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July 2012

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Regular & Adequate Reserve Budgets



Overseeing a homeowner association's finances to ensure proper maintenance of the common elements is a fundamental responsibility of the board. Following a properly prepared reserve study is a big piece of that puzzle. But how does the board know how much money to set aside in reserves each year? A reserve study identifies all the building and ground components that are the HOA's responsibility to maintain, measures each of them, assesses their condition, projects a useful life and repair or replacement costs. 


When this information is projected out over 30 years with an inflation factor, it provides the board with a road map to follow for the funding and a schedule for reserve events.


Different boards have used various reserve funding methods including regular and adequate assessments (usually monthly, quarterly or annually), less than adequate assessments, special assessments, borrowing money or a combination of these options. All funding methods are not all created equal. Funding reserves by regular and adequate contributions is the only fair way to fund reserves.


Special assessments penalize those that have to pay them since former owners were able to use and enjoy the amenities without adequately contributing to costs. Bank loans carry high interest and fees and the HOA must act like a bank for years to collect payments from owners to repay the loan. Collecting regular and adequate assessments, each owner contributes his fair share based on the length of time of ownership. And with regular and adequate contributions, the HOA will always have the money it needs without borrowing or special assessments.


Special assessments affect current owners regardless of the time in ownership. Moreover, if owner approval is necessary to pass a special assessment, a majority may vote "no" (and often do) for self-serving or legitimate inability to pay reasons. If this happens, the board's hands will be tied and necessary, possibly urgent, repairs may go undone for lack of funds. Deferred maintenance always leads to increased costs. For reasons of fairness and collection difficulties, special assessments should be avoided at all costs. Regular and adequate contributions are the solution.


When new board members inherit inadequate reserves and deferred maintenance, a professional reserve study is a great way to assess the overall situation in detail. A reserve study provides an objective evaluation by a trained professional of the common elements. With this ammunition, the board can educate the membership of the need to fulfill:

  • Legal requirements of the governing documents.
  • The board's fiduciary duty to current and future owners.
  • The current requirements of mortgage underwriters like Fannie Mae, FHA and Freddie Mac.
  • State statutes.
  • Common sense.

In summary, the goal of adequately funded reserves is to provide for the planned repair and replacement of common elements at recommended intervals, to distribute the costs equitably among all owners, to eliminate the need for special assessments and to preserve and protect the value and livability of HOA and member property. It is a noble but doable charge. Go and do likewise.


SOURCE: Richard Thompson

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