Why Our Association Need Reserves
Learn how a reserve specialist’s study helps us plan for replacements and maintenance expenses, meet legal requirements and enhance resale values in Desert Ridge.
Each year the Desert Ridge Community Association (Master Association) obtains an engagement from Association Reserves to perform and prepare a reserve study that both the Finance Committee and Board of Directors can rely upon during the annual budget planning process.
Certain expensive common elements must be replaced every 10, 15, or 20 years.
Part of preparing the budget includes calculating how much money the association must set aside in the upcoming year so we have the needed funds for each reserve asset (component) that will need to be replaced, repaired or maintained. To make sure we estimate as accurately as possible, we work closely with our reserve specialist.
The reserve specialist will prepare a study that will provide the board with guidance on how to keep our association’s physical assets from deteriorating faster than our financial assets increase.
The reserve specialist will visit the community to inspect it and prepare a written reserve study for the association. That report will include an inventory of all common area items, recommendations on what needs to be replaced and when, what the replacements will cost, and a plan for paying for them.
The reserve specialist chosen by the board has the expertise and experience to accurately determine the life cycles of our common components and will help the board estimate the cost to repair or replace them.
The reserve specialist is also an expert at analyzing the financial resources needed to maintain the common elements over time and will advise the board on how to balance the size of the reserve fund against the deterioration of the common elements.
Since the community’s physical assets are constantly aging, the guidance of a reserve specialist will help the board protect those assets and keep the community looking its best at all times—and that helps protect our property values!
Major components (like decomposed granite) must be replaced and/or maintained from time to time, regardless of whether we plan for the expense. We prefer to plan and set the funds aside now. Reserve funds aren’t an extra expense; they just spread out expenses more evenly. There are other important reasons we put association monies into reserves every month:
- Reserve funds meet legal, fiduciary, and professional requirements. A replacement fund may be required by:
- Any secondary mortgage market in which the association participates (e.g., Fannie Mae, Freddie Mac, FHA, VA).
- State statutes, regulations, or court decisions.
- The community’s governing documents.
- Reserve funds provide for major repairs, replacements, and maintenance expenses that we know will be necessary at some point in time based on the projected life of the reserve component specified in the reserve study. Although the central irrigation controller system may be replaced when it is 15 years old, every owner must share its replacement costs.
- Reserve funds minimize the need for special assessments or borrowing. For most association members, this is the most important reason.
- Reserve funds enhance resale values. Lenders and real estate agents are aware of the ramifications for new buyers if the reserves are inadequate. Many states require associations to disclose the amounts in their reserve funds to prospective purchasers.
- The American Institute of Certified Public Accountants (AICPA) requires the community association to disclose its reserve funds in its financial statements.
Doug Dickson
President
Desert Ridge Community Association
