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What is a healthy building reserve fund

Written by Super
December 15, 2021
What is a healthy building reserve fund

How much do you need to have in your building's rainy day account? Assess and plan for your reserve needs on a regular basis.

The reserve fund for your condo or co-op is essentially the savings account or rainy day fund for the building. Your monthly maintenance fees go towards funding operational costs (such as cleaning and building insurance) as well as padding the reserve. A healthy reserve is critical for ensuring that a building has the means to pay for emergency repairs as well as planned updates or upgrades. It's the safety net to ensure necessary maintenance can be done without having to take additional drastic measures—such as a special assessment on owners or getting a loan.

A reserve target is typically set by the building board and cannot be touched without board approval. In a building with no major maintenance issues, the reserve should be expected to go up year after year—and if it is not, then a study of your building reserve may be advisable. That said, there are a number of factors that influence whether your reserve is right-sized for your building.

Save at least 10%

A relatively young and problem-free building should not expect to need a large reserve in the near term, however it should plan to ensure it can add to the reserve so that as things wear over time, or if an unknown issue arises, it can afford to pay for them. The right amount will depend on the size of building and whether it has any more expensive amenities to maintain, such as elevators. However, a good minimum to budget for at least 10% of the building income towards the reserve—this is the minimum amount required to meet Fannie Mae and Freddie Mac mortgage lending requirements.

Calculate your percent funded

One method for reserve planning is to calculate the "percent funded"—which looks at how much a building has in its reserve relative to the deterioration of common area assets. For instance, if a building has a roof that is five years into an anticipated 20-year lifespan, then the deterioration calculated for that year is 25% of the roof cost. If the building's reserve can cover all of that cost, then it is considered 100% fully funded for that year. This helps buildings to take inventory of what projects may be arising and understand the relative strength of their reserve over time. More detail on the percent funded methodology is available through Association Reserves.

There is no one-size-fits-all rule for buildings, but it is recommended that a building aim for a reserve that is at least 70% percent funded. According to Association Reserves, that means planning to set aside 15-40% of assessments collected into the reserve. As the building gets older and the deterioration of common area assets increases, expect that reserve targets will need to be adjusted in order to address increased issues and repairs required to properly maintain the property.

Don't kick the can down the road

In an interview with CBS12, attorney Brennan Grogan gives a warning: "If the assessment is really, really low in a building, it’s probably because they’re not taking care of items that they probably should be paying for." Delaying action to manage your reserve properly can only lead to bigger issues. Not only will those issues take a back seat, it will only get harder to rally a larger sum of money once it's desperately needed to fund a project. This can cause problems with residents who can't afford to pay and hinder the ability to get necessary approval through building vote.

Instead, try to conduct a reserve study periodically so that your building can plan for additional funds or repairs needed and avoid a big surprise with owners.

Good building management requires good financial planning. As the operating system for buildings, Super’s software platform helps property managers, boards, and residents streamline tasks and enhance transparency and accountability.

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