wave to comply with the January 1, 2025, effective date of the requirement, when there was a large gap between supply and demand; however, down does not equal cheap. Reports can still cost hundreds or thousands of dollars per unit, depending upon the unique circumstances of each community, which again adds costs to the association. For example: using a low-end cost of $400 per unit as an average for the EEEI on the nine-year cycles equates to $3.70 per month, per unit. While that may not be a budget buster in and of itself, it does continue to add liabilities to associations.
Then there are the fi ndings. Depending on the level of maintenance received and several other variables, the costs to correct any issues noted in the EEEI report can be overwhelming. Communities with signifi cant deferred maintenance can expect signifi cant costs to restore the impacted areas. It’s common to see $10,000+ deck/walkway restoration projects. Damaged framing within the walls is an expense that is not typically anticipated when preparing a reserve study, and therefore becomes an unfunded expense, which can quickly deplete the reserve fund.
FINANCIAL OVERSIGHT
Lenders and insurers have discovered that a reserve study is a tremendous risk management tool for them. When a lender reviews a report that anticipates one or more special assessments,
it knows that it could potentially negatively impact the borrower’s ability to fulfi ll their mortgage obligations.
Lenders generally respond, depending on the underwriter, by declining to loan or charging higher rates or fees to compensate for the added risk.
Insurance underwriters take a similar approach. When they review a report that indicates aging components, such as roofi ng or water piping, with insuffi cient funds to replace or restore the items, they know that increases the likelihood of a leak, and thus a potential claim against the policy. Insurers generally respond, depending on the underwriter, by declining to write a policy or charging higher premiums to compensate for the added risk. Obviously, it would be better to put those resources towards HOA reserves rather than higher insurance premiums and fi nancing costs. For this reason, more community managers, accountants, lawyers, and reserve analysts are recommending that associations improve their fi nancial profi le through increased reserve funding.
HOA fi nancial stability is much like physical fi tness. It does
not deteriorate overnight; it takes years or decades to reach an unhealthy level. It also takes years or decades to return to a healthy level. Many communities have an unhealthy reserve fund and are now in the process of fi nancial healing, which requires increases to the transfer rate atop an already infl ation strained operating budget. So yes, you are correct, it is harder to properly fund reserves than it used to be.
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