Insight into Capital Reserve Fund management

Capital Reserve Fund Management: As trustees and community managers what should we be asking ourselves?

Pro admin shares their thoughts:

1. Does your estate or development have a 10-year maintenance plan and when last was it reviewed?
2. What are the major expenses that you see for your HOA in the next three years?
3. Does your HOA have sufficient reserve built up to cover the major expenses in the next 3 years?
4. If your HOA does not have sufficient resources to cover extra-ordinary expenses what options do you have to raise the necessary funds?

There is no legislation for HOAs to have a Capital Reserve Fund in place, but it is good practice to plan ahead, as the common property of an HOA incur large expenses, which usually cannot be paid quickly out of the normal administrative fund.

The Capital Reserve Fund should cater for expected expenses based on the maintenance and capital expenditure over the next 10 years.

The Capital Reserve Fund needs to have its own financial reporting, budget and Income Statement.

A good business practice for all HOA’s is to use Section 2 of the Sectional Title act as guidance when establishing a Capital Reserve Fund to ensure that sufficient reserve is available when required. For the purposes of section 3(1)(b) of the Act, the minimum amount of the annual contribution to the Capital Reserve Fund must be determined as follows:

(a) If the amount of money in the reserve fund at the end of the previous financial year is less than 25% of the total contributions to the administrative fund for that previous financial year, the budgeted contribution to the reserve fund must be at least 15%.
(b) If the amount of money in the reserve fund at the end of the previous financial year is equal to or greater than 100% of the total contributions to the administrative fund for that previous financial year, there is no minimum contribution to the reserve fund.
(c) If the amount of money in the reserve fund at the end of the previous financial year is more than 25% but less than 100% of the total contributions to the administrative fund for that previous financial year, the budgeted contribution to the reserve fund must be at least the amount budgeted to be spent from the administrative fund on repairs and maintenance to the common property in the financial year being budgeted for.

HOA’s with sectional title components could use the same legislation for both, as they share common property and both are liable for the maintenance thereof.

It is good practice and advisable for the HOA to do a 10-year maintenance plan with an independent company, or through their managing agent. This will give them a clear route as to what – and when – expenses may incur. It is advisable to keep a minimum of 25% of the annual levy as a reserve. Try to stay away from a special levy as this can have a negative effect on home owners. Rather use the levy to fund the Capital Reserve Fund. This can mean that there will be an increase in the levy. Remember that the HOA is voluntary so the residents might not pay a special levy, even though they enjoy the benefits of the HOA.

To protect your Capital Reserve Fund, make sure that the funds are invested in a trust account in the name of the HOA with a reputable financial institution and that the interest accrues to the HOA.

Should you have any further queries on your Capital Reserve Fund or need options of how to pay for unexpected HOA expenses, the experienced staff of Pro admin will be happy to assist.

We have 30 years’ experience in the property market. Your assets are our priority.

Contact Pro admin today for any assistance.