Properly funded reserves are a fundamental aspect of financial health for homeowners associations (HOAs) and condominium associations. Reserve funds ensure communities are able to address major capital expenditures without relying on special assessments or deferred maintenance. The concept of “adequate reserves” is often subject to differing interpretations, and many boards struggle to establish a clear, defensible funding strategy. This article outlines a step-by-step approach to defining and maintaining adequate reserve funds.
Reserve funds are financial resources set aside for the repair, replacement, or restoration of the association’s common elements. These typically include roofing systems, pavement, elevators, HVAC systems, siding, and other major infrastructure. Unlike operating funds, which cover recurring expenses such as landscaping or utilities, reserve funds are used for predictable, non-annual expenditures that arise over the long term. Adequate reserves contribute to the physical and financial stability of a community by ensuring that future capital needs are met.
A reserve study is used to determine the level of funding a community requires. This study involves a detailed analysis of the association’s physical assets, their remaining useful life, their projected replacement costs, and their projected replacement timeline. Based on this analysis, the study provides recommendations on the annual contributions required to meet future obligations. Industry standards recommend that reserve studies be updated every three years, or more frequently if significant changes occur within the community or its infrastructure.
Associations typically adopt one of several recognized funding goals:
Associations are generally considered to be in a healthy financial position when their reserves are at least 70% funded, according to common industry benchmarks.
Adequacy in reserve funding should be evaluated not only by current account balances but also by the association’s ability to meet future obligations without resorting to special assessments or loans. An adequately funded reserve is one that aligns with the recommendations of a current reserve study, supports a long-term funding plan, and provides financial stability throughout the useful life of the association’s assets. Boards should ensure that annual reserve contributions are built into the association’s operating budget and adjusted annually to account for inflation, updated cost estimates, and changes in the physical condition of assets.
Clear and consistent communication about reserve funding is critical for responsible association governance. Many homeowners may not understand the significance of reserve funds, making it essential for boards to provide information that builds understanding and trust. Boards should regularly share information from the reserve study, including projected timelines for major repairs, current reserve balances, and how funding levels compare to recommendations. They should also explain the consequences of being underfunded. Ultimately, transparent communication about reserves promotes informed decision-making, a growing level of community trust, and reinforces the board’s commitment to financial stability. Defining adequate reserves is an essential responsibility of HOA and condominium association boards. By relying on professional reserve studies and adopting informed funding strategies, associations can protect their physical assets, protect property values, and escape financial crises.
Written by James Newby, Architectural Engineer
