Reserve funds play a crucial role in keeping homeowners associations financially healthy and prepared for the future. In Virginia, state laws outline specific requirements for how associations must handle these funds. Both board members and homeowners need to understand these rules.
What are Reserve Funds?
To understand reserve funds, it helps first to see how associations operate. Homeowners associations need money to manage day-to-day expenses and maintain common areas.
This funding primarily comes from regular fees, also called dues, that homeowners pay. These dues cover costs like landscaping, trash removal, security, and utility expenses for shared spaces or elements.
While these operating costs are essential, they are not the only financial obligations an association has. Over time, buildings, roads, roofs, pools, elevators, and other community assets will wear out or require significant repairs. This is where reserves come in.
HOA reserve funds are dedicated savings that an association sets aside to cover major repairs and replacements of capital components. Instead of imposing large special assessments on homeowners, reserves provide a stable and pre-planned source of funding.
Reserve Fund vs Operating Fund
Associations maintain two primary categories of funds: operating and reserves. The operating fund handles routine or predictable expenses. These include management fees, insurance premiums, cleaning services, and landscaping. These costs recur monthly or annually.
A cash reserve account is different. This account is not for daily or recurring expenses. Instead, it is a savings account for large and irregular costs related to the repair, replacement, or restoration of capital components.
Reserves are meant to last for years, with the association collecting contributions in increments throughout the years as part of regular dues. It is critical to clearly separate the operating account and the reserve account to ensure funding remains available at all times.
What are Reserve Funds for?
The purpose of the reserve fund is to provide financial stability for the community, both in the short and long run. When an association builds up its reserves, it can spread out major replacement and repair costs over time. This is a better option for associations and their members instead of levying a large sum in one go.
Reserves can also help maintain property values. Buyers and lenders view well-funded reserves as a sign of a stable and responsibly managed community.
In contrast, underfunded reserves often lead to special assessments or deferred maintenance. Both of these can harm property values.
Reserve Funds Requirements in Virginia
Two things dictate how associations must manage reserve funds: state laws and the governing documents. In Virginia, certain reserve fund limitations help ensure fairness, transparency, and adequate funding.
Both the Virginia Property Owners Association Act and the Virginia Condominium Act impose requirements and responsibilities for boards regarding reserves. Let’s break them down below.
For Homeowners Associations
Section 55.1-1826 outlines the HOA reserve requirements:
- The association board must prepare an annual budget before the start of each fiscal year. It must then provide a budget (or a summary of it) to all homeowners.
- The board must:
- Conduct a reserve study at least once every five years.
- Assess the condition of capital components such as roofs, roads, and shared property.
- Determine how much money is necessary to repair or replace those components.
- Review the results of the study each year to decide if reserves are adequate.
- If the reserve study shows a need for reserves, the annual budget must include the following:
- Estimated replacement costs of capital components.
- Expected remaining life span of those components.
- Current reserve balance.
- Planned contributions for the year.
- A statement on the procedures used to calculate reserves.
- A comparison between the recommended reserve level and the actual balance.
- Associations must use the reserve study as a guide for financial planning.
For Condominiums
Section 55.1-1965 outlines the condo reserve fund requirements:
Condo reserve requirements are outlined in § 55.1-1965 of the Virginia Condominium Act.
- The condo board must prepare an annual budget before the start of each fiscal year. It must also provide a budget (or a summary of it) to all unit owners.
- The board must:
- Conduct a reserve study at least once every five years.
- Determine the necessity and amount of reserves for capital components.
- Review the results of the study each year to confirm reserve levels are adequate.
- If the reserve study shows a need for reserves, the annual budget must include the following:
- Estimated replacement costs of capital components.
- Expected remaining life span of those components.
- Current amount of accumulated reserves.
- Expected contribution to the reserve fund for the year.
- A statement on the procedures used to calculate reserves.
- A comparison between the recommended reserve level and the actual balance.
- The reserve study serves as the guiding tool for financial planning.
Homeowners Association Reserve Funds Rule of Thumb
A common question many boards ask is, “How much reserves should an association have?” Unfortunately, there is no one-size-fits-all answer.
That said, industry experts often suggest that reserves maintain a 70 to 100 percent level of funding. Some communities aim for full funding, while others maintain a lower level depending on economic factors and owner preferences.
When reserves become underfunded, problems can quickly arise. Boards may be forced to impose large special assessments or significantly raise dues when a major repair crops up.
These unexpected charges tend to create financial hardship for owners. More often than not, they even lead to delinquency. In extreme cases, underfunded reserves can result in deferred maintenance. This, in turn, can negatively impact property values.
A strong reserve fund offers financial stability. It benefits everyone in the community, including potential buyers and lenders. With adequate reserves, buyers are more keen to join the association, while lenders feel more confident in the lowered financial risk.
The bottom line is that associations should rely on the reserve study to maintain the right level of funding. Board members can’t simply make assumptions without research and professional backing.
Definition of Reserve Fund: Answered!
Reserve funds are the backbone of long-term financial planning for Virginia associations. By setting aside money in advance, association boards can protect their communities from unexpected costs and maintain property values.
National Realty Partners is a leading provider of association management services in Virginia. We can help your board manage the reserve fund. Call us today at 703-435-3800 or request a proposal online to get started!
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- Is A HOA Reserve Study Required In Virginia?
- Breaking Down Virginia HOA Laws
- Condo Repair And Maintenance Guide: Who’s Responsible?