Reserves - What are they?

Why do we have them?

Are reserves important? Not if you believe that you should pay for the maintenance/replacement of equipment worn out by those that go before you. Not if you have plenty of money to cough up whenever work needs to be done on the streets. Not if you are willing to live with a mass exodus of owners, and the lower property values that ensue, whenever a big project is needed.

Our reserve fund is a maintenance and replacement fund. In other words, it is a fund that we keep so that we have the money to maintain our streets, replace fences when need be, maintain the concrete, and replace/maintain other items of our existing capital structure. Each item that we have is listed separately in the fund, along with the expected life, the current age, and the estimated cost of replacement/maintenance at the time that we expect the work needs to be done. Currently we are 100% funded. This does not mean that we could do all of our maintenance tomorrow, but that if we keep contributing the required amount to the fund, the money will be there when we need it.

The way our yearly contribution to the fund is figured, is that for each line item we calculate how much money should be in the fund at this time to be on target. Ignoring inflation, for simplicity in this discussion (though we don't ignore it in the fund), imagine that our fence has a useful life of 10 years. It will cost $30,000 to replace the fence. Our fence is 8 years old. Then, the amount that we should have in the fund would be (8/10)x (30,000) or $24,000. Each year we should put in $3,000 for the fence fund in order to have the $30,000 when it expires. This calculation is performed for every item in the fund (streets, concrete, etc.).

If you look at this example closely you will see what we are doing is charging each owner for the use of the property as it is being used. The amount that you have contributed to the fund is for the wear and tear of the items while you live in Leewood and is carefully calculated so that you are paying your fair share. If you move tomorrow, you will have contributed to the fund for the depreciation of the items while you were living in Leewood. It is a "pay as you go" plan. For example, if you move out, and new owner Joe Blow buys your house, it would be unfair for him to have to pay for the deterioration of the streets caused by your driving on them all those years. Guess what? He doesn't. You have paid for your portion of the streets, and it is in the reserve fund.

Some communities choose not to fund their reserves adequately, or not to have a reserve fund at all. That means that when needed maintenance has to be done, each member of the community must be assessed for their share of that maintenance. It is not unusual for us to spend $60,000 on road repairs. That would mean that each member of the community would be billed over $3,000 for their "share" of the road repairs. Although this might work out for those that have been here a long time, if they kept a nice bank account, it would be most unfair to new members of the community who have not been using those roads. Also, it would certainly be beneficial to sell your house before such heavy ticket items as road repairs were done. This also could make our home prices unstable, as there could be such a glut on the market before such a "special assessment".

It should also be pointed out that it is required to mention special assessments in the resale packet, and mortgage companies ask whether there are any special assessments, and the history of the association with regard to special assessments in determining whether they will loan a buyer money to purchase their home. Special assessments are a red flag to investors. Thankfully, Leewood has never in their entire history had a special assessment. All the boards have been concerned with funding the reserves, though in our early years it was more of a "seat of the pants" estimate that it is now.

Our healthy reserve fund helps you rest assured that there will not be an extraordinary payment that you must make some year. You are able to budget your housing costs without much fear of such things. Could it happen? We can't say there is zero chance that it could, but it would be highly unlikely.

In order for the amount that we have reserved to have any meaning whatsoever, you must insure that you have boards that are diligent in not spending the reserves for anything but what it is meant for. It is not meant for capital improvements, for example, although there is no law preventing the board from using the fund for that purpose. If it were to be used for capital improvements, however, you can see that the amount of money in the fund would be meaningless. If spent for other items than those that are listed, you would have no assurance that Leewood would have the dollars for needed maintenance when the time came.

Be proud of our reserve fund, it is a sign of the stability of our Association!

1999 Reserve Schedule

Below is our end of year 1999 reserve schedule so you can see what I am talking about. I had to break it into two parts as it was too wide for the page.

And, the second part: