Just as families are encouraged to set aside a portion of the household budget into a savings account, so are community associations advised to maintain a reserve fund for capital improvements—repairs and replacements of major common-owned features, infrastructure and facilities. And just as American families are notoriously lax about saving money, so are condo boards reluctant to increase homeowners’ fees for long-term maintenance.

Jim Collett, a principal in Essex Management Group of Haverhill, Massachusetts, contends that in his experience, “There’s not a single association that’s properly funded according to [their] capital reserve study. And the vast majority are significantly under-funded… especially in regards to major projects such as roofing, siding, paving, pool upkeep.”

“I’ve seen an association that ran out of heating oil,” Collett states. “They had not recognized that their fees were too low. The same thing happened with another, 35-year-old building that couldn’t pay their heating, water or sewer bills.” He described another, four-story condo building that experienced a hydraulic fluid leak in the elevator, where “many of the residents were elderly, and they were without elevator use for seven months.”

“The challenges we’re facing,” Collett continues, “is that all these properties are aging, while unit owners have that ‘have my cake and eat it too’ mentality,” to pay low fees but enjoy superior maintenance.

“When the association doesn’t have reserve funds for these major emergencies, they have to get a loan,” he points out. “Typically, a bank will want to see that there’s a fee increase commensurate with the loan service. The loan payments may go into the operating budget for the term of the loan.” While the condo fee may increase only by the amount dictated by the loan terms, that can be high. “I’ve seen fee increases as high as 38 percent, but that was in a property that was under-funded for years,” says Collett.

The Age Factor

While older properties face the biggest capital funding challenges, new ones are not immune. “With recent construction,” he continues, “things may seem okay, especially with low-maintenance building materials now being used… but problems can still emerge. We had a townhouse project, almost 70 units—not even ten years old, and the septic system had been installed incorrectly. The whole thing failed and needed complete replacement, costing the association $500,000.”

Then there’s Mother Nature upending the balance sheet. “For communities, like on the Florida coast,” Collett notes, “insurance can be 20 percent of their budget if you’re in a hurricane or flood zone. Plus, FEMA has recently expanded their flood plain delineations. In Massachusetts and New Hampshire, we’ve been lucky… not subjected to extreme and devastating weather events. Also, building projects now seem to keep clear of flood zones.”

While raising monthly fees may be painful,” Collett contends, “most boards recognize their responsibility. They know they must maintain properties properly to avoid big expenses. A good reserve study really provides a board with a roadmap [for maintenance], but building a reserve fund is always a challenge.”

Reserve Accounts Can’t Start Too Soon

Nik Clark, director of client services at Reserve Advisors of Milwaukee, agrees that boards are unrealistic about raising fees. “We have clients who, maybe 80 percent are underfunded when we do their reserve study… and they need a special assessment because they don’t have enough reserves” to make major repairs or replacements.

When the reserve fund is insufficient, he relates, “There are three ways to raise funds—increase the monthly [condo] dues or fees; get a bank loan using the future fee collections as collateral; or, a special assessment. An average special assessment might be $5,000-10,000 per unit.” He notes that, for long-term revenue, some associations get creative: “They can sell memberships to their pool, or collect lease fees for cell towers on their facilities. Some associations actually wind up owning units, because of liens or some legal action, and can rent them for extra income that can defer fees owed by the former owner, or help build the reserve fund.”

He recommends that associations “should start reserving funds when the property starts aging”—which means soon after construction is completed.

In a new project, he warns, fees may be low while the developer is still in charge and is personally providing maintenance of common areas. “As soon as unit owners get control of the association, or before that, they should create a reserve fund,” states Clark. He points out that a time frame for planning a reserve fund might be based on the cycle for roof replacement, 20 to 30 years, although “there is [something like] a 100-year cycle for certain infrastructure needs such as plumbing and wiring.” For something so long-term, he adds, it’s just a matter of watching for problems in anticipation of repair. His firm updates clients’ reserve study reports every three to five years. “We itemize every replacement within 30 years… Updates to the report should only require minor tweaks.”

