Do I Really Need Reserves (Savings)? Who Says?

The under-funding of your HOA’s reserve account is one of the greatest challenges you will face.  Failure to “start funding” and a failure to “have a reserve funding plan” could lead to claims of malfeasance against your Board.

Q.  Who says we need reserves?

A.  The legislature.  Reserve funding is required under 57-8a-211 if your community is a “non-condo” and 57-8-7.5 controls if you are in a condominium community.  The procedural requirements for both are the same.

Q.  Why can’t we just specially assess when we need money?

A.  First, as mentioned, reserves are required by statute.  Second, it is just not fair for a new(er) owner to come into a community and then have to pay for repairs or replacement of an asset that others enjoyed without saving up for the day it ultimately needs to be fixed or replaced.

Q.  How much do I need to have in reserves?

A.  The Board needs to tuck away each year an amount it deems prudent or the amount required in the CCRs (if any amount is stated in the CCRs).  Remember, reserve funds come from a portion of the regular assessment.  The secret is to have set your dues “high” enough to cover operating expenses and a reserve contribution.

Q.  How do I determine how much the Board should set aside for reserves each year?

A.  The law requires that a RESERVE ANALYSIS be done.  The Board uses the reserve analysis to determine what a prudent reserve contribution is for any given year.

Q.  What does a reserve analysis include?

A.  An itemization of funds needed to cover the cost of repairing, replacing or restoring common areas and facilities that have a useful life of three years or more and a remaining useful life of less than 30 years, if the cost cannot reasonably be funded from the general budget or other funds of the Association.

Q.  How often do I have to update or “re-do” our reserve analysis?

A.  You need a new reserve analysis every 6 years and an update every 3 years.

Q.  How is the reserve contribution for a given year announced?

A.  You must list a LINE ITEM in your annual budget which shows the amount of the reserve contribution for that year.  This implies that you will distribute the budget at least annually.

Q.  What if my HOA does not fund reserves?

A.  You can be sued for damages.  Trust me, you don’t want to be in this situation.  Get on a reserve funding plan.  There are experts that prepare reserve studies and we can refer them to you.

IMPORTANT NOTE:  A BOARD MAY NOT USE MONEY IN A RESERVE FUND FOR DAILY MAINTENANCE EXPENSES UNLESS A MAJORITY OF MEMBERS VOTE TO APPROVE THE USE FOR THAT PURPOSE.  FURTHER, YOU CANNOT USE ANY RESERVE FUNDS FOR A PURPOSE OTHER THAN FOR WHICH THE FUND WAS ESTABLISHED.

Let me know if you have any questions about reserves.  The above is general information only and not intended to be advice for your specific association but I’d sure love to help you out.

Thanks everyone – John Richards

4 thoughts on “Do I Really Need Reserves (Savings)? Who Says?

  1. Hello John, We do two separate budgets each year. The operation budget in November for the new year and the reserve budget in Jan of every year. We call the contribution to the operating budget “Dues” payable monthly and we call the Reserve budget contribution an “Assessment” payable as a one time fee in the month of June. We therefore do not show the reserve budget contribution as a line item on our operating budget but give a complete breakdown of the reserve budget in January to show that annual assessment and how the money in the reserve is allocated. We also only have a 15 year reserve budget and not a 30 year reserve budget. Does this sound OK and legal?

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    1. I think your dual budget system meets the legal spirit of the law and should not be a problem although a bit unique. The statute expressly states you are to show a line item on the budget but your method can be easily shown to comply with the intent of the law in this regard. Who did your reserve analysis? I am a bit concerned that the full remaining useful life of assets may not be fully budgeted for if based only on 15 years. This could lead to underfunding of the account so I would suggest that be looked at a little more closely but the key is that your association is on a funding plan each year. If that is the case, you should be ‘ok’ but we never want to be accused of underfunding. Let me know if this helps or if you have questions. Thanks , John

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      1. Thank you so much for responding. We did a reserve analysis on our own approx. 5 years ago. I am moving to suggest that we do a professional reserve analysis now. Do you recommend someone in Southern Utah (St. George) so we could get an estimate of the cost?

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