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Do we need to refund $30,000 to home owners

Started by ChadB3 • 27 replies • 521 views

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ChadB3 (North Carolina)
Posts: 9
Posted:
North Carolina Law states:
§ 47F-3-114. Surplus funds.
Unless otherwise provided in the declaration, any surplus funds of the association
remaining after payment of or provision for common expenses, the funding of a reasonable
operating expense surplus, and any prepayment of reserves shall be paid to the lot owners in
proportion to their common expense liabilities or credited to them to reduce their future
common expense assessments. (1998-199, s. 1.

Our current reserves for a 100 home subdivision are $30,000.

For the last several years we have had a few thousand dollars surplus. Some common land that used to be mowed and mulched was taken over when a new subdivision was buildt and we switched to a property management company that charges lower fees.

A homeowner wants us to refund everyone the reserve money, basically $300/home. How does one determine what a reasonable expense surplus is?

BenA2 (Texas)
Posts: 1,273
Posted:
Reserves, by definition, are prepaid. Members put in money for something that will have to be paid for later. In my opinion, "unless otherwise provided...after payment of...any prepayment of reserves" means reserves are excluded from money that would be returned.

It would make no sense to require reserves to be returned. It would defeat the whole purpose.
MaxB4
Posts: 3,513
Posted:
I think people need to see a bigger picture here. What other assets is the HOA still responsible and how is the funding at this time. If certian assets are now being handled by another agency, it might be best to look at re-allocating those prepaid funds elsewhere in the hopes that no assessment increase would need to be added to the homeowners.

Others here might ask, do you have a current, updated reserve study?
ChadB3 (North Carolina)
Posts: 9
Posted:
Quote:
Posted By BenA2 on 12/20/2021 5:09 PM
Reserves, by definition, are prepaid. Members put in money for something that will have to be paid for later. In my opinion, "unless otherwise provided...after payment of...any prepayment of reserves" means reserves are excluded from money that would be returned.

It would make no sense to require reserves to be returned. It would defeat the whole purpose.

semantics. the law says surplus to be returned. Any surpluses are put into reserves. so then who decides what is a surplus and what is a reserve?
BillH10 (Texas)
Posts: 1,217
Posted:
Chad

You were asked questions which would facilitate those reading your posts to formulate responses:

1. What other capital assets are the responsibility of the Association.

2. Do you have a Reserve Study which was prepared in the last 5 years assuming not much has changed?

Do you understand the purpose of Reserve Funds.

Your most recent post seems to indicate you have your mind made up. Are you the homeowner who desires to have the surplus/reserve refunded to homeowners?
ChadB3 (North Carolina)
Posts: 9
Posted:
Quote:
Posted By BillH10 on 12/20/2021 6:32 PM
Chad

You were asked questions which would facilitate those reading your posts to formulate responses:

1. What other capital assets are the responsibility of the Association.

2. Do you have a Reserve Study which was prepared in the last 5 years assuming not much has changed?

Do you understand the purpose of Reserve Funds.

Your most recent post seems to indicate you have your mind made up. Are you the homeowner who desires to have the surplus/reserve refunded to homeowners?

1. There was playground equipment that was replaced last year for $30,000. which consisted of a swing set and multipurpose slide and lots of mulch. There is also a picnic shelter who's roof is 14 years old and will need to be replaced for a few thousand soon. 12 acres of land most of which is forest. about 50 feet of sidewalk and a 50x200 ft area in the front with some trees, bushes and a stone facade with name of HOA on it at entrance. No club house, swimming pool, or other amenities.
2. yes
3. yes
4. whatever and no.
KerryL1 (California)
Posts: 14,550
Posted:
Agree entirely with Bill, are you able to answer his questions, Chad? Think about it this way:

There probably are common area items -- "components" --that your HOA is obligated to repair or replace (Bill's #1). These often are listed in your declaration (CC&RS, covenant) with language something like. The Assn is obligated to maintain, repair & replace, the street lights, sprinkler systems, entry monument, certain fencing, maybe curbs/gutters and paving roads. Maybe more, maybe fewer components.

Unless your reserve accounts contain enough in them to repair/replace all of your common area components when they are estimated to be due for repair/replace, (aka 100% funded), you do not have any surplus in your reserves. thus, according to 47F-3-114, your HOA does NOT have a is surplus. this is NOT matter of semantics.

I'll repeat another of Bill's questions: does you HOA have a reserve study done in the last 5 years (in CA, it would be 3 years)?
KellyM3 (North Carolina)
Posts: 2,239
Posted:
Quote:
Posted By ChadB3 on 12/20/2021 6:48 PM
Posted By BillH10 on 12/20/2021 6:32 PM
Chad

You were asked questions which would facilitate those reading your posts to formulate responses:

1. What other capital assets are the responsibility of the Association.

2. Do you have a Reserve Study which was prepared in the last 5 years assuming not much has changed?

Do you understand the purpose of Reserve Funds.

Your most recent post seems to indicate you have your mind made up. Are you the homeowner who desires to have the surplus/reserve refunded to homeowners?


