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.
