What are reserves?
The fund your association keeps for the expenses that don't show up every month.
Reserves are money an association sets aside for major repair and replacement projects, like a roof or a parking lot, that happen infrequently but cost a lot. They are separate from the operating fund, which pays the recurring monthly bills: landscaping, utilities, insurance, and management fees.
Two funds, two jobs
Every association keeps two pots of money, and they are not interchangeable. The operating fund covers recurring, day-to-day costs: landscaping, utilities, insurance, management fees, and basic maintenance. The reserve fund is different.
"set aside for major repair and replacement projects that occur infrequently but carry significant costs"
Source: HOA Operating vs. Reserve Funds: A Simple Guide, The HOA Handbook
A new roof, a repaved lot, a replaced elevator: these are reserve expenses, not operating expenses, because they happen every ten, twenty, or thirty years, not every month. A monthly landscaping invoice is never a reserve expense, no matter how large it gets.
Why the fund exists
A reserve study, the subject of the next lesson, calculates how much an association's reserve fund should hold based on the age and cost of everything it owns. The point is that when a major component finally wears out, the money is already there.
"without reliance on additional supplemental funding sources"
Source: National Reserve Study Standards (overview), Community Associations Institute
A supplemental funding source is a special assessment or a loan. A well-funded reserve is what keeps a board from having to ask owners for emergency money the week the roof finally gives out.
Where the money sits
Reserve dollars are generally kept in an account separate from the operating fund, and the money in it is generally handled the way a cautious investor would handle it: protect the principal first, growth a distant second.
"preserving principal, avoiding unnecessary or speculative risk"
Source: Association Investing and FDIC Limits, CH&P Management
In practice that usually means insured bank deposits, sometimes spread across more than one bank once a balance grows large, rather than stocks or other instruments that can lose value. Some states place additional restrictions on how an association may invest reserve funds. Check your state's statute and your association's own investment policy before assuming a bank deposit is either the only option or the only requirement.
Check yourself
Answer before you read the explanation, recalling it is what makes it stick.
The clubhouse roof needs replacing after twenty years of use. Which fund covers this?
The landscaping company raises its monthly rate this year. Which fund absorbs the higher bill?
Which of these is a reserve expense, not an operating expense?
Sources
- National Reserve Study Standards (overview), Community Associations Institute
- HOA Operating vs. Reserve Funds: A Simple Guide, The HOA Handbook
- Association Investing and FDIC Limits, CH&P Management
Related elsewhere in the Academy
Reserves
Next: see what actually happens to an association that lets its reserve fund run dry.
Why reserves matter →Whether a reserve study or a specific reserve funding level is legally required, and how reserve funds may be invested, varies by state and by your association's own governing documents.