When it comes to community associations like condominiums, townhomes, or homeowner’s associations (HOAs), having a solid reserve funding plan is essential. These plans ensure that there’s enough financial support for future maintenance and repairs. Let’s take a closer look at various reserve funding plans, each with its own approach, advantages, and considerations.
1. Fully Funded Plan: Aiming for Maximum Preparedness
The Fully Funded Plan is all about being proactive. Using the Component Method, this plan sets out to accumulate funds to cover the depreciation of every component and account in the association. If there are any shortfalls, they are dealt with through special assessments or by using the Catch-Up Period funding method. While this approach offers comprehensive financial security, it might mean higher monthly assessments and the possibility of relying on special assessments, which could impact property values and residents’ satisfaction.
2. Baseline Funding Plan: Striking a Balance
The Baseline Funding Plan adopts the Cash Flow Funding Method, which involves establishing minimum funding levels to cover expenses. The goal is to ensure that the reserve balance never drops below zero during the specified term, usually around 20 years. This plan seeks to balance financial stability with affordable assessments. However, associations need to carefully weigh the risk of underfunding against the benefits of lower monthly assessments.
3. Threshold Funding Plan: Adding an Extra Layer of Security
The Threshold Funding Plan builds upon the Baseline Funding Plan. It introduces a specific minimum contingency threshold amount for the worst year. This buffer of reserves, adjusted for inflation, prevents the reserve balance from falling below the defined threshold. While it provides additional security, the challenge lies in determining the appropriate threshold and effectively communicating the reasoning behind it.
4. Statutory Funding Plan: Guided by Legal Obligations
The Statutory Funding Plan is dictated by a covenant, local statute, or government regulation. It might align with nationally recognized funding plans or have unique requirements. While this plan offers stability, it could limit flexibility in choosing other funding methods, depending on the legal obligations.
5. Modified Funding Plan: Tailoring to Fit Specific Needs
When standard funding plans don’t quite fit the bill, associations can opt for a Modified Funding Plan. This approach involves customizing existing plans to suit specific needs. For example, adjusting a Cash Flow Funding Method to include gradual increases over time can help distribute the financial burden more evenly. Similarly, modifying a Component Method to fund less than 100% of depreciation can balance financial security with cash flow considerations. In conclusion, selecting the right reserve funding plan depends on a variety of factors, such as the association’s financial objectives, property condition, and resident preferences. Working with experts in reserve studies, financial planning, and community association management is crucial to making informed decisions. A thoughtfully chosen funding plan ensures that the association is well-equipped to handle maintenance and repairs without imposing excessive financial strain on residents.