ReserveFunding

Hi Everyone,

I am the Chairman of my HOA Budget and Finance Committee. I am trying to make sense of our recent Reserve Study to fund for the Placement of HOA assets. Here is a Summary of the Funding Schedule presented by our independent specialist:

Present Future Proposed
Dollars Dollars Dollars

Funding Requirements over 30 years $876K per year.......$26,280MM $19,000MM

Reserve Requirements ......................$13,196MM $19,119MM $19,119MM
Reserve Balance invested in CD's............$3,119MM 3,119MM 3,119MM
Balance Requiring Funding...................10,077MM 16,000MM 16,000MM

Balance in the Reserve account after replacement cost...$10,280MM $ 3,000MM

So, at the end of 30 years, we will have $10,280,000. I think the funding amount is excessive. Under my proposed funding, we would cap the Reserve Account at $3,000,000. That would reduce the yearly funding to $633,333 per year, and we would have $3,000,000 in our investment account as a fall back in the event of a need(s) in excess of the Reserve Study.

Note; the Future Dollars and my Proposed dollars, do not assume any earning on the investment. My compounded growth based on CD interest rates of 2% though 5% would add an additional amount in the reserve account of $225K though $753K!

The question I have is:

1. Why would our independent specialist(very reputable firm), suggest a funding that is in excess of the Required Funding by $10,280,000? Am I missing something?

2. Would the excess funding come under attack by the IRS under RR 70-604 and be deemed taxable income to the HOA?

Since I am new to the committee chair, I don't want to appear ill informed.

Thank you in advance for answering.

Vince De Simone

To answer your questions ... we would need more information:

1 Are you Condo, Patio Home, Single Family type HOA?
2. How many units do you have in the HOA?
3. What "common area" does the HOA contain ... swimming pool, tennis courts, etc.?

Have you taken into consideration reserves that have to be spent over the course of thirty years?

According to your numbers, you have $3M now and will overfunded by $10M, and the requirements are for $13M.

My calculations says the reserves are correct.

My calculations show the $10,000,000 overfunded after replacements of 15,781,000 in 30 years. Why would we want to overfund?

What am I missing. If this is 2047, and I am sitting with a Reserve of $10,000,000, and I need an additional
$15,000,000 to fund all replacements, for the next 30 years, my Required funding each year would be $166,666 each year to fund $5,000,000. Right?.

I think I see where confusion is ... Keep in mind the company gave you an estimated analysis based on values at the time and knowing that costs usually increase. If the funding was started over 10 years ago as you noted at $876,000 x 10 = $8,760,000; however, you at this time have only a little over $3 million probably because there have been some repairs over the last 10 years. The study is an estimate of possible costs over a 30 year period, not necessarily what you must have in the bank. At some point if costs increase you may need to increase reserve estimate.

TY everyone for your comments.

I need some time to absorb this.

Vince De Simone