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Do Associations need to fully fund their Reserves, and how do they determine annual contributions?
Condominium statutes require reserves to be fully funded. Fully funded means that at the end of an asset’s useful life, sufficient funds should be available for its replacement. The difficulty is determining an asset’s replacement value and its useful life. Replacement value is obtained in one of four ways or a combination of the four:
- A contractor’s price quote for replacing the asset – i.e., replacing the roof, repaving the parking lot, or repainting the building.
- Money spent the last time the asset was replaced, plus an inflation factor.
- An insurance appraiser’s assessed value of the asset used in determining the property insurance premium.
- Through an engineering study or analysis of the various property assets comprising the Association.
Useful life estimates are based on previous experience and/or industry values. For example, some suggest that an asphalt roof has a life of 22 years and that buildings need to be repainted every eight years. Once useful life and replacement cost estimates are determined, the annual contribution calculation can be easily obtained by determining the amount of money needed divided by the remaining life. The amount of money needed is the replacement cost minus the current reserve balance for the reserve line item.
Another factor to consider in determining annual reserve contributions is whether the Association elects to pool its reserves or break them out into individual line items for each asset. Another option for certain assets, which may be too small to break out separately, is to pool a group of miscellaneous assets into a single line item. For example, a swimming pool reserve line could include pool resurfacing, pool deck replacement, pool pump replacement, pool heater replacement, etc.
In conclusion, annual contributions are calculated using precise formulas that are based on several estimated values. Their importance is critical in helping to reduce or eliminate special assessments.
Please contact us for consulting assistance in assuring reasonable and defendable reserve schedules for your community.