Reserve Contributions – they’re not for Future Expenses!

After 25 years in this business, we still hear the same excuses for not wanting to make Reserve contributions – and high on the list is “We don’t expect to be here in the future, so we don’t want to make contributions towards that future expense”.

On the surface, that seems very fair and reasonable. Who wants to pay for something that they won’t benefit from? That certainly sounds like someone else’s problem!

But upon examination it reveals faulty thinking about Reserve contributions – and I challenge you to be willing to change your view on the subject. Reserve contributions are not for future expenses. Reserve contributions offset the cost of current, ongoing deterioration! Let me lay it out for you. Suppose the association has a roof expected to last 20 yrs that costs $100,000. Roughly speaking, the roof is deteriorating at the rate of $5000/yr ($100,000/20 yrs). Those enjoying the use of the roof should pay their fair share of that deterioration, along the way. It’s only fair. Current owners are the ones using it while it is deteriorating. It’s absurd to expect someone else to pay for something you used up!

Reserve expenses are not like a game of musical chairs, where it is just a matter of (bad) luck to be one of the owners at the time a large expenditure occurs. Your Reserve assets are deteriorating in a very slow, predictable manner over the course of many years. Set your association up with appropriately sized Reserve contributions so that all owners are paying their fair share along the way. If you do that, when the “balloon payment” for that gradually growing obligation occurs, everyone who “used up” that component will have paid their fair share. It is crazy for a homeowner to think they are not responsible to pay their fair share of current, ongoing deterioration at the association!

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One Response to Reserve Contributions – they’re not for Future Expenses!

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