An HOA’s reserve fund is your association’s equivalent to a savings account. Where day-to-day expenses are managed from the association’s operating fund, major repair and replacement costs come from the reserve fund.
Planning for and funding the operational needs of an association is straightforward. Line items such as garbage removal and lawn care services are simply added up to determine how much the association needs to generate per year/per month in dues. What becomes a bit more complicated to predict and plan for are major replacements of building equipment, roofs, siding, asphalt, concrete, etc. Responsible Boards, wise homeowners and experienced management companies have come to see that long-term planning to set funds aside now is imperative. An adequate reserve fund can mitigate or alleviate unexpected special assessments.
Reserve funds are not an extra expense to your association’s operating budget (your monthly “dues”) – they just spread out large expenses more evenly for the needs of your association when it comes to the replacement of those “big ticket” items.
One commonly asked question is how is the amount needed for the reserve fund determined? Typically, an HOA board will hire a specialized outside firm to prepare a Reserve Study. This study, usually conducted by an engineer, first identifies all of the components the association is responsible for replacing; gives those items a remaining “useful life;” identifies the years which those components should replaced; and predicts a cost to do so. In the end you are left with a comprehensive 20-30 year plan. In addition to the expenses, a funding plan is then generated to guide how much the association needs to be saving each year to meet those expenses. This savings “expense” is then planned as part of your operating budget, thus your “dues.”
A reserve fund helps your association and Board fulfill their fiduciary responsibility to ensure your property is maintained – but this fund may also be a legal requirement for the HOA. A reserve fund may actually be required by any secondary mortgage market in which the association participates in such as Fannie Mae, Freddie Mac, FHA, or VA. Additionally, state statues, regulations or court decisions may require a reserve fund be maintained. For example, any common interest community built after June 1994 is required by the Minnesota Common Interest Ownership Act to maintain a reserve fund.
Reserve funds and studies are one of the most powerful tools an association can enact. Possible statutory requirements and powerful fund planning aside, utilizing a reserve study and maintaining an adequate reserve fund is the foundation to ensuring the stability of property values.