Funding of the Reserve Account

You do have a reserves analysis done every year, right, Michael? What does s/he recommend?? What path to reach the goal does s/he recommend? what is your % funded now?

Look at Davis-stirling.com for a lot of info on reserves. Reserves are not required in CA HOA, but yes, lenders will not be happy with a low % funded. There also is a lot of info available online.

Reserves analysts always rec 70-100% funded. You'll see your reserves report call that level low risk. I think medium risk is 30-70% funded. High risk (of a specula assessment is under 30%.

In my opinion, the Reserves should always be 100% funded.

It's not the reserve balance that counts. It's the percentage funded and how inclusive the reserve study is.

Note: As Treasurer, I have never had a bank or financial institution ask for the balance, percent funded or a copy of the reserve study for any loan request an individual owner made. Of course, these would likely be asked for if the Association was looking for a loan.

The longer you wait to fully fund the reserves, the greater the chance of special assessments.

When we did our first study, we had the membership vote and increased assessments to fully fund.
Of course, we did a lot of campaigning for that to happen with examples and explanations as to why it's best to fully fund.

Thank you KerryL1, that was a very nice and useful response. I like the idea of Special Assessment versus raising the dues. Raising the dues is of course permanent where as a special assessment is temporary.

This is very, very true. We had a re-roof estimate of $1.1 million last year for 100 homes. Another roofer, last week, estimated $1.3 million. The re-roofing is scheduled 6 years from now. That's a huge difference. In order to accumulate another $200,000 in 6 years we need to increase monthly per-home reserve contributions by $25. That's going to go over like a lead balloon. One alternative is a $2,000 per home special assessment in 5 years to cover the shortfall.

The worst part, though, is that estimate will change again and it's not likely to go down.

Agree with Augustin re 100% funding - BUT, only as it relates to the results of any particular study.

If the most recent study says you need another $100K a year, and the Board disagrees with the findings a bit (I'm not talking here about ignoring the findings, but disagreeing on the timing for replacements and repairs a bit), then I do agree THAT number needs to be funded at 100%.

Ex: our recent updated study noted several items needing in replacement in 3 year - we examined some of those items carefully and believe we easily have 5-7 years life remaining - so we adjusted the funding level to reflect that. We went item by item with a Reserve Study Group.

John,

I would consider what you described not as a burden, but simply part of the business case of the community.

Assessments should have been raised following the last re roof - the concept of the reserves is that everyone pays a fair share during their ownership period, right? i.e. no on skates for 15 years with too little roof contribute and then sells and then the next folks pay the replacement in shorter periods ...

I've always felt special assessments are bad and most of what I've seen and heard in various articles and CAI seminars I've attended, concur, not to mention my 10 years on the board (5 as treasurer). Thankfully, my community has never had a special assessment, but we had a terrible problem with delinquencies - like credit card debt, it affects your ability to do a lot of things. Our community is also over 40, which is around the time things wear out and you have to replace them or do major repairs (I find the human body is almost the same way!)

Special assessments generally means poor financial planning on the community's part. It's one thing if you have something unexpected, like a devastating hurricane like Florence and now Michael, and the damage is so extensive, insurance can't pay for it all and you don't have enough money in reserves to cover the difference, so a special assessment is necessary.

However, everything wears out sooner or later, so it makes more sense to save money now so you don't get caught off guard. Consider your example - sure your elevators aren't expected to need major repairs 12 years from now, but no one, including you, can predict the future. Incidentally, good maintenance - or lack thereof - can also play a role. If you haven't been maintaining it properly (usually because people want to keep assessments low so they won't have to spend money on things like annual inspections), those 12 years of people going up and down with their luggage, pianos, new sectional sofas and the like without regular maintenance can reduce those 12 years to 6.

Special assessments are also unfair to new owners. You and your current neighbors are using up the community assets because you live there, so you should also be paying towards their eventual replacement. Why should I have to move in and be hit with a special assessment a month after moving in while you lived there and used up the elevator's use for the last 12 years or however long you lived there, and then moved out? I didn't use up that asset, you did.

And how do you know everyone in your community will be prepared to pay a special assessment on top of the regular assessments to pay for routine expenses? Some people do have loss assessment coverage for that, but others don't. I have it, but I also have other expenses - what if something else happens around the same time the board comes calling for a special assessment, such as I need a major operation? Should I have to choose between my health and new roofs (or elevators) for the entire community just because people like you want to keep assessments "low"?

Let's not forget about delinquent homeowners - hopefully you don't have the problems my community has had, but if a special assessment became necessary, how do you plan to blast that money out of people who aren't even paying their fair share of routine expenses for whatever reason?

