HOA Reserves Not being funded

Started by JacquelineV1 • 15 replies • 1461 views

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JacquelineV1 (Delaware)
Posts: 13

Posted:

We live in an developer controlled HOA. According to the CC&Rs the BOD is mandated to contribute part of our HOA dues to the Reserves on a yearly basis. Every year there is audit done by an auditing firm.

I found that the Reserves have not been funded! The BOD are merely keeping a book entry as to how much should be in the Reserves but has not have any monies or other assets supporting that number.

I believe that the BOD is in breach of its fiduciary responsibility. Am I correct in my assumption? I brought it up at a quarterly meeting and basically was told they were not doing it!

Any suggestions as how to proceed?

LarryB13 (Arizona)
Posts: 4,099

Posted:

You mentioned in another post that you owned property in an Arizona HOA and also indicated that it was still under developer control. Is the HOA that you are referring to in this post in Delaware or Arizona?

TimB4 (Tennessee)
Posts: 21,062

Posted:

Jacqueline,

Laws vary by State which is why Larry asked you where the property was.

Typically, the States that require Reserve Studies don't always require that the Reserves actually be funded. Being in a developer controlled Association complicates the issue even further.

Since Reserves are funded with Assessments and it's typical for the developer to be exempt from paying assessments on lots they own, in a developer controlled Association it's unlikely that the Reserves will ever be fully funded. That is something that may simply have to wait until control of the Association transfers to the membership. However, some State statutes may address this issue. Therefore, you may want to check the statutes.

As for how to proceed, have you asked the Board about the issue?
If you did, what did they say?

JacquelineV1 (Delaware)
Posts: 13

Posted:

Hi

We have 2 houses in 2 HOAs one is in
DE and the other in AZ. The lack of Reserves is in the DE HOA.
The CC&Rs state that the Reserves are to be funded. DE has no statues controlling what HOAs do or do not do.
I did bring it up and they chose to ignore the question. In fact they led people to believe we had 2.8 million in the Reserves. It was only upon reading the audit and then questioning them that I found out that it was just being kept as a book entry without no monies.
If the CC&Rs dictate that monies are to be deposited every year and the audit states how much is supposed to be put in to keep the Reserves properly funded I would assume that it is to be done and my guess is that the BOD is in breach of the contract and their fiduciary responsibility but I am not sure.

It appears that AZ on the other hand does have statues that address Reserves.

JohnB26 (South Carolina)
Posts: 1,569

Posted:

they are BOTH:

in breach of contract

and

in breach of their fiduciary duty

now

you need to decide if you wish to hire an attorney well versed in contract law

or

move on down the road BEFORE the special assessments begin

DavidW5 (North Carolina)
Posts: 565

Posted:

You need to check the association's balance sheet. The replacement reserves should be listed as a liability on the balance sheet. By definition, the balance sheet must "balance". So if the reserves are shown as a liability, there must be an offsetting asset or assets listed. In our balance sheet the offsetting assets are "investment accounts". Those contain the actual cash that cover the reserves liability.

AnnH5 (Florida)
Posts: 304

Posted:

Are you saying that a reserve study shows that the Association needs a total of $2.8 mil to meet all reserve study obligations and the Association has dedicated nothing into a reserve account to build it up to the $2.8 mil to cover all necessary future repairs and replacements?

By definition, a reserve account is used to replace and repair community assets that will need such work due to lifespan of the asset. The reserve account is meant to spare each owner the grief of large, special assessments to pay for replacements and repairs. If your community has such an account and only contributes a paltry sum of money to it, they are meeting their obligation to hold such an account but they are not doing a good job business-wise.

I guess my other question would be about the overall financial situation of the HOA. Are they in the black? Is everyone paying their assessments? You can't save in a reserve account if people aren't paying their dues. Or are they squandering money on pet projects and "wants" and not saving for the proverbial rainy day when the capital assets need to be replaced.

JacquelineV1 (Delaware)
Posts: 13

Posted:

David thank you for that piece of advice -- I will most definitely check that out.

