In completing reserve studies for HOA and Condominium Communities we are always reminding Boards and Community Members that common area expenses will occur whether the necessary funds have been set aside or not. The expenses in our reserve study reports are real and to ignore them or just kick the expenses down the road are both fiscally irresponsible and not in the best interest of the community as a whole. While the expenses will occur communities typically have one of several options in how they are paid for and not all are created equally.
1. Regular Assessment Dues – This is by far the cheapest and fairest to the current and future community members. Adequately planning for the even expenses on an annual basis ensures that community members pay their fair share of the total expenses – taking into account inflation of the costs and deterioration of the common area components in any specific year.
2. Special Assessments – With adequate planning these are rarely needed but when a community has a history of ignoring the upcoming expenses they can be the next best option. The current members of the community are penalized for the past membership lack of budgeting. Additionally there will always be some members who cannot afford the special assessment and have to refinance, sell or just leave the home / unit to the bank. The good news is that with approval of the special assessment the necessary work gets completed.
3. Bank Loans – Loans are extremely costly and should be a last resort option. A typical loan for a community already with a poor funding level will care a high interest rate; it’s not uncommon for communities to pay up to double the amount needed to pay the vendor. Example: A Community which pays $200,000, over ten years, for a $100,000 roof replacement has not done its due diligence or adequate budgeting. Not only is this option extremely costly but it sets up the community for an even worse situation over the ten year period as the membership will now being paying off the loan amount, the interest on the loan and need to still set aside reserve funds for the next roof replacement.
4. Ignoring Projects – The head in the sand approach typically leads to significant component deterioration in the community and lower market appeal. While this approach may not impact the reserve bank account it will typically result in lower property values and higher risk of litigation against the HOA or Board.
Most communities, even those currently in a poor funding position, can build on their reserves and improve their reserve account balance to a healthy level without the need for special assessments and loans but adequate planning and budgeting is necessary to do so. A reserve study can help guide a community onto a path of fiscal responsibility which in the long run will be the most cost efficient approach.