HOA Reserves

Hello, serving on a committee revising the bylaws, covenants and design guidelines of our HOA. They have not been revised in 22 years since it was in the hands of the developer. FUN! HA!

Particularly wondering, on possible clauses to ensure there are Reserves. Do any of the forum members have any suggestions on possible minimum or maximum reserves for their HOA's? Thinking, that you wouldn't want folks to bankroll tons of dollars in a reserve when there are pressing issues in the neighborhood, such as maintenance, etc.

Thanks so much in advance.

Do you have a reserves study prepared by a credentialed reserves specialist? If not, you should engage one right away and set up a professional reserve study. Caveat. If you only have very few components--common area items for which the HOA is responsible to maintain, repair & replace, you MIGHT be able to do th study on your own. Do you happen to know what % funded your reserves are?

That person recommends how much you should contribute to reserves to bring up the total availav ble to repair & replace common area items. They also ways recommend a lot be contributed. But, in reality, what they rec often is more than your owners can afford. This happens because all too often, an HOA's reserves haven't been adequately funded so the HOA has to try to play catch-up.

Our restated ('22) CC&Rs state that contributions to reserves. must be increased each year at the cost of living index in our area until we reach 100% funded. I'll find the wording. I d not think you want to"guraretee" too much to reserves as to be too restrictive to Boards making decisions.

With John, it's crucial that you get legal advice every step of the way. Your state may hav statutes with reserve requirements?

What size is your HOA? condos? SFHs?

KerryL1 -

Thank you for the informative information. We do not have a reserves study prepared by a credentialed reserves specialist. We actually do have only a few components that require maintenance, e.g. common areas, swimming pools, gates to the subdivision and a retention pond, but the costliest is maintenance and repair of our streets, since they have to be maintained by the HOA, since it is a gate community. We probably have enough professionals in our neighborhood to do a study on our own. I really doubt, but would have to look to see - but I feel we have very little reserves.

I like that your CCR's state the contributions to reserves must be increased each year by the cost of living index in your area. Do you use the CPI Index and if so, which one, or do you use another form of measurement. That is currently one of our issues to resolve, is which CPI Index to use.

Yes, we are going to definitely get an Attorney in this process to review our documents.

Great information KerryL1 - and appreciate any further answers you may provide.

Andrea,
Any HOA that has half the amenities you mentioned should hire a professional Reserve Study company. Have you ever seen the detail in a existing reserve study? It is a ton of data and has the life expectancy of every item along with the projected cost to replace at the end of life. If you trust that to volunteers who have no tools and no prior experience, you are signing up for a very poor report that will be ignored by the remaining owners of your HOA.

A typical Reserve Study runs less than 3 to 4K for communities with over 1,000 homes. I am very frugal and have been on boards for 14 years. I would not dream of asking volunteers to do that task. I promise it will not end well and you will be back here saying what do we do now. I just noticed your update and with 77 homes yours would be much less than I stated above.

I advise a budgeting requirement that is consistent with a professionally done reserve study, as described in the statute quoted in the first post in this thread: https://www.hoatalk.com/Forum/tabid/55/forumid/1/postid/359244/view/topic/Default.aspx. I like what this Maryland tatute says, even if it's not your or anyone else's state.

Even if you are mathematically proficient, understanding how reserves are funded and why costs are spread over as many years and owners as possible may require a fair amount of cogitation. Consider this thread the barest of introductions.

Please do. Because the summary you posted reads like gobbledy-gook. It does not indicate what, if any, role the reserve study recommendations are playing. California statutes require the board to review the study annually. A diligent inspection of the major components is required every three years. The reserve study itself should dictate how much to contribute each year, in pursuit of a certain percent funded figure within a reasonable period of time.

Please see my above, Elle, but for your convenience, to repeat:

My HOA's CC&Rs, Sect. 6.2.3 "Miscellaneous Maintenance Funds. Any other Maintenance Funds which the Association may deem necessary, provided that as regards any Reserve Fund, such fund contribution shall not be deemed to be adequate unless either (i) the contributions to the Reserve Fund include an increase over the immediately preceding year's contributions equivalent to the average rate of inflation which occurred over the immediately preceding fiscal year, as such rate of inflation has been reasonably determined by the Board, or (ii) funding in the Reserve Fund has reached 100%."

