Uses of Condo Reserve Account

Howard,

I'm not sure what your calling an unexpected repair.

Depending on what you are calling an unexpected repair, Wisconsin Condominium laws, 703.18, specifies that

"Unless otherwise provided in the declaration, in the event of damage to or destruction of common elements of a condominium, the association shall promptly undertake to repair or reconstruct it to a condition compatible with the remainder of the condominium. All cost of the repair or reconstruction in excess of available insurance proceeds shall be a common expense."

Reserve funds are typically for the expected maintenance, repair and replacement of capital components and are addressed under Wisconsin law 703.163. Depending on what the unexpected repair was, it may or may not be proper to use the Reserve funds and make adjustments to correct the new life expectancy.

Examples:

1)You budget in the reserves the need to power wash the community buildings every 8 years.

At the 5 year mark you discover that planning to power wash every 8 years wasn't correct and it should be every 5 years. You should then power wash the buildings and adjust the amount set aside into the Reserves so power washing can be done every 5 years.

2)You budget in the reserves the need to power wash the community buildings every 8 years.

At the 3 year mark the complex was vandalized and you need to power wash grafietti off the buildings. In this case it would be permissible to pay for some of the cost of the power washing from the Reserves (the amount set aside for the last three years from the last power washing) and pay for the balance from the operating budget, contingency fund or through a special assessment.

3) You do not budget for power washing in your reserves.

Anytime the power washing is needed, it would come out of the operating fund, contingency fund or a special assessment.

Hope this helps,

Tim

"Our condo association has had a reseve study and have built up a substantial reserve. The current board insists that we have to take unexpected repairs to common elements from the operating expense budget rather than the reserve. They say that we must adjust the reserve each year to the balance show in the cash flow analysis show in the reserve study. If we charge anything to the reserve that is not in the study we would only have to replace it right away. As a result if a large repair occurs they ask to increase the association fee to to cover the cost of the repair. Isn't this just defeating the whole purpose of a reserve? Are they using the cash reserve analysis in an incorrect manner? Do repairs that are not scheduled in the cash flow analysis have to be replaced immediately? Pleaese give me your input."

Howard,

If you're conceding your HOA has large reserve funds, I say that's highly positive.

I agree with your board's attempts to tap the reserve funds as a last resort, even if an unexpected expense would qualify for a reserve fund cash withdrawal. It tells me the board will cut the "frills" out of monthly budgeted spending to tackle the bigger ticket capital replacement while preserving your cash savings. This strategy by your HOA board places a special assessment or loan as a 3rd, worst-case option. Many HOAs are forced into debt or reserve withdrawals as the first option. Making repairs and replacements with regular cash flow, if possible, is positive in my view.

In seeking dues increases with the stated purpose of replenishing lost reserves - I can support that with additional information. #1. HOAs can build large reserve funds by being lucky on capital expenses even though the HOA isn't saving enough cash in monthly deposits to build the reserve fund in a financially healthy way. My HOA is like that. We'd go stretches where we're "lucky," then get SLAMMED by an expense that takes the cash levels low. #2 - HOA's can lift dues slowly while tightening the operations budget, creating more savings towards reserves. My board is currently following that strategy by reducing spending where we can and adjusting the monthly dues in line with the measured inflation rate. Either way, your HOA directors are telling your their purpose of dues increases - reserve fund strengthening. That's good. Most boards would like more flowers or projects that raise your regular operating budget, not protect what you're already enjoying in your community.

The whole purpose of a reserve fund, from my position, is to cover capital expenses but not regular maintenance. You certainly can, and should, plan for tapping reserve funds for HOA projects ahead of time; it gives the HOA control over its "destiny" with amenity replacement as best possible. The reserve fund is your best defense against special assessment - the worst-case scenario short of watching your property crumble for lack of maintenance funding. So, not raising dues or not linking dues increases to Reserve Fund replenishment weakens that financial protection. Many boards choose a weaker reserve fund to enjoy lower monthly dues, but it's a false security. Pay regular increases a bit higher than you feel is comfortable as insurance (through stronger Reserve Funds) or keep monthly payments lower in cost, which reduces reserve deposits and face a higher probability of special assessment. Special assessments are viewed as very poor budget planning and spending in most cases.

There's no cheap way out and no way "other people" can subsidize large HOA expenditure. On the surface, I think your HOA is acting very prudently and should have your support as long as they communicate with you (as it appears) and work in a transparent fashion (as it also appears because you're very informed). Reserve Funds are the most unglamorous part of an HOA budget. They fund those things that residents expect to work all the time without exception. When was the last residents showed appreciation for shingles and asphalt and good plumbing as opposed to the attention generated by roof leaks, pipe leaks and pot holes?

I think you have a responsible board.

This sounds like an insurance issue.

There should be an emergency fund that would cover any deductible within your budget.

It is not insured since it was under the deductible. Once again this is a repair not a maintenance item that under the state reserve statute can be properly charged to the reserve not to the operating budget.

In SOME circumstances, a loan can be taken out against the Reserve Fund BUT it must be paid back.

I still say that your board should have had an Emergency Fund (in the amount to cover insurance deductible) tucked away in an account and used when needed.

Our HOa bylaws say we must have a Reserve Fund, operating fund, and an emergency fund (in the amount set by the amount of insurance deductible.)

Our guidelines are if you are maintaining/ repairing a common asset, the board can make the decision to use reserves. If its a significant amount, then talk to a reserve analyst and raise dues to replenish the reserve balance and get you back on track.

One of the posters mentioned having a emergency fund, other than having enough money to cover your insurance deductible, it make no sense to me to have more association money tied up in an emergency account.

//Rick
http://paccrestreserves.com/

Rick,

Two years ago we had a much larger than average snowfall. Our normal 6K budget for snow removal cost us over 20K that year. Had we not had a contingency fund to cover that budget shortfall, we would have needed to have the membership approve a special assessment. When the membership gets to vote on any increase in assessments or a special assessment there is no guarantee that they will approve it.

I do agree with you that there should be a limit on how high the contingency fund should be.

Tim,

Obviously each association needs to look at there situations and plan accordingly. Obviously if your snow removal costs are going to vary greatly and unpredictably, a responsible board is going to look at having some fund. There is no reason why this couldn't be part of reserves.

Kelly,

If the association has money in reserves, there is no reason why it couldn't "borrow" from reserves. Obviously this is something that board would have to approve but it would be cheaper to borrow from reserve and pay back via special assessments.

//Rick
http://paccrestreserves.com

Kelly,

A good reserve study would provide for preventative repairs (I call it scheduled maintenance).

Perhaps your Board is not using the correct definition of a fully funded reserve.

A fully funded reserve doesn't mean that all the money ever needed is sitting in the bank account.

A fully funded reserve is one that has funds available at the time the capital components, identified in the reserve study, are in need of the scheduled maintenance, repair or replacement. As long as the bank balance plus the regular deposits to the reserves can provide the funds you have a fully funded reserve.