Below are some of the more common questions we receive:
We have no reserve account. Should we?
In our opinion any organization with any significant site and/or building areas to maintain / repair / replace should be saving for the inevitable outcome from years of use and deterioration. We often encounter Clients who have signage, fencing, underground sprinklers, roofing, windows, that have no reserve account established. The result? When there is a large project expense such as a roof to replace there are no funds to draw on to pay for it. These Clients typically face the challenging task of finding a source of emergency financing. The implementation of a reserve account early on will help to alleviate the reliance on emergency financing as long as the reserve account is funded adequately from the beginning. The need for emergency financing should remain an extremely rare occurrence and should not be necessary for expected expenditures.
Do we need a separate reserve account?
We always recommend our Clients have separate accounts for operating expenses versus reserve expenses. Pooling money into one account and trying to keep track utilizing accounting software is difficult and requires more record keeping. Additionally as the reserve account grows it is extremely tempting to dip into the reserve funds for other maintenance items, specifically when there are economic downturns. A separate account entirely helps to mentally separate this; much like a personal retirement account versus your checking account. Another issue is that Boards change over time and ideas and goals may change with this turnover. With separate accounts there is a clear boundary as to what money has been set aside strictly for reserve expenses.
Should we invest our reserve account funds?
Clients that have funded their reserve account for many years may very well have a large reserve account balance; often they choose to invest their funds which in our opinion is a great option as long as the funds are in very low risk instruments and government backed. During “Peak” year cycles a Client may need access to a very large percentage of the reserve account funds so adequate planning and making sure the funds are available (without penalty) is important.
We are at a Poor Funding Level – What Now?
Well you are in good company first of all. A very large percent of our Clients are in a Poor to Fair funding level when reliance on deferring projects and emergency financing is highest. A reserve study is suggested first of all; either in-house or by a professional reserve study firm. Budgeting is not possible if there is a lack of understanding of what projects expenses are expected to be over time. From there implementation of the reserve study findings is important to make sure the Client is set on a path of adequate funding in the future. It's important to remember that an underfunded reserve account is typically due to the lack of adequate funding in the past. At some point in time someone will have to pay for the project expenses. Adequately planning/budgeting ensures the costs is spread out evenly/fairly over time and takes into account inflation of project expenses. There are likely to be a number of years when very tough decisions must be made.
What type of issues arises from being at a poor funded level?
Poor funding level result in a higher risk for reliance in emergency financing, special assessments, reliance on loans, higher litigation risk, lower marketability and tougher lending landscape to navigate. With few exceptions it has been our experience that these negative consequences always come to fruition with enough time at a poor funded level.
Can any common interest community expenses be paid from the Reserve Account?
No, reserve account balances are set aside for the repair / replacement of common areas outlined in a reserve study. Operating expenses such as lawn mowing, insurance, utilities are monthly or annual contracts which should not be paid from a reserve account. Reserve Account balances typically cover larger expense items that are infrequent (sometimes over 20+ years) but that will come due at some point. It is extremely tempting to utilize reserve funds for other purposes especially when the account grows to a size that appears to be more than adequate to an untrained eye.
Are Reserve Study Professionals licensed?
Reserve analysts are not licensed in most states (Nevada the exception). There are National Reserve Study Standards and designations from the Community Associations Institute (RS) and the Association of Professional Reserve Analysts (PRA) which require a significant amount of experience and understanding of concepts to obtain. We suggest, when hiring a reserve study company, to ask about these designations.
How much does the Study Cost?
Reserve Study providers typically charge based on the amount of time needed to complete the visual site inspection/inventory, complete the necessary research and compile the data into a report. The larger a community is and the greater number of common area components will result in a higher price. We provide free proposals for our services after some preliminary research is conducted on the property.
Additional Resources: About Percent Funded / Common Budgeting Mistakes