Managing Reserve Contributions
There are essentially three ways to contribute to your reserve account. Regular Contributions, Special Assessments and Loans.
Regular Contributions are the best method of funding the reserve account. If adequate regular contributions are not established the reserve fund will eventually be underfunded. An underfunded reserve account leads to deferred maintenance and potentially extensive repair. The effects of deferred maintenance and extensive repair are significantly more than routine or preventative maintenance. Additionally, regular contributions are the most fair to the community members. If reserve contributions are not set properly whether to high or low, the individuals who use the asset will be paying for more or less than their share. If the contributions are set to high, current owners are paying for what future owners should pay for. Likewise, when contributions are set to low, future owners will pay for what current owners should pay for. Having properly set reserve contributions is the most fair and equitable for everyone involved.
Special Assessments (and deferred maintenance) is the result of not having properly set regular reserve contributions. If the reserve fund is underfunded at the time an expense is required, then the community is forced to hold a special assessment or obtain a loan. Most often this occurs when deferred maintenance catches up and the community is forced to deal with it.
Loans are another option to fund expenses. If the association members don’t have the finances to contribute to a special assessment or the required repairs are to extensive and costly for a special assessment a loan may be required.
When considering with the need to increase the monthly reserve contribution amount it is important to remember that if the increase is not made now, it will be made later in the form of a special assessment or loan. Both alternatives to regular reserve contributions eventually require an increase in regular assessments. With regular assessments the Association may earn income in the form of interest, while with loans the Association pays interest. Additionally, the future still needs to be anticipated and saved for. Therefore, you are now increasing contributions to pay for a loan payment and increasing contributions to continue saving for the future.