The rest of Elle's post has nothing to do with Oklahoma or Andrea's questions, so I won't reply.

Much more relevant to this post is the new national "Reserve Study Standards" for all HOAs in the USA. This is a long document, but encompasses a lot. It includes an excellent set of definitions. https://www.caionline.org/LearningCenter/credentials/Documents/CAI Reserve Study Standards July 2023 - FINAL.pdf.

A nice introduction to it is at: https://www.davis-stirling.com/Newsletters/2023-Newsletters/New-Reserve-Study-Standards

Well, our very impressively experienced HOA attorney for this CC&R project approved this wording. Unlike many, many CC&Rs, ours at least guarantees increased contributions to reserves every year, which is not required in CA or in many states. But perhaps his law school wasn't as elite as yours, Elle? Oh, wait...

Please cite from any CC&Rs in states that do not require funding as MD does. Or, from your past HOAs, which have section requiring certain contributions to reserves. There must be some by now.

Here is what I wrote: "That person [the specialist]recommends how much you should contribute to reserves to bring up the total availav ble [sic]to repair & replace common area items. They also [al]ways recommend a lot be contributed. But, in reality, what they rec often is more than your owners can afford. This happens because all too often, an HOA's reserves haven't been adequately funded so the HOA has to try to play catch-up."

This is the absolute reality in at least 70% of HOAs who are not 70% funded in the USA. Andrea's thinking that they may not even have a reserves account. Professional specialists will offer several scenarios to the Board to help their reserves become healthy that won't force owners to see a sudden huge increase in dues so that an adequate amount may be contributed. The specialist may advise a special assessment to get a reserves fund started. Such analysts agree that there can be a logical path to healthy funding, and know it may take a few years.

Until our Board settled on our current firm, whose owner is one of the Task Force members that wrote the new Reserve Standards, as a board member, I worked with 3 reserves specialists in 5 years so learned a great deal about variations among them. But all, including our current specialist beat the drum loudly to fund as much as possible to reach 70% funded, or, of course, more.

Boards must try to walk that tightrope between what is ideal and what is realistically possible.

I s'pose Elle is right that a lot of board members are math illiterate. To be sure, many of our HOA's board members have had serious weaknesses. But we somehow always have very strong math people on the Board and on the Finance Committee, including some math profs, a number-crunching economist frm UT-Austin, and a Professional Engineer. In whatever case, the RS know their math and can explain well it to board members.

MarkM19 -

Thank you so much for this information. Actually, I would love to see a real reserve study that someone has done, not just a prototype or a selling point document to make a sale. I agree, I prefer to leave these things up to the professionals.

I agree ElleN, I prefer to leave it up to the professionals. Yes, I am mathematically proficient - actually a CPA, but retired, (actually folks should use CPAs due to their schooling and certification requirements) so this beast doesn't frighten me. Hey, you take your car to garage when sick, same with your health and a plethora of other specialized areas. Now, the thing is to convince an HOA Board to do this. I am just on a committee, but that may change. Being retired - it is payback volunteer time!

DouglasK1 -

I will definitely look up TimB4's posts. Thank you for pointing out the dozens and hundreds of threads on this forum. I think I shall be busy! Knowledge is power, right? (Although, I am not looking for any power, just fulfilling a need for the betterment of the subdivision.

Andrea,
One of the downfalls on this site is we cannot send private messages to other posters. I would be glad to send you a reserve study from the past that you could see if you provided an email address.

I also think that if you contact any of the larger Reserve Study companies out there and ask them, they should be able to provide sample studies for you to look at. You will be surprised at the detail. They have tools that make these reports and also have all of the life expectancies loaded and updated often.

If you were to try and tackle this with volunteers and they come up with a large dues increase suggestions, they will be attacked. Remember no good deed will go unpunished. If they make mistakes which is very easy to do, they will be blamed.

Please pay professionals and take their guidance.

