The Basics of Association Reserves:
Capital Reserves ARE: Association funds saved for future repair or replacement of capital items in the community that are the association’s responsibility to maintain.
Capital Reserves ARE NOT: Funds intended for routine maintenance costs or day-to-day operating expenses of the association.
Examples: The following are just a few examples of capital items:
• Private roads
• Tennis courts
• Common roofs
• Detention Ponds
Adequate Reserves: Sufficient funds available to meet current costs of repair or replacement of association capital items and a funding plan to meet future capital needs.
Federal Housing Administration (FHA): For those condominiums seeking to be approved for FHA loans, the association is required to have adequate reserves to cover capital needs, as well as to budget 10% of the total annual budgeted income for reserves. Read more about this in our Quick Facts article on Federal Housing Administration (FHA) Approval for Condominiums.
Funding the reserves over time spreads out the expense of repairing or replacing capital items, equitably spreading these costs among owners who use those capital items.
Adequately funding reserves can reduce the need for future special assessments and budget increases.
Association reserves help maintain or improve property values.
Healthy reserves protect the assets of the association.
How Much to Reserve?
A Reserve Study evaluates the current status of the association’s reserves and identifies a funding plan to address the future reserve needs of the association.
• Identify capital items
• Determine effective age
• Determine estimated remaining useful life
• Determine current reserves
• Estimate repair or replacement costs of all capital items
• Adjust for inflation
• Develop funding plan to spread necessary contributions equally over remaining estimated useful life
• Update every few years
How to Fund?
Association reserves can be funded in different ways, but the most common way is to spread contributions over time.
• Work into annual budget
• Create additional capital contributions through initiation or transfer fees
• Special Assessments
Funding example for anticipated road resurfacing in five years:
• Current Road Resurfacing Reserves: $50,000
• Estimated Current Resurfacing Cost: $85,000
• Estimated Cost in Year 5 Using 3.5% Inflation*: $100,000
• Funding Schedule:
|Year||Amount Contributed||Reserve Balance|
Download our L&J Quick Facts article below. Also, check out the L&J YouTube channel to watch our previous Morning Break Webinars or head over to the Resources section on our website to see our other articles on this topic and others.