Capital Reserve Expenditure Question

Started by PegM1 • 8 replies • 678 views

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

⚡ Takes 30 seconds

Already a member? Log in

PegM1 (Pennsylvania)
Posts: 26

Posted:

Thank you in advance.

What constitutes a valid capital reserve expenditure? We have a special assessment required for the repair of a
retention pond due to a sinkhole and rocks shifting underneath. It's a major, unexpected expense. The Board tells us the money to pay for the liner and additional repairs cannot come out of the capital reserve funds. Reserve study did list the retention pond (but only showed "dredging" costs). Our reserves are 70% funded. I realize the work is repair and not improvement--is that why capital reserve should not be used? Thank you.

SheliaH (Indiana)
Posts: 6,964

Posted:

That may depend on the policy your board set up, but start with reviewing your documents to see if it's addressed. Generally reserves are for major repairs and replacements of the common area. Since your retention pond is part of the common area it could be argued that replacing the lining would be a capital expense because it isn't something you do every year.

If your board doesn't have a formal reserves policy, now may be a good idea to prepare one. It can cover issues like what is considered a capital expense, borrowing from reserves, etc. Talk to whoever did goddesses study - he or she could give you some ideas on how to access such issues.

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

KerryL1 (California)
Posts: 14,550

Posted:

If the reserve study sets side n amount for dredging only, reserves funds shouldn't be spent on other aspects of the retention pond that are not listed in your study. The liner surely should have been listed. When an HOA adds components they must pay for them some other way, i.e., special assessment or borrowing form reserves.

HOAs often have components that have multiple aspects to them that have different useful life expectancies, so each must be reserved for separately.

A simple example is a loading dock-type garage we have. The cost to replace the door is one amount, the cost to replace the automatic opener is another separate amount.

AugustinD
Posts: 5,144

Posted:

PegM1, is this a condominium?

If so, the Pennsylvania Condominium statute has some verbiage that I think your board is interpreting as saying prohibits it from dipping into the reserve funds that were designated (per a reserve study?) for other things. See https://www.ncsl.org/documents/environ/PAcondo.pdf

I gather your neighbors and you are annoyed that there will be a special assessment. But if instead of special assessing, the board wanted to dip into the reserve funds to pay for the retention pond problems, then the membership would still be stuck with having to replenish the reserve funds.

Maybe ask if there could be a payment plan, such that each member is allowed to pay in installments, with the total due by Dec 31, 2020.

To me, it sounds like your board is going a good job. I grant that a reserve account that is seventy percent funded is way better than a lot of condos. But it's still walking a bit of a tightrope.

GeorgeS21 (Florida)
Posts: 3,808

Posted:

Sounds like a special assessment, perhaps augmented a bit by Reserve Fund, then the expected timeframe for the repair to be repeated gets calculated, and then the annual assessment gets recalculated.

PegM1 (Pennsylvania)
Posts: 26

Posted:

We are an HOA with single family homes, 55+ community. We understand the assessment, not bothered by it--just wondering why a major repair to a reserve study item would not be considered a capital reserve expense. Is it because it is the liner that is being replaced and the liner was not listed specifically in the Reserve Study?

Thank you for the advice!

GeorgeS21 (Florida)
Posts: 3,808

Posted:

While I can’t see your Reserve Study, and don’t know how accurately your HOA linked the R Study to your R Fund, if the work required has not been collected for - i. e. no linkage from Study to assessment to Reserve contribution, then it has not been covered by the Reserve process.

If your R Fund was overfunded, you could just fund from there ... but the analysis to arrive at that conclusion could be slippery.

JohnC46 (South Carolina)
Posts: 14,265

Posted:

Peg

This can be a problem when Reserve Money is specifically identified such as Retention Pond Dredging versus as a general line item such as Retention Pond Repairs. It appears the BOD might have shot themselves in the foot by being to specific. Reserve Funds can be borrowed against if paying them back is specified.

AugustinD
Posts: 5,144

Posted:

Quote:

Posted By PegM1 on 04/19/2020 4:40 PM
We understand the assessment, not bothered by it--just wondering why a major repair to a reserve study item would not be considered a capital reserve expense. Is it because it is the liner that is being replaced and the liner was not listed specifically in the Reserve Study?

The short answer is yes. The long answer is that this major repair was not anticipated when the reserve study was done. In my opinion, using funds separate from the funds designated for the capital expenses listed in the reserve study, for an item separate from the reserve study's listed capital expenses, is reasonable.

🎯 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