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Subject: Reserve Studies/Funds 101
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TimB4
(Virginia)

Posts:16311


11/17/2010 11:33 PM  
Many States have enacted laws requiring an Association to perform reserve studies. I was recently put into the position (i.e. last on in line when jobs were handed out) of having to complete a reserve study for my Association where none existed before. Since most of us on this Board are volunteers and probably don't do reserve studies for a living, I thought I would start this topic to share what I went through and encourage others to provide input so anyone else who needs the info will be able to find it.

I apologize that this posting will be long but the subject tends to require it.

First and foremost, there are plenty of firms and self help kits available to perform a reserve study. I didn’t use any of them. If you are interested just Google “how to do a reserve study”.

I did find two excellent resources:

1. From the Foundation for Community Association Research, Reserve Studies/Management. a plain language paper on what is in a reserve study and how to do one.


2. From the State of CA, Reserve Study Guidelines for Homeowners’ Association Budgets.


Typically every household has a checking account for everyday expenses and a savings account for emergencies and future major expenses. Homeowner Associations need the same thing. Homeowner associations call the account for emergencies and future expenses a reserve account, reserve funds or simply, the reserves. Some associations create separate physical bank accounts for the reserves (sometimes an account for each item in a reserve study). Some Associations keep all the funds in one pot but keep the balance of each as separate line items in their books. No matter how your Association account for the funds, separate physical accounts or just line items, it's important that reserves are fully funded to meet expected future repairs/replacements.

Money set aside for unexpected expenses is typically called a contingency fund. A contingency fund for a household would be used to cover expenses if you lost your job, had an unexpected repair to your car, larger than expected utility bill or to patch your roof after a storm. Association contingency funds (also known as operating reserves) are used to pay for expenses above the expected budgeted amount (perhaps for an extra heavy snowfall or tree removal after a storm) and to cover any shortages between assessment payments. Contingencies are not the same thing as expected repairs/replacements of capital components.

The amount that should be set aside for contingencies varies between each Association just as it would between each household. However, it is commonly recommend that homeowner associations should have an amount equal to 1/12 of the total annual assessments as a minimum for contingencies.


A reserve study is used to identify the expected maintenance and replacement costs of an Associations capital components and to determine how much money should be collected and saved each year to pay for it. For me, this was a simple process that just took about a year to complete:

Steps:

1. Define what your capital components are

Typically these include; roads, sidewalks, playground equipment, bus stop, entrance sign, roofs, etc. Basically anything the Association is responsible for.

2. For each component, identify what has to be done and how often

As an example, your deck might need to be replaced every 20 years but will have to be power-washed and resealed every 5 years.

3. Identify the costs involved for each item identified in step 2

Example: A cost of a replacement deck might be $10,000 and the cost of resealing may be $500

4. By dividing the cost by the number of years, determine an amount needed to be set aside each year

Continuing with the deck example:

$10,000 (replacement cost) divided by 20 (years before replacement) = $500 per year 500 (sealing cost) divided by 5 (years between each sealing) = $100 per year

Therefore, an amount equal to $600 should be saved each year to cover the planned future expenses relating to the deck.


If the deck was an Associations only capital component, then adding the $600 to the annual expenses and the amount being set aside for contingencies will fully fund the reserves.

Granted this is very basic and actual studies are typically far more complex. However, this would be the basic steps.

Once completed, your study should be reviewed each year for inflation and completely redone every 5-7 years with annual assessments adjusted as needed.

Hopefully this will help guide someone else who showed up to the meeting late or was the last in line when the BOD was deciding who should head up what project.

Please share your experiences, tips and/or problems when you completed your Associations reserve study.

Hopefully someone will find this information useful. If not today, perhaps in the future.

Tim

PeterB1
(Florida)

Posts:257


11/18/2010 4:25 AM  
Tim,

Nice write-up. I wasn't smart enough to know how to do the things you state. So, 4 years ago, we had a commercial firm do the first ever reserve study for the HOA. We have lots of assets: lake, tennis, road, etc. Problems for us - easy for them.

1. We didn't identify all the assets. They pointed out: streetlights, sidewalks, walls and fences - things we missed.

2. We did not have the information to identify the expected life or replacement costs for large or complex items - like roads, fences...

3. They were able to put together a well designed booklet (as well as Excel worksheets) so the Board could see the results.

