What reserves are for
Reserves pay for the components the association must replace on a schedule: roofs, asphalt, siding, elevators, the pool's surface and equipment, fences, the clubhouse roof. Each has a useful life and a replacement cost. The reserve fund is the money set aside, a little every year, so that when the roof reaches year 25 the cash is there and no one is assessed $8,000 in a month.
The reserve study
A reserve study lists every component, its remaining life, its current replacement cost, and the annual contribution that funds all of them on schedule. A specialist prepares it with a site visit; updates without a visit are cheaper. Many states require a study every three to five years, and several require the board to fund it or to disclose by how much it does not.
The study produces two numbers the board needs: the fully funded balance, what the fund would hold if every component were funded in proportion to its age, and the recommended annual contribution.
Percent funded
Percent funded is the reserve balance divided by the fully funded balance. It is the health measure lenders, buyers, and boards use.
| Percent funded | What it means |
|---|---|
| 70 to 100 | Strong. Special assessments are unlikely |
| 30 to 70 | Fair. A large component failing early would strain the fund |
| 0 to 30 | Weak. Special assessments or deferred repairs are likely |
Why boards underfund
Reserve contributions are the easiest line to cut when a board wants to hold the assessment flat. Each year the cut looks small; after a decade the fund is a third of where the study said it should be and the roofs are due. The owners who enjoyed the flat assessments have often sold, and the buyers inherit the special assessment. Lenders and resale certificates now surface the reserve balance, so the shortfall also shows up in the sale price.
Catching up
Raise the contribution to the study's recommendation in steps over two or three years rather than one; owners accept 8 percent a year better than 25 percent once. Put the reserve contribution in the budget as a fixed line, not what is left over. Keep reserve cash in its own account so it cannot be spent by accident. If a component is due before the fund can cover it, a reserve loan repaid through the regular assessment usually costs owners less than a special assessment.