How Much Should We Have In Reserves?
Typically, accountants tell boards they should have three months’ operating expenses on hand in reserve. In our opinion this is poor advice as the amount is based on what the actual needs are. The amount an association needs is very dependent on the major components, their useful life and location. That is why a reserve study is required for most association’s in Washington State. Even small association should have a least one reserve study every few years to know how much they need to maintain their assets.
There isn’t any legal requirement in Washington State for a minimum reserve fund amount per se. However, most banks who make loans to co-ops and condos recommend that corporations and associations follow Federal National Mortgage Association (FNMA, also known as ‘Fannie Mae’) guidelines, which require a 10 percent reserve as a line item in their annual budget.
Many small associations try to get by with a “pay-as-you-go” budget. We call this a “head in the sand approach.” Unfortunately when a major project such as a new roof, deck replacement or painting is needed many people don’t have the cash on hand to pay for it. In this case the board have has limited choices:
- they can refinance the underlying permanent mortgage or secure a line of credit against the building
- they can foreclose on the members that can’t pay the assessment.
A reserve study will look at the association assets and determine how much should be in reserve over a 30 year period. See our detailed sample reserve study reports.