Post date: Sep 27, 2015 3:15:21 PM

When you pay your annual dues to the Bohicket Landing Home Owners Association (HOA) every year you may wonder what you're getting for your money. As a non-profit corporation and in accordance with the association’s Declaration of Restrictive and Prohibitive Covenants, as well as, the corporation’s By-Laws, the HOA Board of Directors uses your annual assessment to meet the daily and future expenses of the association. This includes the improvement, maintenance, and repair of the community use areas, pay the cost of any insurance needed by the association and its members or officers, pay the cost of any taxes or other expenses levied against the association, and to promote the recreation, health, safety and welfare of the association’s members.

TYPES OF FUNDS

Basically there are three ways in which your HOA dues are distributed to meet the above requirements. This includes; an Operations and Maintenance Fund, a Contingency Fund, and a Reserve Fund.

The Operations and Maintenance Fund is like your household checking account. With the O&M funds, the association pays its everyday and expected expenses. The O&M income and expenses for our association are discussed in detail a little later in this article.

The Contingency Fund is like a savings account. With a Contingency Fund, the association saves money for larger unplanned expenses much like your average household savings account would be used to cover expenses should you have an unexpected repair to your car or a larger than normal utility bill. The HOA contingency funds are used to pay for expenses above the expected budgeted amount. For example, the Contingency Fund would be used for repair damage to the common areas after a storm or to cover any shortages between dues payments. Contingency Funds should only be used for unexpected expenses and not for planned repairs/replacements or savings for improvements.

Most financial institutions recommend that the average household have 2 - 3 months of income on hand for unexpected expenses. Likewise, the HOA should have a similar amount available in its Contingency Fund. Any amounts left over in a contingency fund in a given year would “roll-over” into the reserve fund or be used to lower the annual assessment of all members. A special assessment might be needed if any unexpected amounts exceed the Contingency Fund balance and there is no Reserve Fund.

Reserve Funds are similar to say a Retirement or Christmas Club savings account. They’re similar in that, you know that you’re going to have a large expense in the future, you have an estimate of what that expense is going to cost, and you start saving for it now. Why and how our association should have and use a Reserve Fund is discussed later on.

THE OPERATIONS & MAINTENANCE FUND’S INCOME AND EXPENSES

The Bohicket Landing HOA has 45 lots (46 if the boat ramp area is included but it isn’t subject to assessments) that are required to pay annual dues of $200.00 each. Of those 45 lots, we can expect about 33 to 35 to pay their dues on time and every year. So out of a possible annual income of $9000.00, your association actually only collects on average about $6800.00 on an annual basis. While the association can and has taken legal action to recover those dues that aren’t paid, we know from past experience, and is the case nationally with all HOAs, that after legal fees and other associated costs are deducted, we only recover a small portion of the sums owed. (Note: the Bohicket Landing Board of Directors will likely be pursuing additional legal recourse against those owners who are severely delinquent or long overdue accounts.)

The association’s budgeted expenses amount to about $5000.00 annually. This includes things like routine maintenance & care of common areas, mailing & filing fees, insurance, and attorney or accounting fees. The association budget is presented at the annual members meeting and is available for members to review upon request, but yearly we have a positive balance of about $1800.00.

NEED FOR RESERVE FUND TO COVER UNEXPECTED AND LONG TERM EXPENSES

The balance after all our known expenses are deducted from our annual income is just enough to establish a Contingency Fund (remember we should have about 3 months of our annual income in the contingency fund, so 3/12ths of $6800.00 would equal to about 1700.00 dollars), but we also need to budget for long term, large expenses and establish a Reserve Fund. As homeowners, we all know that our homes require regular maintenance, but no matter how much regular maintenance you perform certain things will still need to be replaced overtime. For instance, it’s likely you’ll need to replace your home’s roof shingles within the next 10 – 20 years. It’s also just as likely every two or three years you’ll need to replace some plants or mulch in your landscaping.

The association needs to budget for similar items. We can expect the front signage (even though a few of our neighbors just recently did an excellent job of repairing and updating it) will likely require repainting and new planting every few years. It’s also likely we’ll see additional long term expenses when the association takes responsibility for the subdivision’s stormwater permit requirements in the future. And as we discussed at the annual meeting, the boat ramp road and launch areas are in need of repair and regular maintenance.

If we estimate the ramp road will need to be resurfaced every 5 years and that it costs about $5000.00 in today’s dollars to do that, then we should be saving about $1000.00 a year in our Reserve Fund to ensure we have enough money on hand to pay that expense in five years. We should also figure that the estimate we get today to repair the road is likely to cost more in five years, so we should add an amount for inflation as well (say maybe 3-5% additional for every year).

We should determine what all of the associations long term expenses are and determine similar annual savings for them as well. Also, if we ever plan to do any improvements to the common areas, then we should budget for them as well and increase the savings in the Reserve Fund for those expected expenses.

These long term expenses are usually defined in what is known as a Reserve Fund Study. In larger HOAs or in communities with substantial common use areas, a Reserve Study is typically conducted by a professional organization. However in smaller communities, such as ours, where the community use property is small and the reserve fund requirements are expected to be somewhat limited, the reserve study can be conducted by the Board of Directors or a committee of homeowners appointed by the Board. The important thing is that a reserve study be conducted and that it be updated periodically, so an appropriate amount can be saved to a Reserve Fund each year.

DUES INCREASES OR SPECIAL ASSESSMENTS

Basically, the association can only start saving in a Reserve Fund account if it increases its income. The HOA currently has just barely enough in the association accounts to cover repairs to the boat ramp for this year, but that is an expense the HOA will likely incur every few years and should be budgeted for accordingly. The association has only two means to pay for this and similar expenses, either via a dues increase or by special assessments.

Any dues increase is an unpopular discussion with members and understandably so, but before immediately rejecting any idea of an increase, please consider a couple of items;

- The Bohicket Landing HOA has not had an annual dues increase since the association took over from the developer in 2010. That’s nearly six years without an increase while our HOA expenses continue to grow.

- Without a regular dues increase (to establish a reserve fund), there is no means for the association to budget for long term care or improvements unless the Board of Directors were to levy a special assessment on each lot.

Personally, I’m not a fan of special assessments. In my opinion, a special assessment means either there was some type of large, unforeseen expense or the Board of Directors is not budgeting properly. Further, a special assessment only covers a single event. With no Reserve Fund established to look out for the HOA’s long term financial health that might mean there could be several special assessments within a short time frame.

In accordance with the Declaration of Restrictive and Protective Covenants, the Board can raise annual assessment dues by 10% without membership approval. Dues can also be increased by more than 10% with membership approval. With the exception of one special assessment in 2014 (to cover additional unexpected expenses of the boat ramp, the previous and current Board has not imposed any increased dues or special assessments. To promote transparency regarding the association’s financial matters, it is much preferred to give the members the opportunity to vote on a dues increase.

The associations by-laws require that in order to enact a dues increase greater than 10%, then 60% of the members in good standing need to vote, either vote in person or by proxy. Then 2/3rds of that 60% would need to vote in favor of the increase for it to pass. So basically we would need about 20 members (60% of the 34 who are current on dues and eligible to vote) to actually vote and then of that 20, we would need 13 members to vote in favor of the increase.

If the board determines it is necessary to increase the annual dues assessment by greater than 10%, all members will be notified as required by Article 6, Paragraph C of the Declaration of Restrictive and Protective Covenants. The purpose of a meeting to raise annual assessment greater than 10% dues will be specifically identified in the notice and members are encouraged to attend and voice their opinions, either in person or in writing.