What do you do when the bill comes due, but you don’t have enough money in the bank to pay it?  If you’re like most families, you turn to savings.  That’s what the Farmcolony Board of Directors has done in past years when our quarterly dues did not fully cover our costs of operation. They turned to the reserve funds to cover the shortfalls, until there were no reserve funds left.

Our historical record compiled by Farmcolony Historian Deborah Lee tells the story.

Throughout its first quarter century, Farmcolony slowly evolved as a self-sufficient farm relying mostly on cattle and hay sales for revenue. A long list of improvements had been made and, as founding member Bill Dichtel wrote “liquid assets grew from absolute zero to the present sum of $165,000,” largely obtained through the sale of cattle and of hay.  A particular point of pride was that dues had been kept low despite high inflation. (They were $35 per month in 1985 and remained at that level until 2015). He believed that the break-even point was attainable and not far away, with the two critical factors being “manpower and money.”

Farmcolony remained financially stable at the turn of the century, but the new millennium ushered in a period when the Farm’s capital improvements and other expenses outstripped its income. At the time of the annual meeting in 2000 the HOA had $187,589 in invested monies but had not yet made capital expenditures for the year. Dues collected were $20,962, farm income was $28,997 ($26,397 from cattle sales), less expenses of $19,909 for a net gain of $9,088. Such profits would prove difficult going forward.

In 2019, the financial and management situation at Farmcolony reached a crisis point. Reserves were taken out of the road fund to purchase a tractor and tractor repairs totaled over $15,000 in 2020. Without funds to cover those repairs, the board took out a line of credit with the manufacturer at a high rate of interest. Calves had been held back for direct marketing later but there were limited processing dates available at Fauquier’s Finest and no ready alternatives. The Board levied a special assessment of $130 per lot and also voted to raise the dues to $54.17 per month ($162.50/quarter) to begin to pay off the debts.

Farmcolony is not alone in its struggles.  The number of small and medium size processors dropped from 9,000 nationally in the 1960s to 800 in 2018. Additionally, in 2015 Congress allowed Country of Origin labeling to expire, thereby allowing lower cost foreign beef processed in the United States to bear a USA label. As one food and agriculture journalist observed, “Over the past 40 years, as the meat packing industry has consolidated in the name of scale, efficiency and profits—and while consumers have been the beneficiaries of cheap meat—producers, rural communities, slaughterhouse workers and the environment have all paid a steep price.”

Farmcolony’s financial crisis was a long time in the making and many boards and members contributed to it. Early on when there were no reserves, they took measures to build them up, but over time there was a strong desire to keep dues low even as they were eroded by inflation and the costs of farming rose while income fell.  Accounting methods varied and the numbers were difficult to compare and analyze over time. Members formerly did not have the will or expertise to determine the true cost of the cattle operation. 

“In many ways Farmcolony has been run like an old-fashioned family farm, with unprofessional accounting systems and a tendency to draw from savings when times were lean,” according to  Deborah Lee. “New members, even in the 2010s, were told that proceeds from the cattle operation kept dues low and most members remained unaware of—and unwilling to consider—the growing losses.”

It’s all about the reserves.

In 2019, the State of Virginia placed a new requirement on homeowners’ associations to conduct a reserve study every 5 years, and update it annually.  A reserve study is a report which assesses the physical and financial condition of a community and determines how much money to set aside each year in reserve accounts to meet the costs to repair and replace capital components when the need arises.  Capital components are items that the association is obligated to maintain, repair, and replace.  Poorly maintained common facilities and low reserves increase the likelihood of special assessments and lower property values.  The new Virginia law is intended to protect new home buyers from being surprised by foreseeable special assessments.

To comply with the new law, the Farmcolony Board of Directors initiated a reserve study in 2021 to determine the amount of reserves needed to repair and replace our capital components.  The inspection included an in-depth analysis of the physical assets of the farm which covered six areas:  Roads, culverts, farming equipment, farmhouse, barns and outbuildings, and animal boarding facilities.  The initial analysis conducted by volunteers on the farm underwent a professional review by the DMA Reserves firm in Richmond who conducted an on-site inspection and modified the reserve study to reflect their cost expectations.

