These days, just about everyone is cutting back on spending, either to make ends meet, saving for something special or a rainy day, paying off debt or funding their retirement. Consumers are cutting coupons, looking for deals and keeping a close eye on their dollars. Whenever costs or fees go up and consumers have to pay more, they invariably get upset.
The last thing that residents want to hear is that their association fees or common charges are being raised. Realistically though, to keep a building properly cared for and financially solvent, fees will need to be raised regularly and fairly. Not doing so can force a board to impose a large assessment or a big maintenance increase because they haven’t put enough money aside for a major repair or improvement project that has arisen.
In recent years, both Fannie Mae and Freddie Mac (the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation), government-sponsored enterprises that control the secondary mortgage market, have passed stricter lending guidelines for condominium financing. Among those rules, the Federal Housing Administration (FHA) now requires that condominiums set aside at least 10% of their operating income towards a capital reserve account. For example, if the annual budget is $200,000, then the association must set aside $20,000 for its capital reserve fund.
Just as an individual needs an emergency fund in case of a job loss or an unexpected car repair, an association needs a financial reserve to take care of such major repairs as roof leaks, plumbing problems or foundation issues.
A Community Associations Institute (CAI) study in 2012 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.