Effect of debt on 'Percent Funded'

A few years ago, to comply with state law, I wrote up Reserve Study for my association. We have about $1.1 million of assets that the board is responsible to maintain. As part of the Reserve Study, I listed all assets on a spreadsheet, estimated their remaining life span and their depreciated values. From this I determined our reserve account to be about 13% of fully funded. That was three years ago.

The plan called for a major repair (about $275K) to be done over three years. Instead, our members voted to borrow $175K and do it all this year. Now the question: How do I reflect that in my spreadsheet? By common accounting practices, our "Percent fully funded" is our 'reserve balance' divided by our 'fully funded balance'. In our case it's about 24%. State law requires that we give perspective buyers a copy of our plan so I'd like to know if I'm doing this correctly.

I have looked high and low but have not found any advice on this issue. It is true that we still have $100K in our reserve fund ($415K in full funding) and that's 24%. But can we really say we are 24% funded while we owe money? Maybe we can - maybe the debt is a separate issue. I just don't know.

Anybody ever encounter this?

Carol,

Let me clarify
1. Yes
2. Yes, $100K liquid.
3. Yes. I have the est. replacement cost. Although it's not the full replacement cost that matters, it's the portion of an asset's life span that's used up.
4. We took $100K from reserves and borrowed $175K from a bank (30 month loan).

Yes, I could have saved a lot of work had the board agreed to hire a specialist. That wasn't going to happen. It took me a year of nagging just to get the board to agree to file paperwork the state required three years ago. Arggg!

Alan,

You correct in tabulating your full-funding percentage based on your numbers.

Your operating budget will add an expense item to accommodate regular loan payments and the board will decide how to shift money, within the operating budget, to pay the loan bill. Many HOAs will reduce/eliminate regular Reserve Fund deposits to pay off the debt (which covers a Reserve Fund project). That's a local policy call.

The debt, it can be argued, is a separate issue. The community raised its expenses and the board hasn't determined how to shift existing revenue or raise money to keep the budget balanced.

Been there, inherited the identical situation when I joined my board and became president. Loan expenses must be paid from somewhere....but where? My HOA reduced, in its annual budget, the amount of monthly Reserve Fund deposits to pay the monthly loan payments.

If you want more details from that experience, let me know.

Alan,

In my opinion:

1) Funds that were set aside in the Reserves for the work prior to the loan should be used to pay down the loan.

2) The balance of the loan should then be treated as another debt to the operating Budget (mind you, the amount going into the reserves might be less than before due to the new life expectancy - this can free up more operating funds to pay the loan).

3) The Reserve Study should now be adjusted for a new life expectancy based on the date of work.

4) Funds, from the point of the loan forward, that go into the Reserves should now be set aside for future expected repairs, maintenance and replacement. They should not be used toward the loan.

Alan,

Building on Tim's solid advice:

Get your monthly dues increased enough to make the loan payment "whole" within your budget and don't reduce Reserve Fund deposits to balance your budget. Your membership is underfunding its reserve fund given its strategy of amenity replacement - taking one year instead of three years.

Your mathematics on funding percentage are correct. If you're taking a larger view of Reserves, your funding percentage will suffer in future years as a result of the loan IF dues aren't increased or the Reserve adjustments aren't accurately revised to "free" cash flow for loan payments.

Offering instant gratification is expensive but understandable when the project is slated for three years.