Another Reserves Question

NigelB (Texas)
Posts: 254

Posted:

This HOA is located in Texas and I was just elected to the board in a "coup" (actually I guess I should have said rout but it seemed like a coup at the time.

The Reserve Fund for the HOA is now at around $62,000 and growing monthly. The management company handle all of the accounts and began transferring money from the operating account to a reserve account a few years ago. The operating account currently has a balance of $47,000. There are 230 homes in the association and annual due are scheduled to be raised by $25 to $535 this coming year.

I understand that Texas has no requirement that a Reserve Fund be established by an HOA. But I'm unsure exactly what the purpose of the HOA reserve fund is for because of the following reason. I understand that the purpose of a reserve is to provide for repair and replacement of capital assets held by the association. In the case of this HOA I think the only capital asset is some playground equipment including a couple of benches and tables in the playground area. Also a fountain in the detention pond.

As Texas apparently has no rules regarding reserves I have a couple of questions.

1. Is the accumulation of $62,000 appropriate
2. Can the reserves be used for purposes other than repair and replacement, such as the purchase of solar lighting for the entrance of the subdivision and to install a sidewalk in an area that the developer failed to provide for? Our governing documents authorize the establishment of reserves for repair, maintenance, taxes, insurance, and other charges as specified herein.
3. Was the $25 increase in dues appropriate considering the fact that the association maintains a $62,000 reserve fund and has a $47,000 balance in its operating account.

Actually I probably answered my own question as to what reserves can be used for because the "other charges as specified herein" would seem to cover it because the document specifies that among other things the assessments can be used for lighting, improving and maintaining streets etc.

I'm thinking that in addition to needing an audit prior to the new board assuming responsibility (2 of us were elected to a 3 person board), we probably need to get some kind of study done to appropriately set the amount necessary for the annual assessment. $62,000 just seems way to much of an overage to me.

TimB4 (Tennessee)
Posts: 21,062

Posted:

Nigel,

Storm water retention ponds can be as expensive as maintaining roads.

To determine what is appropriate, you need to have a reserve study done. A professional study will likely cost around $3,000.

See the following thread for more information about reserve studies:

http://www.hoatalk.com/Forum/tabid/55/forumid/1/postid/103517/view/topic/Default.aspx

NigelB (Texas)
Posts: 254

Posted:

Quote:

Posted By TimB4 on 11/18/2014 6:59 PM
Nigel,

Storm water retention ponds can be as expensive as maintaining roads.

To determine what is appropriate, you need to have a reserve study done. A professional study will likely cost around $3,000.

See the following thread for more information about reserve studies:

http://www.hoatalk.com/Forum/tabid/55/forumid/1/postid/103517/view/topic/Default.aspx

The detention pond actually belongs to the Municipal Utility District and they are responsible for its maintenance, I just received the agreement between the MUD and the HOA yesterday, it allows us to landscape, cut grass etc but the actual maintenance of the pond for the purposes of storm water retention is their responsibility.

KellyM3 (North Carolina)
Posts: 2,239

Posted:

1. Get your audit and offer it to your dues payers.

2. Figure out exactly what maintenance the HOA is responsible for. If you have private streets or asphalt surfaces, that maintenance and replacement will consume Reserve Funds, even large-seeming amounts.

3. Regarding lights, I'd argue you could do it....use your excess operating money (not reserves) to install the lights.

4. I'd argue you could use reserve fund cash to complete the sidewalk. By the way, you'll likely need to save into reserves to pay for the other parts of the sidewalk as they fail from age and weather elements.

If you've never served on an HOA, you'll see the Reserves as "profit." Don't do it. Your benevolence will walk your dues payers into a special assessment.

NigelB (Texas)
Posts: 254

Posted:

Quote:

Posted By KellyM3 on 11/18/2014 7:45 PM

1. Get your audit and offer it to your dues payers.

2. Figure out exactly what maintenance the HOA is responsible for. If you have private streets or asphalt surfaces, that maintenance and replacement will consume Reserve Funds, even large-seeming amounts.

3. Regarding lights, I'd argue you could do it....use your excess operating money (not reserves) to install the lights.

4. I'd argue you could use reserve fund cash to complete the sidewalk. By the way, you'll likely need to save into reserves to pay for the other parts of the sidewalk as they fail from age and weather elements.

If you've never served on an HOA, you'll see the Reserves as "profit." Don't do it. Your benevolence will walk your dues payers into a special assessment.

