Most community management professionals learn two hard truths about community associations – (1) residents buy into planned communities to transfer maintenance responsibility onto the association, and (2) most of those same people disagree about funding for the association’s maintenance responsibility. Many new owners are unfamiliar with the shared expenses concept, and are surprised when they receive a significant special assessment to fix a building component they didn’t know existed – or had a shared financial responsibility. Members’ philosophical differences clash in the budget process, where an association’s board of directors makes the most important decisions. The tension especially plays out in a budget’s reserve accounts section.
A “reserve account,” is an association’s fund for future foreseen expenses, like planned roof replacement. Associations can also create a separate contingency reserve account for unforeseen expenses, such as an emergency elevator repair in a high-rise association building. The confrontation boils down to money (keeping assessments as low as possible) and long-term projections (planning for property issues or “kicking the can down
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the road”). A board’s failure to confront long term projections and make difficult planning budget decisions can lead to an underfunded reserve account.
An underfunded reserve account is a common issue among many associations. In 2021, a New York Times article estimated that one in three associations have reserve shortfalls.1 Unfortunately, some association boards inherit underfunded reserve accounts from the community’s declarant – the developer who constructed the buildings and created the association. Declarants may solicit potential buyers in new developments with promises of “maintenance free living,” and low association dues. Sometimes, the low dues sacrifice sufficient early reserve account funding. Declarants then hand over community governance, and the reserve accounts, to unit owner- controlled boards after a substantial number of units are sold. New board directors often face a dilemma – a politically unpopular increase in association dues to make up for reserve shortfalls, or continue the status quo until a problem arises. For new associations, the problems may seem far off because community assets (residential buildings, clubhouses, roads, infrastructure) are relatively new. Regrettably, a
board’s decision not to adequately fund reserve accounts early often haunts future owners when repairs are needed after years of deferred maintenance. Many associations are not aware of the true extent of their funding issues, especially if they do not have a reserve study or some sort of long-term capital plan. Because board turnover is generally quite high, decisions that seemed adequate one year may leave the next board scrambling to play catch -up when the reality of the next year sets in.
The entire world learned about this critical issue when Champlain Towers South, a 12-story condominium building in Surfside, Florida, tragically collapsed on June 24, 2021. The collapse claimed the lives of 98 people.2 Before the collapse, that association’s board believed that the building’s structures required $15 million in repair, but only had $800,000 in reserves on hand.3 The board could have made up the shortfall through significant special assessments, from $80,000 to $200,000 per unit, to fund the reserve account for the project.4
In these cases, boards should discuss all options, but once a decision is made, the board members should act decisively together. In this case, board
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