Written by Chris Majerle, PCAM on January 20, 2021

Community Association Edition

Funding association reserves is often the first budget line item to be cut when it should be the last. Boards are reluctant to increase assessments for fear of an angry reaction from members and, in some cases, are unable to increase without an affirmative member vote. What does this mean to common ownership community homeowners—particularly in condominiums and cooperatives?

It means an increased likelihood of large special assessments or the inability to make repairs to major components like roofs, parking lots, and heating/air conditioning systems. And, when the repairs are of an emergency nature, residents are being displaced with increasing frequency because the funds can’t be collected quickly enough. Buyers are advised of the importance of inspecting the association’s reserve study and financial reports, but may not fully understand the relationship between the reserve study and balance sheet. And when you settle on that property, it’s too late. Some readers may already be owners in these underfunded communities.

But your future buyer may be getting educated in how to avoid buying in an underfunded community and that should be a wake-up call to take action now. Instead, common refrains are “We can’t afford to pay higher assessments” and “Why should we pay more when others are not paying at all?” Ask yourself if you can live with a leaky roof or no heat. Ask yourself if it will be easy to sell when the community is falling apart. Ask if property values will hold when the place looks shabby. The real question is “Can you continue delaying reserve funding while the property keeps getting older?”

As for carrying those who do not pay, it certainly is infuriating. We could go on for hours about what to do about this, such as making foreclosures easier, improving our priority lien for associations, etc. The fact is that, in Maryland, our legislature has always taken far more action to protect those who do not pay than those who do. So, until delinquencies are eliminated, those of us who pay will carry those who do not if we want to live in safe, well-maintained homes and want to protect and enhance property values. We will fund our reserves so repairs can be made when needed. And, yes, it will be painful.

Legislative Action

In 2020, the Maryland Legislature stepped in to require Maryland associations to have reserve studies and to fully fund reserves, but only in Prince George’s County communities. Don’t stop reading! As we write this post, legislation is pending to make that law statewide. So, if not in 2021, eventually it is likely to happen. Here’s what it says:

  • You will have a reserve study professionally-prepared at least every 5 years.
  • Your budget will be required to set aside the recommended reserve contributions.
  • If you must raise your assessments to do it, any restriction against the board increasing assessments without member approval is invalid if the increase is needed to fund reserves.

Having been through one budget cycle in Prince George’s County since passage, I can tell you as a manager, that it was a very different and often difficult discussion. However, for the first time in my 30+ years, budgets in the Prince George’s communities we manage were adopted across the board with adequate reserve funding. I believe this will lead to much-improved standards of living, safety, and security over the next five years and I hope the law helps those outside Prince George’s County adopt proper budgets in the years to come. I don’t like the government telling me what to do, but in this case, it made it easier for boards to make unpopular, yet financially-responsible decisions.