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Use dues collected for Reserve to offset Operating increase instead?

Started by SusanH31 • 67 replies • 956 views

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SusanH31 (North Carolina)
Posts: 69
Posted:
Background: I'm a board member in a neighborhood that is less than 4 years old. It's all townhomes, 3-4 units per building. Last year we paid for a reserve study and voted to increase the budget and start contributing to the reserves. The dues increase was big, and the study author extended the predicted life of things as much as possible to make it more affordable, so the reserve money we collect is only barely enough. Now the board is looking at next year's budget. The per unit increase is 7.6% for everything (planned reserve increase + non-negotiable operating increase) -- under $20/month/homeowner. This is North Carolina, where the state doesn't care if we have reserves. We are self managed - no property manager - because it's a small neighborhood and not worth the expense.

Question: A board member wants to skip the reserve increase and instead redirect money that would have been collected for reserves and use it to offset the operating increase so dues don't go up at all. That works out to a 27% decrease in reserve funding. This person's arguments are: (1) prices are going up everywhere else in life, so we shouldn't increase dues; (2) the neighborhood will appreciate the board keeping dues low; (3) this person can come up with money for a special assessment if needed, and everybody else should too; (4) they would rather invest their money instead of funding reserves; (5) these town houses are new so nothing will need replacing for a long time.

How would you convince this board member to support the reserve funding? I've got:
a) It spreads the cost of use across current and future homeowners, making it more fair for everybody;
b) It protects future homeowners from being unable to get their roof replaced because the guy next door can't cough up $10,000+ for a special assessment; (The way our townhomes are connected, you can't re-roof one unit without doing the whole building.)
c) The board is supposed to look out for the good of the entire neighborhood, now and in the future, and not just our own pockets;
d) Having adequately funded reserves and staying on top of maintenance is good for our property values.

What else? I thought a 7.6% increase was very reasonable and didn't expect push back, especially not in favor of gutting reserves. Thoughts?
AugustinD
Posts: 1,027
Posted:
-- Your reasons are fine. But as the line goes, stupid is as stupid does. This gentleman has no understanding whatsoever of what a reserve study is. The key evidence is his line that 'nothing will need replacing for a long time.' He does not realize that a reserve study takes this into account.

Few people, on boards or not, understand reserve funding. There is probably no convincing this guy of what prudence, as a board, demands.

-- Check the most recent reserve study for verbiage on the importance of funding reserves per a plan.

-- Is this a condominium?

-- Can you list the state statutes to which your townhome community is subject? There are a few things worth checking in the statutes.

-- Do your bylaws limit how much your HOA/COA can increase the regular assessment each year?

-- Do your bylaws place limits on Special Assessments? E.g. is an owners' vote required to impose a special assessment? Is there a dollar limit on how much the Board can special assess?

-- Proper budgeting includes breaking down the regular assessment into the amount that goes into reserves (as given in a current reserve study) and what goes into the operating budget. Assuming you have a current reserve study and decent estimates of next year's operating expenses, plus a cushion of about three months of operating expenses in a "contingency fund," computing what next year's regular assessment should be robotic. Meaning there's little subjectivity to it. Unfortunately this guy wants to interject major subjectivity. In particular this guy believes reserve studies have no value. Not that he could even define "reserve study." Seriously.
MarkM19 (Texas)
Posts: 1,459
Posted:
Susan,
In many States reserve funds have specific rules that do not let you use RF for anything other than reserve items. If NC does not, then I feel sorry that you may not win this battle. He is being smart by not funding the reserves with the new fees to avoid the issue I said above. As Augustine states reserves are a protection against future special assessments. Nobody and I mean Nobody like when an emergency hits for something unplanned and you want to reach into their pocket to fix asap.

It may be time to consider a compromise and increase the dues by 5%. We all have heard that the CPI for the country is 8.71% this year. This should not be news to anyone who goes to the store or buys gas. It also may be time to look at the spending in your HOA budget for things that can be trimmed. You can find things if you look at every item line by line and really think about it.

Good luck and hopefully you get get a more levelheaded board member in the near future.
JohnC46 (South Carolina)
Posts: 14,265
Posted:
Susan

Not uncommon for a BOD Member/owner want to not raise dues. They are the "killers" on many associations. He needs more education from one that understands the issues. Maybe you could have some one on one time with him.
TimB4 (Tennessee)
Posts: 21,061
Posted:
Having a properly funded reserve fund minimizes the need for special assessments.

That was the main selling point we had.
KellyM3 (North Carolina)
Posts: 2,239
Posted:
Hi Susan,

I doubt you'll convince this board member as, it seems, those who are most resolute in their position are generally the least competent. Here's my take from here in the state....

1. As a 4-year-old neighborhood, it's very very likely the developer underfunded the HOA budget to make home sales more appealing. So, you're finding out the real price of maintaining the community to your standards.

2. Having your reserve company "stretch" the lifespan of amenities to make future projects more affordable is a total gimmick to me and I'd be disappointed in the reserve company for the rosy assumptions that may come true if Lady Luck is on the HOA's side.

3. The board member's inflation comments are true but the HOA budget is subject to inflation as well.

4. The board member's HOA contribution and their personal investment choices is a false equivalency.

5. The town homes need a smaller amount saved today and over the long haul so there's cash to pay for the future plans.

Most importantly, a special assessment reflects a bit of financial insolvency on behalf of an HOA. Yes, people - especially retirees, older folks and people who move a lot - do not support proper reserve funding because they will live under the new roof, swim in the new pool and not contribute towards replacement. Then, they'll sell out and leave and the new owner will get stuck paying for the old roof, old pool.

6. Your 7.6% dues increase doesn't not track current inflation rates on a year-over-year basis. Your HOA is STILL under-shooting inflation.

Your position on HOA budgeting for the year is absolutely correct on all fronts. Your budget still doesn't track the inflation rate. Your board should follow your lead. This board member will be the first to fight any special assessment if disaster should strike. No special assessment should ever be used to replace items you know will need replacing, like regular roof replacement, parking lot projects, etc.
KerryL1 (California)
Posts: 14,550
Posted:
Your own points are good ones, Susan. And so are the replies you've received. Here are a couple more (I may have missed them?) How many units are there? Any amenities?

