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What's in Your Wallet? The Importance of Healthy Reserves

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.

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