Community roads, park playgrounds, pool surfaces, and gym equipment don’t last forever. And when something wears out or breaks down, it’s the association’s responsibility to replace or repair it. That’s where the reserve funds comes in.
In this article, we’re going to talk about what reserve funds are used for, how much to save in a reserve fund, and what to do if the association’s reserves are too low.
What Are Reserve Funds?
A reserve fund is like the HOA’s savings account. It’s money the association has put away for emergency repairs, big maintenance projects, and the replacement of assets. Part of the board’s responsibility to the association is to ensure that the reserves are well-funded, so the value of the association can be preserved for current and future homeowners.
It’s important to note that money put away in the reserve fund should not be used for capital improvement projects. These are projects meant to improve the community by adding something new, such as an ungated community becoming a gated community, or an association adding splash pads to its pool facilities. Capital improvements should be given their own budget item to ensure that money put away for necessary repairs is not used instead for discretionary improvements.
How Much Should an HOA Save in a Reserve Fund?
The amount of money an association should save in its reserve fund will depend on many factors, including the kind of amenities the HOA offers and how large the association is. The key is that an HOA should have enough money saved to replace or repair each of its assets as they reach the end of their usable lives. Such assets would include things like roads in private communities, playground equipment, gym equipment, pool surfaces, common area fences, and roofing.
To determine how much your association should be saving, the board can have a reserve study conducted.
What Are Reserve Studies?
A reserve study is a document put together by a reserve specialist that lists all the association’s assets, how much it will cost to replace each asset, and when each asset will need to be replaced. Reserve studies also provide plans for how much the HOA must save each year to pay for the replacements and repairs as they are needed.
How Often Should Reserve Studies Be Completed?
Typically, a reserve study should be completed every three to five years. This allows the reserve specialist to reevaluate and update the replacement/repair schedule to make sure the association stays on track.
Furthermore, the HOA should ensure that any additions to the community are also added to the reserve study, so they can be accounted for in the repairs schedule and association budget. For this purpose, the association should touch base with its reserve specialist if, for instance, it purchases new playground equipment for the park or installs a basketball court.
What If the HOA Doesn’t Have Enough Revenue to Fund the Reserves?
If the HOA’s operating costs and reserve fund needs cannot be met by the HOA’s current assessment rates, the HOA will either need to cut back on unnecessary costs or raise assessments if expenses cannot be cut. If an assessment increase is needed, taking the time to explain the HOA’s budget and reserve study to homeowners, either through a newsletter or a town hall meeting, will help the membership understand why the increase is necessary.
A healthy reserve fund will enable an association to preserve the value of its community for decades to come. If you have any questions about reserve funds or how to schedule a reserve study, reach out to a JellyBird representative. We’d be happy to help!
Also, visit Boardline Academy for more tips on how to be the best HOA Board Member you can be.