Our developer, and I assume many, overestimated the useful life of some components and underestimated the repair or replacement costs. He did this to make appear lower than they should have.you need to count on your certified reserve analyst for accurate numbers. As Kelly notes, do NOT "extend" the useful life.

You want inflation built into your reserves every year. (And taken into account for your operating budget) Our revised CC&Rs require our Board to fund reserves at the inflation rate ,at minimum.

You might have several components that will need repair or replacements much sooner than roofs or roads. If you have a swimming pool, for instance, you need reserves to repair or replace its pump and motor, the coating on the pool interior, pumps for other items?

Lenders today are much more closely watching reserves and it could be hard for your buyers to get loans if your HOA is poorly funded. Poor funding is regarded as under 30% of being fully funded. FHA (I believe) won't even back loans in HOAs if the reserves are funded at under 20% Even buyers are becoming more savvy about reserves and want to see healthy ones.

Do you happen to know your % funded? Your analysts would have written it on the report.

Meanwhile, your opposing director is only one vote on the board, so outvote him!
MichaelT21 (Arkansas)
Posts: 462
Posted:
I want to address a comment by lower dues making homeowners happy.

From my perspective, homeowners don't actually want lower dues. They say they do, but they actually want operational street lights, well maintained parks, and regular compliance visits to ensure their neighbors are keeping up maintenance on their homes. The desire for the latter exceeds the desire for lower dues, so they actually don't want lower dues.

Sounds convoluted, which it is.
MaxB4
Posts: 3,513
Posted:
Quote:
Posted By MichaelT21 on 10/21/2022 9:00 PM
I want to address a comment by lower dues making homeowners happy.

From my perspective, homeowners don't actually want lower dues. They say they do, but they actually want operational street lights, well maintained parks, and regular compliance visits to ensure their neighbors are keeping up maintenance on their homes. The desire for the latter exceeds the desire for lower dues, so they actually don't want lower dues.

Sounds convoluted, which it is.

You need to get back on your meds.
CathyA3 (Ohio)
Posts: 6,299
Posted:
Banks look at reserve funds when they decide whether or not to approve a mortgage loan, so you may limit your pool of future buyers to those who can pay cash. This hurts property values and changes the nature of those buyers. For instance, well funded investors can often pay cash, and they tend to target communities that are "distressed" in some way.

There may also be limits on the board's ability to enact a special assessment in the future. For instance, in some states/communities, the board must obtain homeowner approval for a regular or special assessment increase over, say, 5%. (Note that this is well below the current inflation rate. This is one reason I refer to provisions like this as "a license to commit financial suicide").

In addition to inflation, the increase in extreme weather events has accelerated aging of associations' components. This in turn *increases* your reserve requirements, since that 25-year roof may only last 15 years. Deciding not to fund your reserves "because you won't have to pay for this stuff for years" simply increases the hole your fellow board member wants to dig for himself.

A former board president of ours once commented that she didn't think she should have to pay for stuff for future homeowners. Our lawyer, who happened to be at the meeting, noted that she had a fully functional roof when she moved in, thanks to the developer. The reserve contribution is her pro-rated cost of that functional roof. (Not sure she got the point, but she's no longer on the board.)

All of these reasons are unlikely to persuade a cheapskate. He has an agenda, unsupported by the facts, so he's unlikely to listen to reasons. Unfortunately, when you buy in an HOA/COA, you become business partners with a bunch of strangers, and some of them don't have a head for business. (One of the regulars here once commented that buying a condo is like strolling into a bar and becoming business partners with everybody in the joint. She was not wrong.)

AugustinD
Posts: 1,027
Posted:
Quote:
Posted By MichaelT21 on 10/21/2022 9:00 PM
From my perspective, homeowners don't actually want lower dues. They say they do, but they actually want operational street lights, well maintained parks, and regular compliance visits to ensure their neighbors are keeping up maintenance on their homes. The desire for the latter exceeds the desire for lower dues, so they actually don't want lower dues.
I think this is a fair way to summarize owners' feelings.
CathyA3 (Ohio)
Posts: 6,299
Posted:
Quote:
Posted By MichaelT21 on 10/21/2022 9:00 PM
I want to address a comment by lower dues making homeowners happy.

From my perspective, homeowners don't actually want lower dues. They say they do, but they actually want operational street lights, well maintained parks, and regular compliance visits to ensure their neighbors are keeping up maintenance on their homes. The desire for the latter exceeds the desire for lower dues, so they actually don't want lower dues.


Actually, they want all those things but without paying for them. Not everyone, of course. But if you're in a state that requires approvals for assessment increases over a certain point, you'll probably have enough folks who believe that the HOA has a Magic Money Printing Machine to scuttle attempts to actually pay for expenses.

The problem for HOAs/COAs is that people want the stuff long enough to sign the closing documents, and then when they find out how much things cost to maintain they decide that maybe they don't want the stuff all that much. The real issue, I think, is that people mistake "purchase price" for "true cost of ownership" - those maintenance costs can be significant. (Reminds me of the saying about a boat being a hole in the water than you keep throwing money into. Houses are just boats on land.)
SusanH31 (North Carolina)
Posts: 69
Posted:
Thanks for your reply. This is a collection of townhomes, not condominiums. Each unit owns a front and back yard, but all share a party wall with one or two neighbors.

Thanks for the suggestion of checking for limits on the amount our HOA can increase dues. There is nothing in our Bylaws, Covenants, or the NC Planned Community Act (applicable state law) that limits the amount we can raise assessments. They talk about limits on interest and fines for late dues but not on changing the base amount. There are no $ or % limits on the amounts of special assessments in any of those documents. When the board adopts a budget, there has to be a meeting with the members, but the budget will pass unless a majority of all lot owners rejects it.

