RESERVE FUND EXPLAINED
The Association hires a third-party company to conduct an in-depth analysis of the property's physical condition and current reserve funds. The HOA board takes this recommendation to help plan the next year’s budget. If you are interested in the details, here is a more complete explanation:
The Reserve fund balance as of Sep 30th was $74,899. We expect a year-end balance to be $85,204. This will put us at 37%.
1) What is a Reserve Study?
Ans: The purpose of a Reserve Study is to prepare the HOA for significant maintenance, repair and replacement expenses of reserve components that they can expect to face over time. It helps to minimize “surprises” such as a HOA special assessments (extra dues).
2) How often do HOAs typically conduct a Reserve Study?
Ans: The industry best practice is to conduct a Reserve Study every 3-5 years because of inflation, amenity degradation, etc. Traditions HOA has done two Reserve Studies - one in late 2018 and the other one in late 2022.
3) How is the Reserve Study conducted?
Ans: The Reserve Study is conducted by a third-party company. They look at two aspects: physical property analysis (community areas that are the responsibility of the HOA to repair or maintain) and financial analysis with regard to reserve funds (revenues, expenses, and Reserve Fund balance). The company generates a report with their recommended Reserve Funding Plan to cover potential future expenses.
4) What is included in the Reserve Study Report?
-
Component List: A list of items (potential maintenance and repairs) that can be covered as part of Reserve funds
-
Percent Funded: A measurement of the adequacy of current reserve funds.
-
Funding Plan: A plan to prepare for the expenses that might be required in the future.
5) How do we use the Reserves Study Report?
Ans: A reserve study is a long-term capital budget planning tool which identifies the current status of the reserve fund and a stable and equitable funding plan to offset ongoing deterioration, resulting in sufficient funds when those anticipated major common area expenditures actually occur. The Reserves Study report plans for the worst-case scenario, so the standard industry practice is for the HOA to aim for a minimum of 70% of funding the recommended Reserves.
6) Why was the 2019 Reserve Study used to prepare the 2023 budget?
Ans: Budgets are typically prepared in August - September and approved in October each year.
The 2019 Reserve Study (received Sept 2018) was used to prepare the 2019, 2020, 2021, 2022, and 2023 budgets.
The 2022 Reserve Study was used to prepare the 2024 budget. The 2023 budget was in process for approval before the 2022 study was published.
More context: The Budget preparation begins in August. There are several rounds of reviews that take place between the Community Management Company and the Board before the Board votes for final budget approval. So by September, the budget is already close to final.
This year we anticipate having a surplus of $10-15k in Operating Expenses. As we approach the end of the financial year (Dec 31), the Board can decide to transfer money from the Operating Budget to the Reserve Fund to cover the $9.8k Reserve Fund increase recommended in the 2022 report.
7) Does the Traditions Board use Reserve Funds to build amenities?
Ans : Reserve funds cannot be used to build new amenities. Reserve funds are only used for long-term capital repairs and replacement of existing assets maintained by the HOA.
8) Do we strictly follow the repair recommendations in the Reserve Reports?
Ans : The Reserve Study outlines the repairs and replacements that the third-party company recommends for our community based on expected life span. The Board uses their due diligence to determine if the recommended repairs or replacements are actually necessary so that Reserve Funds are only used when truly needed.
9) What are our significant reserve expenses in this financial year (2023)?
Ans: Our starting reserve fund balance in Jan 2023 was $93,833. We have spent approximately $45k from the reserve fund to revamp the traditions pool deck, and our reserve fund balance became a little low after this expense. Another thing to consider is that the Reserve Fund fluctuates - money is always going in, and money is also always going out based on repairs needed to the various HOA-maintained areas.
The Reserve fund balance as of Sep 30th was $74,899. We expect a year-end balance to be $85,204. This will put us at 37%.
Project Bids for Traditions pool deck repair: $64,474, $90,930, $45,344, $72,729, $62,971 (Board chose $45,344 bid for this project)
10) Do you consider Reserve Study financial recommendations when approving the annual budgets?
Ans : I participated in the approval of the 2023 budget in October 2022. The two Taylor Morrison Board members and I approved Reserve Allocations of $41k, which exceeded the recommendation from the 2019 Reserve Study (The 2023 budget was in final process for approval before the 2022 study was published).
Prior to the 2023 budget, all annual budgets were approved by the Board composed of three Taylor Morrison members, so I cannot answer for that time period.
The 2024 budget will be approved by the current Board (2 Taylor Morrison Board members + 1 Homeowner Board member) on October 17, 2023. This budget considers the recommendation of the 2022 Reserve Study and proposes an increase of the Reserve Funding Allocation to approximately $51K. The 2024 budget is pending approval.
Please see the diagram for Actual Reserve Allocations in the 2019 - 2023 budgets as compared to 2018 Reserve Study recommendations.
Please let me know if you’d like to see the details of the Reserve Fund dynamics and where it will be at the end of this year.
-Venkata Phani Patelkhana
Resident Board Member
