doesn’t have the reserve funds to replace it. That’s OK! We’ve played this game before. DEFER siding replacement. It’s only aesthetics! But now MORE people are unhappy.
SPIRALING OUT OF CONTROL: The property is in trouble. They scraped together enough money to replace roofs (later than they should have) but the reserve fund is severely depleted. The siding looks terrible, and the property now has a significant deficit in “curb appeal,” but they aren’t in a great place to remedy the situation. A special assessment would not be well received. When it came up at a board meeting, tensions were high and the board members were afraid of making it back to their units safely. The board Treasurer who saw this coming resigned, stating he doesn’t need the stress. The board, trying to be compassionate to unit owners who are on fixed incomes and very sensitive to fee increases, cuts back on operating costs to try to funnel money into the reserve. They extend the painting cycle. The property condition deteriorates even more. Over the past few years, the well-funded buyers saw what was coming and moved out. Unit sales prices declined significantly. Sellers took a hit because the property was now in poor condition, but they were relieved to get out of their units. Any money they saved in lower association fees was negated by either seeing their investment fail to increase or worse yet, decline in value. Incoming unit owners are now EXTREMELY cost- conscious, attracted to a lower sale price and lower fees to purchase a condo in a formerly sought-after association. They were eager to get into a unit for a “steal” and they could swing the low association fees as well. These unit owners will have a difficult time affording the “true” cost to live in their association, not to mention the cost to make up for 20+ years of underfunded reserve contributions.
For all the effort to “keep fees low,” the association has driven itself into the financial ditch. They were not frugal or fiscally responsible. They followed the path of least resistance and made a series of bad decisions, each of which made the financial situation worse and made the remedy more unattainable. The people who could have, and should have, contributed appropriately to fund reserves left new unit owners who tended to be more cost- sensitive (willing to accept a
not afford to live there. Most associations survive. Some do not. The properties that survive have a painful recovery that typically involves bank loans and fee increases but few return to their original glory. The sad part is, it didn’t have to be that way.
THE VIRTUOUS CYCLE:
In contrast to the above (all-too-common) scenario is an association that understands that “keeping fees low” should never be the primary goal of the board of directors. While a board can do its due diligence with vigorous bidding and negotiation of annual expenditures to ensure fee increases are not excessive, but rather are stable and equitable, planned fee increases should not be avoided. Proper reserve funding ensures your association will remain a sought-after property for generations to come.
With the exception of construction defect issues and lengthy developer construction timelines (referencing Transition Defect Studies and/or Retrospective Reserve Studies), all associations start their journey in mint condition on sound financial footing. Notwithstanding legacy “drive-by boilerplate reserve studies,” a quality detailed reserve study from an experienced provider is the first step to ensuring financial solvency and prosperity for your association. A quality reserve study is not a forgone conclusion. Boilerplate-type reserve studies give associations reason to question the results of the study which opens the door to inaction. Example: “The reserve provider didn’t even go up on the roof, how can they say it will only last 15 more years?” Start with a quality reserve study in which you can trust the results. With every year that goes by without proper funding of reserves, your association increases the risk of falling into the vicious cycle described above.
EYES WIDE OPEN:
As a result of having a quality reserve study, a board will be able to communicate to unit owners exactly what the fee schedule will look like for the next 5 years
less attractive property because the “fees were low”) with a double whammy: The cost to maintain a property PLUS the cost to make up for 20+ years of underfunded reserves. Congratulations board of directors! Your decisions, over time, resulted in a community full of residents who could
18 | COMMON INTEREST®
An association that properly funds the reserve fund from the beginning will be giving current and future unit owners an accurate financial picture of what it truly costs to live in an association. In addition, as a result of having a quality reserve study, a board will be able to communicate to unit owners exactly what the fee schedule will look like for the next 5 years (the average useful life of a reserve study before an update is conducted). Proper
reserve funding ensures that adjustments to the association fee schedule after a reserve study update will be minimal. Being new, the property is in top condition. A unit owner who, unfortunately, finds the monthly assessments difficult
• Spring 2021 • A Publication of CAI-Illinois Chapter
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