In recent months, headlines from Florida have brought increased attention to the rising cost of condo ownership. Legislation requires condominiums of three or more stories to conduct structural inspections and mandates reserve funding for all structural assets, so condos can no longer vote to waive or partially fund reserves. Additionally, these inspections and reserve funding plans must be prepared via a professional reserve study provider. Combined with decades of improper reserve funding, underfunded reserves, and deferred maintenance, these requirements have created the perfect storm.
A recent article from The New York Post reported that buildings over 30 years old have seen property values plummet 22% in the past two years. The root of the issue? Underfunded reserves. Following the tragic Surfside collapse, the State of Florida passed several pieces of legislation, including mandatory reserve funding. In response, insurance companies and lending institutions have increased scrutiny of condo finances and property conditions to mitigate risk. Insurance premiums have skyrocketed, and more than 5,000 associations nationally have been blacklisted by Fannie Mae.
Legislation, along with stricter insurance and financing requirements, has become necessary to help guide communities to physical safety and financial success. However, as seen in Florida, condo ownership has become unaffordable for thousands of residents. The combination of underfunded reserves and significant deferred maintenance has had dire consequences on the real estate market as many Floridians have become financially strapped and look to move.
What Happens When Reserves Fall Short?
When an association has no plan to address capital projects, it invites risk. Most notably:
- Deferred maintenance that turns minor issues into expensive emergencies – What seems like a small issue today will most certainly become a bigger one tomorrow.
- Financial stress and tension between boards and homeowners – Poor planning increases scrutiny and disagreement over tough financial decisions that lie ahead.
- Significant increases in reserve contributions – Florida condos that are required to comply with mandatory funding must increase reserve contributions by an average of 146% to ensure adequate reserve funding moving forward.
- Special assessments – For condominiums that need to address critical structural issues in Florida, it is not uncommon for individual owner assessments to be in the $10’s of thousands.
- Declining property values– Today’s buyers are more aware than ever, steering clear of troubled communities
Neglecting long-term financial planning is a cycle – one that’s hard to break.
Breaking the Cycle: A Path Forward for Every Community Association
While the impact on the real estate market is most tangible in Florida, it serves as a blueprint for communities nationwide. A proactive approach to capital planning today can help you avoid the cost of underfunded reserves decades down the road.
Approach reserve funding and annual budgeting to reflect reality
It begins with having a professional, and recent, reserve study. Reserve studies serve as a guide – helping boards understand how much a project may cost and when to expect it to occur. It also recommends appropriate annual reserve contributions to cover these related future expenses. Maintaining any community is costly. Incorporating the true needs of your association, as outlined in your reserve study, into your annual budget is prudent and less pricey than the long-term hidden costs of underfunded reserves.
Communicate with “why” – not just the “what”
When residents understand how the annual budget protects their largest investment, they are more likely to support the board’s financial decisions. Transparency is key. It builds trust, and trust keeps communities highly effective at addressing the future.
Use Florida’s experience as a benchmark, not as an outlier
Your state may not require reserve studies or mandate reserve funding. But the risks are still real. Underfunding reserves is a national issue and acting now – before deferred maintenance forces the issue or it is legally required – positions your community ahead of the curve.
Prevention is Always Cheaper Than Reaction
Florida’s real estate challenges are not just a local issue—they are a lesson for us all. Underfunded reserves aren’t just a budgeting issue—they threaten community safety, financial stability, and long-term property values. By investing in their community today, associations can ensure a prosperous future.
