Overcoming Resistance to Funding Reserves

The Problem of Underfunding

One of the most famous books of the last century is Dale Carnegie’s “How to Win Friends and Influence People.” Published in 1937, it has sold millions of copies (and it’s still selling) and was on the New York Times best-seller list for 10 years. It addresses two things we all want to do better in our family relationships, among our neighbors, with our staff and our bosses. But almost nowhere is winning friends and influencing people more important than when matters connected with your condominium or planned development association arise. The way we live and interact together in these communities is a vital part of our everyday lives. Plus, it’s worth reminding ourselves that our personal views on how our association should be run and what the “rules” should be are not simply incidental issues that are easily dealt with. Quite the contrary.

As you may have already guessed, I’m “going somewhere” with this. And where I’m going is into the reserve fund area, drilling down to a specific element—funding—and from there going one layer deeper right into bed rock…the matter of setting monthly contributions amounts.

First, a startling statistic—consider that a 2006 study of representative condominiums in California found that, on average, common-ownership properties were only 44 percent funded. That means that (again, on average) properties had less than half the funds required to carry out the major repairs and replacements called for in their reserve plans.

Why? In some cases we might surmise that the plan itself was poorly put together—the funding schedule was incorrectly worked out. In other cases, there may have been delinquencies, i.e., uncollected (or uncollectible) assessments payable by the unit owners. But it seems much more likely the most prevalent reason is that funding required to meet a 100 percent-funded level was consciously rejected by the boards and by the owners.

How come? We think it’s because two powerful forces are at work: One of them is the reluctance of individuals, be they owners-at-large or individual board members, to agree to higher monthly payments for all the usual reasons. The other one is that the boards, even when they know that the need for an increase is real, are loathe to get into a predictably unpleasant hassle with owners at the Annual General meeting. It’s easier to say “Let’s deal with it later,” or “Let the next board deal with it.”

A huge mistake. When your property gets into an underfunded position, you’re on a slippery slope. Not only will a loan or a special assessment loom in the not-so-distant future, but the fundamental underfunding problem will not have gone away. A need to pay the loan, plus the need to raise fees at the same time, is the fate that awaits. And that’s a very tough row to hoe.

What to do? We have a suggestion. It’s not infallible. It will succeed sometimes, but not always.

Breaking Down Resistance

Before we get into that let’s describe what we mean by “resistance to funding plans.” Well, what’s the first step to increasing unit owner’s monthly fees in order to get more money into the reserve fund? It’s usually initiated by a reserve plan submitted by a Reserve Specialist (RS). The RS has found that in order to meet anticipated expenditures for repairs and replacements, the projected balances in the fund will have to be higher. And to attain these higher balances the RS would have recommended a level of monthly contributions from owners high enough to bring the reserves up to where they should be.

Simple enough, isn’t it? Well, yes, as long as all the board members agree with the higher amounts, and as long as the owners, when presented with those numbers, all nod their heads in agreement.

First let’s deal with the problem of one or more board members who try to roadblock the resolution to raise contributions. Seems to us there may be two reasons for it. One is that they themselves, personally, don’t like the idea of paying higher fees. The other is that, while they themselves, personally, aren’t against it, they know that some of the unit owners will be; and they don’t want to get involved in a potentially unpleasant free-for-all with their neighbors.

If the majority of the board buys into the fee increase, well, the majority rules and motion passed. But if you and other like-thinking board members are in the minority, what then? You’re on the receiving end of other board members’ arguments that paint a picture of the hue and cry the board will face. (They have a point, by the way. The owners won’t like it. But we’ll deal with that later in this article.) Your colleagues suggest that the board should fiddle with the recommended amounts to bring them down to a more acceptable level or what they think will be a more acceptable level. They try to persuade you that the upcoming Annual Meeting will run along like a schooner going before the wind.

The board will score again! Or will it?

Legal Approach to Reserve Funding

Consider that the board has already bought into the notion that the reserves will, by their decision, become (or remain) underfunded. If that scenario isn’t distasteful to you, it should be. Look at what a highly respected accounting institute says.

