While we all know that improvements to property wear out over time, we might not realize the importance of reserve funding. A "reserve fund" is a dedicated source of assets, usually liquid, from which a homeowners association would fund necessary and needed capital improvements. To guide decisions on how the association should spend or accumulate a reserve, the board typically conducts a "reserve study." A reserve study provides a current estimate of capital improvement expenses for a given period of time, usually five, ten or twenty years. The board then allocates the "reserve assessment" to the members of the association according to their pro-rata share.
Oklahoma law does not require a homeowner association to maintain a reserve to the extent the governing documents (covenants and bylaws) fail to require a reserve. For most associations, reserve funding remains discretionary.
For example, a hypothetical association has a brick perimeter fence built to completion in year 0. For our purposes, assume the brick fence would completely disintegrate in year 30. What choices must be made? First, would the association choose to replace the fence in year 30? Would the association seek to establish periodic maintenance of the fence to extend the life of the fence if possible? Would the association fund the replacement of the fence in year 30 through a special assessment or incrementally each year leading up to year 30?
You see, even though the replacement of a capital improvement may take place many years in the future, the decision to do so affects financial decisions today. If an association does conduct a reserve study, the study will likely result in a per lot reserve assessment the association should collect and deposit on an annual basis. Or, the necessary savings may be included in the budget and included in the annual assessment.
While the topic of reserve funding may appear to revolve around money, an underlying issue is fairness. Think about the very real possibility that you buy that gently used home with great curb appeal only to find out that the swell community swimming pool needs repairs to the tune of a several thousand dollar special assessment to each homeowner. Is it fair that you should pay for those years of swimming pool enjoyment exercised by the prior homeowner? Of course, fairness would mandate that the purchase price of the home reflected the pending special assessment. But, does this actually occur?
I suppose the lesson is two-fold. First, Oklahoma homeowner associations will have to work out their own reserve funding according to their governing documents and intelligent debate. Second, Oklahoma home buyers will need to know what questions to ask when buying into a neighborhood with a mandatory association and significant common area improvements.