Reserve Funds
How & Why Community Associations Invest Assets

ISBN: 978-1-59618-027-7
2009, 79 pages
2nd edition
Editor(s): Mitchell H. Frumkin, P.E., CGP, RS and Nico F. March, CFM, RRP
Product Format: Book
Item #: 0277
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Non-Members: USD $25.00
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Reserve funds are essential to the successful operation of a community association—not just an extra expense. In many states they are mandated, and boards need to understand how to comply with these laws.

This guide contains everything you need to know to establish the right funds and invest them responsibly. Understand the two parts of a reserve study—the financial analysis and the component inventory, and find out how to develop each. Learn how to educate homeowners about the value of reserves, what investments may or may not be suitable for your association, how to develop an investment policy and more.

  • How to view the reserve study as part of the association's overall budget
  • How to take advantage of the relationship between replacement reserves, maintenance and energy costs to save money
  • Chart: The Update Test—does your reserve study need to be updated?
  • How to deal with the discontinuation of the AICPA Common Interest Realty Association Audit and Accounting Guide.
  • About infrastructure items
  • Changes in FDIC limits
Loaded with useful charts and sample documents, including:
  • Sample Replacement Reserve Inventories
  • Flowchart for Selecting Reserve-Inventory Components
  • Flowchart of Preventive Maintenance Schedule
  • Two Sample Investment Policies
  • Representative Components of Replacement Reserve Inventories
  • Sample 30-Year Cash Flow Showing Full Funding & Baseline Funding
  • Laddered Portfolio Investments
  • Investment Income Tax Treatment
Also contains three comprehensive appendices:
  • National Reserve Study Standards of the Community Associations Institute
  • Summary of State Reserve Fund Laws
  • Questions & Answers about Community Association Reserves

Reserve Funds is one of six components in the CMCA Study Kit [M5134].

Contents

Chapter 1—Why Reserves?
Educating Owners about Reserve Funds
Who Should Prepare the Reserve Study?
How Often Should Associations Conduct a Reserve Study?
Making the Most of a Reserve Study
Chapter 2—Conducting a Reserve Study
The Component Inventory
The Financial Analysis
Chapter 3—Investment Policies for Reserve Funds
Creating a Formal Investment Policy
Risks Associated with Investing Reserves
Inflation and Net-Net Returns
Investments Suitable for Association Reserves
Investments that May Not Be Suitable for Associations
Chapter 4—Investment Strategies for Reserve Funds
The Laddering Concept
The Barbell Concept
Generally Accepted Guidelines for Investing Reserves
USA Patriot Act
Fiduciary Risks
Tax Considerations
Chapter 5—Financial Reporting Requirements
The CIRA Guide
Required Disclosures
Supplementary Information
The Auditor's Opinion
Tax Considerations
The Representation Letter
Board Meeting Minutes
Appendix 1—National Reserve Study Standards of the Community Associations Institute
Appendix 2—Summary of State Reserve Fund Laws
Appendix 3—Questions & Answers about Community Association Reserves
 
EXCERPT
 
Introduction: Background and Key Points
 
One of the primary business duties of community associations-planned communities, condominium associations, and cooperatives-is maintaining and preserving property values of individual and common property. To do this properly, associations must develop funding plans for future repair or replacement of major common-area components, such as roofs, boilers, elevators, swimming pool components, balconies, seawalls, asphalt surfaces, decks and more.
 
An association has several funding options, including periodic assessments over the life of assets, special assessments at the time of replacement, borrowing funds when needed, a combination of the above, or the most common method (and in some states the only lawful one): setting aside monies in what is commonly called reserve funds, replacement reserves, replacement funds or simply reserves.
 
To help associations learn the specifics of reserve funding, this guide presents the theory behind the preparation of a reserve study, the methods for developing a realistic funding plan, a discussion of the various funding techniques, strategies for investing the reserve funds, and additional information on financial reporting and tax implications of reserves. In addition, this guide explains how to view the reserve study components as part of the association's overall budget and how to take advantage of the relationship between replacement reserves, maintenance and energy costs to save money.
 
Key Points
 
Reserve funds are required by association governing documents and, in some cases, by state law.
 
Associations should hire a qualified, experienced professional to prepare the association's reserve study.
 
Reserve studies can be used to assess the real costs of ongoing maintenance of common elements and the energy needed to operate them.
 
Reserve studies comprise two parts: A physical analysis that provides information about the physical condition of the major common-area components, and a financial analysis that provides information necessary to maintain the fund appropriately.
 
Associations can use one of four reserve funding plans successfully; each establishes adequate reserves that prevent a deficit due to under funding.
 
Boards have a fiduciary responsibility to all owners to make sure reserve funds are invested properly.
 
Certain types of investments are appropriate for community associations and others are not.
 
Association leaders should develop an investment plan that provides continuity and relative financial safety.
 
Boards must make informed and prudent decisions where to purchase specific investments and who to hire for professional investment advice.
 
Associations should consult a tax professional or CPA since taxes will have a direct bearing on the investment vehicles and investment strategy the association employs.
 
Reserve funds must be accounted for appropriately and accurately in the budget, financial statements, audit, and other records of the association according to strict industry standards. 

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