ElleN,

You bring up some great points. I would think when the Maintenance Funds as posted by KerryL1 say Maintenance Funds as deemed necessary would include things such as expected useful life of say a pool motor or a poolhouse roof would be considered. We live in wind, hail and tornado alley and I would very much hope that expected useful life would take in this consideration. One must also take into consideration if the HOA has insurance on these sort of items, such as a poolhouse roof or other items that are insurable. I would not think a pool motor would be insurable, but also this would be another thing that we have to look at and see what insurance policies, besides the Officers and Director's insurance policy, errors and omissions, etc are part of this equation.

Yes, we are playing catch up and I am not sold completely on the idea that something should be 100% funded. In the real world, that, of course, is ideal...but if you look at most pension systems - you will find that most are not 100% funded...but of course, that could be a goal.

Funny you mention CPI. We have the CPI for our HOA dues. Anything above and beyond that has to be approved by the homeowner's. We know there are many different CPI indices that need to be looked at and decided upon exactly which one to use. I also think that an average rate of inflation written in the documents, is rather vague. We also are doing homework on when those CPI indices are released per index, as that will dictate which year to use as the guage for the new HOA bills due in 2024.

Thanks for the thoughts, suggestions and comments. All of these posts definitely have given much more clarity in the thought process of revisions. Although, most we think we have covered, but definitely wanted to ensure we are going the right direction on determining reserves. With all of the recommendations, we will definitely look at!

Yes! I just followed up with Mark and have it in my hands!! And, yes, I would think that a good RS company would definitely consider the area.

NOW, if we decide to use - would love to know what to look for in a Reserve Specialist! Yeah, know the basics, but anything that a person might not think about when choosing a RS.

Thank you!

I'm sorry, I intended to say Andrea, if you are on the board email me.

I do not think this has to do with law as it does financial math.

If you are saying that CC&Rs historically have been quite weak when it comes to helping ensure proper funding of reserves, and your new covenant is an improvement, then you might be right.
This is too vague to have value, IMO. My own observations are as follows:

-- Owners almost always complain about any assessment increase.

-- Whether an owner can afford an increase is simply not the Board's business. The board has a duty to raise assessments pursuant to a budget, with said budget including reserve contributions that are hopefully based on a reserve study. My favorite example of a board that said, "Owners be damned. We have a duty to fix xyz. If an owner cannot pay, the HOA can and will and has in the past foreclosed... ":https://www.sarasotamagazine.com/home-and-real-estate/an-unlikely-heroine-steps-in-to-save-crumbling-dolphin-tower

-- If a board feels the annual increase recommended by the reserve study company is too much, the board should ask the reserve study company to spread out the increases over more years. Also if a board thinks the life expectancies, cost to replace, or inflation values (already built into reserve studies) are not appropriate, the board should talk with the reserve company to see if it will approve different number. But once a board agrees with the assumptions of a reserve study, IMO a board should never, ever stray from trying to comply with the company's guidance, and preferably actually complying.

-- If reserves are not properly funded, then a HOA should in fact commit to catching up. It is what it is.

-- Lenders are cracking down on reserve studies.

-- I agree with using reserve study specialists to teach the board about the studies, preferably at an open meeting where owners are also allowed to ask questions.

AndreaV1, Good to read you are a numbers person. Hopefully you are a "teacher" too. Every professional should also be a teacher, IMO. (So should every tradesmen/women.)

I would suggest wording similar to what has already been provided:

ARTICLE XYZ: Reserves for the repair, replacement and restoration/maintenance of Association common elements and capital components.

Section 1: The Board shall conduct at least once every five years a study to determine the necessity and amount of reserves required to repair, replace, and restore the capital components and said study to be reviewed and updated yearly.

Section 2: To the extent that the reserve study indicates a need to budget for reserves, the Treasurer shall propose a budget that includes a contribution to the Reserves based on the most recent or updated reserve study.

Interested to know ElleN =

How are Lenders cracking down on Reserve Studies?

At this point, I will not agree or disagree with either you or KerryL1 - Will take all of the information that I can get. We WILL have an attorney and We WILL be looking into a Reserve Specialist. And definitely will be looking into better and proper wording for our documents in funding of the Reserves.

Interested to know ElleN =

How are Lenders cracking down on Reserve Studies?

