CA HOA - How low can Reserves go in the two years following a $3 Million underlay project?

Started by SusanO3 • 1 replies • 4 views

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SusanO3 (California)
Posts: 166

Posted:

I have done some research on how low a HOA can go in terms of Reserve Fund money. It seems that Davis Sterling does not specify the lowest amount of dollars that should be in the reserve account (provide you fulfill the requirement of having a study etc etc), obviously good practice suggests you should have some. Would you say that going down to $200,000 in reserves with a plan to raise rates by 3-5% in the years following a major project ($3M underlay) is an acceptable (but not ideal thing to do).

I also read that Fannie Mae requires 15% of budget to go into Reserves, we are currently putting 50% of our operating budget into reserves to top up Reserves to do the underlay project in 2033, with no Special Assessment, so I think meeting Fannie Mae's 15% threshold will not be a problem. Anyone see a problem with my thinking?

Any wisdom and/or experience is appreciated. Sue

TimB4 (Tennessee)
Posts: 21,121

Posted:

This issue tends to come up with Associations that utilize a cashflow methodology for reserves. Yes, the cashflow method can lower the amount of money to set aside (as not everything will have to be replaced at one time). The minimum balance is set by the Board and may or may not be an educated and informed guess.

The component method requires more money to be set aside, but you don't have to worry about not having enough left in the account if two major items need to be replaced at the same time (one expected and one unexpected).

From the AI response (which can summarize easier than I can):

Cash Flow Method (Pooled Reserves)

How it works: Collects money into one general reserve account and matches the total income stream against all combined future project costs.

Pros: Keeps initial homeowner contributions lower and creates a smoother, more stable long-term funding plan.

Cons: Can lead to a depleted balance if unexpected big expenses hit or if the board underfunds the account.

Component Method (Straight-Line Method)

How it works: Calculates a specific funding amount for every single item (like roofs or elevators) based on its individual lifespan.

Pros: Offers extreme financial security and absolute transparency for where every dollar goes.

Cons: Often causes a "cost shock" with much higher initial contributions in the first few years.

Most modern reserve study professionals recommend the cash flow method because it keeps annual dues lower and balances out costs over time. However, in my opinion, the component method is better and you wouldn't have the question you are now asking.

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