Investing & Protecting Your HOA Reserve Funds: The Right Way To Do It

Investing & Protecting Your HOA Reserve Funds: The Right Way To Do It

[ Blog/News ]

Investing & Protecting Your HOA Reserve Funds: The Right Way To Do It

How you handle your HOA reserve funds really makes a difference in the successful running of your association. Managing HOA reserve funds is  important for the longevity and future investments of your association.

As a member of the board, it is your responsibility to stay on top of your reserve fund making sure it is regulated well and in the community’s best interests.

Understand When to Use Your Reserves

Is it a reoccurring expense?  Is it a capital improvement? A reserve fund is savings set aside for common area maintenance, repairs, replacements and unexpected repairs not covered by insurance.

HOA Reserve Fund Laws

Can an HOA invest money?  It depends on what your state laws are and your governing documents.  Some states have restrictions on which investments HOAs are permitted to take advantage of.  Always exercise prudent fiscal management when investing.

Your Investment Policy in the Bylaws

Check your governing documents, as they may include a policy on investments regarding your reserves. Every homeowners association should have an investment policy laid out in the governing documents.

It is very important to consider the following in order of its priority:

  • Safety above all else
  • Liquidity is a must
  • Consider yield last
Investing HOA Reserve Funds

HOA reserve funds don’t have to sit idly by.

Columbia Bank offers the Demand Deposit Marketplace (DDM), a sweep account that will provide FDIC Insurance up to $25 million in deposits. Funds over a target balance are swept out daily to the DDM account where funds will be invested amongst various FDIC insured financial institutions in $250,000 increments.

You will receive a monthly statement listing the names of the financial institutions and the dollar amount that is invested with each institution. This program will satisfy the HOA investment guidelines and provide you the safety, convenience and availability to your funds as you need them. End Of Article

By Columbia Bank

By Columbia Bank

Chapter Happenings Sponsor, September 2021

Columbia Bank works with management companies, associations and their Boards to develop appropriate lending and treasury management solutions.

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Standards, Best Practices, and Public Policy Following Surfside Condo Collapse

Standards, Best Practices, and Public Policy Following Surfside Condo Collapse

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Standards, Best Practices, and Public Policy Following Surfside Condo Collapse

The past two weeks have been devastating after witnessing the partial collapse of the Champlain Tower South condominium in Surfside, Fla., learning of the lives that perished, and seeing the tragedy’s impact on survivors and those in the immediate community. An investigation into the cause of the condo collapse is ongoing; standards of practice and legal requirements related to ensuring maintenance and structural integrity of condominiums understandably are coming under scrutiny.

While community associations have been in existence for more than a century, the rise in condominium developments began in the 1970s and has remained steady ever since. Condominiums are home to millions of people in the U.S., and government officials at the local, state, and federal levels have started pondering what changes need to occur to prevent a similar building collapse from happening again.

CAI’s Government and Public Affairs Committee recently convened a special meeting with guests who offer a broad range of expertise to discuss current best practices, standards, and public policies related to condominium structural requirements. This working group will help CAI establish guidance and model language for CAI’s state legislative action committees as well as considerations for state legislators. Below are the overarching themes of the discussion:

Building Inspections & Maintenance:

Several counties in Florida have inspection obligations that require a structural and electrical engineer or architect to conduct a building inspection and certify the safety of the building. New York City and other localities have similar requirements. CAI is studying these requirements to help develop standards for condominiums and other high-rise residential buildings.

Reserve Study Planning:

Reserve studies for condominium associations are currently required in nine states: California, Colorado, Delaware, Hawaii, Nevada, Oregon, Utah, Virginia, and Washington state. Washington statutorily encourages associations to have a reserve study performed every three years unless doing so would impose an unreasonable hardship. Florida statute does not require a reserve study but requires a reserve schedule for repair and replacement of major components.

