Pay, Borrow, Assess: Your HOA Capital Improvement Fund - Part I
Many Texas condominium associations or homeowners associations today provide services that were once managed by local governments, everything from valet trash pickup to street lighting. Associations may also maintain any number of expensive amenities that most homeowners cannot afford on their own, as well as provide security, social activities, clubhouses, walking trails, and more.
Eventually, every homeowners association (HOA) or condominium association (COA) has to invest in capital improvements. For new board members, a capital improvement is the addition of a permanent structural change or the restoration of some aspect of a property that will either enhance the property's overall value, increase its useful life or adapt it to new uses. Whether that means installing a new heating and cooling system in your high-rise building, replacing the roof on your clubhouse or upgrading the equipment in your fitness center, you can’t overlook these long-term, big-ticket items. But what’s the best way for your association to pay for them?
Read this first installment of our three-part series on funding capital impromvements in your texas association!
PAY: Use Reserve Funds
Perhaps the simplest solution is to pay for needed repairs or improvements from the collections designed to cover these costs – the reserve fund. In Texas, no specific statutes related to reserve studies or required reserve funding have been formally adopted. Board members of associations are instead held to a rule of “prudent businessman” or “reasonable and responsible” in determining whether they have adequately met their fiduciary duty.
A responsible board member or association should establish a capital improvement budget to ensure that sufficient revenues (reserve funds) are generated to provide for major repairs and replacements. According to the Community Associations Institute (CAI), contributions to a reserve fund are often seen as an extra expense that raise owner annual assessments unnecessarily. However, the repairs and capital improvements that are funded with reserves will need to happen regardless of whether you adequately budget for them or not.
“Best practice is to have at least 10% of your association’s income transferred to your reserve fund,” says David Jandak, vice president of finance at FirstService Residential. “The Federal Housing Authority requires it if you want to be an FHA-qualified building,” meaning that prospective buyers can use FHA-backed mortgages to purchase their home. Meeting this federal qualification can increase the chances potential buyers will select your building or community for their next home.
Associations should base the amount budgeted for the reserve fund on a current reserve study. And since the study should be updated at least every two to three years, you may need to budget for that, too, if you haven’t had an update done in a while. A reserve study identifies predictable capital improvement projects and recommends a plan for funding those projects over several years. Appropriate funding of your reserves depends on the accuracy of your study.
In a recent survey, 36% of Texas association board members like you indicated that they don’t have a reserve study or have never updated an existing reserve study. As a result, most don’t have enough money when they need to undertake necessary work. “The most common reason for this is a lack of information,” Jandak notes. “Many associations aren’t getting updated reserve studies. Their studies can be as much as 10 years old. How can you make good decisions if you don’t have the information you need?”
Make sure your condominium or homeowners association is prepared for 2019. Contact FirstService Residential Texas for a candid discussion about capital improvements, reserve studies, and preferred pricing through our insurance and banking partners.
Keep an eye out for the next installment of this series coming soon!