Operating Owes Reserves over $1m

-- AFAIC and among other things, Boards should care about what statutes require. What is "customary" may be helpful but is far less important.

-- Do the books document that borrowing from reserves is occurring, including indicating (in accounting-ese) that the money has to be paid back?

-- NRS 116.3115 (2) (b) is quite clear IMO: "The reserves may be used only for those purposes, including, without limitation, repairing, replacing and restoring roofs, roads and sidewalks, and must not be used for daily maintenance."

-- Other verbiage in the statute offers support for //not// rationalizing that certain operating expenses could maybe be classified as reserve expenses IMO.

-- I suppose a HOA lawyer could (and would, if pressed) make an argument that borrowing from the reserves does not violate the aforementioned statute section, because the books arguably say that the reserve funds are "still there," via a debt owed from the operating account. I could not say how well such an argument would fare in court (if push came to shove). Certainly nationwide this option is there for emergency situations.

On the other hand --

-- If a HOA Board has the choice of borrowing from a bank to pay operating expenses or borrowing from the reserves, well...

-- Times are tough. Astronomical increases in insurance are occurring, for one.

-- I would want to study the books far more before concluding gross mis-managment is occurring.

Is the board not able to raise the regular assessment enough to cover operating expenses (and fund the reserve)? If not, why not?

As you may know, some directors naively pride themselves on never raising assessments, whereas the budget is clear that assessments need to be raised. It is the price of having unskilled (as far as accounting, law et cetera) volunteers have the bulk of say about the HOA's assessments.

Some capitol improvements are paid for out of operating and then deducted from GL "Operating Owes Reserves."

I for one cannot tell without a lot more information.

Hello Dean,

I fully understand what you are saying here. Here is the problem, our MC convinced us to put all our operating accounts into one account, and all our reserve accounts into one account. I went to their financial class, and they said that their partner bank can insure our accounts through an ICS (Insured Cash Sweep) account and that these accounts are insured up to $10 million. We had 4 CDs and they convinced us to roll those into one CD this last October. However, this never happened. The CDs were cashed and deposited to our reserve account and they didn't tell us. I only found out about it recently because we just got our October 2023 financials and I could see what happened in the bank statements. I am also able to review other reports on their BOD portal and I can verify that those funds are still in our reserves. Then they include a statement in the October financials that our accounts are not FDIC insured.

I know the importance of having accounts FDIC insured, what I don't like is the lack of transparency coming out from our MC and finding out about it 4 months later.

all the best,
-Shelley

My experience with PMCs suggests that, surprisingly, many of them do not understand fund accounting. Our former MC collected all fees into operating, then deposited money into our Reserves fund based on what our budget called for.

Now, our monthly statement shows an “Operating Fund” fee, and a “Reserves Fund” fee. Payments are deposited directly into their corresponding fund checking account. To use reserves, we would have to have a GL transfer to the Operating Fund, then spend the money. It can be viewed as a subtle difference, but it means by default the money goes where it belongs. .

Hi David & John,

Our property already owed Reserves when the new MC took over in Sept. 2022. At the time, we owed a little of $600K.

• All our income is deposited to our operating account, and
• we are supposed to transfer the regular reserve contribution (expense #1) and the Special Assessment income (expense #2) on a monthly basis.

I don't see any problems with this type of accounting, but when these transfers aren't made...

• it then gets moved to the operating GL accounts (Due (To)/From Reserves) as a negative figure and ,
• to Reserves GL account (Due To/(From) Operating) as a positive figure.

I also don't see a problem with this either, if the balances were relatively low -$100K (I’m not sure that is realistic or not).

Expense #1 wasn't transfered from Sept '22 until May 2023. Expense #2 was not transfered at all from Sept '22 to Dec '22, and has only been transferred twice in 2023. Also, since the special assessment in 2020, 1/3 of community has paid it off. This makes our monthly SA revenue 1/3 short of the budgeted monthly amount for transfer.

The problem I have with this is that our Operating owes Reserves over $1 Million, when our operating bank account balance is maybe 20% of this. I have gone through the operating expenses and have accounted for all capital improvements. There aren’t any other expenses that we can deduct. We also do not take in enough revenue each month to make the monthly reserve transfers AND pay for regular operating expenses.

I just feel that our board is not paying attention to the potential issues that will arise down the road if we do not address this. The entire purpose of the Special Assessment was to fund and pay for new roofing ($1.5M total) throughout the property. Only half of the property has been completed and we owe reserves over 2/3rd of this total amount.

Is this something that I should concern myself with?

Thanks in advance,

-Shelley

I think you are absolutely right. The MC does get kickbacks if they bring business to one of their partnering companies, so I do see that they have an incentive to push it on us.

Although I am new to ICS accounts, I trusted the MC to guide us with newer technology and better services. I even attended the MC’s financial class with the banker to gain a better understanding of how this worked. What really annoys me is that they did not set up this type of account for us and left our money “unprotected” for over a year. And on top of that, not a single officer has anything to say about it when I addressed it.

I have found so many issues regarding our financials and I do believe our senior BOD members are too complacent. I feel we are being completely taken advantage of and there should be some accountability IMO.

Hello Let,

Thank you for the advice, this is definately on the list of issues that need to be addressed. Hopefully, our Board will support the need.

atb,
Shelley