operating expenses has left reserve accounts severely underfunded.  There will not be enough money to do necessary repairs when the time comes.  As a consequence, associations are resorting to bank loans and special assessments to fill the gap. How do we know this? Check the survey below.
In 1996, Berding|Weil published “Latent Liabilities” a treatise which explored the long-term impact of underfunding the reserve accounts of community associations. Some of our data came from our clients, and some from Levy, Erlanger and Company. We suggested that most community associations, and principally condominiums, were severely underfunded for long-term maintenance and repair and predicted that this issue could lead to large-scale deferral of necessary maintenance or re-construction and ultimately a shortened service life for these projects. Subsequent financial surveys by Levy, Erlanger and Company, with our assistance, have shown this problem to be endemic—this year’s survey finds community associations now have only 54% of the funds on hand that their reserve studies say they should have at this point in time. And the problem is obviously getting worse—in 1993 that figure was 60%! The present survey numbers support those earlier predictions.

          Borrowing from reserves for regular and newly discovered maintenance problems has trended upward, and when the reserves run out, borrowing increases. The fundamental cause of this cash shortage is the inability or unwillingness of boards of directors to increase assessments sufficiently to stay ahead of both inflation and the cost of anticipated repairs, often coupled with the discovery of unplanned-for maintenance and repair problems which are not anticipated by the reserve budget at all. 

          These instances of “hidden damage” have pushed many associations to the financial edge. Too many older associations have discovered hidden damage resulting from long-term deferred maintenance which, when discovered, carries a price tag that greatly exceeds the resources of the membership. Dry rot in balconies, entry structures, roof under layment, and wall framing; and deterioration of utilities like electrical lines and plumbing, are becoming common but are rarely included in any reserve budget.[1]

          Long-term underfunding of reserves coupled with the late discovery of unanticipated damage to buildings places a heavy financial burden on the owners of attached housing units.  This financial burden is enough in some cases to raise the question: have many of these projects reached the end of their service lives—are they, in fact, obsolete? It is important to compare the resources and expenses of a community association to other, similar associations, and it is also important to 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.[2]  Then ask yourself, are the components listed in your reserve study the only areas of concern, or could there be others? If your reserves have less than 100% of the funding called for by your reserve study and if your association was built more than 20 years ago, it’s time to undertake a sober review of the association’s financial and physical condition.