Understanding an Association's Reserve Fund

One of the most important responsibilities of any HOA or CA board is to properly allocate its community association’s funds. HOA members pay monthly or annual fees to enjoy the perks of living in a community association, and they expect their board to use that money in a way that will benefit the entire association.

But when costs for security, landscaping, and maintenance issues start popping up, it can be difficult to know how best to allocate funds to address these different types of expenses. And using money incorrectly can not only causes rifts within your HOA or CA, but can also cause legal repercussions as well. Having a robust reserve fund can be a huge asset for your community association if you understand what it is and what that fund can lawfully be used for.

What is a Reserve Fund?

All community associations will have two types of funds that they primarily deal with: operating funds and reserve funds. Operating funds, as their name suggests, are used for the day-to-day operations of a community association. Reserve funds, on the other hand, are put aside for major or long-term projects that the community association might have.

Operating expenses are relatively easier to pinpoint than reserve fund expenses, and include costs associated with landscape maintenance, utilities, administrative functions, security services, common area upkeep, insurance, and other expenses. Identifying which projects qualify as “major” or “long-term” is a little more difficult but generally include projects that are not yearly occurrences, such as new construction, repair or replacement of common elements like fencing or roofing, and similar projects.

An easy way to think about this is to imagine operating funds like a checking account and reserve funds like a savings account. 

How do you Build a Reserve Fund?

So how much should you have in that reserve fund savings account? The first step in calculating that number is performing a reserve study, especially if your association has not done one in a long time. Although New Jersey doesn’t have any laws necessitating a reserve study, conducting a yearly reserve study — even if not required to — is a great way for a community association to get a comprehensive look at the state of all the shared assets that fall under an HOA or CA board’s responsibility. 

Although anyone can perform a reserve study, it is best to hire a professional to build an in-depth report that can truly reflect the status of the shared assets in your community association. Be prepared to set aside money for these inspections. Reserve studies can cost an HOA up to $10,000 per year depending on the size and complexities of your community association. Be prepared to compare rates for reserve study specialists, but do not compromise on quality just to save a few bucks — sometimes paying more up front can help an association be more proactive in their problem solving, saving money in the long run. After all, it is cheaper and easier to repair a leaky roof than it is to replace a roof that has entirely collapsed.

Ideally, after this study, the HOA or CA board would then place 100 percent of the total estimated costs from the reserve study into its reserve fund. However, it might not be that simple, as more urgent operating costs can absorb much of the association’s overall funds. An HOA should aim to allocate 25 to 40 percent of homeowner dues into the reserve fund, with the ultimate goal of having at least 70 percent of the funds it needs in its reserve fund at any given moment. This will help the association to prevent having to levy special assessments or conduct fundraising efforts in the face of emergency that needs immediate financial attention. Averting the need for these efforts will not only lessen the stress on your HOA or CA board, but it will also help to keep residents happy and confident in their board members.

Carefully constructing and implementing a thorough budget is another key step to building a robust and adequate reserve fund. Although every HOA budget is going to be different, making smart and informed decisions and ensuring the fundamentals are taken care of are important basics to work from.

Do I Really Need a Reserve Fund?

If you live in an HOA or CA that consists of newly constructed buildings and facilities, or in an area with mild weather for most of the year, you might doubt the necessity of a well-funded reserve fund for your community association.

But having a robust reserve fund is about more than emergency preparedness and long-term upkeep. Any unexpected costs threaten a balanced budget and may oblige an HOA or CA board to levy frequent special assessments or increases in dues, which can anger homeowners and threaten the sense of community in your association. It may even discourage potential residents from considering your HOA when they are looking for a place to live. An insufficient reserve fund can also threaten your residents’ ability to get a Federal Housing Association loan, further driving homeowners from your community.

Budgeting your community association’s funds to spend money wisely and in ways that will truly benefit your community association is no easy task, but maintaining a healthy reserve fund is one of the first steps in upholding a safe and satisfied community association.