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Subject: Funding of the Reserve Account
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Author Messages
MichaelB32
(California)

Posts:132


10/02/2018 5:40 PM  
My HOA is in California. Therefore we fall under the Davis-Stirling Act. Our HOA is again having a discussion that we need to maintain 80% funding of our reserver. I have been unable to find any law or recommendation about that percent. Does anyone know where that number comes from?

I realize that Realtors and finance companies like this high reserve balance to booster the value of the properties. But there is a consideration with an aggressive target, moderate target or modest target that affects how much our dues should be raised with the time frame to do it.

How have other HOA's handle these issues. And where do the guidelines come from?

Michael Barto
[email protected]
KerryL1
(California)

Posts:5961


10/02/2018 7:10 PM  
You do have a reserves analysis done every year, right, Michael? What does s/he recommend?? What path to reach the goal does s/he recommend? what is your % funded now?

Look at Davis-stirling.com for a lot of info on reserves. Reserves are not required in CA HOA, but yes, lenders will not be happy with a low % funded. There also is a lot of info available online.

Reserves analysts always rec 70-100% funded. You'll see your reserves report call that level low risk. I think medium risk is 30-70% funded. High risk (of a specula assessment is under 30%.
SheliaH
(Indiana)

Posts:2319


10/02/2018 7:19 PM  
Once you read up on reserves like Kerry suggested, consider your community and what the association is responsible for. How old is it, do you have major repairs coming up soon (or very soon) and how much money do you have on hand right now? How well are you keeping up with inflation - remember, a dollar from, say 2016 may not buy the same amount as in 2018. And if that's the case, do you really think a 2018 dollar will have kept up when it's time to replace a major component 10 or 20 years from now?

It sounds like you're concerned about assessment increases and while I do understand they're not fun, special assessments are a real buzzkill, especially when you have no choice but to replace something because you've put it off and put it off and put it off. Look at it like your retirement fund - better to pay a little more now than to find you have to choose between replacing your water heater or paying for heart medication (some of us have been there).

I understand where realtors and finance companies are coming from, but your top priority should be to ensure the association is financially sound and let sales take care of themselves. In the meantime, you should also take a look at current expenses and consider where you might trim some things or be more aggressive in reviewing contracts to ensure you're getting the most bang for your buck - that will also help control assessment increases (you won't always stop them, but may be able to increase by a smaller amount and still do what you need to do).
TimB4
(Virginia)

Posts:16050


10/03/2018 5:10 AM  
In my opinion, the Reserves should always be 100% funded.

It's not the reserve balance that counts. It's the percentage funded and how inclusive the reserve study is.

Note: As Treasurer, I have never had a bank or financial institution ask for the balance, percent funded or a copy of the reserve study for any loan request an individual owner made. Of course, these would likely be asked for if the Association was looking for a loan.
MichaelB32
(California)

Posts:132


10/03/2018 10:56 AM  
In an idealist world, with unlimited funds, a 100% would be terrific. But last year we raise the dues by almost 20%. There is a reality of putting a lot of money into the reserves, what the members can afford (or do we care) and maintaining the HOA. I would like to expand my question as to how fast should you take a 40% funded reserve to a 100% reserve. One year?

In previous Boards, we would increase the reserves by 5% a year without impacting the dues significantly. Though it was slow growing, it was not a spike in the dues. But last year we went ballistic with a 20% increase. Also, one of our expensive items like paving of the roadways might had been better accomplished as a temporary increase as a special assessment. There has to be something called financial management which is time sensitive. What is the "call" on special assessments versus raising the dues to increase the Reserves?

Michael Barto
[email protected]
TimB4
(Virginia)

Posts:16050


10/03/2018 11:45 AM  
The longer you wait to fully fund the reserves, the greater the chance of special assessments.

When we did our first study, we had the membership vote and increased assessments to fully fund.
Of course, we did a lot of campaigning for that to happen with examples and explanations as to why it's best to fully fund.
KerryL1
(California)

Posts:5961


10/03/2018 11:55 AM  
Just a partial reply for now. A friend, former director here, and real estate and loan broker owns a lot of condos and sits on their boards too. She claims that small ( about 20 units) HOAs' members are better off paying a special assessment now & the than raising dues to keep their funding ratio.

Just one way to look at it. Our reserves analyst is right now preparing a few scenarios to show how long it will take us to get to 80% funded, which is our goal, based on different dues increases to fund reserves, We have about 100 components and some--refurbishing elevators, for instance--are big dollar items.

