For simplicity, let’s say your HOA only has 1 reserve item, the roof.
The Reserve Study company predicts the roof will need to be replaced after 30 years at an estimated cost of $30,000. As such, $1,000 needs to be contributed to the Reserve Fund each year to make sure enough has been saved to replace the roof.
After 15 years…
If your HOA has contributed the recommended $1,000 per year to the Reserve Fund, you have saved $15,000 and are considered 100% funded at that point. You have only half of what you will need in the future to replace the roof but you are on track to have enough in year 30.
Unfortunately, your HOA did NOT follow the recommendation and only contributed $500 per year. That means only $7,500 has been saved and you are considered 50% funded. In order to have $30,000 by year 30 for the new roof, your HOA would need to start saving $1,500 per year to catch up. This extra $500 per year will cause an increase in dues.
After 30 years…
It’s time to have the roof replaced. Again for simplicity, let’s say the Reserve Study company was completely accurate in their estimate and the roof replacement is going to cost $30,000.
What if you don’t have $30,000 in the Reserve Fund?
There will need to be a Special Assessment for the difference. Let’s say your HOA only saved $24,000 so far and there are 6 Owners in the building, each Owner will need to immediately pay $1,000 into the Reserve Fund so the HOA can replace the roof.
This is why it’s best to be as close to 100% funded as possible.
But wait, my HOA Manager, Realtor, friend, etc. told me 50% funded is fine and there is plenty of money in the Reserve Fund…
ANYTHING LESS THAN 100% FUNDED MEANS YOU WILL HAVE TO PAY MORE IN THE FUTURE TO CATCH UP.
Let’s use the original example above but now, in addition to the roof, there is a roll-up garage door that needs to be replaced. It’s been 30 years and the roof needs to be replaced. The cost is $30,000 but your HOA has only saved $24,000 for the roof. Where is the additional $6,000 going to come from? Your HOA Manager tells you that there is $6,000 that you’ve saved for the roll-up garage door that can be used to make up the difference. Problem solved… Not so fast! You just took all the money that was saved for the roll-up garage door. What happens when that needs to be replaced?
This is how HOA Managers, Boards, etc. try to justify that less than 100% funded is ok. They can always “borrow” money from other items that don’t need to be replaced yet.
In our example, your HOA is robbing Peter (roll-up garage) to pay Paul (roof). While the underfunded roof replacement is now solved, the roll-up garage door is now underfunded instead. Even if you have 100 different Reserve Items, you will eventually run out of things to borrow from and that’s when a Special Assessment is unavoidable.