Reserves: An Option, a Tool or a Necessity?

Any good leader of a major corporation (which most HOAs are) knows to utilize and rely on the input of professionals.  To that end, I recently came across some comments regarding reserves from different HOA industry professionals that I didn’t really expect to hear, so I wanted to share them.

The first wasn’t unexpected, but made some good points (be sure to check out the full article):

From an article by an HOA reserve specialist:

“We are in a situation where too many well-intentioned board members and managers are feeling pressure to have a strong reserve fund (more than 70 percent funded) or low reserve contributions at their associations. They want the association to look good to buyers and lenders. But at what cost?

“Reserve planning is based on estimating future costs and repairs. It’s natural to feel optimistic about the future, but board members and managers shouldn’t hide the facts. If you think “a new roof surely won’t cost that much” or “the paint will easily last another five years,” too much optimism can come back to bite you when there isn’t enough money in the reserve fund to cover expenses.

“A community association’s reserve balance doesn’t care about the board’s good intentions, and the building’s components don’t care about the board’s optimism. The reserve balance is what it is, and components will fail whether you have the money saved or not. Facilities are surprisingly expensive to maintain.”

From HOA insurance and risk management specialist, Joel Meskin, Esq., CIRMS:

“Having insured over 75,000 community associations nationwide, I have taken the position that a properly done and funded reserve study is one of the best and most effective risk management tools available to community associations. By having an effective reserve study, many claims that we see daily would never be made against associations.”

And finally, from a post by HOA lending specialist Alan Seilhammer:

“A community association must always first keep in mind that the correct step to take in paying for capital maintenance improvements is to build adequate reserves based on a professionally prepared reserve study that is updated periodically. If the association has not taken that basic step, what is left are only painful and more costly options:  special assessments and long term financing. I have yet to hear a valid argument as to why building a proper level of reserves over time is not the least cost option or the fairest option spread across all unit owners that enjoy use of the building common elements for varying periods of time.

“Needless to say, building appropriate levels of reserves has been the exception versus the rule. Enter the financiers. A very important lesson to appreciate in obtaining a loan for a capital maintenance project is that the loan is not to fund the project. The loan is in reality replacing the lack of reserves that should have been in place so the association could self fund the project.”

A healthy reserve fund doesn’t just help the value of homes and their ability to be bought and sold, it’s an important risk management tool. Nor are reserves an option or alternative to a special assessment or a bank loan.  As a lender very frankly and non self-servingly stated, a loan (or a special assessment) really just replaces the lack of reserves that should have been there in the first place.

Curtis G. Kimble

 

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2 Responses to Reserves: An Option, a Tool or a Necessity?

  1. Diane Hayes says:

    I belong to a HOA that currently has $76,336 in the bank. The operating expenses for 1 year is $27,221. It is o.k. for the HOA to have this much money over their operating expenses?

    • Curtis G. Kimble says:

      Yes, there’s nothing wrong with having that amount in reserves per se. But, the amount in reserves doesn’t have much to do with the operating expenses. The amount in reserves should be based on the association’s reserve study.

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