Sad to say, every time we seem to be about 70% funded, he finds that, again for instance, it'll take $1.1m to "modernize" our elevators vs. the $700k he estimated a few years ago. Sigh.

100%, of course, is ideal, but I think a small % of HOAs in CA & in the US are that well-funded. I haven't seen a recent estimate, Michael, and you should look it up online.
MichaelB32
(California)

Posts:132


10/03/2018 7:29 PM  
Thank you KerryL1, that was a very nice and useful response. I like the idea of Special Assessment versus raising the dues. Raising the dues is of course permanent where as a special assessment is temporary.

Michael Barto
[email protected]
AugustinD


Posts:1222


10/09/2018 10:22 AM  
Posted By MichaelB32 on 10/02/2018 5:40 PM
My HOA is in California. Therefore we fall under the Davis-Stirling Act. Our HOA is again having a discussion that we need to maintain 80% funding of our reserver. I have been unable to find any law or recommendation about that percent. Does anyone know where that number comes from?


Many sites on the net discuss "percent funded" when it comes to a HOA's reserve account. E.g. see https://www.reservestudy.com/what-exactly-is-percent-funded/

I think it is common sense that the lower a HOA's actual percent funded number is, the more likely it is that a special assessment will be needed in the future. The problem with special assessments is that some members may not have the cash on hand and will become delinquent. What this translates to is the HOA not having the cash on hand, and now for some major capital asset that needs immediate replacement. Then the HOA has to take out a loan, increasing the expenses of the HOA.

I disagree with 100% funding. Estimating the life of a useful asset is far from an exact science. Also technology changes; inflation does its black magic; and some capital assets' costs may change radically over the years, up or down. Also, for capital assets that have recently been installed and whose estimated end of life is more than say 10 years away, being below 100% means virtually nothing. Being at 100% could be said to be overcharging members and giving the Board carte blanche to spend on things that are really not needed.


Percent funded is a guide. I think a percent funded value of 70% or more is a good guideline.
GenoS
(Florida)

Posts:2525


10/09/2018 1:21 PM  
Posted By KerryL1 on 10/03/2018 11:55 AM
Sad to say, every time we seem to be about 70% funded, he finds that, again for instance, it'll take $1.1m to "modernize" our elevators vs. the $700k he estimated a few years ago. Sigh.

This is very, very true. We had a re-roof estimate of $1.1 million last year for 100 homes. Another roofer, last week, estimated $1.3 million. The re-roofing is scheduled 6 years from now. That's a huge difference. In order to accumulate another $200,000 in 6 years we need to increase monthly per-home reserve contributions by $25. That's going to go over like a lead balloon. One alternative is a $2,000 per home special assessment in 5 years to cover the shortfall.

The worst part, though, is that estimate will change again and it's not likely to go down.
LetA
(Nevada)

Posts:551


10/10/2018 8:14 AM  
Every year our HOA sends out the budget. It is broken down from what the HOA as a whole pays for services and what each household costs are.
Then the monthly assessments for each household is broken down to each appropriation category. Does your HOA do that?
GeorgeS21
(Florida)

Posts:814


10/10/2018 2:36 PM  
Agree with Augustin re 100% funding - BUT, only as it relates to the results of any particular study.

If the most recent study says you need another $100K a year, and the Board disagrees with the findings a bit (I'm not talking here about ignoring the findings, but disagreeing on the timing for replacements and repairs a bit), then I do agree THAT number needs to be funded at 100%.

Ex: our recent updated study noted several items needing in replacement in 3 year - we examined some of those items carefully and believe we easily have 5-7 years life remaining - so we adjusted the funding level to reflect that. We went item by item with a Reserve Study Group.
JohnC46
(South Carolina)

Posts:7872


10/11/2018 7:52 AM  
We are presently getting ready to raise our dues by 40% ($600 to $840 yearly). The reason is our HOA is responsible for repair/replacing roofs and siding material (brick and vinyl) of every home. At our present dues structure, we will not have the funds to do such. Roof replacements will begin in 2027 and got on for 7 years. We have set up a Roofing/Siding Reserve Fund and the additional dues will be placed in this fund.

If not for this burde, we can easily operate within our present dues structure.
GeorgeS21
(Florida)

Posts:814


10/11/2018 8:35 AM  
John,

I would consider what you described not as a burden, but simply part of the business case of the community.