1. There was playground equipment that was replaced last year for $30,000. which consisted of a swing set and multipurpose slide and lots of mulch. There is also a picnic shelter who's roof is 14 years old and will need to be replaced for a few thousand soon. 12 acres of land most of which is forest. about 50 feet of sidewalk and a 50x200 ft area in the front with some trees, bushes and a stone facade with name of HOA on it at entrance. No club house, swimming pool, or other amenities.
2. yes
3. yes
4. whatever and no.

Use the $30,000 to get a headstart on the playground replacement. You will need that picnic roof priced as well as any wood repair/replacement on the shelter. Money should be reserved for abnormal tree removal where costs could be beyond reasonable pricing for an operating budget (hurricane), completely fund the replacement of 50 feet of sidewalk at 2021 prices.

Then, don't raise dues and be thankful you're in quality financial shape.

TimB4 (Tennessee)
Posts: 21,059
Posted:
Transfer excess operating funds to the reserves.

If you have thousands left every year, identify why and adjust your budget to quit having that large of an excess.

Do not refund.
Adjust the assessment for the following year (which also keeps you in compliance).

SheliaH (Indiana)
Posts: 6,964
Posted:
I agree with what's been said so far.

Consider yourself lucky if your community has a healthy reserve fund. You seem to forget about inflation in all this. Sure there may be a surplus in 2021, but by the time you need the money for something else, 2021 dollars won't buy the same amount.

And if you refund everyone, that could be considered income your had to report on your taxes. Maybe $300 is a small thing to you, but why are It if it's not necessary?

I know you said you aren't the homeowner in question - for some reason I'm a little skeptical of that, but as you said, whatever. You haven't said if you've read the reserve report either - I suggest you do so because it may have other information you aren't aware of or have thought of.

PS - it's ok to ask questions about reserves, but don't forget about Surfside. There are a lot of factors that went into that, but it should have driven home the point to everyone how important it is to have a reserve fund and a reserve study to go with it, as well as follow the recommendations As close as you can. You don't want the board to-do anything that may out your community in a bad way down the road - whether you still live there or not.
If it is not right do not do it; if it is not true do not say it. Marcus Aurelius
ChadB3 (North Carolina)
Posts: 9
Posted:
amazing I take the time to answer questions, but people act like my response is invisible.
ChadB3 (North Carolina)
Posts: 9
Posted:
Quote:
Posted By SheliaH on 12/21/2021 5:11 AM
I know you said you aren't the homeowner in question - for some reason I'm a little skeptical of that, but as you said, whatever. You haven't said if you've read the reserve report either - I suggest you do so because it may have other information you aren't aware of or have thought of.

Whatever



LetA (Nevada)
Posts: 2,679
Posted:
I do not feel you need to refund anything. If anything, use that $30K to fund your reserves. Will that reserves make your reserves 100% funded? I would hod back transferring money from your operating
account to your reserves to keep you 3 to 4 months funded in your operating expenses. There is no shame in having healthy finances.
MelissaP1 (Alabama)
Posts: 13,836
Posted:
Are the they invisible or not what you want to hear? It is a bad idea to refund. Best to adjust the budget if getting that much extra. It is a non profit so should only spend as much as it collects on operational and capital expenses.
Former HOA President
ChadB3 (North Carolina)
Posts: 9
Posted:
Quote:
Posted By MelissaP1 on 12/21/2021 6:12 AM
Are the they invisible or not what you want to hear? It is a bad idea to refund. Best to adjust the budget if getting that much extra. It is a non profit so should only spend as much as it collects on operational and capital expenses.

manipulating a budget to get around the law is :

ILLEGAL

MelissaP1 (Alabama)
Posts: 13,836
Posted:
Uhm last I checked your the one wanting to manipulate the budget so everyone gets a refund...
Former HOA President
AugustinD
Posts: 3,698
Posted:
Quote:
Posted By ChadB3 on 12/20/2021 4:21 PM
A homeowner wants us to refund everyone the reserve money, basically $300/home.
Ask said owner to first define 'reserve account'; 'reserve study'; and all the components that are evaluated as part of your HOA's reserve study. Ask said owner to explain why best practices dictate that HOAs put money annually into a reserve account consistent with what the most recent reserve study (tweaked as needed every year) recommends.

If the owner cannot do so, then the board should say it rejects the premise of the owner's request. And if sai owner does not know what "premise" means, again ask him to look it up.
BenA2 (Texas)
Posts: 1,273
Posted:
Quote:
Posted By ChadB3 on 12/21/2021 7:43 AM
Posted By MelissaP1 on 12/21/2021 6:12 AM
Are the they invisible or not what you want to hear? It is a bad idea to refund. Best to adjust the budget if getting that much extra. It is a non profit so should only spend as much as it collects on operational and capital expenses.


manipulating a budget to get around the law is :

ILLEGAL


With all due respect, you are just being silly. Adjusting a budget to make it balance at the end of the year is not illegal and is common practice.
KerryL1 (California)
Posts: 14,550
Posted:
I might one who appears not to have read your reply. Chad, but you can see that they probably crossed. I do see you list of reserve components now. Is it complete? If there's a picnic shelter are their tables/benches under it?

