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Worst-Case Scenarios When the Reserves Won't Cover It

While there's ample warning before something calamitous happens in a community -- such as a major weather event, for instance -- that's not always the case. A bad situation can be made immeasurably worse when a building or association isn't economically solvent enough to weather an emergency, or when insurance coverage doesn't actually cover the ensuing damages.

Budgeting for the Bad

Any financially solvent condo association or HOA community has both an operating budget to cover the day-to-day expenses associated with running the community, and a reserve fund that's intended to pay for larger repairs and capital improvement projects. Still, you can’t plan for everything and not having enough funds in an emergency can be the downfall of most building communities.

It’s not just the weather that can cause concern. A hypothetical emergency could be anything from flooding without having proper flood coverage to fraud or malfeasance on the part of a board member, to massive legal bills because of a board member acting in bad faith and coming out on the wrong side of litigation. That’s why having a plan for such emergencies is vital for any condo association or HOA.

Other situations that may land a residential common interest community such as a community association or HOA in financial jeopardy include major capital projects that weren’t funded appropriately, being over-leveraged in terms of debt as a result of having borrowed too much, an increase in interest rates and a failure to pay down debt, or an unrealistic operating budget based on the board’s fear of instituting an increase in maintenance/common charges.

Andrew Lester, president of national community management firm FirstService Financial, says that in his 20 years in the industry, he has never seen an association go bankrupt, although some have come alarmingly close. “The development-owned condo associations were the ones most impacted by the economy,” he says. “It falls short when it cannot collect and have delinquency issues with its unit owners.” To combat this, an association may raise owners' fees on an annual basis, or try and get financing to help pay the bills.

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