If you have the money to pay several hundred or thousand dollars for a special assessment now or in the future, good for you. But HOA boards can't think that way - it's best to plan for the next 10 years and concentrate on the next five. I'd rather pay a little more now and have the money available rather than have to empty all my savings (if I have any) or - get a loan.

Oh, yeah, the loan. You do know loans also mean interest - have you forgotten that if you get one, you have to make those payments as well as pay regular assessments and continue to fund reserves?. The banks do look at reserves when they make those decisions and just like your mortgage, the more savings you already have on hand, along with your on-time payment record, the better your chance of getting one at decent rates.

Ditto for bonds (a fancy way for companies and governments to raise money) - sooner or later the bonds will mature and you'll have to pay that along with interest (otherwise, why buy it?) How would you pay for that if your income (assessments) hasn't kept up with inflation and you've also taken steps to control spending and make sure your common areas are being well maintained?

Hmmm ... given the amount of info that is available about this now online and in your neighborhood, if I moved into the neighborhood in 2027 and had a huge special assessment dropped on me, I would probably add a few more thousand to the bill and sue the Board for malfeasance - perhaps it wouldn't fly in SC given the lack of, er, laws in this area, but ... it would make me feel really good.

RPita,

My point is less related to specific blame, but more to the concept of blaming someone via the legal system ... I would want to know I made someone bleed somehow.

Well, sure ... it might get thrown out ... but, that wasn’t my point.

No ...my point is that I would be extremely angry with an HOA BoD that shifted 20 years of costs onto me - this is malfeasance.

Condos, yes. HOAs, no.

The "disclosure summary" is something that puts a prospective buyer on notice that CC&Rs exist for an HOA. The condo statute FS 718.503(2) requires a seller to provide much, much more to a prospective buyer.

That's what a few of our first-year board members want to do. The problem is there's no state law that compels buyer acknowledgment and acceptance of the governing documents and rules & regulations. Our documents do not allow the HOA to approve or reject new homeowners or tenant leases. And yet, the treasurer has been talking to real estate agents and berating them for not getting buyers to sign off on receipt of just that. It would be nice to have, I agree, but absent the legal duty of a realtor to provide a buyer's signed acknowledgment of our restrictions and rules there's nothing we can demand of them.

Letter of Estoppel

An estoppel letter is a legal document provided by the seller’s Homeowner’s or Condominium Owner’s Association, outlining the current owner’s financial standing, past due balances, current fees due and lists all future special assessments due. Each letter has a “good through” date.

https://www.bing.com/search?q=letter+of+estoppel&form=IE10TR&src=IE10TR&pc=EUPP_CMDTDFJS

It Depends. :-)

If you are buying a house cash in our area, you will not automatically receive an estoppel letter. So, you have to ask.

Also, if the HOA is "voluntary" and cannot REQUIRE dues, many banks will simply ignore the entire thing.

If you act as your own attorney at closing, then, you have a fool for a client.

... paraphrase of Abraham Lincoln ...

Since I started this string , let’s get back on track. I am trying to understand the process that is used to justify the raising, keep the same or reducing the dues that are effect by state of the reserves funding. This has nothing to do with special assessments.

AugustinD mentioned this criteria from this web reference (https://www.reservestudy.com/what-exactly-is-percent-funded/)

Good 70% - 100% funded
Fair 30% - 69% funded
Poor below 30%

It been suggested that having a funded of above 70% encourages the Board to go on an unnecessary spending spree. Should we raise our dues based because our HOA has only a“Fair” Reserve funding?

These are the issues, I am trying to get ANSWERS:
Spending the reserves causes the percent of reserve funding to drop - maybe below “Fair”. Does this trigger raising the dues? But that is why the funds are there. For example repaving parking spaces and roadways. Do we have a percent between 30%and above that we can used funds our of the reserves without raising the dues?. Should we stop using the reserves if we fall below 30% funding or do we have to automatically raise the dues?
Right now our HOA is contributing about 17% of are annual budget to the reserves. My HOA is in California. Our reserve account is approximately funded 44% so we are “Fair”. This introduces the problems as to “how much (percent)” should an HOA contribute to its reserves when reserve funding is “Good”, “Fair” or “Poor”?
When a Board raises the Dues, they should provide reasonable justification to the membership showing they have performed some “do diligences”. But most the time it just seems “like smoke and mirrors”. We need to announce and show we are following some guidelines that are not just arbitrary. BUT WHAT ARE CRITERIA/GUIDELINES or FORMULAS????

Are you keeping in mind that, once the HOA has spent a chunk repairing/renovating/replacing a major capital asset, this triggers a new expected life of the asset. Without an assessment increase, the new percent funded figure will go down but not by much.