The bottom line: everyone was happy and we felt comfortable with the process and the results. Not every organization can undertake their own study. There is a lot of money tied up in our reserves and we wanted to be sure we were accurate. Not so happy with the cost. The firm suggested they re-do every year - an idea we were not comfortable with.

We have updated the study ourselves each year. In 2011, we will have the study re-done.

peter
MaryA1
(Arizona)

Posts:388


11/18/2010 6:13 AM  
Tim,

Very nice write-up!

When I was on the board of my former assn I did our reserve study. This was a very small assn with only 49 single family homes, a playground and large,landscaped water retention area. It wasn't difficult to prepare the reserve study and I used info from CAI to guide me.

If an assn decides to do their own reserve study they must make certain all the items that should be included in a reserve study are included. FYI, following are the components in my assn's reserve study which is professionally prepared:

replace metal fences
refurbishment of irrigation system
trees/shrubbery replacement
granite replacement (for those states in the SW who use granite in place of grass)
refurbish entry monuments
repair stucco walls
repaint block walls
repaint decorative lights
replace pole lights
replace metal and concrete park furniture
replace pet stations
replace play equipment
replace playground turf (artificial mat that playground equipment sits on)
replace basketball court
repait ramadas
refurbish ramada roofs

If you have man-made lakes:
repair shoreline
repair lake bed liners
dredge/repaid lake bed
repair lake shoreline
rplace air lines
replace compressors
reolace diffusers
replace and/or replace pumps

All these components have a useful life of from 1 to 28 years

RogerB
(Colorado)

Posts:5067


11/18/2010 9:15 AM  
Tim, in addition to the items you listed there is another critical item for which you did not account in your example - INFLATION RATE. At 3.5% average rate of inflation the cost a deck costing $10,000 today will cost $20,000 to replace in 20 years.
TimB4
(Virginia)

Posts:16311


11/18/2010 10:52 AM  
Posted By RogerB on 11/18/2010 9:15 AM
Tim, in addition to the items you listed there is another critical item for which you did not account in your example - INFLATION RATE. At 3.5% average rate of inflation the cost a deck costing $10,000 today will cost $20,000 to replace in 20 years.




Roger,

Good Point.

I probably should have clarified it better but the reason for reviewing the study every year was specifically for the inflation rate.

We found it extremely difficult to try and factor in material costs and inflation rates. This was very evident to us as we got quotes on road repairs. Since asphalt uses a petroleum product the cost varied as quickly as the cost of oil varied. Therefore, we decided to look at everything in today's dollars (this was mentioned in the report we produced). Once it gets fully funded (we have a second try at doing that on Dec 1) future boards would only have to adjust annual assessments for the inflation rate.

Tim
RogerB
(Colorado)

Posts:5067


11/18/2010 12:45 PM  
Tim, Professional reserve studies include a long range (20 or more years) plan and are reviewed about every 3 years. Revising a reserve study every year is not cost effective nor practical.
TimB4
(Virginia)

Posts:16311


11/18/2010 3:07 PM  
Posted By RogerB on 11/18/2010 12:45 PM
Tim, Professional reserve studies include a long range (20 or more years) plan and are reviewed about every 3 years. Revising a reserve study every year is not cost effective nor practical.




I agree that having a company revise it every year would be expensive. However, some States, like Virginia, require it to be reviewed every year:

§ 55-514.1. Reserves for capital components.

A. Except to the extent otherwise provided in the declaration and unless the declaration imposes more stringent requirements, the board of directors shall:

1. Conduct at least once every five years a study to determine the necessity and amount of reserves required to repair, replace and restore the capital components;

2. Review the results of that study at least annually to determine if reserves are sufficient; and

3. Make any adjustments the board of directors deems necessary to maintain reserves, as appropriate.
SharonB6
(Pennsylvania)

Posts:70


11/19/2010 6:41 AM  
Thank You so much for all the great information! This will be very helpful!!
DorieW
(Tennessee)

Posts:52


07/12/2011 11:11 AM  
Very helpful Tim. Thank you!
BruceF1
(Connecticut)

Posts:2535


07/12/2011 12:04 PM  
Tim,

Reserve studies are not just required by states, but may be required by mortgage companies as well, even in states where no such requirement exist by statute.

