Refund of Excess Collected??

Hey there. First time poster, and I attempted to search for this topic, but couldn't find anything, so I apologize if I am being redundant here.

First, we had our HOA turned over to us in November 2011, and are really starting to work on things. The BOD are currently butting heads over certain things, and I'm hoping that I could get several questions answered here.

First, we are a 39 home HOA with about 30 acres of vacant land that is deemed rural property. We have nothing in it and is basically a lot of land between homes that is owned by the association. Property taxes are covered by the homeowners and not the HOA. Over the last couple years, our annual expenses total around $2,500, but we've done nothing for a reserve fund and have money sitting in an operating fund reserve. Our only capital asset is a sign at the entrance of the road. County sewers and roads, so we have no HOA expenses to repair/replace those.

Now time for the questions:

(1) We have $26,000 in our reserve fund, which some of the BOD feel is too high. Has anyone experienced any legal issues in the ability to refund the excess ot the association members? We are looking at lowering our dues since we currently take in about $5,000 more than our expenses each year.

(2) What would you set in the operating reserve fund as a floor for general emergencies and liability issues? Or better phrased, what would be an acceptable amount given our small asociation?

(3) Thoughts on full fledge CPA audit and having a lawyer review our master deeds and by-laws? They were written in 2004.

Thanks for any and all help.

ScottF,

Welcome to the forum.

How does anyone know that the amount in reserves is too high? Has a reserve study ever been done to see how much money will be needed in reserves for capital expenditures and when? Things wear out and have to be replaced. You need to know what your capital expenditures (roof repair, road resurfacing, etc) will be and when to insure that you will have enough when the time comes. The purpose of a capital reserve is to avoid the need for a special assessment or taking out a loan in the future. Major mortgage lenders like HUD, Fannie Mae and Freddie Mac like to see 10% of a association's annual budget go into reserves. More or less depending on the results of a competent reserve study.

With regard to refunding excess income from dues (regular assessments), some states have laws that require it. In any case, your annual budget should be balanced. Income = expenses, including any amount that is needed for reserves.

Another issue is tax treatment. If the association is filing the regular Form 1120 tax form, any income in excess of expenses is profit and is taxable income. If the association files Form 1120-H claiming the preferred tax status of an HOA, income from regular assessments in excess of expenses is not taxable and my be safely put into reserves.

The answer you are seeking is not a simple one and requires a lot more knowledge of your HOA than you have provided.

Scott if you truly have an excess then cut the assessments going forward or refund this years assessments. The problem with refunding all of the excess at once is in the seven years have you not had one homeowner move? How do you get them their "cut" of the pie and if you don't, I can see a lawsuit in your future. Does your CC&Rs talk about excesses and how they are to be handled?

You need a reserve study to ensure that the sign is the only amenity you currently hold responsibility for maintaining.

Do not issue refund checks for your reserve fund "overage" because the emotional response is that "we have too much money in reserve,"

At best, hold reserves at current level and reduce monthly dues to break even with bill payments, leaving no money for reserves.

You'll never regret having a healthy HOA savings account. You WILL need that money when you least want to spend it.

Hi Scott and welcome to the forum.


As others have said, you need a reserve study to determine if there is enough or too much in the Reserves.
You may pay to have a study done for you or do one yourself.
See this thread for more information on Reserve Studies:

http://www.hoatalk.com/Forum/tabid/55/forumid/1/postid/103517/view/topic/Default.aspx Subject: Reserve Studies/Funds 101


When you say operating reserves I consider this to be a contingency fund for your operating budget and different from your capital reserve fund.

Capital Reserves would be used for expected maintenance, repair and replacement of common elements (playground equipment, entrance signs, street lights, some Associations include trees, etc.).

Operating Reserves would be used for unexpected repairs and to make up shortfalls in your operating budget.
If you don't have a lot of delinquent accounts, not a litigious Association or will likely have large expenses when heavier than normal storms hit your area (tree damage, snow removal, etc.), I've heard that a good rule of thumb is 1/12 the total annual assessment. Then you should adjust that based on your Association specifics.

For example: A couple of years ago, my Association had to cover a overage of $20,000 in our snow removal budget due to one year of bad storms. We now try to keep 25-30K above that 1/12 number in our operating contingency fund so we will be prepared if needed.


I believe that an Association should have a financial review done by an independent party every year or two and an audit done if wrong doing is suspected or there is a turnover from the developer to the homeowner. The cost difference between the to is huge.
For more information see this thread:

http://www.hoatalk.com/Forum/tabid/55/forumid/1/postid/118391/view/topic/Default.aspx Subject: Financial Audits, Reviews or Compilation Which do you use?

We did a rewrite in 1993 (first rewrite since 1980). We hired a company to assist us and it still took two years to complete.
I would suggest the following:

1) form a committee to review applicable laws and your current documents.
2) The Committee should also research similar Association documents within your State to get an idea of what they have.
3) The Committee submits a draft to the Board
4) The Board reviews the draft and makes changes.
5) Send the review to the membership for review and feedback
6) Board makes changes based on feedback
7) The Board should then send the draft to the attorney for review (this will save you some money) and comments
8) The Board should now determine if they will adopt all, some or none of the recommendations from the legal review.
9) Send the proposed changes to the membership for review
10) Hold a meeting and vote
11) Submit applicable documents to State/County for recording (we used our attorney for this).

Hope this helps,

Tim