What are Replacement Reserves?

Replacement reserves are the money an association accrues over time to pay for future repairs and replacements of community assets.  By saving for these large expenses from year to year, on a cumulative basis, the costs are more equitably distributed among all members who receive benefit from the community's assets.

What is a Reserve Study?

A Reserve Study is an in-depth analysis of both the physical components and the financial status of the association's long term funding & planning.  Among other things, a Reserve Study provides a savings plan which allows you to make small monthly contributions to your reserve account in order to have sufficient funding available when each asset needs to be repaired or replaced.  Special assessments are no longer required each time an asset needs replacement.

Why should I pay for this, I'll be dead by the time the money is needed!

By reserving for these expenses over time, nobody has to pay for the whole thing in a lump sum.  Each member pays only for what they use.  It's sort of a Fair-Share plan.  You only pay for the depreciation that actually accrues during your residency.  Meanwhile, the property is well maintained, everyone's investment is protected, and nobody gets stuck with a huge special assessment!

If assessments are too high we'll never be able to sell!

Real life proves otherwise.  Reserve funding actually enhances resale values.  Buyers are increasingly sophisticated.  They recognize your home is a better investment if your association has substantial reserves based on a detailed and comprehensive plan to maintain the property and avoid huge special assessments.  As for lenders, they are professional risk evaluators.  If you underfund your reserves, it may affect how much they will lend, and what rate they will offer, for mortgages in your community.

Why should we save now for expenses that won't be incurred for many years?

Reserves are your community's way of setting aside money for future repairs and replacements of community assets.  A reserve analysis study is a long-term planning and budgeting guide which provides a payment plan that allows you to make small monthly contributions to your reserve account in order to have proper funding available when each asset needs to be repaired or replaced.

Can't they pay those future capital expenses with special assessments?

Most community associations require the approval of the owners to levy any special assessment.  Therefore, there is no assurance for any individual member that the funds will be available when work is required on their home.  Special assessments are difficult to get approved, generally unpleasant and frequently unfair.  Especially for those living on fixed incomes.  It's always better to pay a little extra each month than to get hit with a devastating expense all at once.

How much should we reserve?

There is no rule of thumb and there are no shortcuts.  The only way to determine how much you should be saving for future expenses is to conduct an analysis!  What are the association's responsibilities?  How much is already saved?  How much will you need and when will you need it?  There are many variables.  Do not guess, do the math!

What else can I say to persuade others on my Board?

Of course there's no way you will ever convince everyone, but these are some of our favorite points:

1. Carefree living is not cost-free.    We choose to live in a community association, at least in part, because the association is responsible for much of the maintenance and repair work, including long term asset replacements.  The association must pay someone to do this work.  Reserves are the only way the association, and it's members, can be certain of its ability to maintain, repair and replace community assets when needed.

2. Proper reserve funding makes ownership in your community a sound financial investment, whereas inadequate reserve funding makes it a 'less desirable' investment.  A detailed and comprehensive reserve funding plan demonstrates precisely how your association will pay for long term maintenance of the properties, protect property values and avoid large special assessments.  In essence, your reserve plan is your business plan.  Wise homebuyers will gladly invest more money to live in a well run community than one which is unequipped to protect their housing investment. 

3. The American Institute of Certified Public Accountants (AICPA) issues very specific guidelines (CIRA Guide) that require accountants to address the issue of proper reserve funding when conducting the community's audit.  If the Auditor can't determine how you've set up your reserves, your audit will be "qualified".  That sends up "red flags" to lenders and buyers alike!

4. Your governing documents or state statutes may require your association to conduct a reserve study; budget a specific amount; or maintain a certain level of reserve funding.  If you are not sure of your obligations, it is advisable to obtain a written legal opinion from a qualified attorney who specializes in association or cooperative law.

Budgeting for Adequate Reserves