The reserve funding percentage is a crucial metric for evaluating the financial health of a homeowner’s association (HOA). It frequently draws attention from board members, property managers, and residents alike. This article explores what the percent funded level means, why it matters, and how to calculate it using data from a Reserve Study. Understanding this metric can help associations ensure long-term financial readiness and avoid sudden funding shortfalls.
Why Reserve Studies Matter
Before we break down the calculation process, it’s important to understand the role of a Reserve Study. A Reserve Study serves as a comprehensive evaluation of an association’s long-term repair and replacement needs. It outlines major components—roofs, pavement, and elevators—their expected life spans, replacement costs, and recommended savings schedules.
A well-prepared Reserve Study not only helps forecast future expenditures but also includes a funding analysis, such as the percent funded level. This data equips HOAs with the insight to plan for upcoming costs without relying on last-minute special assessments or loans.
What Is the Percent Funded Level?
The percent funded level expresses how well-prepared an association is to meet its anticipated repair and replacement expenses. It compares the actual or projected balance of the reserve fund to the amount that ideally should be saved by a certain point in time, often called the “Fully Funded Balance.”
Put simply, it answers this question: How much have we saved compared to how much we should have saved by now? This ratio is expressed as a percentage and gives a clear snapshot of the financial strength of the reserve fund at a particular point in the fiscal year.
Example Scenario
To better understand the calculation, let’s look at a simplified example:
An HOA has one major asset, which we’ll call Component X.
Component X has a total useful life of 10 years and is currently 5 years old.
The cost to replace it is estimated at $100,000.
Using a straight-line method, the association would ideally save $10,000 each year.
After 5 years, the Fully Funded Balance should be $50,000.
However, the Reserve Fund currently contains only $10,000.
To calculate the percent funded:
This means the HOA is currently 20% funded, signaling a significant shortfall in its savings plan.
Why This Percentage Matters
The percent funded value is widely used across the industry to assess the financial preparedness of an association. It helps predict how likely it is that the HOA will need to impose unexpected special assessments or borrow funds to cover large repair costs.
Here’s a general guideline used by reserve professionals:
Below 30% – Financial position is considered weak
30% to 70% – Funding status is moderate or fair
Above 70% – Reserve fund is in strong condition
100% or more – Reserve fund is fully or overfunded, indicating ideal financial preparation
Lenders, prospective buyers, and reserve study consultants often use this metric when evaluating the fiscal risk and reliability of an HOA.
Think Long Term
One important consideration: reserve fund levels change from year to year. Making budget decisions based on one year’s data may lead to flawed planning. A short-term surplus or deficit does not necessarily reflect the long-term trend.
Board members and community managers should examine the percent funded value as part of a broader, multi-year funding strategy. Even associations that are currently well-funded can face financial stress if they fail to regularly update their Reserve Studies or deviate from their funding plans.
Conclusion
The percent funded level is a vital indicator of an HOA’s financial readiness. It provides valuable insight into whether the current reserve fund is adequate to meet future obligations without burdening homeowners with surprise assessments. By understanding and monitoring this metric through consistent Reserve Studies, associations can make better-informed decisions, promote long-term financial stability, and preserve property values for all residents.