increase the reserve balance. This is usually only the case when reserves are currently underfunded and in need of a jump start, or you have a major capital project coming up that is imperative but not currently fundable. This option generally won’t be popular among homeowners, and could potentially cause financial hardship for some residents, especially in communities where residents are on a fixed income.
Another con that could be perceived by residents is that some of them may never see the projects they are funding materialize. If a resident moves out before a roof replacement happens, they may feel that they are paying for a project that does not benefit them while living in the association. However, it’s important for boards to communicate to residents that they are paying for their use of the roof, and the wear and tear that happens while they do reside in the association. Simply put, they are paying for their use of the roof.
Following your Reserve Study’s recommendations
Because most of these cons only play out if your association is underfunded or has deferred on necessary capital projects, it’s imperative that you follow the recommendations laid out in your reserve study report, or commission a study if you have not yet had one. Reserve studies identify a timeline of all repairs and replacements of association-maintained components over the next 30 years, and present a reserve fund savings plan that ensures there is enough money in reserves to pay for these projects when they come due.
If you decide not to follow your reserve study report’s recommendations, your association runs the risk of remaining or becoming underfunded and could experience enough of a shortfall that you will have to defer on necessary capital projects or find alternate funding to pay for them. If you defer on a major or necessary capital project like a roof repair, you may expose the association to increased structural issues that would likely cost more to fix down the line.
Following your reserve study’s reserve fund timeline can also foster peace and trust within your community. Adequate savings lessen the need for special assessments or the raising of dues, which is especially beneficial to residents living on a fixed income. Additionally, this ensures that residents are paying their fair share for the use of the component over time, rather than catching up on funding that previous residents did not contribute to.
Board members have the fiduciary responsibility to act in their community’s best interest and work to maintain or increase property value. Failing to follow your reserve study’s reserve contribution recommendations, specifically, if you are aware that you are underfunded or behind on necessary projects and fail to address them, could be considered a breach of this responsibility.
44 | COMMON INTEREST®
The Bottom Line Overall, the pros of funding your association’s reserves far outweigh the cons. If your community is lacking sufficient funds, funding reserves may feel like a large task. However, it will pay off in the long run as financial security is gained and the benefits are reaped. If raising dues or implementing special assessments are a path your community must take to become financially secure, it’s important to be transparent with residents and be able to address any concerns they may have about increased costs. By communicating funding needs and methods to residents and maintaining a savings schedule, the cons of funding reserves can be neutralized, and your association will be on its way to financial health and security.
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• Fall 2022 • A Publication of CAI-Illinois Chapter
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