By Robert Nordlund, PE, RS & Will Simons, RS / Published July 2019
An excuse has been defined as “the skin of a reason stuffed with a lie.” In the process of preparing more than 45,000 reserve studies for associations across the country since 1986, there are three board member sentiments we hear most frequently expressed: “We can’t afford the reserve funding plan,” “Our residents will never go for this,” and “We’ll worry about that next year.” But, no matter how many times a board member may repeat these sentences, it doesn’t mean they’re true, and it doesn’t mean they’re wise. After we look beneath the skin of these three reasons, it may surprise you how differently you feel about these excuses!
Most of us are accustomed to living within our own financial constraints, where there are some things we can afford and some things (like that red Ferrari!) that we can’t. So, we are regularly making choices about where we spend our limited cash. But there are two logical flaws to this concept of “affording” when it’s applied to reserve contributions in an association-governed community. First, common area repairs and replacements don’t disappear if the reserve fund has been underfunded. The claim that you can’t afford the reserve funding plan this year only creates a tidal wave of more reserve obligations in the future. To compound the problem, delayed contributions generally result in delayed reserve projects, so the issue of deferred maintenance comes into play. What’s worse, most deferred reserve projects actually get more expensive when delayed. With the understanding that the costs in question don’t go away, if the association isn’t going to fund the reserve account on an ongoing basis for these components, then there are only three other options on the table, none of which are appealing. The only other logical choices are special assessments, bank loans, or lines of credit—or worst, choosing to do nothing at all. In the last option, although there may be no immediate out-of-pocket costs, this eventually means accepting declining property values as the community continues to sink into cycles of more advanced deterioration. No matter which option an association chooses, the owners will be “paying now or paying later” but always footing the bill, one way or another.
We hear this one often from association board members who may, intentionally or not, be thinking more about preserving their seat on the board of directors than they are about properly serving their association residents. Our response is often to point out that it’s not up to them to make that assumption on behalf of their membership. Rather, it’s generally the board’s duty to educate and inform the membership about the realities of the association’s financial situation. If that means that the budget will need to be increased to pay for immediate upcoming projects, or to try and build up the reserves to prevent future special assessments, residents deserve to know that. Given that information, if the residents then decide to petition the board to waive or reduce reserve funding, then at least they’re making an informed choice, and board members can sleep easily at night knowing they did their duty.
What’s more, boards don’t really have a choice in the matter. Board members are both empowered and obligated to operate the association according to state requirements and their own governing documents. Throughout the United States, boards are empowered to set a budget to collect “adequate” funds from the owners to maintain the physical assets of the association. In the state of Florida, state law specifically obligates board members to propose a budget that includes fully funding the reserves. Taking matters into their own hands by deciding to obscure or minimize the reality of the situation could expose board members to personal liability. Owners or future owners might be inclined to file a lawsuit against the board because the special assessment that was levied against them is actually a deficit catch-up strategy from all the years that the association benefitted financially by keeping assessments lower than they really should have been.
The problem with this next excuse is that reserve obligations are not future events. Reserve obligations arise from very predictable deterioration that occurs every day, every week, and every month, over the course of many years. Unlike a fine wine, buildings don’t improve with age, so those repair and replacement costs continue to pile up. The monetary value of that ongoing deterioration can be easily calculated and translated to an off-setting reserve contribution rate. Reserve obligations are as real as any other bill the association receives. Cultivating a culture of not paying your own bills is not only fiscally irresponsible but inherently unfair.
Let me explain: Is it fair to be forced to pay for a new roof to replace one that someone else “used up”? The unwitting victims of deficit-reducing special assessments or bank loans necessitated by underfunding reserves may not all have enjoyed the full life of that component. Some suffer the unfortunate timing of being owners at the very end of the component’s useful life. Many owners are being forced to subsidize the reserve deficit of prior owners who underpaid the cost of maintaining the association.
“It is the greatest of all mistakes to do nothing because you can only do a little.
Do what you can.”
– Sydney Smith
It may be a hard pill to swallow, but boards need to stop making excuses or kicking the problem down the road.
You can do the wise thing. You can figure out your current situation by following the funding plan—it’s one of the key results of a reserve study. Then, begin to take steps of progress. Not only will you then fulfill your role and responsibility as a board member and protect yourself from liability, but you will help your association maximize property values by making timely repairs and replacements. Remember: serving on a board is an opportunity to steer your community in the right direction, not a popularity contest to be won by minimizing owner complaints at the expense of the association as a whole.
Robert M. Nordlund, PE, RS
CEO/Founder, Association Reserves Inc.
Robert M. Nordlund, PE, RS, is CEO/Founder of Association Reserves Inc. For more information, e-mail RNordlund@reservestudy.com or visit www.reservestudy.com.
Will Simons, RS
President, Association Reserves
Will Simons, RS, is the President of the Florida regional office for Association Reserves, one of the oldest and largest reserve study providers in the country. Since 1986, the company has prepared more than 45,000 reserve studies for community associations throughout the United States and abroad. Highly regarded for its excellent customer service, attention to detail, and user-friendly reports, the company has been recognized as a multiple-time Readers’ Choice Award winner by the Florida Community Association Journal. For more information about the company, you can visit www.ReserveStudy.com.