Strategizing Your Texas COA or HOA Reserve Fund

Property strategizing the reserve fund is critical for any Homeowners Association (HOA) or Condominium Owners Association (COA). In Texas, while reserve studies are not mandatory, they play a pivotal role in helping board members uphold their fiduciary duty to residents by responsibly investing association dues. Your COA or HOA reserve fund ensures that your community can tackle both near-term and long-term projects without financial strain. Here are a few COA or HOA rules of thumb for strategizing your reserve fund to best support the financial health and stability of your community.

Start with the reserve study

A reserve study is your community's roadmap to financial stability. By breaking down the expected lifespan and replacement costs of shared components, it ensures everyone pays their fair share over time. This foresight helps avoid unexpected expenses and prevents the need for sudden special assessments. Through regular updates and reviews, your association can plan confidently for future needs, maintaining equity and trust among residents.

Why does a reserve study cover a 30-year period when most boards focus on the next three to five years?

The National Reserve Study Standards recommend that reserve studies cover a minimum of 20 years. This long-term planning ensures that major projects are anticipated well in advance. While your association may focus on planning for the next three to five years, having a 30-year reserve study provides a safety net for future projects, promoting stable and equitable funding.

The concept of "fair share"

A key principle behind reserve studies is the “fair share” concept. As amenities are used, current residents' dues contribute to the reserve fund, offsetting the wear and tear over time. This way, each generation of residents pays their “fair share” for the use of community assets, ensuring that funds are available when it's time to replace or repair major components.

Updating your reserve study

When and why to update

Reserve studies should be updated every three to four years (with a site inspection) to remain accurate. Over time, the actual condition of community assets may diverge from initial projections. Here are some key reasons to update your reserve study:

• Current reserve fund balance: Determine if the fund balance is significantly above or below projected needs.
• Completion of capital projects: Reflect completed, deferred, or significantly altered projects.
• Component deterioration rates: Ensure components are deteriorating at anticipated rates.
• Inflation adjustments: Account for changes in repair and replacement costs due to inflation.

Prioritizing projects

• Safety issues: For example, wooden balconies are not waterproof, which means moisture can hinder their structural integrity. This means boards should promptly address updates to wooden balconies for safety reasons.
• Functionality issues: For example, in a high-rise building, if water pumps are not properly pumping water to the upper floors, this may not be a safety issue, but it should be addressed immediately for functionality reasons.

• Aesthetic upgrades: Clubhouse interior renovations or outdated light fixtures don’t necessarily need to be upgraded immediately if everything still functions properly.
• Selective replacements: Instead of replacing an entire playground, only replace parts that pose safety risks, like slides or swings.

Your COA or HOA reserve fund: why consistency matters

Peace of mind

A well-funded HOA or COA reserve fund gives residents confidence that the association can cover unexpected expenses without imposing special assessments.

Market value preservation

Properly funded reserves help maintain the market value of properties within the community.

Equitable cost participation

By consistently funding reserves, all residents contribute fairly to the cost of community assets. This also helps prevent the need for special assessments, which would only impact current residents at the time of replacement.

Determining maintenance vs. reserve components

Regular maintenance

Items requiring frequent attention, such as pressure washing sidewalks or window cleaning, should be included in the annual operating budget.

Reserve components

Costlier items that need eventual replacement, like roofs and mechanical equipment, should be included in the reserve inventory.

Infrastructure components

Older communities should also include certain infrastructure components, like sewers, as part of their reserve fund. They will most likely need more involved maintenance when they reach the halfway point of their expected lifespan.

Communicating with residents about your COA or HOA reserve fund

Effective communication with residents is crucial for successful reserve fund strategy and management. Keep residents informed about changes to the reserve study and the reasons behind project prioritizations. Transparent communication fosters community support and trust so residents know exactly how their dues are being used.

Conclusion: COA and HOA reserve funding strategies

Well-planned COA or HOA reserve funding strategies are essential for enhancing the financial health and sustainability of your community. By conducting regular reserve studies, updating them as necessary, and prioritizing projects effectively, board members can ensure they meet their fiduciary duties while supporting the long-term needs of the community.

For more guidance on managing your reserve fund, consult with your property management company who can assist in finding the best reserve specialist to perform your reserve study. Their expertise can help you create a robust reserve fund strategy that benefits your community for years to come.