Financial Articles
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Customers of IndyMac Bank in California learned the hard way what violating FDIC limits can cost. Clients whose deposits with the failed thrift exceeded FDIC limits of $100,000 for individual accounts and $250,000 for retirement accounts are expected to get just 50 cents on the dollar for the money they held in excess of those limits.

But there is another option currently available named Certificate of Deposit Account Registry Service (CDARS) which gives those whose deposits exceed FDIC limits an easy way to use a single bank to set up multiple accounts at several banks linked in a network. More than 2,250 banks are part of the CDARS service.

A single depositor using CDARS can receive FDIC protection for up to $50 million. Local banks, in turn, hold onto deposits that can fund loans in their community, which appeals to nonprofits and local government agencies with large accounts needing protection.

CDARS is placing about $10 billion of deposits a month, nearly triple its volume a year ago. Banks don't charge a fee for the service, but some do lower the interest rate they pay by a few basis points to cover costs.

Community banks make up the lion's share of the CDARS network, with large regional banks less motivated to participate. Large banks are perceived as being "too big to fail," which can make it harder for small banks to attract deposits. That assumption of safety in size convinces many depositors that it's OK to keep unprotected funds at large institutions. But with a credit crunch that has already consumed $500 billion in bank capital grinding on, that assumption may prove damaging.

How CDRS works: CDARS is a Match.com for banks needing to swap deposit accounts. A bank customer who wants to protect, say, a $1 million certificate of deposit would approach a local bank participating in the CDARS service and negotiate an interest rate. That host bank would then use CDARS to set up CDs with about $91,000 each at 11 banks. Eleven is the number needed to maintain FDIC insurance on that amount once interest is included. And the host bank doesn't need to give up deposits. It receives $1 million in deposits from other institutions, again in blocks under the FDIC limits. This swap process takes place once a week.

Customers receive their usual monthly statement, listing all the banks holding their deposits along with FDIC coverage. Had that same customer placed $1 million at IndyMac before it failed, he would have gotten only about $600,000 back.

By Aldo Svaldi of The Denver Post. A list of banks participating in CDARS is available at www.cdars.com    BACK

Reserving Without Reservation
Federal National Mortgage Association (FNMA aka Fannie Mae) and Federal Home Loan Mortgage Corporation (FHLC aka Freddie Mac) purchase most of the residential mortgage loans lenders make and set the standards those loans must meet. New rules were enacted in 2007 that require lenders to verify every condominium loan made that the HOA contributes at least 10% of its annual budget to reserves.

In HOAs that don’t comply, owners will have trouble refinancing or selling their unit. Boards that have avoided the reserve question in the past will now have to address it. Homeowners associations that haven’t established reserves or funded them adequately will have to do so and all will have to rethink their reserves policies. The elephant in the room is about to take a seat at the table.

Here are some best practices to consider:
You Need a Plan. Homeowners associations need a plan for funding and managing their reserves, and the first step toward creating that plan is to commission a reserve study. A reserve study will identify all the major common element components, estimate their useful life, and project the cost of repairing or replacing those components when the time comes. The goal is to make sure that when it’s time to replace the roof or the HVAC system, you will be able to pay for it out of reserves rather than obtaining a bank loan or levying a special assessment on owners.

The reserve study should have two components – the useful life and replacement cost projections and a condition survey – a detailed physical audit of the property that provides a real-time picture of where it is today, indicates how various components are aging, and recommends maintenance priorities.

Update it Annually. Even the best reserve study has limitations. While it predicts likely life spans and replacement costs, it can’t guarantee either one. A reserve study is based on assumptions that change over time. The climate, weather, soil conditions, maintenance, design and construction quality play a role in the aging process, causing some components to age more rapidly or slowly than expected. The financial climate is also variable. Investment earnings and the inflation changes from day to day. To keep the reserve study accurate, industry experts recommend that you update it annually.

