Funding reserves often dominates budgets

MESSAGE FROM THE GRF TREASURER

by Nick Massetti

GRF Treasurer

AHomeowners Association ( HOA) reserve fund is a dedicated savings account set aside to cover the cost of major repairs and replacements on shared community property, like roofs, streets, sidewalks, swimming pools, or building exteriors.

In Leisure World, the reserve fund(s) are typically the largest contributor to a resident’s Mutual assessment, and the second largest contributor to the GRF assessment. Their main purpose is to prevent sudden large costs from burdening individual homeowners with special assessments. It is distinct from the operating fund, which is used to cover daily expenses and regular maintenance costs.

The GRF and Mutual (HOA) boards of directors are responsible for managing their reserve funds. To accurately calculate how much money should be set aside in the reserve fund, the board hires a certified reserve analyst to conduct a “reserve study.”

The reserve study entails a physical analysis of the community, as well as a financial analysis of the related budget. It provides an estimated cost of what components need to be replaced, repaired, or renovated over the next 30 years. It assigns a replacement cost and a number of years before a component is expected to need replacing. The replacement cost is spread over that useful life.

For example, a roof with a 25-year life is saved for at a rate of 1/25th of the replacement cost each year for 25 years. That amount is the annual proportional reserve funding contribution assigned to each component.

Every year the proportional contributions of all the components on the reserve list are added up to determine how much needs to be added to the savings account. That total is usually the amount that is reflected in the yearly budgets. For 2025, in my mutual, reserve funding comprises 27% of the budget costs. Of the much larger GRF budget, 9.2% is dedicated to its 2025 reserve fund.

How the management or mismanagement of reserve funds can impact our assessments will be covered in a future column, along with the unique way GRF actually funds its reserves.