RussR (Colorado)
Posts: 5
Posts: 5
Posted:
How large should a "contingency fund" be as a percentage of operating expenses ? By contingency fund a mean money set aside for unplanned emergencies; aka, General Reserve.
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Contingency Fund
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JimH (California)
Posts: 2
Posts: 2
Posted:
Wouldn't that depend on the projected cost of future expenses such as reroofing, painting, etc. Our general reserve was just found to be $400,000 in the red and we had to take out a loan to pay for badly needed roof replacement, paint, and wood repair.
RogerB (Colorado)
Posts: 5,067
Posts: 5,067
Posted:
RussR, there are two funds, operating and reserve, which must be maintained separately according to IRS regulations. It is up to the association to decide whether or not a contingency account should be included in either fund. I would not include this as part of either; instead I try to budget for realistic minimum income and maximum expenses.
To each their own,
Roger
To each their own,
Roger
SamuelB (North Carolina)
Posts: 83
Posts: 83
Posted:
Posted By RussR on 01/08/2006 1:46 PM
How large should a "contingency fund" be as a percentage of operating expenses? By contingency fund a mean money set aside for unplanned emergencies; aka, General Reserve.
How large should a "contingency fund" be as a percentage of operating expenses? By contingency fund a mean money set aside for unplanned emergencies; aka, General Reserve.
I think Russ brings up an excellent question and I would like to hear from other Association board members as to their thoughts on this subject. I have found Robert J. Bruss (http://tms.ecol.net/realestate/bruss.htm) to be an excellent source for some questions but am very interested in things like âis a âReserve Studyâ, which would be used to (supposedly) inform the Association what the reserves should be over a particular period of time, worth it or recommended? Or is it a waste of money?â. We have found that Reserve Studies can cost anywhere from $4500 to over $15,000 and I would be reluctant to believe anything it produced to be anywhere near accurate after a couple years. But these are just my thoughts; Iâm interested in yours.
BTW, Robert J. Bruss recommends a reserve over a 10 year period to be $1000 per unit for condo units in the $100,000 to $150,000 price range as an absolute minimum, $2000 per unit recommended (if there are no special amenities), and $3000 per unit on the high side. Does this correlate with what other board members are seeing? What are your ideas on the subject.
Once again, excellent question, Russ. Thank you.
Samuel
I fly because it releases my mind from the tyranny of petty things . . . - Antoine de St-Exupéry
AdamM (Utah)
Posts: 13
Posts: 13
Posted:
We just received community control from the developer and our reserve account is about 67k. We have 21 buildings, a clubhouse, pool, and a few other amenities.
We are just working on determining an investment strategy. Does that seem like a good start for a reserve?
Adam
We are just working on determining an investment strategy. Does that seem like a good start for a reserve?
Adam
RussR (Colorado)
Posts: 5
Posts: 5
Posted:
Posted By RussR on 01/08/2006 1:46 PM
How large should a "contingency fund" be as a percentage of operating expenses ? By contingency fund a mean money set aside for unplanned emergencies; aka, General Reserve.
How large should a "contingency fund" be as a percentage of operating expenses ? By contingency fund a mean money set aside for unplanned emergencies; aka, General Reserve.
More Information:
We have 12 buildings, 42 residences and an operating budget of $100K. Our Contingency Fund is $42k. Again this is for unplanned items. We plan for repainting and have another fund for that. We would like to know if $42K is too high/low ?
HankL
Posts: 47
Posts: 47
Posted:
Get a Reserve Study done to support the normal "Reserve" fund, which should always be funded adequately. Fortunately, inflation has been low for a long time, but the rule-of-thumb otherwise might be to get a new stude every 3 to 5 years. But studies are expensive, and you might consider approving a methodology of funding reserves 10 or 15% above the study, which only provides, after all, a recommendation. I think the IRS should find this OK, but it is plain old good management if you are not in financial straits. Remember, the Board does have ways of adding to or taking from the fund as might be necessary, but do the paperwork, usually a Resolution.
the big H
the big H
SamuelB (North Carolina)
Posts: 83
Posts: 83
Posted:
Has anyone ever done a Reserve Study? If so, what discipline performs this activity (Contractors? Construction Consultants?)?
I have always been against the Reserve Study, but am very interested in the other side of the argument.
I have always been against the Reserve Study, but am very interested in the other side of the argument.
I fly because it releases my mind from the tyranny of petty things . . . - Antoine de St-Exupéry
RogerB (Colorado)
Posts: 5,067
Posts: 5,067
Posted:
SamuelB, we do reserve studies for our clients at an intial cost of $300 with provide free updates every three years and whenever there is a major expenditure from the reserve fund.
