RealManage Insight

The Case for Adequate Reserve Contributions | But... That's all we can afford!

by Guest Blogger on Jul 16, 2019 8:25:00 AM

What’s better - $50/mo Reserve contributions (as part of your condo’s total monthly assessment) or $100/mo? All other things being equal, I’d rather pay the $50 monthly bill. Why would any board, able to set the budget at their association, choose the higher amount for the owners?

But that question, faced by boards every year, reveals flawed logic. It’s not an “I’d rather pay more or less” question, nor should it be considered a board “choice”. The roof will fail and need to be replaced on a very predictable schedule, along with many other similar projects. There are indeed “Surprise!” expenses faced by associations (construction defects, hailstorm or hurricane damage, etc.) but those aren’t Reserve expenses. Reserve expenses are predictable projects. National Reserve Study Standards, published in 1998, contains a tight four-part test that dictates which types of these predictable projects should be funded through Reserves. Those Reserve expenses are as real and predictable as any other upcoming bill the association will face.

So the true question is only how you pay for it… and as a bill that needs to be paid it boils down to “sooner” or “later”. And unfortunately, the common choice of “later” is usually more expensive. Choosing to fund Reserves at a rate less than your assets are deteriorating, less than recommended in your Reserve Study, doesn’t save you money. It simply means you’ll pay that money later by means of a special assessment or a loss in home values (or both). And “later” often means the project will be more expensive than initially anticipated. A good example is a paint project that will require significant prep or repair costs due to a delay getting started.

The basic complaint of “that’s all we can afford” is an arbitrary line in the sand created by the Board. It has nothing to do with the real “bill” of the ongoing cost of deterioration. Each owner purchased a home with common areas (roof, paint, asphalt, elevator, hallway, pool, etc.). Those common area components will need to be repaired or replaced with 100% certainty. If the board feels assessments are “high”, the answer is not to reduce Reserve contributions in an attempt to keep assessments low. The board’s job is to provide for the needs of the association. Individual owners are responsible to make their own value judgments on affordability of their housing choices. The correct balance of responsibilities is for the board to budget what the association needs, and for owners to decide if living in the association is affordable or not. The board is making decisions outside their scope of responsibility if their decisions are influenced by their perception of what owners can “afford”.

Adequate Reserve contributions are part of the true cost of owning an association home. These contributions are not “for the future”. These contributions simply pay the ongoing deterioration bill, so the funds will exist when the bill comes due. Protect your owners from the avoidable “surprise” of special assessments and let them make their own informed decisions about the cost of being members in the association based on the true cost of home ownership.

So Reserve contributions are not for “the future” or for “surprises”. Setting a budget that includes adequate Reserve contributions allows every owner to pay their fair share of the deterioration that occurred while they owned a home in the association. After all, it is “just another bill” that needs to be paid

Guest Blogger: Robert Nordlund, PE, RS
Founder/CEO of Association Reserves

www.ReserveStudy.com
Twitter - @Reserves

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