Gulfshore Insurance > Gulfshore Blog > Condo Associations > Are Your Association Reserves Adequate?

What happens when an association encounters large or unexpected expenses? For example, if the clubhouse roof starts leaking, the pool needs resealing, or worse. Where does the association get the money to repair or replace these? At those times, the association’s reserve fund comes into play.

874ddaa2 3906 44d6 a962 1190cdf31b53Adding money to your Association’s reserves is a tough sell to members. However, the reality is that many associations (upward of 70%) are woefully undercapitalized. They can pay the day-to-day bills as long as nothing unexpected happens, but something always comes up.

Every community association should have money set aside “in reserve” to cover the cost of emergencies or major repairs. Reserves are — or should be — an essential part of every community association. An undercapitalized association with inadequate reserves will have no choice but to hit owners with a nasty assessment, increase contributions substantially, borrow money to meet the cash flow shortfall, or some combination of these three options.

There are three requirements for reserves for condo associations – roofs, paving and painting, plus any item that is deemed to be over $10,000 to be replaced. Aside from the three mandatory requirements, you should consider reserves for uninsured/underinsured items, such as landscape and large deductibles.

Typically (that is a dangerous word), most condominium associations should be setting aside 15% – 40% of their assessments towards reserves.

This ratio is lower for associations where each homeowner maintains their own home and the association only is responsible for some minimal common areas.

Obviously, every association has its own unique list of common area assets it is responsible to maintain. Some may have a longer list that force higher reserve contributions (pool, elevator, tennis court, balconies, wood siding, etc.), some may have shorter lists of amenities or more cost-efficient exterior finishes.

Reserves should be capable of covering all known liabilities that the regular budget doesn’t specifically cover.  If another hurricane were to tear through the area tomorrow and you lost nearly everything, what would the association have to come up with to cover it all?