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FULLY FUNDED RESERVES

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.

Funding Levels. 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.

Property Values. 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 reserve study 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.

Funding Plan. 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), §5560(b).)

ASSISTANCE: Associations needing legal assistance can contact us. To stay current with issues affecting community associations, subscribe to the Davis-Stirling Newsletter.

Adams Stirling PLC