As a result of the housing crisis and Fannie Mae's and Freddie Mac's financial woes, these two mortgage underwriters (and now, the FHA as well) tightened their underwriting requirements for mortgages written for homes purchased in an association development. Those requirements include maximums on delinquincy rates and minimum reserve requirements. The requirement is that a minimum of 10% of the association's annual budget be set aside for reserves, unless the association has done a reserve study showing that a smaller amount can be justified. Many lenders want to be able to package their mortgages for possible resale at some future date, which cannot be done if the mortgage doesn't meet Fannie or Freddie requirements.

We undertook such a study a few years ago, much in the same manner as you did, and allowing for inflation.
TimB4
(Virginia)

Posts:16311


07/12/2011 2:47 PM  
Bruce,

Excellent points.

Is that requirement for all Associations or just Condominiums?

Do you have a link to the ruling?

Tim
DavidW5
(North Carolina)

Posts:563


07/13/2011 6:23 AM  
Posted By MaryA1 on 11/18/2010 6:13 AM
Tim,

Very nice write-up!

When I was on the board of my former assn I did our reserve study. This was a very small assn with only 49 single family homes, a playground and large,landscaped water retention area. It wasn't difficult to prepare the reserve study and I used info from CAI to guide me.

If an assn decides to do their own reserve study they must make certain all the items that should be included in a reserve study are included. FYI, following are the components in my assn's reserve study which is professionally prepared:


repaint block walls
repaint decorative lights






Mary,

FYI - the IRS does not recognize painting as a valid use of reserve funds. Painting should be paid for out of the operating account, not reserves, to avoid a tax issue.


DianneL1
(Washington)

Posts:34


07/13/2011 5:43 PM  
Our condo association is going through the FHA Approval process right now. As a surprise to us, they required us to raise our fidelity coverage (in our master insurance policy) to match our net worth - which includes the money you have in reserves. We had to raise the amount from $50k to $160k. This added $500 to our premium. If we add $20k more to reserves this year, we'll need to up that coverage again.
Hope this information is helpful to someone.
TimB4
(Virginia)

Posts:16311


07/14/2011 3:51 AM  
I've copied the message about fidelity bonds into a different thread as I can see it possibly taking this thread off topic.

The thread about Fidelity Bonds can be found here:

http://www.hoatalk.com/Forum/tabid/55/view/post/forumid/1/postid/116433/replyid/116433/Default.aspx

Tim
SteveM9
(Massachusetts)

Posts:3231


07/14/2011 6:41 AM  

FYI - the IRS does not recognize painting as a valid use of reserve funds.


At what point would the IRS get involved with reserve fund decisions. I've never heard of such a thing.
DavidW5
(North Carolina)

Posts:563


07/14/2011 8:19 AM  
Posted By SteveM9 on 07/14/2011 6:41 AM

FYI - the IRS does not recognize painting as a valid use of reserve funds.


At what point would the IRS get involved with reserve fund decisions. I've never heard of such a thing.




As I understand it, when your association files its income tax return, funds set aside for replacement reserves are not taxed as they would be if they remained in the operating account representing income to the association not consumed by operating expenses. However, the IRS does not recognize funds set aside for future painting as a valid reserve expense. If you budget for painting in the operating account and then don't do the painting, those excess funds in the operating account are taxable.

Any CPA's here on the forum? If so, please correct me if this is wrong.
SteveJ8
(Florida)

Posts:5


07/20/2011 11:32 PM  
Posted By DavidW5 on 07/14/2011 8:19 AM
Posted By SteveM9 on 07/14/2011 6:41 AM

FYI - the IRS does not recognize painting as a valid use of reserve funds.


At what point would the IRS get involved with reserve fund decisions. I've never heard of such a thing.




As I understand it, when your association files its income tax return, funds set aside for replacement reserves are not taxed as they would be if they remained in the operating account representing income to the association not consumed by operating expenses. However, the IRS does not recognize funds set aside for future painting as a valid reserve expense. If you budget for painting in the operating account and then don't do the painting, those excess funds in the operating account are taxable.

Any CPA's here on the forum? If so, please correct me if this is wrong.





Great, concise post! As a CPA, I can add that the tax code and related rulings are all about dotting your I's and crossing your T's. Very carefully, in most cases.

If you are the president or treasurer on a board considering this, it doesn’t hurt to read Revenue Rulings 74-563, 75-370, and 75-371. Don't worry, they are not very lengthy! :-) Or consult your CPA.

