Reserve funding for associations can be a daunting task, but it does not have to be. Use the following tips to more successfully fund your reserves.
Give Yourself Enough Time
Other than funding reserves itself, this is probably the most important tip. It is so important to have a long enough of a runway to place an item on the schedule and then fund for it. The more costly that an item is, the more this matters. Let’s take an example of roofing and say that the cost is $1,500,000 and that it has a 15 year lifespan. Properly funding it would be $100,000 per year (with increases for inflation along the way). However, if the association was able to waive reserves for some time and didn’t start funding until there was 5 years left, now they have to fund $1,5000,000 over 5 years, which would be $300,000 per year, substantially different from the $100,000 per year if they were funding it properly from the start. It is my opinion that most special assessments are avoidable. While there may be a surprise from time to time, it is essential to properly plan and fund for items hiding in plain sight like roofing.
Use Pooled Method Rather than Component Method
It is my opinion that the pooled method works much better in practice than the component method. The pooled method has one source of funding that can be used for all items in the reserve schedule. Conversely, the component method has reserve category balances that can only be used for items in its specific category. For example, roofing funds can only be used for roofing, painting funds can only be used for painting, etc. You can explore why the pooled method is better for large associations with this article. You may think that the restrictions of the component method sounds more appealing. I can assure it is not. What ends up happening is more red tape. This happens because associations have to get special permissions to move funds from one category to another if one of the categories is short on funding. Also, the component method can be much more easily manipulated with how the funds in a specific category are applied to those items within that category.
Make Sure Costs Get Updated Periodically
It should go without saying, but the costs for all of the items (or at least the vast majority) in your reserve schedule should change every year. You would be amazed at how many associations haven’t changed either how much they fund or the estimated replacement cost of the items in years. The knock-on effect of not properly updating the cost of the items is that you are now funding to a lower cost of the item, which is creating a funding deficit. Not updating the costs for several years can cause a much larger deficit, which can eventually lead to special assessments.
There are always going to be challenges and surprises when it comes to funding reserves. However, it is key to control the aspects that you can control to have a more successful reserve funding plan.