Interest earned by reserve fund could be paid to homeowners

Q: When an association has met its reserve fund, it is reasonable to assume that the money in the fund will be gaining interest. Over a period of time, the fund will increase. Since this increase is from the investment of the homeowners, shouldn't the reserve fund interest be paid out to the homeowners?

A: First, you have to remember that interest earned on the reserve funds is taxable, and Uncle Sam is going to take his share of the interest. Contrary to popular opinion, homeowner associations are not tax-exempt organizations. Being designated a nonprofit corporation in the eyes of the state of Nevada is not the same as obtaining the status of nonprofit from the federal government. Associations do not meet the requirements of the federal government.

Second, a reserve study is a projection of interest rate, inflation rate, current value and future value. Just because your reserve account has reached its goal for this year does not mean it can maintain its yearly goals. The amount of reserves needed fluctuates based upon the economic life cycle of the component parts of the association. You may need that interest rate for years when the projected rate of return is less (look at interest rates on reserve accounts now -- what was 5 percent a year ago may be under 3 percent now). In addition, significant price increases can occur in materials. Increases in gasoline and transportation costs could further add to the cost of roofing materials and, consequently, the estimated cost for replacing of a roof today could be more than what was originally projected a year ago. This is one of the reasons why state law requires reserve studies to be revised every five years and why the state requires associations to review their reserve studies every year when preparing their operating and reserve budgets for the coming year.

Third, having made these comments, an association board can certainly review its finances with its financial advisors (they can be investment advisors or certified public accountants who specialize in associations) to determine if interest earned by the reserve account should be refunded to homeowners. Interest earned would not be transferred to the association's operating account because the manner of computation of the reserves in a reserve study includes the interest earned to offset future expenditures.

Q: I live in a cul-de-sac that is a private road in the county. The other seven homeowners and myself are getting estimates to have a gate installed. I have called several insurance agencies about insuring the gate once it is installed and I was told that we would have to form a homeowners association to obtain insurance. The only purpose for the association would be for the gate's installation and maintenance, insurance and power bills. How do we find the information that we need to create this homeowners association?

A: The state laws pertaining to homeowners associations is known as NRS 116. The creation of an association can first be found under NRS 116.2101, which requires the recording of a declaration executed in the same manner as a deed and by conveying the real estate subject to that declaration to the association. NRS 116.2105, entitled "Contents of Declaration," lists two pages of required contents in the declaration. NRS 116.2107 states that the declaration must allocate to each unit its percentage of undivided interests in the common element, in this case the private street and gate. There are other sections within NRS 116 that would control the association.

If the only purpose of establishing an association is for the installation and maintenance of the entry gate, forming a homeowners association would not be my recommendation. You would find yourselves under too much state regulation than what you bargained for in forming the association. The best recommendation is to seek legal counsel and review the advantages and disadvantages of establishing a homeowners association. The reader should also ask if it is possible just to create an LLC business company where the homeowners have stock and a board to manage the gate and a means by which to fund the gate. Regardless of whether an association or some form of a business is created, the homeowners would have to agree that the entity is recorded against their property and "runs with the property." Right now, the owners appear to be in unity and want to install this gate. But what happens later after the initial set of owners sell their property? It would need to be written into the applicable legal documents that future owners of homes in the cul-de-sac are buying into partial ownership of the entity that owns the entry gate.

Barbara Holland, certified property manager, broker and supervisory certified association manager, is president and owner of H&L Realty and Management Co. Questions may be sent to Association Q. & A., P.O. Box 7440, Las Vegas, NV 89125. Her fax number is 385-3759. Questions may be shortened and are subject to editing.