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What You Need to Know About Dues & Assessments

Following are a couple of articles I found that really hit the nail on the head. The first one really drives home the importance of establishing a healthy reserve fund.  The second article uncovers and dispels the misconceptions about proper funding and assessments. If you own a condo anywhere, it's important that you read, and take these articles to heart.  Enjoy...
"Excuses, Excuses"

~ Robert M Lordlund, PE, RS

Association Reserves

An excuse has been defined as “the skin of a reason stuffed with a lie”. In the process of preparing over 30,000 Reserve Studies for Associations across the country over a period of 28 years, there are two board member sentiments we hear most frequently expressed: “We can’t afford the Reserve Funding Plan” and “We’ll worry about that next year”. But no matter how many times a board member may repeat these sentences, it doesn’t mean they’re true and it doesn’t mean they’re wise.

“We can’t afford the Reserve Funding Plan.”

Most of us are accustomed to living within our own financial constraints, where there are some things we can afford and some things (like that red Ferrari!) that we can’t. So we are regularly making choices about where we spend our limited cash. But there are two logical flaws to this concept of “affording” when it’s applied to reserve contributions. First, common area repair and replacement expenses don’t disappear if the Reserves are underfunded. The claim that you can’t afford the Reserve Funding Plan this year only creates more Reserve obligations in the future. In addition, delayed contributions generally result in delayed Reserve projects, creating deferred maintenance. Many of those deferred Reserve projects actually get more expensive when delayed. Delaying doesn’t usually save you any money.

The second flaw is that Boards don’t really have a choice in the matter. board members are both empowered and obligated to operate the Association according to state law and their own Governing Documents. Throughout the United States, Boards are empowered to set a budget to collect “adequate” funds from the owners to maintain the physical assets of the Association. Making a decision to not budget for the needs of the Association exposes board members to personal liability. Owners or future owners might be inclined to file a lawsuit against the Board because the Special Assessment that was levied against them is actually a deficit catch-up strategy for all the years the Reserve contributions were artificially low.

The reality is that underfunding reserves is nationwide problem. More and more prospective buyers are becoming aware of this issue. In the State of California, the Department of Real Estate took the unprecedented step in September 2012 of issuing a Consumer Warning of the special assessments and declining home values due to underfunding Reserves. Read it yourself by Googling “California DRE underfunded homeowners associations”.

“We’ll deal with that next year.”

The problem with this next excuse is that Reserve obligations are not future events. Reserve obligations arise from very predictable, ongoing deterioration that occurs every day, every week, and every month. The cost of that ongoing deterioration can be easily calculated, which forms the basis for an association’s Reserve contributions. Those repair & replacement costs are as real as any other “bill” the association faces. Cultivating a culture of not paying your own bills is not only fiscally irresponsible, but inherently unfair.

Let me explain: Is it fair to be forced to pay for a new roof to replace one that someone else “used up”? The unwitting victims of Special Assessments or bank loans likely are paying far more than their fair share of that component’s cost. Those current owners are being forced to “pay the bills” of prior owners who underpaid their fair share of the Association’s ongoing cost of deterioration.
So what to do?

“It is the greatest of all mistakes to do nothing because you can only do a little. Do what you can.”  Sydney Smith

It may be a hard pill to swallow, but Boards need to stop making excuses or kicking the problem down the road. You can do the wise thing. You can address your current situation by following the Funding Plan- it’s one of the key results of a Reserve Study. Then begin to make steps of progress. Not only will you then fulfill your role and responsibility as a board member and protect yourself from liability, but being able to afford timely repairs and replacements will maximize property values and go a long way to help overall homeowner satisfaction.

Top 5 Reserve Study Misconceptions

~ Robert M. Nordlund, PE, RS, CEO and Founder

Association Reserves:

As a professional Reserve Study provider, we guide associations towards having sufficient funds for the major common area repair and replacement projects their association will face. We may provide counsel, but the board remains in control of the association. So what are the biggest misconceptions we see among our clients? All our clients are well-intended, but we regularly see the same five costly thinking errors leading to decisions which end up being expensive or disruptive for their association. Read on, to avoid falling prey to them yourself!

1) Thinking that contributing 50% of our recommended Reserve contribution will result in the association being 50% Funded

It takes a significant amount of cash to provide for the timely repair and replacement of the association’s Reserve components. But it only takes 10-15% more to add some “margin” to your Reserve Fund and be on-track to become fully (100%) Funded. Cutting Reserve contributions in half dooms the association to having inadequate cash, leading to deferred maintenance, special assessments, and a host of other problems.

2) Thinking that delaying a project will save the association some money

So common, but so wrong! Timely repair and replacement projects can go smoothly. But delays make problems bigger, and more expensive. It is all too common to see a $50,000 painting project turn into a $100,000 painting and repair project due to deferred maintenance and delays. Net effect – unnecessarily higher costs for the homeowners.

3) Thinking “it’s not my problem… it’s a future problem that someone else can deal with”

This reveals a fundamental misconception about Reserves. Roof, paint, asphalt, elevator, etc. all started deteriorating the day they were first installed. That includes last year, this year, yesterday, today, tomorrow, next week, and next year. Reserve contributions offset ongoing deterioration, not a vague expense far off into the future. The “cost” of ongoing deterioration is as real as any other “invoice” the association faces. If every homeowner were to pay their fair share, over the months & years they own a home in the association, the future will take care of itself.

4) Thinking it is not necessary to update the Reserve Study

Do you buy or sell stock based on outdated business news? Would a bank make a loan based on an old tax return? Good decisions require current information. Every year the conditions of your assets change, the cost of replacement changes, and your Reserve balance changes. Since Reserve contributions are typically one of an association’s largest budget line items, it makes sense to update that big line item annually. Not only is it a wise thing to do, but homeowners deserve an accurate update on the association’s preparedness for the care of the major common area assets, not a regurgitation of something out of date.

5) Thinking we can’t afford appropriately-sized Reserve contributions

The problem is that this statement is just plain not true! Reserve contributions are relatively inexpensive for the average Condo association in the US, adequate Reserve contributions are typically $3-$5/unit per day. That’s about the cost of a premium coffee drink. Adequate Reserve contributions for Planned Developments are significantly less. So when people say their association can’t afford appropriate Reserve contributions, what they are really saying is: “I’d rather buy my favorite cup of brand-name coffee than pay my fair share of my home’s roof, paint, and asphalt deterioration.”

For many people “perception” is reality, even when perception and reality are quite different! The way something is regarded, understood, or interpreted leads to a mental impression that may not reflect the truth. But the people responsible for directing the Association finances and protecting the value of the properties within the Association are held to a standard of reality, facts, and the truth. Well-intended board members and managers who are open to overcoming some “misguided thinking” can avoid many costly errors in judgement and decision-making.

Robert Nordlund is Founder and CEO of Association Reserves, a national Reserve Study company. Robert Nordlund started Association Reserves in 1986. As a registered professional engineer and Reserve Study pioneer, Robert was involved in creating the 1998 National Reserve Study Standards and has greatly influenced the community association industry. His insights and views have translated into remarkable value for Associations of all shapes and sizes. Under Robert’s leadership, Association Reserves has grown to include 12 regional offices scattered throughout California and the United States. Prior to forming Association Reserves, Robert was a “rocket scientist” at Rockwell International, serving as the Lead Engineer on the Space Shuttle Main Engine Program. He was awarded a BS degree in Mechanical Engineering from the University of Washington. For more information, visit  www.reservestudy.com