“Why Reserve for Expenses 30 Years Away?”

Answer:

Today a well-intentioned Boardmember called, asking why he should tell his homeowners that the expensive roof they installed five years ago, not needing to be replaced for another 25 years (or so), is something they should be paying for now? They paid the special assessment to install the current roof, the average age of homeowners is over 60, and they don’t expect to be around when the next roof needs to be installed. “Let others worry about the next roof in 20 years!” he says. This is their roof. They paid for it. So… is it his problem?

It is unfortunate that the majority of current homeowners had to pay a large special assessment five years ago to replace an asset they hadn’t “used up”. Prior owners had enjoyed the use of, and “used up” that asset, and didn’t pay for it. That was irresponsible. But doing the same thing for future owners is also irresponsible.

How can a Board responsibly choose to not care for an association asset? All physical assets are gradually deteriorating every day. As the physical value of that asset moves from “new” to “old”, there needs to be an offsetting growth in the Reserve Fund in order for the Board to claim they are responsibly caring for the assets of the corporation. In addition, if the Board ignored a Reserve Study that indicated the funding needs of the association and the Board chose to not reserve for one or more components, there could be some real liability exposure.

Note that when home values begin to be influenced by Reserve Fund strength, this will be less of an issue. A Reserve Study shows the size of any Reserve deficit, and any prospective homeowner can use that figure in sales price negotiations. Current homeowners will pay for common area deterioration one way or another… either in loss of value or with Reserve contributions.

The Board’s primary responsibility is to protect, maintain, and enhance the assets of the corporation. That is done when the deterioration of physical assets are offset by the growth of financial assets. Physical deterioration cannot be ignored. Two wrongs don’t make a right.

By:
Robert M. Nordlund, P.E., R.S.
Association Reserves, Inc.

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