waiver from 100% reserves funding

Started by JimR24 • 24 replies • 1750 views

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JimR24 (Texas)
Posts: 399

Posted:

There is an idea floating around our community to make a motion (for possible adoption by our membership at our next Annual Membership meeting) to waive the need for 100% funding of our capital replacement needs.

By applying math to our 2012 Reserve Study and seeing where we are in terms of needs for future capital replacement needs, there does not appear to be a way in which our Association can have a collection plan which would come close to a 100% funding level when it is needed.

It is my understanding that, in order to have a 100% funding level (from a reserves funding standpoint), there must be sufficient reserves being put aside to fully fund future capital replacement needs when needed.

What do you think?

Any comments or suggestions?...questions?

Thanks,

oljim, in texas

Lovin' life with my honey!
and, President of HOA in Texas

RichardP13 (California)
Posts: 3,868

Posted:

Jim

The 100% fully funded is as of today's requirements.

If you are funding for a pool heater that has a useful life of 10 years and it cost $3000.00 and you put it $300.00 a year beginning in 2011 it is 2016 or year 5 and the funds are at $1500.00, you would be 100% fully funded.

Funding for everything long term is a different story and one that reserve studies don't generally pickup.

NpS (Pennsylvania)
Posts: 4,216

Posted:

Complicated topic. But most important thing to consider is what exactly does "100% funding" actually mean. First thing to realize is that it's not the only yardstick used to evaluate reserves - There are 2 others.

1. "Baseline Funding" - Under this method, you make sure that your reserve funds never dip below $0. In other words, you always make sure that there is enough money in reserves to pay for projected expenditures this year. This of course is the riskiest approach because if any of your projections are wrong, you won't have enough $ to make needed repairs/replacements.

2. "Threshhold Funding" - Under this method, you choose a % of the 100% funding plan requirements (say 10% or 20%) and never let your reserve funds dip below that percent. This approach gets you to focus on the years that you expect to have big reserve expenditures - It's a big step up from "baseline funding."

3. "100% Funding" - Under this method, you typically set aside funds as if you had a separate account for each component. So if you have a big expenditure in one year for Component A, you aren't going to use money set aside for Component B. The end goal is to always have enough funds set aside to be "current" on all components. For example, if you have a component that is going to be replaced this year, 100% of the money is available and set aside for that component now. If a component is scheduled to be replaced next year, and it has a 10-year life, then 90% of the money for replacing that component is set aside now even though it won't be spent til next year. This of course is the most conservative approach and IMO, it might be overkill.

Best example I can give is my own community. We have no amenities. The cost to repave our roads represents around 55% of of our reserve needs. Repaving is scheduled for the next few years. We have ample funds now to pay for the repaving. We chose to run on the "Threshhold Funding" model for now. We also have a long term plan that gets us to "100% Funding" in the year 2024. If we never reach "100% Funding", it be a big deal because we can probably run on "Threshhold Funding" for a very long time.

Sikubali jukumu. Read all posts at your own risk.

NpS (Pennsylvania)
Posts: 4,216

Posted:

CORRECTION:

Quote:

Posted By NpS on 02/01/2016 7:25 PM
Complicated topic. But most important thing to consider is what exactly does "100% funding" actually mean. First thing to realize is that it's not the only yardstick used to evaluate reserves - There are 2 others.

1. "Baseline Funding" - Under this method, you make sure that your reserve funds never dip below $0. In other words, you always make sure that there is enough money in reserves to pay for projected expenditures this year. This of course is the riskiest approach because if any of your projections are wrong, you won't have enough $ to make needed repairs/replacements.

2. "Threshhold Funding" - Under this method, you choose a % of the 100% funding plan requirements (say 10% or 20%) and never let your reserve funds dip below that percent. This approach gets you to focus on the years that you expect to have big reserve expenditures - It's a big step up from "baseline funding."

3. "100% Funding" - Under this method, you typically set aside funds as if you had a separate account for each component. So if you have a big expenditure in one year for Component A, you aren't going to use money set aside for Component B. The end goal is to always have enough funds set aside to be "current" on all components. For example, if you have a component that is going to be replaced this year, 100% of the money is available and set aside for that component now. If a component is scheduled to be replaced next year, and it has a 10-year life, then 90% of the money for replacing that component is set aside now even though it won't be spent til next year. This of course is the most conservative approach and IMO, it might be overkill.

Best example I can give is my own community. We have no amenities. The cost to repave our roads represents around 55% of of our reserve needs. Repaving is scheduled for the next few years. We have ample funds now to pay for the repaving. We chose to run on the "Threshhold Funding" model for now. We also have a long term plan that gets us to "100% Funding" in the year 2024. If we never reach "100% Funding", it won't be a big deal because we can probably run on "Threshhold Funding" for a very long time.

