What is the Purpose of Reserve Funds?

Common-interest developments or community associations are the fastest growing housing sector today. These types of associations exist as condominiums, cooperatives, vacation timeshares, planned unit developments and more. According to the Community Associates Institute, as of 2020, over 25% of the entire US population lived in a community association.

One cited advantage of community association living is shared amenities such as swimming pools or tennis courts, which would be difficult for one household to acquire or maintain on its own. However, depending on the type of community association and its bylaws, shared assets could also include infrastructure such as roads, fences, ponds, parking lots, landscaping, roofs, decks or other assets. When living in a newly constructed association, you may not think about the eventual replacement costs and/or maintenance of these shared assets. 

The purpose of reserve funds is to set aside money to prepare for the major repair and replacement needs of these community assets. While deemed long-lived assets in some instances (i.e. subsurface utilities), these items do deteriorate with age and should also be maintained accordingly. Maintaining sufficient reserve funds minimizes the chances of surprise special assessments and ensures that the replacement and major maintenance needs of association maintained assets can occur in a timely manner, thereby protecting the value of the residences in the community. With proper reserve fund planning, you are also able to assess consistent annual reserve contributions; ensuring fair and partial equity between those that have owned their units for one year or thirty years.

The volunteer or elected boards of these associations have a fiduciary duty to protect the assets of the community. This means having sufficient reserve funds to handle timely replacement and/or maintenance needs of these assets. In many instances, the starting point for these funding plans is a reserve study. Having the studies conducted on a regular interval and following the reserve study professional’s funding guidance puts associations in a strong position to have sufficient reserve funds to address capital expenditures both now and in the future.