The Purpose of Reserve Studies


The Purpose

Reserves are monies budgeted, collected and set aside for replacement or deferred maintenance to the capital improvements. The establishment of reserve accounts begins with the developer and/or the board who have a fiduciary capacity and responsibility for the establishment of the association’s budget. All association boards establish reserve accounts for the future replacement or deferred maintenance of the common areas.

Most members of community associations have become aware of the necessity of reserves being included in the budget. Without reserves, owners may be subject to either special assessments or may not be able to repair or replace the common area assets. If there are no reserves the risk of reduced property values in a community is a distinct possibility. Reserve funds enable the association to maintain the common areas with a reduced risk of special assessments and minimize the impact of financial challenges. The establishment of 100% reserve funding ensures the owners of the following.

  • Establishes and preserves reserves for a strong financial position to meet future expenditures.
  • Reserves reduce the potential for special assessments.
  • Reserves reduce the potential for reduction in property values.
  • All owners share the expenses of the association equally by paying a fair share of the cost.

Adequate funding is the key to reserves. Just having reserve funds doesn’t make a community’s financial future strong. Reserves must be set at a goal of 100% funding to accomplish all of the goals of the association.

There may also be times when natural disasters such as flood, hurricanes, windstorms, and frost can cause considerable damage to uninsurable property. These events should also be a consideration of the board and a reserve contingency fund established to meet these natural disasters. If the association has no funds to meet a natural disaster, consideration should be made after 100% funding of the capital improvement reserves has been established.