Email Mike Email
Residential Real Estate
Jan 7, 2020

What To Do If There Are Insufficient Reserve Funds

Sponsored Content provided by Mike Stonestreet - Co-Owner/President, CAMS (Community Association Management Services)

What are reserve funds and what are they used for? Reserve funds are broken down into capital and non-capital expenses; capital would be replacing a roof; non-capital would be painting. These are IRS terms really, but for HOAs reserves are in general a savings account saving up to take care of long-term repairs and replacement — replacing the roof, paving the roads, resurfacing the pool, etc. It can get very detailed such as with club house furniture, storm water systems as well as any common area components that have long term repair/replacement costs. Reserve items are typically larger expenses the community will face in the future. Smaller and routine expenses should be funded through the annual operating budgets.

Every association should have a professional reserve fund assessment done. Let’s say a roof lasts 20 years; you take the cost of that roof and divide by 20, so in 20 years you have money in the bank to pay for replacement of the roof. The professional reserve fund assessment does this for each asset of an association, creating a 20-30-year cash flow with each homeowner paying his or her fair share.

What is the preferred amount/percentage of reserve funds? Conservatively speaking if you were reserving 75-80 percent, you’re in the top percentile of communities nationwide; if you do 100 percent you may have money in there that never gets used. I did a reserve study on a cash flow basis and component basis, but in analyzing it and cash flowing it over 30 years using the component funding basis, it never would have fallen below 1 million dollars; as long as there’s adequate cash flow funding, the homeowners can keep money in their own personal account as not all reserve components come up at one time.

Reserve funds are amassed as part of each homeowner’s property assessment whether paying annually, quarterly or monthly. For a community association and how it manages reserve funds, it should have segregated reserves from operating activities on the financial statements and have its own bank and investment account(s). Now, there is not a law in NC that requires that, but the governing documents of many communities do require it and it is best practice.

What can happen if a community has inadequate reserve funds? HOAs are limited insofar as things they can do about this. They can raise assessments, special assess the members, take out a loan, or a combination of these things. If an asset expires, you get into a push me pull me because the association is required to maintain and replace certain parts of the building and common areas, but if the association doesn’t have enough money to keep repairing or replace the roof, etc., its ultimately going to result in further damage to the roof and eventually to the interior of the home. Therefore, if there are inadequate reserves, one of the options above will need to be utilized – the roof has to be repaired or replaced.

HOAs should update their reserve study every 3-5 years. Material and labor cost change every year; fuel, energy prices, lumber prices, labor cost, etc. are what have impacts on the replacement cost. Therefore, they need to be checked and updated and kept on track because the study will assess replacement cost, remaining life of the asset for 5-10-15 years, and current reserve funds on hand at the time of the study. The reserve study also takes into account estimated annual inflation and interest income from reserve fund interest and investment income.

What rights do homeowners have with regard to oversight of reserve funds? It’s generally the board of directors that has the ultimate responsibility to manage the reserves; indirectly homeowners can keep an eye on things through elections. Generally speaking, just keep an eye on budgets and financial statements; if your HOA is budgeting 100k/year are they meeting that?

Engaged homeowners who keep an eye on reserves and push for ongoing professionally prepared reserve studies are essential so that that current — and future — homeowners aren’t left scrambling to raise emergency capital when assets expire.

Mike Stonestreet is a 30-year veteran of the professional HOA management industry who has achieved one of the highest education-based designations in the field, that of Professional Community Association Manager (PCAM). Community Association Management Services (CAMS) has been a leading association management company since its inception in 1991. CAMS is a trusted provider of management services, dedicated to holding themselves to a higher standard of service to the community associations they serve throughout North Carolina and South Carolina. To find out how CAMS can benefit your community or visit www.CAMSmgt.com.

Other Posts from Mike Stonestreet

Cams300pxx250pxblockadjune2018[1]
Ico insights

INSIGHTS

SPONSORS' CONTENT
Jeremytomlinson enfuse headshot

Your Biggest Security Threat To Your Business Is On Your Payroll

Jeremy Tomlinson - Enfuse Technology Solutions
Becksmith griffinestep headshot

Life Insurance: How Much Do I Really Need?

Beck Smith - GriffinEstep Benefit Group
Mel wideopentech headshot

How Technology Is Improving Franchise Operations

Mel Beasley - Wide Open Tech

Trending News

Apartment Community Sells For $67.5M In Leland

Cece Nunn - Jun 14, 2021

Laura Tayloe Joins Live Oak Private Wealth

Christina Haley O'Neal - Jun 15, 2021

Mixed Use Development Proposed Off Military Cutoff Extension

Christina Haley O'Neal - Jun 16, 2021

Port Of Wilmington To Link To CCX Terminal In Rocky Mount

Christina Haley O'Neal - Jun 15, 2021

TopSea Wingz Now Open

Jessica Maurer - Jun 16, 2021

In The Current Issue

Eyeing Potential On S. College Road

More activity could be coming soon to vacant property in the 800 block of South College Road in Wilmington, and while it appears nothing’s s...


Agency Steps Up To Help The Jobless

The pandemic highlighted the haves and have-nots, amplifying the need for organizations like StepUp Wilmington....


A Storm Of Preparation

While the term ‘’infrastructure improvements” may bring to mind images of bridge construction and road repair, the concept is at the heart o...

Book On Business

The 2021 WilmingtonBiz: Book on Business is an annual publication showcasing the Wilmington region as a center of business.

Order Your Copy Today!


Galleries

Videos

Trying to Grow a Business?
2020 Health Care Heroes
2020 WilmingtonBiz 100