When anyone who has been a member of a Homeowner Association Board knows that things will wear out and, unanticipated expenses will occur. In general, there is no way to predict the future. For this reason, it is important that any Homeowner’s Association do a reserve study which consists of a careful analysis and a prediction of future happenings.
A reserve study is considered a special plan used by people in an organization who can anticipate and prepare for the necessary expenses. These expenses will be encountered in repairing and replacing necessary things in the common area or other operations connected with the association. It provides for the establishment of funds to take care of these occurrences in a timely manner. By putting money into this special allocation, it is simple matter to take care of these problems.
In the everyday world, one will often find these neighborhood Homeowner’s Associations. These associations have a Board that collects monthly fees from the homeowners. This money is put into a special reserve fund that takes care of any replacements or repairs needed in the common area. This relieves the homeowner the burden of a sudden huge payment out of pocket.
Businesses using this method find that the expenses to this reserve do not take a drain on the company’s cash flow when these things occur. This fund should be directed for this purpose only. Special emergencies often require a special assessment. This is a very sound business decision.
An association or business must make advance planning in anticipation of things which naturally occur over time, such as deterioration. Not doing this will create a financial emergency, which, in the case of homeowners, would be a special assessment. If this occurs there cannot only be hardship on the people involved but also be disastrous to the association.
A Homeowner’s Association, in particular, must do very careful advance planning. If this is not done when something such as deterioration of some physical assets occurs there is no recourse but to declare an emergency and special assessment. This is disastrous for those responsible and for the association itself.
There is a great responsibility on the Board members of an Association. They are corporate officers and, as such they not only have a legal responsibility but a moral one as well. Being aware, and planning for, the deterioration or needs of the common area, will allow the association assets to be maintained and result in secure budgets and congeniality relationship with the homeowners.
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