The only maintenance the HOA is responsible for is maintaining three small plots of land, cutting grass along with landscaping and cutting the grass of the 13 acre detention pond area that is owned by the Municipal Utility District. No private streets, the developer and individual builders were responsible for installing sidewalks, which then become public right of way and are maintained by the City. The only capital assets are the small playground consisting of swings, slides etc.

I don't see the reserve as being profit - I just think that probably the assessments might be too much. This community is young and was actually started in 2008. At that time the annual assessment was $450 and that has risen over time to $535 for next year. But in 2008 there were only a few houses and now the subdivision has been completed with 230 houses. Other than a 100 percent increase in the annual landscaping bill last year (from $24k to now over $51K) there really doesn't seem to have been any appreciable increase in overall costs. The landscaping is definitely something we need to look at, but it seems the old board might have reauthorized an annual contract just prior to the annual meeting we were elected at (another thing we have to change - contracts to be entered into after the annual meeting and election.

SheliaH (Indiana)
Posts: 6,964

Posted:

You said "there doesn't seem to have been any appreciable increase in overall costs" - you won't know that until you finish your audit, so do that first, so you can quote actual figures. You may also want to check how landscaping contracts were bid - perhaps the last board didn't collect enough of them - I always like to look at a minimum of three to increase the odds of getting a competitive rate. The lowest rate isn't necessarily the best - you have to look at what's coming with the costs and you WILL get what you pay for.

And don't forget about inflation - I looked at the cumulative inflation rate calculator on inflation data.com and it appears the cumulative rate between 2008 and 2014 was 10.82%, so what was a dollar in 2008 is $1.08 today. That's a starting point, but remember the cost of living in your area vs. others can vary. Labor costs and insurance are other factors that have probably increased. Finally if you go ahead and install lights, they will require maintenance, so you need to consider that in your operating expenses and reserves because sooner or later they will need to be replaced. One more thing, sidewalks use concrete, which is a byproduct of oil and we all know how gas has gone up and down through the years.

Bottom line, it's one thing to check the budgeting process to ensure you're getting the biggest bang for the buck, but be careful with that "assessments are too much" thinking. Sometimes people slash the budgets too much without thinking everything through only to be cause shorthanded a few years later. That could lead to special assessments - and then you and the new board might be the next group to get the boot.

If it is not right do not do it; if it is not true do not say it. Marcus Aurelius

NigelB (Texas)
Posts: 254

Posted:

Quote:

Posted By SheliaH on 11/19/2014 6:03 AM
You said "there doesn't seem to have been any appreciable increase in overall costs" - you won't know that until you finish your audit, so do that first, so you can quote actual figures. You may also want to check how landscaping contracts were bid - perhaps the last board didn't collect enough of them - I always like to look at a minimum of three to increase the odds of getting a competitive rate. The lowest rate isn't necessarily the best - you have to look at what's coming with the costs and you WILL get what you pay for.

And don't forget about inflation - I looked at the cumulative inflation rate calculator on inflation data.com and it appears the cumulative rate between 2008 and 2014 was 10.82%, so what was a dollar in 2008 is $1.08 today. That's a starting point, but remember the cost of living in your area vs. others can vary. Labor costs and insurance are other factors that have probably increased. Finally if you go ahead and install lights, they will require maintenance, so you need to consider that in your operating expenses and reserves because sooner or later they will need to be replaced. One more thing, sidewalks use concrete, which is a byproduct of oil and we all know how gas has gone up and down through the years.

Bottom line, it's one thing to check the budgeting process to ensure you're getting the biggest bang for the buck, but be careful with that "assessments are too much" thinking. Sometimes people slash the budgets too much without thinking everything through only to be cause shorthanded a few years later. That could lead to special assessments - and then you and the new board might be the next group to get the boot.

This is a very easy organization to audit as the monthly financial records are available on the management company website.

Going back to 2009, the largest expense was that of landscaping which accounted for $24k a year with another $2k-$3k for seasonal plantings. The next largest expense is the management fee and related administrative expense, then insurance, water, electricity. Total expenses during the early period were in the region of $57k annually. The last financial available (Sep 2014) shows that annual expenses are now at $101k annually - however $19k of that "expense" was money transferred to the Reserve account, and another $25k was for the increased cost for the landscaping contract. Deducting those two figures indicates that the actual expenses have really not increased that much.