What I am seeing is that the typical HOA member lacks the math competence to understand even basic principles of reserve funding. I think the best a HOA can do is send people to a good web site and give the two main reasons for reserve funding: (1) for fairness, and for any one home, the cost of major capital assets should be spread over the years over multiple owners (as Shelia pointed out); (2) it is not only unfair to owners over the years but also financially reckless to instead do special assessments, since many owners may not be able to afford the special assessment and, since the need to replace/renovate a capital asset must be imminent, it could force the HOA to take out a loan and incur the expenses of interest, credit worthiness, et cetera.

Probably the biggest risk of imposing an assessment increase is that the unwashed masses of members will not understand why this is being done. They may vote a responsible board out and vote in an irresponsible board.

On the other hand, if the masses are rising up and saying they do not want a stinkin' assessment increase and prefer periodic large special assessments, then buyers in many states are permitted to review the status of reserve funding and in theory will understand a large special assessment is coming at some point, and possibly while they own the HOA unit. This should factor into the pricing of units so that, in theory, market forces will work their magic to lower the sales price of homes so that new owners can better afford an anticipated special assessment.

On the third hand, I doubt many buyers have a sufficient handle on HOA or business financing to get any of this. This argues for a board being responsible and maintaining 70+ percent reserve funding.

I was wondering if you were returning to chime in on this conversation.

Yes, there are some boards who might be tempted to look at reserves as some sort of slush fund where they can spend it on whatever. That’s why it’s good you’re asking questions - you may not always like the answers, but if the board has demonstrated that careful thought and research went into the decision making process, you should respect that. No one can predict the future, but since we never know when this economy might flip over and back again, it’s important to be prepared.

That said, remember there is no absolute rule as to when assessments should or shouldn’t be raised. Board members have to pay it too, and if they’re doing their jobs in a prudent fashion, they should be able to tell you what else influenced that decision – it’ll probably be more than the state of the reserve fund. Are your vendors increasing their fees? What about your property manager? Or the association’s master insurance (given the hurricanes, wildfires and other stuff happening lately, I wouldn’t be surprised if that influences your rates for next year)

You seem to think everything’s ok because your community’s reserve funding is considered “fair” as opposed to “poor” and perhaps that’s fine – for now. But you might want to Google “underfunded HOA reserves” or use the search function on this website to look for various conversations on the subject. Many people have asked the same questions you’re bringing up. Some of them also found out the hard way what happens when you have an underfunded reserve fund or no reserves at all. Trust and believe when I say you DO NOT want special assessments. You may not think they’re part of this conversation, but they really are because they often are a result of people keeping assessments “too low”.

I get the impression that you don’t completely understand the state of your community’s reserve funds or what a reserve study is and how it influences the budget (to be honest, there are a lot of board members who don’t completely understand it either!) Why not get a copy of your community’s reserve study and read it (ALL OF IT) so you can see the numbers for yourself. That’s where you’ll find the criteria the specialist used to crunch said numbers, but don’t stop there. Note the number and type of major components the association is responsible for, the state of the reserves at the time of the study and how soon some components will need to be replaced. You have to factor inflation into all of this, which is what a good reserve study will do.

By the way, do you not remember the “great recession’ and the beatdown it put on everyone’s savings accounts (which is what a reserve fund is)? It takes time for those accounts to recover (some longer than others). Meanwhile, time marches on, your community’s major components continue to depreciate and when the time comes to replace them it will likely cost more money because that’s what inflation does – along with changes in building codes, availability of materials, increased labor costs, etc., etc., etc.
You should also consider past decisions of the board – did the previous board or boards ignore reserves altogether and now the current one is playing catch up, which requires an increase in your assessments?

Still have questions? Talk to the board, and if they can’t explain it, ask that your questions be forwarded to the reserve specialist for a response. Better yet, suggest that the reserve specialist be invited to the next board meeting or perhaps a special homeowner’s meeting where he or she can discuss the study in detail and answer your questions and perhaps a few more.

Hmmm ... with only 40% Reserve funding level, every dollar possible should be going into it.

Perhaps showing my ignorance, but couldn't the Board transfer the excess for the year into the Reserve Fund, then reassess the Reserves and then base the new assessment for the next year on the relative level? i.e. if you add the 17% surplus into the Reserve Fund, does it substantially change the Reserve funding level, or does it just help a bit compared to whatever the previous plan was?

Another thought - since Reserves are for capital item replacement (in some cases major interval based repairs) the existence of a 17% excess for a year (assuming the reserves component had already been allocated on the books) may simply mean some bills didn't get presented, or some maintenance items cost less than predicted ...

you are presently 100% funded

if at year 73 you have 73% of replacement cost you would still be 100% funded

if, however, at year 50 you have 40% of replacement cost you would be UNDERFUNDED by 20%

I agree with Royal above. Michael, maybe take another look at the web site I linked and similar web sites. I do not think you understand fully, yet, how percent funded is computed. You are close, though.