Assessments should have been raised following the last re roof - the concept of the reserves is that everyone pays a fair share during their ownership period, right? i.e. no on skates for 15 years with too little roof contribute and then sells and then the next folks pay the replacement in shorter periods ...
MichaelB32
(California)

Posts:132


10/11/2018 8:53 AM  
To JohnC46 (Post 7735) reference to “raise our dues by 40% ($600 to $840 yearly)”
If our HOA have to raise your dues by 40%, my State requires that that must be voted on by the general membership. Below 20%, the Board can approved the increase. But then there is the impact of how much that really is. JohnC46 is looking at $30 more a month. Last year our HOA raise our dues by almost 20% representing an increase of about $100 per member (average dues are $500 to $540 a unit). Our HOA now has the highest dues in the area. Of course this has affected the property values. Also, out HOA has very few amenities.

From what I got from the AugustinD (Post 1093) web site link reference, time of when the money is required has significant impact and what current reserve requirements. Time sensitive Trying to have a reserves at 70% funding in one year with large dues increase because an elevator need to be replaced in 10 to 12 years, is not good financial management. Therefore aiming for a arbitrary targets as a percent of reserve funding which may or may not represent the actual requirements, it not that good of financial management. But percent can provide a clue to the health of an HOA. Excellent being 70% or above. 30% or below being poor. What falls in between is “fair”.

Also, are special assessments so bad? One members approve one, even going out two or three years, cannot this be used a collateral for a bank load or something link that. It is too bad that HOA’s cannot sell bonds.

Michael Barto
[email protected]
SheliaH
(Indiana)

Posts:2319


10/11/2018 9:23 AM  
I've always felt special assessments are bad and most of what I've seen and heard in various articles and CAI seminars I've attended, concur, not to mention my 10 years on the board (5 as treasurer). Thankfully, my community has never had a special assessment, but we had a terrible problem with delinquencies - like credit card debt, it affects your ability to do a lot of things. Our community is also over 40, which is around the time things wear out and you have to replace them or do major repairs (I find the human body is almost the same way!)

Special assessments generally means poor financial planning on the community's part. It's one thing if you have something unexpected, like a devastating hurricane like Florence and now Michael, and the damage is so extensive, insurance can't pay for it all and you don't have enough money in reserves to cover the difference, so a special assessment is necessary.

However, everything wears out sooner or later, so it makes more sense to save money now so you don't get caught off guard. Consider your example - sure your elevators aren't expected to need major repairs 12 years from now, but no one, including you, can predict the future. Incidentally, good maintenance - or lack thereof - can also play a role. If you haven't been maintaining it properly (usually because people want to keep assessments low so they won't have to spend money on things like annual inspections), those 12 years of people going up and down with their luggage, pianos, new sectional sofas and the like without regular maintenance can reduce those 12 years to 6.

Special assessments are also unfair to new owners. You and your current neighbors are using up the community assets because you live there, so you should also be paying towards their eventual replacement. Why should I have to move in and be hit with a special assessment a month after moving in while you lived there and used up the elevator's use for the last 12 years or however long you lived there, and then moved out? I didn't use up that asset, you did.

And how do you know everyone in your community will be prepared to pay a special assessment on top of the regular assessments to pay for routine expenses? Some people do have loss assessment coverage for that, but others don't. I have it, but I also have other expenses - what if something else happens around the same time the board comes calling for a special assessment, such as I need a major operation? Should I have to choose between my health and new roofs (or elevators) for the entire community just because people like you want to keep assessments "low"?

Let's not forget about delinquent homeowners - hopefully you don't have the problems my community has had, but if a special assessment became necessary, how do you plan to blast that money out of people who aren't even paying their fair share of routine expenses for whatever reason?

If you have the money to pay several hundred or thousand dollars for a special assessment now or in the future, good for you. But HOA boards can't think that way - it's best to plan for the next 10 years and concentrate on the next five. I'd rather pay a little more now and have the money available rather than have to empty all my savings (if I have any) or - get a loan.

Oh, yeah, the loan. You do know loans also mean interest - have you forgotten that if you get one, you have to make those payments as well as pay regular assessments and continue to fund reserves?. The banks do look at reserves when they make those decisions and just like your mortgage, the more savings you already have on hand, along with your on-time payment record, the better your chance of getting one at decent rates.

Ditto for bonds (a fancy way for companies and governments to raise money) - sooner or later the bonds will mature and you'll have to pay that along with interest (otherwise, why buy it?) How would you pay for that if your income (assessments) hasn't kept up with inflation and you've also taken steps to control spending and make sure your common areas are being well maintained?
JohnC46
(South Carolina)

Posts:7872


10/11/2018 11:06 AM  
Michael

State laws in SC do not play a role in HOA dues increase.

Our Covenants allow the BOD to increase dues (any amount) on 01/01/19 if we notify fellow owners of such on or before 12/01/18.

