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Dear Homeowners,
Once again, I appreciate being able to communicate with the homeowners each week through the Valley News. Thank you for continuing to read these articles.
My topic this week is RESERVES. There are many aspects to reserves in an association, and I won’t cover all of them today. I will feature additional components in future articles. I will focus on how many community managers, including myself, view balancing the future with the present and the past.
100% Reserve Funding Level vs. 50% vs. 150%.
The fundamental reason for reserves is simple…we are saving a portion of your total assessments to pay for the long-term, future repair and replacement of The Estate’s assets, buildings, equipment, infrastructure, etc.
Why is 100% my goal for our funding level? When we think of 100%, we tend to think about perfection, the valedictorian of our graduating class, that straight-A student. In my view, Reserves at 100% is truly a neutral or balanced proposition. It means that our Past Owners, Current Owners, and our Future Owners have EQUITABLY shared the costs to maintain, repair, and replace The Estate’s assets. This is the most fair way to share the burden amongst our 3 ownership groups. (Past, Present, and Future).
Scenario A:
At 150% funding, we would have charged our past and current owners much MORE than their fair share/burden to fund the reserves. Most owners would scream if we over-assessed like this. You would never let this happen. Right?
Scenario B:
At 50% funding (which is an equal variance from “neutral” in scenario A), we would have charged our past and current owners much LESS than their fair share/burden to fund the reserves. While owners, Boards, and managers do not like being severely underfunded like this, they are much more willing to see this as acceptable because it keeps the overall assessments low. It can also be characterized as kicking the can down the road. In my opinion, as a financially sustainable business manager, this is not the way to run a business.
Most of you are aware that our present reserve funding level is well below 50%, which leaves us with not having enough dollars to fund those long-term reserve projects that are due now and in the future. This is contradictory to why HOAs create, and are required to, reserve funds in the first place.
Refer to the analogy of the 1972 Cadillac in last week’s article. The Association, via its elected Board of Directors, has a legal/fiduciary duty to:
- Fund the reserves appropriately to maintain, repair, and replace our collective assets.
- Use the reserve funds to maintain, repair, and replace our collective assets.
That legal/fiduciary duty is prescribed in the Civil Code and the Governing Documents.
One final note, I have worked with an HOA lobbyist in Sacramento and spoke to the California Legislative Committees on proposed legislation. In the next 2 years, there is a significant push to further regulate HOAs, specifically on the topic of REQUIRED reserve funding levels and increased oversight of HOA operations. I will continue to advocate against this, and if necessary, work to water down any legislation that negatively impacts HOAs. If these proposed bills are passed and become law, they will have an immediate and major impact on the community.
We will need real and reasonable solutions. Not everyone will agree, but we must work together to overcome these challenges. Let’s make San Diego Country Estates the BEST IT CAN BE!
Once again, this is a TEAM approach. WE CAN DO THIS!
Thank you, Carl Weise, GM
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