LONG TERM FINANCIAL PLANNING
[Source: Walt Williamson, PCAM]
The Reactions of many unit owners in homeowner associations to the news that major special assessments or loans loom on the horizon range from “a doe caught in the headlights” to anger.
On one end are those who own at common interest communities with insufficient capital reserves who wonder how they can possibly afford a major monthly increase in fees pay their share for roofs, roads, and other major common element systems – and on the other end are those who are genuinely angry and often ask “where did our money go?”
Based on experience from more than a few 3 community associations, the problem of underfunded reserves for capital repairs and replacements is going to cause, for many people, financial hardship and perhaps the inability to maintain residence at a particular property.
Unlike municipalities and states that are also short on funds for capital repairs and replacements, most community associations who have insufficient capital reserves can look to two major causes:
- Artificially low monthly common fees; and /or
- Lack of a documented plan to justify and track future capital needs.
Those who feel that keeping the monthly fee as low as possible for competitive purposes compared to other similar properties are exactly the same. There are differences in demographics, financial resources, quality of construction, and myriad other factors that could cause significant differences.
Also, the use of thumb rules as “$1,000 per unit” and guidelines regarding “10% of the Operating Budget for reserves” are useful, but they may not address situations where the potential shortfalls are so great that possible in-house remedies are unworkable for addressing actual funding needs say within the next five to seven years. In these cases, it is incumbent upon an association’s leadership to make all unit owners aware of the near and long-term financial outlook. In other words – no unpleasant surprises!
In a nutshell, a document near and long-term capital needs plan consists of these components:
- An inventory of each common element system (roofs, roads, decks, etc.,)
- Estimated current and future replacement cost for each common element and estimated remaining useful life for each element.
- Evaluation of current reserve policies vs. future funding needs.
- Adjustments to annual finding as necessary.
- Communication to all unit owners of possible shortfalls – well in advance!
Community associations that are 15 or more years old have one set of problems with common elements such as roads and roofs that will soon have to be repaired or replaced within the next five or so years.
Officials at newer communities, especially 55+ types, may have the problem of convincing owners that building reserves now is the right this to do when many of them scoff at projecting needs out twenty or so years from now. Some of the new developments that have free standing units on large acreage are surprised when they find out that their reserve funding policy is woefully inadequate for road repaving twenty or so years in the future.
All should be reminded that future buyers and lending institutions have become much more interested in the financial soundness of community associations.
Recent legislation has attempted to increase transparency and access to information about the operations of homeowner associations. Everyone who has a vested interest should become informed (and participate) in the governance process to prevent short-sighted funding decisions.
Feel free to contact Alan at Alan Barberino Real Estate, LLC at 203-265-7534 if you have any questions in reference to the above referenced article. www.BarberinoRealEstate.com