Re: Reserve Studies
From: Holly McNutt (holly.mcnuttgmail.com)
Date: Thu, 29 Dec 2011 09:19:59 -0800 (PST)
Hey Coho-er's,

I've been wondering about something regarding Reserves.  We do a Reserves study 
about every 3 years, working with an expert in this field, and our Reserves 
account is quite healthy, I think.  But I wonder if  there is a general rule of 
thumb that most communities follow in terms of how much they should have tucked 
away.  Like how healthy is healthy?  I am on our board of directors and find 
myself wondering if we might actually be over-saving for this.  We tend to have 
about $10k per household in Reserves.  Can anyone help me gain some perspective 
on this?  Just curious.

- Holly in Nyland

On Dec 29, 2011, at 10:03 AM, Douglas G. Larson wrote:

> 
> 
> 
>> We have never done a Reserve Study.  As the liaison with this List, I
> have forwarded a lot of the e-conversation about it to my neighbor on our
> Long Term Planning Committee.  Would someone please > 
>> send a definition of what it is? And how it is worth the expense.  Part
> of her response is below.
> 
> 
> Here are the basics about Reserve Studies and Reserve Funds for Homeowner's
> Associations. 
> 
> Reserves are funds set aside by a Homeowner's Association to be prepared for
> the eventual replacement of assets. Those assets are very broad and can be
> big ticket items like roofs, driveways or painting (both interior and
> exterior) but can also be smaller items like fences, landscaping, decks,
> common house dishwashers, ovens or refrigerators. There generally is a lower
> dollar limit below which an asset is NOT included in the reserve study.
> Hence things like toasters, coffee makers, food processors are generally not
> included. The professional Reserve Study organization can guide you on where
> that dollar limit is. 
> 
> Reserve funds are collected regularly, usually via your regular monthly
> Homeowner's Association dues, to build up the fund for the future
> replacement of these assets.
> 
> A Reserve Study, is a study done by professional organization that has
> experience with and knowledge of Homeowner's Associations financial standing
> as well as experience with the expected life of common capital assets, like
> those I mentioned above. They usually do a detailed initial study and then
> less detailed follow-up studies every 3 years or so. The initial study
> involves them coming to your site and looking at all assets in question. The
> follow-up studies are done to make sure that each asset appears to be about
> where you thought it was in its expected life-span as well as updating costs
> for each asset as market prices change and allowing for inflation. I am not
> sure if follow-up studies require a site visit since our community hasn't
> had its first follow-up yet. 
> 
> Total Reserve Funds for an HOA need not be a sum of the value of all assets.
> That would be prohibitive and usually isn't necessary. Usually it's a
> percentage of the total and is designed to cover replacement expenses as
> they occur. Each asset has a different life span and the professional
> organization you hire can help you with numbers and with deciding where you
> are and where you want to be. 
> 
> Also Reserve Funds are NOT for Capital Improvements, i.e. for building or
> purchasing assets not previously present in the community (e.g. a New
> Greenhouse, a New additional refrigerator). You would use other financial
> assessment methods to acquire those assets. Once they were acquired,
> however, they would be added to the total list of assets to be managed with
> Reserve Funds. 
> 
> Likewise Reserve Funds are NOT for replacement of assets in the event of
> catastrophic events (e.g. Storms, Fire). Typically your insurance covers
> assets that expire under those conditions. 
> 
> 
> The purpose of the Reserve Study is so that you have some sound basis for 
>  a) The expected life-span of each asset
>  b) That you are collecting adequate funds to cover each asset replacement
> in the year expected.
>  C) A schedule of how much to collect each year overall and from each
> owner.
> 
> 
> Most state laws require Homeowner's Associations to have and collect Reserve
> Funds. I have heard shocking statistics that many Homeowner's Associations
> have inadequate funds and/or inadequate collection rates but I don't recall
> precise numbers. 
> 
> What I can tell you is hiring a professional organization to do the Reserve
> Study is money well spent. 
> 
> In addition to the reserve study itself, it would be beneficial to give
> serious thought to how manage the reserve funds. That is, in any given year,
> if an asset is due for replacement, the following questions are germane:
> 
>  a)  Who (or what committee) is authorized to decide to spend the funds?
>  b)  Can the authorized person(s) spend the money without community
> approval?
>  C)  When can or should the funds be spent? Some assets will last longer
> than expected and others shorter than expected. How much time before or
> after the scheduled year, can the money be used?
> 
> Our community is working on this Reserve Fund Spending Model now. It isn't
> complete yet but we are almost done with it. If you are interested in it,
> let me know and I can send it to you directly. 
> 
> 
> 
> 
> I hope this helps. 
> 
> 
> Douglas Larson,
> Songaia Cohousing,
> Bothell, Washington
> 
> 
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> 
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