Best Practice #2
Complete and fund a reserve study to
support financial stability.
The most difficult decision for the board is generally how much to set aside in the
replacement reserves.
The purpose of funding these components over time is to assure you have the
needed funds ready when the time comes to replace them. This minimizes the
need for special assessments, which can be challenging for both community
members and the association.
The most prudent action a board can take at this point in the process is to
hire a professional to prepare a reserve study. A comprehensive study will
include two parts: a physical inspection and evaluation followed by a funding
recommendation that provides several funding models. The typical models you'll
find in a recommendation are: baseline, full funding, and threshold funding.
We suggest that the board complete the reserve study in mid-summer and make
their reserve funding decision before starting on the operating budget – this
approach gives the board more information upfront for the best decision-making
and assures that the funds for replacing assets will be available when the time
comes. In short, completing – and fully funding – a reserve study significantly
contributes to your community's financial stability.
Replacement Reserves:
Also known as the reserve account, these
are funds set aside for the replacement of common area components. Based on the
common area as defined by the governing documents, this includes roofing, asphalt
driveways, concrete walkways, building exteriors, lighting, and amenities.
