Reserve Funding Plans: Selling Out, Settling, or Succeeding

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By Robert M. Nordlund, PE, RS
Association Reserves, Inc.
December 2014

Associations often struggle to determine the appropriate level of Reserve funding for their communities. This challenge is understandable, as associations must weigh boardmember reluctance to raise Reserve contributions against the need to adequately offset deterioration. Unfortunately, the scale seems to have tipped in favor of the former option; data from over 30,000 Reserve Studies prepared by our company indicates that 70% of associations throughout the United States are currently underfunded. At this point, Boardmembers are faced with taking one of three approaches: selling out, settling or succeeding. The majority have opted for the first two routes which, unfortunately, will ultimately lead to special assessments, deferred maintenance, & lower property values. The third path may be challenging, but the results are more than worth the extra effort.

Selling Out

In spite of advice from their Reserve Studies, Boardmembers choose to keep reserve contributions at a woefully inadequate level, even when Reserve cash flow problems become obvious. It is easier to take the comfortable route and ignore the need for adequate reserve contributions, but this approach is not beneficial in the long run. In fact, selling out is actually foolish, as current and future homeowners will face special assessments, deferred maintenance, and lower property values far in excess of what adequate Reserve contributions would have cost.

Settling

These are the Associations who make well-intended Reserve contributions, but less than needed by the association. While inadequate contributions may appear to have no ill-effects for a while, it will gradually erode the association’s financial future. Well intended, but inadequate contributions cause the underfunding gap to grow over the years. Ideally, Boardmembers should choose to think beyond the current-day situation and plan for the long-term success of the association.

Succeeding

It is tempting for associations to undercut reserve contributions or to settle for partial success.  But those willing to bite the bullet and follow the Funding Plan necessary to assure timely repairs & replacements are likely to experience significant financial rewards for years or even decades to come. Reserve study recommendations indicate that full-funding contributions are ideal for sustained financial health, minimizing the risks of special assessment, avoiding deferred maintenance, and protecting property values.

An association’s current decisions regarding Reserve funding will greatly impact its future trajectory. Through preparing Reserve Studies we observe what is happening at thousands of associations each year.  It is our experience that those who successfully set their contributions to what is needed at the association reap financial rewards, and those who settle or sell out suffer the consequences. What does your Reserve funding plan reveal about your association’s approach to the future?

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