Now is the time for your HOA to prepare for their reserve study. It is essential to conduct these routine assessments and ensure there are sufficient financial reserves for unexpected expenses in their neighborhood community. Unanticipated expenses can include a giant tree falling onto the roof of one of your community's structures, a main water pipe bursting, or any acts of nature causing severe damage making properties and surrounding areas unsafe and unsuitable for your residents. Therefore, it is important to properly plan for these reserve studies to make sure your HOA is allocating enough financial resources to maintain your HOA’s reserve fund to account for these unpredictable disasters. While reserve studies cannot predict future disastrous events, their objective is to check for any potential structural issues or repairs that will need to be fixed in the future. These reserve studies will verify that buildings are up-to-date on safety codes and materials do not lend any potential health hazard for the residents in their community.
However, it is important to remember that your HOA’s operating fund is very different from the reserve fund. An HOA’s operating fund is for routine maintenance and normal upkeep of your neighborhood community. In contrast, an HOA’s reserve fund in many ways is like an emergency fund. Ideally, an HOA reserve fund should be 70% to 100% funded; however, that may not always be the case. It is crucial to conduct a reserve study to establish somewhat of a starting point on how much more needs to be financially met to maintain a healthy reserve account.
It is also critical to keep these accounts separate due to accounting purposes with the IRS. If they are not kept in individual accounts, the IRS can deem the money intended in the reserve fund as taxable income. Therefore, your HOA needs to make sure they are following all the proper guidelines and protocols in setting aside these financial resources for their reserve account; this establishment of an HOA’s fund balance account assists in accounting for every dollar spent and maintaining a clear record of expenditures and deposits in case they are audited.
A reserve study can be conducted by someone within your HOA Management or a third-party company who thoroughly surveys your community’s properties for any wear and tear on interior and exterior repairs and makes observations of potential structural issues that could potentially cause any kind of dangers to the residents of your community.
Atlantic & Pacific Management will ensure these reserve studies are done in a timely fashion. Once these reserve studies have been completed, the HOA can take these findings based on their research to formulate a financial plan on how much should be set aside, invested, or charged to residents to create budgets that will adequately fund their HOA reserve account and ensure their residents are always safe and protected! For a Reserve Fund evaluation, contact our Director of Community Associations at Atlantic & Pacific Management, Dominic, at email@example.com or (858) 672-3100.