Does an Association Need Replacement Reserves?

Replacement reserves, a key indicator of an association’s financial health, should be maintained. The Community Associations Institute’s GAP Report 24, A Guide to Replacement Reserve Funds and Long-Term Reserve Funding, lists the following reasons for a replacement reserve fund:

  • To meet legal, fiduciary and professional requirements – A replacement fund may be required by any secondary mortgage market in which your association participates; by state statutes, regulations, or court decisions; and by your community’s governing documents.
  • To provide for planned replacement of major items – Owners expect their community association to fulfill its obligations. At some point in time, the work will have to be done.
  • To distribute the contributions of old and new owners – Owners, especially those on fixed incomes, have limited resources. They may not be able to afford the large special assessments that would be required if reserves are insufficient to cover a major replacement.

To enhance resale value of community association units – Lenders and real estate agents are aware of what a replacement fund is and the ramifications for a new buyer if reserves for replacement are inadequate. Many states have reserves disclosure requirements for buyers of community association units.