SusanH31 (North Carolina)
Posts: 69
Posted:
If we used already-collected reserves for operating expenses, the IRS could tax the HOA on the entire amount of our reserves as income. I think what this person wants to do could be possible by recategorizing the dues we collect - more going into operating while underfunding reserves. The IRS doesn't care if we cut reserve contributions too far, as long as we never use money from reserve accounts for non-reserve purposes.

A 5% dues increase would guarantee undercutting reserves. We can't refuse to pay a portion of the insurance bill, and everything else is as slim as we dare. I am the treasurer, and technically (legally) I could get paid for this work, but I am not asking for compensation. That alone saves the HOA money. (If I accepted the amount of compensation some have suggested, that would increase the budget by another 3.7%.) I cut corners and handle HOA business as frugally as possible, where it makes sense.
SusanH31 (North Carolina)
Posts: 69
Posted:
Yes, the developer greatly underfunded the original dues.

The reserve study author was not happy about stretching the lifespan of things, but adopting the ideal reserve plan would have increased dues by 60%, not including the increase needed to correct the developer's anemic budget. As it was, we had a 40% increase between 2021 and 2022, mostly for reserves.

I agree that 7.6% is less than inflation, but we benefited from a change in contractors. The 2022 budget was correct until an expensive vendor suddenly closed his business at the end of 2021. We got very lucky and found another vendor who is providing that service for around 18% less. The 2023 budget is still benefitting from that, because the new vendor is still a lot cheaper than the old one.

Thanks for giving me a line to use in fighting for reserves. Love it.
"No special assessment should ever be used to replace items you know will need replacing, like regular roof replacement, parking lot projects, etc."
SusanH31 (North Carolina)
Posts: 69
Posted:
Fewer than 25 units, no amenities. We do have responsibilities that cost money but aren't fun, like owning a small street and an extensive storm water management system, which kudzu constantly tries to clog.

I asked our reserve study author about handling the rise in inflation. We're also benefitting from higher rates paid to savings and CD accounts than his plan used, but of course those are nowhere close to this year's inflation rate. The author said the study looks at 30 years and that we shouldn't panic over this year's wild swings. We should get the study updated in a few years, when we can take those rates into context over time.

Interesting point about FHA looking at reserve funding levels. Ours will be above 30% at the end of 2023, if we can increase contributions as planned. (It's 28% for the end of 2022, the first year of contributing to our reserves.)

Thanks!
JohnC46 (South Carolina)
Posts: 14,265
Posted:
Susan

An Operating Budget can have a line item labeled Reserves. Look at it as an expense item lake Water, Electricity, etc.. Increase the dues and increase the Reserve line item donation.
KerryL1 (California)
Posts: 14,550
Posted:
Your plan for '23 looks good. It shows you're on a path to healthy reserves.
AugustinD
Posts: 1,027
Posted:
Quote:
Posted By SusanH31 on 10/22/2022 8:47 AM
There is nothing in our Bylaws, Covenants, or the NC Planned Community Act (applicable state law) that limits the amount we can raise assessments. They talk about limits on interest and fines for late dues but not on changing the base amount. There are no $ or % limits on the amounts of special assessments in any of those documents. When the board adopts a budget, there has to be a meeting with the members, but the budget will pass unless a majority of all lot owners rejects it.
Got it.

I asked because, if the Bylaws or state law placed limits on how much the assessment could be increased or how large special assessments could be, then this would argue for taking more care each and every year with budgeting, as opposed to doing what Director Clueless-About-Reserve-Funding wishes.
Quote:
Posted By SusanH31 on 10/22/2022 9:05 AM
If we used already-collected reserves for operating expenses, the IRS could tax the HOA on the entire amount of our reserves as income. I think what this person wants to do could be possible by recategorizing the dues we collect - more going into operating while underfunding reserves. The IRS doesn't care if we cut reserve contributions too far, as long as we never use money from reserve accounts for non-reserve purposes.
Where did you hear or read this?

Respectfully, I do not think this is correct.

I expect others will comment on this. Stay tuned.
AugustinD
Posts: 1,027
Posted:
Quote:
Posted By SusanH31 on 10/22/2022 9:27 AM
[Our reserve funding] will be above 30% at the end of 2023, if we can increase contributions as planned. (It's 28% for the end of 2022, the first year of contributing to our reserves.)
If the 28% and 30% are truly what is called the "percent funded" figure for your reserves, the board can present these figures all by themselves to owners and explain that these are appallingly low. Anyone with doubts need only google on "Percent funded" "reserves."

Granted many owners are going to think that a "percent funded" value of 30% means that 30% of the value of all infrastructure is now in the HOA's bank account. No; wrong; nothing could be further from the truth. The 30% means that, at the end of 2023, the HOA will have saved only 30% of what it should have saved by this point in time (meaning here the end of 2023).. Example: Suppose new roofs for a HOA have an estimated replacement cost of $100,000 and a life expectancy of 20 years. Suppose this is the only infrastructure a HOA has. Proper reserve planning means saving $100,000 / 20 years = $5000 each year. If after three years, $15,000 is in the reserve account, then the reserves are 100% funded. If after three years, $10,000 is in the reserve account, then the reserves are 67% ( = 10,000 / $15,000 = actual / recommended at a given point in time) funded.

Related aside: Reserve study companies seem to have gotten away from using "percent funded" to estimate health of a reserve fund figure. I would be surprised if the OP's HOA's reserve company computed this figure.
MaxB4
Posts: 3,513
Posted:
Quote:
Posted By SusanH31 on 10/22/2022 9:05 AM
I am the treasurer, and technically (legally) I could get paid for this work, but I am not asking for compensation. That alone saves the HOA money. (If I accepted the amount of compensation some have suggested, that would increase the budget by another 3.7%.) I cut corners and handle HOA business as frugally as possible, where it makes sense.