How Much Do You Need? The reserve study will estimate how much is needed to pay for future projects and when the funds will be needed. Fannie Mae and Freddie Mac want to see a minimum of 10% designated for reserves in the HOA’s budget. But that formula will produce different results in different communities since common elements vary. For the typical garden style condominium, it is necessary to reserve 25-35% of the annual budget to meet future needs. So, while 10% is better than nothing, you should follow the funding recommendations of the reserve study which will likely be much higher.

Communicate with Owners. For HOAs that are not currently contributing enough to reserves, the solution is to start contributing more by increasing the fees. Since fee increases are unpopular, the board can point out that new mortgage lending requirements are driving the need. In other words, besides the practical considerations, there is no choice. Owners must fund the reserves because it will be difficult to buy, sell, or refinance a unit in the community if they don’t. So, once the reserve study has been produced, send all members a copy of it and encourage them to read it. Hold a special meeting and invite the reserve study provider who produced the study to explain it. Make sure owners understand how the reserve funding schedule was calculated. Emphasize the direct correlation between the HOA’s level of reserves and property values. It is not just lenders that will be scrutinizing the HOA’s finances; savvy buyers will be scrutinizing them as well.

Don’t Commingle Funds. Reserves are intended to finance the repair and replacement of commonly owned components and should be kept in a different account than operating budget funds. They should not be used to pay for repairs that are part of ongoing and routine maintenance which should be paid out of the operating budget.

Develop a Reserve Investment Plan. In addition to establishing a reserve fund, boards should invest that money safely and productively. Usually, investing in Certificates of Deposit (CDs) is the way to go. Make sure not to invest more than $100,000 with one FDIC insured lender.

Most state laws don’t establish specific investment standards for homeowner associations and governing documents typically give the broad investment discretion. Boards should develop a written investment policy that defines the HOA’s investment goals, establishes the objectives against which the investment performance will be measured, and identifies the boundaries within which investment selections will be made. Some important ingredients of the investment plan include:

• Keep the reserves safe.

• Preserve earning power (choose investments that match or exceed the inflation rate if possible).
  Ensure that reserve funds are available and accessible when they are needed.

• Consider working with an investment professional.

• Remember that the board is investing "other peoples’ money". Define the HOA’s investment risk tolerance levels accordingly.

• Document the board’s investment decisions in meeting minutes.

• Diversify the investments.

• Maintain reasonable liquidity. A small portion of the reserves (about 5%) in cash for emergencies; another 10-15% in short term (six months or less) securities; with the rest spread among varied investments with varied maturities. Use your reserve study event schedule as guidance.

• Review your investment strategies annually to make sure they still match your near-term and long-term financial goals. Don’t let cyclical changes in the market alter your investment perspective, which should remain long-term.

The HOA’s approach to reserve planning should reflect a similarly long-term focus on the community’s financial health. Maintaining adequate reserves has always been part of the board’s fiduciary obligation to preserve and protect the investment owners have made, individually and collectively, in their community. The new FNMA and FHLC rules haven’t created that obligation, but they will force boards and HOAs that haven’t done so to make reserve funding a priority and act on it.

By Nena Groskind of CondoMedia    BACK

Budget for Success
Every homeowner needs a well crafted and updated annually budget to calculate the fees to be paid by the members. For most HOAs which have a fiscal year starting in January, the fall prior to that is budget review time. This is an exercise that should happen every single year without exception because costs change every year. Failure to recognize that reality will put the HOA deeper and deeper in the hole. There are number of areas that every budget review should include:

Historical Operating Expenses. Examine the most recent 12 months’ expenses to determine your base for each expense line item. Scrutinize line items that are larger than normal to determine if there was an anomaly that is not likely to repeat the next year. If so, adjust that item downward.

Anticipated Increases. Utility costs typically increase every year. Contract services also are subject to increase. Call your utility and service providers and ask them if there will be an increase in the coming year.

Contingency. HOAs often experience unforeseen expenses. Add 5-10% of the total budget to cover this.

Revenue Shortfall. It is common to a certain number of members in collection. Add a historically realistic line item to cover this.

