When prices rise, owners may be pleased to see their home values climb. The association, however, feels the other side of inflation. Nearly every line in the budget is affected, and long-range plans built on old cost estimates can fall far short.
This article is general information and is not legal or financial advice. The association's attorney and financial professionals should be consulted.
How Rising Costs Affect an Association
Higher prices reach an association in many ways:
- Contract services. Landscaping, pool care, janitorial work, and security reflect higher fuel, labor, and material costs.
- Repairs and maintenance. Materials, equipment, and skilled labor cost more, and supply delays can push projects back.
- Utilities. Electricity and water bills for common areas tend to follow energy prices.
- Insurance. Property and liability premiums can rise at each renewal, and deductibles may change as well.
- Management and professional fees. Accounting, legal, and management costs are adjusted over time.
The largest risk is in long-term planning. A reserve study prepared years ago may have estimated a roof, paving, or seawall project at a cost that is no longer realistic. If the estimate was never updated, the reserves set aside for it may cover only a fraction of today's price, and current owners are left to make up the difference.
Update the Reserve Study
The first step is an accurate picture of what lies ahead. A reserve study lists each major component, estimates its remaining useful life and replacement cost, and calculates a yearly contribution. When construction costs rise quickly, an outdated study understates what is needed.
For condominiums, reserve rules are found in section 718.112(2)(f) and (g) of the Florida Statutes. Buildings three habitable stories or higher must have a structural integrity reserve study (SIRS) at least every 10 years, and required reserves for SIRS items may not be waived or reduced. Many homeowners associations are not required by law to have reserves, but their roads, gates, walls, and amenities still wear out on a predictable schedule. More on this subject can be found in
consequences of not having cash reserves.
Plan Capital Projects Early
Large projects should be planned years in advance. Current bids should be obtained before the budget is set, and the cost of waiting should be weighed. When prices are climbing faster than reserve contributions, delaying a project can make it more expensive, and deferred maintenance often causes further damage.
Options for Funding Large Projects
Three tools are commonly used, alone or together:
- Higher reserve contributions. Gradual increases spread the cost across owners over time.
- Special assessments. A one-time charge collects the shortfall quickly but can be a heavy burden on households.
- Association loans or lines of credit. Borrowing allows a project to be completed now, with repayment spread over several years through assessments.
Florida nonprofit corporations generally have the power to borrow money under section 617.0302, but the governing documents may limit that power or require an owner vote. For condominiums required to have a SIRS, section 718.112(2)(f) allows reserves for SIRS items to be funded by regular assessments, special assessments, lines of credit, or loans, and a special assessment, line of credit, or loan for that purpose requires approval by a majority of the total voting interests.
A loan is not right for every association. Interest adds to the total cost, lenders review the association's finances and collection history, and the debt is repaid by owners. Interest rates, fees, and terms should be compared with the expected cost of waiting. The association's attorney should review any loan documents before they are signed.
Communicate With Owners
Rising assessments are easier to accept when the reasons are understood. Updated reserve studies, current bids, and a clear comparison of funding options should be shared with owners before decisions are made. Owners who see the full picture are more likely to support a plan, whether it calls for higher contributions, a special assessment, or a loan. More background can be found in
understanding the importance of reserves for your condo or HOA.
Planning Help for Your Association
Budgets, reserve study coordination, bid collection, and funding comparisons are prepared for the boards of the communities managed by Condominium Associates. To talk about your association's long-range plans,
contact us.
