estimating needed reserve account

I'm delighted to find this resource for HOA board members! Our condo is in the throes of approving an operating budget for the year and we are struggling with the issue of how much is enough to have in our reserve account... do you need to fully fund something today that you won't have to repair for 10 years? We have had two major repairs for items not covered in any previous estimation of needed reserves (who knows why!) but now that they are fixed, don't want to levy a special assessment today to cover repainting of our buildings in 10 years.... get the picture... anyone have advice or can point me in the direction of print or online resources to use as a guide. Thanks Nanacy

Roger,

your recommendation sounds interesting but would you not need a qualified engineering company to inspect all units and certify such repairs will be needed in 20 years? This could get bloody expensive for small guys, you know.

FL HOAs have a choice; 'straight line' or 'pool funding' or no funding of reserves providing the developer did not establish reserves or the membership did not vote for it. So, it is not always mandatory. Also, the membership has the right to adjust the amount every year at the annual meeting.

Nancy,

I agree with Roger that the BOD needs to have a reserve plan developed; I believe he meant a 20-year reserve plan. IMO, the BOD should contact a co. specializing in reserve funds and have a study done. The study will tell you exactly what capital improvements/repairs need to be placed in reserve and how much money should be put into the reserve account each month. It may cost a few $$$ to have this done but it's well worth it in the long run. Our assn has our reserve study updated about every 2-3 years.

At the simplest level, least expensive way to start is:

1. Pick an item that will need repair, lets say a roof.
2. Call someone in the phone book for an estimate to replace. Tell them it leaks or something.
3. Estimate how many months the roof has left in service.
4. Add 3.5% to the estimate to compensate for inflation.
5. Divide the roof estimate by the number of months left in service
6. The answer will be how much money you need to transfer to the reserve fund each month in order to have enough money to cover the new roof at the date you estimated its death.
7. Do this for many other items.

You don't "need" to pay someone to do a reserve study, but it sure saves allot of time and they do know what they are doing.

Example:

$20,000 New roof estimate
+ 3.5% Inflation
----------------------------
$20,700 Total

$20,700
/ 180 Months of service left
----------------------------
$115 Needed per month for reserve fund

Pretend the $115 is a mandatory expense needed each month, just like mowing the lawn. Make sure you keep up with paying it just like any other vendor and your reserve fund will start to look much better. When the time arrives to replace the roof, you will be glad you did this.

Roger,
Attached is an article on "pooled reserves"... It is written by a Florida well-known and respected attorney.
Ann

I've read your responses - thanks for the ideas. I have questions about the 20 year reserve idea. Our situation is that we currently have a reserve account as recommended by our property manager. The account is to cover repainting our two buildings (elastameric paint and cherry picker needed to reach top stories - both expensive), replacing tiled & flat roofs, two elevators (motor in one just replaced for $15,000), large skylights in one building (just replaced for $19,000)and water tight sealant of walkways, etc.

One issue the board is facing is the estimate made by our property manager. The elastameric paint we used 7 years ago (two coats as per manfacturers specs)has a 10 year warranty... that's the figure our prop. mgr insists on using, even though the paint still looks fabulous and no way is it going to be redone in 3 years, maybe not even 5 or 6. So, the board wants the money there when the actual repair can be reasonably expected, but does not want to raise HOA dues to fully fund something we won't be fixing. (The source of our problem is that no previous board included the skylights or elevator motors in the reserve account, so this board has to find money to pay for those repairs AND add them to the reserve account, though that money won't be needed for years)

So, the board is considering a) taking a look at what we can reasonably expect from our assets that may need replacement in the way of longevity - which most likely exceeds the warranty (our previous skylight lasted 20 years - this one - almost identical but better is waranteed for 10) and b) determining how much we need in any given year and planning accordingly regarding how much we need in the way of HOA dues... right now 2/3 of our monthly dues goes into maintenance and upkeep and 1/3 goes into reserves. We are a small condo with 27 units/2 building - a three story and a four story building near downtown Austin.

In that way, we are hoping to recoup what we spent on the two uncovered expenses and still have enough money to make all needed replacements when they REALLY need to be replaced, not when their warranty runs out. We might be able to do that with a small special assessment and not raise HOA dues... How does that sound to you all? I look forward to hearing your responses... and keep it simple, please - we are, unfortunately, not rocket scientists, just having fun living in downtown Austin.

Steve,

as much as I like your formula it may not always work for roofs. About 8 years ago we paid $15K for a roof replacement and 2 years ago $32K.

Concrete repairs and road resurfacing will be a major expense for us next year. Now the sprinkle system is going and the fences may have to be replaced and who knows what the insurance companies are going to do this year.