Reserve Funds. Every HOA should set aside funds for future common element repairs and replacements. As of 2008, both Fannie Mae and Freddie Mac (the entities that underwrite most home mortgages) require a minimum of 10% of the condominium annual revenues be dedicated to reserves. For HOAs with little common area or few common elements, 10% may suffice but condominiums often need 25% or more of the annual budget dedicated to this purpose. Only a reserve study done by a qualified professional reveals the answer. For a list of professionals that hold a PRA (Professional Reserve Analyst) credential, the highest available in the industry, go to www.apra-usa.com

Some boards fail to raise HOA fees each year because:

Some members are on fixed incomes. While this is true in virtually every form of housing, the board needs to remember that every member’s property is affected negatively if repairs and maintenance are deferred due to lack of money. The truth is that some homeowners may have reached a point where downsizing makes sense. And unless the board gets the other members’ consent to subsidize the members who don’t have enough money, the response to those that can’t pay should be "we sympathize but the budget needs to be adequate to maintain the common elements." The board that keeps the budget artificially low for this reason bears personally responsibility for the consequences.

They don't want to look like bad guys. The board is elected to run the HOA like a business. It takes money to run a business properly. While no one wants to pay more than it costs, few members are naive enough to think costs don’t go up each year. The board that ignores reality is personally responsible for the results.

They disagree with the reserve study provider’s recommendations. While it’s possible that a reserve study may be flawed, few board members are qualified to perform one so the board needs to be careful in dismissing recommendations that call for more money to be put into reserves. The average condominium should be setting aside 25-35% of the annual budget to address reserve needs (and more if the funding level is low). If less than that is being reserved, it increases the likelihood of a special assessment which inevitably falls on members that shouldn’t have to pay it and on others that are financially unable to pay it. Reserves are best funded monthly, in the case of condos, or quarterly, semiannually or annually in the case of homeowner associations which have modest reserve needs.

HOA fees need to match neighboring HOAs. The financial fingerprint of each HOA is unique...no two are alike. The budget needs to be based on the specific services required to maintain the operation and reserves, not what the Joneses are doing. The Joneses may be headed for disaster. Even similar HOAs can have very different financial requirements. Some have higher insurance premiums due to prior claims. Some have funded their reserves appropriately, some are catching up, and some haven’t even started yet. Some take care of repairs on a pro-active basis and some have deferred maintenance. Some have earthquake insurance, cable TV and internet access and some don’t. In other words, the "HOA fee" doesn’t include the same costs in all complexes so comparing the bottom line without knowing what created it is meaningless. Your HOA fees should be based on specific needs, not the neighbor’s.

What about cost cutting? Most HOA expenses are not discretionary but there are some areas with great potential for savings, such as:

Insurance. Increasing the insurance deductible lowers the premium. However, if this is done, there should be an Insurance Deductible reserve spread over, say, three years to cover at least one claim. If no claims are filed during the three years, the money is saved.

Landscaping Renovation. Older HOAs often have vast turf areas which are very expensive to maintain. Replacing turf areas with planting beds filled with drought resistant plants and bushes can dramatically reduce costs.

Lighting. Compact fluorescent bulbs use 70% less energy and last years longer than traditional incandescent bulbs. They usually work with existing fixtures and the brighter light they cast enhances security.

Heating & Air Conditioning. If the HOA provides central heating and air conditioning, it is often worth installing new energy efficient equipment. Your utility company usually can provide you a cost/benefit analysis. The older your existing equipment, the faster the payback.

Hot Water Heating System. The same cost/benefit approach applies to central hot water systems. Investing in new equipment can often pay back in only a few years with the energy costs savings.

Pool Solar Heating Equipment. Pool heating costs can easily be one of an HOA’s biggest expenses. Solar hot water heating equipment can substantially reduce energy costs.

Add Natural Lighting. Common areas can often benefit from devices like Solatube www.solatube.com which capture, concentrate and focus sunlight into dark interiors, reducing the need for electric lighting.