These rulings allow the portion of the budget dedicated to reserves to be accumulated in a separate capital account, if the requirements of the rulings are met. Generally speaking, this segregation of funds is done by stating the purpose on a separate line item or section in your budget, notifying owners, and keeping the funds in a separate bank account.

In other words, the amounts are not taxable when an association collects them. On the flip side, the amounts are not tax deductible when used (spent) for the designated purpose. The association benefits by not having to pay income tax up front, upon collection.

In addition to painting, the IRS does not allow amounts held in a contingency fund to qualify for this capital contribution treatment.

For example, in Florida, the condo law (Chapter 718) and rules (61B-22, Florida Administrative Code) mandate that associations maintain and fully fund reserves, unless member/owners vote not to fund or partially fund reserves. The rules also allow the establishment of nonstatutory reserves, such as for painting and contingencies.

Not surprisingly, many associations in Florida set up a hurricane fund or reserve! Insurance or debt service reserves are other possibilities.

I strongly recommend that the statutory reserves, painting reserve, and contingency reserve(s) all be kept in separate bank accounts. This severely limits the ability of the IRS to come in and try to say that all the reserves are taxable income.

Put another way, if the IRS sees that painting and other funds are mixed with funds to replace your roofs, roads, swimming pool, etc., they might try to say that all the funds are taxable!

Despite its usefulness in prolonging the life of an exterior, painting is deemed to be a cosmetic activity!

Please note that these revenue rulings are not quite as important in years when an association chooses to file Form 1120-H, and thereby observe Code Section 528. However, it is vital to keep the separate reserves functioning for years when an association needs to file Form 1120, similar to a regular corporation. Also, Form 1120-H and Section 528 are not available to commercial associations, or those with a high amount of transient (short term) rental activity.



KaushalV
(New Jersey)

Posts:25


07/23/2012 9:36 AM  
Hello all,

I am looking to communicate with MaryA1 about her response dated 11/18/2010 6:13:52 AM at this topic:

http://www.hoatalk.com/Forum/tabid/55/forumid/1/postid/103517/view/topic/Default.aspx

I couldn't find how to interact with a member one-on-one, so I am forced to bump this thread. MaryA1, if you see this, please respond and let's figure out how to communicate one-on-one.

Thanks,
CarolR11


Posts:0


07/23/2012 11:03 AM  
When developers set up the original reserves study (required in CA), they sometimes overestimate the estimated life of various components, and underestimate the replacement cost. This helps keep the dues lower to attract more buyers.

Our building opened in 2001.

Cheap example: There's a desk & chair in the security kiosk, which are used 24/7. The reserve schedule says that they'll last 25 years!

Expensive example: Cooling towers (operate our HVAC) on the roofs of our twin towers were estimated to last 25 years & the replacement cost was est. at $450,000. Even if they hadn't been defective in a couple of ways, they only would be expected to last 15, maybe 20 years. We replaced them for $900,000.

The developer also sometimes "miss" a component. We just found one maybe 3 years ago: a holding tank for water for our ceiling fire sprinklers.

Tim's list is really nice. To see detailed aspects of everything you want to know about reserves, go to davis-sterling.com, Main Index, scroll to Reserves.
CarolR11


Posts:0


07/23/2012 11:18 AM  
When developers set up the original reserves study (required in CA), they sometimes overestimate the estimated life of various components, and underestimate the replacement cost. This helps keep the dues lower to attract more buyers.

Our building opened in 2001.

Cheap example: There's a desk & chair in the security kiosk, which are used 24/7. The reserve schedule says that they'll last 25 years!

Expensive example: Cooling towers (operate our HVAC) on the roofs of our twin towers were estimated to last 25 years & the replacement cost was est. at $450,000. Even if they hadn't been defective in a couple of ways, they only would be expected to last 15, maybe 20 years. We replaced them for $900,000.

The developer also sometimes "miss" a component. We just found one maybe 3 years ago: a holding tank for water for our ceiling fire sprinklers.

