What is a reserve fund? A reserve fund is money set aside to maintain a community’s major common areas, equipment and facilities. The fund is used to repair or replace assets as needed over the life of a community. In order for a community to properly plan and fund a reserve account, they should complete a Reserve Study to best understand their future needs.
A reserve fund should not be viewed as a “slush fund” account for the operating fund. Monies placed into a reserve fund are not intended to be used as shortfalls to the operating fund. Failure to budget appropriately for the monthly operations of a community does not justify using reserve funds to cover an operating shortfall.
It is not uncommon for a board of directors to fear raising dues in order to properly fund their community. Budgeting from a place of fear does not serve a community well in the long term. Evaluate current data, review the community plans/goals, consider historical expense trends, note any future expenditure increases or decreases and prepare a budget accordingly.
The operating budget should be funded to ensure the proper funds area available for the operational expenses of your community and the appropriate reserve fund contribution is made on a monthly basis. When planning your monthly reserve fund contribution, review the reserve study or long-range capital plan to make sure information is relevant for the upcoming year(s). Failure to budget a proper reserve fund contribution usually leads to special assessments to cover expenses that should have been funded appropriately over the years. In our industry “special assessment” is a dirty word, although sometimes necessary.
Currently, in order to meet FHA approval for lending purposes a condo association must be contributing at least 10% of their annual operating budget to a reserve fund. If a community is not doing so, purchasers will not be able to secure FHA financing for a condo.
In some states the amount of reserve fund contributions are dedicated to specific projects and cannot be redirected to another project without a vote of the membership. Currently Georgia is not as restrictive in governing how reserve funds can be used by a community.
If you plan to live in a specific community for a long time (10+ years) take a look at your reserve fund and, if available, the reserve study. Are you on track to have funds available to replace the roof in 20 years? Will the funding be there when the hallway carpeting needs replaced? If not, it is likely that the current amount of reserve funding is inadequate. If so, you can sleep better knowing that your community is financially prepared for the future.