JohnB26 (South Carolina)
Posts: 1,569

Posted:

so .... you don't have a clue, but, still stated that 'they' were in breach of their duties ?!

and I, in my infinite stupidity/gullibility 'bought into' your babbling ?!

have a merry holiday

PEACE ON EARTH TO ALL MEN OF GOODWILL

yes, the quote is actually accurate

JacquelineV1 (Delaware)
Posts: 13

Posted:

Ann,

Here is the situation. The CC&Rs mandate that a Reserve fund be created and funded. The audit states how much should be contributed on a yearly basis based on the Reserve fund study. They are ONLY CARRYING A BOOK ENTRY as how much should be in it THERE ARE NO ASSETS backing up that ledger entry.

The HOA is under the control of the developer -- the BOD is totally controlled by the developer.

We are in the red to the tune of 11 million. The developer is funding all shortfalls but they are not absorbing them.
Once again there is a book entry of how much we owe the developer. According to the CC&Rs they MAY forgive all part or none of it. We also are on the hook for 8 million for the golf course according to the CC&Rs. When we personally bought the community had just started and the economy was great.
Ever since they have been struggling.

I believe we as homeowners have a HUGE financial risk but the majority of homeowners do not feel the same. They feel that the developer will do the right thing.

Personally I believe that is a very naive position to take. One developer picked up stakes and left and we were just fortunate that the partner in the venture took over. I am sure they paid pennies on the dollar for the assets.

But what I believe others do not consider is that the developer makes "business" decisions and if the community is not going to turn around they will also walk away. They are there to make a profit.

Without Reserves to count on there would be special assessments.

I am guessing that we would have to take the BOD to court -- I do believe that they have breached their fiduciary responsibility. They have kept the HOA dues artificially low in order to sell homes too.

But again the majority of homeowners do not see this. It is a 55 and older community and the mean age I would suspect is mid 70's. Most believe by the time this happens they will be dead! I kid you not!

I was just wondering is there anything other one can do besides litigate.

GnomeX (Washington)
Posts: 253

Posted:

Quote:

Posted By JacquelineV1 on 12/15/2013 9:05 AM
I believe we as homeowners have a HUGE financial risk but the majority of homeowners do not feel the same. They feel that the developer will do the right thing.

Even if you have no problems now, they can crop up decades later. You best watch the developer like a hawk if you plan to stay there.

Let me tell you what happened to us because people just naively trusted (and still trust) the developer.

Our community was built in early 1980s. Developer never deeded over golf course to the HOA, he fell behind on property taxes, & county foreclosed. Fast forward to 2005, new owner sold the golf course and now, it is no longer a golf course. We lost it, never to return thanks to our "trusted" developer.

Fast forward again but now to 2011 when I move here, get on the Board, and discover that NONE of the other common areas were ever deeded over either. NONE of them. Not a single park, greenbelt, the clubhouse and surrounding acreage, and even the ROADS!

When I raised the alarm, I got the same reaction that you are getting and much worse. People believe in fantasies and will many will outright hate you for bringing up inconvenient facts. I was called just about every name in the book as many people here are friends with the developer's family.

And get this.

Last month I found out that the widowed wife of this developer SOLD ONE OUR ROADS. Not in 1980s, not in 1990s, not in 2000... But in February 2013!!!

Our HOA maintains common areas. Developer retains ownership and sells em at profit. Or worse loses them entirely and the community is out.

But many of the people here side with the developer and accuse me of spreading lies.

You can't make this stuff up... People will believe anything... Wizards first rule...

GnomeX (Washington)
Posts: 253

Posted:

And like you said, with that many elderly they simply won't care as they will all be dead.

JacquelineV1 (Delaware)
Posts: 13

Posted:

Gnome,

Thank you so much for that piece of information about deeding over the common areas and clubhouse etc to the HOA. I know we are paying for all of it in our dues but honestly I am not sure who currently owns it. Hmmm not sure in Arizona either. I will reach out to both but in Delaware I will go to the recorded of deeds and check it out for myself!

JacquelineV1 (Delaware)
Posts: 13

Posted:

LarryB13 (Arizona)
Posts: 4,099

Posted:

Jacqueline,

Normally reserves is a pile of money set aside to pay for foreseeable future repair of capital assets. This is just a common-sense recognition of the fact that as things get older they break down. In your case, the builder/developer is still in control, suggesting that everything is still fairly new. Unless your association is the size of a county, $2.8 million in reserves at this point sounds unusually high. Normally when the developer turns control over to the owners nothing should require replacement.

How big is your development and how did that $2.8 million figure come about?

CarolR11 (Colorado)
Posts: 2,563

Posted:

I'm wondering about the $2.8 million figure too. What common area elements does it include?

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