–All Somersett owners should now have received a Budget Mailer Package (either by electronic or hard copy media) summarizing the SOA’s 2019 Operating and Reserve Fund Budgets for the General Common, The Club at Town Center and the Streets & Gates assessment areas. So what are some take-aways?
General Common Special Assessment
Per the SOA’s “Notice of Special Assessment” memo contained in the Budget Mailer Package, “The purpose of the Special Assessment is to provide funding for rockery wall repairs in two locations (Gypsy Hill Trail & Timaru Trail and near Roundabout 2) and to bring the reserve funding balance to an acceptable level”. The $1200 Special Assessment will generate approximately $3,762,000 from unit owners plus an additional $90,000 from the Town Center commercial properties. These assessments will be transferred to the General Common reserves to replenish funds spent in 2018 on rockery wall repairs, which will have depleted the General Common reserve fund to an estimated $492,393 by the end of 2018, representing an unacceptable 8.3% funding level. Note that the General Common reserves, prior to 2018, did not address any “Retaining Wall” repair or replacement costs, hence the inadequate reserve funding when they failed.
Operating Fund Budgets
The Operating Fund Budgets summarize the operating expenses incurred by the SOA on a recurring annual basis and the revenue income that funds them. Summaries for the General Common, The Club at Town Center and Streets & Gates assessment areas follow:
Monthly assessments for the General Common area remain unchanged at $92/month/unit with an average of 3125 contributing unit owners. Approximately $81 of the $92 assessment is applied to the Operating Fund and $11 to the Reserve Fund. The 2019 budget estimates $3,437,600 in revenue and $3,248,326 in total expenses. The 2019 operating expenses are approximately $547K under that projected for 2018. Significant deviations from previous budgets include an increase in legal fees for the Rockery Wall lawsuit and no funding for Special Projects.
Monthly assessments for The Club at Town Center (TCTC) remain unchanged at $89/month/unit with an average of 1923 contributing unit owners. Approximately $78 of the $89 assessment is applied to the Operating Fund and $11 to the Reserve Fund. The 2019 budget estimates $2,077,449 in revenue and $2,244,972 in total expenses. The 2019 operating expenses are approximately $318K higher than that projected for 2018. Significant deviations from 2018 expenses include: Administration Costs (+$90K), Maintenance Allocations (+$44K) and Special Projects (+$185K). The Special Projects increase is primarily a result of 2018 budgeted TCTC expansion projects (e.g., pool modifications) moved into 2019.
Monthly assessments for the Streets & Gates remain unchanged at $54/month/unit with an average of 846 contributing unit owners, Approximately $26 of the $54 assessment is applied to the Operating Fund and $28 to the Reserve Fund. The 2019 budget estimates $272,208 in revenue and $272,208 in total expenses, which is $18K under that for 2018, primarily due to the absence of any Special Project.
Reserve Fund Budgets
The Reserve Funds are not as easy to assess as the Operating Funds unless one understands what the “Fully Funded Balance” entries pertain to. Hence,the following discussion:
The Fully Funded Balance (FFB) is a calculated amount which takes into consideration a reserve components replacement cost, useful life and age. The FFB is calculated as follows:
Fully Funded Balance = Replacement Cost x Age/Useful Life
For example if a components replacement cost is estimated at $30,000 with a useful life of 20 years and is 5 years old, the FFB would equate to: 30,000 x 5/20 = $7500. At year 10 the FFB amount would be $15,000 and at year 20 (i.e., end of life) $30,000. What the FFB does is to establish what the reserve funding amount should be such that, at the end of life, repair or replacement costs are fully funded. Note that many of the SOA reserve components are identified with a variable useful and remaining life. How these are used in the FFB calculation is unclear, but basically unimportant, only the result is.
That brings us to the percent funding level, which is the ratio between the actual reserve amount and the calculated FFB amount. For example if, in any given year, the actual amount in a reserve account for a reserve component is $15,000 and the corresponding FFB amount is $30,000 the funding level would be 50%. If this level was continued until end of life, replacement costs would be underfunded by 50%.
What constitutes adequate reserves for an HOA? Since neither Nevada Law nor Industry Standards establish such, it is up to the HOA Board and the opinion of others (paid consultants) to determine. However, as a rule of thumb, A 100% funding level is considered most desirable, above 70% strong, 30% – 70% fair and 0% – 30% poor. Poor funding levels should be avoided as they usually result in special assessments, whereas maintaining high funding levels generally require higher monthly assessments.
The General Common Reserve Study established a 2019 FFB of $5,284,654 along with an estimated year end reserve balance of $2,552,413, representing a 48.3% funding level, which compares to 8.3% for 2018, 76.5% for 2017 and 131.5% for 2016. As mentioned above, the 2018 reserves had been depleted to the 8.3% funding level due to rockery wall repair costs. Hence, the need for the $1200 special assessment which added $3,852,180 along with $400,000 from monthly dues to the reserve fund. Will this be enough to maintain future funding at an acceptable level without another special assessment or monthly dues increase? This given the uncertainties associated with future rockery wall repair costs (e.g., another $3M for Gypsy Hill Trail and Roundabout 2 repairs). Only time will tell.
The TCTC Reserve Study established a 2019 FFB of $2,111,977 with an estimated year end reserve balance of $851,058, representing a 40.3% funding level, which compares to 68.4% for 2018, 76.5% for 2017 and 50.6% for2016.
The Streets & Gates Reserve Study established a 2019 FFB of $2,462,981 with an estimated year end reserve balance of $3,322,970, representing a 134.9%, funding level, which compares to 141.7% for 2018, 134.1% for 2017, and 131.5% for 2016. Since no risks appear to exist with the reserve components, perhaps the SOA Board should consider reducing the Streets & Gates monthly assessment as the reserves appear to be continually overfunded.
Aside from the Streets & Gates, the General Common and TCTC funding levels appear to be trending downward, not a good sign for avoiding increased assessments.