Summit Ridge: A 3 Percent Cap, a Three-Year-Old Reserve Study, and a Roof
Summit Ridge is a 120-unit association whose fiscal year begins January 1. The draft operating budget is $1.15 million. The reserve study, three years old, calls for $180,000 per year of reserve contributions, but the board has funded $110,000 for five consecutive years; it projects a $640,000 roof replacement in year three, and reserves now hold $310,000. Delinquencies total $96,000, or 14 percent of annual assessments. Insurance premiums rose 22 percent. A board faction wants to cap the assessment increase at 3 percent 'because owners are struggling' and pay for the roof with a special assessment 'when it is actually needed.' The bylaws require budget adoption at least 30 days before fiscal year end, and any increase over 10 percent requires a membership vote.
1. Identify and quantify the financial problems in the draft budget. What does the board owe the owners?
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Three separate problems are hiding inside one document.
1. Reserve underfunding is cumulative, not annual. The board is $70,000 per year below its own plan for five years - roughly $350,000 of deferred funding. That shortfall does not disappear; it moves into future years at construction-cost inflation.
2. The roof consumes the entire reserve, leaving zero for anything else. At $110,000 per year for three years plus the current $310,000, projected reserves total approximately $640,000 - exactly the roof estimate and nothing more. Paving, siding, or a mechanical failure in the same window becomes an immediate special assessment. And the study is three years old: rebidding a roof today commonly lands 10 to 25 percent above the study figure, which converts a balanced projection into a six-figure gap.
3. The revenue line assumes 100 percent collection. A 14 percent delinquency rate means the budget should carry a bad-debt allowance and a conservative collection assumption, not full assessment income.
The fiduciary point: a board may choose a funding level, but it must choose it knowingly and disclose it. Presenting a balanced-looking budget that assumes an unnamed future special assessment is a misrepresentation of the association's position to the people paying for it.
2. The faction wants to hold the increase to 3 percent. Walk the board through the mechanics and the consequences.
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Start with arithmetic, then with process.
Arithmetic. Add the 22 percent premium increase, any contractual wage and utility escalation, and the reserve contribution the board is willing to defend. If that total exceeds 10 percent over the prior year, the board has no unilateral option - the bylaws require a membership vote, and the board's preference cannot substitute for it. Also confirm whether the reserve contribution sits inside or outside the capped assessment; many documents treat them together, and assuming otherwise is how associations end up in litigation.
Consequence of the 3 percent path. Model it honestly: cut reserve funding further, say to $80,000 per year. Reserves at the roof date become roughly $550,000 against a $640,000 project - a special assessment of several hundred dollars per unit before any cost overrun, and no reserve left for the next component. The 'wait and see' option does not avoid the cost; it concentrates it, hits owners who sell in the interim with nothing and owners who remain with a lump sum, and often forces borrowing at association rates.
Recommendation. Bring a phased plan: a multi-year schedule that steps the reserve contribution up toward the study figure and updates the study now. If the increase exceeds 10 percent, submit it by written ballot with a one-page explanation showing the roof math, the special assessment alternative per unit, and the consequence of each choice. Owners tolerate a documented number far better than a surprise.
3. Delinquencies are at 14 percent. What collection framework should the manager recommend?
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A delinquency rate that high is a policy problem before it is a legal one. Owners pay reliably when the rule is uniform, predictable, and visibly applied to everyone.
Build a written policy with an escalation ladder: statement and reminder, demand letter, pre-lien notice where required, lien, then suit or referral to a collection agency or foreclosure as permitted. Check state law for mandatory pre-lien notices, lien priority (including any super-lien for assessments), permissible interest and late fees, and whether fines can be liened at all.
Keep discretion structured. Hardship payment plans are legitimate, but they must be written, time-limited, and contain a default clause - and every variance should be approved by the board and the reason recorded in minutes. The manager should never be the person selecting who gets relief; that is where discrimination claims begin.
Separate the budget question from the collection question. Budget a realistic collection rate now, and report delinquency aging to the board monthly so trends surface early.
Communicate the policy. A short notice explaining how collections work and that payment plans exist reduces both delinquency and resentment. Owners who understand the ladder climb it or call before the lien.