Condo’s Underfunded Reserve Creates Many Problems

C.R. from outside of Connecticut writes:

Dear Mister Condo,

I live in a condo building with 58 units. There are zero adornments except for a very nice meeting room. We have two elevators which travel eleven floors up and down. I am currently serving on the board. Our Reserve fund is at 18K which in my eyes is very low. We will need a major elevator repair in a few years and increasing insurance as well as a rooftop service plan. We have decided to increase HOA dues 15% = $3000. more each month or 20% increase equaling an extra $4000. per month. We want to propose this to our residents and are working on a plan. Currently, there are a few things that need addressing (i.e. a new awning, a better gardener and washing the windows). We do not feel we can do these things with such a low Reserve. We have had many leak and flooding issues some handled by insurance some not. Can you offer any advice?

Mister Condo replies:

C.R., I feel your pain. When it comes to long-range planning and proper funding a Reserve Plan and a commitment to fund the suggested amounts of Reserves is a commitment taken on by the community (through the Board) are always the best solution to problems like yours. However, as many as 7 out of 10 associations decided to underfund or completely fail to fund their Reserve Fund, leaving them in the same precarious situation you now find yourself in. You have answered your question by suggesting that it is time to increase common fees and fund the Reserve. It may also be time to consider a community association loan to make the more urgent repairs. Neither of these options are going to be popular with the unit owners as both will cost them an increase to their monthly fees. Many Board members who wish to continue serving on the Board will be afraid of upsetting their constituents by suggesting an increase to the common fees but that is what needs to be done. How you handle it will determine your success. I suggest an open dialogue with all unit owners. Explain the problem and the proposed solution. It may be a bitter pill for them to swallow but it is the only way to keep their investment properly protected and financially secure. Good luck!

5 thoughts on “Condo’s Underfunded Reserve Creates Many Problems

  1. I will say as a condominium maintenance contractor. What I have found especially with condo buildings built the same throughout the complex. If you have one problem you will have many more. Allow me to explain. Some time back I was asked by the property manager to go find a roof leak. If I say it took me 10 minutes that would be a lot. I asked her if i can remove some diding to see the extent of the damage.I removed from the top iof the second floor down to the sills and it was all rotted. I was then informed it had been leaking for many years and they put on a new roof and that didn’t stop it. Like I stated i found the leak within a few minutes. So once I sent my photos to the property manager she contacted the insurance adjuster. So I tarped unit and left. But prior to leaving I went a few units down which by the way all have the same design and remove a small section of siding and guess what all rotted.Now, the board nor manager were aware of this. I estimated 30,000.00to 33000.00 to repair rot I found. Now, are the associations really saving enough money for these kinds of improvements.

  2. USA needs to look at our strata legislation in Australia. Ever since the balcony fell off a multi storey block of apartments in Sydney and another lost 25% which sank into the ground due to inadequate footings in early 2000s, our legislators introduced a mandatory CapItal Works Fund PLAN. You call it your Reserve Fund. Our schemes must must must have a 10 yr documented financial plan for contributing towards capital works. Levies are determined using that PLAN which is also reviewed every five years. Demanding oqnwrs pay extraordinary contributions when a disaster occurs or refurbishment of the lift is not as likely to happen with a 10 yr Cap. Works Plan.

  3. This is a problem in many States. Utah, where my business operates, has laws stating that HOA’s must do a reserve study and fund it to a “prudent” level. The reserve study doesn’t have to be done by a professional. The term “prudent” can be abused. As a result, Associations that are managed by companies that don’t care or are self managed and either don’t care or don’t know better, will have this kind of result. We took on several Associations over the last year that were in similar situations. Some made the tough decisions to double assessments (or more) in order to begin changing their future for the better. All were either self managed or managed by companies that primarily manage rental properties and don’t seem to care about the future of the Association prior to us. The Associations that follow our advice have turned around dramatically. The ones that do not have been terminated, by us as we will not have clients that do not do things the right way. Unfortunately, depending on the laws in your State, there may not be much you can do about such situations unless some people step up and force change.

  4. Nothing good comes from underfunding Reserves. The “cost” of Reserve component deterioration is as real as any other bill at the association. If not paid on an ongoing basis, owners eventually pay it via special assessments. In the meantime, their property values slide.

    Underfunding Reserves doesn’t even really save the board any money:

    It is the board’s responsibility to care for the assets of the corporation. That means budgeting responsibly so the association can pay its bills, the ones that come due every month, and the ones that come due every 5, 10, or 20 years.

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