Reserves allow an HOA to maintain its common elements
Reserve Study, Reserve Fund and Short Term Thinking Syndrome
Maintaining the common elements is a core purpose of every HOA. These common elements can be as simple as an entry monument or as involved as siding, painting, roofing, pools, paving, and more. All of these components wear out at some point and must have substantial repair or replacement. The costs are high and funds must be accumulated to address these costs. All of this needs thoughtful advance planning which is summarized in a Reserve Study.
A reserve study identifies the common elements that the HOA is responsible to maintain, the life expectancy of each component and a current repair or replacement cost. This information, when combined with the current rate of inflation and return on invested funds over a projection period of, normally 30 years will produce an annual contribution amount adequate to meet those future costs. By collecting reserve contributions monthly (Normal for a condominium), costs are fairly distributed among the owners that benefit. Whether an owner is long-term or short-term, the amount of individual reserve contribution is directly related to the individual benefit received.
While a reserve study may or may not be required by state law or the HOA’s governing documents, no HOA should be without one. Properly maintaining the common elements directly affects the livability and market value of the member homes or units.
Every two or three years, the reserve study needs to be reviewed and revised for accuracy. The reserve fund balance, inflation rate and investment rate always change. Any reserve events that actually take place should be amended for price and particulars. Any known material or labor cost changes need to be revised. Going through this exercise and reforecasting the 30 year projection ensures that the board always has the best information available and that reserve contributions are keeping place with costs.
One way of funding reserves is by special assessment. Basically, when money is needed, current members pony up the money. Several complications exist with special assessment funding:
- Owner Vote Might be Required. The board may not have the authority to approve a special assessment and must obtain a vote of the members. It is not uncommon for the level of vote needed to be quite high, like 75% of all members. This could make getting approval for a special assessment extremely difficult.
- They’re Unfair. A special assessment impacts only current members, regardless of time in ownership. So owners that have not enjoyed the facilities are forced to pay for those that have benefited but have sold their property.
- Hard to Collect. At any given point in time, a certain number of members are unable to pay a special assessment due to divorce, job loss, disability, illness or other valid reasons. The result is the same: cash flow problems for members mean cash flow problems for the HOA. The HOA can file a lien, but that doesn’t mean the money comes when needed.
Another challenge to getting a reserve study done or funded is Short Term Thinking Syndrome (STTS). HOAs with large numbers of seniors often have little interest in investing in long range planning. Many members see reserves as paying for a benefit they will not enjoy. The truth is reserves pay for assets as they are being used up. When collected monthly, reserve contributions merely pay for what the current residents got the benefit from. Paying into reserves is like refilling the gas tank of a rental car. You only put back what you used. If your HOA suffers from STTS, point out the reality of what is happening. Most of these folks want to be responsible and will cooperate when the reality is explained.
Reserves in a homeowners association are an absolute must. Having the right amount of funds and a reliable schedule for getting the work done is a fundamental tool that no HOA board should be without.
(Reprinted from APRA advisor)Share