Why should I have to pay to fund reserves for projects that will not be done for years, and I probably won’t live here then?
This is a common question we’ve all heard. Many unit owners feel that reserves are savings for future projects, and making them understand the reality can often be difficult. Current unit owners are actually paying for the portion of the reserve components that they are using, or consuming, during their time of ownership.
For example, assume Charlie Condos buys into a condominium unit just after the pool is refurbished. Charlie has a beautiful, essentially brand new pool finish that should last 20 years. If he lives there for 10 years, he will have consumed ½ of the pool marcite’s usable life. By funding reserves, Charlie is actually paying for the half of the replacement cost that he used during his tenure there. If there are no reserves, then poor Frannie Follower, who purchases from Charlie, ends up paying for all 20 years of consumption, rather than just the 10 that she used.
Lastly, remind unit owners that this works both ways! If the unit owner is Frannie, wouldn’t she rather buy into a condo with reserves, so that when that pool project is completed, she only pays for her use of 10 years, rather than hers and Charlie’s? Also, with no reserves, Frannie is probably also going to paying a large special assessment, or loan interest if the association has to borrow monies to complete the required project.
Reserve are an important part of the financial health of a condominium, and their importance should not be minimized.
-Karen Danzinger, CPA, LCAM
Orchid Management Solutions