Our owners could call for a Special Meeting (10% of all owners required to call) prior to 01/01/19 to disapprove the new budget but it would take 51% of all owners voting it down. I repeat all owners, not just those at the Special Meeting. We seriously doubt this will happen. If voted down, there is an automatic increase tagged to some US Gov COL (typically about 3%) that kicks in.

Some say well let "them" worry about it (roof replacements) when it happens (beginning in 2027). If done that way it will probably require a Special Assessment of about $5K per house in today's cost. Candidly I could live with that as I can afford it but as a Member of the BOD I cannot, in good conscious, ignore it.
GeorgeS21
(Florida)

Posts:814


10/11/2018 1:20 PM  
Hmmm ... given the amount of info that is available about this now online and in your neighborhood, if I moved into the neighborhood in 2027 and had a huge special assessment dropped on me, I would probably add a few more thousand to the bill and sue the Board for malfeasance - perhaps it wouldn't fly in SC given the lack of, er, laws in this area, but ... it would make me feel really good.
RoyalpitA


Posts:0


10/11/2018 2:58 PM  
? WHICH board ?

This is a major problem with volunteer BODs; the virtual total lack of accountability 'down the road'.
GeorgeS21
(Florida)

Posts:814


10/11/2018 9:13 PM  
RPita,

My point is less related to specific blame, but more to the concept of blaming someone via the legal system ... I would want to know I made someone bleed somehow.
AugustinD


Posts:1222


10/12/2018 8:08 AM  
Posted By GeorgeS21 on 10/11/2018 9:13 PM
My point is less related to specific blame, but more to the concept of blaming someone via the legal system ... I would want to know I made someone bleed somehow.


CC&Rs generally allow Special Assessments. It appears to me Florida's HOA buyer disclosure laws require that the seller provide the buyer with the CC&Rs. I think this is sufficient for a HOA to get a lawsuit, like the one proposed above, thrown out. Some HOA boards are naive enough to favor large Special Assessments, dumping the costs of use on a single owner instead of multiple owners over the years. I feel such a decision shows incredibly poor judgment, but I think it's rare that such a decision is unlawful.
GeorgeS21
(Florida)

Posts:814


10/12/2018 8:59 PM  
Well, sure ... it might get thrown out ... but, that wasn’t my point.
AugustinD


Posts:1222


10/13/2018 7:04 AM  
Posted By GeorgeS21 on 10/12/2018 8:59 PM
Well, sure ... it might get thrown out ... but, that wasn’t my point.


Your point is you do not like covenants that allow large special assessments. The remedy to correct this is to not buy in HOAs or condominiums that have such covenants.
GeorgeS21
(Florida)

Posts:814


10/13/2018 12:55 PM  
No ...my point is that I would be extremely angry with an HOA BoD that shifted 20 years of costs onto me - this is malfeasance.
JohnC46
(South Carolina)

Posts:7872


10/13/2018 3:21 PM  
In our HOA a Special Assessment must be approved by 2/3rds of all owners.

I know of one HOA that went after a Special Assessment of $30K per unit. They did their homework and after presented, 80% of all owners approved.

An owner that moved in prior to the assessment sued the seller, who was on the BOD prior to the assessment, claiming the seller, as a BOD Member, knew it was being discussed prior to happening and should have revealed it. The suit was dismissed in a NY minute. The Judge ruled many things are discussed and until motionned and voted on, the discussions mean nothing.
GenoS
(Florida)

Posts:2525


10/13/2018 7:33 PM  
Posted By AugustinD on 10/12/2018 8:08 AM
It appears to me Florida's HOA buyer disclosure laws require that the seller provide the buyer with the CC&Rs.

Condos, yes. HOAs, no.
AugustinD


Posts:1222


10/14/2018 8:09 AM  
Posted By GenoS on 10/13/2018 7:33 PM
Posted By AugustinD on 10/12/2018 8:08 AM
It appears to me Florida's HOA buyer disclosure laws require that the seller provide the buyer with the CC&Rs.

Condos, yes. HOAs, no.


For HOAs, the law apppears to be Florida statute 720.401. It appears the statute requires only the existence of CC&Rs be disclosed and that they are a matter of public record, available from the county or, if not yet recorded, the developer. Furthermore, the statute says the disclosure must indicate, that a member, "will also be obligated to pay any special assessments imposed by the Association."

http://www.leg.state.fl.us/statutes/index.cfm?App_mode=Display_Statute&URL=0700-0799/0720/Sections/0720.401.html

GenoS
(Florida)

Posts:2525


10/14/2018 11:54 AM  
The "disclosure summary" is something that puts a prospective buyer on notice that CC&Rs exist for an HOA. The condo statute FS 718.503(2) requires a seller to provide much, much more to a prospective buyer.
JohnC46
(South Carolina)

Posts:7872


10/14/2018 1:34 PM  
I would want any buyer, to be fully aware of our Covenants, Bylaws, R&R's. I want them to know what they are getting into.

