Funding Your Reserves Banking Against Surprises

Bill and Martha Jensen bought a new condominium in Miami in 1995 and lived there for 19 years. In 2014 they sold the apartment to Max and Rita Diaz. A year later, the condominium association’s board of directors voted to replace the building’s roof and imposed a special assessment to pay for the project. “That’s not fair,” the Diaz’s complained, insisting that they shouldn’t have to pay the full assessment to replace a roof that sheltered the Jensens for 95 percent of its life. 

It wasn’t fair—but major components and systems don’t last forever, and big assessments are what happens when a board doesn’t set aside funds on a regular basis to update those components and systems. 

“The number one mistake a board can make is characterizing such things as future expenses,” says Robert Nordlund, founder and CEO of Association Reserves, Inc., a Calabasas, California-based, reserve study firm with clients in every state. 

“It’s human nature to worry about future things at a future time,” he explains, “but if you characterize reserve expenses as offsetting ongoing deterioration, the future takes care of itself. Associations that don’t pay this ongoing bill doom themselves to deferred maintenance, special assessments, and declining property values.”

What Deserves Reserves

Nordlund says that for an item to warrant reserve funding, it must be a common area maintenance responsibility, exceed a minimum threshold cost, and have a limited and predictable useful life.

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Comments

  • A communication error during my interview showed up in this article. Typical Reserve contributions are 15-40% of an association's total budget, so associations only contributing the 10% FHA minimum requirement will likely be underfunding their Reserves.