As the Green Revolution expands it’s footprint, there are more sustainable energy saving alternatives to consider. Some are low tech and some are higher than high but all are designed to stretch your dollars. For more energy saving and cost cutting information, see US Department of Energy website at http://apps1.eere.energy.gov/consumer

In the final analysis, the board is charged with running business in the best interest of all members. Sometimes that means ruffling a few feathers. But the board has the fiduciary duty to set the HOA fees at a level that is adequate to cover realistic operating and reserve expenses. Budgeting for success means planning, leadership and execution.    BACK

Collections During Tough Times
Slow housing sales and tight financial markets create challenges for some homeowner association members to stay current with mortgage payments and HOA fees. Compounding these difficulties, some HOAs are facing large special assessments to fund construction defect litigation or to repair aging buildings. For these homeowner associations, there are tools available to reduce the financial impact of collections in tough times, such as:

Be Prompt with Collections. Act early to address past due accounts. Along with mailing a late notice on the 10th, make a courtesy phone call to inquire if there is a problem because payment hasn’t been received (it could just be an oversight.) At thirty days past due, a letter should be sent which includes the amount due, late fees and consequences for failure to pay (attach the Collection Policy). At sixty days, a ten day demand letter should be sent advising that the account will be turned over to an attorney for collection if payment is not received. If the deadline passes, the account should be sent to the attorney immediately. The goal is to get the attention of a delinquent owner early when the debt is still manageable.

Be Consistent. Observe the time deadlines rigidly. Collection of assessments must be a top priority. Advise the debtor how much you want, when you want it by, what will happen if they do not pay, and follow through. Don’t play favorites. The consequences should apply to one and all.

Pay Close Attention to Foreclosure Notices. Second mortgage holder liens are inferior to the association’s lien so the association’s lien cannot be extinguished with the foreclosure. However, the mortgage holder and the foreclosing servicer often need to be educated by providing them relevant portions of the governing documents and applicable statute.

Bankruptcy Filings. Bankruptcy does not always mean the HOA will not get paid. In a Chapter 13 bankruptcy, attending the meeting of creditors to voice concerns over the hardship caused to the homeowner association may convince a bankruptcy trustee to approve a repayment plan to the HOA.

Follow Federal Fair Debt Practices Collection Act. Although HOAs that collect their own debts are not subject to the Federal Fair Debt Practices Collection Act (FDCPA), management companies and attorneys that do substantial collection work are.

Bad Debt Contingency. During a poor economic climate, a bad debt contingency fund based on past history may save a lot of stress for the board.

Be Reasonable. Don’t put owners further in the hole by slapping them with huge late fees and penalties. It is likely a court would deem those fines unreasonable if challenged. If an offer is made to consider reduction of late fees, interest, or other collection penalties in exchange for payment in full, the board should seriously consider such an offer. The alternative may be a bankruptcy and/or foreclosure where the HOA is likely to get less, and perhaps nothing at all.

Short Sales. In a short sale, the sales price is not enough to pay all creditors who have liens. In these situations, the Realtor or workout consultant negotiates with the creditors asking for a reduction in the dollar amount of their claim to allow the sale to go through. These requests should be seriously considered as they are usually done in a situation where the seller is facing a bank foreclosure. For example, the homeowner association might forego late fees and interest and still be paid on the outstanding assessment and collection costs. It is also possible to negotiate with the owner for a payment plan secured by a promissory note. However, a promissory note can be extinguished if the seller files bankruptcy at a later date, and it will not be secured by a lien on the unit.

While tough times often increase the number and amount of past due accounts, those HOAs that follow these good collection practices will have better success. Be flexible and responsive. A better day is coming.

By attorney Karna Gustafson of Landye Bennett Blumstein LLP     BACK

Creating a Nest Egg
Federal National Mortgage Association aka Fannie Mae and Federal Home Loan Mortgage Corporation aka Freddie Mac purchase most of the residential mortgage loans lenders make and set the standards those loans must meet. New rules were enacted in 2007 that require lenders to verify every condominium loan made that the HOA contributes at least 10% of its annual budget to reserves.

