Reserve Fund & Fiduciary Duty

Back in 2010 our BOD had a Reserve Study carried out by Professional Reserve Analysts but didn't like what they were told so have not conformed to the recommendation. Over the years the BOD have changed and reserves have been built up in a completely inconsistent way. Maintaining a Reserve Fund is optional according to our docs.

Now, some 7 years later, a completely new BOD have decided to comply with the 2010 study but not commission a new one. This is despite the study actually saying a new study needs to be carried out every 2 to 3 years because of the variables such as the estimated rate of inflation that exist.

Even more alarming in my eyes is that HOA members have already paid $5000 to fund a new study.

I read somewhere that ignoring the advice of experts could very easily constitute a breach of fiduciary duty. Is that right?

Is there any case law which sets a precedent in regard to these matters?

Any help would be appreciated.

Thanks Tim. In our case the membership was not consulted.

I was just reading another thread relating to Reserves which you started and there's a link to a resource which shows each State's laws relating to Reserve Funds. http://www.reservestudy.com/legislation

For Florida it states "Annual budget requires computation and funding for “capital expenditures and deferred maintenance” (i.e. Reserves). "

Given that the computations being used currently are obsolete do you think the HOA are actually in breach of the law?

I'll try this again.

That would be a question for a local attorney.

However, lets expect that the answer is yes. What is it that you think is gained knowing this?

> Maintaining a Reserve Fund is optional according to our docs.

Look at this another way. Since a reserve fund is optionsl, funding a reserve study when the association does not intend to fund a reserve is an improper use of money, and violation of fiduciary responsibility.

If your documents say reserves are optional, I don’t know if you can accuse the board of not adhering to its fiduciary duty, although I agree they’re behaving stupidly. To fund and manage reserves properly does require regular studies (every 3-5 years is best) and possibly other steps, including assessment increases. No one likes those, so that probably explains why previous board did what they did.

It looks like your new board recognizes something has to be done – at least they’re starting with the 2010 study, although I agree it would be better to get an updated study using 2017 numbers (assuming that’s what the $5K was supposed to cover).

When I was treasurer of my HOA board, our too low reserve fund was one thing that concerned me almost as much as high delinquencies. I found educating homeowners was vital in pushing for regular reserve studies (at least every 3-5 years) and funding it regularly. If people still drag their feet, you may need to consider running for the board yourself to push for changes – perhaps you and two or three new board members might be enough to turn things around.

There are numerous discussions on this site as well as around the Internet on the importance of reserves – if you’re on the board, I suggest you take a look at some of them and start educating your colleagues and the homeowners. The homeowners need to understand that if the reserves aren’t properly funded, they’re looking at special assessments down the road, which they’d have to pay in addition to regular assessments (I doubt most people have several thousand dollars lying around for things like this). I’d also consider amending your documents to at least require a reserve study – that will require a homeowner vote, but if you educate them on what’s at stake, that may persuade them to vote to approve it.

What you and your neighbors need to keep in mind is money in your Reserve Account is money which down the road will avoid a "Special Assessment" being administered against all property owners. It is much better to set a little aside each year for future "high dollar" items vs. an all of a sudden large amount charged to owners. This is why more and more states are in essence requiring a "reserve fund". To save a little over time does not put a financial hardship on owners vs. a large special assessment being charge to owners. It can potentially be a difference of keeping your home vs. loosing your home in some circumstances.

Thanks for all the comments.


I just think that once a BOD have taken expert advice and don't act on that advice then you have to ask why they bothered and then collect an amount from owners to pay for the next survey and then don't conduct one? Having checked our docs. I can see that the BOD can approve a compounded 15% increase in assessments. Our assessments are actually less than the original assessment of 10 years ago so there's no real limit in that respect.

If you take the 2010 advice and adjust the figures to the actual inflation rate as opposed to the figure used in the study then I believe our reserve fund is about $500 per owner over-funded. There are owners who have contributed for the last 10 years who have sold their homes and have lost this amount because the amount collected is just plucked out of thin air.



I honestly don't think I could have any effect. Over the years I've tried to help by offering advice, a lot of it I've found on this forum but it just gets ignored. Everybody is obsessed with the short term and they think $5000 is a lot of money to spend every 3 years when it works out at just $7 per owner per year.

Be careful with saying the reserve is overfunded – you have to consider what the association is responsible for (which you haven’t mentioned) and then see if the current balance has kept up with inflation. Inflation isn’t always the only thing that can influence the replacement/repair of a major component. For example, your 2010 study in 2010 may have said the useful life of the roofs will end in, say 2035, but a huge amount of wear and tear due to weather or an unexpected storm might move up that date.

The owners who contributed for 10 year and have since moved on didn’t lose anything. People often balk at funding reserves because they figure they won’t be around in 10 years and shouldn’t have to pay for something they’ll never use. Frankly, I bet that's the main reason previous boards have been inconsistent in funding reserves.

What they and the rest of the homeowners need to understand is by funding reserves, they’re actually paying for the common areas they using right now while they live in the community. If you sell your home in 2012, the reserves you paid up to that point should cover your use of the streets, sidewalk and whatever else the association was responsible for. The new buyer is now paying for the portion they’re using up.

What’s unfair is when reserves are underfunded or not funded at all, you buy a house and are then hit with a huge special assessment to cover the roofs – why didn’t the association save for that expense and why should a new buyer pay for a new roof when he/she wasn’t there to use it up?

As for why the Board didn’t listen to expert advice, I agree it doesn't seem to make sense, but you'll have to take that up with them. If you're really unhappy, you may have to consider running for the board yourself so you can push for a new approach. That said, remember everyone, including you, has had an occasion where you asked for expert advice and didn't take it for whatever reason. Maybe you got another opinion that seemed more reasonable, you still weren’t ready to make that move, or didn’t have the money to make the move, etc. Sometimes the delays work out, other times it turns out to be a mistake.

No one’s perfect – sometimes you do all the due diligence you can and make what you think is a good decision, but it doesn’t work out. If you did all you can do, but still got a bad outcome, that’s not your fault, but you can and should learn from it, fix what you can and move on. Since you have a new board and they’re starting with the 2010 study, that IS a start – what you and your neighbors need to do is keep pushing them to make sure they get a good reserve study and follow the recommendations as close as they can.

The next time the Board gets a reserve study (whether you join the board or not), why not ask if the specialist can make a presentation at a special homeowners meeting where he/she can explain why reserves are necessary, how the study is conducted and the findings for your community? That will help the board as well as the homeowners

I am assuming you are an HOA as you noted in your original post. If you are a Condo let us know and we can provide a similar section regarding Condos.