Story of the Month
The Budget Jam that became a Lawsuit

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By Robert M. Nordlund, PE, RS
Association Reserves, Inc.
December 2011

It all started out so innocently, with a phone call asking if we knew about reserves at condominium Associations. It was the attorney of a Developer. They were being sued by the Association for an outrageous sum, for failure to set aside appropriate Reserves. They wanted our expert help to see if the damage claim had any substance.

The Association was about five years old and had been functioning on the Developer’s initial budget for all those years. Finally, the Association had reached a point where some significant Reserve projects were “due”, like deck sealing and their first repainting project. They were dismayed to discover that those two projects alone would completely drain their Reserve Fund. To make matters worse, there were expensive asphalt and roofing projects now just a few short years away. No wonder the Association panicked and called their attorney!

My first question to the attorney was whether the Association has a current, credible, credentialed Reserve Study. It turns out that in Year 2, as the last units were being sold, the Developer commissioned an independent Reserve Study by a credentialed Reserve Specialist (not us!) . That Reserve Study was provided by the Developer to the new homeowner-controlled Board. The recommended Reserve funding contributions in the Reserve Study were a little higher than those in the Developer’s initial budget, but not by much. The new Board chose to ignore that Reserve Study, as they were just getting organized, and everything about the Association still looked “new”. Why should they worry about setting money aside for re-roofing, repainting, or recoating the decks?

A few years later, the Board asked their accountant to update the expired Reserve Study. The updated Reserve Study came back with a slightly higher Reserve funding contribution recommendation than the original Reserve Study. But the proposed Funding Plan didn’t fit into the Board’s budget, so they shelved that Reserve Study and ignored that recommendation.

Through the years, the Association did continue to make the reserve contributions recommended in the Developer’s initial budget, often skipping a monthly contribution here and there when they “didn’t have the money”. When the Board found their Reserves to be inadequate, just before the statue of limitations ran out, they sued the Developer.

It is sad for me to be involved in a case like this. Let’s review the Board’s mistakes:

#1. They failed to take Reserve contributions seriously, skipping contributions and ignoring evidence that they needed to make higher contributions.

#2. They failed to appreciate that the future is built on the foundation of the present. To arrive at a successful financial future, they needed to be pointing the Association in the right direction now. They should not be waiting for “a better time”.

#3. They failed to take responsibility for a situation of their own making, adding insult to injury by burdening the Association with legal bills.

It’s no wonder their Reserve Fund was inadequate! In my work on this project, I found that had the Association made Reserve contributions as recommended, with only minor adjustments from that point forward, they would have sufficient Reserves for all their anticipated repair & replacement projects. Their woefully inadequate Reserve Fund balance was not something that could be blamed on the Developer!

Don’t make these mistakes at your Association. Reserve projects don’t care if your Association is financially prepared. Common area repairs & replacements will arrive with alarming regularity as the Remaining Useful Life (RUL) of each component approaches “0”. So, learn the facts. The scope and timing of your Reserve projects can be quantified. The strength of your Reserve Fund can be measured. A Reserve funding plan can be crafted to set your Association on a path to financial stability and timely repairs & replacements. Otherwise, your Association, in some future year, will find yourself in similar shoes, without enough cash. And that will tempt future Boards to call their attorney about aiming a lawsuit in your direction!

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