What About Reserves? Some Advise From The Experts At SNAP Collections.

Although our expertise is in community association collections our Senior Management Team are experts in money management, and after all when we recover association funds there are things you should know.  So here are some commonly asked questions and answers that we get from boards of directors regarding reserves:

1) What types of bank accounts are operating funds and reserve funds held in, respectively?

Answer:  Association funds should be held in financially stable, federally or state chartered banks and/or savings and loans that provide government guarantee on deposits.  As importantly, they should NOT be comingled and transferring money from the reserve account to the association’s operating account should not be a simply task to be accomplished by just one board member.  Therefore, the financial institution the association utilizes should have appropriate control procedures available to the association to make sure at minimum two active board members are involved with any transfers out OR between their bank accounts.

2) How much money should a building or association hold in reserve at any given time? How is that figure determined?

Answer: This changes dramatically from association to association.  In fact, there is an entire industry support area around reserve study analytics for communities.  However, conceptually, this is like the community saving up the funds equal to depreciation of major capital equipment so that when the time comes to replace a capital item, they have the money needed already there.  Major items include, but are not limited to: air conditioner/chillers, boilers, driveways/parking structures, balcony and/or steel frame maintenance, roofs, social common area maintenance (ie lobbies, walkways, meeting rooms/game rooms/media rooms, pools, and many others.

3) Aside from not being able to complete necessary repair/replacement projects, what are some other possible ramifications of inadequate reserve funding?

Answer: The association may need to pass a special assessment to raise money when needed.  This may result in a disproportionate burden for repairs and maintenance being borne by current residents/owners rather than having properly raised the funds from people who have owned units in an association’s past when it had the opportunity to have them pay into reserve accounts.

For example, in Florida, members have to actively waive funding reserves from their budgets in order to not be required to allocate part of their regularly scheduled maintenance fees to funding reserves.

Depending on i) the urgency of a repair/replacement and ii) specific financial parameters for the community association, the association may be forced to borrow funds at higher interest rates than may be offered by traditional banks.

If repairs/replacements are not done in a timely manner, the association may be exposed to fines/violations from the town/city/community in which they are located.  At some extremes, and likely very rarely, certificates of use/occupancy may be pulled/revoked requiring the building to be abandoned until the situation is rectified.  For example, this could happen if there was a functional problem with fire safety or other life safety issues in a building.

4) What are the most common ways condos or HOAs can beef up their reserves?

Answer: -Increase the amount they set aside on an annual basis to help catch up on prior year amounts that were not funded.

-pass special assessment (one time or on going for a specified limited time) to catch up on funding reserves.

5) What are some reasons why those common methods might not be appealing to a board looking to increase their reserve fund?

Answer: These are not always politically popular.  Board members may not want to be viewed by their neighbors as the one raising rates.  Just like in our government entities, sometimes the answer involves cutting spending as well as raising revenue to right a situation.  In our communities, depending on the financial situation specifics of a community (which vary dramatically), raising revenue (ie increasing maintenance and/or passing special assessments) may be a necessary hardship to properly save funds.

6) Please discuss alternatives to common reserve funding strategies — different loan products? bonds? Investments?

Answer: We can’t think of a circumstance where it would make sense in today’s markets to borrow funds in order to fund a reserve account.  This is because the likely returns on any reserve account would be very low single digit returns while the cost of borrowing such funds would be higher.

This is why saving for reserve funds is important.  If an association has to later borrow to fund a capital improvement for which they haven’t saved already, the overall cost to the association’s members will be higher due to the need to pay interest on a loan.

7) How can condo/HOA administrator research and identify ones that might work for their community. What resources exist to help boards initiate and maintain alternative funding strategies?

Answer: Association Financial Services can and does make and/or source loans for associations in need.  They are typically not a lender of first resort as the interest rates charged tend to be above 12% per year.

If possible, some associations may be able to borrow more cost effectively from a local community bank with whom they have a current banking relationship.  These loans are typically bench-marked to the current interest market environment (which remains today very attractive).  We have seen associations be able to borrow funds at 5-8% from their local banks.  Oftentimes,the association needs to have a very good collections program in place as the banks don’t like to see delinquencies above 5-10% of the total community.

So there you have it.  Some important information on Reserves that every board of director should know.

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