Reserve studies are a very important part of a homeowner association's financial plan. Typically, the annual operating budget is the most visible — one line item in that budget is the reserve allocation.
An allocation for reserves is important to the community. If reserves are built up correctly, special assessments for needed repairs could be a thing of the past. Deferred maintenance could also be a thing of the past.
Buyers in communities are looking at reserve balances when buying their homes. Therefore, it is wise for the association to fund the reserves correctly.
Knowing the balance of funds on hand in a reserve account is not quite enough information. It is also important to know what the anticipated maintenance spending will be over the next few years and know that funding is adequate to pay for the association's needs.
Anyone in the association can know this by looking at the reserve study or a summary of the reserve study. Many folks ask what the correct amount is to have in a reserve fund. The real answer is “just enough.”
In California, there is no minimum funding requirement for a replacement reserve fund, at least not yet.
The proper funding amount will be an amount that has sufficient funds to pay for the replacement of association asset items when they come due and not need a special assessment to obtain funding.
Different folks will give you different amounts based on their understanding. The real way to know is to look at a cash flow projection over the next five to 30 years and see that, based on projected spending and the funding allocation, a special assessment will be necessary to obtain adequate funding to meet the anticipated expenditures.
In these economic times, it is tempting for an association to back off on reserve funding in order not to increase the monthly maintenance fee. This is not recommended — except in extreme cases.
If an association suddenly finds itself without enough cash to operate due to a high rate of delinquencies or foreclosures, it may be necessary to temporarily borrow from reserves to meet operating cash flow requirements. This should not be done without proper and full disclosure to the membership with a plan in place to repay the loan within the next 12 months.
In extreme cases, other alternatives may be available. It would be wise to consult with the association's CPA, attorney or community manager to learn what options are available and how to best make them work for the association's benefit.
Steven Shuey is a certified community association manager, management consultant with Personalized Property Management and a director for the Association of Professional Community Managers.
