Negative Retained Earnings

The builder turned over the HOA to the owners on January 1 with a negative retained earnings. We feel this is not right as it will take years to reduce it to zero. Should we be concerned that the builder is screwing us?

What you may be seeing is that your previous budgets set aside a defined/budgeted amount for Reserve Funds and then the operations budget went "over," requiring the HOA to not save as much in Reserves as planned. It creates a deficit that you're correct in wanting to alleviate. Something in your budget is "starving" due to undercollections (dues too low) or over-spending.

I bet your HOA monthly dues are too low to be financially sustainable (Developers would want very low HOA fees to encourage home sales). Expect to raise your dues or your board should look to cut monthly and operational expenses.

My own HOA logged negative retained earnings for many years and never went bankrupt but, during that period of time, our annual budgets were not funding Reserve Funds adequately and we were paying off loans caused by a lack of Reserve Funds. Negative Retained Earnings has always been mysterious to me, to be honest.

I'm certain that if you're fully funding your Reserves and your operational budget can end each year a bit in the "black," you'll alleviate negative retained earnings quickly. Don't worry too much about it but be mindful.

Let's say your association started up in 2010 with $100K for operating and $500K for reserves.

In 2010 you took in $100K from assessments and your expenses for the year totaled $200K. At years end you have a negative $100K retained earnings.

Over the course of the next ten years if you took in $100K and spent $100K each year, at the end of ten years, you would still have a negative retained earnings.

BTW, contributions to the reserves is a expense item to the operating account.

You start Jan 2010 with $100K and throughout the year you collected $100K in assessments. If you had not spent a dime, your ending balance would have been $200K. But your actually expenses were $200K

Let's make it a little easier to comprehend.

Balance as of Jan 1, 2010 = $100K
Assessments for year paid Jan 15th =$100K for total of $100K in operating account
Expenses for the year = $188,000

Net income/loss = ($88,000)
Cash in Bank as of Dec 31 $12,000
Retained Earnings as of Jan 1, 2011 = ($88,000)