Reserve Requirement

Ferdie, unless your Declaration mandates a reserve fund fiscal responsibility is the primary reason for having a reserve fund.

To determine reserve requirements I create a 20 plan. I list all capital investments which will need replacement in the future and the anticipated life of each. One example might be a perimeter fence with a 15 year total life. Determine the current cost of replacement and then based on inflation rate, such as 4.0%, determine the future cost at the estimated date of replacement. Add a contingency fund line item for unexpected costs such as legal costs and items which may not be covered by insurance. Finally, compute the amount to be added to the reserve fund each year to meet these future costs.

Some HOAs simply assign a percentage of the regular assessment, such as 1/3 to the reserve fund. In which case if the budget for the operating fund was $120,000, then $60,000 would be placed in the reserve fund. So the total budget would be $180,000. And if there are a total of 300 units than each unit's annual assessment would be $600.

Using this method the 20 year reserve fund is done first and the annual assessment is determined last.