It is probably best to utilize a continual reserve funding mechanism, like a transfer fee or an allocation of monthly charges, to fund reserves. Complementing this is a reserve study supporting the annual level of funding to owners and other key stakeholders.
In lieu of that, some properties simply gather the necessary information the property will be required to provide for this purpose over the next few years. The concept is to determine the need and the annual requirements so the board can make provisions to fund. The problems arise when unexpected projects come along like projects to keep up with the work neighboring buildings are doing or new construction that interferes with unit owners seeing the past level of value in their units. These types of projects are rarely considered along with the needed upgrade to systems and the requirement for an assessment or multi-year capital improvement plan.
Many buildings find it easiest to not adequately plan to have adequate reserves, although their appetite for improvements is not fazed. We have seen instances where funding provisions established by prior board members fall by the wayside as funding day-to-day operations surpass in importance.
To eliminate or reduce monthly increases, especially due to fear of a perceived reaction by owners, the budget is customized to lead to decreasing the amount that is available to fund future projects. Besides leading to increased debt or additional assessment when there are insufficient funds for a needed upgrade, the undercutting of capital funding is not something that needs to occur.
Failing to continually fund your reserves can have other serious consequences. Sophisticated prospective buyers can potentially avoid a property which then negatively affects the property values.
Even when a board has been diligent with funding operational needs, the unexpected needed or anticipated projects by unit owners can drain reserves previously set aside. These all dampen the enthusiasm to set aside sufficient reserves as further loans or assessments are needed to maintain the property.
To remedy this, first, try to understand future needs and assure funding is occurring. Add an element of surprise into your expected needs to cover the items that are necessary and yet not in the plan. Lastly, stick to long-term capital funding plans over time regardless of changing board members.
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