When I bought from the developer there was a 30 day period that I could have backed out for any reason. At the beginning of the 30 days I was given a copy of all the docs. I had to sign a cover sheet and initial each page. That is how to do a clean deal.
GenoS
(Florida)

Posts:2525


10/14/2018 5:10 PM  
Posted By JohnC46 on 10/14/2018 1:34 PM
I would want any buyer, to be fully aware of our Covenants, Bylaws, R&R's. I want them to know what they are getting into.

When I bought from the developer there was a 30 day period that I could have backed out for any reason. At the beginning of the 30 days I was given a copy of all the docs. I had to sign a cover sheet and initial each page. That is how to do a clean deal.

That's what a few of our first-year board members want to do. The problem is there's no state law that compels buyer acknowledgment and acceptance of the governing documents and rules & regulations. Our documents do not allow the HOA to approve or reject new homeowners or tenant leases. And yet, the treasurer has been talking to real estate agents and berating them for not getting buyers to sign off on receipt of just that. It would be nice to have, I agree, but absent the legal duty of a realtor to provide a buyer's signed acknowledgment of our restrictions and rules there's nothing we can demand of them.
JohnC46
(South Carolina)

Posts:7872


10/15/2018 7:07 AM  
Do not real estate sales in an association require a "SOMETHING" from the association or its MC like saying no dues owed, no fines pending, no violations exist?

There is a name for this "SOMETHING" but it is slipping my mind right now.
RoyalpitA


Posts:0


10/15/2018 10:09 AM  
Letter of Estoppel

An estoppel letter is a legal document provided by the seller’s Homeowner’s or Condominium Owner’s Association, outlining the current owner’s financial standing, past due balances, current fees due and lists all future special assessments due. Each letter has a “good through” date.

https://www.bing.com/search?q=letter+of+estoppel&form=IE10TR&src=IE10TR&pc=EUPP_CMDTDFJS
RoyalpitA


Posts:0


10/15/2018 10:10 AM  
Posted By RoyalpitA on 10/15/2018 10:09 AM
Letter of Estoppel

An estoppel letter is a legal document provided by the seller’s Homeowner’s or Condominium Owner’s Association, outlining the current owner’s financial standing, past due balances, current fees due and lists all future special assessments due. Each letter has a “good through” date.

https://www.bing.com/search?q=letter+of+estoppel&form=IE10TR&src=IE10TR&pc=EUPP_CMDTDFJS




I would want one dated THROUGH the closing date.
GeorgeS21
(Florida)

Posts:814


10/15/2018 11:40 AM  
It Depends. :-)

If you are buying a house cash in our area, you will not automatically receive an estoppel letter. So, you have to ask.

Also, if the HOA is "voluntary" and cannot REQUIRE dues, many banks will simply ignore the entire thing.
RoyalpitA


Posts:0


10/15/2018 1:19 PM  
Any COMPETENT attorney will not 'allow' a buyer to close w/o said letter.

I did say: competent.

RoyalpitA


Posts:0


10/15/2018 1:21 PM  
If you act as your own attorney at closing, then, you have a fool for a client.

... paraphrase of Abraham Lincoln ...
GenoS
(Florida)

Posts:2525


10/15/2018 8:01 PM  
Anyone buying or selling a property in a Florida HOA should be aware of Estoppel Letters. Nothing happens automatically; the letter must be asked for and then paid for (in most cases) as well. They do have a shelf life: email or hand delivery is good for 30 days and one sent by regular mail is good for 35 days.
MichaelB32
(California)

Posts:132


10/15/2018 8:42 PM  
Since I started this string , let’s get back on track. I am trying to understand the process that is used to justify the raising, keep the same or reducing the dues that are effect by state of the reserves funding. This has nothing to do with special assessments.

AugustinD mentioned this criteria from this web reference (https://www.reservestudy.com/what-exactly-is-percent-funded/)

Good 70% - 100% funded
Fair 30% - 69% funded
Poor below 30%

It been suggested that having a funded of above 70% encourages the Board to go on an unnecessary spending spree. Should we raise our dues based because our HOA has only a“Fair” Reserve funding?

