Question: I read your article, “Refining HOA Reserves” and am particularly interested in understanding the statement: “If the reserve fund Percent Funded is below 100%, implement a funding strategy to increase that level to the 100% goal as soon as possible.” From my research, reserve study specialists often recommend that reserves be 100% funded but add that the law does not require they be 100% funded. Our management company acknowledges the 100% funding recommendation, but states that it is not necessary. My question is there a “Percent Funded” that is a widely accepted as the “should be” level?
Answer: There are two compelling reasons why reserves should be 100% funded each and every year: fairness and fiduciary duty. Consider the example of a 30 year roof that costs $300,000 to replace. Fully funding the roof reserve requires $10,000 per year ($300,000 ÷ 30 Years). In other words, as 1/30th of the roof is used up, 1/30th of its replacement cost should be set aside in reserves. If less than 1/30th of the cost is reserved each year, the shortage will have to made up by future owners. It is normal for a certain percentage of ownerships to turnover each year. So, the owner roster in Year 1 will likely be different in Year 5, Year 15 and Year 30. The farther in the future a repair event takes place, the more likely different owners in the future will be asked to pay for what prior owners failed to pay. Those future owners are simply not financially responsible for paying for roof reserves prior to their ownership. Secondly, the board has a fiduciary duty to protect the interests of all owners, current and future. Underfunding reserves now is contrary to the interests of future owners. If the board transfers current owner obligations to future owners, it has failed its fiduciary duty and exposes itself to legal liability.
Used with permission from Richard Thompson of www.Regenesis.net