These days, just about everyone is cutting back on spending, whether to make ends meet, save for something special or a rainy day, pay off debt or fund their retirement. Consumers are cutting coupons, looking for deals and keeping a close eye on their dollars. Whenever costs or fees go up and consumers have to pay more, they invariably get upset.
The last thing residents want to hear is that association fees are being raised. Realistically though, to keep a building properly cared for and thriving financially, fees will need to be raised regularly and fairly. And, in some cases, associations are forced to raise fees because they haven’t put enough money aside for a major repair.
In recent years, both Fannie Mae and Freddie Mac (the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation), government-sponsored enterprises that control the secondary mortgage market, have passed stricter lending guidelines for condominium financing. Among those rules, the Federal Housing Administration (FHA) now requires that condominiums set aside at least 10 percent of their operating income toward a capital reserve account. For example, if the annual budget is $200,000, then the association must set aside $20,000 for its capital reserve fund.
Just as an individual needs an emergency fund in case of a job loss or an unexpected car repair, an association needs a financial reserve to take care of such major repairs like roof leaks, plumbing problems or foundation issues. A 2012 Community Associations Institute (CAI) study found that cash-strapped associations are trying everything to make do. To compensate for a cash shortfall, 38 percent have postponed planned capital improvement projects, 35 percent have reduced landscaping services, 31 percent have reduced contributions to their reserve account (funds that are set aside for major maintenance and repairs), 23 percent have borrowed from the association’s reserve account, 16 percent have levied special assessments, 12 percent are allowing residents to perform minor tasks in the community and 6 percent have borrowed from banks and other lenders, according to the study.
Ostensibly, reserve budgets can look like extra cash lying around for a rainy day and a tight-fisted association is often tempted to use the money to lower the budget. But, when that roof begins to fail and the reserve isn't there, all of the sudden an association is thousands of dollars in the red. “Obviously money is needed on day-to-day operations, and a lot of associations don't put money away in reserves, and it's only kicking the can down the road, because they'll be faced with the expenses at some point in the future. Because of the economic conditions that we face now, a lot of associations are trying to reduce expenses so they can keep the maintenance fees low,” says Gary Budd, president of Crest Management Group in Boca Raton.