Which Do Lenders Dislike Most: Underfunded Reserves? Or Special Assessments?

Our new reserves analyst and his Reserves Study show that our HOA now is only 36% funded. The reason is that he found about $2 million more in components than our two previous analysts: $7 mill. vs. $ 5mill.

I've carefully compared the three studies--very tough to do as different spreadsheets, layouts, etc. were used by all three. I think I've found about $1.5 mill that we didn't reserve for previously, and yeah, probably should reserve for (one is almost $1 million)

Anyway, at our August board mtg., directors panicked and voted by a 4-3 majority to increase assessments for '15 about 8-9% per high rise condo unit with a $10k a month increase in contributions to reserves. (213 units)

One director attended this meeting by phone and later said he really couldn't hear all directors. i know I could not always hear him. Anyway, he, I & the other one who voted against this increase are trying to think of more palatable ways to better fund our reserves.

Instead, for instance, of such a big month's increase that will only slowly bolster our % funded, we could do a special assessment. Or 1/2 assessment, 1/2 increase.

But our GM has said privately that lenders hate special assessments. And others have said that lenders hate underfunded reserves. Are both right? if so, which do they hate the most?

Kerry,

If I was a mortgage lender and asked for financials I could see whether your reserves were adequately funded (in my opinion). But how would I know about a special assessment that has yet to happen and may not occur at all? For that matter, how would I know about past special assessments?

I hit submit too soon.

I wanted to add that you shouldn't worry about what lenders may or may not be concerned with. You, as a Director, need to make decisions on what is best for the Association.

Kerry actually they dislike both. What banks really fear are the massive Special Assessments that cause homeowners to default on their loans, much like when all of the balloon payments came due on those nothing down loans that were so prevalent. Since the housing bubble burst, Fannie & Freddie put stricter loan guidelines in place which limit loans when reserves are underfunded, SA, percent of homeowner occupied units vs rentals, amount of units one individual can own, etc. And since a lot of banks resell their mortgages, surprise, surprise, many of them are following suit.

Although the amount of increase proposed is rather moderate, $47.00 per month or a $564.00 SA, which depending on the financial strength of your fellow homeowners, it could be seen as an annoyance or a real hardship coming up with a lump sum. Even maxing out the percentage of what you are allowed to SA for, it's going to take a few years to make up for your shortfall: $2,000,000.00 divided by 213 is approx $9,390.00 per unit or 16 years.

Good point. The lenders are not your constituency. Whether units are easy to finance or hard to finance is not your board's problem.

It also seems that much of the concern about the financial health of associations comes from the FHA. Since the FHA finances the bottom rung of home buyers I would not lose any sleep that those who are on the fringe may not be able to get a mortgage in my community.

Interesting question and even more interesting responses! Personally, I would think this depends on the lender, but if I had to choose, I'd say underfunded reserves are more worrisome because they ultimately lead to special assessments.

Our reserves are in even worse shape that yours, but the Board is limited to increasing assessments up to 5% over the current year without homeowner approval. Before I left the board (I was treasurer), I suggested that we gradually increase the percentage of assessments that went to reserves. It was 9% at the time, so I said we should increase it by 1% every year until we hit 15%, then hold at 15% for a few years and see where we were.

Unfortunately, we're so far behind now, that even this approach probably won't help us avoid a special assessment, but you have to start somewhere. I'd gotten this idea from another HOA, which included annual fee increases of a certain percentage (3%, I think) for the next five years or so. Our association started planning the 2015 budget this month and has to approve it and send it to the homeowners by December 1 - I wasn't at the September meeting, but will attend the next two to remind the board why they really can't hold assessments at the current rate as some have suggested. Yes, it would be nice not to have to worry about increases, but I believe the die has been cast and we have no choice but to accept fee increases of at least 3% for the next 20 years (at a minimum) will be the rule, not the exception.

You might want to try this approach, working with some of the percentages you mentioned. This way, homeowners would know in advance what to expect and plan accordingly. In the meantime, be sure to evaluate the performance of your reserve investments to see if there isn't another place you could put the money where it'll grow, yet protect the principal in the account. Couple that with doing some hard analysis of your operating budget to see where you can save some money and you should be ok. Good luck!