These are the issues, I am trying to get ANSWERS:
Spending the reserves causes the percent of reserve funding to drop - maybe below “Fair”. Does this trigger raising the dues? But that is why the funds are there. For example repaving parking spaces and roadways. Do we have a percent between 30%and above that we can used funds our of the reserves without raising the dues?. Should we stop using the reserves if we fall below 30% funding or do we have to automatically raise the dues?
Right now our HOA is contributing about 17% of are annual budget to the reserves. My HOA is in California. Our reserve account is approximately funded 44% so we are “Fair”. This introduces the problems as to “how much (percent)” should an HOA contribute to its reserves when reserve funding is “Good”, “Fair” or “Poor”?
When a Board raises the Dues, they should provide reasonable justification to the membership showing they have performed some “do diligences”. But most the time it just seems “like smoke and mirrors”. We need to announce and show we are following some guidelines that are not just arbitrary. BUT WHAT ARE CRITERIA/GUIDELINES or FORMULAS????

Michael Barto
[email protected]
GeorgeS21
(Florida)

Posts:814


10/16/2018 6:40 AM  
Thinking too much about his.

If it was your house and you needed to save for a roof replacement, would you fund your roof replacement fund at 30%, 50%, or 100%?

If you funded it at 100% initially, then, after 10 years noticed the roof was deteriorating faster than predicted and saved for, would you increase the amount being saved? If the roof was looking good and lasting longer, would you decrease the amount being saved?

Reserve Study, then fund to 100% in a reasonable manner, to make increases manageable ...some communities do this over some time period ...fund to 80, then 90, then 100% over three years ...then update the Reseve Study formally or informally to reassess the initial accuracy, refund based on that ... repeat every 3-5 years.
AugustinD


Posts:1222


10/16/2018 7:54 AM  
Posted By MichaelB32 on 10/15/2018 8:42 PM
Spending the reserves causes the percent of reserve funding to drop - maybe below “Fair”.
Does this trigger raising the dues?
...
When a Board raises the Dues, they should provide reasonable justification to the membership showing they have performed some “do diligences”. But most the time it just seems “like smoke and mirrors”.


Are you keeping in mind that, once the HOA has spent a chunk repairing/renovating/replacing a major capital asset, this triggers a new expected life of the asset. Without an assessment increase, the new percent funded figure will go down but not by much.

What I am seeing is that the typical HOA member lacks the math competence to understand even basic principles of reserve funding. I think the best a HOA can do is send people to a good web site and give the two main reasons for reserve funding: (1) for fairness, and for any one home, the cost of major capital assets should be spread over the years over multiple owners (as Shelia pointed out); (2) it is not only unfair to owners over the years but also financially reckless to instead do special assessments, since many owners may not be able to afford the special assessment and, since the need to replace/renovate a capital asset must be imminent, it could force the HOA to take out a loan and incur the expenses of interest, credit worthiness, et cetera.

Probably the biggest risk of imposing an assessment increase is that the unwashed masses of members will not understand why this is being done. They may vote a responsible board out and vote in an irresponsible board.

On the other hand, if the masses are rising up and saying they do not want a stinkin' assessment increase and prefer periodic large special assessments, then buyers in many states are permitted to review the status of reserve funding and in theory will understand a large special assessment is coming at some point, and possibly while they own the HOA unit. This should factor into the pricing of units so that, in theory, market forces will work their magic to lower the sales price of homes so that new owners can better afford an anticipated special assessment.

On the third hand, I doubt many buyers have a sufficient handle on HOA or business financing to get any of this. This argues for a board being responsible and maintaining 70+ percent reserve funding.


RoyalpitA


Posts:0


10/16/2018 8:12 AM  
PERFECT
SheliaH
(Indiana)

Posts:2319


10/16/2018 9:26 AM  
I was wondering if you were returning to chime in on this conversation.

Yes, there are some boards who might be tempted to look at reserves as some sort of slush fund where they can spend it on whatever. That’s why it’s good you’re asking questions - you may not always like the answers, but if the board has demonstrated that careful thought and research went into the decision making process, you should respect that. No one can predict the future, but since we never know when this economy might flip over and back again, it’s important to be prepared.

