Just like in any business and organization, homeowners associations need reserve funds for future use. These are highly liquid assets that come in handy whenever there are any unexpected costs.
It is crucial for every organization. Let’s take a deeper look at association reserve funds, their purpose, and the different factors affecting them.
Best Practices and Community Association Reserves
Best practices are proven, repeatable, and documented techniques that help deliver the desired outcome. They are easily adaptable to fit into unique organizations and be able to achieve measurable performance and management improvements.
Community associations, including homeowner, condominium associations, and cooperatives, may vary in age, type, amenities provided, and maintenance obligations. In a separate account, they must have a specific amount of cash allotted for repairs and replacement projects.
Careful planning is required to ensure a sufficient amount of funds in the reserve account. This will not only benefit the best interest of the association but satisfy the requirement of the law.
Using systematic and specific practices will help the association maintain an adequate reserve fund.
Why Are Association Reserves Important?
1. Protect and Enhance Assets
The reserves will enhance and protect the physical assets present in the community, including the investments made by the homeowners. Good fiscal planning by the association ensures that the worn-out components will be replaced when needed.
2. Fairness and Accountability
The fairest and impartial way to have fund reserves is to introduce a process. This should require every homeowner to contribute a fair share over a period where the beneficial assets are beneficial to them.
3. Sound Financial Planning
Part of the annual budget is the funding for the eventual replacement of the commonly-owned properties and components. The lack of enough financial planning will require special assessments and even borrowing.
4. Legal and Fiduciary Duty
The board has a legal and fiduciary responsibility to the property owners and members. Failure to include reserve funding in the annual budget demonstrates a lack of prudent judgments and sound practices by the board members. These make them liable for breach of duty.
5. Statutory Requirement
Several states have laws that require every community association to conduct research involving reserves. They implemented legislations like the addition of the preliminary budget before construction, removal of surplus and deficit to statutory requirements, prioritization of the funding plans, and clarification of terms based on the regulations.
An Overview of Reserve Study
A reserve study, both physical and financial analysis, is a budget planning tool that identifies the components that require maintenance or replacement. Looking into the current status of the reserve fund and ensuring a stable funding plan for future expenditures are also part of the study.
The most critical decision in a reserve study is determining which components to include. It requires analysis of the association’s documents and a physical inspection of each component. All these components must apply the necessary statutes and civil codes of the state.
The concept may be relatively simple when a single component is taken into consideration. But as multiple components get involved, the process becomes more complicated.
Hence, most association boards hire a reserve study professional to assess each component and make the best decisions out of it.