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Standard Reserves? Monthly Contribution?

Started by 1927H • 17 replies • 1982 views

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1927H (California)
Posts: 1
Posted:
Hello all.

I've recently taken over as treasurer of a small HOA in San Francisco (only 7 units). I'm looking for some thoughts on:
1. what is an acceptable reserves (noting that we recently replaced the roof and hot water heater!) we usually have around $15,000
2. and what % of HOA dues should reasonably go into reserves? we bring in about $2500 in HOA dues per month and have about $2250 in expenses, only contributing around $250/month to reserves. Is that enough?
3. And finally, I read that it is acceptable for an HOA to raise dues 20% every calendar year, without a vote. Is that true?

Many thanks for your expertise and advice!

TimB4 (Tennessee)
Posts: 21,059
Posted:
Reserves are to pay for the expected maintenance, repair and replacement of capital components (roads, lights, signs, playground equip, roofs, parking areas, etc.) that the Association is required to maintain.

There is no standard rule of thumb for the amount of Reserves an Association should maintain or how much should be placed into a Reserve fund. This is because each Association is different with different amenities, different common areas and different external affects on those common areas (use, weather, etc.).

The only way to determine the amount of Reserves you should currently have and the amount needed to be set aside each year is by having a Reserve Study. Reserve studies can be done by an outside company or internally. The better ones are done by an outside company (as they are expected to have experts in the various fields) but if this isn't affordable, doing a study internally will at least get you started down the right path.

To learn more about Reserve Studies and how to do one yourself, see the following thread in this forum (click on the link):

Subject: Reserve Studies/Funds 101

Be prepared for a dose of reality if you haven't done a Reserve Study in the past. My Association is over 30 years old and we did our first study in 2010. Based on this study we needed to raise Assessments by 20% to fully fund the Reserves.

I noticed that you are in California. Davis-Stirling.com has some specific information on Reserves for CA Assocaitions. Here is a link to Reserves Menu page.

In addition to Reserves, an Association should have a contingency fund for day to day operations. This fund would make up the shortfall between assessments being paid and when bills are due. Additionally, they would cover unexpected repairs or general budget shortfalls. For a Contingency fund, I have heard that it should be at lest 1/12 of the annual assessments. It may need to be larger if you have a lot of members who pay late.

Hope this helps,

Tim

TimB4 (Tennessee)
Posts: 21,059
Posted:
Quote:
Posted By 1927H on 08/25/2013 11:19 PM

3. And finally, I read that it is acceptable for an HOA to raise dues 20% every calendar year, without a vote. Is that true?

Oops, I forgot to address this one.

The amount a Board may raise Assessments will depend on the authority identified in your governing documents and any applicable laws.

In CA, CA Civil Code 5605, is the applicable law. Per this law, a Board may raise assessments up to 20% of the previous year.

If a Board has a proper budget and properly funded Reserves, there should be no need to increase assessments any higher than the cost of inflation. Personally, if a Board had to raise Assessments by 20% there better be a darn good reason.

DaveD3 (Michigan)
Posts: 796
Posted:
Like Tim said, do a reserve study to determine how much $ is required to replace/repair/maintain those common elements that need periodic maintenance/repair/replacement. Total amount per item, divided by the projected life expectancy gives you the annual reserve contribution required. Add that up for each separate item and you have the annual total.

The most difficult part of the study is getting estimates on expected lifetime for something that is in relatively decent shape. We had to do such for a private road. Took a few calls to get someone out to take a look and give us an assessment of the condition and life expectancy, AND to give us a replacement/repair cost.
KellyM3 (North Carolina)
Posts: 2,239
Posted:

1. None of us can be sure of your needs in regards of Reserve Funds. My HOA budget is $119,000 per year. We save $32,000 a year into reserve funds because we're behind on what need to be saving for the future - 26.67% of our total budget.

2. If you're replacing roofs, I could safely guess that $15,000 is not enough for the scale of your maintenance.

3. You're contributing approximately 10% to your Reserves. Okay.

4. Your HOA by-laws will outline the limits of the board in raising monthly dues. Read them and your answer will be clear.

Many HOAs will draw up their budgets using this structure - they outline their operating budget and any "leftover" money gets deposited in Reserve Funds. Therefore, it's tempting to minimize "leftover" money and keep dues artificially low as it looks like a form of profit or excess collection. Place the Reserve Funds as a budget expense item inside your operating budget, just like the power bill budget and you'll protect your long-term savings much better if you're seeking a stronger Reserve Fund picture.

Good luck!
JohnC46 (South Carolina)
Posts: 14,265
Posted:
Quote:
Posted By KellyM3 on 08/26/2013 8:00 AM

1. None of us can be sure of your needs in regards of Reserve Funds. My HOA budget is $119,000 per year. We save $32,000 a year into reserve funds because we're behind on what need to be saving for the future - 26.67% of our total budget.

2. If you're replacing roofs, I could safely guess that $15,000 is not enough for the scale of your maintenance.

3. You're contributing approximately 10% to your Reserves. Okay.

4. Your HOA by-laws will outline the limits of the board in raising monthly dues. Read them and your answer will be clear.

Many HOAs will draw up their budgets using this structure - they outline their operating budget and any "leftover" money gets deposited in Reserve Funds. Therefore, it's tempting to minimize "leftover" money and keep dues artificially low as it looks like a form of profit or excess collection. Place the Reserve Funds as a budget expense item inside your operating budget, just like the power bill budget and you'll protect your long-term savings much better if you're seeking a stronger Reserve Fund picture.

