Reserves - The Basics


The Basics

Every community association should strive for a strong stable financial position. Adequate reserves and insurance are all important in maintaining financial stability. Adequate insurance provides funding for the unexpected losses to the association’s assets. Adequate reserve funding provides for the expected maintenance, repair and replacement of the association’s assets.

A reserve program is a long term planning tool designed to provide all or part of the funds necessary to pay for maintaining, repairing and replacing the capital improvements of the association. Reserves are funded with small monthly or quarterly payments to meet future required expenses to maintain the association’s assets.

The statutory requirement for condominium associations simply states reserves must be 100% funded for roofing, painting and paving, plus any other items in which the cost to maintain, repair or replace those items exceeds $10,000. Most association boards know it is prudent and fiduciarily incumbent upon them to collect and have a Reserve Analysis completed and accordingly have engaged an independent specialist to prepare a reserve schedule for inclusion in the association’s budget.

Not every circumstance can be accounted for future loss possibilities such as catastrophic disasters. At the request of some boards a reserve study may include reserves for uninsurable losses due to a catastrophe. These losses may be caused by flooding, freezing, lightning, hurricanes, or un-named windstorms and may include damage to such un-insurable items as landscaping or improvements excluded from windstorm insurance.

The method we use in of calculating reserve contributions uses threshold funding methodology to determine reserve requirements. This method enables the association to meet future reserve expenditures based upon each individual line item component within each reserve category by matching expenditures with funds available in each reserve category. A twenty year cash flow analysis compares the expenditures with funds available to determine adequate reserve funding. Reserves can be established as restricted by categories funding or a collective pool of funds. Each association can select to use either restricted category funding or pool of funds.