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November 19, 2019 By admin

How Does Our Reserve Fund Compare to Other Associations?

Reserve funding for associations varies widely based on the size of the association, number of reserve components, and cost of the reserve components.  So comparing the annual funding amount of one association to another is an apples-to-oranges comparison.  The best comparison, however, would be to compare the percent funded of associations.  Percent funded essentially measures how much you have in reserves compared to how much you should have in reserves.  For example, if the total of the reserve items are 25% depreciated, and you have 20% of their current costs funded, then the association is 80% funded. 

The following chart shows a breakdown by segment of the different funding ranges. 

0-30% funded:          poorly funded

30-70% funded:        fairly funded

70-100% funded:      well funded

100+% funded:         very well funded

Having a higher percent funding is helpful to avoid special assessments, but does not guarantee it.  The percent funded of your reserves for your association matters because it can be one of several criteria used to determine if the property meets qualifying loan conditions from FHA, Fannie Mae, or other lending entities.

Reserve Fund Strength Statistics

One question that we are routinely asked is how is our percent funded compared to other communities you have conducted reserve studies for?  To answer this question, we reviewed a large sample size of our reserve studies over the past couple of years.  The results were as follows:

  • 23% of associations were considered to be poorly funded (0-30%).
  • 42% of associations were considered to be fairly funded (30-70%).
  • 20% of associations were considered to be well funded (70-100%).
  • 15% of associations were considered to be very well funded. (100% +)
  • The average percent funded was 59%.
  • The median percent funded was 51%.

Understanding the Numbers

It should be noted that these are only associations that have had reserve studies.  Many associations have never had a reserve study and it’s likely that their percent funded would be in the lower sectors.  Additionally, there was no clustering of numbers in any one area and the sample had high variability, which means the percent funded was all over the place.

Since the median percent funded was 51%, that means half of the associations are better than that and half are worse.  51% funded can be acceptable for some associations as long as they do not have a lot of expenses coming due in the near future over a small window of years.  However, 51% funded can be a big problem for associations that have a large expense in the near future.  An example of this could be roofing, where it makes up a large share of the reserve budget.  There may not be enough time to properly fund for it and it could be a special assessment if they are significantly behind with only a few years left. 

Combining the last two groups means that 35% of associations are well-funded or better.  Essentially, this means only 1 out of 3 associations is relatively healthy with their reserve fund.  Conversely, 23% of associations were poorly funded and are at a fairly high risk of having a special assessment.  Under funding the association’s reserves can be a problem that is hard to fix.

Filed Under: Blog Tagged With: Funding Reserves, Percent Funded, Special Assessment

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