Condo Bylaws Association With Low Reserves In Phoenix
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Achieving a 70% funded reserve is considered a milestone for inium associations, indicating a reasonable level of financial preparedness. It signifies that the association has taken proactive steps to ensure the long-term sustainability of the community and mitigate the risk of financial instability.
A reserve fund is savings or a liquid asset set aside to cover unexpected costs or future financial obligations. Many governments, financial institutions, and individuals regularly set aside funds into accounts that earn interest.
There is a distinction between “Reserves” and “Maintenance Expenses” which are part of the yearly operating expenses, like lawn maintenance. “Reserve Contributions” are accumulated for years until the component needs replacement or renovation.
Percent funded as defined by National Reserve Study Standards is “The ratio, at a particular point of time (typically the beginning of the Fiscal Year), of the actual (or projected) Reserve Balance to the Fully Funded Balance, expressed as a percentage.” More simply, Percent Funded compares what you have (Reserve ...
On average, The Board should be setting aside 15% to 40% of their total assessments towards reserves, although for some simpler situations, a more minimal reserve fund ratio of 10% to 15% may be sufficient. Develop a funding plan that aligns with the calculated reserve fund requirements.
The Florida Homeowners' Association Act also provides guidelines for establishing a reserve fund but doing so is not mandatory. If your HOA has one, the reserve budget acts as a savings account for large projects that don't happen annually. Major repairs and projects are funded through this fund.
So how much should your HOA have on hand to address these inevitable repair and replacement costs? A good rule of thumb is for Reserves to be funded at 70% or higher of the property's calculated deterioration.
The Federal Housing Administration (FHA) has weighed in by requiring approved inium projects to have at least 10% of the annual operating budget set aside for reserves. However, that percentage is arbitrary and is usually never enough for an association that has to paint and replace roofs.
Percent funded is calculated by dividing the current reserve fund balance by the fully funded balance. In the above example, if the association has $30,000 in reserves in year 10, it is 60% funded ($30,000 / $50,000).
So how much should your HOA have on hand to address these inevitable repair and replacement costs? A good rule of thumb is for Reserves to be funded at 70% or higher of the property's calculated deterioration.