The disciplines we utilize to perform this activity are an engineer with a construction background and a financial analyst. Knowledge of current replacement costs and average life for each items included in the study are needed. Spread sheets are used to run several senarios which illustrate such things as how various inflation rates affect costs on 20 year reserve plans.
IMHO 20 reserve fund analyses should not cost thousands of dollars.
Roger
The disciplines we utilize to perform this activity are an engineer with a construction background and a financial analyst. Knowledge of current replacement costs and average life for each items included in the study are needed. Spread sheets are used to run several senarios which illustrate such things as how various inflation rates affect costs on 20 year reserve plans.
IMHO 20 reserve fund analyses should not cost thousands of dollars.
Roger
SamuelB (North Carolina)
Posts: 83
Posts: 83
Posted:
My goodness, the prices we have been getting for a Reserve Study, the cheapest was $4500 and the most expensive was $15000. Now you know why I have been against a Reserve Study which is probably obsolete the day it's published.
I fly because it releases my mind from the tyranny of petty things . . . - Antoine de St-Exupéry
JackJ (Florida)
Posts: 40
Posts: 40
Posted:
I have a an accounting question about reserves in general and how they are treated on the balance sheet.(and how the membership perceives them!)
We have an investment fund that is in the low six figures.
We also show a "Reserve for roads" balance on the liability side of the balance sheet.
The perception of our average HOA member is that the "Reserve for Roads" actually has money in it despite the fact that it appears as a liability and is a deduction from our net worth and has nothing to do with the investment fund.
So when it came time to repair our roads and we took money out of our investment fund, many members could not understand how that could be.
They felt the money should come from the "Reserve for Roads" which of course does not have a dime in it.
I don't like accounting gimmicks like this in the first place but I'm wondering how others handle these kinds of accounting tricks, especially when you are dealing with senior citizens who like me, would like to believe that the "reserve" is what it purports to be.
We have an investment fund that is in the low six figures.
We also show a "Reserve for roads" balance on the liability side of the balance sheet.
The perception of our average HOA member is that the "Reserve for Roads" actually has money in it despite the fact that it appears as a liability and is a deduction from our net worth and has nothing to do with the investment fund.
So when it came time to repair our roads and we took money out of our investment fund, many members could not understand how that could be.
They felt the money should come from the "Reserve for Roads" which of course does not have a dime in it.
I don't like accounting gimmicks like this in the first place but I'm wondering how others handle these kinds of accounting tricks, especially when you are dealing with senior citizens who like me, would like to believe that the "reserve" is what it purports to be.
RogerB (Colorado)
Posts: 5,067
Posts: 5,067
Posted:
JackJ, accountants usually use GAAP (generally accected accounting procedures). They can use accrual, cash, or modified accrual accounting. The balance sheet will vary depending on the type accounting used. We non-accountants don't understand financial reports unless cash basis accounting is used (we use it to balance our check book).
Your "Reserve for roads" on the liability side of the balance sheet can be used with accrual accounting after the road expense is committed but not yet done. However, naming it "expenses for roads" would have be better. This is not a gimick or a trick, only poor labeling of an account read by people who do not understand accural accounting.
For HOA accounting, DARCO prefers to use cash basis. The balance sheet (and income statement) for cash accounting would only Sshow income after it was received (not when it was due but not yet received) and expenses when payment is made (not when committed). In cash accounting, matching reserve funds with investment statements can be done by anyone. Reserves can be listed in reserve sub-categories such as road, sidewalks, etc. Then when the road expense is paid the reserve fund (or road reserve fund) goes down accordingly and people understand.
In HOA accounting KISS (keep it simple stupid),
RogerB
Your "Reserve for roads" on the liability side of the balance sheet can be used with accrual accounting after the road expense is committed but not yet done. However, naming it "expenses for roads" would have be better. This is not a gimick or a trick, only poor labeling of an account read by people who do not understand accural accounting.
For HOA accounting, DARCO prefers to use cash basis. The balance sheet (and income statement) for cash accounting would only Sshow income after it was received (not when it was due but not yet received) and expenses when payment is made (not when committed). In cash accounting, matching reserve funds with investment statements can be done by anyone. Reserves can be listed in reserve sub-categories such as road, sidewalks, etc. Then when the road expense is paid the reserve fund (or road reserve fund) goes down accordingly and people understand.
In HOA accounting KISS (keep it simple stupid),
RogerB
RogerB (Colorado)
Posts: 5,067
Posts: 5,067
Posted:
Jack, this is a slightly different response than my email. On the balance sheet I would show reserve funds under CURRENT ASSESTS. It is not necessary to break out reserves funds, however I list by each investment, i.e., MM, CD, mutual fund, etc. The IRS guideline is to keep operating funds and reserve funds separate. The current value of your capital assests, such as the road, I would itemize under PROPERTY AND EQUIPMENT. Depreciation of capital assests I would show under CURRENT LIABILITIES.
