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Signs of an ailing community association

Assessments stay the same, year after year. No one likes to pay assessments, but you’re not doing members any favors if you don’t raise dues. Your costs are rising, and the building is wearing out. Eventually, a big repair or replacement project arises, and there’s no money for it. Or the property starts to look shabby, and market values go down.

“Sometimes, boards don’t raise assessments for political reasons,” said Mark Stelter, vice president of Itasca Bank in Itasca. “They don’t want to make their neighbors mad. Sometimes, it’s because of lack of information. They don’t have a reserve study, so they have no idea how much work needs to be done in the next three to five years. They make an arbitrary decision how much the assessments will be.”

Remedy: Complete a reserve study, which is a long-range repair-and-replacement plan, then create a realistic budget. Assessments should at least go up by the cost-of-living index, Stelter said.

Reserves are dwindling. Boards under pressure to keep expenses down often slow or halt contributions to the reserve account. Worse yet, they spent it.

“A key sign that an association is in poor financial health is they pay their operating bills first and only pay the reserves if there is enough cash left at the end of the month,” said certified public accountant Chris Nyborg of Nyborg & Co. in Batavia.

“It’s especially worrisome if reserves are going down and no projects are being done,” Stelter said.

Another bad sign is borrowing from reserves to pay for unplanned expenses or operating costs, said Christine Evans, regional vice president of Associa Inc. management company in Schaumburg.

“It’s usually done with good intentions of payback, but there isn’t a definitive plan, and it doesn’t happen,” she said.

Remedy: Review your reserve study to see how much you should be setting aside every year. Raise assessments to cover that amount. Make the contributions. If you don’t, you’re looking at a pricey loan or special assessment when the next big thing breaks down, Nyborg said.

Owners aren’t paying dues. Delinquent assessments have a major impact on an association’s fiscal well-being, Nyborg said.

“If several owners are not paying their assessments, it causes the association to incur legal fees pursuing them, and they don’t receive the cash flow from those delinquent owners,” she said.

“If you’ve got huge delinquencies and no reserves, you don’t have the money to do anything except the most basic of repairs (and) maybe keep up the insurance and take care of some life-safety issues,” Stelter said.

Remedy: Establish a firm collections policy and apply it to everyone. Move quickly. The longer you wait, the less likely you are to collect anything, said Marcia Caruso, president of Caruso Management Group Inc. in Naperville.

“Give owners options so they can pay online, by credit card, by mail and by auto-debiting their checking accounts,” she said.

The checking account often runs short. It’s expensive not to have money. If you don’t pay your bills on a timely basis, you incur late fees. Utility companies will require deposits. Minor repairs, if unattended, grow into major projects or even emergencies.

Remedy: To improve cash flow, make sure the budget accurately reflects your expenses. Follow your collections policy.

“You have to set assessments at what the property needs, not what you think owners can afford to pay,” Caruso said.