By Amy Bazinet CMCA, AMS, PCAM
Associations are responsible for the upkeep of common elements, and this can include everything from roofing and roads to landscaping and swimming pools. To manage these responsibilities effectively, strategic allocation of your Association’s reserve funds is essential for maintaining the financial health and longevity of the community. This process involves planning, communication, and regular review, ultimately protecting the community’s financial stability and property values.
Get a Reserve Study
The first step on the strategic allocation path is getting a comprehensive reserve study completed by a reserve analyst. This study will outline all the components the Association is responsible for, evaluate their current condition and remaining useful life, and determine the cost to replace or repair those items. This study provides a roadmap for the community that can assist in preparing a plan to save the money needed to cover the future expenses as outlined in the study. Regular reserve studies typically conducted every three to five years, help ensure that the reserve fund plan remains accurate and reflects any changes in the condition of community assets or economic conditions.
Set A Funding Plan
So, you have a reserve study in hand, the next step is to develop your funding plan. This plan should outline how the community will gain the necessary funds over time. There are three types of funding that can be used – Full, Baseline, and Threshold.
- Full funding is a commitment to accumulate 100% of the estimated future costs as outlined in the reserve study.
- Baseline funding focuses on what is needed to cover immediate foreseeable expenses.
- Threshold funding focuses on setting a minimum balance that will cover expenses and when that balance dips below the set amount, additional assessment will need to be applied.
Whichever funding plan you choose depends on the needs and the financial health of the community.
Assess your Risks
Your decision making on reserve allocation must focus on risks: what risks might the community face that will put demands on financial resources with not enough cash on hand to address? Make a list of possibilities: a recession, a major system repair, a flood, a wildfire, a significant increase in material costs. As you develop your list, attach a probability score to each risk. Healthy reserves must be risk discipline first, and that means flagging the items on your master list of reserves that should be funded first. You need to be mindful of the fact that the major expense that hits your community before you get your reserves built up must be considered your major expense at that point in time. So, find ways to slow down and spread-out payments for your rungs, paying more cash to your first few projects than to the final few. That’s how reserves become a crystallizing tool for your community.
Communicate Your Plan
Transparency and communication to homeowners are necessary for effective reserve fund management. Keeping homeowners informed of upcoming projects, reporting the financial status of reserve funds and notifying homeowners if there are going to be any changes to their assessments, all work to build trust and “buy in” on how their contributions are being used.
Take Time for Review and Adjustment
Reserve fund allocation is not a one-time process and should be periodically reviewed and adjusted if necessary. These reviews can come in the form of a reserve study review every 3-5 years, as well as noting any changes in the financial landscape of the community at any time. This review ensures that the Association’s financial planning remains relevant and accurate. There may need to be adjustments made due to changes in inflation rates, unexpected wear and tear on assets or new community developments. Staying proactive and adaptable is key. This will ensure a healthy reserve fund that meets the community’s needs.
Decide How you Want to Invest
Your investment strategy is an important consideration when allocating reserve funds. You will need to balance the need for cash, for immediate expenses, with the goal of earning returns on funds that are meant to help offset future costs. Investment options should be outlined in the Investment of Reserves Policy. Options that are commonly included are money market accounts, certificates of deposit (CDs) and low-risk bond funds. Each of these involves some degree of risk and a return. It’s always advisable to find yourself a Financial Analyst who will help you walk through the options. Your strategy should align with the Association’s risk tolerance, financial goals, and timeline for major expenses.
The benefits from choosing to strategically allocate your reserve funds are plentiful. If your reserves are properly managed, you will ensure that repairs and maintenance will be done timely, and you will preserve the property values and overall quality of the community.
Amy Bazinet CMCA, AMS, PCAM has dedicated over 15 years to serving communities across the Denver Front Range. She currently holds the position of General Manager for the Aspen Alps Condominium Association in beautiful Aspen, CO, where she embraces the many wonders of mountain life.
