Life Isn't Fair But the Funding Models In A Reserve Study Should Be

Fairness is a concept a reserve analyst must consider when developing funding models for a in a reserve study. It’s one of the basic concepts outlined in National Reserve Study Standards which was published by the well-respected Community Associations Institute in 1998 and is an extremely important consideration when providing the most tailored options(s) available to a community.


1. What is fairness?

Fairness refers to equally dispersing the reserve allocation expenses to the membership over time in an equal and stable fashion. This can be challenging as expenses occur irregularly and often seem to come due all at once in “Peak Years”; when several of the larger expense common areas meet the end of their respective useful lives.


A common example of Peak Year expenses that often occur together are Asphalt Resurfacing and Roofing both of which have similar useful life expectancies and are extremely costly.


2. Why is fairness important to the current board and community membership?

The Board has a legal responsibility and a fiscal responsibility to the membership of a community. The decisions made and voted on should be for the long term health of a community and not shortsighted attempts to appease current Board and Membership. Often Boards are tempted to keep HOA dues artificially low to keep the membership of the community happy but this typically ends poorly; likely for a different Board and a different group of Community Members to deal with at a later date.


If a Board makes decisions that are not fair to the future membership of a community it opens itself up to a much higher risk of litigation. Remember the Board has a legal responsibility to make fiscally responsible decisions for a community. From our data the communities with the highest litigation risk are those that are in a poor funding level for extended periods of time and which most often is the result of poor planning by prior Boards.


3. How Does a Reserve Study Professional Come Into It

A Reserve Analyst will provide an independent opinion for the best options a community has in respects to the budgeting for and replacement of common area components. This independent opinion is tailored to the community as a whole, which includes current and future membership consideration. The Reserve Analyst will provide Funding Plans that are fair to all membership that will utilize the common area components over the 30-50 year period covered in the reserve study.


Often a community Board and Members will have pressures from each other and outside parties related to votes and decisions to keep dues as low as possible, adding capital improvements (paid for from the reserve account) and various other distractions which make it difficult to vote for and implement decisions which can be tough at times and opposite of what the group as a whole would like. This is often the case with raising HOA dues on a regular basis. While this is the most realistic way to increase the allocation amount to the reserve account (due to constant inflationary factors) Board members have to convince the membership and other Board membership that this really is the best option for the community… Not an easy task when everyone is already feeling pinched from turbulent economic times and would rather keep HOA dues artificially low. A Reserve Study Professional does not have these factors weighing on their decision and can provide a realistic, appropriate and fair opinion in the reserve study. The Board can then utilize the study to show the membership that the options provided an experienced expert. 


4. The Reserve Account is not a Saving Account

An important notion to remember in the Fairness concept is that a reserve account is not a savings account in that it does not just represent the dollar amount saved to pay for component projects at a future date. The reserve account balance should ideally be an amount that is equal to the estimated deterioration of the common area components over time. The deterioration is monetized based on how much it will cost and how many years is left before the project expense is likely to occur. This is a mouthful but really is a simple concept that ensures that the community members are paying their fair share of the costs of common areas over time.