Actually, you can't get paid as you are a director first. A treasurer who is only an officer and not a director can be compensated.
CathyA3 (Ohio)
Posts: 6,299
Posted:
Quote:
Posted By AugustinD on 10/22/2022 10:22 AM
Posted By SusanH31 on 10/22/2022 8:47 AM
There is nothing in our Bylaws, Covenants, or the NC Planned Community Act (applicable state law) that limits the amount we can raise assessments. They talk about limits on interest and fines for late dues but not on changing the base amount. There are no $ or % limits on the amounts of special assessments in any of those documents. When the board adopts a budget, there has to be a meeting with the members, but the budget will pass unless a majority of all lot owners rejects it.
Got it.

I asked because, if the Bylaws or state law placed limits on how much the assessment could be increased or how large special assessments could be, then this would argue for taking more care each and every year with budgeting, as opposed to doing what Director Clueless-About-Reserve-Funding wishes.
Quote:
Posted By SusanH31 on 10/22/2022 9:05 AM
If we used already-collected reserves for operating expenses, the IRS could tax the HOA on the entire amount of our reserves as income. I think what this person wants to do could be possible by recategorizing the dues we collect - more going into operating while underfunding reserves. The IRS doesn't care if we cut reserve contributions too far, as long as we never use money from reserve accounts for non-reserve purposes.
Where did you hear or read this?

Respectfully, I do not think this is correct.

I expect others will comment on this. Stay tuned.

With Augustin, I also haven't heard this. "Reserves" is just a label that's put onto a portion of your assessment income that has restrictions on it as to how and when it is spent.

You may be thinking of the income that's earned on your reserve accounts. Associations generally try to hold the reserve money in some form of fixed income investments (CDs, money market accounts, or bonds that are held to maturity). This income may be taxable.

In addition, some HOAs own income-producing properties such as golf courses, and this sort of income may also be taxed.

Disclaimer: talk to your own accountant/CPA who prepares the association's tax returns (which must be filed even though the association may owe little to no tax).
KerryL1 (California)
Posts: 14,550
Posted:
I, too, have never heard that the funds in reserves are taxable income.

Our new reserve study by a national firm's credential analyst does, indeed show the % funded in each of our 3 reserve accounts.

While 30% funded isn't great, it's also not "appallingly low." Our same national firm, founded by, yes, a rocket scientist, who's very highly regarded, has a chart that shows that with 30-70% funded, there is a "medium" risk of a social assessment. This firm considers 30-70% funded as "fair."

By, being on a good path, I meant the contributions will increase every year to build up your reserves to 70% funded. A good reserves analyst will show you how much owners need to contribute each year to improve your % funded.
AugustinD
Posts: 1,027
Posted:
Conventional wisdom across the net seems to be to be at least 70% funded and preferaly, 100% funded.

From various sites:
If reserves are in the 0-30% funding range, members can expect special assessments.
https://www.davis-stirling.com/HOME/F/Fully-Funded-HOA-Reserves

0% - 30% Funded – Is considered to be a “weak” financial position. Associations that fall into this category are subject to special assessments and deferred maintenance. This situation could lead to lower property values. If the association is in this position, actions should be taken to improve the financial strength of the reserve fund.
https://www.appliedreserveanalysis.com/learn

Most experts agree that communities whose Reserves are funded between 0-30% are considered low because the cost of their calculated deterioration outpaces the growth and/or stability of their Reserve funds. Reserves are said to be in a strong position if they are funded 70% (or higher). The goal for any community should be to build their Reserves to 100% (or more).
https://assocmc.com/what-is-reserve-study-hoa/

As the percent funded calculation falls the risk levels for loans, special assessments and litigation factors increases. Historically those communities which are 0-30% funded have a high risk level, communities 31-70% funded have a moderate risk level and communities which are 71-100% funded have a historically low risk level.
https://www.rdanorthwest.com/reserve-study-professionals/knowledge-corner/what-is-percent-funded/

To me, 30% funded translates to the need for either large increases in the regular assessment and or special assessments, almost guaranteed.
KerryL1 (California)
Posts: 14,550
Posted:
Oh, absolutely 70%. + funded is optimum, of course, and the reserve analysts we've had over time (4 different firms) all have urged our HOA and no doubt their other accounts to keep raising their annual contributions to reserves to be on a path to reach that goal.

But the reality seems to be that the number of HOAs whose reserves are 70% or better funded are fairly few despite what their analysts advise
JohnC46 (South Carolina)
Posts: 14,265
Posted:
Quote:
Posted By AugustinD on 10/22/2022 10:34 AM
Posted By SusanH31 on 10/22/2022 9:27 AM
[Our reserve funding] will be above 30% at the end of 2023, if we can increase contributions as planned. (It's 28% for the end of 2022, the first year of contributing to our reserves.)
If the 28% and 30% are truly what is called the "percent funded" figure for your reserves, the board can present these figures all by themselves to owners and explain that these are appallingly low. Anyone with doubts need only google on "Percent funded" "reserves."

Granted many owners are going to think that a "percent funded" value of 30% means that 30% of the value of all infrastructure is now in the HOA's bank account. No; wrong; nothing could be further from the truth. The 30% means that, at the end of 2023, the HOA will have saved only 30% of what it should have saved by this point in time (meaning here the end of 2023).. Example: Suppose new roofs for a HOA have an estimated replacement cost of $100,000 and a life expectancy of 20 years. Suppose this is the only infrastructure a HOA has. Proper reserve planning means saving $100,000 / 20 years = $5000 each year. If after three years, $15,000 is in the reserve account, then the reserves are 100% funded. If after three years, $10,000 is in the reserve account, then the reserves are 67% ( = 10,000 / $15,000 = actual / recommended at a given point in time) funded.

Related aside: Reserve study companies seem to have gotten away from using "percent funded" to estimate health of a reserve fund figure. I would be surprised if the OP's HOA's reserve company computed this figure.

Good explanation. Thanks.
SusanH31 (North Carolina)
Posts: 69
Posted:
Quote:
Posted By MaxB4 on 10/22/2022 10:38 AM
Posted By SusanH31 on 10/22/2022 9:05 AM
I am the treasurer, and technically (legally) I could get paid for this work, but I am not asking for compensation. That alone saves the HOA money. (If I accepted the amount of compensation some have suggested, that would increase the budget by another 3.7%.) I cut corners and handle HOA business as frugally as possible, where it makes sense.


