Reserves-What are they? Why are they necessary? How to calculate them
Reserves, What are They?
A condominium association, through their bylaws, is responsible for certain association ongoing property maintenance / operational tasks incurred on behalf of its owner / members (“Co-Owners”). Examples of these tasks include garbage service, lawn cutting and fertilization, tree and scrub maintenance, lawn sprinkler system maintenance, and building shell structure hazard and casualty liability insurance. These ongoing tasks are paid for by the association through the assessment of monthly dues to its Co-Owners.
That same association, again through it bylaws, is also responsible for the replacement of capital assets such as building roofs, driveways, sidewalks and porches. While Co-Owners use these assets on an ongoing basis and there is an annual ongoing cost for these assets, the replacement of such assets may be many years away, with the actual cost having to be paid at the time of such replacement. As such, there is a current use and cost for the capital assets, even though the actual replacement and cost are years away.
An example of an association capital asset that will eventually have to be replaced are the roofs of the Co-Owner buildings. To explain this, let’s use an example where each association building is comprised of two Co-Owner residences of equal size. It is determined that the roofs of these buildings have an average expected useful life of 20 years going back to the time they were installed, and the current cost of replacement would be $20,000. As the replacement cost is $20,000 and the expected useful life is 20 years, the annual cost of the roofs for each building is $1,000, or $500 for each Co-Owner. While there is a $500 per year cost to each Co-Owner for the “use” of their residential roofs, the actual cost of replacement, many years down the road, will not have to be paid until those roofs are actually replaced.
Why are Reserves Necessary?
Monthly Co-Owner dues are determined based upon the association costs for both ongoing property maintenance / operational tasks that must immediately be paid AND for current capital asset usage that will not be paid until the capital asset is actually replaced, many years into the future.
Monthly Co-Owner dues should be assessed and collected in amounts large enough to pay for both ongoing property maintenance / operational tasks and to fund reserves for the eventual replacement of capital assets. Current Co-Owners immediately receive the benefits of the ongoing property maintenance tasks and the use of he capital assets, thus they should have their dues reflect the funding of these benefits. Co-Owner due collected in such monthly amounts will avoid special assessments (more on this later).
Funding ongoing expenses is easiest to do in the sense that Co-Owners have to immediately pay for the on-going maintenance tasks, whereas with capital asset reserves, the association is funding the replacement cost of an association asset that will take place years into the future.
What happens if the Co-Owner dues that are collected are not large enough to cover either ongoing maintenance / operational expenses or capital assets replacement costs? Read on!
If Co-Owner dues are insufficient to fund ongoing maintenance / operational tasks, a special assessment can be levied by the association to all current Co-Owners. As an example, let’s say ongoing property maintenance task costs were incurred totaling $60,000, and dues of $48,000 were collected to pay for these ongoing tasks, leaving a shortfall of $12,000. As these costs were already incurred for the association of 30 Co-Owners, the association would levy a special assessment of $400 to each of the association’s current 30 Co-Owners ($12,000 shortfall / 30 Co-Owners = $400) to pay for the $12,000 shortfall. This special assessment is in addition to the regular Co-Owner monthly dues.
If the roof of a two Co-Owner building has to be replaced at a cost of $20,000 and there is only $2,000 in association reserves to pay for such roof replacement, the $18,000 shortfall will have to be paid through a special assessment to the current Co-Owners. In this example, the association would levy a special assessment of $600 to the 30 current Co-Owners ($18,000 shortfall / 30 Co-Owners = $600) to pay for the $18,000 roof replacement shortfall. This special assessment is in addition to the regular Co-Owner monthly dues.
How to Calculate Reserves
Calculating the correct Reserve amount to currently assess and collect from Co-Owners is a series of complex calculations using various assumptions, and the calculations have to be updated each year using both actual Association amounts and currently updated assumptions.
An Association can either pay thousands of dollars to a professional for them to complete a Reserve Study, or they can use this Condominium Association Reserve Program (“Program”) and complete a Reserve Study on their own, at a fraction of the cost ($349.95) of what a professional would charge!
The Program will guide your Association through an easy to follow, step by step process in calculating a correct amount to charge for Reserve funding. The Program takes the guesswork and complexities out of Reserve calculations, and is designed for use by individuals with no previous construction contractor, investment, or financial experience. All that is needed is that the individual tasked with using the Program (an Association Board member or someone else appointed by the Board) have a basic to intermediate knowledge of Microsoft 2010 Excel (or higher version). Microsoft Excel 2010 © is a spreadsheet program that is needed to use this Program.