How Much are Adequate Reserve Contributions?
by Steven Beltramo, Project Manager
At Association Reserves we understand board members face a big challenge to budget for the maintenance and replacement of their association’s major common area assets. Boards typically have little knowledge of project costs and when those costs are expected to occur. Looking to the Reserve Study for guidance, most members will review the document and exclaim, “We’re supposed to put THAT much in?” Such a realization often brings a chill to the budget process.
For board members, the size of adequate Reserve contributions are regularly viewed as dark and mysterious. Board members often tell us they feel as though they are moving forward in the dark. They know they’ll face the wrath of their members if special assessments are needed because of past low Reserve contributions, and they know those same owners will be upset if Reserve contributions are “too high”. The path to budget success can appear very narrow.
In order to answer, “What is normal?” We randomly selected 120 different associations to study from more than 4,000 we served during 2016. We compared our recommended Reserve contribution rates to the association’s total assessment rate. From this data, a clear story began to emerge. In the Figure shown below, you can see that about 90% of associations need to set aside 15% to 40% of their total homeowner assessments towards Reserves in order to offset deterioration and minimize their risk of a special assessment.
The cost of unchecked deterioration is expensive and unrelenting. Associations able to get by with Reserve contributions under 10% of total budget are rare. Most associations with Reserve contributions under 10% of total budget are headed for special assessments in the future.
So from all of us at Association Reserves, we hope this study sheds some light on the dark mystery, “How much are adequate Reserve contributions?”