Rent Real Estate

Policizing Homeowner Association Reserves

Planning for future repairs and replacements is one of the most critical and beneficial things a homeowner association should do. A Reserve Study is a long range planning tool that identifies common element building and grounds components that have useful lives of 3-30 years, the current cost of repair or replacement of each and a Funding Plan to accumulate the money to accomplish the work. A Reserve Study is an indispensable planning process. But the Study itself doesn’t commit the Board to follow it. A formal policy should be adopted that commits the HOA and Board to the reserve planning process and holds future Boards to the standards. For that, a Reserve Study and Funding Policy is called for. Without it, a future Board could decide to set the plan aside, or worse, spend reserve funds on something they were never intended for. A Reserve Study and Funding Policy obligates the homeowner association to follow the recommendations of the study. For many associations that have been handling costs by special assessment, this is a radical paradigm shift. So, formalizing the commitment to change will help ensure that some Board in the future won"t drop the ball or shift back to old and bad habits. Below is a policy which can be adapted to your HOA’s use. Whether you already follow a good Reserve Study or are thinking about getting one, consider enacting one to formalize the commitment. Nottacare Condominium Sample Policy Resolution #____ Reserve Study & Funding WHEREAS, Section ___ of the Association Bylaws grants the general power to conduct the business and affairs of the Association to the Board of Directors, whose members shall be members of the Association; and WHEREAS, the Board of Directors has the responsibility to plan for the proper maintenance, repair and replacement of the Association common elements; and WHEREAS, the members have the responsibility to fund the proper care of common elements; and, WHEREAS, proper care of the common elements directly impacts the value of members" homes, NOW, THEREFORE, BE IT RESOLVED THAT in order to properly maintain the common area, protect market value of members" homes and livability in the community, the Board of Directors establishes a policy as follows: Reserve Study Defined. The Board shall have a Reserve Study performed that includes this criteria: Identifies all components that are the homeowner association"s responsibility to repair or replace that have a useful life of 3 to 30 years. Assigns a reasonable cost of repair or replacement to each component based on current costs for the area. Assigns a reasonable useful life to each component based on local conditions. Lays out a 30 Year Repair & Replacement Schedule which identifies the years when each component work will be performed including the inflation adjusted cost. Establishes a 30 Year Funding Plan which takes into consideration the costs of repairs and replacements, contributions from members, impact of inflation, revenue generated from invested reserve funds and taxes owing on interest earned. The Funding Plan shall include monthly contributions from members adequate to meet projected costs without the need for special assessments. The Funding Plan shall include a "Percent Funded" factor (percent of actual reserve funds on hand versus the ideal of 100%). If Percent Funded balance is below 100%, the Funding Plan shall provide for a plan to systematically increase contributions to attain the 100% level without special assessments, if possible. Permitted Uses of Reserve Funds. Reserve funds are to be used only for the repair and replacement of the specific components identified in the Reserve Study. Annual Review & Revision. The Board shall review and revise the Reserve Study annually to reflect changes in costs, inflation and interest yield on invested funds. Component information shall be amended to reflect new information received, component additions or deletions. With this revised information, a new 30 Year Reserve Study projection shall be generated and used in conjunction with the Annual Budget process. Borrowing Reserve Funds. Under special circumstances, like an unanticipated Operating Budget shortfall or an emergency, and if allowed by state statute, the Board may borrow from reserve funds. In such cases, the Board shall adhere to a strict repayment plan that will replace borrowed reserve funds within 12 months. Investing Reserve Funds. In order to reduce the amount of member contributions, the Board shall invest reserve funds to generate interest revenue that will be added to the reserve account. Unless otherwise approved by the membership, all investments will be FDIC (Federal Deposit Insurance Corporation) insured or guaranteed by the United States Government. Investments should take into consideration the repair and replacement schedule so that there is no loss of interest for early withdrawal. The Board shall review the reserve fund investment plan at least annually to ensure that the funds are receiving competitive yields and make prudent adjustments as needed. The Board may hire an investment counselor to assist in formulating an investment plan. Performing the Reserve Study & Annual Review. To ensure objectivity and competency, the Board shall hire only a third party Reserve Study professional with experience, references and credentials to do the Reserve Study. Dated: ______________________, 200___ _____________________________ President - Board of Directors Attested by :__________________________Secretary For more on this topic, see Regenesis.net "Reserve Planning".

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