Joe Adams: Pooled reserves ensure there’s cash when needed
Q: Our board of directors has been talking about switching over to “pooled” reserves. Can you explain what this means? L.A. (via e-mail)
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A: The concept of funding condominium reserves through the “pooling” method, sometimes also known as the “cash flow” method, came into vogue about seven years ago.
The Florida Condominium Act requires an association to include as part of the annual budget, a reserve schedule. Reserves must be set aside for roof replacement, pavement resurfacing, building painting, and any other item of association responsibility with a replacement cost or deferred maintenance expense of $10,000 or more.
Traditionally, the reserve schedule accompanying the proposed budget has used the “straight line” method of calculating required reserves. For example, assume that the roof on a condominium building has a 20-year useful life, it is 10 years old, and will cost $100,000 to replace. Further assume that the current amount of money in the roof reserve is $50,000. The association will need to collect $5,000 per year, over the next 10 years, to accumulate another $50,000 so as to “fully fund” the roof reserve. This is traditional, “straight line” funding of reserves.