Actually, you can't get paid as you are a director first. A treasurer who is only an officer and not a director can be compensated.

This item in our Bylaws makes me wonder about that.

"Section 6. Compensation. No Member of the Board shall receive any compensation from the Association for acting as such; provided, however, each Director, upon approval of the Board, shall be reimbursed for reasonable out-of-pocket expense incurred and paid by him on behalf of the Association, and nothing herein shall prohibit the Association from compensating a Director for unusual and extraordinary services rendered to the extent authorized by the Members of the Association at any meeting called for that purpose"
SusanH31 (North Carolina)
Posts: 69
Posted:
Thank you for the quotes and sources! Much obliged.

For all, our reserve study includes a Projections table that shows % funded by year. It lists member contributions, interest contribution, expenditures, the ending balance, what the fully funded ending balance would be, and the percent funded. (It sounds like our reserve company did a better job than some.) We won't hit 70% funded until 2048.
SusanH31 (North Carolina)
Posts: 69
Posted:
Does the FHA have reserve funding requirements for townhomes? All I've been able to find is a 10% rule for condos. Anyone?
AugustinD
Posts: 1,027
Posted:
Quote:
Posted By SusanH31 on 10/23/2022 10:10 AM
Does the FHA have reserve funding requirements for townhomes? All I've been able to find is a 10% rule for condos.
What 10% Rule?

Today, I opine that no way is the FHA going to be satisfied with a percent funded figure of 10%.
AugustinD
Posts: 1,027
Posted:
Quote:
Posted By SusanH31 on 10/23/2022 9:13 AM

This item in our Bylaws makes me wonder about that.

"Section 6. Compensation. No Member of the Board shall receive any compensation from the Association for acting as such; provided, however, each Director, upon approval of the Board, shall be reimbursed for reasonable out-of-pocket expense incurred and paid by him on behalf of the Association, and nothing herein shall prohibit the Association from compensating a Director for unusual and extraordinary services rendered to the extent authorized by the Members of the Association at any meeting called for that purpose"
I agree that compensation as treasurer (even if also serving as a director) is very much Bylaw and state dependent.
AugustinD
Posts: 1,027
Posted:
Quote:
Posted By SusanH31 on 10/23/2022 9:21 AM
For all, our reserve study includes a Projections table that shows % funded by year. It lists member contributions, interest contribution, expenditures, the ending balance, what the fully funded ending balance would be, and the percent funded. (It sounds like our reserve company did a better job than some.) We won't hit 70% funded until 2048.
Oh my goodness.

Are you sure that the company's percent funded figures have the usual accepted meaning of "percent funded"? I am suspicious that there is some mis-reading going on.

For a young HOA like this one, accumulating the reserves resulting in full funding (meaning, importantly, at this point in time) should not be that hard. Remember, for a $100,000 roof replacement twenty years from now, where the roof is the only infrastructure, only $5000 (= $100k/20) needs to be in the reserve fund the first year for the reserve fund to be fully funded.

Did the reserve company present a plan to get you to at least 70% within a few years?
AugustinD
Posts: 1,027
Posted:
Quote:
Posted By SusanH31 on 10/23/2022 10:10 AM
Does the FHA have reserve funding requirements for townhomes?
Just saying: I see chatter about FHA reserve requirements for "multi-unit" properties. I do not think being a condo or not matters.

I would use this argument (about FHA loans being at risk when reserves are poorly funded) against Mr. Director Clueless-About-Reserve-Funding.

Maybe he will say something really stupid like, "Keeping owners with FHA loans out is good for property values." Whence you should consider the HOA/COA attorney having a "chat" with the board, focus on this director, about Fair Housing law.
SusanH31 (North Carolina)
Posts: 69
Posted:
Quote:
Posted By AugustinD on 10/23/2022 10:51 AM
Posted By SusanH31 on 10/23/2022 9:21 AM
For all, our reserve study includes a Projections table that shows % funded by year. It lists member contributions, interest contribution, expenditures, the ending balance, what the fully funded ending balance would be, and the percent funded. (It sounds like our reserve company did a better job than some.) We won't hit 70% funded until 2048.
Oh my goodness.

Are you sure that the company's percent funded figures have the usual accepted meaning of "percent funded"? I am suspicious that there is some mis-reading going on.

For a young HOA like this one, accumulating the reserves resulting in full funding (meaning, importantly, at this point in time) should not be that hard. Remember, for a $100,000 roof replacement twenty years from now, where the roof is the only infrastructure, only $5000 (= $100k/20) needs to be in the reserve fund the first year for the reserve fund to be fully funded.

Did the reserve company present a plan to get you to at least 70% within a few years?

From our reserve study:
"Percent Funded: A measure (expressed as a percentage) of the association’s reserve fund "health" as of a certain point in time. This number is the ratio of the Anticipated Reserve Fund Balance to the Theoretically Ideal Reserve Balance:
Percent Funded = Anticipated Reserve Fund Balance / Theoretically Ideal Reserve Balance

An association that is 100% funded does not have all of the Reserve Funds necessary to replace all of its Reserve Components immediately; it has the proportionately appropriate Reserve Funds for the Reserve Components it maintains, based on each component’s Current Replacement Cost, age and Useful Life."

The study includes a table listing all the items it covers with columns for Remaining Life, Useful Life, Current Cost, and Fully Funded Balance. For example, it shows roofs with a useful life of 20 years, 17 years remaining, current cost of $68,000, fully funded balance of $10,200 which works out to 15% (3 years used divided by 20 total).

On the plan to get us to 70% funded, yes, the first report delivered got us to 70% in 2026, but that required a 60% dues increase, which the neighborhood voted down. An average jump from $180 to $297 was more than people would tolerate. (The jump including making up for things the developer left out to keep dues artificially low for sales purposes.)
KerryL1 (California)
Posts: 14,550
Posted:
Good word by your reserve analyst. As you probably know, you may ask the specialist to calculate different scenarios to enable your HOA to hit 70% funded sooner. Somewhere around 2033 might be tolerable with respects to contributions from Owners.