Tim's list is really nice. To see detailed aspects of everything you want to know about reserves, go to davis-sterling.com, Main Index, scroll to Reserves.
DavidA7
(California)

Posts:179


07/23/2012 11:33 AM  
I add to the developer underestimate to the developer didn't even do a reserve study. Our dues in 2004 were set to $170 and after taking ownerhsip realized how underfunded we were. Dues went to $280 and now 8 years later range from $340 to $380 a unit. If you are reading this and you are contemplating purchasing a NEW condo make sure the developer does a reserve study by an outside firm, review it for accuracy and then make sure its being acccounted for in the dues you are being quoted.
GlenL
(Ohio)

Posts:5491


07/23/2012 12:22 PM  
Posted By KaushalV on 07/23/2012 9:36 AM
Hello all,

I am looking to communicate with MaryA1 about her response dated 11/18/2010 6:13:52 AM at this topic:

http://www.hoatalk.com/Forum/tabid/55/forumid/1/postid/103517/view/topic/Default.aspx

I couldn't find how to interact with a member one-on-one, so I am forced to bump this thread. MaryA1, if you see this, please respond and let's figure out how to communicate one-on-one.

Thanks,



Kaushal, MaryA1 was a very active poster here, her posts actually numbering in the thousands despite what the counter says. Sadly she stopped posting here about a year and a half ago.

Studies show that 5 out of 4 people have problems with fractions
TimB4
(Virginia)

Posts:16311


07/24/2012 5:18 PM  
It has been my experience that when the counter stays at zero it's an indication that the individual withdrew from the forum.
TimB4
(Virginia)

Posts:16311


11/21/2012 5:56 PM  
Updating a link in the original post:

State of California, Department of Real Estate RESERVE STUDY GUIDELINES for Homeowner Association Budgets
LarryB13
(Arizona)

Posts:4099


11/21/2012 7:45 PM  
Posted By CarolR11 on 07/23/2012 11:18 AM
When developers set up the original reserves study (required in CA), they sometimes overestimate the estimated life of various components, and underestimate the replacement cost. This helps keep the dues lower to attract more buyers.




One thing I think that many reserve estimates fail to consider is that what costs $1 today is likely to cost $2 fifteen years from now and $3 twenty five years from now.
KellyM3
(North Carolina)

Posts:1367


11/22/2012 7:11 PM  
Reserve Fund philosophy is one of those concepts that hits you in a "Eureka" moment if you study it long enough. Inflation is a biggie w/ 3% inflation doubling the cost of something every 20 years.
CarolR11


Posts:0


11/23/2012 8:18 AM  
A couple of different reserves analyst firms that we'd had over the past 6 years both factored in inflation. On the detailed chart, the current replacement cost is listed and a est. future cost.

Re: my remarks from a few months ago below. A neighboring high rise had a detailed study done a few months ago and the analyst told them that a lot of components' lives were overestimated and the replacement cost of others underestimated--to the tune of 1 million bucks!! I'm guessing the total value of their assets is about $10 million. They're talking special assessments for the next couple of years to catch up.
DuaneR
(Washington)

Posts:34


11/27/2012 8:41 PM  
By reading all the posts on this subject of Reserve Studies I have come to the conclusion that Assement dues are headed up! We are going to have our first study done this year( state law 12-05-2012) has that happen to anybody who has already done these studies?
TimB4
(Virginia)

Posts:16311


11/28/2012 5:14 AM  
Duane,

After we did our first reserve study we had to go to the membership and request a 20% increase in assessments in order to fully fund the reserves. Fortunately, they approved it. However, we were very transparent on how the process was done, ran articles about reserves and provided copies of the study. I believe that the transparency aided the approval.

LauraR5
(Tennessee)

Posts:216


11/28/2012 7:35 AM  
Our reserves were seriously underfunded. Like we had $35,000 bucks and should probably have $250,000 minimum.

We went to the homeowners and told them we were going to raise assessments with all of the new money going to reserves. In just a year, we tripled our reserves.

At this year's meeting, we told them we wanted another $10 to put in the reserve fund. This probably gets us to the level we need to be at as far as our percentage of dues going into reserves. (Our builder put nothing in there to keep the assessment cost low to attract buyers.) People balked at the additional $10, but basically we explained to them that they'd be much better off to pay an extra $10/month than get stuck with a $2,500 assessment that they had 30 days to pay. I'm still not sure they saw our point, but the board has the authority to raise dues, and really we had no choice.

I can probably get you a copy of our study if you want to see what one looks like. I was surprised at how thorough it was.
FrankM7
(Pennsylvania)

Posts:61


12/03/2012 6:44 AM  
Posted By LauraR5 on 11/28/2012 7:35 AM
Our reserves were seriously underfunded. Like we had $35,000 bucks and should probably have $250,000 minimum.