Sikubali jukumu. Read all posts at your own risk.

TimB4 (Tennessee)
Posts: 21,059

Posted:

NP nailed this issue.

Being 100% funded can mean different things.

Although I have always seen requirements that reserve studies be done. I have not seen requirements that the funds themselves be 100% funded. Typically, if the Board takes the issue to the members and the members vote against fully funding the reserves, the Board has met their requirement.

One thing to keep in mind is that more and more States are requiring that Association finances be disclosed to potential buyers. Failure to fully fund the Reserves may cause lost sales. I've personally walked away from three homes we were interested in because of Association finances.

JimR24 (Texas)
Posts: 399

Posted:

Great information in this thread. Sure do appreciate each of you for responding to this important issue. I also appreciate the owners of this website making it available so all of us can share ideas and information.

There is much to think about and - right now, some on the Board are leaning toward making a motion at our next Annual Meeting that a waiver be approved for "less than" 100% funding. I may be thinking differently tomorrow...lol... - however, at this time (in consideration of everything), i am in support of this motion.

Gonna be interesting to see how all this floats out. We will also be educating our homeowners more on the definitions of baseline funding, threshold funding and 100% funding.

Thanks!

oljim, in texas

Lovin' life with my honey!
and, President of HOA in Texas

NpS (Pennsylvania)
Posts: 4,216

Posted:

Nice booklet that the state of CA puts out:

http://www.dre.ca.gov/files/pdf/re25.pdf

Sikubali jukumu. Read all posts at your own risk.

JimR24 (Texas)
Posts: 399

Posted:

Quote:

Posted By NpS on 02/02/2016 6:04 AM
Nice booklet that the state of CA puts out:

http://www.dre.ca.gov/files/pdf/re25.pdf

Wow - excellent booklet. Thanks sooo much for the reference!

oljim, in texas

Lovin' life with my honey!
and, President of HOA in Texas

KellyM3 (North Carolina)
Posts: 2,239

Posted:

Quote:

Posted By RichardP13 on 02/01/2016 6:54 PM
Jim

The 100% fully funded is as of today's requirements.

If you are funding for a pool heater that has a useful life of 10 years and it cost $3000.00 and you put it $300.00 a year beginning in 2011 it is 2016 or year 5 and the funds are at $1500.00, you would be 100% fully funded.

Funding for everything long term is a different story and one that reserve studies don't generally pickup.

Jim,

The 100% funding threshold is a goal that is very difficult to achieve because HOA's must invest in capital upgrades on a semi-regular basis. That said, Richard is correct in how to view Reserve Funding.

I would not change a thing with your HOA's policy for Reserve Funding because it doesn't change the reality of your budget situation; it merely affects human emotions. The amenities will certainly break down over time, and broken "stuff" is not concerned with funding philosophy. Build cash!

JimR24 (Texas)
Posts: 399

Posted:

Quote:

Posted By KellyM3 on 02/02/2016 8:11 AM

Thanks for the response Kelly. So far, we've done a fair job of educating our homeowners about our reserves shortfalls. Lots of discussion about this now - and there is no shortage of opinions...bet you already guessed this - ...lol...

Our last monthly fees increase (at the first of this year) was pretty substantial and there appeared to be a good overall understanding of the reasons for this increase (i.e. to build cash). I will try to remember to keep ya'll up to date on how this goes for us. Interesting topic...huh?

oljim, in texas

Lovin' life with my honey!
and, President of HOA in Texas

KellyM3 (North Carolina)
Posts: 2,239

Posted:

You will find that residents often understand the basic tenets of Reserve Funding (as a hedge against special assessments) when explained in a transparent manner over a fairly long period of time. When understood, you find they'll support saving cash as they understand the "rainy day" will come, no matter what, for capital expenditure.

JohnC46 (South Carolina)
Posts: 14,265

Posted:

Quote:

Posted By KellyM3 on 02/02/2016 9:33 PM
You will find that residents often understand the basic tenets of Reserve Funding (as a hedge against special assessments) when explained in a transparent manner over a fairly long period of time. When understood, you find they'll support saving cash as they understand the "rainy day" will come, no matter what, for capital expenditure.

Kelly

I find the older the residents are and the less income they have, the less they care about reserves. More than one has said well I will be dead before that needs to happen and if not said publicly, many privately think it.

