Adequate Reserve Account contributions are necessary and required for an Association to meet is fiscal responsibility to the membership of a community. However there are ways to minimize the payments over time:
1. Adequately fund a reserve account from the beginning.
The fastest way a community runs into financial heartache and a low funding level is by having an allocation rate to the reserve account which is not sufficient to offset the long term costs (deterioration of the assets). In the short term this practice will often result in lower HOA dues but in a relatively short period of time the Association will be in a situation where dues will need to be increased significantly (penalizing owners for a lack of funding in the past). The fairest, most fiscally responsible and cheapest way to fund reserve accounts is to start off on the right foot and fund an adequate amount from the beginning. A reserve study will provide the necessary direction and allocation amounts necessary for a newer community to do just that.
2. Keep up on maintenance
Annual maintenance of common areas such as touching up paint, roof repairs, gutter cleaning, carpet cleaning, etc all help to extent the useful life of components. The longer a community can responsibly push off replacing common areas the more time an Association has to fund for the associated costs and the lower overall months/annual reserve allocation rate. Small maintenance fees (such as roof repair) can often times extend a component’s useful life by several years which is a huge benefit to the membership of a community without having deferred maintenance issues.
3. Some items can be replaced on failure rather than recommendations
Some components in a reserve study such as fencing, pool heaters and carpet may be replaced on failure rather than just going off the recommendation in the reserve study. If a fence is functional, aesthetically appealing and is serving its functions as necessary... let it be. This will allow the community additional time to save for the replacement costs and is especially beneficial to a community which is at a poor funding level trying to work its way higher. Note however than other items that are more integral parts of the building envelope; (roofing, siding, windows) if not replaced in a timely manner will often result in unseen damage in the way of rot or mold which can be extremely costly to remedy. Items not replaced till failure should be items that are not integral parts of the building and are common area component that a community can do without if they do fail and will require some time to replace.
4. Do not “double dip” into the operating account and the reserve account
We most often see this with smaller mechanical equipment, tree trimming, painting and asphalt/concrete repair. If a common area component is being paid for with the operating account budget then there is no need to fund for it in the reserve account. Doing so unjustly double charges the membership twice for the same item. Note however that there are maintenance items related to common areas which are separate from the reserve replacement costs like pressure washing the siding which is typically paid from the operating account versus replacement of the siding which is funded from the reserve account.
5. Invest a Portion of the Reserve Account
Investing in extremely safe government backed instruments allows an Association to collect a higher interest that what is typically given on a savings account. With large enough funds this can play a significant role in the long term financial strategy developed and will typically result in reduced reserve allocation rates. A reserve study will provide a timeline of expected costs over a long period of time; it is important to review and take into account the amount necessary in any time period so that investments can be planned and withdrawn without penalties. Note that we recommended only a portion of the account be invested at any particular time.
6. Having your head in the sand does not pay off!
Differing replacement of important common areas (building envelope or items that add significantly to the aesthetic appeal of the community) often will result in additional damage and reduced marketability. Additional damage from a water leak adds significantly to the replacement costs of a roof or siding. Allowing a clubhouse to deteriorate to a degree which makes it functionally obsolescent will result in lower market appeal in the community and typically lower homes prices versus similar communities which have remained on the upkeep. Both of these items results in higher costs to the membership.
Written by Joel L Tax - Professional Reserve Analyst - 02/12/2016