In HOAs that don’t comply, owners may have trouble refinancing or selling their unit. To ensure that this doesn’t happen, boards that have avoided the reserve fund question in the past will now have to address it. The elephant in the room is about to take a seat at the table.

Here are some best practices:

You Need a Plan. Homeowner associations need a plan for funding and managing their reserves, and the first step is to commission a reserve study. A reserve study will identify all the major common element components, estimate their useful life, and project the cost of repairing or replacing those components when the time comes. The goal is to make sure that when it’s time to replace the roof or the HVAC system, you will be able to pay for it out of reserves rather than obtaining a bank loan or levying a special assessment on owners.

But keep in mind that even the best reserve study has its limitations. While it predicts likely useful life spans and replacement costs, it can’t guarantee either one. A reserve study is based on assumptions that change over time. The climate, weather, soil conditions, maintenance, design and construction quality play a role in the aging process, causing some components to age differently than expected. The financial climate is also variable. Investment earnings and the inflation changes from day to day. To keep the reserve study accurate, industry experts recommend (and state statutes often require) that the reserve study be updated annually.

How Much Do You Need? The reserve study will estimate how much money is needed for future projects and when the funds will be needed. Fannie Mae and Freddie Mac want to see a minimum of 10% designated for reserves in the budget. But that formula will produce different results in different homeowner associations since common elements vary. For the typical garden style condominium, it is necessary to reserve at least 25-35% of the annual budget to meet future needs. So, while 10% is better than nothing, you should follow the funding recommendations of the reserve study which will likely be much higher.

Communicate with Owners. For HOAs that are not currently contributing enough to reserves, the solution is to start contributing more by increasing the monthly fees. The board can easily justify the increase by pointing out the new mortgage lending requirements. In other words, there is no choice. Owners must fund the reserves because it will be difficult to buy, sell, or refinance a unit if they don’t. Once the reserve study is completed, provide owners with a copy and encourage them to read it. Hold a special meeting and invite the reserve study provider to explain it. Make sure owners understand the reserve funding schedule and emphasize the relationship between the reserve level and property values. It is not just lenders that will be scrutinizing the HOA’s finances. Increasingly savvy buyers will be scrutinizing them as well.

Don’t Commingle Funds. Reserves should not be used to pay for ongoing maintenance and repairs. Those should be paid out of the operating budget. Reserve funds should be kept in an account separate from operating funds. Typically, the portion of HOA fees earmarked for reserves is swept each month into a separate account. Only reserve related expenses should be paid for out of this special account.

Borrow Reserves Funds Carefully. Only borrow from reserves in an emergency or because of seasonal high expenses (like the insurance premium comes due early in the year and not enough fees have accumulated yet to pay it). If you must borrow, document the board vote approving that decision, establish a reasonable repayment plan and stick to the plan.

Develop a Reserve Investment Plan. Reserve funds are typically placed in FDIC insured savings accounts, money market accounts and Certificates of Deposit. Most state laws don’t have specific reserve investment standards for homeowner associations. The governing documents usually give the board investment discretion. Boards should develop a written investment policy that defines the investment goals, establishes the objectives against which the investment performance will be measured, and identifies the boundaries within which investment selections will be made.

The investment policy should include:

• Keep the reserves safe (don’t risk the principal).

• Preserving earning power (choosing investments that at least match the inflation rate).

• Ensure that the funds are available when they are needed.

Other issues to consider include:

• Consider working with an investment professional.

• Remember that this is OPM (Other Peoples’ Money). Tread carefully.

• Document the investment decisions in meeting minutes.

• Diversify the investments (savings, CDs, etc.)

• Focus on liquidity. Industry experts recommend holding 5% of reserves in cash for emergencies, another 10-15% in short term (six months or less) securities and the rest spread among varied investments with varied maturities.

• Don’t overlook the earnings potential of your operating funds. If they aren’t in an interest-earning checking account, they should be.

