Every condo/homeowner association should exercise a plan to repair and replace major common area components like roofs, siding, and decks. Because the board has a fiduciary duty to manage association funds and property, a replacement reserve budget is very important. Not only does this information supplement the annual pro forma operating budget in providing owners with financial information; the reserve study is also an important management information tool as the association strives to balance and optimize long-term property values and costs for the membership.
A Reserve Study is comprised of two parts: the physical analysis and the financial analysis. The physical analysis section refers to the current conditions and estimated replacement cost for the individual common area components. The financial analysis section includes information on the current status of the reserve fund and recommendations for the future life of the fund.
How Do Reserves Fit into the Overall Financial Plan?
The reserves are an important part of the association’s annual pro forma operating budget. The replacement reserves relate to association budgeting in two important ways:
- The pro forma operating budget will include planned replacement reserve funding and the accrual-basis expense for the year.
- The reserve estimates depend on assumptions about the association’s maintenance program, and maintenance expense is a part of the operations budget.
It is important that association members understand the difference between operations and replacement reserve activities. Boards should establish policy to distinguish between reserve expenses (funded from the replacement reserve account) and operating expenses (funded through the non-reserve operating budget).