But even on your current path, perhaps you'll be, say 45% funded by, hypothetically '35. That means your risk of a special assessment drops considerable and would be, I believe only about 10-12% risk.
AugustinD
Posts: 1,027
Posted:
Thank you for quoting the study directly.
Quote:
Posted By SusanH31 on 10/23/2022 12:14 PM
From our reserve study:
"Percent Funded: A measure (expressed as a percentage) of the association’s reserve fund "health" as of a certain point in time. This number is the ratio of the Anticipated Reserve Fund Balance to the Theoretically Ideal Reserve Balance:
Percent Funded = Anticipated Reserve Fund Balance / Theoretically Ideal Reserve Balance

An association that is 100% funded does not have all of the Reserve Funds necessary to replace all of its Reserve Components immediately; it has the proportionately appropriate Reserve Funds for the Reserve Components it maintains, based on each component’s Current Replacement Cost, age and Useful Life."
Perfect.
Quote:
The study includes a table listing all the items it covers with columns for Remaining Life, Useful Life, Current Cost, and Fully Funded Balance. For example, it shows roofs with a useful life of 20 years, 17 years remaining, current cost of $68,000, fully funded balance of $10,200 which works out to 15% (3 years used divided by 20 total).
What do you mean by "works out to 15%"?

For these roofs, with a $68,000 replacement cost, twenty year life, 17 years remaining, and at this point in time, the reserves for the roof are 100% funded. That is, the percent funded figure is 100% for the roofs.

Quote:
On the plan to get us to 70% funded, yes, the first report delivered got us to 70% in 2026, but that required a 60% dues increase, which the neighborhood voted down.
I do not understand. I thought you indicated in your earlier posts that owners had no say over changes in the assessment? Did I misunderstand?

Do owners have to approve increases in the assessment? Or can the board lawfully increase the assessment without an owners' vote?
AugustinD
Posts: 1,027
Posted:
Quote:
Posted By KerryL1 on 10/23/2022 12:31 PM

But even on your current path, perhaps you'll be, say 45% funded by, hypothetically '35. That means your risk of a special assessment drops considerable and would be, I believe only about 10-12% risk.
If there are reserve analysts who associate a specific risk figure with a specific percent funded figure, I would be surprised. And if they are, throwing around figures like the above is reckless, in my highly educated in statistics and financial math opinion.
KerryL1 (California)
Posts: 14,550
Posted:
The rocket scientist who founded a national reserve firm prepared exactly such a chart. His firm is highly rated and he's regarded as one of the premier experts in HOA reserves. You might actually find his chart somewhere at Davis-Stirling.com. Otherwise I'll see if I can find my copy somewhere in the next few days.
SusanH31 (North Carolina)
Posts: 69
Posted:
Quote:
Posted By AugustinD on 10/23/2022 12:32 PM
What do you mean by "works out to 15%"?

For these roofs, with a $68,000 replacement cost, twenty year life, 17 years remaining, and at this point in time, the reserves for the roof are 100% funded. That is, the percent funded figure is 100% for the roofs.



All I meant by 15% was that 3 years out of 20 is 15% of the time, so multiplying the total replacement cost by 15% equals the fully funded amount at that moment in time. I was doing the math to make sure I understood the calculation.

Quote:
On the plan to get us to 70% funded, yes, the first report delivered got us to 70% in 2026, but that required a 60% dues increase, which the neighborhood voted down.

I do not understand. I thought you indicated in your earlier posts that owners had no say over changes in the assessment? Did I misunderstand?
Do owners have to approve increases in the assessment? Or can the board lawfully increase the assessment without an owners' vote?

The board was in its first year and had already been attacked by vocational dissidents, so it asked homeowners to vote on whether to (a) fund reserves as recommended by the study author (b) fund not as much as recommended but better than nothing or (c) skip reserves entirely. The vote was held as a goodwill gesture, not a requirement. The only requirement is for the board to adopt a budget and hold a meeting with the lot owners to consider ratifying the budget. Unless a majority of owners rejects the budget, it is adopted.
AugustinD
Posts: 1,027
Posted:
Quote:
Posted By KerryL1 on 10/23/2022 12:44 PM
The rocket scientist who founded a national reserve firm prepared exactly such a chart. His firm is highly rated and he's regarded as one of the premier experts in HOA reserves.
I think he is one of the premier experts in charlatan-ism, numerology (a cousin of astrology), and marketing.

I will take your word that he provided a chart matching the risk of an assessment to the percent funded figure. I am sure this sells. I wonder if he knows Jim Cramer.

Next time, maybe ask him about the margin of error in his percentage risk calculation. Watch out for bs'ing.

The math:
Asserting that a percent funded value of 45% has attached to it an (estimated) risk of a special assessment of around 12% is fascinating. For example: If the only infrastructure is roofing; the roofing has a 20 year life; the roofing is 19 years old; and this year, the percent funded figure for reserves is 45%, I would say that the risk of either a special assessment or a huge increase in the regular assessment will depend on more than the percent funded figure.

JohnT38 (South Carolina)
Posts: 1,631
Posted:
Quote:
Posted By SusanH31 on 10/23/2022 1:08 PM
Posted By AugustinD on 10/23/2022 12:32 PM
What do you mean by "works out to 15%"?

For these roofs, with a $68,000 replacement cost, twenty year life, 17 years remaining, and at this point in time, the reserves for the roof are 100% funded. That is, the percent funded figure is 100% for the roofs.



All I meant by 15% was that 3 years out of 20 is 15% of the time, so multiplying the total replacement cost by 15% equals the fully funded amount at that moment in time. I was doing the math to make sure I understood the calculation.

Quote:
On the plan to get us to 70% funded, yes, the first report delivered got us to 70% in 2026, but that required a 60% dues increase, which the neighborhood voted down.

I do not understand. I thought you indicated in your earlier posts that owners had no say over changes in the assessment? Did I misunderstand?
Do owners have to approve increases in the assessment? Or can the board lawfully increase the assessment without an owners' vote?


