Reserve Contributions as a Part of Budget Planning
As we approach October, we are now officially into budget season. Associations are working hard to develop next year’s budget and doing everything possible to keep assessments from rising. Association Managers are calling vendors and utility companies to get an idea of next year’s rates and fees. In addition to the regular operating budget, associations are also evaluating long term expenses paid for utilizing the reserve account. The amount of money set aside within the reserve fund is generally determined by several factors, a few of which we would like to briefly describe.
Results and Recommendations within the Reserve Study
A reserve study is one of the first and best resources an association typically uses when determining how much money to reserve. It provides an excellent method of viewing the financial horizon, mapping expenses, and projecting the financial health of the association. The projects contained within the report show when expenses are expected to occur and provides an opinion of how much money the association should reserve or save on an ongoing regular basis.
Community aesthetics, cultural desires, and economic ability
Other considerations the association needs to review are the expectations of the association’s culture, aesthetical desires, and economic ability. Every association is unique and has a different desire for the look and feel of their community. Some associations wish to have frequent, large projects to maintain a premium appearance. Other communities lack the desire and economic ability to maintain the property in such a manner.
Risk tolerance of the association
Once the association has a good understanding of the anticipated expenses, they can then select the amount of funding appropriate to set aside. They can choose to fund at any level they wish based on the risk tolerance of the association. If they fund at a high level, there is a significantly smaller probability of requiring a special assessment. Some associations would prefer to save regular amounts that are adequate to reduce the risk of a special assessment, while other associations prefer to keep assessments as low as possible with the knowledge that special assessments are expected.
At the end of the day, every association has the responsibility to care for and maintain the common property of the association. This can be a daunting task, and in our experience, the association benefits from funding the reserve account to the best of their ability. When a reserve account is well funded there is significantly less deferred maintenance, and less risk of component failures such as gate operators, elevators, roof leaks, etc. Additionally, home buyers generally prefer associations that have strong reserve accounts, which increase the property values within the association.
Frequently associations with underfunded reserve accounts benefit when the board, association manager, and unit owners work together to develop a multi-year funding plan to steadily increase the financial health of the association. Communicating the responsibilities the association has for the maintenance, repair, and replacement expenses with unit owners helps them understand the challenges ahead, increases team work, and the overall morale of the community.