C.G. from Bristol County, Massachusetts writes:
Dear Mister Condo,
I thought the Reserve was the balance left in the bank account. Can you please explain the difference?
Mister Condo replies:
C.G., the balance left in the bank account is just that – the balance. A Reserve Fund is an entirely separate account or accounts where money is deposited at planned intervals to pay for repairs and routine maintenance that occurs over time. For instance, if the association had roads that need repaving every 10 years, the Reserve Fund should look at the likely cost to repave the roads in 10 years and save that money in the 10 years leading up to the repaving. If the repaving will cost $50,000, the association should put aside $5,000 every year just for that purpose. The same is true for each and every common element that the association owns. When you add all of these items up, you have the Reserve Fund. It is not uncommon for associations to set aside 10% or much more of the monthly common fees as Reserve Fund contributions. Over time, the Reserve should grow quite large so that there is money in the account when the time comes for the capital repairs for which the money was saved. If your association is counting on the balance left in the bank account to pay for these large expenses, your association is heading for dire financial consequences. I certainly hope that is not the case. All the best!
4 thoughts on “Explaining the Condo Reserve Fund”
If an association had roads that needed repaving every 10 years, it has a board that needs replacing or reeducating immediately! 25 years is a standard estimate and often they can be stretched somewhat longer.
Our association never put enough money in the reserve fund they use assessments particularly for roads
B.M., that is a dangerous practice, to be sure. It would be far better for the association to budget for the roads and make regular contributions to the Reserve Fund. That will raise the monthly common fees but will provide the community with a better solution in years ahead. Good luck!
Thank you, Mr. Condo, for this enlightening message. Over the past fifteen years my wife and I have owned units in two different self-managed condo associations. I have been involved in the management of each. C.G.’s question is one that many condo owners have but are unable to verbalize.
It is my experience that a large percentage of self managed condos are hurting for adequate reserves because their volunteer leaders lack the training to understand the ins and outs (literally!) and true need for reserves. I have witnessed even “professionally” managed condos in similar straights.
Large “special” assessments are a way of life in these associations. The drive to keep monthly maintenance fees at a minimum, plus a lack of understanding of the philosophy of reserves, contribute to perpetuate this situation. There is a serious lack of education and a serious need to provide easy-to-get education in this area.
I am in Connecticut where there are no standards or governmental regulations about reserves. I am aware, and almost jealous of, the opposite situation in Florida, for instance, where adequate reserves appear to be required by regulations.
Thank you for your excellent service to condo dwellers!