Reserves

Started by StephanK • 10 replies • 613 views

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StephanK (Florida)
Posts: 11

Posted:

I now have to manage a very small HOA of three business owners. (Each has its own office building, but we share the land.)

We all decided to build reserves, but I want to make sure I handle this correct in the bookkeeping. Any limit on how much we can put into reserves to not have profit?

Anything else I should know?

Thanks,

Stephan

StephanK (Florida)
Posts: 11

Posted:

We are in Florida.

LetA (Nevada)
Posts: 2,679

Posted:

Did you have a reserve study conducted? A reserve study along with an audit and monthly expenditures will tell you all that.

StephanK (Florida)
Posts: 11

Posted:

Our HOA has a budget of $3000 a year and does not a require a reserve study, that is why we did not have any done so far.

MarkM19 (Texas)
Posts: 1,459

Posted:

Stephan,
The reserve study is needed so that they can identify all of the common area items that will need to be repaired or replaced over the next 20 to 30 years. Once they do that and estimate how much lifespan is remaining in each of those items. They will estimate how much they will cost to replace when it's useful life is over.

We have no idea what these items might be from your Post. It is impossible for anyone other than a paid professional to give you real Data. You might start by using 15% of your annual budget and set it aside for the Reserve Study. Hard to tell what the initial Study will cost because we do not know what they will be studying.

TimB4 (Tennessee)
Posts: 21,061

Posted:

Stephan,

Not being required to have a reserve study done doesn't mean you shouldn't have one done.
You can do it yourself but it may be harder being commercial space.

As Mark pointed out, the study tells you how much money you need to set aside each year to cover the expected maintenance, repairs and replacement of common elements. Without a study, you may be drastically short or substantially over in your savings.

To learn more about reserve studies (and how to do one yourself) see the following thread in this forum:

Subject: Reserve Studies/Funds 101

As an HOA, if you are filing IRS form 1120-H, the reserves are effectively not considered income. I don't know how FL taxes would see them.

If you are filing any other version of IRS form 1120, you should contact a CPA or tax attorney to have your question answered.

NOTE: Reserves are only to be used for the expected maintenance, repair and replacement of existing capital components. It is not a savings account for new capital components.

Hope this helps.

Tim

RichardP13 (California)
Posts: 3,868

Posted:

I would guess that your HOA would file IRS form 1120-H for Federal taxes.

A reserve study will identify assets of the corporation that require repair or replacement over a period greater than one year. Anything requiring maintenance under one year is paid out of the operating account based on your annual budget.

A percentage of your dues would go to reserve contributions. That would an expense line item in your chart of accounts. You would be eligible to pay taxes on the interest the reserve or operating account earns. For example, if the combined interest earned is $100.00 , then you're not going to pay taxes. On the other hand, if your reserves were larges and you earned $40,000 annually, you will be paying taxes, no ifs, ands or buts.

GenoS (Florida)
Posts: 4,276

Posted:

StephanK, ask your attorney to clarify whether or not you're an actual HOA subject to Chapter 720 of the Florida Statutes. You may not be.

FS 720.302(3):

This chapter does not apply to:
(a) A community that is composed of property primarily intended for commercial, industrial, or other nonresidential use; or
(b) The commercial or industrial parcels in a community that contains both residential parcels and parcels intended for commercial or industrial use.

In any case, neither Florida condo law or HOA law requires a Reserve Study. It's something to consider, though, from the point of view of it's good business practice.

StephanK (Florida)
Posts: 11

Posted:

Thanks for all the input so far.

1. We are not subject to Chapter 720.
2. We only have a parking lot including lighting, a few trees and a bit of grass.

SteveM9 (Massachusetts)
Posts: 3,699

Posted:

Do your own reserve study.

How much per year does the parking lot need in maintenance?
What year will it need to be repaved or repaired?
How much money do you have now?
How much money will it cost to repave?

Do the math on how much money you will have to put away to re-pave it in XX number of years.

Doesn't matter how small you are, its simple math. The less things you own, the easier it is to calculate.

KerryL1 (California)
Posts: 14,550

Posted:

I agree with Steve. Lighting is a different component. One line item would be anything you need to s do to it more than once a year, say paint the standards. would be the one term plan to replace them factored over several years, i.e, however many years you think they have left.

Light bulbs would be in your operating budget. And electricity. Striping your parking lot would be too if you do it annually or more often.

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