When owners buy into a community they expect that in exchange for their payment of the regularly assessed dues, the association will maintain the community in a good state of repair, in accordance with the governing documents. The main goal of many boards of directors is to maintain and improve property values. They only way that the board can assure their ability to maintain the assets is by assessing an adequate level of dues.

Some Associations will be able to maintain the same dues level as in 2005. Many will need to increase their dues. The Board of Directors has a legal duty to maintain the value of the Association property. This includes ensuring that funds are available to perform routine and preventive maintenance on the common property, cover other operating expenses, and ensure that reserves are set aside for future major repairs and replacements. Despite this, reports indicate that the vast majority of community associations fail to plan for and adequately fund capital reserves.

What are Reserves? Reserves are funds of the association that are saved for future major repairs, replacement, or improvement of capital items in the community that are part of the association’s maintenance responsibility. They are a savings account to fund future capital projects.

Associations are usually required to set aside a portion of their annual operating budget to fund the Reserves. These capital items or components include pool resurfacing, siding, paving, roofs, elevators, etc. At some point in time, every component will need significant repair or replacement. Reserves ensure that you have funds available for that repair or replacement. Normal maintenance items, such as repairing minor roof leaks, pressure washing, etc. should be funded through the annual operating budget. Reserves are intended to be used when those capital items require replacement, major repairs, etc.

ome associations hire an engineer to conduct a reserve study. This study determines how many years are left in the life of these components, such as the roof; how much it will cost to replace; how much the association needs in its reserve fund today and how much it should add to reserves each year, in order to reach this goal. Funding the reserves each year is fairer for all owners in the Association. Imagine, you just purchased a house in a 10-year old community. Six months later, you are assessed a special assessment to resurface the swimming pool. You wouldn’t be too happy. Funding items like these through reserves more fairly and evenly distributes the cost of replacing a component among those people that use or benefit from the component.

Insufficient reserves can severely hurt property values. Many real estate agents, appraisers and mortgage companies contact associations regularly and ask: Has a Reserve Study been prepared? How much is in the Reserve Fund? Has there been a special assessment recently? Is one planned? What is the purpose of the special assessment? The answers almost always affect the appraisal and sometimes the interest rate.

Special assessments and borrowing to make the major repairs are unfair to the owners than current reserve funding. The inequity of special assessments/borrowing is that it forces current or future members to bear the cost of replacing something worn down by past members. If the funding of reserves is waived or reduced, special assessments will more than likely be required as the property ages.

 

 

Budgets: Since many associations are currently preparing their 2006 budget, they need to ensure that all factors are considered.

To determine a budget, we first recommend that all committees be consulted regarding operating expenses and projected needs for the upcoming year.  All continuing contracts (pool, lawn, management, insurance) need to be reviewed and a determination be made if new bids will be asked for, if the current contractor plans on raising their contract price on the contract renewal date.   Next, a review will need to be made of other operating expenses.

Due to the increased gas prices, many landscapers have increased their contract prices or added a monthly surcharge to their invoice; the City of Charlotte has increased their rates in July 2005 and 2004 by 9% each year.   Other operating expenses (plumbing, electric, accounting, general repairs, accounting) may increase due to other factors.  Several associations may have prepared a Reserve Study and determined that their reserves are too low and have decided to increase dues in order to properly fund reserves.

All of the expected expenses (including a contribution to the Reserve Fund) are then totaled and divided by the number of homeowners to obtain an annual assessment amount, by owner.  If the calculated dues are higher than the previous years dues, the Board needs to review its governing documents to determine what steps are needed to establish a dues increase.

Some associations don’t want to increase the dues to a level they feel might be uncompetitive in the resale marketplace.  They may assume that many of the residents will no longer live there when something needs replacing.   More often than not, the reason for a shortage of funds is that the budget and maintenance fees are being determined politically and not realistically.

If dues are not increased when they need to be, the Association will not have enough funds to properly maintain the property, which will hurt property values.

As you can see, an increase in dues may mean that the Board is doing their job to preserve/enhance your property values.  It could be a good thing!