I would be less concerned with the IRS and more concerned about having sufficient funds to replace the road at a future date. This requires long range planning via a 20 year reserve plan. This is independent from the balance sheet which does not show anticipated future expenses (or income)when using cash bais accounting. I'd suggest each year the HOA develop an annual budget ONLY AFTER considering that years needs for additional reserve funds as indicated by the 20 year reserve plan. My 20 year reserve plan is created by listing income added to cover reserve expenses, each and every capital expense items, anticipated life of each item, anticipated replacement cost today, and estimated cost at time of replacement based on the estimated annual inflation rate.
Roger
I would be less concerned with the IRS and more concerned about having sufficient funds to replace the road at a future date. This requires long range planning via a 20 year reserve plan. This is independent from the balance sheet which does not show anticipated future expenses (or income)when using cash bais accounting. I'd suggest each year the HOA develop an annual budget ONLY AFTER considering that years needs for additional reserve funds as indicated by the 20 year reserve plan. My 20 year reserve plan is created by listing income added to cover reserve expenses, each and every capital expense items, anticipated life of each item, anticipated replacement cost today, and estimated cost at time of replacement based on the estimated annual inflation rate.
Roger
JohnM3 (Florida)
Posts: 288
Posts: 288
Posted:
I like what 1 member stated this is a hoa issue or a condo issue they are never the same they are totally diferent big time.
First history been on the board since the beginning (14 years) been Treas so long my management company has issued me the title of "TREASURER FOR LIFE".
We use the accural method and after 8 years I still dont understand it at all.
I have used and understand THE TOPS SYSTEM it is foolproof I acess my records via our web site into the management company and all checks must be signed-countersigned by me and a second board member its in our docs. Which were written by the developer and we need 90 percent okay to change them we tried 12 times and failed.
I use 2 accounts 1 savings and 1 checking my yearly budget is 300,000 dollars 3 lakews 12 miles of roads and 50 miles of sidewalks.
How many roads have I replaced in all that time of 45 hurricanes is ZERO.Yes zero. How many times have I repaved zero.
We started out with 22 different contingency fund and 5 years ago we scrapped the hole system and went to a straight checking account savings account system it is a heck of a lot easier to manage and control. I have none of the nightmares that other associations have. Plus I will not allow them to occur I have been around just long enough to understand the systems.
Yes we had a massive huge sinkhole of epic proportions and we lived thru it and survived and our homes are up to 275,00 dollars in value from a starting point of 45 to 95000 dollar beginning.But we are building a clubhouse ( Modular) we are building 24 parking lots around the community we are spending over 8000 dollars on new entrance signs we have a unarmed guard at our rec area to maintain civility the entire time it is open. The soceer moms get peace and quiet and no foul language with very little hassel.
Life is now good for us but it gets crazy sometimes. We have 3 board members period mainly cause nobody wants to get involved we ask for vol at every meeting we get new ones they last 1 project and quit. Or they no show for 3 meetings and they are gone automatically its in the docs.
What amazes me is the city wants nothing to do with us at all.
First history been on the board since the beginning (14 years) been Treas so long my management company has issued me the title of "TREASURER FOR LIFE".
We use the accural method and after 8 years I still dont understand it at all.
I have used and understand THE TOPS SYSTEM it is foolproof I acess my records via our web site into the management company and all checks must be signed-countersigned by me and a second board member its in our docs. Which were written by the developer and we need 90 percent okay to change them we tried 12 times and failed.
I use 2 accounts 1 savings and 1 checking my yearly budget is 300,000 dollars 3 lakews 12 miles of roads and 50 miles of sidewalks.
How many roads have I replaced in all that time of 45 hurricanes is ZERO.Yes zero. How many times have I repaved zero.
We started out with 22 different contingency fund and 5 years ago we scrapped the hole system and went to a straight checking account savings account system it is a heck of a lot easier to manage and control. I have none of the nightmares that other associations have. Plus I will not allow them to occur I have been around just long enough to understand the systems.
Yes we had a massive huge sinkhole of epic proportions and we lived thru it and survived and our homes are up to 275,00 dollars in value from a starting point of 45 to 95000 dollar beginning.But we are building a clubhouse ( Modular) we are building 24 parking lots around the community we are spending over 8000 dollars on new entrance signs we have a unarmed guard at our rec area to maintain civility the entire time it is open. The soceer moms get peace and quiet and no foul language with very little hassel.
Life is now good for us but it gets crazy sometimes. We have 3 board members period mainly cause nobody wants to get involved we ask for vol at every meeting we get new ones they last 1 project and quit. Or they no show for 3 meetings and they are gone automatically its in the docs.
What amazes me is the city wants nothing to do with us at all.
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