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Subject: Maintenance Fund Usage
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Author Messages
KevinH
(Texas)

Posts:53


05/09/2006 8:18 PM  
What are some methods used by other HOAs to beef up their maintenance fund? Also, have HOAs used those funds to significantly improve their neighborhood in non-traditional ways? (other than landscaping, etc)

Example:
1) Do you use investment strategies to build up your HOA fund? (Mutual funds, stocks, etc - anything other than CDs, savings, Money Market Accounts, etc) Other options? What methods do you use or find useful?

2) Obviously, when pooling funds, the potential could be huge. Couple questions on this: 1) What factors do you use to determine the minimum that should be maintained? 2) Have you been able to grow the fund much larger than that amount? 3) If so, what other options has your HOA considered to help raise property value? (ex: buying homes from homeowners that seem to want out/non-compliant, etc, then remodeling home and either reselling or renting out the home? Or using the interest income from the fund to offset amount of dues needed - dropping from $300 to $200/homeowner, etc)

Everything would be done legally and above board, but curious if other HOAs have done anything like this in the past with any success.

If you cannot see the forest for the trees, back up and get a better view. Don't start to clear a path while still blind.
SwanB
(Washington)

Posts:199


05/10/2006 5:25 AM  
KevinH: A quick question so we are all on the same page here, How do you define your Maintenance Fund and what purpose is it used for? i.e. Facilities upkeep, roads repairs and upkeep, brush removal. Does your HOA have tennis courts and swimming pools and where do they fall under Maintenance?
JulieS
(Georgia)

Posts:412


05/10/2006 7:06 AM  
Since HOA's are typically non-profit, you will need to be careful in how you raise additional revenue. Check the laws in your state as some require money to go back to home owners if a profit is made. I would check with an accountant or attorney on this so that you do not get into legal trouble.

We are trying to pass an initiation fee amendment to our covenants. This money will primarily be used to fund the reserve based on our reserve study. We are hoping this will off-set the annual assessment increases we have been giving in order to build the reserve to the level it should be at.
KevinH
(Texas)

Posts:53


05/10/2006 7:14 AM  
SwanB,

Facilities upkeep, roads repairs and upkeep, brush removal.
We do not have a swimming pool, tennis courts, etc.

If you cannot see the forest for the trees, back up and get a better view. Don't start to clear a path while still blind.
KevinH
(Texas)

Posts:53


05/10/2006 8:12 AM  
This is what I found so far regarding Texas State laws:
----------------------------------------------------
TEXAS CIVIL STATUTES
CHAPTER 9. NON-PROFIT, COOPERATIVE, RELIGIOUS AND CHARITABLE

Art. 1396-2.29. DELEGATION OF INVESTMENT AUTHORITY.

A. The board of directors of a corporation may:

(1) from time to time contract with investment counsel,
trust companies, banks, investment advisors, or investment
managers; and
(2) confer on those advisors full power and authority to:
(a) purchase or otherwise acquire stocks, bonds,
securities, and other investments on behalf of the corporation;
and
(b) sell, transfer, or otherwise dispose of any of the
corporation's assets and properties at a time and for a
consideration that the advisor deems appropriate.

B. The board of directors also may:
(1) confer on an advisor described by Section A of this
article other powers regarding the corporation's investments as the board of directors deems appropriate; and
(2) authorize the advisor to hold title to any of the
corporation's assets and properties in its own name for the benefit of the corporation or in the name of a nominee for the benefit of the corporation.

C. The board of directors has no liability regarding any
action taken or omitted by an advisor engaged under this article if the board of directors acted in good faith and with ordinary care in selecting the advisor. The board of directors may remove or replace the advisor, with or without cause, if they deem that action appropriate or necessary.
--------------------------

However I will need to check our Articles of Incoporation to see if there is any specific reference that pertains to our organization. That would explain why that is requested whenever opening an investment account.

Thanks so far.

If you cannot see the forest for the trees, back up and get a better view. Don't start to clear a path while still blind.
RogerB
(Colorado)

Posts:5067


05/10/2006 8:17 AM  
Kevin, it appears what you can a maintenance fund is part of what I call the operating fund. IRS guidelines require the operating fund and the reserve fund to be maintained separately. Our primary objective of budgeting is to stabilize annual assessments at a low level.

The annual assessment is determined based on a two part budget: Operating Budget and Reserve Budget. The reserve budget is based on the 20 year reserve plan; it is the Reserve fund you referenced to "beef up". Investment income is part of the reserve budget.

Regarding investments, many HOAs invest in CDs. Their guideline is to first preserve principle (security), then yield (interest rate), and lastly liquidity (timely availability to funds). We are surprised how often an HOA Board is not aware of how a MC takes advantage of them through these funds. We have encountered MCs that use coupons and let the bank do most of the leg work on A/R while the HOA pays dearly due to a lower yield. For those HOA we have taken over the yield has increased thousands of dollars.
KevinH
(Texas)

Posts:53


05/10/2006 8:47 AM  
"IRS guidelines require the operating fund and the reserve fund to be maintained separately."

Could you explain this further? How exactly is is supposed to be separated? Different accounts?

Technically speaking, they would be different accounts if that were the case. We have a checking account and money market at the same bank for operational costs. Our Bylaws, etc describe the money to be the maintenance fund, thus I used that phrase.

The money we plan to invest would be in a separate account with a investment company, being sure to balance risk and yield based on what we (the association as a whole) are comfortable with. At the same time, we would seek to preserve a large enough amount in conservative investments, like bonds etc.

I don't care for CDs. From what I have seen, our previous management did little to obtain a good yield and we have at best 3%, while a large portion of our money is sitting in a 1% money market account. Mutual funds, other money market accounts (thru investment company), and even bonds offer a much higher rate that are far more liquid when we need it to be (3 days without penalties, unlike CDs).

But again, I ask, how have other HOAs used such assets to improve their neighborhood? It just seems there is so much potential to improve our neighborhood with the right investment strategy, coupled by a game plan to address the areas needing work. What have you found to be effective?

Thanks so far...

If you cannot see the forest for the trees, back up and get a better view. Don't start to clear a path while still blind.
TomJ
(Arizona)

Posts:42


05/10/2006 9:32 AM  
Kevin, our HOA has separate accounts for the Operating Fund and the Reserve Fund. We have also had a reserve study done (at turn over by the builder) to determine the amount we need in the Reserve Fund.

The Reserve Fund is used for Capital Improvements/repairs. We have had to use some for non Capital Improvements, for example, installing more crushed granite in the common areas. We did this because there was not enough money in the Operating Fund for our yearly maintenance and the granite. The funds used for the granite was replaced in the Reserve Fund my an additional periodic deposit.

Each year when we do the budget for the next year we look at all the maintenance items from the previous year to increase/decrease the Operating Fund.

One item you may also want to have in a Fund for Legal Expenses. To collect fines we must first take the homeowner to court and try and get a judgement. So far we have not had to do that but that was a new Arizona law from 2005 and I can see it coming. We noticed one large HOA in the area has an enormous amount for Legal Expenses and they do not have problems with CC&R compliance.
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