Why make Reserve Contributions?
In this busy "budget time" of year, when so many associations (those with a 12/31 Fiscal Year End) are working on their budgets, it is a good time to remind my readers why Reserve Contributions are important.
And it's not just me. A prominent Southern California attorney , Mr. Robert DeNichilo, just wrote a nice summary on his "HOA Brief" blog (to see the article, click here). In addition, as Mr. DeNichilo notes, the California Department of Real Estate has just issued a consumer warning about the dangers of underfunded community associations (to see the warning, click here).
Sufficient Reserve Contributions Are Only Fair
In addition to the comments made by an independent community-association attorney and the California DRE, there is the underlying reason that making adequately sized Reserve contributions is simply the fair thing to do.
Making a Reserve Contribution less than the rate at which the association's common area assets are deteriorating means the current owners are paying less than their fair share, and forcing future owners to pay more than their fair share.
In this common situation, Boards are essentially "self-dealing", giving themselves lower assessments at the cost of future owners who will be forced to play "catch-up" when the roof fails or the elevator fails. Inadequate Reserve Contributions often result in Special Assessments in future years. I wonder how long it will be until that liability exposure becomes more commonly discussed!
Common area deterioration, the reason for Reserve contributions, is as real as any other "bill" at the association.
The Result of Inadequate Reserve Contributions
Some day, the reality of that ongoing deterioration will rear its ugly head. The only choice facing an association is if that bill will be spread out fairly over the owners who enjoyed the use of those common areas, in direct proportion to the number of months they owned a home in the association, or if those expenses will collapse on some future owner who gets caught "holding the bag". Someone is going to pay the bill.
Spread it out. Pay your fair share. Set your association's periodic Reserve Contribution equal to the ongoing cost of deterioration of the common area assets.
By the way - stay tuned for our November Webinar (sign up for our company's email newsletter here to get the announcement of date/time), when we'll discuss this very issue with respect to the Board's D&O insurance coverage.