How Does an Association Know if its Reserves are Sufficient?
Every condominium is different and has different expenses and reserve requirements. Therefore, no specific dollar amount can be given for any condominium. Instead, a board must make a reserve study (or analysis) of the project to determine if the association has sufficient reserves. A reserve study requires the board to determine: (i) which parts of the project the association is responsible for (e.g. walls, roof, parking lot); (ii) when they will need replacement, maintenance, or repair; and (iii) how much that will cost.
Example: A board’s reserve study indicates that in 10 years the project roof will have to be completely replaced at a cost of $100,000. At present, the association has no money to do the work. The board must collect at least $10,000 a year for the next ten years ($100,000 divided by 10) to ensure that it has a “full” reserve for the roof (i.e. $100,000 to replace the roof 10 years in the future). NOTE: The board does not have to collect $100,000 immediately. The board needs to collect only enough to ensure the association has the necessary amount at the end of ten years. For example, if after 5 years the board has collected $50,000, its roof reserve should be “full” at that point. The roof will still be 5 years from replacement, so the association will still have 5 years to collect the necessary funds. In 1992, the reserves law was amended to permit an association to set aside a “statutory reserve” of at least 50 percent of a full reserve.
Private companies that conduct reserve analyses for condominium associations may be hired to assist associations with their reserve study.