HOW TO AVOID THE RESERVE FUNDING DEATH SPIRAL

Don’t Bankrupt your Association by Underfunding Reserves

Dozens and perhaps hundreds of condo buildings have budget shortfalls as thousands of owners, under water on their mortgages or in foreclosure, stop paying monthly fees. Community associations rely on the monthly cash flow from assessments to pay virtually all of their expenses. In most cases, they have no other source of income. When that income is seriously curtailed, the ability of the board of directors to protect and maintain the project is in jeopardy. Borrowing from reserves works for a while, assuming there are reserves in the first place.

When reserves run out and money is needed for maintenance or repairs, it can lead to a catastrophe in the making. Boards without sufficient reserves have to make some very tough decisions. Pay for maintenance and upkeep or insurance? Continue to pay for a management company or pay the monthly water bills? Levy a special assessment or allow the facilities to deteriorate??

When you get down to life-safety issues, like paying for electricity, security guards or the sewer bill, its time to re-evaluate the very survival of the Association.

The key to survival in tough economic times is to make sure you set aside sufficient reserves to pay for deferred maintenance items so they can be paid when they come due. Sound financial management of an Association requires that the Board continually reevaluate what reserves are needed for future maintenance and how much needs to be set aside now to pay for the maintenance. All owners benefit from having the reserves needed for future upkeep and repairs and all owners suffer when reserves are underfunded.

If your Association is not setting aside reserves or is underfunding reserves, talk to a responsible management company about you need to do to get on the right track today.