Many of our owners support some funding of reserves, but most don't support full funding based on some 20 year plan. They say 'hey, I am not going to live that long'. Some people are also planning to move because they want larger homes or are leaving Florida. They do not support the full funding of reserves either.

The full funding is just not going to fly in our development, I do not think. No one trusts the Board enough to even come up with any realistic estimates for major repairs needed in 5 years. Ha.

We do however need to set up a preventive maintenance plan and budget for that. Also huge reserves may become taxable, no?

Eva,

The reserve fund is just one fund. If there are 10 items in the reserves, that doesn't mean you have 10 reserve funds. The reserve study will tell you how much $$$ is needed for each category. What is not practical is calling for special assessments, which, IMO, is an indication of poor planning. As your membership ages and more people go on fixed incomes, a special assessment may be hardship for the majority of the members. Also, insurance coverage is not something that is contained in a reserve fund. However, the assn can have a contingency fund for insurance deductibles and increases and other emergency expenses that might come up that would not be covered by the reserve fund. When the budget is being prepared, the ins agent should be called and asked if he anticipates rate increases over the next year. If "yes" then a certain % can be added to the current year amount for safety sake, or you can just get in the habit of adding 1%, 5%, whatever, each year. This is called planning for the unknown.

Eva, you seem to like to do research, I would suggest you do a little research on reserve funds. It's apparant you don't understand the real purpose of having a reserve fund.

Mary,

every 'special assessment' has to have a special accounting. Whether the association sets up a special fund for every 'special assessment' or not is up to the Treasurer. That accounting is only on paper, does not mean we have to have ten bank accounts.

And, if the money is left over (such as roof special amendment) the excess has to be either returned to the owners or the owners have to vote transfer the money to another fund.

Our insurance company is regulated by the state and any increases proposed by the insurance company must be approved by the state and usually are announced in the newspaper in June for August increases or decreases. And,not too worry, special assessments are not hardship for our members at all. If the members prefer it, so be it. Nothing you or I can do about it.

Mary,

First I am not a board member. Second the Board can’t do anything about it because the new law dos NOT apply to us unless the membership ‘opts-for it’. We can simply revert to our old documents. (Please read the law, if you like. But I have already posted that.) Third, our covenants are very specific regarding the use of funds when ‘special assessments’ are imposed on owners (I can post it later if you’d like). It makes sense if I fund the roof the board cannot take my money and use it for planting flowers. Fourth the insurance increases are usually announced after our semi-annual invoices are mailed and therefore even the mid-year budget cannot be amended. Have to run.

Eva, does this mean if there is no money budgeted to repair or replace your roof that if the roof starts leaking you will need to catch the water in buckets? I think you would be asking for your roof to be repaired before planting flowers It is very important that the Board make sound business decisions even when the result causes a revision of the budgets.

Mary, as I said before, we have reservers to cover at least two roof replacements and/or major repairs.

Roger writes:

>>>A knowledable buyer in an HOA will review the controlling documents and the financial status including the reserve fund and long range reserve plan (budget).<<<

In theory, yes as to the knowing part. But in practice? I'd guess less than 1 in 10 even look at the docs, and fewer at the financials (except to see what the dues are). Hence many HOA problems. What's your experience?

Eva,

I don't recall any mention of mandatory funding of a reserve account. There is no mandatory funding requirement in AZ, but that doesn't mean a prudent board (such as mine) shouldn't have a reserve study performed and religiously deposit monies into a reserve account each month.

What did the members vote 90% "no" on in 2009?
I know you stated you have a reserve fund to cover at least 2 roofs, but what about the other roofs and any other major repairs. If I recall correctly you rely on special assessments to which I stated that, IMO, special assessments mean poor planning on the part of the board. And, I really think Roger would agree to that! Mary
____

The members voted 98% against the ‘full’ funding of reserves. If you think our Board is incompetent and exercises poor planning so be it. But, I think you ought to be a little more careful before making such conclusions. And, I tell you why.

One hurricane can result in almost $1 mil damages and wipe out all planning. It happened before. Not once but several times. The insurance may triple, the labor costs for fixing the roofs may sky rite, if you can even find anybody to fix anything.

So, please you do your 20 year elaborate studies if it works for you. We will do as we think is the best approach for us. The only thing the Doc Committee is trying to do is to understand the law - or interpret the law the best we can - and to identify the loop holes in our documents. Is that so difficult to understand?

Eva,

I'm finished with you. You seem to have all the answers; I don't know why you're asking any questions.

BTW, excuse me for thinking you are a board member.