NpS (Pennsylvania)
Posts: 4,216

Posted:

Quote:

Posted By JohnC46 on 02/03/2016 5:57 AM

People who are likely to move in the next few years don't care much either.

Sikubali jukumu. Read all posts at your own risk.

JimR24 (Texas)
Posts: 399

Posted:

I believe that all of you are right-on in talking about how homeowners feel about this subject.

Lots depends on their circumstances and how they see their finances in relation to the finances of the HOA. I find that many understand that they have partial funding responsibility for what the HOA does; and some have difficulty seeing how their contributions relate to the overall picture.

Very interesting stuff.

oljim, in texas

Lovin' life with my honey!
and, President of HOA in Texas

SheliaH (Indiana)
Posts: 6,964

Posted:

Yup – with the economy we’ve had and still have, you think people would be think more long term when it comes to finances, but…

Like you, I think a 100% waiver is probably not a good idea and it’s always amazing that people THINK they won’t have any issues because 5 or 10 years hence they’ll be gone (moved out or taking a dirt nap!) Unfortunately, life is what happens when you’re making other plans (as John Lennon once said) – you thought something would happen in 2020, but fate moved up the schedule and something showed up on Labor Day 2016.
I seem to recall you’re on the board, so you may want to get your figures in order to show why this is a bad move and present your argument at the meeting. The reserve study specialist could assist you in preparing it, starting with defining what you mean by 100% funding, as NpS suggests.

Better yet, perhaps he/she could look at your budget vs. the reserves and make a presentation on where the community is right now and what it should do (or not) to ensure they and future owners can get repairs and replacement done without resorting to a special assessment or loan – or both. Sometimes people are more inclined to listen to an impartial third party (the study’s already paid for, so the specialist doesn't have any skin in the game, as it were).

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

JimR24 (Texas)
Posts: 399

Posted:

Thanks Shelia - for taking the time to respond..and for your advice.

This issue will be discussed at our Board meeting later this month. Gonna be interesting to hear more Board member's thinking on this.

oljim, in texas

Lovin' life with my honey!
and, President of HOA in Texas

NpS (Pennsylvania)
Posts: 4,216

Posted:

Thinking on your issue a bit more Jim - While I have no objection to your board deciding to eliminate the 100% funding requirement - I have a very serious objection if your board does not put forward a credible proposed alternative. Are they proposing a 20% threshold funding plan? 25? 30? 35?

I could go with any one of these if I had confidence that the board had developed a workable plan and were going to live by it.

Sikubali jukumu. Read all posts at your own risk.

JimR24 (Texas)
Posts: 399

Posted:

Quote:

Posted By NpS on 02/03/2016 11:36 AM
Thinking on your issue a bit more Jim - While I have no objection to your board deciding to eliminate the 100% funding requirement - I have a very serious objection if your board does not put forward a credible proposed alternative. Are they proposing a 20% threshold funding plan? 25? 30? 35?

I could go with any one of these if I had confidence that the board had developed a workable plan and were going to live by it.

Thanks for your response NpS. Our 2012 Reserve Study projected proposed capital replacement needs for 20 years. This Reserve Study has been crucial to our understanding of where we are and what plans we need to be making for future needs. So far, our homeowners have taken this study seriously and i have been impressed with the interest being shown to be as financially responsible as possible.

There is ongoing discussion now about how best to handle a deficit which appears to be coming in the year 2022 (primarily because of probable roof replacement needs). We are exploring several options we have available (such as substantial increases in monthly fees, special assessments and using debt).

The jury is still out about whether we will end up with a workable plan; however, in the past - our community has had good leadership and good support, and my guess is that there will be a workable plan as soon as everybody puts their best thinking forward. I have produced a first draft of a plan which i will be offering for discussion at our February board meeting. Gonna be interesting to see how this floats out.

Thanks!

oljim, in texas

Lovin' life with my honey!
and, President of HOA in Texas

NpS (Pennsylvania)
Posts: 4,216

Posted:

If you don't mind my asking, how much are roofs and what % of total reserve requirements?

Sikubali jukumu. Read all posts at your own risk.

GenoS (Florida)
Posts: 4,276

Posted:

Quote:

Posted By JohnC46 on 02/03/2016 5:57 AM
Kelly

I find the older the residents are and the less income they have, the less they care about reserves. More than one has said well I will be dead before that needs to happen and if not said publicly, many privately think it.

Tell me about it. Where I am the board routinely passes a budget that underfunds the reserves by about 30%. Instead of insisting that the homeowners take a vote on underfunding or waiving certain reserve accounts - as mandated by state law - the owners literally applaud when they hear assessments won't be going up next year. I almost had to get up and walk out of the meeting the last time that happened in October.

