Establishing and Adhering to a Funding Plan for Reserves
The Reserve Fund contribution is one of the most unusual line items in any community association's budget. No two are the same and a contribution of identical amounts may leave one HOA properly funded and another dramatically short. From the moment the first foundation is poured, deterioration and the useful life cycle clock get turned on. Establishing and adhering to a proper funding plan for Reserves does not happen accidentally. It must be planned for and it must be followed if a community association is going to remain fiscally strong in to the future.
It all begins with a proper Reserve Study. While there are firms that specialize in this type of work, any well-intentioned Board can actually do a great deal of the work on their own. Community associations are made up of elements that are owned in common, owned in limited common, or privately owned by the unit owners within the association. All of these elements will age and decay over time. Individual unit interiors are the responsibility of the unit owner. Limited common and common elements are the responsibility of the Board of the association. An inventory should be taken of what these items are, how long they are likely to last according to manufacturer's suggested useful life, and an approximation of how much it will likely cost to replace the common or limited common element once it expires. The resulting number is the likely target for the Reserve Fund. The number of years needed to save for the item dictates the annual contribution to the Reserve Fund.
Many unit owners are anxious to keep their common fees as low as possible. Lower fees can make for an attractive option when associations compete with other properties to attract purchasers. However, at the heart of the Reserve Fund contribution is fairness. Since the deterioration of the common elements is happening every day, it is only fair that unit owners pay for that deterioration as it is occurring. Leaving the Reserve Fund underfunded or unfunded means that when the common elements eventually fail and need to be replaced, the association will either need to levy a special assessment or seek a community association loan to pay for the repair or replacement. That means future unit owners will be paying for deterioration that happened before many of them even were unit owners.
Once the Reserve Fund amount and contribution is determined, it is then incumbent upon the Board and the association to make sure the Reserve Fund contribution is made every year. Some states have laws requiring the association to do so. As a requirement for providing mortgage loans within the association, the Fair Housing Authority (FHA) has its own requirements for the funding of the Reserve Fund as well. Currently, FHA requires that a minimum of 10% of the association operating budget be set aside as Reserve Fund contribution. For most associations, 10% isn't enough to properly fund their Reserves, but at least it satisfies the FHA requirement.