A condominium unit owner recently shared “We have a great board of directors. We haven’t had a fee increase in 11 years.” Little do they realize their boast was more of a confession.
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With this perspective, we see a critical mistake so many association boards make. In a desire to keep assessments from going up, many association boards set a course that will steer their association straight into the ditch.
Costs increase. This is an irrefutable fact of any modern economy. If your association fees have not increased AND have not increased in a substantive way, your association is likely headed into a vicious cycle that will require painful intervention to break.
HOW DOES IT BEGIN? An association has annual operating expenses they incur every year. This includes things like mowing, utilities, cleaning, trash removal, insurance and other costs required to maintain daily operations. These expenses, which will eventually increase even after intense cost-conscious bidding and negotiating, must be funded annually or they are not received. Thus “keeping fees low” necessitates either reducing or abandoning those products or services (at the cost of the appearance and performance of the association), or reallocating money intended for other purposes.
Pop Quiz!: “Where, within an association budget, can a board reallocate money to cover increasing annual expenditures without raising association fees?” If you said, “Cut back on RESERVE FUNDING,” you’ve played this game before! While a statistical analysis has not been done, anecdotally this author is willing to bet 80% of all associations have made this very decision at one point or another. (Note: If someone undertakes an actual statistical analysis, “bet the over” with respect to the real percentage.) Most associations have chosen to underfund their reserves in order to “keep assessments low” today. The roof, the siding, the parking lot… those
expenditures only come up once every 20+ years. You can kick that can down the road for many budget cycles before “it” hits the fan.
All the motivation is there: “We have unit owners on fixed income,” or “We want to keep fees low to help units sell,” or “I just don’t want unit owners mad at me!” This is how it begins.
THE VICIOUS CYCLE: Operating costs increase over time, so the association board underfunds its reserves to “keep fees low” and everyone is happy.
Because of underfunding, the association’s reserve fund is inadequate to finance major capital projects, such as the roof.
The association defers its roof replacement because it didn’t have enough money and a special assessment wouldn’t be popular to homeowners. NOT everyone is happy! Some unit owners who bought a well-maintained and/or like-new condition condo do not want to sacrifice appearance and performance of their property just to save some nominal fee increases. Smart well- funded owners see the writing on the wall and put their unit up for sale. The eventual buyers of listed units, by the very nature of the reality on the property, will be people who are willing to sacrifice property appearance for lower assessments. The property had some deferred maintenance, BUT the price was right and the fees were low, so they bought.
The association ends up with some unexpected expenses for water damage from roof leaks. The Association finally replaces its roofs 5 years later than they should have, spending more money to re-deck the roof due to water damage. Not to mention the increased cost of the roof because the price of materials rose from where they were five years ago. DISASTER AVERTED? NO! The siding is now looking really bad but the association
www.cai-illinois.org • 847.301.7505 | 17
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