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