Issue link: https://www.cominghomemag.com/i/1520927
You know that savings account you have in the bank for emergencies and big-time future purchases? Community associations have those, too. They're called reserve funds, and they help pay for an association's unexpected expenses and costly improvements. Follow along as we recap all things reserves. A lesson on reserve funds and studies. A S T U D Y O N R E S E R V E S RESERVE FUNDS What's a reserve fund? Community associations have two accounts to pay for expenses: the operating fund and reserve fund. The operating fund covers day-to-day purchases and standard bills, like insurance, taxes, landscaping, and more. Conversely, the reserve fund pays for future replacements and repairs that don't occur on a regular basis. You can think of the reserve fund like a college savings account—you set the money aside and let it mature, taking it out only when needed. What are reserve funds used for? Unfortunately, your community can't just dip into reserve funds whenever extra cash is needed. Each community has guidelines about how and where to allocate reserve funds. Your governing documents will outline how money can be spent, but reserve funds can often be used for bigger projects like: • Major landscaping • Large-scale renovations and construction • Roof and fencing repairs and replacements • Pool and playground equipment and repairs • Shared area and structure painting • Road and sidewalk repairs and resurfacing • Disaster response and recovery Why do communities need reserve funds? The phrase "better safe than sorry" applies to reserve funds. Reserves give residents confidence that their community is prepared for the inevitable. Funded reserves are also a selling point for new homebuyers and lenders. Plus, in some places, they're required by law. How much money should be in a reserve account? Reserve funds aren't one-size-fits-all. Reserve amounts vary based on a community's needs, size, type, and location. To figure out how much money your community should have, you'll have to run the numbers or bring in a professional to conduct a reserve study and calculate costs. RESERVE STUDIES What's a reserve study? A reserve study is a planning tool that examines the current reserve fund status and analyzes the expected lifespan of common elements and future replacements and repairs. Say you have a playground with equipment that must be replaced every 10 years; your reserve study will tell you how much money needs to be saved to make repairs on time. What happens during a reserve study? Reserve studies are usually completed in two parts. The first part, the physical analysis, checks the physical condition of a community and estimates the cost of any repairs and replacements. The second part, the financial analysis, reviews the community's reserve fund and suggests a contribution rate. Associations can do their own reserve studies, but hiring a qualified reserve specialist or analyst is best. Why do we need reserve studies? Like a trip to the doctor, reserve studies help communities confirm they're in good shape for the long haul. They prevent loans or special assessments, fulfill legal requirements, and demonstrate strong financial stewardship. All of that raises property values, boosting your community's attractiveness and quality of life for residents. How often should we do reserve studies, and how much do they cost? Every community has unique reserve study frequency regulations specified in their governing documents and relevant laws. Ideally, associations should adopt a "living reserve study" approach and refresh theirs every three years to address rising costs and newfound efficiencies. Overall, reserve studies aren't one-time projects—you have to conduct them consistently to estimate future needs accurately. While costs vary, studies are a worthy investment. COMING HOME MAGAZINE 33