Holding the Line

Leading Associations in Times of Financial Anxiety

By Will Simons / Published August 2023

Over the last few years we have seen an overall trend in the community association industry—particularly with respect to condominiums—of a rising cost of ownership for association residents. From our perspective, this trend seems unlikely to stop any time soon. There are a number of interrelated issues, which this article will seek to highlight while offering some perspective and suggestions for the volunteer board members who are at the forefront of these challenges.

The complete economic impact of the COVID-19 pandemic is still certainly hard to calculate, but nearly everyone can agree that one immediate, lasting effect has been dramatic cost increases in goods and services due to inflation. Although some costs seem to have fallen from their peaks, most items are more expensive than they used to be a few short years ago. Gasoline, groceries, and other consumer products have all made the headlines in recent memory, but associations have also experienced a rise in operating costs as a result. Ongoing maintenance, landscaping, utility bills, and other routine monthly expenses have all increased quickly, but so have labor costs. It’s a fairly simple chain reaction: as inflation kicks in at the individual level, reducing purchasing power, employers then face increasing pressure to raise wages to keep up or else risk losing valuable talent as a result. Associations who employ professional managers and other vital staff members are no exception.

Another potentially significant impact of inflation on associations is the risk of an increase in delinquency rates. When inflation occurs, residents feeling economic pressure may have a harder time keeping up with their association’s assessments, possibly leading to increases in late payments and bad debt. This vicious cycle becomes increasingly difficult to manage for associations that are being pulled in opposite directions—simultaneously experiencing both a slowdown in incoming revenue (assessments), paired with an increase in outgoing expenses to keep the association functioning properly. Of course, inflation also affects the reserve fund. The reserve fund is set up to cover expected repairs and replacements of community assets. Inflation can reduce the purchasing power of the reserve fund over time, too, undermining the association’s ability to pay for necessary projects. Even associations that have been diligently conducting reserve studies and following their recommendations may find that costs have increased beyond the expected amounts shown, possibly resulting in surprise shortfalls for pending projects.

Perhaps the most alarming economic concern facing most associations comes from the exorbitant rise in insurance premiums in recent years. We talk with clients on a daily basis that have been hit with staggering increases in premiums, if not dropped from their policies entirely—sometimes with little warning or explanation. This trend seems to worsen every year, with associations being forced to foot the bill for insurance premiums that are doubling (or worse, in some cases) from one year to the next. The reasoning behind this may come down to basic economic market forces. I was told recently by a client’s insurance broker that dozens of insurance companies chose to leave the Florida market (or went bankrupt) in 2022—and that was before Hurricane Ian delivered its crushing blow to the Gulf Coast, ultimately causing $112 billion in damage, making it the costliest hurricane to ever hit Florida according to the National Hurricane Center. In a state where the majority of the population lives along the coastline, and even the most “inland” regions are still less than 100 miles from the coast, this existential, annual threat of hurricanes and their resulting costs isn’t going away. Insurance companies know this and will have to price that risk into their policies accordingly, or as we’ve seen in recent years, choose not to participate at all. To make things worse, Florida has a serious problem with a disproportionate amount of insurance litigation relative to claims filed, which only adds more complexity to the problem.

Other authors have effectively summarized the latest legislative requirements brought about by Senate Bill 154, namely the need for milestone inspections and structural integrity reserve studies, so this article will not provide a complete overview. However, it must be said that the financial impacts of these legislative changes will also be a serious wake-up call for thousands of associations across the state. Beginning in the very near future, full funding of reserves will become mandatory for the critical components of most condominiums and co-ops, ending the days when such associations could waive or partially fund reserves on an annual basis (sometimes for decades at a time). These associations that have become accustomed to relying on some combination of loans and special assessments to pay for major expenses will have to come to grips with the fact that these replacement costs will now be provided for on a consistent, ongoing basis through the annual reserve budget—not all at once, charged to some unlucky group of owners who happen to be living in the property when key projects ultimately become unavoidable.

Clearly, this combination of inflation, insurance costs, and stricter budgeting requirements will represent a significant challenge for many associations, and board members will have a difficult task ahead. At the heart of the matter is an inherent conflict between the needs of associations and the residents who live within them. On one hand, every community association is also a corporation and needs to be managed like one, with a strong emphasis on financial responsibility, a focus on both short- and long-term objectives, and healthy risk management. However, communities are also made up of residents with different motivations and different financial circumstances, who may not be aware of the challenges facing their properties. In the middle are volunteer board members who must wear two hats: that of a corporate leader, thinking of what’s best for the organization; but also of a fellow resident, subject to the same financial obligations as their neighbors. It’s a difficult position to be in, no doubt about it. However, board members must not shrink from this responsibility. Our collective hope is that things will turn around—that inflation will subside, the insurance market will stabilize, and associations that have neglected reserves will find their financial footing—but hope is not a strategy. We encourage board members to lead the way with a combination of honest, transparent communication; sound business judgment; and the courage to make difficult decisions. Tough times call for strong leaders, and by volunteering for the position, board members have made a commitment to their fellow owners that they will do what’s right for the association, which in turn should benefit all who reside within it. That can be a tough message to deliver, particularly in times of economic stress, but years from now the associations who have made it through successfully will owe a debt of gratitude to the volunteers who kept them on course.

Will Simons, RS, EBP, Credentialed Reserve Specialist & 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, email wsimons@reservestudy.com, call 954-210-7925, or visit www.ReserveStudy.com.