The American Institute of Certified Public Accountants’ Audit and Accounting Guide for Common Interest Realty Associations (CIRA) recognizes the need for funding of reserves stating that “Above all, boards of directors need to be aware that the goal of whatever policies they set should enable them to meet their fiduciary duties to maintain and preserve the common property.”[1]

We might say, therefore, that when board members are tempted to fiddle with the recommended numbers, one of the members should put the above quote on the table. Our hope is that the recalcitrant members would audibly “gulp” and surrender—all at the same time!

The above, folks, is what I might call the “techno-legal” approach. But we promised to pull Dale Carnegie out of our hat to use the winning friends and influencing people strategy. Let’s introduce one or two of his widely-accepted teachings right here.

One in particular that we think would work well here is anticipation. That is, anticipating that some of your fellow board members may want to fiddle; i.e., water down the recommended level of contributions. If you anticipate, you can prepare. And you’ll be following Dale Carnegie’s advice…”Dramatize your ideas.” Here’s how.

Before your board meeting, use a copy of your Reserve Specialist’s spreadsheet that provides the recommended funding level and water it down yourself. Reduce the planner-recommended contributions increase by, say 50 percent. And see what happens. (This means reducing the increase by 50 percent, not the entire reserve fund contribution amount). What you’ll arrive at is a string of annual reserve balances that are inadequate. With those numbers in your pocket you can confidently demonstrate that the watering-down idea should be quickly dismissed. Dale Carnegie advocates “Throw down a challenge.” What could be more challenging than asking your fellow members if they really want to go to the Annual Meeting knowing that their watered down plan is decidedly dangerous.

Game over? By no means. We’ve had our little skirmish at the board level. Now we start the next world war—getting the plan approved by the owners. Let’s look at tactics that could help to reduce owners’ objections to a required contributions increase. We’ll see how we can win friends and influence people.

The Right Answers to the Wrong Excuses

Let’s first explore what reasons people give when they do not want to see the plan adopted; i.e., in order to escape the dreaded passing of a motion to demand higher monthly payments.

• The favorite. “I may move some day and I won’t be able to recoup the money I’ve paid into the reserve fund.”
• Or…“I just can’t afford it. Everything gets more expensive, and this is one increase we can avoid.”
• “How do we know the plan is a good one? Who’s to say all the repairs on your computer spreadsheets are actually going to be required?”
• “Last year they put new carpeting in the South Wing but did nothing where I live. I keep paying for improvements that benefit others”.
• “What’s the worst that can happen if we don’t raise the fees?”
• “The board is incompetent, dishonest, careless or unintelligent. Or all of the foregoing.”

An effective response to the first one might be something like this [2]:

It’s true, as the saying goes, “You can’t take it with you,” whether it’s about moving or dying. But there is an obligation to pay our way as we go through our lifetimes. During the occupation of your unit, you have been responsible for part of the wear-out that constantly occurs. You have walked on the carpets, used the elevators, and been around while the winds blew and the rain came down and the sun shone, affecting the paint, the brickwork and the driveways. You have been cooled by the air-conditioning, warmed by the heating system, and showered by the hot water from the boilers. Money is required to bring all the elements of the property up to scratch, and to keep them that way. All that money is spent for your contentment and for maintaining resale values. Besides, if reserve contributions aren’t collected you would walk away some day and leave behind a community that had deteriorated and that had no money to pay for restoring it. Is that really what you’d like to do?

The second one — simply can’t afford it — is a toughie.

It’s not easy for people, at a public meeting, to say it, but if the property has a disproportionate number of senior owners, someone stating this might evoke a lot of sympathy. You might, then, want to say something like…

“Yes, on a fixed income, all price increases are hard to take. But the reality is that even though inflation has been relatively low lately, much of what the property spends its money on has seen more rapid cost increases. Some workers’ costs have risen by 15 percent over the last two years. We were in danger of losing our caretaker by not paying the going rates. The driveway repaving uses oil-based tar; so it’s much more expensive.