At this point, I will not agree or disagree with either you or KerryL1 - Will take all of the information that I can get. We WILL have an attorney and We WILL be looking into a Reserve Specialist. And definitely will be looking into better and proper wording for our documents in funding of the Reserves.

1. Yes. I think Reserves should be examined annually and a study done, well every 3 years..but I am somewhat flexible on that.

2. Interesting, will I note the insurance deductible portion on the statements and possibly suggest it. Many of these suggestions, I have to let them "gel."

3. Yes, we are running into that on this stuff is not easy to understand. Realize there are Board pressures and Homeowner's do not like increases.

4. Will have to see if there are reserve funding statutes, but in this state, I do not believe we have, but will research.

And finally, YES, in my prior job, I was also a requested speaker at seminars, and found great satisfaction in "teaching" others. Because, for sure if you teach it, you have to be pretty much an expert on the subject matter.

Thanks for the comments.

I guess my question is how do they crack down? Raising rates or ?

ElleN -

I probably should have rephrased that...What I plan to do is find out the deductible portion of any insurance for the neighborhood, besides for the officers and directors liability insurance and will (possibly) suggest noting that, but really don't think it would be in the reserve section of a financial statement. We get the budget and actual type statements, without notes, but would not think that would be proper to state that in those statements, but will find out for certain, what is the back story behind all of it at our HOA and assess it then. We are just a committee doing bylaws and revisions, but also taking into account all of these type things.

Well aware that a deductible does not have a remaining useful life.

Yes, I liken studies in many ways to actuarial type reports, they are only a best guestimate, but much better than having nothing for planning purposes.

Yes, familiar with the REDA in Oklahoma and we have definitely added to our latest revisions we are working on now.

Interesting that lenders are cracking down. Will read the article.

Thanks for the information!

ElleN -

Thank you for making that disctinction. I misinterpreted the original meaning of what you said about the deductible.

Got it!

When you recommend reserve companies to the board, do consider those that offer the following package: Year one a full onsite study-this covers an analyst's review of your CC&Rs, instruction and manual re: your equipment and other components. sometimes contact with one or more maufacturer.

Year two is a level two study often with no caste list. the special communicates with your PM and onsite engineer or head maintenance sup, if any about all change to any reserve items. replacements, repairs, restorations itc are provide to them. Level 3 also if an offsite list. Our firm, which is national offers bulk rate for the three years.(this matter in CA were a full onsite viral study is required by law every three years.

I urge you Andrea to forget about the insurance possibility for now, I would ONLY follow a professional's advice on this sort off-beat topic, i.e, our S has not recommended adding it to our study. The band new Reserve Standards may other recs of additions to studies, i.e, all component that an HOA is obligated to repair/replace if they have a 50 year estimated life. FHA always has had a requirement that reserves be xx funded, I don't recall the %. 20%? Similarly I'd only follow an RS's knowledge on the extent to which this is widespread or a minor trend, or?

Tim wrote: "Section 2: To the extent that the reserve study indicates a need to budget for reserves, the Treasurer shall propose a budget that includes a contribution to the Reserves based on the most recent or updated reserve study." At first this seemed too harsh to me. But that the treasurer only may rec the huge increase that about 70% of US HOA's need is OK with me.

Boards can and do take into account owners' ability to pay. NOT individual owners, as Elle wrote, but the aggregate. To hike dues to the extent that the RS recs could sly send many owners into delinquency which end up being an expense and worse to an HOA.

As I wrote above: "Professional specialists will offer several scenarios to the Board to help their reserves become healthy that won't force owners to see a sudden huge increase in dues so that an adequate amount may be contributed. The specialist may advise a special assessment to get a reserves fund started. Such analysts agree that there can be a logical path to healthy funding, and know it may take a few years." It seems Elle ultimately agrees with this reality.

So, Andrea, I enjoy working with reserves analyst and I like the studies. It's fun for me and may be for you. But don't expect it to be for your committee colleagues. I have to add that our complicated high rise twin towers contain three reserve studies for different areas. Some "areas" contribute to all reserves ci companies, some contribute to only a few and the 3rd area confutes to about 2/3rd.Now, it was a lot of fun repairing many errors everywhere.