In today's harsh economic times, maintaining a healthy reserve fund is more important than ever. A community association’s reserve fund can be used to cover any number of emergency expenses from sudden repairs to legal costs. In addition, a reserve fund can be used for ongoing maintenance projects or for anticipated future repairs.
How Much is Enough?
Though a robust reserve fund is highly desirable, there is too much variation in properties to have one specific formula to calculate how much money should be in a community’s reserves – at least not one that works across the board. That said, there are some rules of thumb and guidelines that boards can use to determine a healthy amount to keep in reserve. One way to get a sense of what your condo or association should have in reserve is to look ahead at the building’s needs. Conduct a survey to determine what systems might need to be replaced and what repairs might be necessary over the next five years.
Many times, surveys are done by qualified engineers who generate projections of cash amounts the building will need to put aside in the next one, two, five and ten years for that new roof, siding or furnace. These findings are typically bundled into a report prepared by the engineer called a “reserve study.”
Despite the usefulness of current reserve studies, many communities are stuck with outdated studies that are not that useful in generating precise repair or replacement costs, says Marie Shepherd, CPA, and a partner in Graham, Huckins & Shepherd, PC, in Worcester, Massachusetts.
“A lot of condos have very old reserve studies – especially considering the changing economic conditions and pricing of things,” says Shepherd. An updated study, Shepherd notes, would reflect recent fluctuations in the prices of labor and materials.