It is good budgeting practice on a personal level to anticipate expenses and save for them over time – for example, Christmas savings accounts. Remember the personal financial axiom that recommends you have six months income in liquid savings “just in case”?
A similar axiom for condominium associations was put in place in Ohio law in 2004. An historical lack of adequate reserve funding and the hardships of large special assessments led to financial problems with many aging condominium buildings. The 2004 statutory changes required homeowners associations to establish and adequately fund their reserve accounts.
Careful planning for future repairs and replacements is in the best physical and fiscal interests of the community association, and it is now required by law in Ohio. Maintaining a reserve fund not only meets legal, fiduciary and professional requirements, it also minimizes the need for special assessments and enhances resale values.
Mortgage regulations are continually changing and requiring a reserve study is becoming the norm. Government entities and banks understand that adequately funded reserves helps to protect the investments homeowners make in the community. If you are in the market to sell your condo, you will need to reveal lack of adequate reserves, any special assessment pending, and also face the possibility that your buyer may not secure financing because of the Association’s inadequate reserves.
Definition of Reserve Studies
There are two components to a reserve study:
1) PHYSICAL ANALYSIS
During the physical analysis, information is gathered regarding the physical status and repair/replacement cost of the association’s major common area components. A component inventory, a condition assessment, and life and valuation estimates are established.
2) FINANCIAL ANALYSIS
A financial analysis assesses the association’s reserve [savings] balance or fund status (measured in cash or as percent funded) to determine a recommendation for an appropriate reserve contribution rate (funding plan).
Selecting a Funding Plan
Once your association has established its funding goals, the association can select an
appropriate funding plan. Associations will need to update their reserve studies more or less frequently depending on the funding strategy they select.
“Full funding” – The goal of this funding strategy is to attain and maintain the reserves at or near 100 percent. For example, if an association has a capital asset [for example, a paved drive way] with a 10-year life and a $10,000 replacement cost, it should have $3,000 set aside for its replacement after three years ($10,000 divided by 10 years=$1,000 per year X 3 years=$3,000). In this case, $3,000 equals full funding.
Condo Owners and Associations are now required by law to operate within these fiscally responsible funding principles.