In 2011 the reserve fund was $500. It is now at $62,000 and growing monthly. That would indicate to me that the board was either saving for some kind of project, or the assessments are actually in excess of what is needed. With the completion of the subdivision, the total dues received by the HOA have gone from $26k in 2009 to $121k for this coming year with no substantial increase in expenses other than the increased landscaping contract.

EllieD (Vermont)
Posts: 446

Posted:

NigelB,

Since money is being put into the Reserve Fund, have you seen, or have you asked to see the Reserve Fund Study?

The Reserve Fund Study should contain a breakdown of the items, or projects, to be done at some future date(s) along with the projected cost(s).

NigelB (Texas)
Posts: 254

Posted:

Quote:

Posted By EllieD on 11/19/2014 7:50 AM
NigelB,

Since money is being put into the Reserve Fund, have you seen, or have you asked to see the Reserve Fund Study?

The Reserve Fund Study should contain a breakdown of the items, or projects, to be done at some future date(s) along with the projected cost(s).

I don't believe that a Reserve Fund Study was ever done. The Associations documents are on the management company website and the Reserve Study tab is empty. I tend to think that moving money on a monthly basis into a reserve account was the idea of the property manager with the agreement of the previous board. I'll certainly be inquiring about the reason for the reserve at our first meeting. The build up of the reserve apparently began when control passed to the community - so the developer never contemplated any large expenditures.

KellyM3 (North Carolina)
Posts: 2,239

Posted:

Quote:

Posted By NigelB on 11/19/2014 7:19 AM

Posted By SheliaH on 11/19/2014 6:03 AM
You said "there doesn't seem to have been any appreciable increase in overall costs" - you won't know that until you finish your audit, so do that first, so you can quote actual figures. You may also want to check how landscaping contracts were bid - perhaps the last board didn't collect enough of them - I always like to look at a minimum of three to increase the odds of getting a competitive rate. The lowest rate isn't necessarily the best - you have to look at what's coming with the costs and you WILL get what you pay for.

And don't forget about inflation - I looked at the cumulative inflation rate calculator on inflation data.com and it appears the cumulative rate between 2008 and 2014 was 10.82%, so what was a dollar in 2008 is $1.08 today. That's a starting point, but remember the cost of living in your area vs. others can vary. Labor costs and insurance are other factors that have probably increased. Finally if you go ahead and install lights, they will require maintenance, so you need to consider that in your operating expenses and reserves because sooner or later they will need to be replaced. One more thing, sidewalks use concrete, which is a byproduct of oil and we all know how gas has gone up and down through the years.

Bottom line, it's one thing to check the budgeting process to ensure you're getting the biggest bang for the buck, but be careful with that "assessments are too much" thinking. Sometimes people slash the budgets too much without thinking everything through only to be cause shorthanded a few years later. That could lead to special assessments - and then you and the new board might be the next group to get the boot.

This is a very easy organization to audit as the monthly financial records are available on the management company website.

Going back to 2009, the largest expense was that of landscaping which accounted for $24k a year with another $2k-$3k for seasonal plantings. The next largest expense is the management fee and related administrative expense, then insurance, water, electricity. Total expenses during the early period were in the region of $57k annually. The last financial available (Sep 2014) shows that annual expenses are now at $101k annually - however $19k of that "expense" was money transferred to the Reserve account, and another $25k was for the increased cost for the landscaping contract. Deducting those two figures indicates that the actual expenses have really not increased that much.

In 2011 the reserve fund was $500. It is now at $62,000 and growing monthly. That would indicate to me that the board was either saving for some kind of project, or the assessments are actually in excess of what is needed. With the completion of the subdivision, the total dues received by the HOA have gone from $26k in 2009 to $121k for this coming year with no substantial increase in expenses other than the increased landscaping contract.

Just make sure you're saving for everything you KNOW your HOA will need to replace - using money not in your operating budget. Your issue, from reading this thread, is ensuring who cares for sidewalk replacement and who maintains 100% of the paving in your community.

Good luck.

BarbaraT1 (Texas)
Posts: 821

Posted:

Is there an irrigation system in those plots of land? It will need to be repaired and components replaced as it ages.

Are there any common area fences or perimeter walls? Do you have a monument sign at your community entrance?

Playgrounds are expensive, even small ones. Those little rocking horses? Easily $1500 apiece to replace. Don't get me started on the climbing equipment. Replacing the surface cushioning is a few thousand bucks each time, too.

If the community doesn't already have a reserve study, you should order one.