Association Reserve Funding Strategies: Ensuring Your Budget's Success
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A reserve fund is a community savings account that serves as a cushion — protecting your association’s finances from the burden of necessary future expenditures. By design, a reserve account grows over time through regular funding that comes from a percentage of your association’s dues.
A reserve study assists with an association’s long-term financial planning by taking into consideration the current status of the reserve fund and determining a regular funding contribution that will offset ongoing wear and tear and/or achieve future community enhancements. The reserve study is comprised of two parts — a comprehensive physical analysis of the current condition of your community’s assets, and a detailed financial analysis.
Both the reserve fund and reserve study are critical components of the budgeting process that help ensure the long-term financial security of your community.
Association Reserve Funding Benefits
The key to protecting the fiscal health of your community is committing to the consistent funding your reserve fund over time. By doing so, your association will realize three distinct benefits:
Peace of mind - A reserve fund gives association members greater confidence and comfort in knowing money will be there when it is needed.
Market value preservation – When reserves exist to support shared assets in a community, the market value of properties within that community are better maintained.
Equitable cost participation – One of the main advantages of establishing and maintaining a reserve fund is that it ensures all residents who are using and enjoying community assets are contributing to their costs. Without reserves, a special assessment may be needed whereby only those residents who are living in your community at the time an asset needs to be replaced would be impacted. By funding reserves over time, you can ensure that generations of owners share in the costs of assets.
Risk Management—By properly funding capital replacement reserves on an ongoing basis the community will ensure compliance with applicable requirements of the Minnesota Common Interest Ownership Act (MCIOA) 515B.3-1141. More importantly, it will help avert deferring important infrastructure projects due to lack of available funding.
In the State of Minnesota, an Association governed by MCIOA is required to reevaluate the adequacy of its budgeted replacement reserves at least every third year. A good property management company will keep track of the schedule for the required reserve update and offer sound guidance on establishing and maintaining funding of your reserves. At FirstService Residential, it is an essential component of the support we offer communities for successful, long-term property management and financial planning.
The importance of a reserve study to your reserve funding strategy
It can be challenging for a board to identify all the items in its community that will eventually need the support of reserve funds, when those items will need to be developed, upgraded or replaced and how much it will cost in the future. That’s where the reserve study comes in.
By assessing the condition of common-area assets within your community (like club houses, lobbies and pool areas), identifying future replacement costs and recommending an annual contribution amount for the reserve fund, the study can better position your board for long-term financial success.
At FirstService Residential, we highly recommend that you enlist the services of a third-party professional such as a reserve specialist to conduct your reserve study. These pros will have a thorough understanding of all the assets in your community that should be considered and if/when they should be added to your reserve inventory.
They will also have intimate knowledge of your state’s requirements regarding reserve funds and studies. And most importantly, they will offer your board an unbiased and sometimes much needed voice to your budgeting process. Please reach out to FirstService Residential if you need help identifying a reserve specialist in your area.
It is also important to treat your reserve study as a living, breathing document that should be regularly reviewed and updated. But remember, it’s a guide. You don’t have to hold fast to time frames for capital replacements if the assets are performing differently than anticipated or the timeline moves up for a higher priority project.
“For example, your reserve study may indicate that a roof should be replaced in 30 years. If you are 28 years in, it still looks great and you’ve done all the preventive maintenance, you can decide to get another five years out of it and adjust that component accordingly,” said Mark Gittleman, president, FirstService Residential Minnesota.
Determining Maintenance vs. Reserve Components
Properly categorizing your community’s common area components is one of the challenges that comes with managing reserves. Some items will require regular maintenance such a pressure washing sidewalks and window cleaning, others will need to be replaced like roofs and mechanical equipment, and still others will require both such as pools and carpeting.
To ensure your community components will last until they are due to be replaced, you must budget for maintenance on a planned, recurring schedule for all applicable common property assets. If you don’t, you may end up having to replace them before the reserve study’s replacement due date and impose a special assessment or take out a loan.
At the same time, you must make a reserve contribution each year to be properly prepared for covering replacement costs when they are scheduled to occur.
Deciding whether items are maintenance vs. replacement (or both) will ultimately determine if they will be listed in your annual operating budget or as part of your reserve schedule. Usually, less expensive items that are recurring are included in the operating budget. Costlier items that represent maintenance rather than replacements are typically assigned as components in the replacement reserve schedule so their replacement costs can be financed over a longer time period. If you need help determining whether an item should be included in your operating budget or reserve schedule, consult with your auditor, property management company or reserve specialist.
As your board takes on the responsibility of budgeting for your association, be sure to rely on your reserve fund and reserve study. They are both indispensable tools that can help keep your community’s long-term financial plan in check.
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