Excellent point! When it comes to affordability, I was always more concerned with the Association having enough money to provide routine maintenance consistently, funding reserves properly (so we'd have the money for future repairs and not need special assessments or loans) and making repairs when they became necessary. I'd rather spend on a small repair now than delay and have to pay a lot more later. Everything goes up no matter what you do, so it's easier to concentrate on making sure you're getting the biggest bang for your buck. Of course, that requires a long, thoughtful look at the numbers and the story behind them, and we know this interferes with watching the latest episode of Survivor or The Voice!

Too often, people yell about assessments being "too high," but never explain how they came to this conclusion. Most of the time they'll say "X community pays a lot less than we do" or "this community looks a mess - where's the money going?" The second comment may be valid if the board really is wasting money, but I always challenged homeowners to bring me X community's budget and contact information for its treasurer so we could compare notes and perhaps see if there was something our community might adapt to save money. Otherwise, I don't care what X community pays because I don't live there.

No, it's still the bottom rung. It's just that there are a lot more of us in the bottom tier.

Full Disclosure: My wife and I bought a home in 2011. We thought our credit was pretty good but the FICO score put us just three points above no mortgage at all. We purchased a foreclosed home through FHA with just 3% down. Our home is now worth double what it was when we bought it, so after just three years our equity in the home is roughly 50%. We could not have done it without FHA.

Thank you again for your replies. I still haven't looked again at a certain part of our reserves study, but for now I'll reply where I can.

Tim points out I should be most concerned about what's best for my HOA and I am! Down a ways on the list of directors' obligations, at least per our MC CCO/President, are items like curb appeal and marketability, which is why I asked the question. Our board has taken care of all of the more important items like protection of our common areas, maintenance, adequate operating budget. 37% of our condo units are tenant occupied.

At 36% funded, our new analyst characterizes our risk of sp. assess. because of deferred maintenance risk at "medium."

Eliminating 3 very inexpensive 900 sq. ft. outliers, the av. sales price ranges $500,000-$900,000. We do have several upper level town home style homes, or top story single level units that sell for $1 mill. + . Dues vary based on sq. ft. The proposed increase of $52 to $80 per month includes about a 3-1/2% increase to our operating budget.

Many Owners are retired now & bought their condos when the building opened in '01 for that purpose and moved in even years later. And until '04, the prices were reasonable by ocean & marina views- nice-urban-neighborhood, great- location standards. Such a large dues increase will be difficult, I think, for many such folk.

A special assessment of $1,500 per unit (N =213) would help us achieve about 40% funded almost immediately. (I think--I'm very weak at math.) We could still continue to fund our reserves at $48,000 per month. In thinking about the entire community, $1,500 will be a lot all at once for some, but I think credit cards can help spread it out just as if it were a dues increase. So, following, NpS, i believe a special assessment of $1,200-$1,500 per unit would be most 'affordable."

The sole purpose of the special assessment would be to bolster reserves, not conduct any major repairs or replacements, i.e, we're not "in trouble." Over the past 3 years we've replaced some very expensive components with construction defect settlement funds, and they should last a long time.

I should add that for the past 8 or so years, 40% of all sales in my (compact, vertical urban) zip code are all cash.

There's still a number I must look up, but much later.

I don't see how curb appeal and marketability are reserve elements.

Curb appeal comes through maintaining common elements. Common elements would be things like painting the outside of the building, trees and specific landscape elements, power washing the exterior of the buildings and sidewalks, etc. All of these would affect curb appeal and would be appropriate reserve components. However, creating a curb appeal reserve item sounds more like a slush fund to do what ever a board things should be done.

Marketability also comes through maintaining the common elements and, if needed, providing security.

Have you thought about distinguishing between owner occupied and rentals in your fee structure? In my experience, landlords have a better capability to absorb incremental costs because they can usually be passed on.


What would the move from 36% to 40% accomplish for you? Yes you will bring in more than $200k immediately, but as you said, you don't have an immediate need. Going from 36 to 40 seems like a "feel good" measure, and IMO not enough to warrant the disruption of a special assessment.


Square footage is probably not a good indicator of Wear and tear. Do you have the flexibility to use a different cost allocation criteria?


Never liked relying on credit card payments. Some people pay 26% or more on CC balances. It is the most expensive form of easy financing and can cause it's own problems.

Looking even more closely at the analyst's lengthy detailed reports, he (well, his firm's program) asserts that 20% of HOAs that are 36% funded experience specula assessment or deferred maintenance.

