FULLY FUNDED RESERVES

The definition of 100% funding is confusing to many people. If your reserve study states that you need to replace your roof in 10 years at a cost of $100,000, "fully funded" does not mean that you have $100,000 today. It means that you have $10,000 in the bank this year, $20,000 next year, $30,000 the following year, and so on until you have $100,000 on year 10 when the roof is scheduled for replacement.

Funding Levels. To determine how healthy your reserve are, divide the amount of money actually in your reserves by the amount that should be in the account. For example, if on year 5 you have $25,000 instead of the $50,000 called for by your reserve study, you are only 50% funded. If your reserves are in the 0-30% funding range, you can expect frequent and significant special assessments. Associations in the 70-100% funding range are considered financially strong, and special assessments should be rare.

Funding Plan. To steer associations into fiscal responsibility, the legislature now requires that boards develop detailed plans on how they intend to fund their reserves. Funding plans must be adopted in open meetings and distributed to all owners. Civil Code §1365(b), Civil Code §1365.5(e)(5)

For a list of companies that specialize in providing reserve studies for community associations, see our Service Directory.

Updated by ADAMS KESSLER 4/27/2008