Collected Assessments and Established Reserves = Fiscal Viability

By Jim Digre

One of the biggest responsibilities that a condominium board faces is maintaining the fiscal viability of the association. The operating income of the association comes from the assessments paid by the unit owners and in the light of rising costs, it is inevitable that those assessments will need to increase, if only to keep up with inflation. However, no condo owner wants their assessment raised and there are some who blithely wonder just why assessments should ever have to go up. Well, now that we are in a time of financial crisis, when personal incomes are suffering, and foreclosures abound, the problem of fiscal viability verses assessments becomes an even greater concern to the Board and the association.

Because of the ongoing financial crisis, many boards are having a difficult time collecting some portion of the monthly assessments needed to run the association. When you pile on top of this a history of poor fiscal management, major problems for the community can arise that may take years of strict financial austerity to overcome. In parts of the country, some situations have gotten so bad that buildings that were once thriving condo communities are looking more like slum projects on the "bad side of town". Units get abandoned, repairs go undone, and general neglect of the property becomes the norm.

Hopefully we are starting to see a turnaround for the economy and those associations that are struggling will have the chance that things will get easier financially. In light of all this though, there are some associations that seem to go on weathering financial storms as if nothing was happening at all and I'm not talking about just communities full of rich people. I'm talking about those associations run by boards whose members truly understand their fiscal responsibilities.

The Illinois Condominium Property Act specifically lays out the responsibilities of the board and what they can and can't do. So, when elected, the first thing board members should do is to thoroughly acquaint themselves with the provisions of the act. The second thing is to read and digest the Decs and Bylaws of their own association. Since assessments are the life blood of the association, part and parcel to these documents is what the board can and must do to enforce the collection of past due assessments. In addition to the collection of assessments, establishing a workable budget that contains provisions for adequate reserves is critical to achieving the financial where-with-all to avoid a crisis when the economy implodes.

"Adequate" reserves is a nefarious statement that can be interpreted in many ways. Most commonly, because of Government lending guidelines, it is thought of as a minimum of 10% of the annual budget. However, those associations that stay viable and avoid special assessments approach their budget, assessment and reserve requirements in a specific and technical manner that addresses the actual needs of the association not just an estimated guess. Understanding that reserves are meant for scheduled repair and replacement of common area elements not "extra" money, separating them from the operating budget and the undertaking of a reserve study to see what they actually need financially is what creates a successful association that can "weather the storm".

If you are wondering what your association can do to improve its fiscal viability and avoid the need for special assessments,  e-mail me and I will happily send you a free report entitled "Reserve Study Know How". In this report you will learn how to do your own reserve study at a fraction of the cost charged by reserve study companies.