To Reserve or Not To Reserve

One of the primary business duties of the Board of Directors is maintaining and preserving property values. To do this properly, an association must develop funding plans for future repair, renovation, or replacement of major common-area components such as roofs, boilers, sidewalks, swimming pool components, buildings, fairways, asphalt surfaces, decks, and more.

An association has several funding options including periodic assessments over the life of assets, special assessments at the time of replacement, borrowing funds when needed, a combination of the above, or the most common method and the one we use here at SCSH (and in some states the only lawful one):  setting aside monies in what is commonly called reserve funds, replacement reserves, replacement funds, or simply reserves. A reserve fund is established by a reserve study.

A reserve study is a complex document that projects when numerous components—like the clubhouse roof, parking lots, or tennis courts—will need to be repaired, renovated, or replaced; what they will cost; and how much we need to set aside each year to pay for the various components at the necessary time. Preparing a reserve study requires a unique combination of specialized engineering knowledge, a keen understanding of financial projections; and savvy investing skills.

Professional reserve study providers are extensively trained before they are considered qualified to perform competent reserve studies tailored for each community. These professionals have met stringent requirements and are held to high standards. They have a thorough knowledge of common interest developments and can provide the Board with sound guidance.

Reserve funds aren’t an extra expense—they just spread out expenses more evenly. There are other important reasons we put association monies into reserves every month:

1.    Reserve funds meet legal, fiduciary, and professional requirements. A reserve fund is required by:

a.    any secondary mortgage market in which the association participates (e.g., Fannie Mae, Freddie Mac, FHA, VA).
b.    state statutes and/or regulations.
c.    the community’s governing documents.

2.    Reserve funds provide for major repairs, renovations, and replacements that we know will be necessary at some point in time. Although a clubhouse roof may be replaced when it is 25 years old, every owner should share in its replacement costs.

3.    Reserve funds minimize the need for special assessments or borrowing.

4.    Reserve funds enhance resale values. Lenders and real estate agents are aware of the ramifications for new buyers if the reserves are inadequate. Many states require associations to disclose the amounts in their reserve funds to prospective purchasers.

5.    The American Institute of Certified Public Accountants (AICPA) requires the community association to disclose its reserve funds in its financial statements.

6.    Having a healthy reserve fund is proof that the community is looking into the future and preparing for large asset replacements that, if not planned for, could result in large special assessments.

In California there is no statutory requirement for associations to fund their reserves at any particular threshold; however, the state does require that associations conduct a full and complete reserve study with a site inspection of components once every three years and update the reserve study annually, which we do.

According to data gathered by the California Association of Community Managers, 44% of associations are under the 50% funded mark, while 43% are above and a small percentage, 13%, are at the “ideal” 100% and above mark.


SCSH’s Board of Directors has elected to fund your reserves at the 97% mark for 2015 without an increase to your monthly assessments by using funds saved in other areas. This funding mark is at the 19% higher percentage level and very close to the “ideal” 100% funding mark. Your Board should be congratulated for achieving this funding percentage.