For a homeowners’ association (HOA) to last long term, its major components, like elevators, clubhouses, and swimming pools, will eventually need maintenance or replacement. The funding for these capital improvements comes from the money set aside in a reserve fund.
An HOA reserve fund is cash saved by a community association for additions to components the association is obligated to maintain and future replacements and repairs that don't occur on an annual basis. Funding a community’s reserves is more than just another budget item—HOA board members must know how to manage their reserve fund successfully so the community has the best chance to optimize the health and wealth of the monies saved. Read on to learn four best practices for managing your reserve fund and the benefits of well-funded reserves.
1. Complete a reserve fund analysis regularly.
A financial analysis is one element of a reserve study. A reserve study, performed by a reserve specialist or reserve analyst, observes the HOA’s property and reserve account and analyzes all foreseeable capital improvements and repairs. In the financial analysis portion of the study, a reserve specialist assesses the current reserve fund status and recommends an appropriate reserve contribution rate.
Some states, provinces, or HOA bylaws require an annual reserve fund analysis. Even if yours doesn’t, it’s imperative to review and replenish your HOA’s reserve fund each year. Ideally, maintain a 20% reserve fund to cover unforeseen expensive repairs. At the minimum, maintain funds to cover the deductibles on HOA insurance policies.
2. Ensure your accounting practices clearly identify reserve contributions.
There are some studies that estimate nearly 70% of HOAs in the United States have underfunded reserves—and that may be due to a lack of transparency. Many communities are in the habit of combining regular assessments and reserve contributions in their accounting. However, by noting each as separate items on your income sheet, boards can see where each account stands more accurately, and homeowners can see where their money is going. Similarly, on the expense side of the accounting equation, make sure your financials include a line item for reserve contributions. This confirms the community always knows how much money is going into reserves—and it proves the board is fulfilling this part of its fiduciary duty.
3. Keep reserve cash in a separate bank account.
It’s easy to pull cash from a checking account. By leaving excess cash in your HOA’s business checking account, you run the risk of borrowing from it when you don’t need to. Instead, transfer your monthly cash reserves to a separate, interest-bearing bank account. That way, the interest collected can help boost the community’s cash reserves.
4. Check in on the interest your reserve fund is receiving.
A healthy reserve balance equips you to take care of needed repair and replacement projects, but it can do much more. As interest rates fluctuate, review your return on interest and connect with your reserves banking partner to inquire about any new, higher reserve interest-bearing programs. While the return and interest rate offered will vary by bank and depend on the account terms and conditions, this could help your community optimize its cash savings.
4 Benefits of Well-Funded HOA Reserves
Creating and maintaining an adequate reserve fund is part of a board’s fiduciary duty. The following are four reasons to keep your reserves properly funded.
1. It shows the board is acting responsibly.
Well-funded reserves demonstrate good stewardship of the association’s money. Homeowners will have peace of mind that the board is acting in their best interest, and their most valuable asset—their home—will be protected.
2. It proves you’re prepared for the unexpected.
Sufficient reserves allow the association to pay for unexpected expenses, like damage from earthquakes, hurricanes, and other natural disasters. If an unforeseen event occurs and necessary funds aren’t set aside, a special assessment may need to be issued.
3. Lenders see your community as a trusted entity.
Lenders appreciate a well-funded reserve because that means an association is less likely to issue a special assessment to cover repairs and replacements or pay an insurance deductible for a natural disaster. Lenders are more confident that their money is used on actual costs, with a very small chance that a buyer will overextend credit lines or deplete cash. Some lenders also assess for indications of financial health when reviewing mortgage applications, and an association with inadequate reserves may be at risk for mortgage denials.
4. It appeals to new buyers.
The overall appearance of a community translates directly into its property value. With appropriate reserves, associations can cover unexpected expenses and community asset replacements, improving resale values, keeping current homeowners happy, and attracting new buyers.
We Can Help You Manage Your Reserve Balance
At Enterprise Bank & Trust, our staff of veteran HOA bankers and industry experts can help you grow your reserve fund. Our reserve balance interest rates are some of the best in the business; plus, we offer a comprehensive array of additional banking products and services that are specifically designed for you.