Does the the 50X200 entry monument area have lighting? Or the sidewalk? It's not just "amenities" that we must reserve for.

I'm curious about why you haven't read the reserve study?

There you'll see how long the playground equipment is expected to last. Replacement cost (not including inflation?) is $30,000. Estimated useful life is 10 years. Your HOA should be contributing $3,000/ann. to reserves for that component alone. Many studies will have an estimated cost to replace, e.g., 30K and in a separate line items with cost estimates for repairs on things like playground equipment.

With Ben, adjusting the budget annually is not even close to illegal.
DavidG45 (Delaware)
Posts: 994
Posted:
Quote:
Posted By ChadB3 on 12/20/2021 6:11 PM
Posted By BenA2 on 12/20/2021 5:09 PM
Reserves, by definition, are prepaid. Members put in money for something that will have to be paid for later. In my opinion, "unless otherwise provided...after payment of...any prepayment of reserves" means reserves are excluded from money that would be returned.

It would make no sense to require reserves to be returned. It would defeat the whole purpose.


semantics. the law says surplus to be returned. Any surpluses are put into reserves. so then who decides what is a surplus and what is a reserve?

I'm pretty sure you are mistaken. This is not semantics, this is accounting and law. Reserves are not surplus. Reserves are a budget item. When money goes into Reserves it is not a surplus subject to refund, it is money with a prescribed purpose that can only be withdrawn for that purpose.

Let's say your budget its:

$20,000 property manager
$ 5,000 professional fees
$15,000 maintenance of common areas
$ 5,000 reserves

That's a budget of $45,000. If you collect $46,000 in fees for the year you will have a $1,000 surplus, despite adding $5,000 to your reserves fund. That $1,000 is subject to a refund, and only that $1,000.

ChadB3 (North Carolina)
Posts: 9
Posted:
Quote:
Posted By DavidG45 on 12/21/2021 10:37 AM
Posted By ChadB3 on 12/20/2021 6:11 PM

Let's say your budget its:

$20,000 property manager
$ 5,000 professional fees
$15,000 maintenance of common areas
$ 5,000 reserves

That's a budget of $45,000. If you collect $46,000 in fees for the year you will have a $1,000 surplus, despite adding $5,000 to your reserves fund. That $1,000 is subject to a refund, and only that $1,000.


Bingo!


Thanks this is a balanced and mathetically sound explanation. Most of these other answers are Power hungry hawkish in nature. Your response is balanced and makes sense.
MelissaP1 (Alabama)
Posts: 13,836
Posted:
You sti do not do a refund. It is a bad idea. If you are collecting toouch then reduce the dues collecting instead. That is a better approach all around. A refund will put all kinds of thoughts in people's heads. Which end up with lots of projects the HOA could or should be paying for. Something that is not always accurate.

But hey what do we know? It is what you want and want to hear that matters. We just will listen for the face palm in a few months of how this was a terrible idea to refund.
Former HOA President
KellyM3 (North Carolina)
Posts: 2,239
Posted:
Chad,

You've duly advised in near-unanimous terms. I wish we could close threads. This is vetted

TimB4 (Tennessee)
Posts: 21,059
Posted:
Quote:
Posted By DavidG45 on 12/21/2021 10:37 AM

Let's say your budget its:

$20,000 property manager
$ 5,000 professional fees
$15,000 maintenance of common areas
$ 5,000 reserves

That's a budget of $45,000. If you collect $46,000 in fees for the year you will have a $1,000 surplus, despite adding $5,000 to your reserves fund. That $1,000 is subject to a refund, and only that $1,000.


And the proper way to "refund" would be to adjust the budget next year and, if necessary, lower the assessment or not raise them the amount that would normally be needed.
ThadC2 (Florida)
Posts: 820
Posted:
Quote:
Posted By MelissaP1 on 12/21/2021 11:03 AM

But hey what do we know? It is what you want and want to hear that matters. We just will listen for the face palm in a few months of how this was a terrible idea to refund.

do you always find a way of making all threads personal attacks, about one's credibility, kind of an immature way to replying about things as mundane as someone elses budget that doesnt' even affect you? Don't sweat the small stuff, stress will kill you.
MelissaP1 (Alabama)
Posts: 13,836
Posted:
Okay how was that a personal attack? It is staring the obvious. You have made it in bold type even. Not my words but your own. Your HOA budget is wrong if you are making a profit or extra monies period. It is a non profit corporation but not a charitable one. Can not donate money to it. It is not anyone's fault here or concern if your HOA budget is off. it does call for a refund. It calls for a reduction in collections or could face taxes amongst other consequences.
Former HOA President
MelissaP1 (Alabama)
Posts: 13,836
Posted:
I t does NOT call for a refund. Sorry typos. Typing on my phone...
Former HOA President
KerryL1 (California)
Posts: 14,550
Posted:
Re: David's scenario, Chad. We do not know if the $5,000/ann to reserves funds the reserves at 100%? 50%? 30%? If not 70% fully funded, the annual contribution to reserves should be increased.

Still very curious why Chad won't read his reserve study....

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