By Chief Financial Officer, Amy Kleinschmidt
As board members, you are likely very aware that your association’s reserve fund is a critical component of your community’s financial wellness. Reserve balances are maintained to provide for the cost of future capital replacement projects, and these funds are kept separately from an association’s operating account, which funds day-to-day expenses.
Having a professional reserve study in place that is updated regularly is essential to evaluating the adequacy of your reserve balance and is an important tool in the annual budgeting process.
While setting aside funds for future expenditures is always a wise choice, there are also some specific reasons why doing so is particularly important for homeowners associations:
1. Reserve funds meet legal, fiduciary and professional requirements. For example, replacement reserve funds are often required by mortgage lenders, state statutes and the community’s governing documents.
2. Reserve funds provide for the cost of major repairs and replacements that will be necessary at some point in time. While a roof may not need replacement for 25 years, every owner should share in the replacement costs by contributing through their dues to the fund over time.
3. Reserve funds minimize the need for special assessments. This is important to many homeowners in order to avoid the burden of paying a larger special assessment amount at a later date. Special assessments could also result in collection issues for the association, which can in turn lead to cash flow issues.
4. Adequate reserve funds enhance resale values. Real estate agents and lenders are aware of the importance of funding reserves, and in many states (including Minnesota) associations are required to disclose reserve fund balances to prospective buyers.
Please reach out to us if you have any questions regarding your association’s reserve funds. We are happy to help you plan for the future!
Gassen HOA Management