Excess in Reserve

Our bylaws state that 2 months dues be in reserve account. We have a separate account for future roof replacement which a portion of our monthly due are applied to each month. (the condo building is 12 yrs. old) My question is the reserve account far exceeds 2 months of dues (not in any interest bearing account)...should the "overage" be returned to homeowners? (I have lived here 6 years and we have had 3 increases in monthly dues).

Amy,

What you describe sounds to me like what we call an "operating contingency". It is separate from the replacement reserve account and is intended to cover unexpected operating costs.

Our association, at the recommendation of our auditor, maintains an operating contingency equal to between 10% to 20% of annual assessments. We were very glad to have this in the winter of 2009/2010 when we had 2 snow falls over 20" within a few weeks and our snow removal costs exceed our budget by $68,000. The operating contingency allowed us to pay that bill without a special assessment.

If your governing docs require a reserve of 2 months worth of dues, that is a very prudent practice. Whether your board should allow that reserve to grow larger than 2 months worth, or refund money to the members is a decision they should make based on their judgement as to risks of unexpected operating expenses and the pain that a special assessment would cause if it were needed.

Amy,

Reserve Funds are not simple to explain but I would think the two months' assessment Reserve Fund rules are a minimum account requirement.

My thinking is there is more to maintain than your upcoming roof replacement. A comprehensive look at everything maintenance-wise is needed before deciding a reserve fund overage exists.

Pavement, decks, paint, pool replastering, etc. When those things "die," you don't want an assessment leveled against you. Everyone's situation is different, though.

Amy

Look at reserves this way. The average lifetime of a roof is about 20 years. Depending on type and size of the roof it could well cost $20,000.00 to replace them. This says we should be setting $1,000.00 per year aside so that in 20 years we will have the $20,000.00 to pay for such.

What can we do if we do not have the money come time for roof replacement?

1. We can ignore the roofs and wait for complaints.

2. We can do a one time assessment charge for each unit to cover the $20,000.00.

3. We can borrow the $20,000.00 and arrange a payback schedule.

All of the above scenarios are unpleasant (especially for new owners) but also a very typical issue. You see it out here all the time. The problem was caused because the BOD did not put the $1,000.00 per year in the Capital Reserve Fund as they went along.

In my HOA, we have 113 stand alone homes. Typical roofing cost about $500.00 per house. This means $56,500.00 to replace all roofs.

Hope this helps.

Amy,
A couple of other points.
You need to be putting enough in your reserves to cover all future and present capital expenses. There should rarely be a need for a "special assesment".
Special assesments are a result of poor finiancial planning and the FHA and lenders now consider them negatively when looking at mortgage and refinancing applications. You should check your local state laws and the FHA lending guidelines. These thing can affect your ability to sell or refinance your property and your property values.

You also need to be careful about the amount of reserve contributions because it is considered an unfair burden (and loan risk) if owners are paying more than their fair share of current and future repairs. All owners should be contributing to future repairs even if the repair is 15 years away and they might be long gone. This should have been happening from the beginning but many associations didn't do that to try and keep their HOA fees low and many are suffering because of it.

You should also check your documents and state laws to see if they make a legal distinction between "common profits" and "common surplus".
Common Surplus is the amount left when HOA fees collected during any one period exceeds Common Expenses. Common profits is the amount collected from things like fines,special fees, rental of equipment or common areas etc.
The Board does not always have the authority to take any amounts collected over and above the operating budget and place them in reserves.

They could also be slowly increasing the fees to try and build up an adequate reserve fund.