Why Do Associations Need Reserves?

Why Do Associations Need Reserves?



New Associations in today's economic environment are struggling with the need for having
reserves, but reserves are critical for an Association to preserve the property and have funds for
capital expenditures. Equipment and major components (like the roofs) must be replaced from
time to time, regardless of whether we plan for the expense. We prefer to plan and set the funds
aside now. Reserve funds aren't an extra expense. They just spread out expenses more evenly.
There are other important reasons we put Community Association Management monies into
reserves every month:

1. Reserve funds meet legal, fiduciary, and professional requirements. A replacement fund may
be required by:

* Any secondary mortgage market in which the association participates (e.g., Fannie Mae,
Freddie Mac, FHA, VA).

* State statutes, regulations, or court decisions.

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* The community's governing documents.

2. Reserve funds provide for major repairs and replacements that we know will be necessary at
some point in time. Although a roof may be replaced when it is 25 years old, every owner who
lives under or around it should share its replacement costs.

3. Reserve funds minimize the need for special assessments or borrowing. For most association
members, this is the most important reason.

4. Reserve funds enhance resale values. Lenders and real estate agents are aware of the
ramifications for new buyers if the reserves are inadequate. Many states require associations to
disclose the amounts in their reserve funds to prospective purchasers.

5. The American Institute of Certified Public Accountants (AICPA) requires the community
association to disclose its reserve funds in its financial statements.

Therefore, Property Management Company must work with Association boards to impress
upon the board to maintain the reserve in order to insure that the capital projects can be funded
without having to resort to lending or special assessments. Imagine a special assessment of a
large one time payment of a few thousand dollars to repair a roof at a condominium complex
that has to be paid in a short period of time. Would you as a homeowner in a community enjoy a
large bill being dropped on your lap right before the holidays to pay for an emergency roof
repair? Community associations leaders understand that the unexpected bill is not feasible; and
this puts a premium on planning and budgeting to reduce the chances that all Santa brings a
homeowner is a special assessment.

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