That said, remember there is no absolute rule as to when assessments should or shouldn’t be raised. Board members have to pay it too, and if they’re doing their jobs in a prudent fashion, they should be able to tell you what else influenced that decision – it’ll probably be more than the state of the reserve fund. Are your vendors increasing their fees? What about your property manager? Or the association’s master insurance (given the hurricanes, wildfires and other stuff happening lately, I wouldn’t be surprised if that influences your rates for next year)

You seem to think everything’s ok because your community’s reserve funding is considered “fair” as opposed to “poor” and perhaps that’s fine – for now. But you might want to Google “underfunded HOA reserves” or use the search function on this website to look for various conversations on the subject. Many people have asked the same questions you’re bringing up. Some of them also found out the hard way what happens when you have an underfunded reserve fund or no reserves at all. Trust and believe when I say you DO NOT want special assessments. You may not think they’re part of this conversation, but they really are because they often are a result of people keeping assessments “too low”.

I get the impression that you don’t completely understand the state of your community’s reserve funds or what a reserve study is and how it influences the budget (to be honest, there are a lot of board members who don’t completely understand it either!) Why not get a copy of your community’s reserve study and read it (ALL OF IT) so you can see the numbers for yourself. That’s where you’ll find the criteria the specialist used to crunch said numbers, but don’t stop there. Note the number and type of major components the association is responsible for, the state of the reserves at the time of the study and how soon some components will need to be replaced. You have to factor inflation into all of this, which is what a good reserve study will do.

By the way, do you not remember the “great recession’ and the beatdown it put on everyone’s savings accounts (which is what a reserve fund is)? It takes time for those accounts to recover (some longer than others). Meanwhile, time marches on, your community’s major components continue to depreciate and when the time comes to replace them it will likely cost more money because that’s what inflation does – along with changes in building codes, availability of materials, increased labor costs, etc., etc., etc.
You should also consider past decisions of the board – did the previous board or boards ignore reserves altogether and now the current one is playing catch up, which requires an increase in your assessments?

Still have questions? Talk to the board, and if they can’t explain it, ask that your questions be forwarded to the reserve specialist for a response. Better yet, suggest that the reserve specialist be invited to the next board meeting or perhaps a special homeowner’s meeting where he or she can discuss the study in detail and answer your questions and perhaps a few more.
MichaelB32
(California)

Posts:132


10/16/2018 9:34 AM  
Just to tell you what is going on. Last year my Board raise our HOA dues almost 20% and justified this raise because we had 40% funding of our reserves. This was approved by the Board in November 2017 for the 2018 budget. The December 2017 HOA books closed (and audited) with almost a 17% surplus of the HOA annual income before the new assessments took place. In January 2018 members were hit with a 20% increase in dues.

This now causes the members to be very wary any justification to raise our dues.

As a side note the President was elected again this July and immediately resigned. She did not even take her seat. The Property Management Company was replaced also at that time and seem that the new property management company has misplaced all the financial statements, along with the governing g documents. I have to provide my copies to the Board. Great transition.

Last November 2017 the legal yearly reserver study (State of California requirement) was going to be approved with minor changes. I find out a day ago (11 months later), that this has never approved and reserve study is being revised. So I cannot get a copy of if because it is not approved.

At the pending October 2018 HOA meeting at the end of this month, normally the Board is suppose to present its new budget for member to review and comment. The Board then approves the new Budget at the November meeting. Will they raise the dues again? Good questions and very scary.....

Michael Barto
[email protected]
GeorgeS21
(Florida)

Posts:814


10/16/2018 12:32 PM  
Hmmm ... with only 40% Reserve funding level, every dollar possible should be going into it.

Perhaps showing my ignorance, but couldn't the Board transfer the excess for the year into the Reserve Fund, then reassess the Reserves and then base the new assessment for the next year on the relative level? i.e. if you add the 17% surplus into the Reserve Fund, does it substantially change the Reserve funding level, or does it just help a bit compared to whatever the previous plan was?

Another thought - since Reserves are for capital item replacement (in some cases major interval based repairs) the existence of a 17% excess for a year (assuming the reserves component had already been allocated on the books) may simply mean some bills didn't get presented, or some maintenance items cost less than predicted ...
MichaelB32
(California)

Posts:132


10/16/2018 1:55 PM  
I have a building that has a 100 year life expectancy. It is year 40. I have 40% of my replacement cost in the reserves. Am I in big trouble? Do I needs to raise our due to get it to 100% funding as soon as possible. What is the guidance? How should the reserve accounts be setup? With a drop dead dates?

