In the aftermath of the tragic Surfside condominium collapse in Florida, the relevance and importance of Homeowners Association (HOA) reserve funds are shown in a new light. As we piece together the lessons from this unfortunate incident, it becomes abundantly clear that adequately funded reserve accounts are a vital part of responsible HOA management. Here are the most important things to understand about HOA reserve funds and how to properly plan for emergency needs in your association.
What is an HOA Reserve Fund?
An HOA reserve fund is a pool of money set aside by the association to cover the costs of anticipated major repairs, replacements, and improvements in the community. This could include repairing shared roads, replacing roofs on community buildings, updating community amenities, and more. These funds ensure that the HOA can afford to maintain and improve shared assets without the need for sudden, large assessments on homeowners. These funds help the Association to plan for large expenses and to preserve the property values within the HOA.
Calculating HOA Reserve Fund Needs
Determining the right amount for your HOA’s reserve fund requires careful calculation and thoughtful forecasting. All HOAs should hire a reserve analyst to develop a reserve study. The primary elements that a reserve analyst will consider include:
- An inventory of the shared assets that the HOA is responsible for maintaining.
- An estimation of the remaining useful life of each of these assets.
- The projected cost of maintaining, replacing, or repairing these assets.
The reserve study will help the HOA to determine the amount necessary to hold in reserves. An ideal reserve fund should have enough money to cover these projected costs without causing significant financial burden to homeowners in the form of unexpected assessments. If your association is unsure if your reserve fund has adequately saved for future expenses, it is vital to meet with qualified financial planners and an experienced HOA attorney for a complete review. Reserve studies should be updated every 3-5 years.
What HOA Reserve Funds Can Be Used For
HOA reserve funds are specifically meant for substantial, long-term projects, not for routine expenses like lawn maintenance, utility bills, or other operational costs. The key purpose of these funds is to ensure the financial stability of the HOA and to facilitate the smooth management of the community’s common areas and amenities. Reserve funds should be prudently invested, in vehicles that preserve the principal.
Lessons from the Surfside Tragedy
The Surfside condominium collapse in 2021 offers a sobering look at what can go wrong when HOAs neglect to appropriately fund and use their reserve accounts. The condominium, plagued by years of structural issues, failed to adequately address these problems due to a lack of funds. Over the years, the problems compounded and, tragically, resulted in the building’s eventual collapse and the tragic loss of many lives. This incident underscores the importance of proactively addressing maintenance issues and adequately funding reserve accounts to ensure the safety and well-being of all community residents.
The Importance of Legal Consultation for Arizona HOAs
Having an experienced HOA law firm review your current reserve fund strategy and emergency planning is crucial. Legal professionals specializing in HOA law can provide guidance on state requirements, and ensure that the board is meeting its fiduciary duties.
HOA reserve funds play a vital role in the preservation of a community’s integrity and the protection of its residents’ safety and financial well-being. The Surfside tragedy serves as a stark reminder of what can happen when reserve funds are not appropriately managed. We urge all HOAs to reassess their current reserve fund planning and consider seeking legal counsel to ensure they are sufficiently prepared for future needs. Contact our firm today to schedule an initial consultation with our HOA attorneys by submitting your information on our contact us page.
The Brown Law Group shares this article for informational purposes only, and it does not create an attorney-client relationship.