NpS, I didn't answer one of questions properly:The estimate varies each year. It's about how much per year the analyst says we'll need to spend in the next 10 years. He sees: '15--$1,305,334*; '16-- $316,447; '17--$118,174; '18, $188,851; '19--787,564.

*Need a complete first-time ext. bldg. paint (2-25 story towers) and coating of our garage floors (190,000 sf)

Hey Kerry

I forgot to mention the most obvious reason that you probably shouldn't do a Special Assessment this year.

You should do a Reserve Study Update in 2 or 3 years. While the list of components and their projected useful lives aren't likely to change between now and the update, 3 RS estimates could be quite a bit different by then: interest earned, inflation rate, and component replacement date. Any one of these could have a significant effect on your percent funding calculations.

You should probably have the update done by the same firm who did your most recent report. You will avoid the headache of trying to compare different looking reports done by different companies.

Thanks again to all and especially NpS. It really will, btw, be about $60-65 a month on average. And now I certainly need to check to see if our MC's lead accountant did the math right. All I can do is ask as I can't do it myself.

this is annoying, by the way, because we do have a Finance Comm., a board treasurer and two additional board members who have backgrounds in finance and/or securities analysis. One is an astute investor and makes the best investments possible--I do trust her. But they do not analyze anything and never question any of the numbers that we're given. My background has nothing to do with finance, numbers, etc., but I'm the one who finds financial errors. The new reserves analysts, for instance, attributed too many components to one of our specula benefit areas that would've cost them more per month than the correct attribution. (Yes, our special benefits areas make our finances even more complex.)

Anyway, I'm going to follow NpS's ultimate advice, and Kelly's too. I still will, however, ask the president to call a special meeting on the budget due to a teleconference director not hearing us and vice versa during the budget approval meeting. He's back in town. There were some additions approved to the operating budget that we might be able to reduce.

Interesting thought, NpS although I'm not so sure we could do it without an amendment to our CC&Rs. It's there that the two special benefit areas are defined and were written by the developer. There also is a mechanism by which to set up another special benefit area, but it seems to involve physical criteria for which a "Landlords Special Benefit Area" wouldn't apply.

Just one problem is that it's not unusual for owners to rent out their units, then move back in for a while then move out again. In addition, we have some owners who live here for the three summer months or for four-five winter months and rent out their units the times that are residing in their other homes. Some of this transitioning is starting to happen right nows as folks move back to Florida, TX, AZ, while others move back here from the northwest or Northeast.

Here, I can agree that our MC has a bit more paperwork from landlords as they must always register their tenants, files must be kept, but as high rises, the typical "pride of ownership" that might be visible in other communities isn't different here between renters & owner-occupants.

I really appreciate your thoughtful a advice, NpS.

Renter Fees could work here, NpS. Now, we already charge anyone who's moving a fee to cover the cost of the extra security office we hire to monitor our lobby doors for the movers. And there's a refundable deposit too for any damage that might be done on the move route.

"Reasonable" & "merited" fees would have mainly do with the paperwork. There are registration forms, fobs distribution & records, stickers for car windshields/car registration, and bicycle decals (if needed). There also are elevator reservation forms for our Asst. Mgr., her time checking the overs' liability insurance. Probably some odds & ends I'm not award of too.

Looks like it would be legal in CA:

"RENTER FEES
If done properly, it appears that landlord members of an association can be charged a "renter's fee" for the burden their tenants place on the association. In the case of Ken Watts v. Oak Shores Community Association a five-week bench trial on this issue resulted in a decision that the association fully justified its rental fees. It must be noted that this is a lower court decision so it cannot be cited for legal authority."

"RECOMMENDATION: As long as an HOA can show that fees related to renters are reasonable and merited (and not plucked out of thin air) this case demonstrates that such fees can survive a legal challenge. Boards should be cautioned not to levy fees on renters "just because." They should consult with legal counsel to evaluate if the association has a legitimate basis for such fees."

Read more: Renter Fees http://www.davis-stirling.com/RenterFees/tabid/3401/Default.aspx#ixzz3EwRecggW
from Davis-Stirling.com by Adams Kessler PLC.

Kerry
Get copies of pages 10-13 of the Watts v Oak Shores decision (referenced by the DS page you cited) for your board. IMO, it's a treasure trove for your discussions.

Dave

In our FHA purchases, our Declarant just filled out a basic form. When I asked him he said, no big thing.