Maintain reserve funds now or pay later

There is a pressing concern regarding Owners Association (OA) funds that needs to be addressed immediately.
When the Dubai Land Department's Real Estate Regulatory Agency (Rera) issued directives for OAs, it required that all OAs must establish two funds - a general administration (general fund) fund and a reserve (sinking) fund.
The general fund is to be used for daily maintenance, utilities, management, insurance premiums, master developer charges and any other expenses that are of a recurrent nature.
Reserve funds, on the other hand, are to be used for capital expenditures, or those that do not occur on a regular basis. Reserve funds would cover items such as repair, renovation or replacement of the roof, external cladding, windows, balconies, parking areas, elevator equipment, fire safety systems, mechanical equipment, common area A/C systems, pools, gym equipment, lobbies, stairwells and other common elements of the property, as they come to the end of their expected life cycle.
The directives require that an OA budget be prepared each fiscal year, the general fund for a one-year period, and reserve fund for a minimum of 10 years (international best practices call for 15 to 30 years at a minimum).
Independent studies
The reserve fund must be based on an independent, third-party reserve study of the costs of renewing or replacing the common elements over the course of the chosen period. Over the last few years, the Dubai Government has been licensing inspection/reserve fund companies to conduct such studies. However, the best practice standards for this type of study have yet to be established here.
To those working in this field, it is clear that most OAs do not have adequate reserve funds for future expenses and repairs. There were hundreds of buildings constructed in Dubai during the boom period in the early to mid 2000s. Almost all of them will be due for major repairs and renovations to the common elements within the next five to 10 years, especially considering the Middle East's harsh climate, and the challenge of substandard building quality that some buildings are facing.
What will happen when there is not enough money in the reserves for this work to be done? It is the OA's sole responsibility to handle all of the maintenance, capital expenditures and repair issues. How will the shortage of funds be covered? How will this affect the value of a property?
The current OA regulation allows for a "special service charge" to be imposed to cover any required expenditure that was not included in the budget. This means that owners will have to provide extra money for the work to be completed. For example, if the building's main A/C chiller breaks down in July and must be replaced, and the OA decides that it needs to implement a special service charge, and that each owner needs to pay Dh15,000 immediately to purchase the chiller, until the money is collected from all the owners, there is no A/C.
Consequences
If the owners willfully decide not to pay, cannot produce the money or the special service charge fails to raise enough money to fund the capital expenditures and repairs, there will be major consequences. Failing to maintain common areas, such as the look of the property, pool, A/C systems and other facilities will result in a dilapidated building that will decrease the value of the property.
The lack of repair and maintenance to components such as fire alarm systems, elevator equipment, A/C systems and balconies, will result in safety hazards that could lead to the loss of life. This would likely render the property uninsurable, which would also make it unmortgageable.
All of these issues will detract both investors and tenants from the property. Now imagine this happening to hundreds of properties at the same time and what impact this will have on an already fluctuating Dubai real estate market.
Preventive measures are always better than reactionary ones. So now is the time to address the issue of OAs having adequate reserve funds, and implement effective standards.
The author writes on behalf of the Middle East Real Estate Inspectors Association. Views expressed are his own and do not reflect the newspaper's policies.