It is common for associations to be a couple decades old and to never have had a reserve study performed. In fact, we hear that quite a bit. It is likely that if your association has never had a reserve study that they are not funding enough in reserves or are issuing special assessments to make up shortfalls. With that in mind, here are five ways to turn around your association’s capital reserve fund.
1. Get a Reserve Study
It is our opinion that the best long-term decision your association can make is to get a reserve study. The reserve study will give your association a starting point to understand what is coming up in the future. Take the advice and funding recommendations shown in the reserve study. Reserve studies can sometimes be “sticker shock” for associations because the annual funding is an increase from what they were currently funding, but the increase in funding is necessary to set aside enough money for all of the items. Remember the goal is to avoid special assessments. It is better to pay a little more each month than a large lump sum. No one likes to raise dues, but it is best to be realistic about what the current situation is. It is not a badge of honor to say we have not raised our association’s dues in 10 years.
2. Prioritize Your Reserve Projects Coming Up
Items such as roofing and road paving should be higher priority than renovating the clubhouse or upgrading the irrigation system. It may sound like common sense, but you really have to be careful about how much money is available to do the essential projects versus the non-essentials. Non-essential projects can also be pushed back a couple of years if money is really tight. Ideally, you also want to space your larger projects out with a few years in between so your reserve funds have time to replenish and you’re not cutting it close.
3. Vet Your Construction Professionals
When doing construction projects get several bids and find a company that will do a great job. The cost of bad workmanship is a real killer to any budget or future budget because you have to keep putting good money down a rabbit hole. Don’t necessarily focus on the lowest price, but rather someone that can show and validate that they do good work.
4. Move Excess Operating Funds to Reserves
Should there be considerable surplus funds from the operating and maintenance account, it makes sense to move any excess budget funds from operating into reserves (remember to always keep 2-3 months of operating funds as a safety net). This can be for different reasons. Maybe your association simply did not use some of the projected budgeted operating funds for this year. In this case, you can simply move them over. Another scenario is to try to cut expenses from operating for the upcoming year and the money cut out can be moved to reserves.
5. Keep a Close Eye on Your Reserve Schedule.
The reserve items in your schedule are always changing and evolving. Some of the items may fare better than their projected remaining lives, and other items may not fare as well as their projections. Additionally, keep a close eye on the cost of the reserve items. Certain items such as asphalt paving are petroleum-based and its cost can be volatile based on market conditions. The worst thing you can do is just bury your reserve schedule and get it out 5 years later and assume everything is the same.