Are You Planning for the Future?
We’ve all driven past neighborhoods that look horrible. The pool is closed and empty. The tennis courts are cracked and weeds are growing up through the asphalt. The roof is caving in on the clubhouse, and the perimeter fence looks like it’s about ready to fall down. More than likely, these associations failed to create a reserve fund to replace and maintain the association’s common property.
All too often, association budgets don’t include enough money for reserve funding. Some new association budgets don’t take reserve funding into consideration at all. Failure to plan for the inevitable maintenance of association property and amenities is a recipe for certain disaster that can take your association down a rocky road.
The consequences for not adding reserve funding to the budget can be vast including the depreciation of property values, increased days on the market for homes that are up for sale, special assessments to homeowners and potential liability for board.
Reserve funding is an area that is often unintentionally overlooked by board members that are more concerned with the imminent, day to day expenses instead of looking in the future towards eventual property maintenance and replacement. Ninety nine percent of associations created today will require at least a minimal amount of reserve funding. Remember to fast forward and look ahead when creating the association budget.
Even if the association merely has a monument at the front entrance, it will still require a budget line item for reserve funding. At some point, the monument will need repair or replacement, and even the most modest front entrance monument will have a replacement cost of at least $10,000.
Reserve funding has five essentials steps:
- Determine what items the association will need to repair/maintain/replace in the future
- Determine the approximate life span of the item
- Calculate a cost estimate for repair or replacement of that item in the future
- Divide the replacement cost of the item by the life span of the item to determine how much will need to be saved each year in order to pay for the item at the time of replacement
- Establish a separate, interest bearing bank account for reserve funding
For example, let’s say that an association has a large monument at the entrance that has a replacement value of $20,000 and a useful life span of 20 years. In order to have enough money in the bank to replace the monument in twenty years, the association would have to save one thousand dollars per year for twenty years.
Board members would be wise to commission a formal reserve study. Just ask your community manager for help. We’ll get a quote for you and once approved, we’ll get the ball rolling. Reserve studies are performed by third party accounting professionals that will provide a detailed report on the funding needs of the association. A formal reserve study will include a physical and fiscal description of all property, calculation of useful life spans and/or remaining life spans and replacement costs for all association owned property.
The reserve study also takes into account any inflation that may occur and includes that amount in the replacement values. The reserve study report is very detailed and includes information on how much the association needs to save each year per home. A formal study such as this provides valuable information to each homeowner so that they can understand what the association’s expenses are going to be in the future and why the board is making certain financial decisions.
There are an odd number of board positions for a reason. You will not always see eye to eye. Don’t take it personal if the other members of the board disagree with you. This will occur and is healthy. While each board member should attempt to come to a consensus with the other members, you will not be able to achieve this each time.
Countless hours are wasted by board members continuing to argue a point just to obtain “victory” on a certain issue or to avoid any vote that is not unanimous. This occurs because someone is taking it personal. If your view is not shared on an issue, take a vote, and move on. Do not hold a grudge. Recognize that you can disagree and still work well with each other.
Spectrum Association Management, LP offers this information for educational purposes only and not as legal advice. The information provided in this article does not create a client relationship between you and Spectrum Association Management, LP, nor is this article a substitute for legal advice. The contents of this article are subject to change without notice. You should not rely or act upon the contents of this article without seeking advice from your own attorney. Spectrum Association Management, LP is not a law firm.
Spectrum Association Management, LP provides information in this article as a general resource to clients and other interested readers. By making available access to this article, (i) Spectrum Association Management, LP is not purporting to render legal or other professional advice or opinions on specific facts or matters and (ii) Spectrum Association Management, LP is not creating or intending to create a client relationship between you and Spectrum Association Management, LP.