Purpose: To provide additional information on the Topic as a supplement to the Finance Advisory Committee article appearing in the May 2017 issue of the View under Committee Reports.
Question: What is the purpose of the Replacement Fund?
Answer: The Association’s governing documents require that funds be accumulated for Future Major Repairs and Replacements of common property owned by the Association. The funds accumulated are commonly referred to as the Replacement Fund.
Question: Please describe what common property is owned by the Association.
Answer: Common property owned by the Association includes:
- Real property and common area improvements acquired from the developer
- Additions and improvements to common area real property improvements
- Personal property and equipment including golf carts, vehicles, equipment, furniture and office equipment
Question: Please provide us some examples of common area improvements acquired from the developer.
Answer: Real property and common area improvements acquired from the developer include the two golf courses, the two club houses, the three swimming pools, and the two fitness facilities that are owned by the Association.
Question: Please provide us some examples of additions to common areas.
Answer: Additions and improvements to common areas include the addition of the pickle ball courts in Phase III of the community and the additional office space and meeting room in the management office for the Association.
Question: How does the Association accumulate funds in the Replacement Fund?
Answer: Members of the Association are subject to paying monthly assessments to fund the Association’s operating costs, future capital acquisitions and common area improvements, and future major repairs and replacement of both common area improvements and personal property.
Question: Homeowners pay a total monthly assessment including an amount for the Operating Fund and an amount for the Replacement Fund. How is the amount for each fund determined?
Answer: Annually, the Board reviews and approves an Operating Fund budget and a Replacement Fund budget. The budgets reflect how much the monthly assessment will be for each of the Operating Fund and the Replacement Fund as well as in total for each unit.
Question: What are the monthly assessment amounts for each fund in 2017?
Answer: The monthly assessment for the Operating Fund is $210 per unit. The monthly assessment for the Replacement Fund is $45 per unit. The total monthly assessment is $255 per unit.
Question: Does the home owner have to make separate payments to the management office, one for the Operating Fund and one for the Replacement Fund?
Answer: Fortunately, no. The home owner is billed monthly for the total monthly assessment - $255 at this time. The total amount due from the unit owners is deposited into the Operating Fund upon receipt. The management company transfers funds from the Operating Fund to the Replacement Fund on a monthly basis.
Question: Are the funds accumulated in the Replacement Fund set aside in separate accounts and not comingled with the funds in the Operating Fund?
Answer: Yes, the funds accumulated in the Replacement Fund are held in separate cash and investment accounts for future major repairs and replacement of both common area real property and personal property.
Question: What is the dollar amount of the cash and investment accounts in the Replacement Fund as of December 31, 2016?
Answer: As of December 31, 2016, the Replacement Fund has $221K of cash, $9.3M in certificates of deposit, and $1.9M of investments in government securities and municipal bonds for a total of approximately $11.4M.
Question: How does the Board determine how much funding should be held in the Replacement Fund at any one time?
Answer: Funds are being accumulated in the Replacement Fund based on estimates of future needs for major repairs and replacements of common real property components and personal property utilized in common areas (Common Property).
Question: How often are the estimates updated and reviewed by the Board?
Answer: Estimates of future needs are updated annually and the Association engages a third-party consultant to review and issue a report which is known as the reserve study.
Question: What information is included the in reserve study?
Answer: The reserve study includes:
- A line item description of all identified Common Property, called components
- The estimated remaining useful lives of the components
- The estimated timetable when the components will be replaced
- The estimated replacement cost of the components of Common Property
Question: So, the Association accumulates cash in the Replacement Fund for future major repairs and replacements of both common area real property improvements and personal property. Is that correct?
Answer: Yes, that is correct.
Question: Who invests the funds held in the Replacement Fund for the Association?
Answer: The Association has retained an investment consultant, Comerica Securities, Inc., to make investment recommendations and provide record keeping for cash and investments in the Replacement Fund.
Question: What guidelines are utilized by the investment consultant in making investment recommendations?
Answer: The investment consultant is guided by the Investment Policy adopted by the Board of Directors for the Association. The investment consultant periodically reviews the Investment Policy and provides suggested changes to the Investment Policy as and when it deems it advisable. The Investment Policy is reviewed at least annually by the Finance Advisory Committee and the Board of Directors. Any recommended changes in the Investment Policy are approved by the Board of Directors.
Question: Who approves the investment recommendations made by the investment consultant?
Answer: The Finance Advisory Committee reviews the investment recommendations made by the investment consultant and prepares a written recommendation to the Board of Directors. The Board of Directors approves investment recommendations made by the investment consultant.
Question: So, when cash is expended on a major repair or replacement of common area real property improvements, how is that recorded in the financial statements?
Answer: Expenditures for major repairs and replacements of common area real property improvements are accounted for as Replacement Fund expenditures, an expense in the Replacement Fund financial statements.
Question: So, the Association does not record those expenditures as assets in the Replacement Fund financial statements?
Answer: Yes, that is correct. These items are not recorded as assets in the balance sheet of the Replacement Fund in accordance with industry standards and generally accepted accounting principles for HOA’s.
Question: How is the accounting and financial reporting performed for purchased common area personal property and equipment that is being acquired or replaced?
Answer: Funds expended for the purchase of common area personal property and equipment are capitalized in the balance sheet of the Operating Fund in accordance with industry standards and generally accepted accounting principles. Those assets are then depreciated using the straight-line method over the estimated useful lives of the various classes of assets and depreciation expense is recorded in the Operating Fund financial statements.
Question: So, how does the Operating Fund have the funds to pay for the purchase of common area personal property and equipment that is being replaced?
Answer: The Replacement Fund transfers funds to the Operating Fund to pay for the purchase of common area personal property and equipment being replaced and records such as an inter-fund transfer in the financial statements of the Association.
Question: All of this information is very helpful. What other reports could a unit owner review to further understand this complex area?
Answer: The unit owner can review the annual audited financial statements of the Association as well as the annual reserve study prepared for the Association. Both of these reports are available on the website for the Association.