RESERVES: Ask Richard Thompson

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

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