The board was in its first year and had already been attacked by vocational dissidents, so it asked homeowners to vote on whether to (a) fund reserves as recommended by the study author (b) fund not as much as recommended but better than nothing or (c) skip reserves entirely. The vote was held as a goodwill gesture, not a requirement. The only requirement is for the board to adopt a budget and hold a meeting with the lot owners to consider ratifying the budget. Unless a majority of owners rejects the budget, it is adopted.

I understand your thoughts on a goodwill gesture in regards to having the homeowners vote. Respectfully, I think this is a mistake. The Board has to stand for something and hold their ground. Reserves for me was a non negotiable item. I made it clear to a couple of people that didn't like it that they could read the governing documents and follow the steps needed to kick me off the Board.

Even if I did have them vote I would NEVER give them option C to skip reserves entirely. By doing this the Board is not fulfilling their fiduciary responsibilities to manage the HOA.
AugustinD
Posts: 1,027
Posted:
Quote:
Posted By SusanH31 on 10/23/2022 1:08 PM
The vote was held as a goodwill gesture, not a requirement. The only requirement is for the board to adopt a budget and hold a meeting with the lot owners to consider ratifying the budget. Unless a majority of owners rejects the budget, it is adopted.
Okay. I call such votes "advisory votes" and advise the board to make clear that the owners en masse have no legal say in the board's decision, but the board is interested in how owners feel.
SusanH31 (North Carolina)
Posts: 69
Posted:
Quote:
Posted By AugustinD on 10/23/2022 1:20 PM
Posted By SusanH31 on 10/23/2022 1:08 PM
The vote was held as a goodwill gesture, not a requirement. The only requirement is for the board to adopt a budget and hold a meeting with the lot owners to consider ratifying the budget. Unless a majority of owners rejects the budget, it is adopted.
Okay. I call such votes "advisory votes" and advise the board to make clear that the owners en masse have no legal say in the board's decision, but the board is interested in how owners feel.

I think you and JohnT38 are right. Those of us running the HOA were new and trying to learn while dodging attacks from a hateful minority. We're learning.
JohnT38 (South Carolina)
Posts: 1,631
Posted:
Quote:
Posted By SusanH31 on 10/23/2022 1:33 PM
Posted By AugustinD on 10/23/2022 1:20 PM
Posted By SusanH31 on 10/23/2022 1:08 PM
The vote was held as a goodwill gesture, not a requirement. The only requirement is for the board to adopt a budget and hold a meeting with the lot owners to consider ratifying the budget. Unless a majority of owners rejects the budget, it is adopted.
Okay. I call such votes "advisory votes" and advise the board to make clear that the owners en masse have no legal say in the board's decision, but the board is interested in how owners feel.


I think you and JohnT38 are right. Those of us running the HOA were new and trying to learn while dodging attacks from a hateful minority. We're learning.

You came to the right place to learn. Good luck!
AugustinD
Posts: 1,027
Posted:
As it happens, in 2020 the "rocket scientist's" company performed a reserve study of the now defunct Champlain Towers South (Surfside). This would be the condo building in Florida that collapsed in June, 2021. For a report from the "rocket scientist" , see https://sofl.cooperatornews.com/article/financial-physical-operational-health. Excerpt:

We identified many common area elements with a remaining useful life of ‘0’ years, and developed a funding plan that included a multimillion-dollar special assessment."

From https://www.cnn.com/2021/07/08/us/surfside-collapse-condo-finances-invs/index.html:

"We identified many common area elements with a remaining useful life of ‘0’ years, and developed a funding plan that included a multimillion-dollar special assessment. "

Based on that gap, the report found that the Champlain South board was at “high risk” of “special assessments & deferred maintenance.” About a year after receiving the report, the board moved in April 2021 to levy a $15 million special assessment on condo owners to raise money needed for repairs.

Robert Nordlund, the founder and CEO of Association Reserves, told CNN in an interview that about three out of 10 condo associations nationwide that his company reviews are at high risk, with less than 30% of the recommended reserves."

Said rocket scientist elsewhere explains the source of his graph that shows Risk of a Special Assessment vs. Percent Funding:

Is the slide showing special assessment risk vs % reserve funding available, and
where do its statistics come from?
RN: The graphic you mention was derived from over 20,000 completed
Reserve Studies for our clients across the country, over the span of more
than a decade. What we found most interesting was that the profile was
very stable, no matter how we sliced the data (large vs small, old vs new,
townhome vs condo, high-rise vs planned development, even regions of
the country). If you wish a copy of the graphic, email me directly at
[redacted]

See https://www.reservestudy.com/wp-content/uploads/2018/12/Ignoring-your-Reserve-Study-with-Adrian-Adams-Webinar-Outline.pdf

Said rocket scientist founded his reserve company in 1986. He does not speak of being a rocket scientist on his company's web site, which I think is wise. I suspect he was a 20-something and worked a few years in Washington aerospace.

If the rocket scientist does not have printed on his graph, "Past performance does not guarantee future results," then he's fired.
SusanH31 (North Carolina)
Posts: 69
Posted:
Quote:
Posted By JohnT38 on 10/23/2022 1:34 PM
Posted By SusanH31 on 10/23/2022 1:33 PM
Posted By AugustinD on 10/23/2022 1:20 PM
Posted By SusanH31 on 10/23/2022 1:08 PM
The vote was held as a goodwill gesture, not a requirement. The only requirement is for the board to adopt a budget and hold a meeting with the lot owners to consider ratifying the budget. Unless a majority of owners rejects the budget, it is adopted.
Okay. I call such votes "advisory votes" and advise the board to make clear that the owners en masse have no legal say in the board's decision, but the board is interested in how owners feel.


I think you and JohnT38 are right. Those of us running the HOA were new and trying to learn while dodging attacks from a hateful minority. We're learning.


You came to the right place to learn. Good luck!

