How Much is Enough for a Condo Reserve Fund?

If you are helping manage a homeowners’ association, you might be wondering how much to keep in your association’s condo reserve fund. The answer might seem simple enough. You need enough in your fund to cover all of the expenses you expect over a certain time period, but a number of factors can affect your decision, including:


        The condition of the common elements. If your association has put off maintenance on the condo properties for several years and the elements of the condos are reaching the end of their useful life, then you might need more money, sooner rather than later. This means that your association likely has little time to accumulate reserves.

        The time value of money. Things typically cost more tomorrow than they do today, due to inflation. That being said, most condo associations invest their reserves, so that they earn interest and other returns over time. These two factors can affect how much your association has in reserves over 20 or 30 years.


The Community Associations Institute, also known as the CAI, developed a concept known as full funding, which refers to the reserve balance in direct proportion to the fraction of used life of the current repair or replacement cost. If something, for example, has an estimated useful life (EUL) of 10 years and will cost about $10,000 to replace, then in order to be fully funded, the association should have $3,000 towards replacing the item in the third year. You should calculate the same costs for each of your common elements and add them up to create your reserve budget.


There are several factors that drive the funding strategy, including:


        Rainy day funds. An association might not be able to foresee the potential defects of common elements and results of natural disasters, so they usually designate an account balance or threshold that they never want to drop below.

        Improvements. Since communities are not static entities, homeowners might want to make some improvements, including adding amenities, replacing existing equipment with higher quality items rather than in-kind items or complying with new regulations and standards like the Americans with Disabilities Act.

        Statutory Requirements. Associations are beginning to come under more and more regulation, so there might be statutory requirements from state and local governments, lenders and insurance companies that you need to adhere to as an association.

        Actual performance. Many associations rely on estimated useful life (EUL) tables to figure out when common elements need to be replaced. Components usually don’t wear out at exactly the end of their estimated useful life, and preventative maintenance can usually extend the EUL. Your association’s engineering consultant can usually schedule their work fairly accurately based on their experience and observations in the field.

        Vacancies and delinquent accounts. Homeowners are usually under a lot of stress these days, and the number of units in foreclosure has increased exponentially over the past few years, so associations should take into account their inability to collect from some unit owners.


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