Good luck!

This is good advice.

We all agree the amount needed has to be achieved by a Capital Reserve Study. My personal experience says that if less then 20% of dues per year are being allocated to Capital Reserves, then most likely there will be issues down the road.

GlenL (Ohio)
Posts: 5,491
Posted:
In addition to the excellent advice already posted many lenders especially those that are backed by the government WILL NOT loan if the reserves are too low. The fear is that they may loan someone the money to buy and then that person is hit by a large Special Assessment that they can't handle and go Tango Uniform on the original loan.
Studies show that 5 out of 4 people have problems with fractions
KennethS2 (California)
Posts: 36
Posted:
California Civil Code requires you to have an outside company who specializes in Reserve Studies to perform a study at least once every three years. All of this is spelled out at Davis-Sterling.com -

http://www.davis-stirling.com/tabid/1612/Default.aspx

Ken
AllisonD (Florida)
Posts: 449
Posted:
After you do a reserve study, I would suggest having reserve accounts (for replacement of the items) and operating accounts (for the yearly operating costs).
RichardP13 (California)
Posts: 1,767
Posted:
Ken

Can you point out where in Civil Code that the reserve study must be perform
RichardP13 (California)
Posts: 1,767
Posted:
Ken

Can you point out where in Civil Code that the reserve study must be performed by an outside company that specializes in reserve studies? The link you posted is from an attorney's opinion.

Many associations large and small do their own reserve studies using the same software as the specialists use along with the tools to determine costs and longevity.
RichardP13 (California)
Posts: 1,767
Posted:
I have done 4 for different associations, but ONLY after the original study was done. The maintenance and updating is really straight-forward. The information, as with other things, as the person doing the work in the first place. I have had to update items were not all linear feet were put into the fence measurements. Once you replace a component or paint for example, you must make sure the report is updated, otherwise you are throwing your money away.

Reserve Studies, once properly understood, are a great financial tool for the association.
KennethS2 (California)
Posts: 36
Posted:
Sorry, read it wrong but here is more about it in cal:

DILIGENT VISUAL INSPECTION
The Davis-Stirling Act requires boards "as part of a study of the reserve account requirements" to "every three years" cause to be conducted a:
a reasonably competent and diligent visual inspection of the accessible areas of the major components that the association is obligated to repair, replace, restore, or maintain . . . (Civil Code §1365.5(e))
"Diligent" is not defined in the statute but is clearly more than a cursory inspection. Black's Law Dictionary defines diligent to mean "attentive and persistent in doing a thing." In addition to "diligent," we must factor in what proceeds diligent, i.e., “reasonably competent" and what follows, "accessible areas."

Reasonably Competent. "Reasonably competent" does not require a particular professional license but there are two national credentials available to reserve study professionals. One is the Professional Reserve Analyst (PRA) administered by the Association of Professional Reserve Analysts (APRA). The second is the Reserve Specialist (RS) administered by the Community Associations Institute. Both organizations require a demonstrated background of training and experience in properly preparing reserve studies before they will issue designations.

Read more: Diligent Visual Inspection http://www.davis-stirling.com/tabid/3612/Default.aspx#ixzz2d91oBFxA
from Davis-Stirling.com by Adams Kessler PLC. If your association needs legal assistance, call us at (800) 464-2817.

Ken
JohnC46 (South Carolina)
Posts: 14,265
Posted:
Can some please list the cost of A Reserve Study they have had done. Also give an overview of the association such as individual homes, townhomes, units in low rise building (no elevator), units in high rise building (elevator) and amenities like pool, tennis, parks, etc.

Thanks in advance.

SteveM9 (Massachusetts)
Posts: 3,699
Posted:
I did one myself. Free.
SteveM9 (Massachusetts)
Posts: 3,699
Posted:
Quote:
Posted By JohnC46 on 08/27/2013 3:51 AM
Can some please list the cost of A Reserve Study they have had done.


Other people's study costs are not useful. Every property is unique and has a unique set of assets. Your best bet, if hiring someone, is to get multiple quotes and decide which quote is best. Doesn't matter what other people pay for reserve studies.
SteveM9 (Massachusetts)
Posts: 3,699
Posted:
Sample Reserve Study
https://docs.google.com/viewer?url=http%3A%2F%2Fwww.reservestudy.com%2Fwp-content%2Fuploads%2F2011%2F09%2FLLC-%2520WA%2520Sample%2520Report-%2520Condo.pdf

Sample Reserve Study
https://docs.google.com/viewer?url=http%3A%2F%2Fwww.dre.ca.gov%2Ffiles%2Fpdf%2Fre25.pdf

Sample Reserve Study
https://docs.google.com/viewer?url=http%3A%2F%2Fassociationanalysis.com%2Fwp-content%2Fuploads%2F2009%2F02%2FTransitionCombined.pdf

Sample Reserve Study
https://docs.google.com/viewer?url=www.fairlington.org%2FMews_Reserve_Study_2012.PDF

Sample Reserve Study
https://docs.google.com/viewer?url=http%3A%2F%2Fwww.karecondo.com%2Ffiles%2FSample_2010_Reserve_Study_2010-09-17.pdf

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