Michael Barto
[email protected]
RoyalpitA


Posts:0


10/16/2018 2:00 PM  
Posted By MichaelB32 on 10/16/2018 1:55 PM
I have a building that has a 100 year life expectancy. It is year 40. I have 40% of my replacement cost in the reserves. Am I in big trouble? Do I needs to raise our due to get it to 100% funding as soon as possible. What is the guidance? How should the reserve accounts be setup? With a drop dead dates?




you are presently 100% funded

if at year 73 you have 73% of replacement cost you would still be 100% funded




if, however, at year 50 you have 40% of replacement cost you would be UNDERFUNDED by 20%
GeorgeS21
(Florida)

Posts:814


10/16/2018 2:11 PM  
Or, are you saying you are funded at 40% of what you SHOULD have at year 40?

If you are 40% into the cycle and actually have 40% of funds on hand, you have another 60 years to fund the next 60% - i.e. you are 100% funded at this point in time.

AugustinD


Posts:1222


10/16/2018 5:37 PM  
Posted By RoyalpitA on 10/16/2018 2:00 PM
Posted By MichaelB32 on 10/16/2018 1:55 PM
I have a building that has a 100 year life expectancy. It is year 40. I have 40% of my replacement cost in the reserves. Am I in big trouble? Do I needs to raise our due to get it to 100% funding as soon as possible. What is the guidance? How should the reserve accounts be setup? With a drop dead dates?


you are presently 100% funded

if at year 73 you have 73% of replacement cost you would still be 100% funded


I agree with Royal above. Michael, maybe take another look at the web site I linked and similar web sites. I do not think you understand fully, yet, how percent funded is computed. You are close, though.
SheliaH
(Indiana)

Posts:2319


10/16/2018 5:52 PM  
Posted By MichaelB32 on 10/16/2018 9:34 AM
Just to tell you what is going on. Last year my Board raise our HOA dues almost 20% and justified this raise because we had 40% funding of our reserves. This was approved by the Board in November 2017 for the 2018 budget. The December 2017 HOA books closed (and audited) with almost a 17% surplus of the HOA annual income before the new assessments took place. In January 2018 members were hit with a 20% increase in dues.

This now causes the members to be very wary any justification to raise our dues.

As a side note the President was elected again this July and immediately resigned. She did not even take her seat. The Property Management Company was replaced also at that time and seem that the new property management company has misplaced all the financial statements, along with the governing g documents. I have to provide my copies to the Board. Great transition.

Last November 2017 the legal yearly reserver study (State of California requirement) was going to be approved with minor changes. I find out a day ago (11 months later), that this has never approved and reserve study is being revised. So I cannot get a copy of if because it is not approved.

At the pending October 2018 HOA meeting at the end of this month, normally the Board is suppose to present its new budget for member to review and comment. The Board then approves the new Budget at the November meeting. Will they raise the dues again? Good questions and very scary.....





Of course no one likes assessment increases and a 20% hike is considerable, but you haven’t said how many increases you’ve over the last five or 10 years, what sort of improvements have been made – or if maintenance has been deferred over and over again. My Spidey sense tells me you have issues with increasing costs, underfunding of reserves and deferred maintenance that you can’ put off any more. Maybe you did have some assessment hikes over the same time, but perhaps they simply didn’t keep up with inflation.

Which may explain why your president quit – methinks the caca is about to hit the fan and she doesn’t want all that falling on her or wind up in the hot seat to explain what’s been going on with all the money. Unfortunately for her and the rest of the board, they were in charge and the homeowners deserve an explanation.

As for your property management company, you need to go after the board for the lack of records as well. There should have been some sort of transition plan before the new company came on board – along with oversight by the board to ensure things were done in order. Don’t be surprised if you and your neighbors may find it necessary to sack the rest of the board, but if you do that, you will need people ready and willing to take over - and as I always say, YOU may need to be one of them. It’s one thing to criticize the board (and they may very well deserve it), but when you get involved and take a deep dive into association affairs, the experience can be quite humbling.

As for the most recent reserve study, it appears you’ll have to wait until it’s approved, so you may want to start attending some meetings and listen closely to the proceedings. I’d also start by asking why the study is being revised – are we talking about the same minor changes or did something happen that requires lots of recalculation? Once you get an approved copy, what I said earlier stands – sit down, get comfy and read the damned thing. You might also want to go over previous board meeting minutes to see what else is going in your community that is affecting the budget – based on what you’ve said, I bet there’s a lot more going on than just funding reserves, so you have to look at the ENTIRE PICTURE and not obsess over one piece of it.

So, what about 2019? You may not be able to avoid an increase because bad management almost always results in higher expenses for everyone. However, you might be able to persuade the board to reduce the increase to, say 10% or perhaps hold it at the current rate until the board can get a better handle on the finances (once they find the records and approve the reserve study after reading it). Hopefully by this time next year, you’ll have a better idea as to what’s going on with the money. Good luck!

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