Commission says HOAs are not properly funding reserves

Note: I recently wrote a story about funding reserves for a CAI Nevada Chapter publication. I got permission to publish it in my column.

The Community Associations Institute (CAI) Nevada Chapter is the local branch of the national organization that serves community association living in the Las Vegas area and throughout Nevada. It provides education, resources and networking opportunities for community association homeowners, board members and managers. The chapter was founded in 1990 to support the growing number of common-interest communities in Southern Nevada through educational seminars, workshops, and advocacy. For more information about CAI, contact Christina Snow at info@cainevada.org.

As many of you know, I have been involved with the management of people and real estate properties for more than 50 years. I am also an expert witness in real estate transactions, community managers and association boards’ cases.

It’s budget time again.

Community managers, treasurers and finance committees for hundreds of associations begin to review their finances in preparation for developing a budget. One of the requirements under Nevada Revised Statutes 116.3115 (2b) states that the association shall establish adequate reserves, funded on a reasonable basis, for the repairs, replacement and restoration of the major components of the common elements and any other portion of the community that the association is obliged to maintain, repair, replace or restore.

NRS 116.31152 (1b-1c) states that at least annually, the association shall review the results of its reserve study to determine whether those reserves are sufficient and to make any adjustments to the association’s funding plans, which the board deems necessary to provide adequate funding for the required reserves.

Sounds simple. Sounds direct.

The Commission for Common-Interest Communities and Condominium Hotels meets quarterly. One of its responsibilities is to review alleged complaints and make decisions. In reviewing the complaints and decisions, a very disturbing pattern has appeared.

Associations are not properly funding their reserves.

Cases have involved the following:

Failing to adhere to the requirements to prepare budgets or never doing a reserve study.

Failing to resolve proper funding of reserve funds, by not transferring the amount due from and due to the reserve account.

Failing to reasonably reconcile the amount required to adequately fund the reserves.

Some of the actions taken by the commission are as follows:

The association shall hire a community manager until the association is at least 75 percent funded in its reserves and is current with all of its maintenance obligations.

The association is to adopt a special reserve assessment of $60 per unit per month for five years and shall not lower the special reserve assessment without the approval of the Nevada Real Estate Division.

Update the reserve study and impose a special assessment.

The association shall order an audit and a reserve study within three months, effective the date of this order.

Let’s look at one of the primary failures of an association that is not properly funding their reserves.

Take a good look at your financial report. Often the summary report will report some number under this due from and due to without specifying the details. That will require the treasurer and the board to dive in and look at the supplementary report from the management company to determine what the number represents.

Right now, many management companies have given their community managers instructions to “clean up” the due from and due to their reserve account, partially in response to the commission’s many decisions concerning the lack of proper funding of the reserve account.

How did this happen? One example is where the association had a major improvement that drained significant funds from their reserves.

The problem: No action was taken to begin to refund that improvement, consequently, the due from the operating account to the due to the reserve account was not implemented. In fact, many associations just saw a number on their financial reports without taking any action.

Another example is the reluctance of association boards to increase their monthly assessments to meet their anticipated reserve balances as stated on their reserve accounts.

There are some boards who “pride” themselves for not ever having to raise their monthly assessments. Other boards are hesitant because of their perceived negative reaction from their membership, which could lead to their removal, either at the next scheduled election period or by a formal election removal.

Associations’ governing documents control their percentage increase in assessments, without formal approval by their membership, hence their increase in assessments may meet their normal operating expenses, but not their reserve balances. Each year, their reserves funding continues to decline and their due from and due to increases.

Unfortunately, the direction that some boards take is to delay needed repairs or to just move items, without consulting their reserve specialist, to future years based on the board’s observation that the repairs are not needed now. A perfect example is the street asphalt.

There was one association board that instructed the reserve specialist to remove an item from the reserve study. The reserve specialist was astute enough to realize he needed to have a footnote on his reserve study that the item was missing as the board recategorized this improvement expense under normal maintenance and not reserves.

How does NRS 116.3115 address the funding issue of reserves?

First, NRS 116.3115 (2b) allows for the association to develop a funding plan if the funding plan is designed in an actuarially sound manner, which will ensure that sufficient money is available when the repair, replacement and restoration of the major component are necessary.

The second alternative under NRS 116.3115 (2b) states “notwithstanding any provision of the governing documents to the contrary, to establish adequate reserves pursuant to this paragraph, including, without limitation, to establish or carry out a funding plan, the executive board may, without seeking or obtaining the approval of the units’ owners, impose any necessary and reasonable assessments against the units….” The assessments imposed must be based on the reserve study.

How do you avoid surprising your membership that a major increase due in 2026?

Don’t hide your numbers.

How does your association address the financial report at its board meeting?

For many associations, a motion is just made, seconded and passed to approve the financial report subject to audit. No information is shared either at the board meeting or on the board’s website.

A monthly or quarterly report on the financial health of the association can easily be produced and sent to each homeowner with sufficient information of the financial plan of how the board plans to meet its funding of its operating and reserve accounts.

Not all associations have a finance committee. A finance committee can be developed with specific requirements for those homeowners who would like to serve on the committee. The requirements can be established by the board with the assistance of their accounting firm to allow the board to appoint homeowners with financial background. This committee could review the monthly finances with the board’s treasurer and community manager prior to the report being provided to the full board. By including other homeowners in reviewing the financials help to remove the “mystery” of the association finances.

If your association takes action to communicate on a regular basis to your membership of the financial condition of the association, your board can remove the “surprises” when there is a major increase in assessment or a special assessment specific to the reserves.

The decision is yours unless you want the commission to make the decision for you.

Barbara Holland, CPM, CMCA, AMS, is an author, educator and expert witness on real estate issues pertaining to management and brokerage. Questions may be sent to holland744o@gmail.com.