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When you think about it, we have safety nets everywhere. Emergency exits on airplanes, lifeboats on liners, fuses in our electrical systems, etc., etc. Why? Because we know that everything always doesn't go as it should. Airplanes crash-land, ships hit icebergs, and wires get overloaded.
How about your reserve fund? You hire a reputable Reserve Fund Specialist. The Specialist inspects the property and comes up with predictions on when repairs and replacement will be required, and how much they will cost. And you set up a schedule of funding so these things can be paid for when the time comes. What can go wrong?
Enter Murphy's famous line ... "If something can go wrong, it will". Things break down, or wear out, or cease to function, before they're supposed to. The cost of replacing or repairing them is higher than your Specialist expected. Your healthy-looking plan suddenly isn't doing the job and you're "in the red" ... or close to it.
Maybe your Specialist wasn't as competent as you thought - and we quickly add, that's a rarity. But a bit more likely is that he or she slipped up, when making the plan. Overlooked something, did some faulty arithmetic. Still not likely but possible. But most likely of all, mechanical or structural parts of your property simply did not stand up the way they should have. Kind of "nobody's fault, but it happened".
That's the cost end of things - how about the funding end? Well, the reserve fund plan included a funding schedule and it all looked good, at the time. But once in place, real expenditures began to vary from planned expenditures (we've already said that), but nobody was paying much attention. The predicted balances, had they been updated with new information would have looked sicker and sicker, and warning lights would have flashed. With no warning system in place, your property was up to its neck in quicksand before they realized it.
All right, we've identified three broad areas of cause - the plan was faulty, the property's components failed unexpectedly early, and the fund balances were not being monitored properly. Which brings us to ...
... our safety net theme. First question do you have one? The answer is "yes", you actually do. Two, in fact. Your fund needs an injection of money, where do you get it? One source - one of your safety nets - is from a financial institution. The other source is from your unit owners.
First, the financial institution. We're talking about borrowing. The kind of institution that usually springs to mind is The Bank. And it is, indeed, an option. But you may not know that there are firms that specialize in just the kind of loans we're referring to here. They know all about shortfalls in reserve funds, and they know all about owners' contributions and reserve fund spreadsheets and plans. You'd be surprised if you knew how many properties used their services.
So, there's one option.
The other source of funds is, of course, the Special Assessment. (We were about to say, "the dreaded Special Assessment"). It's safe to say that it's not a good day, when the Board announces that all unit owners must write a one-time (hopefully) check for some significant sum. No matter how it's explained a hue and cry is inevitable. It's bad tasting medicine, but if it's swallowed, it works!
Let's compare the Loan with the Special Assessment. The loan will almost certainly call for some increase in monthly fees. You'll need the money to pay back the loan, in stages. But the amount, each month will usually be tolerable because it's spread out over time. Part of the re-payments will be interest on the loan so the amount paid back, in total, will be higher than the actual amount required to fix the fund.
Another thing is that new owners coming in to the property will also pay the higher fees caused by the loan. Higher monthly fees have an affect on resale attractiveness, and that's a consideration.
With a Special Assessment on the other hand it's a "done deal". You get the money that's required, there are no extra costs associated with getting it, the fund is brought back to a healthy position and your crisis is over. On an ethical basis, the people that were there when the fund became ill are the ones that are paying to cure it, not new residents who had nothing to do with the shortfall.
There's no best way. Like many condo issues, some properties will see one alternative as better than another. You'll be able to choose which safety net is best for you only after you explore the pro and cons in light of your particular situation, and compare them. Nice to know they exist though. Agreed?
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