CAI-NJ March 2022

SUCCESSFUL BOARD... from page 30.

replacement that is expected to occur twenty years down the road may seem like an easy item to push off. This especially becomes prevalent when there is pressure to maintain low maintenance fees or tackle other less prevalent projects such as land- scape enhancements, etc. Despite all of this, ensuring that the association has sufficient reserves is one of the most important financial tasks that a board will face during their tenure. Owners and residents should pay for their share of the common elements over time, as they receive a benefit from them. For example, asking a new owner to foot the bill for a large capital project creates a disconnect between the person benefiting from that capital component, and the per- son paying for it. Would it be fair for a new owner to be charged with a special assessment for a roofing proj- ect immediately upon moving in when they received no benefit or usage from that roof throughout its useful life? The prior owner should have contributed their share of that roof’s replacement costs ratably over the roof’s life. This is what is referred to as the “pay as you use approach”. Using this method helps to ensure that every owner is paying for their share of the common elements as they use them. Once a board understands the importance of adequately funding the replacement fund, the next ques- tion is “what does adequate funding mean”? Due to its importance, it is always recommended that boards uti- lize a licensed engineer to help them determine the term adequate funding. Engineering firms can provide a thor-

benefits to an association, including but not limited to: • Allowing boards to properly main- tain the structural integrity of the site • Maintaining home values • Reducing the likelihood of unfore- seen special assessments, loans, etc. • Helping to maintain steady, pre- dictable increases in maintenance fees • Promulgates the “pay as you use” approach Mismanagement of an association’s replacement fund is one of the most common pitfalls that can cause finan- cial strain on an association’s owners. This tends to be a common pitfall due to it is not always the most pressing issue. For example, saving for a roof

owner within the association. As such, it is never recommended to place the association’s funds into any type of investment that places the principal at risk. Despite the lower returns, debt securities such as bonds, certificates of deposit, and savings and time deposits ensure that the association cannot “lose” money. Documenting this approach in a formal investment policy will ensure that sound invest- ment practices are being carried out for many boards to come. Discussing how to manage large accumulations of cash safely leads us into the next discussion point: the replacement fund. A properly funded replacement fund provides multiple

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