Reserves and Why They Are Important By Lisa Glogow, CMCA, AMS, CCAM

Reserves and Why They Are Important

By Lisa Glogow, CMCA, AMS, CCAM

The governing documents of an association typically obligate the association to maintain, operate, repair and replace the common elements in a community. A common element is the part of a community that all its members own and can use. The common elements usually include pools, clubhouses, parks, tennis courts and pickleball courts. Some developments include roofs, exterior maintenance and landscaping. The governing documents give the right of the HOA to collect assessments from each owner to cover the ongoing maintenance of the common areas. The amount of the assessment is determined on the amenities that the community has to offer and the cost to maintain each component.

The board of directors has a fiduciary duty to fund the reserves responsibly. All funds must be invested in a way that provides security for the association and not invested in a way that is considered risky and unsafe. The board should make sound decisions on funding and investing reserve money. The following are the best investment strategies for an association:

• Certificates of Deposits

• Money market accounts (savings and checking)

• Money market funds

• U.S. Treasuries

The deciding factor on where to place the funds should be determined on when the HOA needs to have the money available for any upcoming projects.

A reserve study contains a list of the major common area components with an estimate of their remaining useful life. All associations are required to obtain a reserve study regardless of their size. Once every three years, a visual inspection should be done of the major components that the HOA has an obligation to maintain, repair or replace.

Even though funding a reserve is not mandated by state authorities the board should fund the reserves in accordance to the reserve funding plan. Fannie Mae, Freddie Mac and the Federal Housing Administration have tightened their underwriting guidelines for obtaining loans. Many institutions have a requirement to fund the reserve contribution equal to 10% of the association’s annual budget.

Boards should not defer maintenance or repairs in fear of depleting the reserve account. The repairs and ongoing maintenance should be performed. Funding the reserves properly can reduce the likelihood of a special assessment or the need to borrow funds from a financial institution.

For further information and questions regarding your reserves, please contact a reserve study analyst for more information.

Lisa Glogow, CMCA, AMS, PCAM, CCAM, is Director of Community Management for Powerstone Property Management in Palm Desert. Lisa was named 2018 CAI-CV Manager of the Year. She can be reached at (760) 797-7797 or lglogow@powerstonepm.com.