Do You Need a Reserve Study? (HINT: The Answer is Probably Yes)
Posted on October 8, 2019 12:58 PM by Melissa Gentry
Categories: Board Member Articles
Equipment and major components must be replaced from time to time, regardless of whether we plan for the expense. Pavilions, clubhouses, plumbing, electrical, pools, roofing, paving, or sports courts to name a few—will need to be replaced, what they will cost and how much we need to set aside each year to pay for the various components at the necessary time.
We need 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 association 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
- State statutes, regulations, or court decisions.
- 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 banks 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.
How do we know how much to save?
Preparing it requires a unique combination of specialized engineering knowledge, a keen understanding of financial projecting and savvy investing skills. Professional reserve study providers are extensively trained before they are considered qualified to perform competent reserve studies tailored for each community. These professionals have met stringent requirements and are held to high standards. They have a thorough knowledge of common interest developments, HOAs, and community associations, and can provide the board with sound guidance. Your board should take its fiduciary responsibility very seriously to be good stewards of owner money. By hiring these professionals it’s a road map to ensure we are doing the right thing.
- January 2022 (1)