When it comes time to raise the assessments to allocate necessary value to the fund, a reserve study may be your best friend, but before you or the hired vendor presents the report, there are a few points to consider.
First, a reserve study is based on the assumption that nothing out of the ordinary will go wrong. However, as a manager or homeowner leader, we know that something will need to be repaired or replaced early. Therefore, sufficient funds must also be available for unexpected repair and or replacement.
The report will identify common element items, look at each capital item’s replacement and repair year, and project how much money should be in the reserve account each year to cover anticipated costs. A few items typically included in the report will be painting and caulking, roof repairs and replacement, driveway seal coating, boiler replacement, sign updates/repairs, siding or tuckpointing, and common element repairs.
The financial part of the report could be shocking to the board. However, from my experience, reserve funds in most associations are extremely underfunded due to a few consistent decisions. Generally, it is due to not raising the assessments, not seeing the importance of the reserve fund, believing that they have more time to put money away in the future, delaying necessary repairs, not correctly investing, or previously overspending on projects. Hopefully, when you present the report reflecting how much money should be in the reserve account, it will persuade the board to reconsider and modify their previous policies.
Typically, the reserve funding line item allocation is one of the first areas boards and managers will decrease to try and produce a balanced budget. However, the projects covered out of the reserve fund are generally expensive projects that maintain or increase the property value for the association.
The reserve account funds are generally accumulated slowly, but one large project and the funds will quickly dissipate. Therefore, it is imperative not to make the allocation the first item to reduce when balancing the budget. Instead, the allocation should be one of the most significant monthly expenses, depending on the finding of the reserve study.
Let’s say that you have an association that built up its reserve fund, and the account is adequately funded. After the reserve study, you find that you are in exceptional financial shape. Okay, next step, how are you protecting and diversifying the reserve funds? Based on the reserve study’s predictions, how soon will the association need the funds?
26 | COMMON INTEREST® • Spring 2022 • A Publication of CAI-Illinois Chapter
The standard savings and checking account is only insured by the FDIC up to $250,000. If your association requires more than $250,000 in the account, reach out to a few financial advisors and schedule a meeting to discuss the best options and plans for the association. Invite the advisor to attend a board meeting to present their financial advice and recommendations. The board may consider a few options: CDs, Money Markets, Treasury Bonds, etc., and the advisor will also provide you with additional opportunities to consider.
It is a group effort to ensure that the association is financially responsible between the board, the manager, and the unit owners. The manager must guide the board and the unit owners to their options and provide feedback on ways to correct any discovered concerns.
Please note that some of the common elements may need to be repaired before or after the projected information in the reserve study. Please ensure that the board knows it is an estimated time frame. The exact time frame is based on several variables, including the item’s usage, environment, and weather (or winters, here in Illinois!).
As a manager or board member, we are responsible for adequately allocating the necessary amount of the collected assessments into the reserve fund. The fiduciary responsibilities of the board and manager are duty of care, duty of loyalty, and duty of obedience; these are mandated by state law and described uniquely in the governing documents for the association.
The main thing to remember is that it is the responsibility of the manager and the board to ensure that the reserve account is adequately funded and the necessary amount is being allocated each month. Unfortunately, they may be making the difficult decision of a passing a special assessment, increasing assessments, or taking out a loan or line of credit. They are not easy decisions or discussions, but they are necessary to make each year.
Reference
<ahref=”
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https://greekgodsandgoddesses.net</a> - Greek Gods & Goddesses, June 11, 2018
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