Experience has told us that what you don't fix today will still
break tomorrow. In some associations, past boards have deferred the
funding for necessary repairs and kept maintenance fees artificially
low, but sure enough, something broke or worse, shook loose during an
earthquake or hurricane. The unfortunate part of this is that, with
deferred maintenance also comes deferred maintenance fee increases, so
not only is the community stuck with broken buildings and equipment,
they are also stuck picking up the tab for the past error of
underfunding reserves. It sure is not what we would call an attractive
investment.
During these difficult economic times, owners will appreciate a
well-funded reserve that pays for these unexpected (but should have
been anticipated) expenses, thus avoiding the dreaded special
assessment. Board members should be cautious when recommending changes
to a professional reserve study. The study is based on the condition of
your property at the time of the study. Changing the replacement life
or replacement cost detailed in the study will most likely create
funding problems in the future. Relying on an expert’s opinion is
defendable, ignoring it may not be.
A well-funded reserve fund also provides lenders with more
confidence when loaning to a buyer, another plus during a period when obtaining a home loan
has become more difficult. Lenders appreciate that there most likely
will be no special assessment to cover common replacement costs or to
pay the insurance deductible in the wake of a natural disaster.
They are more confident that their lending decision is based on actual
costs with a small chance of their buyer depleting their cash or
overextending their credit lines.
In fact, Fannie Mae and FHA are honing in on condominium loans in
particular, addressing reserve funds in their loan requirements. FHNMA
requires at least 10% of the annual condo budget be allocated to
funding a reserve account and that there be “adequate funds” budgeted
for an insurance deductible. FHA requires that a current reserve study
must be performed to assure that adequate funds are available for the
funding of capital expenditures and maintenance
A current reserve study is important to your community’s budget. With budget preparation time right around the corner your community association manager
and/or treasurer will begin to prepare and analyze the data in your
operating and reserve accounts. In addition to revising actual cash
balances, they may be consulting with the professional Reserve
Specialist to adjust components of the reserve report to reflect the
current cost and anticipated life to replace your association’s assets.
A current reserve study is important and, in many states, required by
law. Most importantly, a current reserve study reflects the current
cost and an owner’s current rate of contribution to the fund. Support a
policy that requires accurate, professional studies.
They say a penny saved is a penny earned, but also true is a penny
saved today is one you don’t have to pay tomorrow. The current
contribution rate that each owner pays into the reserves is their “fair
share” of the cost to replace the assets of the community from which
they benefit today – similar to a user fee. And tomorrow, when the roof
is in good shape and the buildings are in good repair, a buyer is more
likely to look with favor on purchasing a home in your community, which
in turn improves your resale value and attracts more buyers!
Linda Marabito, AMS®, PCAM®
Vice President of Marketing, Hawaii District
Certified Management
Kona, HI
reprinted with permission from Association Times