Yalnes, Inc. Blog

Why does an Association need reserves?

Equipment and major components (like the roofs) must be replaced from time to time, regardless of whether the expense is planned for. Most Association members prefer to set the funds aside now instead of having to pay a Special Assessment to cover cost of a major project such as a roof replacement. Reserve funds aren’t an extra expense – they just spread out expenses more evenly. Funds for a particular project are accumulated over a period of several years instead of a one-time Special Assessment levy. There are other important reasons why Associations put monies into reserves every month:

1. Reserve funds meet legal, fiduciary, and professional requirements. A replacement fund may be required by:
– Any secondary mortgage market in which the association participates (e.g. Fannie Mae, Freddie Mac, FHA, VA);
– State statutes, regulations, or court decisions;
– The community’s governing documents;
2. Reserve funds provide for major repairs and replacements that will be necessary at some point in time. Although a roof may be replaced when it is 25 years old, every owner who lives under or around it should share its replacement costs.
3. Reserve funds minimize the need for special assessments or borrowing. For many association members, this is the most important reason.
4. Reserve funds enhance resale values. Lenders and real estate agents are aware of the ramifications for new buyers if the reserves are inadequate. Reserve Study bill passed in Washington just recently requires Associations to disclose the amounts in their reserve funds to prospective purchasers. It also contains specific requirements for Reserve Studies.

March 26, 2009 - Posted by Sergey A. Petrov, PCAM | Accounting | Financial Planning, Reserve Funds