Being on a homeowner's association (HOA) board of directors comes with a lot of responsibilities—some big, some small, and some that only pop up once in a blue moon (or a big storm). That’s where your reserve fund comes in. Think of it as your community association’s financial safety net, ready to catch those major expenses before they turn into major headaches.
What Exactly Is a Reserve Fund?
A reserve fund is a special savings account set aside for future repairs and replacements that don’t happen regularly. Unlike your operating budget (which keeps the lights on and the grass trimmed), reserves are for those “big ticket” items.
This account is funded by assessments from owners. It’s not just a “nice to have”; it’s a critical part of responsible community management.
Why Do HOAs Need One?
Imagine the clubhouse roof starts leaking or a hurricane turns your lovely walking path into a muddy mess. Who’s footing the bill? Without a reserve fund, the answer is often: a hefty special assessment that homeowners don’t appreciate (to put it lightly).
A healthy reserve fund ensures your association can handle:
- Major improvements to common area assets (capital components)
- Unforeseen damage from natural disasters
How Can Reserve Funds Be Used?
Reserve funds aren’t a free-for-all slush fund. They’re earmarked for major projects that protect the community’s value and keep residents happy. Examples include:
- Construction and large-scale renovations for items that are identified in the association’s governing documents as the HOA’s responsibility to repair or replace.
- Resurfacing roads, replacing roof or siding – e.g., items that have a finite useful life and the expected remaining lifespan can be reasonably estimated.
- Any significant project tied to shared spaces that exceeds the minimum threshold cost. Generally, these are assets with an expected useful life of over 5 years. Smaller expenses are best handled via the regular operating budget.
The Secret Sauce: Reserve Studies
Ever wonder how your community association knows how much to stash away? That’s where a reserve study comes in. Typically conducted by engineers or reserve specialists, this study takes a deep dive into your community’s assets and their expected lifespans.
For instance, if your community pool deck has a 30-year life, the reserve study will map out how much to save annually so you’re ready when it’s time for a facelift. It’s part science, part strategy—and it takes the guesswork out of financial planning.
While reserve studies are legally mandated in some states, this is not the case in the Carolinas. However, lenders often require a reserve study when reviewing loan applications, particularly in condominiums, which are subject to additional requirements from agencies like Fannie Mae or Freddie Mac.
Planning for Funding
So, how does the money actually get into the reserve account? Typically, a percentage of the regular annual homeowner assessments is allocated to the reserve fund each year. The reserve study will tell you how much is needed and over what time frame, ensuring your community doesn’t under-save or overburden residents unnecessarily.
Once a reserve study is in place, listing all the association’s capital components, expected remaining life, and the funding plan for replacement, it is advisable to conduct a reserve study update every 3 -5 years. This is because macroeconomic factors (think inflation) impact the funding plan over time.
Wrapping It Up
A well-funded reserve isn’t just a best practice—it’s peace of mind. It helps maintain property values, keeps the board out of financial hot water, and saves everyone from unpleasant surprises. With the right planning, your HOA can weather the storms—literal and figurative—with confidence.
About Community Association Management Services
In business since 1991, CAMS has grown to become North and South Carolina’s premier community management company. With experienced local managers in each of its nine regions, CAMS provides innovative solutions to the community associations it serves. To learn more, visit www.camsmgt.com/choose-cams.
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