Reserve Funds -- A Tip (No. 2)

My agenda includes posting a “tip” every couple of weeks that’s intended to be helpful to forum members. Today’s item relates to expenditures from your reserve fund. Let’s say you have an item in the reserve fund plan for balcony repairs. The repairs are scheduled for 2009 and the estimated cost is $20,000. This job is also scheduled for future years, at intervals of 6 years.

So far so good, but now, in 2008 the balconies have already fallen into serious disrepair and require immediate action. The Board decides to proceed with the job, but finds that the job will actually cost $25,000. The Board also notes that the repair in 2008 was only five years after the previous job.

My observations are that this kind of thing happens all the time. But when it happens, the Board almost never uses that information to change the reserve plan in respect to the future jobs. They’re in there, still, at $20,000 every six years.

My point? When a reserve expenditure is made, Boards should be sure to check their future years’ predictions fro the same repair. If they don’t reflect the latest ACTUAL cost-level, or the latest ACTUAL repair interval, the plan should be changed, and the predicted balances should be re-calculated. In other words … use your new information to bring your estimates into line with reality.

We feel it’s a sensible idea. How do you feel?

Mary--
I'm pleased you like the idea. I hope you're sitting down, but we recommend doing it quarterly! Most properties do an average of about 10 reserve projects a year, so updating this information quarterly means only doing 2 or 3 every 3 months. Not a huge task and you're "on top" of the picture all the time. If you'd like a copy of my chapter on this please send an e-mail. It's no-charge, of course.

DeeB
Your concerns are well-stated, but I believe they can be put to rest. (Good news). There are two basic issues that you raise. (1) The frequency of updates and … (2) not having funds in the reserves when unexpected repairs are required.

Looking at (1), I agree 100% that reserve studies should be carries out infrequently. Our statutes in Ontario mandate that reserve studies with a full inspection should be carried out every 6 years and thorough financial updates carried out at the 3-year mark. I agree with these intervals. The updates I referred to in my “tip” are easily-accomplished, one-at-a-time corrections to the existing plan based upon current repair and replacement experience. The experience is an actual repair cost that differs (as it almost always does) from the planed cost and the planned timing. Doing this, quarterly, ensures that the plan reflects the latest real information. It means that you don’t have balcony repairs in the plan every 6 years that cost $20,000 when experience has just told you that they should be in the plan every 5 years and cost $25,000. A change like that does not “re-do” the entire plan. It just brings this part of it into line with reality.

Turning to (2), a well-prepared fund will have been created with funding that results in healthy balances across the years. These balances will have had a “cushion” built into them for the singular purpose of recognizing that actual experience will differ from the planned expenditures. That, by the way, does NOT mean that the estimates are careless. It means that they’re estimates and ALL estimates are going to be wrong. Most of the time just by little bits but sometimes by a lot. It’s life!

The funds, then, to do repairs that are more costly or earlier then expected, come from the “cushion”. If the balance’s cushion is not thick enough (and that can happen) then the funds to pay for the unexpected repair must come from a special assessment or a loan. But NOT out of the operating budget.

Footnote: I mentioned a “well-prepared” plan, above. If you have a reserves plan with little or no cushion built into it your “driving on fumes”. You have enough gas in the tank to get there if there are no traffic jams, storms, or detours, but if one little thing goes wrong you’re scuppered. Contact me directly, please, if you’d like some additional material on all of this.

Karen,

Would putting the cost into next year's budget mean a raise in assessments?

You can do what I did when I was treasurer of a 49-member assn. I asked for volunteers to help but got none, so I conducted the reserve study myself. I just went around the neighborhood looking for things that might need major repair or replacement and calculated the cost. I researched installation costs of the playground equip., measured the common areas (grass and gravel)and the perimeter walls, counted all the shrubs and trees, called around to get the costs of various items that would be included, etc. I came up with a rough estimate for every item and submitted a proposal to the board. Of course, I documented everything. It may not have been what a professional reserve co. would have done, but it was sufficient for our small assn.

MaryA-

After feeling as though I was piloting this ship alone, I stepped down as pres. at our annual meeting and am now serving on the board in another capacity. Yes, including a reserve study would mean an increase in assessments, but not doing so will eventually lead to a special assessment. If the vote will be not to obtain a study or conduct our own, then that is the will of the board. It will be memorialized in our minutes and posted on our website. May just get some new blood involved.

Graham-

I did receive your terrific information and will be forwarding it to the president and our PM.

And to those of you who have stepped back rather than get totally burned out- now I, too, know how to spell relief! woo-hoo!

GrahamO,

I just joined HOA and have been going over the forum. This very issue surfaced in our small community when I became President of our HOA. We have never had a reserve fund and have only used our operating budget for replacement/repairs on capital projects. I'd be very interested in reading your Create a Reserve Plan from Scratch and also any valuable information on making the transfer of funds when available from the operating fund to a "new" reserve fund. We are a small community with water frontage with community docks, pavilion and pool. Knock on wood everything is in working order. Could you tell me how to go about getting this information. Thank you

Deborah:

The postings you are responding to is about 4 years old. I doubt the OP will respond.

There are many sources for reserve fund information which should be easy to find.

Do your governing documents have anything to say about reserves?

My opinion if would certainly be prudent to have some savings in a reserve account depending on the size of your property, the age of the property and the areas to be maintained by the HOA under the documents.

One source might be the CAI website which might offer you some information as to the purpose, need and procedures to fund such an account.

In my area many if not all banks are requiring reserve accounts be in place in a certain amount and that there be a transfer of 10% of the operating income made to these accounts.

Good luck.

Yes they do. It's covered under § 55-514.1, here is a link to that statute:

http://leg1.state.va.us/cgi-bin/legp504.exe?000+cod+55-514.1

I will say that the hardest thing is identifying everything that needs to be addressed by the Reserve fund. For instance, in our last study we forgot to include:

Street Signs/poles
Additional signage/poles (speed limit, stop signs, etc.)
Storm Water Management facilities (thought the county took care of that - we were wrong, they only take care of some of them on the property)

A professional study would have likely caught those, but the board didn't want to spend the money. That's when I discovered the material to do your own study. Even though it wasn't perfect, it was better than no study at all as it showed we needed to increase assessments by 20% (which took a membership vote) to fund the reserves.

Tim