The Foundation for Community Association Research has a Best Practices Report on reserve studies and reserves management that was updated in 2020. CAI is reviewing reserve funding best practices and requirements to determine if changes are needed.

Funding For Maintenance, Repair, & Replacement of Major Components:

Condominium associations are required to have reserve funding for maintenance, repair, and replacement of major components in 11 states: Connecticut, Delaware, Florida, Hawaii, Illinois, Massachusetts, Michigan, Minnesota, Nevada, Ohio, and Oregon. CAI will be exploring tax benefits to incentivize association reserve funding as well as for special assessments and loans used to fund component maintenance, repair, and replacement.

Insurance:

CAI is reviewing best practices and standards for adequate insurance coverage for condominiums and individual units.

CAI is uniquely positioned to lead the conversation on these standards, best practices, and policy changes to benefit our more than 42,000 members, the 73.5 million Americans living in community associations, and the millions more living in community associations around the world.

We will continue to engage in conversations with members, experts, and stakeholders in the community association housing model to strengthen existing standards and public policy in these areas.

If you have comments, opinions, or expertise in any of these areas & would like to contribute to the conversation, please email government@caionline.org. End Of Article

Condo Safety - Structural Integrity, Maintenance, And Reserves - Community Associations Institute - Click to Go to CAI's Web Page

Right now CAI is providing information & resources to help concerned residents and board members understand structural integrity, maintenance, and reserves.

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A Strong Reserve Fund Is The Strongest Hedge Against Inflation

A Strong Reserve Fund Is The Strongest Hedge Against Inflation

[ Blog/News ]

A Strong Reserve Fund Is The Strongest Hedge Against Inflation

What is a Community Association’s strongest hedge against inflation? A strong reserve fund! As of the end of April, 2021, increases in the pricing of lumber[1], asphalt binder[2], and other materials have risen well into the double digits when compared to the previous year. Costs for the “Big 9” projects (painting, roofing, asphalt, siding, windows, decks, plumbing, elevators, HVAC) are simply wild and unpredictable right now.

If your association is less than 50% funded, and any of these major projects are due within the next few years, get moving, now. Armed with a well-conceived scope of work, specifications, bid documents, and some time, you’ll stand a good chance of achieving the best value for project $$$ spent.

Strong reserves can hedge against significant price swings, and the extra costs of emergency work, Special Assessments, deferred maintenance, bank loans. Don’t be tempted to cut corners – I can confidently say after thirty plus years of experience, your best value is to hire a reputable consulting firm to oversee the process, and the work for these major projects.

Reserves are all too often thought of as for some distant “rainy day” event. Reserves are for the ongoing, measurable deterioration in your community, and should be thought of as real as any other bill of the association. Past the cautionary notes, there is good news if you are a part of a well-run, and well-funded community association. With Reserves Percent Funded of 70% or more, you have a 1% or less probability of a Special Assessment[3]. For these communities, the news gets even better. Our studies show that on average, resale prices are  ~12% higher than similar properties in their market area with weak reserves.

Think about that.

If you start with a median Seattle area condo unit value of $500,000 and to strongly fund reserves and building maintenance, have been paying ~$150 a month more in assessments over the last seven years than your weakly funded neighbors, you will have paid somewhere around $12,600 more, to realize a sales price $60,000 higher. That’s a nice return. Communities that understand this, and are proactive, vs. reactive, are: easier to live in, easier to manage, and as it turns out, likely a better investment! End Of Article


[1] Chicago Mercantile Exchange lumber futures
[2] WSDOT Asphalt Binder Reference Cost
[3] Association Reserves, Inc. database

By Association Reserves Washington, LLC

By Association Reserves Washington, LLC

Chapter Happenings Sponsor, May 2021

Written by Jim Talaga, RS

Learn more about Association Reserves WA at: www.reservestudy.com

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Establishing Your Reserve Funding Plan: Considerations & Strategies

[ Blog/News ]

Establishing Your Reserve Funding Plan: Considerations & Strategies

Association approaches to preparing for major repair and replacement projects have varied widely over the years—from completely ignoring, to detailed analysis of building components and their related costs, and all variations in between. While next year’s operating expenses and the resulting regular assessments are rarely viewed as “discretionary,” reserve expenses and the offsetting Funding Plan often are, particularly when projects are slated more than a few years away.

