Archive for the ‘Advice’ Category
In today’s economy, many boards are refusing to raise assessments for operating and reserve funding needs.
The main rationale that I hear all of the time is that the economy sucks and owners are struggling as is and they just can’t bear to add to their “friends” and neighbors expenses.
Such an emotional response isn’t doing anyone any favors and in fact might be doing more harm than good. It could also open the Board for criticism or lawsuits for not living up to their legal and fiduciary responsibilities.
I have one association who hasn’t raised assessments in three years and the Board is quite proud of that. The problem is that inflation hasn’t stood still and every month the association’s cash flow decreases and some months they can’t pay all of their bills and age them into the next month. They’ve dealt with this cash flow issue by underfunding the reserve account. While a small 1-2% increase each year over the last few years would have alleviated this problem and been easier for their owners to swallow, this coming year they will probably have to raise assessments nearly 15% to make up for. That increase will actually place more hardship on their owners and cause a lot of anger. Add to that the fact that their reserve fund is now very underfunded.
Here are just a few reasons why not setting your assessment levels at actual needs can come back and bite you:
1) When you do have an increase, the amount will be huge and you may have an owner revolt on your hands.
2) Cash flow issues start impacting routine maintenance that would normally get done. Such deferred maintenance lowers property values. Too much deferred maintenance also makes the day-to-day living in your community less desirable and owner resentment and anger can build.
3) Not properly funding your reserve (which nearly always is what suffers for cash flow) harms property values. Right now FHA/Fannie Mae/etc. are the only ones really writing mortgages. They have strict requirements for reserve funding. Not meeting those guidelines means your owners who are trying to sell can’t find buyers who can get financing. Fewer potential buyers mean downward pressure on property values.
It is hard to make the pragmatic and proper decision for your association’s future. I always recommend to my Boards to properly fund their actual needs and caution them against making emotional decisions rather than the sound business decisions that their fellow owners elected them to do.
Should your association have a reserve study done? That’s a seemingly simple question and one would think the no-brainer answer would be yes. It is a little more complicated than that though.
Reserve Studies are an analysis of where the physical condition of your property stands; industry norms of component life cycles; and recommendations of when work (maintenance or replacement) can be expected to have to be performed.
For instance – your roof will be inspected. If your roof is 10 years old and in average condition for its age and if an average life span of say a flat roof is 15 years, you can expect that you will need to replace it in about 5 years. An estimate dollar amount (adjusted for average inflation) will be provided as a guideline for planning your savings. If you have $10,000 in roof reserves and your estimate in the reserve study indicates a potential price of $40,000, you now know you need to start saving about $500/month if you don’t want a special assessment.
There is no doubt that all associations should do not only annual budgetary planning, but long term planning as well. An association is a business (though non-profit) and should be run as such and associations that fail to plan, both short and long term, doom the association to financial difficulties and special assessments.
But, does that mean they should hire a company to provide them with a formal study?
For larger association the answer is unequivocally – yes. Economies of scale make the per unit cost for larger associations much less and also, larger associations have more, and more complicated, structures and systems that only real experts can properly advise about.
Smaller associations are the gray area. One could argue that smaller associations are the ones who might need it the most since the cost ramifications on a per unit basis of not planning could be quite significant. However, smaller associations tend to have a more “pay as we go” mentality and are very relaxed (or short-sighted) about future savings in favor of keeping assessments “artificially” low today – they’ll deal with the future when it arrives.
Despite that tendency, they need to plan for the future as well. At a minimum, any association that chooses to not have a formal reserve study done should at least:
1) Take inventory of every major building/property component (roof, exterior walls, windows, hallway carpet, water heater, doors, porches, etc.) and note its general condition and age.
2) Research the average life expectancy of each of the components and the cost in today’s dollars for replacement.
3) Use the difference in actual age and life expectancy to see when you can reasonably expect to have to replace that component.
4) Do a calculation adjusting the current price for the future cost at the needed time of replacement and find out what you need to save monthly to achieve paying for the work in cash when the time comes.
5) Make a spread sheet listing all of the components and the monthly savings “needs”.
Is that monthly needed savings amount doable? If yes – DO IT. If not, then come up with a plan to add as much as you can to your reserves to minimize the potential assessment that may be coming.
Today, I was going to blog about Reserve Studies. An email over the weekend prompted that thought and now seemed like as good a time as any to tackle the subject of “should an association have a reserve study?” but that’s been preempted.
This week there is a recurring theme at four of my buildings – Water. Specifically infiltration of water into the buildings or their structures from various sources. Hurray – fun for me and my managers.
Let’s start off with the obvious. Water is the number one enemy of buildings. What about fire you say? I reply, what do they put fire out with? During most fires, the water does the majority of the damage. But I digress; I promise we’ll talk about BBQ’ing in bathtubs another day….
As I said, water is the number one enemy of buildings. Any water leak progressively does more damage the longer it is left unresolved. Damage from some of the issues faced by my managers could very well cost thousands of dollars.
Interestingly, three of the four leaks or water issues were air conditioning related.
Chicago has had an unusually warm and humid spring so far. Air conditioning units have been running pretty hard right from their very first start-up.
It’s simple, air conditioning usage creates condensation. That condensate (water) has to go somewhere. Condensate drain lines are fitted to the air conditioning units (or pans underneath them) to channel away the water into the buildings sewer lines or outdoors onto the ground. Individual unit air conditioners can create anywhere from a few cups of water to a few gallons of water per day. Big chiller units on 25 story 250 unit high-rises can make many gallons – per hour. If the condensate drain lines clog or fill with random debris, that water has nothing better to do with itself than find a nice opening somewhere and run into it.
That seems to be the main issue today; for sure with two of three air conditioning related leaks. So, the key lesson to all owners: Maintenance of your system does not only include furnace tune up in the fall and adding coolant in the spring, but also should include cleaning out your condensate drain lines each season.
My fourth building issue is simply a long rainy weekend and building neglected masonry issues. I say building neglected because every year for the past five years the Board at this building has decided to “squeeze out one more year of hoping that it will last” in order to not spend the large amount of money to make the repairs. What could have been $150,000 in special assessment five years ago, has been estimated this year by one engineer at $600,000. They have to do it as an emergency or the building could literally collapse. The poor economy makes this expense much harder to swallow now than it would have been five years ago. So the lesson learned on that is water damage only gets worse with time so fix it now even if it is hard to swallow this financial pill.
It’s been along water day – I think I’ll grab a beer and go play on my boat this evening – at least it was meant for water.