The definition of 100% funding is confusing to many people. If your association's reserve study states that you need to replace your roof in ten years at a cost of $100,000, "fully funded" does not mean that you have $100,000 today. It means that you have $10,000 in the bank this year, $20,000 next year, $30,000 the following year, and so on until you have $100,000 on the 10th year when the roof is scheduled for replacement. It should be noted that the actual annual contribution for roofs would not be exactly $10,000 since reserve studies take into account inflation, interest earned and other factors that will change from year to year. As a result, the true contribution will fluctuate around the $10,000 figure.
To determine how healthy an association's reserve are, divide the amount of money actually in reserves by the amount that should
be in the account. For example, if on year 5 you have $25,000 instead of the $50,000 called for by your reserve study, you are only 50% funded. If reserves are in the 0-30% funding range, members can expect special assessments. Associations in the 70%+ funding range are considered financially strong and special assessments should be rare. If the reserve account is over-funded
, steps can be taken to bring it back into balance.
. It should be no surprise that healthy reserves increase property values
and improve sales. To comply with the Davis-Stirling Act, boards need
to have a
done every three years with annual updates in between. Associations should use experienced companies
to prepare their studies, including a reserve funding plan
. To improve marketability in their HOAs, boards should then make every effort to raise their reserve funding levels
as quickly as possible. In addition, they should fully disclose
the condition of their reserves.
To encourage better funding of association reserves, the legislature requires that boards develop detailed plans on how they intend to fund their reserves. Funding plans
must be adopted in open meetings and annually distributed to all owners. (Civ. Code §5300(b)(3)
: Associations needing legal assistance can contact us
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