Sarah Anderson, PCAM, Director of Marketing & Operations of EMB Management, Inc., AAMC, discusses some of the challenges of reserve planning with industry veteran Jim Talaga, RS, President of the Association Reserves – Washington regional office. Their goal is to present some new ways to view and approach this important task and establish some best practices.

Best Practice 1

Because of the havoc of special assessments and their disruptive effect on the community, boards should address the reserve funding plan early in the annual budget process. Being overly optimistic about a monthly landscape budget, for instance, rarely causes financial challenges. But years of underfunding Reserves will almost certainly result in the need for a Special Assessment.

Sarah: Why do you think it has been difficult for many associations to increase their reserve contributions and follow the recommendations within their Reserve Study?

Jim: There are three reasons for this in my view. First, many associations began their lives in an era where little to no reserve planning was ever undertaken. The misconception among board members and homeowners (that continues to this day) is that the Reserve Fund is for some far off future expense. In reality, funding reserves is necessary to offset ongoing common area deterioration as it occurs. The second reason is that addressing the reserve contribution is often left until the end of the budget process and board members are often unprepared to make wise funding plan decisions. In most instances, the reserve contribution is one of the largest budget line items, and an increase in the rate often means an increase in overall assessments, which is always viewed as unpopular. Finally, we have found there is a general misunderstanding of how to read and use the Reserve Study.

Although there is a statutory requirement in Washington for a 30-year reserve funding plan, the expense projections can and should be broken down into five- and ten-year action plans. With simple addition and subtraction, an association can clearly see how much reserves they currently have in the bank, and what expenses they need to prepare for in the near term. There is also confusion and emotion surrounding the concept of “% Funded” and “Fully Funded”—industry terminology that should not get in the way of a simple planning task.

Sarah: Can you suggest some other ways for association boards to explain what their reserves are for and, if an increase is necessary, how to get them moving in the right direction?

Jim: Boards can use the information in the Reserve Study to create a summary of specific projects that will be completed during the next five or ten years. It will become much clearer to homeowners when, for example, they see there is a need to paint the buildings, replace the fence, and reseal the decks. This makes the expenses tangible, not just a list of meaningless numbers on a page. When we have clients facing a special assessment in order to afford timely repairs, we often counsel that those funds be allocated to specific projects, or a combination of specific projects and rebuilding their reserves. People like to know how their money is being used.

The current budget disclosure requirements that were implemented within the RCW (both the Condominium and HOA Acts) in 2011 for budgets adopted on or after January 1, 2012 are also a wonderfully illustrative tool. The disclosures clearly show the cash flow path the community is on by comparing their current budgeted reserve contribution rate to the funding levels recommended in their Reserve Study.

Homeowners need to appreciate that reserve expenses are inevitable and should be a question of when, not if. There are only four ways to pay for the expenses listed in the Reserve Study: 1) set aside sufficient reserves (many Declarations actually require this) 2) levy a special assessment 3) obtain a bank loan 4) endure deferred maintenance and the decline in property values associated with doing nothing. When you include compounding interest over time with regular reserve contributions, properly funding reserves is always the least expensive funding option by a significant margin.

Best Practice 2

Provide access to the entire Reserve Study to each owner, along with links to video tutorials, webinars and articles. You’re all in this together, sharing expenses and creating your community. Also, have your studies prepared and therefore available for distribution well in advance of the budget process, allowing time for owners to digest and formulate questions.

Sarah: But what if the Funding Plan in the Reserve Study requires a large increase, which the association cannot financially tolerate?

