RESERVE FUNDING
OVERVIEW
Since the early 1970s, community associations such as condominium associations, cooperatives, and planned communities have experienced exponential growth. This growth is expected to continue for the foreseeable future in the United States and globally. Approximately 35 percent of U.S. housing inventory exists in planned or managed residential communities, generally referred to as common interest communities or community associations. The Foundation for Community Association Research estimates that in 2026, there are nearly 375,000 established community associations in the U.S. representing 30 million housing units and 80 million residents. Community associations also are a growing trend in Europe, Australia, South Africa, and the Middle East. WHAT ARE RESERVE FUNDS AND WHY DO THEY EXIST?
RESERVE BALANCE: Actual or projected funds clearly identified either at the begin- ning or end of the associa- tion’s fiscal year that will be used to fund reserve com- ponent expenditures. The source of this information should be disclosed within the reserve study. Also known as beginning balance, reserves, reserve accounts, or cash reserves. This balance is based on provided informa- tion and not audited.
Community associations come in all sizes. They vary by age, type, amenities provided, and maintenance obligations. Careful planning for future repairs and replacement is in the best interests of the community association, and also required by law in many states. Maintaining an adequate reserve fund helps associations satisfy legal, fiduciary, and professional responsibilities. It also minimizes the need for special assess- ments or borrowing and enhances property values in the community. The concept of reserves—community-wide assessments to fund the replacement of common elements—dates back to 1947 before the first condominium was created in the United States. Every association should have a specific amount of cash in a separate account to fund necessary repairs or replacement projects. These funds are normally known as the reserve account.
There are several reasons why associations need reserves:
• Protect and enhance assets. Funding of reserves protects the physical assets in the communi- ty and the investment each owner made by purchasing a home in the community. By making sure that worn components can be replaced when needed, associations carry out a primary function of good fiscal planning. • Fairness. The most equitable means to fund reserves is a process where every homeowner contributes their fair share over the period where they benefit from the common assets. A
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