Reserves

At our Board meeting this evening, the Board approved the 2011 budget that stops the funding of our reserves for the immediate future. Apparently, because we are 140% funded, there is no need to fund reserves and the money can be used elsewhere, I presume. Our normal monthly expenditure for feeding the reserves was $8100 or roughly 20% of our monthly expense.

We are a private gated community and two of the reserve items, sewer and major utility repairs were removed as a reserve line item. Being in California, we are in earthquake country and if one were to hit, we have no monies repair or fix the sewer and/or water. All the other utilities would covered by the individual utility companies.

Were they right in their decision or should reserves continously be funded, but maybe at a lower rate?

Glen

The two reserve studies I am comparing are from 10/07 and 11/09, both from the same reserve firm. There are major differences in Current Average Cost between the two reports, and the two of the major items left off from the 2007 study were the wood fences and the major utility reconstruction.

No we don't have earthquake insurance, and the current board insists its too expensive.

One criteria for the Reserve fund is that the item have a "measurable life" - our water system is not in the reserves because if that blows, there will either be county intervention or a SAD thru the township. We could never save up enough to replace that. We do, however, have $100,000 in the reserves in case the main holding tank needs replacment. (never mind how we'd get it into the building, ye gads, probably have to remove the roof)

Richard,

If anyone in your association tries to sell their unit, and the buyer is trying to get a loan, the underwriter will more than likely deny the loan application. Since you association does not have earthquake insurance, and your reserve is not large enough to cover all damage from an earthquake, the underwriter will want to see 10% of gross income be placed in the reserve.

Also, I am recommending to all my associations that can afford earthquake insurance to purchase it. While earthquake insurance is expensive, the overall price has gone down considerably over the recent years. I had one association that the Board of Directors did not want to purchase the earthquake insurance, but the homeowners did. We ended up having a ballot vote on the topic, and the homeowners agreed to pay an extra $25 per unit to help offset the cost of the earthquake insurance.

In regards to the HOA documents, a property management company is required to be transparent to the Homeowners and Board Members. While there is certain documentation we are not allowed to show Homeowners, a Board Members are allowed to see any documentation involving their association. I would recommend that you set up an appointment with your management company with a list of the documentation you would like to review.

Richard, we are the Register Agent for all the HOAs we manage. The records of the association are available for viewing at our office. It requires making a request for what records want to be viewed; an acceptable reason for viewing (not for gaining information for solicitations, etc.); a date and time is arranged within 5 working days; and there is a charge for our time to pull records, file afterwards, and monitor while records are being viewed (so that members do not remove and/or steal records). We also will make copies upon request at the cost of copies plus our time.

Richard, you have a valid concern "if a sizable quake hits and damages our infastructure, sewers and water lines, we wouldn't have the resources to fix. Even if we purchased earthquake insurance, would the company pay when it came down to settle. I remember the Northridge quake anda number of insure went out of business or left the state."

Make sure you have insurance with a large insurance company with a good record. Reserve fund budgeting is separate from costs which needto be covered by insurance.

Ryan

I do have a contact with Travelers from a CAI trade show I attended last month. Our current PM and management company prefers to conduct business in secret without homeowner input.

The Finance Committee which is chaired by the Treasurer presented the 2012 budget to the Board in Executive Session and they approved it. It provided for not funding the reserves which was against the recommendation of the Reserve Company. Guess will just have toi wait until next month.

Yes there are tons of these type companies out there, a simple Google Search of "reserve studies" will get you a list. We used a local engineer for ours.

Here is a url that might be useful: http://www.reservestudy.com/pdf/National_Standards_4-04.pdf

Mark,

The $2.7M comes from what it would take to replace all the Assocation asset at the end of its useful life. If they fund at the current level, we would be short at least 400K. The reserve study said to increase reserve spending by 2% every year until year 20 and then at an increase of 3%.

Mark

Our problem is we have a treasurer that knows nothing of finances reading a report that says TODAY, we are 140% funded, but doesn't know how to interpret a reserve study. She thinks that we won't need any more money.

Sharon,

Every asset has a useful life. The reserve fund is for replacement of assets when the "useful life" has ended. Just like a h/o replaces their refrigerator when it just doesn't work anymore. Insurance is for replacement of everything in case of a catastrophic occurrence.

Richard:

As you said, it sounds like you have a Treasurer that does not really know what they are doing. All you can really do now is take that into account at the next election.

Sharon

It depends on the type of Association you are. Are you a condo, townhome or single family home community. Most likely you will have assets that will need to be replaced over time. The purpose of having a reserve plan in place is to plan for the future. It's easier for each homeowner to put aside $15--$20 a month aside to set up reserves than thousands when the item has to be repaired or replace.

That's wise to look at several different reserve specialists and look at what they do and what they can offer an Association.

SharonB6:

Reserve Studies are a great tool. I always recommend that the reserve studies are done by a professional company. A reserve study is a great tool for budgeting your future major expenses.

In California, Homeowner Associations are required to have a reserve study done every three years.