By Will Simons, RS, EBP / Published August 2020
This is a story about a fictional association inspired by a true story; an association, like so many others, that lost its way. The real association was mature, had significant deferred maintenance, and was financially unprepared for its own inevitable repair and replacement projects. See if this tale sounds familiar.
Like most problems, this one started small. It was simple at first—in order to keep costs down, we reduced janitorial service to once a week, instead of twice. More cost trimming followed, which involved saving on insurance by raising the deductible (and crossing our fingers!). Next came the decision to not replace the failed pool heater (convincing ourselves a cool pool was so refreshing) and to discard the old pool furniture when the straps broke rather than replace it (since it sat mostly unused anyway). Then came bigger choices, such as deferring scheduled building painting (because it still looked “okay”).
Choices like this allowed us to not increase our homeowner assessments, and we had to reduce our reserve contributions only a few hundred dollars per month to balance the budget; however, before long, we had become “that” association. Dry and sparse plantings graced our entryway. Our entry sign had a few chips and cracks in it (although we did replace one letter; it matched pretty closely). The entry awning was faded and had a number of tears, the building color was dull and discolored, lobby furniture was old and mismatched, and the carpet had stains and wear patterns (and clashed with the original stairwell carpet that had never been replaced).
We hadn’t updated our reserve study in more than five years, and based on that old reserve study, the roof was about due to be replaced (but it wasn’t leaking yet!). It didn’t help that we had changed management companies a few times to save a few more dollars per month. In the process, we lost some of their expertise, as our new management contract had them only collecting payments, paying bills, preparing monthly financial statements, and following up on rules violations. The management company had no opinion on our budget or the direction our association was moving and didn’t touch the subject of homeowner delinquencies; on that they deferred to our attorney. But it seemed the only thing the attorney cared about, other than collection issues, was encouraging us to update our dated governing documents and charging a few hours to oversee our annual elections. Neither our manager nor our attorney reminded us that our job as the board was to provide for the care of the common areas, and that took money.
The wakeup call was the balcony emergency. One balcony literally fell off the side of the building. Fortunately, nobody was on it at the time, so there was only property damage to the two cars parked underneath. But now we had a real problem. Insurance covered the car damage but not balcony replacement. We didn’t like our insurance provider’s decision, but we couldn’t disagree that the balcony fell due to gradual deterioration, not a singular insurable event like a windstorm.
We hired an engineer to inspect our balconies, spending almost all of the little money we had in reserves. We found there was significant deferred maintenance, meaning a few more balconies were at risk of falling at any moment. We had to restrict owners from using their balconies. To prepare for higher expenses, we stopped the pool service and closed the pool, and when the entry gate broke again, we simply left it open. We needed a special assessment to get some money together for balcony repairs and a new entry gate motor, and we figured the incentive to have enough money for those repairs meant that the special assessment would pass.
But, we were wrong. The homeowners were upset that the association had fallen into disrepair. Home values were below that of other condominiums in the neighborhood, and with no entry gate, no pool access, and no use of their balconies, the owners were mad. The special assessment was soundly defeated, and 10 owners pooled their money and hired an attorney to sue the board for failure to maintain the common areas. We figured that was just one more annoyance to add to the long list of annoyances, but we were wrong again. It was another big problem. Our D&O carrier said that because the board willfully neglected raising homeowner assessments in the face of rising costs, they would not defend us. We were only doing what other boards before us had done! But that meant we had to pay for our own defense, and we really didn’t have a defense.
Moral of the Story: Small, seemingly insignificant choices can lead to big problems. Our mistake was to take the easy option and find ways to spend less money and to try to keep assessments low. But, we lost our way. Our choices did not lead us to a good outcome. Wise choices, starting with small ones, would have pointed us toward a better outcome. Wise choices may cause short term discomfort, such as assessments that are a few dollars higher each year, but at our association, those revenues would have kept the pool warm and inviting, the balconies intact, the roof waterproofed, the entry gate functioning, and home values thousands of dollars higher. It’s the classic benefit of deferred gratification. Whatever you do has a compound effect, one way or another. Take it from me and our association: We wish we had done things differently.
Will Simons, RS, EBP
President, Association Reserves
Will Simons, RS, EBP is a credentialed reserve specialist and president of the Florida regional office of Association Reserves, a national provider of Reserve Study services. For more information, call (954) 210-7925, email firstname.lastname@example.org, or visit www.ReserveStudy.com.