Common interest communities are non-profit businesses and just like any business budgeting and financial planning are essential to the success and longevity of the business. What is everyday common sense with respects to businesses is often ignored for common interest communities. While this may seem like a harsh assessment of many Boards out there it is an unfortunate reality as is evident by the high number of special assessments and loans being taken out by Associations to cover expenses that are usually expected and have years or decades to properly fund for. The reasons for the lack of adequate funds can most often be attributed to the following scenarios.
Head in the Sand Approach
The most common approach to reserve funding; if we do not discuss it or fund for it the expenses will magically not occur. Obviously this is not true and it will be someone else down the timeline of the community which has to make up for the past membership’s lack of funding and budgeting. This approach is unfair to the future members of the community and allows members of a community early on to pay a minimal HOA fee when in fact they are utilizing just as much of the common area component deterioration as the later members of the community. What may be an approach that works out for many years or even decades it is the Peak Year expenses that will derail the financial stability of the community and lead to loans, special assessment and falling property values.
Common interest communities are for better or worse a family that must live within a defined area and share common areas. Communities will typically have Boards that are elected to make fiscally responsible decisions some of which will be unsavory to the community membership. Unfortunately this democratic system can also lead to different personally types with very different views trying to work together and have a common goal and direction. Some may just want to have special assessments when large expenses arise, others will prefer adequately planning and some will just be downright difficult to work with regardless of the direction. When things become dysfunctional decisions are often not made and votes are casts that may be based more on feelings than what is fiscally responsible.
Being too Optimistic on Life and Costs
Optimism is great for many aspects of life but we have found it is much wiser to be safe than sorry with respects to reserve funds. A composition shingle roof that a Board hopes will last 40 years but which we have only ever only seen last 30 years at a maximum is an optimistic point of view. So when a Board decides to fund for this roof based on a 40 year useful life but it ends up only lasting 25, well the Community now has to figure out a way to come up with a significant shortfall in funds (what would have been 15 years more of reserve account deposits).
This optimism can also be related to the extent of the repairs or replacement needed. We have seen this with wood decks that Boards fund for never being replaced but only refurbished only to find out at 30 years the decks are rotting and need full scale replacement; an expense that can be over double the cost of refurbishing the deck and again lead to a potential dramatic underfunded scenario.
Being too optimistic with costs is another common scenario. This can often be attributed to internet searches done by Board members who while having good intentions are not aware that almost all costs numbers on the internet are for single family residential construction and do not include expenses like overhead, vendor profit, disposal and issues related to commercial construction which has a significantly higher costs than residential construction.
Lack of Knowledge of the Community’s Financials / Building Components
Often when a Board is making decisions that from the outside appears to be poorly directed, from their point of view is fiscally responsible. This often can be attributed to the lack of understanding with respects to what a reserve account is and why it is so important for the longevity of the community and to the fairness of the community. This can be expanded to the lack of understanding of inflation and interest rate factors in funding for projects in the seemingly distance future.
Additionally and just as troublesome is that many Board members are making decisions with respects to funding based on a lack of knowledge about common area components. This is not to say that the Board members need extensive experience to learn the basic s related to costs and useful life of components. They absolutely do not, but if they are making decisions for the community without direction from qualified vendors then they are telling the community members that they know what is best, most often without every taking the time needed to learn about the costs and useful life of the component. When a Board decides that roads will never need funding for or paint can be done every 10 years instead of the typical 5 they are telling the community membership that they know more than the qualified vendors which advise differently. Who is to blame when the roads fail and the wood siding has water intrusion and rot issues? Well those Board members will likely be long gone at that point so it’s the future community members that suffer from these poor decisions.
Not Hiring Qualified Vendors or DIY Projects
There is often a tempting scenario of a vendor coming in and providing bids at half the costs of other vendors. As we have seen time and again you get what you pay for and this half prices bid will often lead to a project which is half done, half of the craftsmanship or half of the regulations followed. The end result; to fix it is often double or triple what it would have costs by hiring a qualified and licensed vendor.
DIY projects may be fine for a residential home which only you are occupying but DIY projects for high traffic multi-family setting is different scenario. We have seen DIY deck railings fail catastrophically, DIY electrical projects which put lives at risk and DIY paint projects that never get completed. While DIY is appears to be a money saver it is usually at the expense of safety, code compliance and marketability.
Each day my personal goal is to help make a difference to the Clients we serve. Completing reserve studies gives me the opportunity to do just that as the communities and organizations seeking one of our studies have questions and concerns regarding their own funding plans. People are often in the dark with matters related to costs and component life expectancy which are essential to understand before a long term funding goal can be calculated and implemented.
It’s an important and fulfilling opportunity for me to contribute to each of these communities & organizations in positive and beneficial way. Commonly our studies are utilized by HOA’s, condominium communities, museums, nonprofit organizations, schools, daycares, marinas, places of worship, commercial buildings, etc.