• Review your investment strategies annually to make sure they still match near and long term goals. Don’t let cyclical changes in the market alter the investment strategy which should remain long term.

Some boards may perceive the new Fannie Mae and Freddie Mac requirements as an unwelcome burden. But maintaining adequate reserves has always been part of the board’s fiduciary duty to preserve the investment owners have made. The new rules haven’t created that obligation, but they force boards that haven’t done so to make reserve funding a priority.

Excerpts from an article by Nena Groskind of CondoMedia     BACK

Regular & Adequate
Overseeing a homeowner association’s finances to ensure proper maintenance of the common elements is a fundamental responsibility of the board. Following a properly prepared reserve study is a big piece of that puzzle. But how does the board know how much money to set aside in reserves each year? A reserve study identifies all the building and ground components that are the HOA's responsibility to maintain, measures each of them, assesses their condition, projects a useful life and repair or replacement costs. When this information is projected out over 30 years with an inflation factor, it provides the board with a road map to follow for the funding and a schedule for reserve events.

Different boards have used various reserve funding methods including regular and adequate assessments (usually monthly, quarterly or annually), less than adequate assessments, special assessments, borrowing money or a combination of these options. All funding methods are not all created equal. Funding reserves by regular and adequate contributions is the only fair way to fund reserves.

Special assessments penalize those that have to pay them since former owners were able to use and enjoy the amenities without adequately contributing to costs. Bank loans carry high interest and fees and the HOA must act like a bank for years to collect payments from owners to repay the loan. Collecting regular and adequate assessments, each owner contributes his fair share based on the length of time of ownership. And with regular and adequate contributions, the HOA will always have the money it needs without borrowing or special assessments.

Special assessments affect current owners regardless of the time in ownership. Moreover, if owner approval is necessary to pass a special assessment, a majority may vote "no" (and often do) for self-serving or legitimate inability to pay reasons. If this happens, the board's hands will be tied and necessary, possibly urgent, repairs may go undone for lack of funds. Deferred maintenance always leads to increased costs. For reasons of fairness and collection difficulties, special assessments should be avoided at all costs. Regular and adequate contributions are the solution.

When new board members inherit inadequate reserves and deferred maintenance, a professional reserve study is a great way to assess the overall situation in detail. A reserve study provides an objective evaluation by a trained professional of the common elements. With this ammunition, the board can educate the membership of the need to fulfill:

1. Legal requirements of the governing documents.
2. The board’s fiduciary duty to current and future owners.
3. The current requirements of mortgage underwriters like Fannie Mae, FHA and Freddie Mac.
4. State statutes.
5. Common sense.

In summary, the goal of adequately funded reserves is to provide for the planned repair and replacement of common elements at recommended interval, to distribute the costs equitably among all owners, to eliminate the need for special assessments and to preserve and protect the value and livability of HOA and member property. It is a noble but doable charge. Go and do likewise.     BACK

Life Blood Infusion
Assessments are the life-blood of homeowner associations. Without the continuous infusion of funds, HOAs suffer the same fate as an individual suffering a heart attack. So, every HOA needs a cohesive and consistent collection process to thrive.

Whether they realize it or not, all HOAs have a collection philosophy. Some do it haphazardly, others consciously adopt a philosophy which fits the homeowner association. Collection philosophies run the gamut from "HOAs are businesses and must be run like businesses" to "collections are messy; if left alone, the members will eventually pay voluntarily" (Ha!).

One approach to developing a collection philosophy is to prepare a Total Quality Management (TQM) style mission statement. It might look like this:

1. We want to collect as close to 100% of assessments as possible.
2. We believe in clear and regular communication with delinquent members.
3. The process should provide for graduated penalties for late payments.
4. The procedure must be written.
6. The procedure must be enforced in a consistent and uniform basis.
7. Members must be treated with respect throughout the process.

The centerpiece of an effective collection process is an administrative resolution enacted by the board and distributed to all members. Its purpose is simple: to communicate exactly what actions the HOA will take to pursue collections.

