A Reserve fund is a crucial part of an HOA or COA’s financial plan. For every budget that is planned by a COA, a reserve fund is very much needed. “How much money should a COA have?” This question is often thrown to COA members.
Similar to corporations and businesses, COAs utilize reserve funds to get ready for what the future holds. COA reserve funds are highly liquid funds that are used to meet future financial responsibilities. Reserve funds can come in useful whenever there are sudden costs — either big or small. Thus, it’s important for every organization and business to decide how much money is put into their reserve funds.
COA finances are mostly divided into two separate financial accounts: the operating fund and the reserve fund. To understand what a reserve fund is, it is crucial you know how it differs from the community’s operating funds.
An operating fund is used to fund the daily costs of the COA. This involves settlement for property management, upkeep of shared spaces, security services, cleaning services, legal expenses, and insurance premiums.
On the other hand, a reserve fund is used for massive projects and maintenance that are likely to occur in the future. Normally, it is used for maintaining and/or replacing common structures, like the clubhouses and pools.
COA members are meticulous when it comes down to COA reserve funds and how the funds will be spent. All expenses must abide by the community’s rules and bylaws. Try to think of reserve funds as the funds used to pay for costs that do not occur on a regular basis.
Here are some uses of the COA Reserve Funds:
- Significant landscaping projects;
- The building of a new playground equipment
- The replacing of a pump at the community pool
- Replacing the leaking/bad roof on some of the common area buildings
- Painting of structures
Importance of COA Reserve Funds
HOA board members are in charge of the well-keep and maintenance of any community or community structure. Aside from overseeing the day-to-day activities of the HOA, they also have to expect financial duties that may come at any time in the future. This involves the fixing of the clubhouse roof when it begins leaking, the usual resealing of the pool tiles, and replacing broken fitness equipment in the gym or fixing any other broken community structure.
COA reserve funds do not only serve as a way to pay for just replacement and maintenance expenses but they can also be used to revamp or improve a public area for the interest of the entire community.
Most of these massive projects are very much more expensive than the regular daily operating charges of the community. Having a reserve fund lets the board fund these costs without having a need to bring up association dues.
With enough cash in the COA reserve funds, the community will be capable of taking care of unexpected charges. For example, regular structures like the clubhouse may suffer damage as a result of hurricanes and storms.
In cases like these, it’s always best to stay safe than to feel sorry. When it comes down to reserve funds, board members are able to easily and quickly sort out any problems concerning the COA. They can implement the needed changes early without disturbing the homeowners with more costs.
How much should a COA have in its reserve?
Now that we got certain questions out of the way like what an operating fund is, what a reserve fund is, and also the importance of reserve funds, we can move ahead to how much a COA should have in their reserve.
Honestly, there is no specific answer to this question. The amount of money depends largely on the community and its needs. For such reasons, it is recommended that every COA carries out a reserve study on a regular basis. This is to ensure that the board can get a better understanding of how much funds should be distributed to the reserve fund.
Reserve studies are normally carried out every 3 to 5 years. It is also advisable that the COA board should also carry out a yearly review of the community’s utilities as well as the budget to see if changes should be made.
Since most COA board members may not be capable of carrying out reserve studies, COAs are advised to seek the services of an accountant or a property manager. Every COA community has its different necessities. They vary in both size and numbers. By having a reserve study, you’ll be able to assess the condition of the major assets of your community.
Conclusion
COA reserve funds are very crucial for the maintenance of any community and its structures. As a result, it is the duty of the board members to make sure that their COA has an adequate reserve fund.
The money in the reserve fund is critical to carry out maintenance and replacements that normally happen over time, as well as those that happen by chance.
Want more accountability for your COA? Then reach out to Core Accounting we have built experience over the years in helping condo associations to manage resources for sustained growth and will be happy to answer any questions you might have.
