Minimim Reserves

SteveT,

How old is your association? $650 per year per owner goes into your budget to fund line items. Are you over or under your budget? If under budget, what happens with the excess? Perhaps that excess could go into a Reserve Fund Account. If over budget, is the $65,000 an increase from the past?

It does not sound like you have a budget line item for reserves to fund replacement costs. I believe you should have one. It's refreshing to see you are thinking about the future. But it sounds to me like timing is of the essence.

Your estimate of the replacement costs needs to be more formalized by, and I cannot stress this enough, an independent contractor to analyze the true costs based upon industry standard. The contractor for my community was a transition engineer that performed a capital reserve analysis, and study of the elements to evidence if they complied with industry, local, state, and federal code. We have approx 80 single-family homes and over 100 townhouses.

"Estimates" is a word that needs to become "Replacement Cost Projections" (RPC for simplification) based upon industry standard. A factor that will contribute to RPC include but not limited to inflation. For example, construction costs since 2002 have increased at minimum 18.5%.

Bottom line, the minimum amount of reserves your association should maintain can vary depending on funding goals and methodologies. You have to decide how aggressive you want to be with funding and what can be done to achieve that. There are risks with each method and funding goal. You must take into consideration the unknown regarding the deterioration of the elements. Routine maintenance of the elements will prolong the lifespan.

More than that I think you need an engineering firm, cpa, and finance committee.

Best of luck,
GeraldT1
NNJ

Hi Steve,

First off, congratulations at looking at your long term need for Reserves, a lot of HOAs don't do that until it's too late.

My suggestion is to hire a company that specializes in Reserve Studies and anlysis. They can produce a detailed look at everything that will eventually need to be replaced. They'll give you a line item for everything, how long they estimate it will last before needing replacement, how much it will cost to replace and how much the HOA needs to save each year for that item until replacement time.

They also factor in inflation to the costs, so a $ 5,000 pool heater today may cost $ 6,000 by the time it needs replacement.

Your 500k estimate may be in the ballpark, or it may not be close, You might be surprised at how many items there are that will need replacement.

Once you have this analysis, then you can determine how much you need to put into the Reserves each month or each year so that you'll have enough money to do the replacements.

The Reserve Study is an estimate of how long an item will last, so with some regular maintenance, items may last far longer. If you have a wrought iron fence around the pool, the Reserve Study may show it having a 25 year life. If it's taken care of, it could last 30-40 years.

Having a good Reserve Study done is one of most important things you can do for the long term success of your HOA.

Good Luck.

My association is single family homes and the assets I mentioned are the only ones covered by the association.

Go to google.com and enter reserve "reserve study" or many of the condo web sites have links to reserve specialists. Also depending on where you live the state may also regulate your reserves. In Ohio you must put at least 10% of your annual budget into reserves or the majority of your association MUST vote each year to allow "special assessments".

Also as a Board member you have a fiduciary duty to plan for the future or you can be held responsible. That is why it is always prudent to have an up to date reserve study done by a professional. If you follow the reserve study and still come up short you have someone to point to if you followed the plan in good faith.

Thanks Bonnie...I will check all these sites out. We did have a MC, the one the developer hired and she gave us no information about transation, we knew nothing so we did nothing and we go XXXXXed big time. I have ask the President over and over to get and audit (well a financial review-can't afford and audit) and the reserve review, she as done neither. We do have a new MC (2 monthes) and I'm sure the President hasn't ask them about it either. So I would like to get all the information in my hand to give to the President. See if I can get an approx. cost...Oh! by the way, I'm in Pensacola, Fl....thanks again

Tip,
Listen to your attorney; you pay him for his professional advice. Remember if you are not saving enough in reserves and have to hit the homeowners with a large special assessment in many states the homeowners can come after you as a director for failing in your fiduciary duty.

You also need to check your state laws regarding reserves. In Ohio the Association must put at least 10% of its annual budget into reserves or a majority of its homeowners MUST vote each year to allow special assessments. Instead of putting what's left over at the end of the year into reserves you should budget and deposit a set amount each month. The best way to know how much you should be saving is through a reserve study. Another plus of having a reserve study done is that if you need to increase assessments for reserves, you will have the documentation in hand to justify it.

Hi - in response to your statements:
"This budget cycle, the Board has had had criticism from some homeowners that we are putting too much into reserves, and that by raising the yearly association assessment fee, and then returning as much or more of this increase to reserves is "double-charging" owners more than the allowable amount per our by-laws. Since we carry replacement-cost insurance for the whole complex, the opinions have been that we should only have about $100,000 in reserves and spend the rest on needed projects, since the insurance would cover any other catastrophic loss. "

Please help your HOs understand the difference between the Reserve Fund and the replacement-cost insurance. The Reserve Fund is necessary to cover capital replacements, for example, to replace a roof or clubhouse, as a result of normal wear and tear.

The insurance is to cover replacements as a result of a catastrophic loss, such as due to a fire.

Both are neccesary and required. I agree with the prior suggestions to hire an experienced Reserve Analyst Firm to conduct a reserve analysis. Please scroll back for web links on this subject.

Good luck - Bonnie