A Collection Resolution should include:

1. Assessments are due on the first of the month.
2. After ___days, late charges of $ ___ apply.
3. Balances due over 30 days will be assessed ____% per month.
4. A Notice of Intent to Lien is sent to members more than 30 days delinquent.
5. A lien will be is recorded against any member more than 45 days late.
6. Assessments will be accelerated to end of fiscal year (if allowed in the governing documents) for delinquencies of more than 3 months.
7. Property foreclosure will be processed for delinquencies of more than 4 months.
8. After institution of foreclosure action, all payment plans or settlements require board approval.

Enforcement Mechanics
Notice of Intent to Lien. It serves as both a warning regarding the lien if debt is not paid by a certain date.

Lien Recording. It secures payment of the delinquent assessments. The preparation, recording and service of the lien is best handled by a qualified attorney who needs this essential information:

1. Member’s property legal description
2. Mailing address for owner of record
3. Tax identification number of the property
4. A statement detailing amount owed, late charges, interest charges and any payments made.

Acceleration of Assessments. Some governing documents provide the HOA with the right to accelerate the balance of the fiscal year's assessments in case of default. If the collection process is designed to provide increasing sanctions for delinquencies, like when a four-month delinquency exists).

Foreclosure of a Lien. Some boards prefer to wait until a certain minimum dollar amount of delinquency has been exceeded. This approach can create problems particularly where partial payments have been accepted. It is recommended that foreclosure action be started after a specific number of months of delinquency has passed rather than a dollar amount. Foreclosure actions require the assistance of a knowledgeable attorney.

Collection of Deficiency Judgments. In some circumstances, there may be insufficient equity to pay off the HOA’s debt and foreclosure may not make sense. The alternative is pursuing a deficiency judgment against the member. Getting a judgment does not automatically translate into payment. The judgment must be collectible by garnishment of wages or bank account or by attachment of non-exempt personal assets.

Enacting a comprehensive Collection Resolution and adhering to it on a consistent basis is the best hope for a homeowner association to minimize uncollected assessments. Keep the life blood pumping in your HOA.  If this pump runs dry, it will be difficult to bring the patient back to life.   

From an article by John A. Stevens of Matheson, Parr, Schuler, Ewald & Jolly, LLP  BACK

Measuring Reserves Adequacy
Each homeowner association requires a different amount of cash in reserves to perform the anticipated projects on time without requiring special assessments or loans. In addition to the difference in HOA types and ages, when one also considers the difference between reserve plans and reality, measuring reserves adequacy can be a shot in the dark. But an HOA's risk of having adequate reserves can be measured if the right kind of ruler is used.

Winston Churchill said "Saving is a very fine thing, especially if your parents have done it for you!" But how much "savings" does it take to provide an adequate level of comfort? A reserve cash balance that is adequate for one HOA is not necessarily adequate for another. But if actual reserves on hand are compared to current reserve requirements, a relative measuring scale called Percent Funded can be established. This measuring scale allows us to measure how well a reserve fund fits and meets reserve needs.

Large homeowner associations with many common area components have high reserve fund requirements. Conversely, HOAs with a few common area components have smaller reserve fund requirements. You can convert reserve information into numbers by multiplying the current cost of each component by its fraction of life "used up". The result of this computation is called the Fully Funded Balance.

On the table below, for an HOA 0% - 10% Funded, there is more than a 50% chance that the there will be inadequate cash to perform its anticipated reserve projects. This will trigger a dreaded special assessment. The higher the Percent Funded, the smaller the risk.

An ancient Chinese proverb states: "Forecasting is difficult, especially about the future." Every Reserve Plan is destined to be inaccurate, since future events are out of our control and never happen as planned. HOAs that have a weak reserve cash balances run a higher risk of special assessment as their Percent Funded drops. Setting a goal for a strong Reserve Fund provides a margin for protection when reserve expenses are higher than expected or earlier than expected.  
By Robert M. Nordlund, P.E.  BACK