We went to the homeowners and told them we were going to raise assessments with all of the new money going to reserves. In just a year, we tripled our reserves.

At this year's meeting, we told them we wanted another $10 to put in the reserve fund. This probably gets us to the level we need to be at as far as our percentage of dues going into reserves. (Our builder put nothing in there to keep the assessment cost low to attract buyers.) People balked at the additional $10, but basically we explained to them that they'd be much better off to pay an extra $10/month than get stuck with a $2,500 assessment that they had 30 days to pay. I'm still not sure they saw our point, but the board has the authority to raise dues, and really we had no choice.

I can probably get you a copy of our study if you want to see what one looks like. I was surprised at how thorough it was.





Laura,

Since I am continuing to expand our own version of a reserve study worksheet, it would be very helpful to me to also have a copy of the recent reserve study done for your association, if that is possible. Let me know if that would be possible and how to communicate directly with you. Thanks.

Frank
TimB4
(Virginia)

Posts:16311


03/07/2014 2:49 PM  
I've been referencing this thread for awhile.

I've noticed that there are some broken links and some new resources that should be added to the thread. Additionally, doing a simple internet search on "reserve studies" provides a huge amount of resources. Here are updated and additional links:

Reserve Study Guidelines for Homeowners’ Association Budget by California Department of Real Estate

Best Practices: Reserve Study Management/Research by the Foundation for Community Association Research

Reserve Study Definitions


Videos (Webinars) by Robert Nordlund (there are more than listed here):

Reserve Study Basics
Reserve Studies 101: The Component List
Reserve Studies 102: The Financial Analysis
Reserve Studies 103: Reserve Contributions
What do you do with your Completed Reserve Study?
Reserve Studies & D&O Liability Insurance
The Legal Side of Reserve Studies
The Legal Side of Reserve Studies Part 2
Can You Underfund Reserves?
Underfunding Reserves and the Business Judgment Rule
Underfunding Reserves - Keep Calm & Be Smart

JanetB2
(Colorado)

Posts:4168


03/07/2014 10:55 PM  
Thanks Tim ... great info as always.
JoseV2
(Florida)

Posts:9


08/06/2014 4:57 PM  
Tim this is great and useful information and I am very happy that there are people out there that can provide pertinent information within minutes or just a couple of hours. loads of information. However, you brought up a good point regarding man-made lake or what we call here retention pond. So far, the home owner has had to bear the cost of fixing the erosion. It's been left to the home owner to fix it the best way he can. I protested on behalf of the homeowner stating that the Board should have consulted with an engineer. Also, there are currently a number of plants that can be used to stabilize the ground from eroding. There are many options. But concrete is not the best unless it's covered with dirt and sodded. Unfortunately, They listen to neither recommendations. So, our lake shoreline have been fill with broken concrete blocks, some even come in color. They have taken away the beauty of the appearance of the lake.
TimB4
(Virginia)

Posts:16311


08/06/2014 8:06 PM  
Posted By JoseV2 on 08/06/2014 4:57 PM
However, you brought up a good point regarding man-made lake or what we call here retention pond. So far, the home owner has had to bear the cost of fixing the erosion.




To keep this thread on topic of learning about Reserves, I used Jose's post and started a new thread on retention ponds.

Please post information about retention ponds on that thread:

http://www.hoatalk.com/Forum/tabid/55/forumid/1/postid/178571/view/topic/Default.aspx
GenoS
(Florida)

Posts:2907


08/08/2014 12:07 AM  
Are there any info sources that list which states require reserve studies? We just moved into our first HOA home early this year and, while chatting with the head of the Finance Committee, learned that our association has never had one done. It has been around for about 25 years and from what I was told, the reserve requirements have always been evaluated in-house.

I have read FS 720 and become familiar with it. I don't think Florida requires that reserve studies be done. But I could be wrong and would like to confirm that.
TimB4
(Virginia)

Posts:16311


08/08/2014 6:53 AM  
I found this web page: Reserve Study Laws & Legislation by reservestudy.com. However, you should always verify the information by reviewing your State statutes.

Additionally, even if a study isn't required, it's a good idea to have one done and plan for the future.

