One of the most important indicators of building health is the state of the building’s reserves. Think of the reserves like the building’s savings account (as opposed to the operating fund, which is the checking account). The reserves ideally have all the funds for the building’s short to mid-term projects, and also sufficient funds to cover unforeseen expenses, which should also be expected to come up occasionally.
But how much should the association have in reserves?
Many associations of larger buildings undergo a reserve study, which is an audit by a third party firm that compares the building’s likely future needs with the current reserves. But, often, smaller associations don’t have the money or desire for a full on study. In this case, a more rough and general estimate of what a building might need in the next year or two can give an indication of what kind of reserves might be ideal.
The state of the reserves is also determined by how fiscally conservative the HOA board is. On one side of the spectrum, imagine a building with high monthly assessments, whose reserves are fully funded to cover any projects that are likely to come up. This sounds ideal, but if in reality only a small fraction of the reserves are used in any particular year, owners in the building might start to gripe about the unnecessarily high monthly assessments they have to pay.
On the other hand, picture a building with a low monthly assessment and not much in building reserves. Any time significant costs arise, this building would have to ask its owners for a special assessment — an extra payment on top of their monthly assessments. As you can imagine, no one likes to receive an unexpected bill for several hundred, or even thousand, dollars. At those times, owners tend to forget that they’ve had the ongoing benefit of lower monthly assessments and are often not thrilled about the need for a special assessment.
So how much is enough to have in reserves? While, as you can see above, there is a range, we would say that closer to fully funded is something to strive for and at least 70% of anticipated project needs. That would allow most projects to be funded from the reserves, and only unexpected projects would create the need for a special assessment.
The other key part here is that reserves are funded in relation to anticipated projects. You can’t know how well your reserves are funded unless you have a good knowledge of the projects your building will need in the next 3 to 5 years, and that in and of itself requires a good amount of experience to accurately estimate. Incidentally, reserve studies are also usually conducted every 3 to 5 years to stay relevant to the building’s changing needs.
Do you need help assessing the state of your building’s reserves? With more than 200 buildings managed since 2003, we at Hales Property Management have the proven track record of success to ensure your building’s finances are in good shape.
Contact us today to request a proposal!