P.S. from Waukesha County, Wisconsin writes:
Dear Mister Condo,
How do you determine how much money should be kept in your reserves?
Mister Condo replies:
P.S., I always like to say that Reserve Funds are part science, part common sense, and part crystal ball! The science is pretty simple. Every single common element owned by the association begins wearing down the moment it is installed. Regional weather conditions will wear certain items faster than others but every shingle, every piece of wood, every asphalt road, every sidewalk – everything that the association is responsible for is going to wear down and fail at some point. The “common sense” part is also easy. If these items are wearing down today, they need to be paid for today as well by the folks who are using them – the association owners. Finally, the crystal ball comes into play because we have to “guess” what these items will cost to replace in the future. Every association has different Reserve Fund needs and that is where the Reserve Specialist comes into play. Larger associations and those in states where Reserve Studies are required rely on these professionals to prepare a Reserve study detailing the association’s common elements and their likely life span and cost of replacement. Based on these numbers a Reserve Fund contribution is determined. Forward thinking associations then use that number as part of their common fee computation. For instance, a 100-unit association that will need $500,000 in Reserves within 10 years would collect $5,000 from each unit over those 10 years. $5,000 divided by 120 months = $41.67 per month per unit to be contributed to the Reserve Fund. If operating expenses, management fees, etc. = $300 per month, a monthly common fee payment of $341.67 per unit would allow the association to pay its bills and have the Reserve Fund money available when needed in 10 years. While this is far too simple an example, I hope it gets your thinking on track for how to prepare a number that is right for your association. A word of warning – don’t sidestep the process and just pick a number out of thin air. Reserve Fund needs vary by community. Do the work and determine the real number for your association or consult with a Reserve Study professional. They are often worth every penny spent with them to make for a strong financial footing for a successful community association. All the best!