Reserves, budgets, and green options

Nov 6, 2015
Green Options are Part of Reserves That Affect Budgets
compliments of Lemus Construction 

Condominium and community association owners need to prepare an annual budget and a big piece that factors into the budget is the reserves. The aspects of a condominium association and a homeowner association have different aspects to each and are not quite the same.

Reserves are integral to any entity’s budget because that is money saved for situations that tend to be sudden or unplanned, such as a construction project that comes out of nowhere. Such maintenance is performed less frequently due to low volume, but it does happen. Reserves include funds for things like roof replacement, painting of building property, pavement resurfacing, etc.

The usefulness of reserves is that it offers a great planning tool, as long as managers and associations explore proactive options and show responsibility. For example, if a manager knows that a roof will need to be replaced in 10 years for about $100,000, then an annual budget of reserves would ideally contain $10,000 toward that eventual project.
As rules differ in certain states and associations, it is important for people who deal with budgets to be cognizant of not being delinquent in payments. That, in turn, could cause a cash flow problem down the line that could be detrimental to a financial landscape.
That brings up the question: how much should an association have in reserves?

The answer is that each condo and HOA is unique in its own right, notably in the problems or volume of maintenance that is needed. Aspects like size and location also impact how much of a reserve budget will be needed over time. There are factors that help mitigate how associations should determine their own budgets. Some aspects include funding methodology, a five-year capital plan, proper budgeting, and assessing, operating an account balance, proactive planning, and fiduciary spending.

Then there is the reserve study, which is a comprehensive budget tool that consists of a financial and physical analysis of a particular community that aligns with its respective governing documents. The studies play a role in figuring out maintenance, repair and replacements; the amount of financial hardship or liability that can occur if there is not enough money saved to deal with potentially-hazardous situations can become a serious issue.

Reserve studies should be updated every 3-5 years.

Some would say the primary purpose of reserve studies are that they establish a guideline of fiscal responsibility and allow for entities to not put all their eggs in one basket, so to speak. They can save and spread out costs for major expenditures over time, making general spending more comfortable. 

There are green engineering options that go hand in hand with reserves, such as the environmentally-friendly and proactive option of replacing wood fences with composite materials. Green engineering, according to one engineering company, refers to three main areas: using art and science to create land development designs that are not only cost-sensitive and environmentally friendly, but also exceeding a client’s needs without degrading the natural surroundings of a premises; designing places for people to work, play, and cohabitate; working for both your own business entity and the environment.

Managers must be aware of the overall budget but also note an asterisk next to reserves. Many unplanned things occur in the nature of a business, and rather than scrounge up leftover change from between couch cushions, being able to access stored money that was budgeted and planned is the most viable course of action.

Nick Mordowanec on behalf of Lemus Construction
Nick works as a journalist in the metro Detroit area. His work has been featured in myriad websites and publications.

Lemus Construction
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