What is a "good" reserve funding %? How to sanity check reserve studies? What to believe?

A reserve account IMO is set up for avoiding a huge special assessment in the long run when a major capital item has to be replaced. The question think your asking is do you make the amount 100% of the expected expense or can you get away with 80% of the expected cost?

There may not be anything wrong with having a lower reserve account if it's understood that the percentage less of the overall expense will be a special assessment. So either you save up now and have the money covered or you decide to make up the difference.

Just understand a HOA is ONLY funded by it's members FOR it's members. So it's your HOA/Members choice if they want to be fully reserved or plan to special assess when the time comes. I am for fully reserved for various reasons. However, there may also be a reasons why not to have a full reserve. The HOA can decide.

Suggestions:

* Check the assumptions. The company doing the study should have spelled out what assumptions they used to project future costs (eg., projected inflation rate). Are these assumptions reasonable, or do you have some basis for disagreeing with some of them?

* Make sure that all of the necessary items were included. A study that came back surprisingly low may have missed something.

* Put everything into a spreadsheet showing projected spending by year for the next thirty years. Then add a column for projected levels of your reserve funds. Do you see a shortfall in there anywhere?

* Finally, the nature of your community will determine how much wiggle room you have. A condo community with private streets, multi-story buildings with elevators and a number of amenities has fewer options to delay spending than a small HOA with detached homes on a public street whose only amenity is some green space.

Many view being fully funded as a requirement. Personally I don't agree. I think that the money needs to be available when you need it (hence the spreadsheet exercise). Being fully funded means having money on hand that you probably won't need for 20 years. In a low interest rate environment, it makes less sense to have money not working for you.

But not being fully funded also means taking some level of risk. You may need the money earlier than projected. Or inflation may pick up, which means that the future costs were under-estimated. Or some unexpected event makes a previous assumption inaccurate.

Reserve studies are all about trying to estimate future expenses as accurately as you can. Laying out all of this stuff in a spreadsheet will allow you to tweak things and re-calculate based on new info. I try to get my spreadsheet to reflect reality as closely as possible, allowing for a cushion of some sort, rather than aiming for an arbitrary percentage.

Thanks for all these replies!

Well our situation is the following:

-- We generally operate on the yearly plan to contribute enough from the operating fund (revenue from owner monthly normal assessments) to the reserves fund, which is designed to have enough $ in it for the ongoing expected $ value of capital expenses at any time.

I.e. every year you sock away the right $ amount from your owners' contributions to have the savings account be able to pay for the time-averaged capital repairs, etc. that will be needed. In other words, if all goes according to expected lifetimes and costs of replacement, you shouldn't need any special assessments.

*However*... our past leadership has not been acting well in terms of 2 things:

-- Unplanned capital items have been spent on, depleting some of reserves $ unexpectedly

-- Proper yearly $ transfers from the operating fund were not made to the reserves as planned

So the state of the reserves is not clear / much lower than it needs to be.

The question for us is, "what % does it need to be?"

And add on top of that the confusing situation that various studies and various people have different opinions about not only what the funding % should be, but whether the component lifetimes and cost $ to replace are "reasonable".

So it's a puzzle that we're slowly trying to work our way down the list of all the components to get to a clear answer at least of the state of the building.... if not the question of what should the % be..

It's so complicated!

Chris

The starting point is a Reserve Study which should layout lifetime of something and cost to replace when it needs replacement. Example:

Roof Replacement, $600K, needed in 2031. $60K per year is set aside in a Roofing Reserve Fund. At the end of 5 years there will be $300K. Some will say it is 100% funded as it is on track at $60K per year. Others will say it is only 50% funded. Also major items cost should be reviewed every 3 to 5 years.

Some break down their Reserves in sub categories, others do not. I think it is wise to have sub categories. If the budget shows one lump sum then it should reference the Reserve Study which should show it broken down into categories. Makes it easier to "see" where one stands for down the road expenses.

Our Yearly Forecasted Budget shows two Reserve Line Items. Roofing Reserves and General Reserves. We have no amenities, public streets, public sewage/water so little need for further breakdown. We are responsible for each homes sprinkler system and fencing but we carry those two items as Operating Expenses as they are in consistent need of repair/replacement. Not saying this is the best/proper way to handle it but it is how we do.

Not setting money aside (Reserves) is one of the main failures of a good many associations with the answers being an increase in yearly assessment (Dues), Special Assessment, or let the place rot.

First, having to do a special assessment to fund the reserve account or a capital project identified in the reserve study is one sign of poor financial management. Banks don't look kindly on special assessment, especially ones that have to fund a reserves.

That being said, properly funding reserves, based on the calculations set forth in a reserve study is difficult with only 20 units, (less pain to divide amongst). Your biggest expenses are going to be roofs and elevators. Can you get figures all over the place, yes. Unfortunately, most boards I have come across have no idea how to use a reserve study. Worse, they have no idea if the numbers are accurate or not. There are some good reserve companies that are "certified" and there are some that just do canned reports.

The percentage should be 100%. An example, let's say your roof were to cost $600K and its lifetime use is 30 years, and your are 20 years old, that would mean you have 10 years remaining. Each year, $20K should be going in just for the roofs and at 20 years you have $400K in reserves set aside exclusively for the roofs, you would be considered 100% funded.

I handled the reserves while I was on my board. We had a rather large community, with a large number of components in a study. We also managed a reserve account with $1.5M with different banking institutions. There is a science to managing reserves. Being 70-75% funded might be fine, but make sure you have a backup plan if an emergency arises.

Check for any State law that requires a minimum percentage. I believe here in Nevada an HOA reserve fund must be at least 85%.