Reserve fund

A reserve fund is a financial tool. Bankrate explains how it works.

What is a reserve fund?

A reserve fund is a savings account or other liquid asset managed by a condominium, business or individual for anticipated future expenditures, such as major repairs and improvements. Reserve funds usually are set aside in an account separate from the general operating funds.

Deeper definition

A reserve fund is usually set up to meet both scheduled and unscheduled expenses. Condominium corporations keep a reserve fund for non-routine repairs, such as a swimming pool renovation, and to replace assets and other features of the property. An organization determines the amount of money to put into the reserve fund by doing a reserve fund study.

A reserve fund study, which is done by an independent outside consultant, involves a physical inspection of the capital property of the condominium, such as its air-conditioning and heating system, roof and emergency generator. It also entails a financial analysis.

The reserve fund report outlines the findings of the study, including which assets or features will need to be repaired or replaced down the road and how much it will cost. That way, the condo’s directors can make a financial plan and be prepared for major expenses.

If the condominium incurs expenses that are too large for the reserve fund to cover, the owner of each unit will be obligated to pay a special assessment to cover such costs. Assessments can run into the thousands of dollars.

Reserve funds are beneficial, as they help recover major costs and shield owners from facing huge, unmanageable bills.

Reserve fund example

A small Florida condominium had a reserve fund study done. The study found that the two elevators in the building probably would need replacing within three years, at a cost of $275,000. The condominium’s board of directors added a specific amount to each owner’s quarterly maintenance fees in order to collect the $275,000 for the reserve fund in time for the anticipated elevator project.

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