ScottS13 (California)
Posts: 1
Posts: 1
Posted:
I'm wondering if anyone has some insight on the proper way to account for a loan that was taken out (for a capital improvement project) in a formal reserve study.
Let me provide a bit of background -- last year, our Board (of which I was not a member at the time) decided to take out a loan to replace the roofs in our complex. Although we had slightly enough in our reserve balance to cover the project, the board was not comfortable with the low level this would draw reserves down to and decided to take out a loan as well as raise the Association's monthly dues. The increase in dues was designed to cover the loan payments + interest. This loan was taken out a few months before last year's reserve study and appears to have had a positive effect on our funding status, which I question. Basically, the board decided that since the loan payments were being covered by the increase in dues, they would make the payments + interest on the loan come out of the operating budget and that our overall monthly contribution to reserves would remain unchanged, despite the increase in dues.
My concern is that this may be having a perverse effect on our reserve study, since we were able to push back a very large liability (replacing the roofs) by 25 years, with no real effect on reserve assets -- i.e. our reserve balance didn't decline since we took out the loan, and our contributions remained the same. I'm thinking it might be more accurate to show the loan payments and interest being paid out of the reserves, and to show a corresponding increase in our reserve contributions (from the increase in dues). Maybe the two would offset though and we would end up with close to the same result.
Thoughts? Are loan payments and interest for capital improvements typically shown in a reserve study?
Thanks for your help.
Let me provide a bit of background -- last year, our Board (of which I was not a member at the time) decided to take out a loan to replace the roofs in our complex. Although we had slightly enough in our reserve balance to cover the project, the board was not comfortable with the low level this would draw reserves down to and decided to take out a loan as well as raise the Association's monthly dues. The increase in dues was designed to cover the loan payments + interest. This loan was taken out a few months before last year's reserve study and appears to have had a positive effect on our funding status, which I question. Basically, the board decided that since the loan payments were being covered by the increase in dues, they would make the payments + interest on the loan come out of the operating budget and that our overall monthly contribution to reserves would remain unchanged, despite the increase in dues.
My concern is that this may be having a perverse effect on our reserve study, since we were able to push back a very large liability (replacing the roofs) by 25 years, with no real effect on reserve assets -- i.e. our reserve balance didn't decline since we took out the loan, and our contributions remained the same. I'm thinking it might be more accurate to show the loan payments and interest being paid out of the reserves, and to show a corresponding increase in our reserve contributions (from the increase in dues). Maybe the two would offset though and we would end up with close to the same result.
Thoughts? Are loan payments and interest for capital improvements typically shown in a reserve study?
Thanks for your help.