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RESERVE FUNDS FOR ASSOCIATIONS
July 1, 2003
Community Associations set aside reserves for specific
future expenditures. These expenditures are for major
repairs and or replacements of certain common Association
components. Reserves are items of expense that will not
occur on a regular basis. Typical reserves are roof
replacement and repair, building painting, pavement repair
and replacement, elevator modernization and repair, lobby
redecorating, swimming pool, tennis court, air conditioning
replacement and repair, seawall replacement and repair,
balcony restoration, etc. It is also possible for
Associations to fund reserves for other types of
expenditures such as anticipated increases in insurance
premiums and other special projects.
The main reason that reserves are budgeted is for the
membership to be able to fund for the extraordinary expense
on an immediate or planned basis, without having to have a
special assessment for the expense. These funds are
accounted for in a special reserve section of the budget
and the balance sheet. Because these funds are separately
accounted for, their use is restricted to their intended
use, unless the membership decides to allow the Board of
Directors to change their use.
There are three commonly used reserves: Repair and
Replacement Reserves, Capital Reserves and Contingency
Reserves. The following defines and clarifies what each
type of reserve is and how it is used:
REPAIR and REPLACEMENT RESERVE:
Repair and replacement reserves are generally for common
area components that will need to be repaired or eventually
replaced over a long period of time. Also, deferred
maintenance items are considered as repair and replacement
reserves. Deferred maintenance is by definition something
that is maintained and/or repaired less frequently than
yearly and results in maintaining the useful life of the
component. Some components would be roofing, painting,
paving.
In a budget for reserves for repairs and replacements, the
budget will be accompanied by a schedule showing when the
components will need to be replaced, and the cost of
replacement and amounts of funds that need to be set aside
each year to fund the repair or replacement.
For condominiums and cooperatives, there are state statutes
and administrative codes that must be followed for the
budgeting, reporting and funding of these reserves. In
several instances, the state statutes require that the
Board of Directors budget and adopt a fully funded budget.
After that takes place, the membership can then reduce or
waive the funding requirement.
This funding requirement cannot be waived by the Board of
Directors and the reduction and or waiving of the reserves
is for that year only. Each year the Board must report and
adopt a fully funded budget.
Homeowners’ Associations are not required by statute to
have reserve funds. Any reserve fund requirement for
Homeowners’ Associations would come from the Association
Documents.
CAPITAL RESERVE:
Capital reserves are generally used to fund special
projects and improvements for Community Associations. In
addition, a capital expenditure is usually for an
expenditure of funds for the purchase or replacement of an
asset whose useful life is more than one year or results in
the increase of the useful life of an asset for more than
one year. Examples of capital reserves would be saving for
a new clubhouse, privacy walls, landscaping projects,
additional street lighting, new entry features, etc.
These types of reserves come and go depending on the needs
and desires of the Community Association.
CONTINGENCY RESERVE:
Contingency reserves are undesignated funds that are set
aside for unanticipated expenses. Examples for future
expenses might be for future increases in insurance, legal
expenses for litigation, increases in operating expenses,
etc. Many Associations will try to budget 1 - 3% of their
total budget for contingency expenses. A contingency
reserve will not meet the state requirements for funding,
in that the reserves are not designated for specific uses
and are not restricted.
When defining the purpose of a Reserve Fund for deferred
maintenance and capital expenditures, the Board should
clarify how specific or general the use should be. For
example, if the Association had a reserve fund for Tennis
Court Resurfacing and the Board wanted to use the funds for
the replacement of the Tennis Court Lighting. They should
not use the funds in that manner, as they are restricted by
their definition of use. However, if they titled the
reserve fund as Tennis Court Reserve, then the funds could
be used for resurfacing, lighting, fences, tennis court
supplies and additions.
Reserve funds are an excellent way for Associations to help
manage the deterioration and repair of common elements,
meet unexpected expenses and help an Association to save
for major improvements without incurring special
assessments to their unit owners.
If your Association does not have reserves or annually
waives their requirement, you may want to reconsider this
practice, as an Association with fully funded reserves is a
sign of good financial management and will help the value
and marketability of your Association’s units.
Copyright 2007© Associated Property Management of the Palm Beaches, Inc.
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