Click History for a list of changes and updates.
__This subject was included in the post, 2008 MOA&PCC Financial Results. Because of its importance concerning keeping MOA a viable organization, a separate post is created for further discussion and comments on Reserve Fund — more descriptively the Preservation Fund. The continuation of this post provides that additional discussion and will be updated with any new information concerning this important concept.
Don Nordeen
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- Key Words:_ Accounting Principles and Issues; Financial Information, General; MOA Operations, General/Total; Reserves for Capital Repair [Preservation Fund]
Why is the Preservation [Reserve] Fund Important? (continued)
Why is the Preservation [Reserve] Fund Important?
__This fund sets aside cash and cash equivalents for future capital repairs, replacements and renovations (RRR) to ensure that the funds are available when needed for such capital expenditures. Accordingly, it is a restricted fund — to be used only for the stated purposes. This fund has many names in use and in the literature. The accounting term is "reserve" because cash is "reserved" for the restricted purpose. An analysis to estimate the future capital expenditures is typically called a reserve study. MOA's CPA uses the term "Replacement". As I have studied this issue further, I have adopted to the term "Preservation Fund" (or possibly "Asset Preservation Fund") because it is the most descriptive for the general public.
__In a private business or even in a publicly-traded corporation, the same needs for asset preservation exist. The management can decide to set the cash aside for such future capital expenditures, or might decide that the capital expenditures would be financed with new loans, or a combination. The obvious question is why doesn't a similar policy work for property owners associations (POAs)?
__The simple answer is that the owners/members decide whether or not to make the capital expenditure to preserve the assets, not the management of the POA. If the members decide not to pay for the required capital expenditure, the assets will just deteriorate as occurred at Michaywé during the 1980s and 1990s when the developer refused to make the necessary capital expenditures.
__Run-down and tired facilities have an adverse effect on the community, property values, and attractiveness of individual residences and the community as a whole. To have confidence that the asset preservation expenditures will be timely made, owners must commit to one another to set aside the required funds. It is all part of the interests of the owners/members being inescapably intertwined with one another. At Michaywé, this commitment by members to one another is unlikely to occur without a New Bargain defining how the recreational facilities will be operated and maintained. That New Bargain will likely have to be based on fundamental fairness too obtain the broad support for defining a New Bargain.
__See the post, Reserve for Repair, Replacement and Renovation, for a further explanation including a table showing the numerical reserve study. A column showing the expenditures required in the 2006-2010 time period has been added as an indication of status.
Other Posts on Preservation Fund
__All of the posts that involve the Preservation Fund are included in the category, Reserves for Capital Repair [Preservation Fund], in the left column. The posts for which the Preservation Fund is the principal subject include the following:
- 2009 Mar 11 — Accounting for the Reserve [Preservation] Fund — This post is my 2008 Dec 13 email to Vice President Kirk Yodzevicis concerning a possible misuse of $80,000 from the preservation fund (reserve for repair, replacement and renovation) which occurred in 2007. This shortfall of deposits into the preservation fund is reported in the 2007 audit report as described in the email. After three months, there is still no reply.
- 2008 Jul 24 — Preservation of MOA's Assets — One of the major obligations of MOA through its board of directors is the preservation of MOA's assets. The quality and appearance of the assets provides an important indication of the well being of the Association. Wear and tear are inevitable. Assets in need of restoration are an obvious indicator of the financial health of the Association and poor management by the board of directors. This post provides the parts of the 2005 preservation study for the items identified for RRR in the 2006-2010 time frame. It seems clear that the current board has decided not to take any action on preserving the assets, even though the board made a report in 2006 stating that the estimates were on the low side, items were omitted from the study, and the preservation fund had a major shortfall.
- 2006 Feb 27 — Reserves and Fiduciary Duty — This post is an email sent to the MOA Board of Directors concerning reserves and fiduciary duty. The email references an Illinois case in which the reserves were allegedly not maintained and disclosed to members as required in the governing documents. The ruling of the court stated the obligation of the board of directors to adhere to the governing documents which placed specific requires for reserves, and stated a fiduciary duty to do so. The Illinois case appears to be very similar to what is happening with regard to reserves and fiduciary duty in the Michaywe Owners Association.
- 2006 Feb 15 — Reserve Funds for Capital Repair — This post has been edited from my 2005 Dec 23 entry in my notebook.
- 2005 Dec 31 — Reserve for Repair, Replacement and Renovation — This post was entered on 2008 Jul 20, but is indexed to the effective date of the information which is the end of year 2005. The post consists of the two pages from the 2005 Audit Report on the Reserve for Repair, Replacement and Renovation (RRR). The information consists of a brief description of the disclosure followed by a one-page schedule of assets and estimated costs for RRR. A column has been added to the reserve schedule to show the money amounts scheduled for RRR within five years, namely 2006 through 2010.
- 2005 Jul 06 — Reserve Studies — This post is an email to the MOA Board of Directors and others concerning reserves for capital repair, replacement and renovations (Reserves for RRR). Having sufficient reserves, as required in the governing documents, is vital to the long-term financial health of MOA. When facilities deteriorate due to normal wear and tear, and breakdowns, funds must be available to make the necessary RRR to maintain the facilities in good condition. The email includes comparisons to similar business concept and references to literature on the subject concerning owners associations.
- History:_
- 2009 Mar 27 — Initial Post
- Links:_ Why is the Preservation [Reserve] Fund Important? at [http://swagmanmwpoa.blogspot.com/2009/03/why-is-preservation-reserve-fund.html]
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