Condo Reserve Fund Analysis

Condo Association Reserves Fund

Reserve studies for condominium associations involve the condominium structures and their replaceable components. Accordingly, they are usually more complex than associations consisting of single family homes where the association does not have responsibility for the maintenance of building exteriors. The reserve professional must be familiar with a wide variety of building components and their normal major repair or replacement cycles.

The purpose of accumulating condo association reserves is to provide sufficient funds at the time the major repairs or replacements must be made. However, many factors can affect the normal repair or replacement cycle of components, causing them to either wear out sooner than expected, or to last longer than expected. As a result, the condo reserve fund becomes an estimate. The only real goal that can be achieved with condo association reserves study is to accumulate approximately the right amount of money at approximately the right time. In the early years of an association's life, estimated component cycle lives are normally based on industry averages or manufacturers warranties. As components get closer to the end or their life cycle, it becomes easier to predict when the replacement should occur.

An example of this is looking at one of the most common roofing types in the United States, the three tab asphalt shingle roof. Although products on the market have ranges of estimated or warrantied lives of 25 to 50 years, the 30 year warranty is one of the most common products. Assuming the 30 year product, during the first 25 years of the roof's life cycle, it may be difficult based on condition to assume any life different from the original estimated life of 30 years. But, deterioration during the last five years of the cycle generally provides better visual evidence of when the actual replacement should occur. It is unlikely to be exactly 30 years from date of original installation, but generally occurs at a time fairly close to the original estimated life.

This same type of evaluation must be performed for each separate building component that requires major repair or replacement. The report of reserve studies for condominium association summarizes this evaluation of all the separate components, and turns the component analysis into a financial projection. This condo reserve fund study becomes the long range budget for the condominium association reserves. This report is used to accumulate the condo reserve fund to provide monies for those future major repairs and replacement.

There are potential conflicts within any association related to the impact of a reserve study for condominiums. Current members would like to keep their overall assessments as low as possible, and since the projected expenditures occur far in the future, current members are motivated to underfund reserves. Developers are also motivated to keep assessments as low as possible to encourage sales. Board members have an obligation to make sure that assessments are at a level sufficient to condo reserve fund operations, including the accumulation of reserves. So, much depends on the accuracy of the condominium reserve study.

At Facilities Advisors, we are dedicated to providing the most accurate reserve studies for condominiums.