Reserve Account Misuse?

Started by DennisG7 • 8 replies • 1326 views

💬 Join us to post & get advice from 50,000 HOA & Condo leaders.

⚡ Takes 30 seconds

Already a member? Log in

DennisG7 (Georgia)
Posts: 155

Posted:

Our HOA in GA of 189 single family homes is 17 years old. We have an annual income of about $80K. Our Reserve account for the past 5-6 years has hovered around $105K. No funds have been transferred to the reserve account since 2013. As we entered 2017 our reserve balance was still $105K, until we started paying for new construction cost overruns. Our current reserve balance is around $73K and we still owe the contractor another $12K. I suspect those funds will most likely also come from the reserve account.

At a quarterly member meeting this week the Management company rep. said that Reserve Funds are often used to pay for NEW construction. I thought that reserve fund were primarily used for repairs, renovation and replacement of things, like the HVAC unit that had to be replaced a few years ago for $6K. Our CC&R nor our By Laws has no language regarding Reserve Funds use.

Can anyone offer any guidance on this? Are Reserve Funds commonly used for new construction?
Thanks

SheliaH (Indiana)
Posts: 6,964

Posted:

It's true that reserves are typically used for repairs and replacement of common area components like property line fences or roofing for townhomes, but your property manager may have been thinking of a situation where, say, a clubhouse was completely destroyed and the insurance payout wasn't enough to cover rebuilding it - that might be where reserves may come into play.

Since your documents don't contain language on how reserves are supposed to be used, it would appear that decision would be up to the board, although I would hope they would get buy-in from the homeowners. That said, I'm more concerned about the lack of reserve deposits since 2013 - costs have gone up since then and if your board doesn't turn things around like right now, the association risks needing special assessments as well as huge regular fee increases to pay for the usual major repairs and replacement.

I hope you are going to your board and demanding answers on this issue - if you don't get them or they don't seem well thought out (with supporting documentation), it may be time for you and your neighbors to consider if you want this bunch to continue serving as your board.

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

JohnC46 (South Carolina)
Posts: 14,265

Posted:

Dennis

There is no "law" about reserve funds but there are some typical guidelines/recommendations:

1. The amount in reserves should come from a reserve study, not a best guess.
2. They are to be used to replace/repair existing items not build new.
3. They can be borrowed from but one should have a plan to replace the borrowed funds.

Barring any controls in your docs, the above is a guideline to follow.

DennisG7 (Georgia)
Posts: 155

Posted:

Thanks for your thoughts. Since there is zero language in the CC&R and By Laws that address any financial issues to speak of I would say that the BOD is essentially free to spend it as they may. This issue surrounds a frequent posting I've made in the past. A "tennis pavilion" which I supported the construction of in early 2016 turned into a nightmare. It was bid and approved at $16.7K. A basic 20'x20' concrete slab with open sides and a simple truss roof. The project is essentially complete at a cost of over $50K. No we did not modify the design, 20x20 with a truss roof. Nearly all the excess funds came from the reserve account.

I raised my concerns about the cost and oversight of the project and was told (in the Monday meeting) that if I didn't like it I could move! I have been a thorn in their side because they have wasted thousands of dollars, ignored concerns voiced by other HOA members as well and are now looking at suing the contractor. I pointed out that our CC&R says the BOD must obtain a 75% approval vote to take legal action (law suit) if no contract was signed. We have no contract...it was a handshake deal.

Anyway when I read that portion of our CC&R out loud at the meeting the President went crazy. He and no other BOD member had ever looked at the section on litigation.

My concerns have been voiced in writing to the BOD and most have been ignored.

As to the reserve account! Good point. Since the last deposit in 2013 we should have put about $20-$25k into the Reserve account. NOTHING has been put in it. Last year I sent the treasurer 2 emails and asked why no funds were deposited? She never responded. On the last email she said to not contact her on the matter again and that I was being a bully for asking the question. She quit and the new Treasurer has refused to address the Reserve Account.

A member raised his concern on the reserve account at the meeting last Monday. Another $4000 was to go into the reserve account by the end of the year. It's not going to happen. We don't have enough for operating expenses, paying the contractor (12K) and an anticipated $5-6K attorney bill coming due.

I think we need to consider some CC&R language on the management of the accounts and stick to annual contributions that are budgeted but ignored. Can we say Fiduciary Responsibility ?

Thank for your observation.

TimB4 (Tennessee)
Posts: 21,059

Posted:

Dennis,

Realistically, I believe you know what is happening.
The tennis court pavilion went way over budget and, rather then use a special assessment, the Board used the Reserves (as they saw it as one big pot of money).

To answer your question: Yes Reserve funds can be used for other things beside their normal use (expected maintenance, repairs and replacement of existing capital components). However, the proper way to do this is by borrowing from the reserves with a plan to pay the reserves back.

Now, the end result in what your board has apparantly done will likely be one or more of the following:

1) deferred maintenance, repairs or replacements
2) special assessments when needed
3) higher annual assessments (as more will now be needed to be put into the reserves).

Keep in mind, now that you have a pavilion, you should have a new reserve study done to plan for the future expected maintenance, repairs and replacement of the pavilion. To learn more about reserves, see the following thread:

Subject: Reserve Studies/Funds 101

KerryL1 (California)
Posts: 14,550

Posted:

Well, though JohnC wrote there is no law about how reserves may be used, there is in CA and there might be in GA. So check, Dennis.
Our CA law basically says what JohnC & Tim wrote.

Seems like it's time, Dennis, for you & other likeminded Owners to get on the board!

JohnC46 (South Carolina)
Posts: 14,265

Posted:

Had I paid attention and realized this was Dennis from GA continuing to look for ways to hang his BOD on the Tennis Pavilion, I would have not posted.

PaininyourA
Posts: 215

Posted:

Quote:

Posted By KerryL1 on 10/26/2017 7:48 AM
Well, though JohnC wrote there is no law about how reserves may be used, there is in CA and there might be in GA. So check, Dennis.
Our CA law basically says what JohnC & Tim wrote.

Seems like it's time, Dennis, for you & other likeminded Owners to get on the board!

However, the IRS has rules regarding corporate taxes.

Use of reserves for purposes other than THEIR permitted purpose(s) may/will generate tax bills of 30% of said expenditure.

Now y'all may need to file 1120 instead of 1120(h) - an expensive 'oops'

What did the CPA say ?

JanetB2 (Colorado)
Posts: 4,219

Posted:

Quote:

I'm with Kerry ... you need to get others such as yourself on the BOD. That is your best method to keep an eye on everything and insure proper funding for the future.

🎯 You've read this entire discussion

Join the conversation with 50,000 HOA & Condo Leaders:

✓ Ask follow-up questions
✓ Share your experience
✓ Get expert advice
✓ Access 350,000 discussions

Create Free Account →

⚡ Takes 30 seconds

Already a member? Log in here