Jim: The Funding Plan is based on a scope and schedule of reserve expenses, as determined by the actual condition of each item on the component list. The repair and replacement costs won’t go away, and in fact are likely to increase during the life cycle of the association. Remember that all reserve components are inflating over time, and the lower the association’s current reserve fund strength, the harder it will be for them to meet those expenses if they don’t get going now.

With many of our client associations, we are able to craft a strategy of lower initial increases followed by some periods of time with larger than typical (e.g., 5% to 10%) annual increases. This type of “ramping” as we call it can get an association moving in the right direction more effectively rather than trying to implement a large leap in assessments. If some combination of reserve contributions and Special Assessment is inevitable, the earlier in the process the board can communicate the funding strategy to the homeowners, the better.

Because Community Associations are volunteer organizations with comparatively high turnover of board and committee members, financial transparency and basic education will likely always be at the center of successful communities. Many boards do not provide homeowners with a copy of the Reserve Study, nor utilize many educational resources and tools. We see this as a huge mistake.

Sarah: We have seen Washington state go from little or no guidance for Reserve issues, to requiring mandatory Reserve Studies and disclosures. What do you think the future may hold?

Jim: Well, the trend has clearly been for more scrutiny of an association’s financial health, not less, and more encouragement for the board to “do the right thing” on behalf of the homeowners. This trend is a good thing in my opinion. There is no reason for homeowners to be surprised by a repair or replacement expense that gradually approached over many years, often in plain sight! Association-governed communities are most successful with owners who are a good fit, including their ability to afford the “true cost of ownership.” If they can’t, delinquencies and foreclosures can result in major impacts to the cash flow and financial wellbeing of the association. We review association budgets every day, and often see “collection costs” as one of the largest line items in the operating budget.

I think it will continue to be important to educate and create a system where good financial stewardship of an association is rewarded, not punished. There has been a misperception in the real estate world that lower monthly assessments are, by themselves, very attractive, and is often a selling point in a buyer’s purchase decision. However, if a comparable property nearby has higher monthly assessments but sufficient reserves and a solid Funding Plan in place, the property with the lower monthly assessments may not be the better deal financially. Reserves “% Funded” is a fair way to compare property to property. Washington could follow the lead of California, where one of the mandated disclosure requirements is to show a per-unit reserves deficit or surplus.

I recently presented an educational seminar to an influential group of real estate professionals in the downtown Seattle core to illustrate these concepts. They warmly embraced the message, knowing that the ability to provide some basic financial insight into an association for their buyers would set them apart, resulting in happier customers and referrals. Board members and Managers should do the same—make sure you understand basic Reserve Funding concepts and that real estate agents and prospective homeowners are aware that you have a current Reserve Study, a strong reserve fund, and are pursuing a reasonable Funding Plan. That will set your association apart from competing properties in your market area.

Best Practice3

You should be continually recruiting volunteers— those who take time to read and understand the Reserve Study may be your next community leaders.

Sarah: To circle back to the beginning, and put you on the spot a little, what Funding Objective should an association pursue: Baseline, Threshold, or Full Funding?

Jim: Most people who debate this issue are unaware that reserve contributions associated with the higher-risk “Baseline” objective and the more conservative “Full Funding” objective averages only a 13% difference. Having said that, this is a question that will likely be debated until the end of time!Unfortunately, it’s been our experience that people who get caught up in this funding plan detail often miss the bigger picture.

After establishing a well-conceived budget and disclosing the association’s complete financial picture to the homeowners (of both current and future needs) the board will want to be sure that their decisions and actions comply with their Declaration and state law, as well as fall under the protection of the Business Judgment Rule: Made in “good faith,” in the “best interests of the association as a whole,” and “with reasonable inquiry.” That’s the bottom line.

Co-Authored By Sarah Anderson, PCAM

Director of Marketing & Operations, EMB Management, Inc., AAMC

Co-Authored By Jim Talaga, RS

President, Association Reserves

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