We have to make very costly renovations to our building and do not have the reserve funds to cover it. What should we do?
In this case, there are two realistic options the board has. The first is to get a bank loan for the community to cover the cost of the renovation. There are specific banks that specialize in association loans, so there may be someone willing to help. However, the bank will only loan the association money if it has demonstrated to be upstanding and financially responsible in the past. The bank may want to see reserves with a certain minimum balance or dollar amount and a small (likely 10% or less) collection loss.
The second option is likely much less popular and that is a special assessment. A special assessment is a fee that all association owners would pay to cover the cost of the expense not budgeted for.
Are our reserves for our association adequate and how do we know if our reserves are adequate?
There is no one size fits all for this question. Ideally, an association would have their reserves 100% funded. That means that the association has already funded the current amount of depreciation for all items on their reserve schedule.
In reality, however, most associations are well below 100% funded. A more realistic approach is to make sure the reserve annual payments cover the big expenses in the near-to-middle-term future. For example, if roofing is 60% of the reserve funding for your budget and it is estimated to be replaced in 10 years, that is the most important item to fund for. It is imperative to the funding for the replacement of the roofing by year 10, even if there is very little left over after the replacement. In this case, the association may be well below 100% funded, but it is still meeting the cash demands for replacement.
The best way to gauge reserves is by percent funded. What this really means is how much do we have in reserves compared to what we should have in reserves.
Can we upgrade our community with reserve funds?
Reserve funds are for the repair and replacement of association-owned items. Associations are supposed to replace the reserve item with the same likeness, material, or building element. In some cases, the old reserve item is obsolete and one of similar quality is what should be replaced.