Imagineers Summer 2010 Newsletter

Why the Need for Reserves (Replacement Funds)?


The replacement fund consists of funds put aside in reserve for the replacement of major components of a community's common property. Typically, the reserves might be used for equipment and major components (e.g. roofs, siding, asphalt paving, central heating and cooling, etc.) that must be replaced from time to time. Reserve funds do not represent an extra expense, but rather they are just a plan to spread future expenses out more evenly. There are other important reasons to put association funds into reserves every month:


  1. Reserve funds meeting legal, fiduciary, and professional requirements. A replacement fund may be required by:

    • Any secondary mortgage market in which the association participates (e.g., Fannie Mae, Freddie Mac, FHA, VA).
    • State statutes, regulations, or court decisions.
    • The community's governing documents.
    • The American Institute of Certified Public Accountants (AICPA) requires the community association to disclose its reserves funds in its financial statements.

  2. Reserve funds provide for major repairs and replacements that we know will be necessary at some point in time. Although a roof may be replaced when it is 25 years old, every owner who lives under or around it should share its replacement costs.

  3. Reserve funds minimize the need for special assessments or borrowing. For most association members, this is the most important reason.

  4. Reserve funds enhance resale values.Lenders and real estate agents are aware of the ramifications for new buyers if the reserves are inadequate. Many states require associations to disclose the amounts in their reserve funds to prospective purchasers.

  5. Maintaining a replacement fund equalizes the contribution of old and new owners. Both old and new owners benefit from the presence of a reserve item both should contribute to it.



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Imagineers LLC
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Phone: 1-800-560-7268
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