By: Beth Mulcahy, Esq.
Our firm often receives questions regarding reserve funds. The most commonly asked questions are the following: how much should we have in our reserve fund and is a certain percentage appropriate? The answer depends on the amenities your association has and the quality of the items being replaced or the type of maintenance necessary to keep them in good working order. The best way to determine what is best for the association is to have a reserve study completed by a professional reserve company.
Why does the association need a reserve fund?
• A reserve fund provides for the planned replacement of major items;
• It distributes the monetary contributions of old and new owners;
• It reduces or eliminates special assessments; and
• A reserve fund can enhance resale values, because reserves funding policies must be disclosed.
A reserved study begins with an accurate inventory and determination of the useful life of all the major assets of the association. With an inventory, it is possible to plan for replacements within a scheduled timeline. Once completed, the association should review the study as it applies to the budget and future funding to determine the necessary funding required to meet the time line.
Because of the technical details required in development of a reserve study, the association should seriously consider hiring a qualified reserve study professional. If the association cannot afford to hire a professional, “do-it-yourself” software programs and worksheets are available.
A reserve fund is created by the association setting aside funds to pay for the replacement or repair of assets for which the community association is responsible. Assessments are typically divided for the association’s operational budget and reserve budget, so a portion of each month’s assessments should go to a reserve account. Reserve expenses are capital expenses and major expenses other than annual expenses and must be budgeted. Examples of reserve expenses may include, painting, road repair and replacement, pool re-plastering, roof replacement, lighting replacement, etc.
Reserve funding may affect property values—educated homebuyers may not invest in a community that is not maintained well, has debt or has no reserve fund. Additionally, lenders may not approve mortgage applications in such a community if the reserve is underfunded or not funded at all. Therefore, adequate reserve planning and funding is in the best interest of the association.
Finally, experts recommend that reserve studies be reviewed or updated every one to five years.