Maintaining a condominium's financial health is a key responsibility of the board of directors. A task that can be easily overlooked, creating a reserve account to cover future repairs and replacement of major assets is crucial to successfully fulfill this duty. Read on to learn more about reserve funds, why your condominium needs one, and more.
What’s a reserve fund?
A reserve fund is money set aside by a condominium for the repair and replacement of major components the condo is obligated to maintain and future replacements and repairs that don't occur on an annual basis.
Why does my condo need a reserve fund?
A reserve fund is your community's way to plan and prepare for the inevitable repairs and updates you know will happen, such as replacing a shared roof or resurfacing common roads and driveways. An up-to-date reserve fund is critical to the financial management of a community and is required in accordance with the Condominium Act.
How are reserves funded?
Reserves are funded by a portion of the unit owner's maintenance fees. Additional money can come from interest and returns earned from existing reserve funds.
How much money should a condo have in its reserve fund?
Every condo is unique and will require a different reserve amount depending on its needs, size, type, location, and other factors. To decide how much money is enough for your community, you’ll need to identify what your condo owns, estimate when things will need to be replaced, and then calculate how much everything is going to cost. A Reserve Specialist or Reserve Analyst can perform a professional reserve study to help determine the appropriate amount.
What are condo reserve funds used for?
Reserve funds will have a plan in place for how and when money can be spent. Reserves can’t be used for regular, everyday expenses, so always check your governing documents before allocating any reserve funds. Reserve fund expenditures often include, but are not limited to:
- Roof replacements
- Pool pumps
- Playground equipment
- Replacing fencing in common areas
- Painting of community buildings
- Major landscaping projects
- Construction and major renovations
- Road and sidewalk resurfacing
4 Benefits of Well-Funded Reserves
Creating and maintaining an adequate reserve fund is part of a board’s fiduciary duty. The following are four reasons to make sure your reserves are properly funded.
1. PROVEN RESPONSIBILITY
Well-funded reserves demonstrate good stewardship of the condominium's money. Homeowners will have peace of mind that the board is acting in their best interest, and their most valuable asset—their home—will be protected.
2. GUARANTEED PREPARATION
Proper reserves allow the condo to pay for unexpected expenses. If an unexpected event occurs and sufficient funds aren’t set aside, a special assessment may need to be issued.
3. INCREASED LENDER CONFIDENCE
Lenders appreciate a well-funded reserve because that means a condo is less likely to issue a special assessment to cover repairs and replacements.
4. BUYER ATTRACTIVENESS
The overall appearance of a community translates directly into its property value. With appropriate reserves, condos can cover unexpected expenses and community asset replacements, improving resale values, keeping current homeowners happy, and attracting new buyers.
Webinar: What You Need to Know About Reserve Funds & Studies
To learn more about reserve funds and studies, check out our webinar, “What You Need to Know About Reserve Funds & Studies.” In it, we break down commonly asked questions and provide helpful tips and insight from experts.