Not only do the homeowners not know, they don't want to know. This and similar situations are further evidence that buying into an HOA with a large percentage of older retirees can be problematic if you're planning to live there for 10 to 20 years or more. We suffer from the "What do I care?" syndrome here and we're not even a designated 55+ community.

At this point we're headed at full speed into a special assessment for painting in 5 years. At the current rate of reserve funding we'll be $150,000 short of what's needed when 2021 arrives (next painting scheduled). Then things will get interesting. I can almost guarantee this without knowing who will be on the board in 5 years' time. The board won't do a special assessment but will raid the roof reserve, again without an approval vote from the homeowners as called for in state law, leaving it short by $150,000 when the next re-roofing is scheduled 5 years after that. At that time, with another paint job only 3 years away, there will not be another reserve account available for looting so a special assessment will be needed.

So the worst part of my scenario is 10 years down the road and nobody here, including the board, has any desire to worry about that now.

This forces me to reconsider whether or not I really want to stay here. Essentially the current owners are unwilling to pay into the reserve funds at an adequate (state mandated, I might add) level. Why should I be stuck with the tab? If I do decide to sell I will switch camps immediately and sing the praises of how well our reserves are funded. Potential buyers will like to hear that.

JimR24 (Texas)
Posts: 399

Posted:

Quote:

Posted By NpS on 02/03/2016 12:51 PM
If you don't mind my asking, how much are roofs and what % of total reserve requirements?

Excellent question NpS. Our estimate on roof replacement for all of our buildings is approximately 1.1 million (estimated in future dollars) - and this represents a major percentage (46%) of the whole for a single element of our reserve requirements.

oljim, in texas

Lovin' life with my honey!
and, President of HOA in Texas

NpS (Pennsylvania)
Posts: 4,216

Posted:

Quote:

Posted By JimR24 on 02/03/2016 1:23 PM

Posted By NpS on 02/03/2016 12:51 PM
If you don't mind my asking, how much are roofs and what % of total reserve requirements?

Your situation (roofs 46% - life 25+ years) is similar to ours (roads 54% - life 18+ years). In our opinion, threshold funding is the way to go. If you choose 20% threshold funding, you might need to have around $150-175k in reserves above and beyond roof replacement cost. My numbers are just roughs - but they do indicate that you would have a decent buffer depending of course when your other expenses need to be made.

Sikubali jukumu. Read all posts at your own risk.

JimR24 (Texas)
Posts: 399

Posted:

Sure do appreciate your thinking on this NpS. Although we have 20 yr rated shingles - with all the heat and wind here in Texas - we have been told that 20 yr shingles won't last that long. To confirm this, we had an independent inspector evaluate our roofing and he agreed with the "shorter than 20-yr" opinion.

We still have some time to consider the best route to go with this. Seeing where we are now, i am getting close to the opinion that debt may be a reasonable option for us. We do not have any debt on our books right now, so that decision won't be an easy one.

Anybody else have any experience with using debt to take care of capital replacement needs? I am curious about other HOA's experience with using debit in situations like this.

Thanks!

oljim, in texas

Lovin' life with my honey!
and, President of HOA in Texas

GlenL (Ohio)
Posts: 5,491

Posted:

Jim, more and more lenders are taking a look at reserves before they will write a mortgage. So even if they save themselves a buck or two today, they may find themselves with an unsalable property down the road unless they can find a cash buyer. If you have any friends that work in real estate or banking, you might check with them about this.

Studies show that 5 out of 4 people have problems with fractions

JimR24 (Texas)
Posts: 399

Posted:

Quote:

Posted By GlenL on 02/05/2016 4:00 PM
Jim, more and more lenders are taking a look at reserves before they will write a mortgage. So even if they save themselves a buck or two today, they may find themselves with an unsalable property down the road unless they can find a cash buyer. If you have any friends that work in real estate or banking, you might check with them about this.

Yep right-on GlenL. We have a pretty high demand of the homes in our condominium at this time and we sure don't want to do anything to decrease this demand. To keep home values up, we want to be as attractive to as many potential home buyers as possible.

My most recent conversation with the real estate professional (who sells many of the homes here) says we still have a way to go for our values to be impacted....and she has been able to make sales within a short period of time Ya never know though - and we're keeping a close eye on this....for sure!

Right now, our reserve fund (to the novice eye anyway) looks mighty healthy. However, when projecting out capital replacement (which are gonna come sooner or later...no doubt about it!) over the long term - things don't look so rosy.

oljim, in texas

Lovin' life with my honey!
and, President of HOA in Texas

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