HOA Finances: Reserve-Fund Basics 

When you live in a common-interest community like an HOA or condominium, the regular assessments that each owner pays are often divided into two primary types of accounts:
•Operating fund: For day-to-day expenses and the ongoing operating maintenance of the association’s amenities and assets (utilities, insurance, recreational amenities, grounds maintenance, etc.)
•Reserve fund: Savings for capital expenses, including major repairs and scheduled replacement of long-term community elements like roof replacement, road resurfacing and elevator restoration.
Your community’s association is obligated by both Florida Statute and, in most cases, the governing documents to maintain all common-area elements, both in the short-term and long-term. Naturally, most homeowners recognize the need to fund short-term, day-to-day operating expenses like power, water, and insurance premiums. But some may overlook the importance of a long-term reserve strategy. Proper and sufficient reserve savings are prudent because they:
•Ensure that all owners who enjoy the assets over time (up to 40 years) also take an equitable financial role in their eventual repair or replacement.
•Allow the association to take advantage of time and long-term interest earnings, effectively offsetting the impacts of inflation and increasing costs on the inevitable work.
•Decrease the need for special assessments, drastic assessment increases, and/or taking on debt obligations like loans.
Florida Statutes and often the community’s governing documents prescribe the requirements for association reserve funding. For condominiums, this reserve funding is mandatory, with exceptions allowed in only very rare circumstances. For homeowners associations, reserve funding is not yet mandated by law, with certain exceptions.
The basis for funding the reserves in the annual budget is called a reserve analysis. These analyses can be prepared with different methods, including straight-line funding and cost pooling. No single correct method exists for every association, and the association board should consider the long-term ramifications before deciding on any method. It’s difficult to reverse that decision later. Further, for all associations, strict statutory limitations govern what expenses accumulated reserve funds may be used for.
A reserve analysis inventories all of the common elements that would require scheduled repair or replacement, estimates the remaining useful life of the subject element, estimates the total replacement cost of the work to be accomplished, and finally, calculates the amount of money that must be set aside each year to ensure the resources are available in the future. For larger communities with many such elements and for any condominium, a licensed reserve analyst should be engaged to perform this work. A reserve analyst is most often an engineer or a team of engineers who can render an independent, technically proficient and legally defensible report that the association can use to fulfill its reserve obligations.

Our role at Artemis Lifestyle Services is to offer our experience and known best practices to our client board members. Our team of experienced community managers and accountants work closely with the board and their vendors, including legal counsel and the reserve analyst, to prepare prudent budgets that include reserve savings accounts. The Artemis team works closely with the entire marketplace of reserve analysts who provide estimates for these vendors.
A properly funded annual operating budget and reserves are the roadmap to a healthy community, stable assessments for the homeowners, and deterring financial deficits that must be recovered from the homeowners in the form of new assessments. Artemis is ready and eager to help your board fulfill its highest duty, in all regards, at all times.