Thanks for your help!
KerryL1 (California)
Posts: 14,550
Posted:
I wrote "rocket scientist" since we may not name companies but I knew interested parties could find his research, company name etc. One of his employees, our RA, told us his background. A quick skim of Aug's citations, seems to show his firm did the right thing. Now that his name is here, I feel confident in saying he is regarded as a top-notch reserve specialist and is cited by many.

However long he was a rockets scientist, where, or when means northing. Years ago, I had quite a few rocket scientist pals, who all 20-somethings and were PhD physicists. I assume their knowledge of math, stats, probability, etc. was a job requirement.

I'm thinking Aug's accusation about Norlund: "I think he is one of the premier experts in charlatan-ism, numerology (a cousin of astrology), and marketing," is, um, misguided.

AugustinD
Posts: 1,027
Posted:
Quote:
Posted By KerryL1 on 10/23/2022 6:38 PM
I wrote "rocket scientist" since we may not name companies but I knew interested parties could find his research, company name etc. One of his employees, our RA, told us his background. A quick skim of Aug's citations, seems to show his firm did the right thing. Now that his name is here, I feel confident in saying he is regarded as a top-notch reserve specialist and is cited by many.
I think he's a big cat shill for CAI. Which means CAI, the rocket scientist, and the rest of the sub-industries of the HOA/COA world play the one hand washes the other game. In my opinion the rocket scientist is very self-promoting.

To be clear: I, a mere peon but one with an inactive PE license in her desk drawer, point no finger at the rocket scientist's company for the reserve study it did the year before Champlain Towers South condo building collapsed. The reserve company said a number of reserve components had zero useful life left. I am betting the reserve study did not say that certain columns, for one, in the underground parking lot had zero life left. But the reserve study did include the report of the main structural engineering company that recently criticized the drainage problems. I think the engineers and professionals assessing the situation did the best they could. To say more is 20/20 hindsight. If I felt the various engineering firms had messed up, I would say so. I put far more blame on management, the COA's attorney (a notorious law firm) and the structure of HOAs/COAs in general. Oh and greed.

In 2020 Champlain Towers had a percent funded value of 6.9%. I really hope no one tried to associate a risk of special assessment figure with this percent funded value.

I asked the rocket scientist to send me a copy of his graph. I want to see if he put the appropriate disclaimer on it about past performance (which his graph is) not guaranteeing future results. Does the rocket scientist also go around saying that the historical return of the stock market is 10% per year, so put all your life savings into stocks?

I just do not see how one can rationally associate a "risk of special assessment" with a percent funded figure without making so many assumptions that it undermines the point one is trying to make. Said point being: Condos are tough to financially manage. Ya gotta have a savings program.

Asserting there is only a 10% risk of a Special Assessment for a percent funded value of 45% is appalling to me. It says that 45% is not anything to really worry about. I think that's pure applesauce (as Justice Scalia would say). People should be determined to get their percent figure at 70% or higher, no ifs, ands or buts. If they think the reserve study is inaccurate, go through it item by item.

On the other hand I agree with the rocket scientist that not enough attention is paid to reserve studies. I see his company sells a DIY kit for reserve studies for a few hundred bucks. His company does a lot of educating. All of this is excellent.
MaxB4
Posts: 3,513
Posted:
Quote:
Posted By AugustinD on 10/23/2022 7:01 PM
Posted By KerryL1 on 10/23/2022 6:38 PM
I wrote "rocket scientist" since we may not name companies but I knew interested parties could find his research, company name etc. One of his employees, our RA, told us his background. A quick skim of Aug's citations, seems to show his firm did the right thing. Now that his name is here, I feel confident in saying he is regarded as a top-notch reserve specialist and is cited by many.
I think he's a big cat shill for CAI. Which means CAI, the rocket scientist, and the rest of the sub-industries of the HOA/COA world play the one hand washes the other game. In my opinion the rocket scientist is very self-promoting.

To be clear: I, a mere peon but one with an inactive PE license in her desk drawer, point no finger at the rocket scientist's company for the reserve study it did the year before Champlain Towers South condo building collapsed. The reserve company said a number of reserve components had zero useful life left. I am betting the reserve study did not say that certain columns, for one, in the underground parking lot had zero life left. But the reserve study did include the report of the main structural engineering company that recently criticized the drainage problems. I think the engineers and professionals assessing the situation did the best they could. To say more is 20/20 hindsight. If I felt the various engineering firms had messed up, I would say so. I put far more blame on management, the COA's attorney (a notorious law firm) and the structure of HOAs/COAs in general. Oh and greed.

In 2020 Champlain Towers had a percent funded value of 6.9%. I really hope no one tried to associate a risk of special assessment figure with this percent funded value.

I asked the rocket scientist to send me a copy of his graph. I want to see if he put the appropriate disclaimer on it about past performance (which his graph is) not guaranteeing future results. Does the rocket scientist also go around saying that the historical return of the stock market is 10% per year, so put all your life savings into stocks?

I just do not see how one can rationally associate a "risk of special assessment" with a percent funded figure without making so many assumptions that it undermines the point one is trying to make. Said point being: Condos are tough to financially manage. Ya gotta have a savings program.

Asserting there is only a 10% risk of a Special Assessment for a percent funded value of 45% is appalling to me. It says that 45% is not anything to really worry about. I think that's pure applesauce (as Justice Scalia would say). People should be determined to get their percent figure at 70% or higher, no ifs, ands or buts. If they think the reserve study is inaccurate, go through it item by item.

On the other hand I agree with the rocket scientist that not enough attention is paid to reserve studies. I see his company sells a DIY kit for reserve studies for a few hundred bucks. His company does a lot of educating. All of this is excellent.

VERY easy for Augustin to always criticize from the cheap seats.

KerryL1 (California)
Posts: 14,550
Posted:
Well, Aug, recently leveled heavy criticism against a national Robert's Rules forum that comprises parliamentarians. And now a nationally respected reserves firm. Speculating what this firm "might have" missed in their reserve study is just plain guesswork, and not even educated guesswork.

I, and I'm sure many, greatly appreciate Augustin's willingness to research various topics for posters. But talking uneducated smack against various organizations should be avoided here, imo.

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