As I pointed out, my Association did our study ourselves. It wasn't as complete, but it was better than no study at all. This year, I'm talking with reserve study specialists to see what the costs may be so we can hopefully budget for a professional one to be completed next year.

GenoS
(Florida)

Posts:2907


08/09/2014 1:40 PM  
Thanks, Tim. It looks like Florida requires budgeting and funding requirements for reserves to be computed, but not necessarily by an outside party.
CeceliaV
(North Carolina)

Posts:30


08/12/2014 6:24 AM  
Sorry, a little off topic but the FHA was brought up in the postings.

Does the FHA require that 10% of the yearly income be budgeted for reserves or that the total reserves are 10% of the yearly budget?

Thanks
SheliaH
(Indiana)

Posts:2473


08/12/2014 7:08 AM  
You should check the FHA website to be certain, but I think the FHA rules apply to condos. The last ones I saw did have a requirement that reserve deposits should be 10% of the annual budget and I think they're also required to have a reserve study. I don't remember if they specify how old it can be, but those should be done at least every 5 years.

Personally, I've always felt that is a good baseline for any HOA because the underwriting guidelines for many mortgage companies often mirror FHA (or Fannie Mae/Freddie Mac) guidelines and everyone is beginning to take a longer and harder look at HOA and condo finances - if a community can show it has relatively stable finances, a mortgage in that community is more likely to be approved, which should increase sales.

The FHA website is http://portal.hud.gov/hudportal/HUD?src=/federal_housing_administration

TimB4
(Virginia)

Posts:16311


08/12/2014 7:12 AM  
The amount of reserves needed are based on the reserve study.

There is no formula to say that an association with x% going to reserves is good, bad or indifferent.

An Association that has no amenities but an entrance sign will need a very low amount going to the reserves (perhaps $100 a year).
An Association that has roads, pools, storm water retention ponds, etc. would need several thousands going to the Reserves per year.
A Condominium would certainly need several thousand per year going to reserves.

For more info on HUD approval specifics see: HUDs Condominium Project Approval and Processing Guide. The section dealing with financials start on page 31.


Note: Even though HUD approval is not required, lenders are also looking at the financials of Homeowner Associations (vs. Condominium Associations). The main reason is that they want to make their own determination that the financial health of the Association is good enough to prevent a special assessment that may keep the borrower from making a mortgage payment (which is also what Fannie and Freddy look at when they purchase mortgages from the lenders).

CeceliaV
(North Carolina)

Posts:30


08/12/2014 12:22 PM  
Thank you Tim and Shelia,

We never had a reserve study because we are a small patio neighborhood with only 4 common areas --two heavily landscaped, a large fountain and entrance sign. Our main problem the developer put fast growing trees around the perimeter of the neighborhood that are now very large and very prone to disease. With nature we never know how many trees will need to be replaced each year.

I always though we did not need the expense of a reserve study and we estimated what we would need and have which is about 30% of our annual income????

As treasurer I am getting ready for the annual meeting and want to point out how having a healthy reserve benefits the neighborhood. A lot of people do not understand a good reserve will affect prospective buyers getting mortgages and will cut down on people not being able to sell and having their home for rent.

TimB4
(Virginia)

Posts:16311


01/24/2017 2:22 AM  
In order to update this thread with more info, it gets reactivated.
However, it's always good to keep Reserves and Reserve Studies on the mind if your a Director.

The update I wish to add is a spreadsheet developed by another member of this forum, SteveB25.
He has been utilizing the feedback given on his thread and made the spreadsheet better.

Here is a link to that thread, Subject: Reserve Study Analysis Spreadsheet:

http://www.hoatalk.com/Forum/tabid/55/forumid/1/postid/214592/view/topic/Default.aspx


Steve has provided links in that thread to his drop box to download a 32 bit or 64 bit version as well as a readme file. The files are simply too large to have as an attachment to this thread.

Tim
SteveB25
(Arizona)

Posts:64


06/18/2017 11:20 AM  
I would like to add that I really like to hear opinions, comments, suggestions on how to improve the Reserve Funding Analyzer application that I have created.

Here is the link to my original posting on this topic ...

http://www.hoatalk.com/Forum/tabid/55/forumid/1/postid/214592/view/topic/Default.aspx

Thanks,

Steve
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Forums > Homeowner Association > HOA Discussions > Reserve Studies/Funds 101



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