You know that certain items in your personal budget have zoomed upward lately—gasoline being a prime example. The alternative is to not do the repairs, to get less qualified help, to put up with an axle-breaking driveway. Then what happens? Your community begins to look shabby, selling a unit becomes difficult, the people who would have agreed to pay for better upkeep move out, and the spiral continues, downward.

The end result is that your investment—possibly your biggest single investment—goes into a nose-dive. The increase we’re recommending isn’t really an option. It’s a must.”

Our third item (the plan may not be good) should be easy to answer.

If the board has engaged a reputable planner with professional qualifications and an impressive client roster, this criticism should be put to rest quickly. But how, exactly, do you do it?

It depends. If you get the chance to meet with the dissenter one-on-one you can trot out the specialist’s detailed plan. Point out the exhaustive list of components. Describe how each one is individually analyzed regarding its life expectancy and the costs of repairing or replacing it. Show how the predicted opening and closing balances are computed, including the interest on money percentage. And, most importantly, demonstrate that if the recommended funding amounts were watered down the balances would become perilously low—maybe even “negative.”

If this objection surfaces at a general meeting, you won’t have the time to go into this much detail but (unless you’ve prepared a flip chart or PowerPoint presentation beforehand) you’ll just have to do it with well-rehearsed words. In fact, why not even do a “What if…” that uses lower funding numbers? That would convincingly illustrate what the balances would look like.

Here’s another idea. Have the reserve planner attend the meeting to explain how he or she went about creating the plan. This idea assumes the planner is a reasonably good speaker and can hold his or her own with the audience. And it assumes as well that the planner’s presentation has been thought through ahead of time. It’s not the place for ad-libs or fancy-footwork. One downer…the planner may charge a fee for attending the meeting if that task wasn’t part of the contract with him or her. It would be money well-spent, we believe.

Now we come to the fourth and fifth items on our list, above.

Both of them can be handled easily. The notion of paying for someone else’s benefits—well, it happens all the time. The community a mile down the road gets a new park. Bus service in the south end of town is improved and you live in the north end. Your kids have finished school but you still pay school taxes. Our point? Your association is a “community” just like a town, a county, a state or indeed a nation. The argument that every payment must bring direct benefits to the payer is indefensible. Case closed.

The question about the worst that can happen? The answer is…your community will face a quickening downward spiral. Dilapidated buildings and grounds, more renters and absentee unit owners. Lower resale values, and in time virtually valueless assets. These scenarios are, regrettably, not fictional. But they don’t “just happen.” They happen precisely because when the need for adequate contributions is incontrovertibly demonstrated, people still prefer to go into denial.

Finally, the last “beef.” And a nasty one it is.

On a purely technical note, the answer to attacks on the board of directors could simply be that rules are in place in the association’s charter, (or CC&Rs or constitution or by-laws) that explicitly describe the processes related to the election and removal of directors. These should be at hand and referred to if necessary at the appropriate time.

But quoting from the constitution is not nearly as good as winning over, or at least mollifying, complainers with the kinds of approaches that Dale Carnegie proposes. There’s a long list of them and they include the following:

• Using a person’s name when you address him or her.
• Listening. Demonstrating that the person’s opinions merit your attention, at least.
• Admitting it, when the board has indeed blundered, and adding what you intend to do to ensure it won’t happen again.
• Making the other person feel important and do it sincerely.
• Asking questions. Making sure you understand exactly what the complaint is about. Asking what your complainer would have done under the same circumstances.
• Dramatizing your ideas with examples, analogies, charts, and quotes from authorities. We previously covered this fully where we stressed the need to anticipate questions and objections. If you anticipate, you can prepare!
• Referring to the more agreeable parts of the grievance before explaining why the other parts may not be justified.

Not to be overly “touchy-feely” about it all, there are times when you must close down a debate and state that the parties must finally “agree to disagree.” A board must walk the line between acquiescence and dictatorship. The board has been elected to head up a democratic, republican society (if we can use the two words in the same sentence)—not a kingdom. The board members’ constituents are also their neighbors, and a happy community isn’t possible where over-the-fence battles prevail.