Unless it's a thoughtful gift or a party in their honor, nobody likes surprises. That's especially true when it comes to sudden, serious, or non-negotiable repairs to a condo building or HOA. A community must have enough money saved to deal with major projects as they arise, or risk major financial and structural troubles. But economic woes of residents such as unemployment or default, or living on tight fixed incomes, means more HOAs are finding it difficult to keep their reserves adequately funded.
The solution often is to mandate special assessments for necessary capital projects. Special assessments can tie up community administrators and residents because financial problems often mean putting off capital improvements with the building or its common areas, which leads to slumping housing values. And decreasing housing values can cause more financial problems for communities since property value losses make it harder to sell properties, which can lead to more homeowner defaults.
A recent Community Associations Institute (CAI) study found that cash-strapped associations are trying everything to make do. To compensate for a cash shortfall, the CAI study shows 38 percent have postponed planned capital improvement projects, 35 percent have reduced landscaping services, 31 percent have reduced contributions to their reserve accounts—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.
That’s why it is essential for a community to have adequate funds in reserve, especially in tougher economic times. While building up cash reserves can be difficult, there are ways that communities can build their reserves without causing undue distress to struggling residents. Knowing how to achieve such a bankroll can save money in the present and future.
Checking Your Balance
To have the right amount of capital reserves for a community, buildings and HOAs use one of two particular formulas to determine their financial needs. The two methods commonly used to calculate this necessary expenditure are the Component Method and the Cash Flow Method. With the component method, a building’s management calculates the replacement cost of each building component and divides it by the useful life of each component, such as the building’s HVAC system or roof, etc. The useful life of the component can be determined by its age and condition, and also by the maintenance work done on it. Technology can affect the useful life of a component, because technology can make some building systems obsolete. Environmental conditions also can affect useful life, too, since some environments are harder on building components.