At that time Farmcolony’s reserve fund was in the range of 1% percent funded, which represents a weak reserve position.  Percent funding is a measure of the health of the reserve fund and a percent funding range of 70% to 100% is commonly adopted as a target percentage as it has been statistically shown that associations that maintain their percent funding in this range are far less likely to experience emergency assessments or deferral of maintenance and can more easily weather unexpected expenses and economic downturns. 

Based on this starting point, the Board recommended increasing the reserve contributions to $21,600 per year, or $1,800 per month and continue to increase those monthly contributions at the rate of inflation each year in order to meet future financial obligations.  At the time, this was the equivalent of $112.50 per lot per quarter to be saved from each lot’s quarterly fees, assuming a 100% collection rate from the 48 lots.

Each homeowners’ association gets to decide how to deal with maintenance and upkeep of their property. The money to pay for upkeep is drawn from the homeowners’ association (HOA) fees, which each homeowner is obligated to pay.  HOA fees are established by the board of directors based on a projection of the annual budget.  Often, HOA fees are split up, with one half going towards operating expenses and other shared expenses, and the other half going into a reserve fund, which is for large emergency expenses like repairing burst water pipes or leaking roofs.

Yet not every HOA splits fees like this. Some HOAs charge lower monthly fees and then, in the event of a large emergency charge, splits the cost among members of the association with a special assessment bill, which is paid on top of the monthly fees. Once  reserve funds were depleted in 2020, Farmcolony members began experiencing special assessments to cover costs, the first in 2020 and each year since. 

Ideally, according to Common Interest Community guidelines, a policy board in the executive branch of the Virginia government, the replacement reserve account should be built through regular assessments paid by association members.  A specific dollar amount of regular association payments should be earmarked for reserves, and deposited into a reserve account as they are collected. Financing of replacement reserves from regular assessments is desirable because it spreads the responsibility for replacements over time so the burden doesn’t fall more heavily on current or future owners to make up the deficit.  However, Farmcolony’s governing documents limit increases in fees or assessments to 25% of the preceding fiscal year without a vote of a majority of members of the association to protect members from unexpected spikes in costs.

Board Updates Reserve Funding Plan.

The farmhouse roof was leaking.  The Board decided to do the roof repair three years early, and there was only one place to get the money: the road reserve fund. The board voted to fund the roof repair with reserves and a scheduled special assessment. 

“We redirected the scheduled special assessment for the roof because the attorney said we cannot use a special assessment to fund the reserves as has been done in the past. One thousand dollars came out to pay for the down payment on the roof, and the rest of the withdrawal covered the final bill. $8000 has been put back into the reserves. The goal is to put $7000 more into the reserves hopefully by next week,” according to a report by Treasurer Mike Foley at the May 11 board meeting.

Concerned to see a $10,000 withdrawal from the fund without an updated reserve study in place to properly inform its decisions, a group of members filed a formal complaint to the board.  The board updated its plan for funding the reserves in its June 9 meeting.  With a funding plan in place, the Board of Directors has answered the call for financial planning for the general maintenance and upkeep of the community.  Virginia law requires an annual review of the reserve study at which time the estimated numbers will be considered again.

Conclusion

A reserve fund is like a piggy bank. By establishing and funding a reserve, associations can lessen the potential of having to impose costly special assessments on members to pay for repair and upkeep and newer owners will not have to assume the burden of the cost to repair or replace older components in the community. When the association does not have sufficient savings in reserve funds to cover expected costs, the only recourse is to impose special assessments on members when funds are needed.  Members of the Farmcolony Homeowners’ Association have experienced several special assessments in recent years.  Hopefully, with an updated reserve study in place and a renewed effort to increase reserve funding, members of the association will be able to avoid special assessments in the future.