Replacement Reserves

One of the most common failings of community associations is to not include an adequate appropriation to the Reserve Fund in the Annual Budget. The problem often starts with assessments that are ‘low-balled’ in order to sell new condominiums quickly and then perpetuated when Boards feel pressured to not raise assessments in the face of rising costs. However, failing to recognize the depreciation that is occurring every year to important assets such as siding, roofs, asphalt, etc., will lead to future financial crises for your Association. When Operating costs increase it is tempting to lower Reserve Funding in order to avoid an assessment increase. However, that will inevitably lead to deferred maintenance, which lowers property values, requires large special assessments which create financial hardship for some owners, and collection problems for the Association.

Your Association’s Reserve Plan protects major costs over the next 30 years, using the Cash Flow approach. Under the Cash Flow method, the goal is to identify the amount that must be set aside each year to ensure that the funds are available as the anticipated capital expenditures incur. An inflation factor is applied to the future costs of the capital expenditures and also includes a cost of living increase each year for the Reserve appropriation so that owners in future years will be effectively paying the same as owners today for the annual Reserve funding. Estimated net after-tax interest earnings are also factored into the Cash Flow figure.

The Reserve Plan is available on the homeowner portal.