When Concessions Must Be Made

Beyond people’s pocketbooks, the attitudes of condo residents can affect how a reserve fund is created or maintained. “People used to think that condo living meant ‘everything’s done for you’ and the association was [something] different from the unit owners,” reports Michael Callahan, owner of the New England office of Advanced Reserves Solutions [ARS], Inc. of Dover, New Hampshire.

“We had a community call us some years ago [for a reserve study] and their claim to fame was they hadn’t raised their dues in ten years… that alone was a red flag. The property was built in the 1980s and had almost 220 townhouse units in 26 buildings. They were only saving the minimum amount, putting about eight dollars per unit each month into the reserve fund… it was completely under-funded. An association should look for an inflation or cost-of-living annual increase in the dues of about three percent. We came up with new fees, raising each monthly payment per unit by about $25. Although unit owners grumbled about it, we were able to produce a plan for them that replaced all roofs, decks and steps, upgraded the pool and clubhouse and put new paving on the roadways—completing this over the last 11 years. The board has stayed with our recommendations and increased fees two to three percent each year, so there’s been no need for special assessments or loans. Now we come out every year” to adjust the reserve study, if necessary, Callahan reports.

On the opposite end of the spectrum, he says, “There was a property with over 350 units in 30 buildings, complete with pools and roadways, and they had deferred every major repair for over 30 years. At the time they hired us, they were in no position to pay what it would take to catch up. They only wanted to spend enough money to repair or replace things according to the ‘lowest common denominator’ of residents’ income level. It was so minimal [an amount] it was a waste of time… not enough to repair anything. About two years later, they asked for our help again, but I wouldn’t prepare a reserve study because they wouldn’t follow our recommendations. By that time, the decks were condemned and sliders were boarded up. They were just against any increase of any kind.” Callahan admits he hasn’t communicated with this board in a couple of years and wonders how they have fared.

Going Downhill

Patrick Hohman, author of “Condos, Townhomes and HOAs— How to Make Your Investment Safer,” has researched many properties that neglected fee increases and reserve funding. “What happens, especially in major, urban areas, you had apartment buildings convert to condos 30 or 40 years ago. They adopted low monthly fees that didn’t rise. A big condo building like that is like a neighborhood that’s going downhill,” he says, with increasingly more rentals and lower-income residents. “In Miami last year,” he continues, “there was a community of three buildings, 12 stories each, built in 1968. Things got so bad, with code violations, it was condemned by the city. Usually, it takes 30 years to get that bad; it’s a long, slow decay.”

“In most cases,” Hohman adds, “getting condemned is a wake-up call” and unit owners ultimately concede to whatever measures will save their property. “There are examples from different places in the country, in some major urban areas, where older properties have been condemned,” he continues. “Granted, it’s a small percentage, and that’s the extreme. But if you consistently don’t collect enough money, and you can’t pay your bills, and you can’t maintain the building—then it starts to fall apart.”

One stumbling block for associations, Hohman reports, is the requirement for a super-majority of 80 percent or more of unit owners voting on major issues. “You can’t get 80 percent of any group to agree on the time of day,” Hohman states. “There was an oceanfront mobile home park north of Miami where owners were offered almost $1 million each. With a couple of holdouts, they couldn’t get the 80 percent vote to dissolve the park and sell to a developer.”

To avoid a slow decay, Hohman says, “You must give the board the power to implement incremental increases in fees. Also, that 80 percent vote is too hard to achieve… It should be 67 percent or something lower. Some places have already adopted” provisions for a lower threshold.

He points out that operating expenses are usually the same year to year, “but on the other side are the major repair and replacement expenses like siding, roofing, or a huge paint job. Those, one year you might have no expenses, and the next year it might be a million dollars. So that’s why you need to have money in the bank, and be prepared, and at least know when it’s going to hit.” He especially recommends a reserve fund study for any community, because, “It eliminates a lot of unnecessary, neighborhood food fights.”

Marie Auger is a Massachusetts freelance writer and a frequent contributor to New England Condominium.