How much should be in reserves?

How much should be in reserves and how fast do you get there? The developer still has majority vote and they seem to think that we need to have 1M in reserves. We now have about 180K and the developer thinks we should have 375K by the end of 2007. This has causes very high COA fee’s and we are taking on a Restaurant, Bar and Spa. It cost us about 1.4M for operations right now. The nice thing is the developer has spent over 1.5M on a new roof and has done major structural repairs. Or equipment is fairly new and well maintained.
I have asked a few residents their thoughts and it is divided. The developers have been very helpfully and as a whole we feel good about most of their decisions. I would just like to know if there is a formula COA’s use to figure this out what the capital reserves should be, we are paying in about 10K per month.

Thank you
D

DouglasD - first, there is no set formula, each hoa is different. the amount necessary is based upon several factors. 1) the expected life-cycle of the elements that the hoa is legally obligated to maintain - therefore replace. 2) the cost of replacement of the element plus inflation at or around the time the elements are to reach the end of their life-cycle. 3) take the cost of replacement of the elements and divide it by the number of years it will last. those figures are the minimum amount your hoa will need set aside each year in an interest bearing account. minimum because when the elements needs to be replaced, you don't want the reserve account to be depleted. each element will have different life-cycles. so the reserves will always fluctuate.

4) once the developer is off the hoa board, the hoa hires an independent transition engineer at it's expense to perform a capital reserve replacement analysis and transition evaluation. the transition evaluation will uncover any latent or known defects and make sure that all construction complies with your state code. the developer should have provided a public offering statement that includes a budget of operating expenses with a forecast of the reserves needed. right now you are setting aside about 8% of your operating budget to reserves. the developer is telling you to set aside an additional $195,000 by the end of 2007. but going forward, according to the developer, you should set aside considerably more. i would take that as a good bit of friendly advise and ask the developer to assist the hoa by contributing substantially to the reserve fund.

to visualize a schedule of replacements from the reserves, you can set-up an excel spreadsheet with the elements in one column, the expenditures in the next, then columns for each year-mark 5, 10, 15, 20, 25, 30, 35, 40, etc. in each of these columns will be the sum of the expenditure. then create a column for the reserve balance at the year mark. this is the reserve balance minus the expenditure(s) at that time. then create a column for the next year mark where an expenditure will occur. create a formula that takes the yearly reserve transfer times the number of years set aside add that to the balance at the previous year mark and subtract the expenditures. the transition engineer can provide you with this matrix of sorts, usually it's in paper form. i like to take their figures and create my own schedule.

setting aside more to reserves does not necessarily equate to a raise in dues. the process is called a transfer to reserves. an hoa needs to allocate the money, so it's best to look first to the existing budget and keep a close watch on all discretionary spending and try to offset dues increases by transfer money first from other areas while still maintaining the quality of life that the residents bought into. JoeW1