The hallmark of strong financial health is having enough liquid assets on hand to fund ongoing operating expenses while also being able to cover unexpected emergencies when they arise. This is why any HOA budget should allocate funds into two main financial accounts – an operating fund and a reserve fund.
While operating expenses tend to remain relatively predictable, it can be more challenging to determine how much in reserves an HOA should maintain for unexpected emergencies and capital planning projects. One way to make the task easier is to conduct a reserve study.
Conducting a Reserve Study
To ensure adequate funding for emergencies and future improvements, condo associations in Illinois should consider conducting a reserve study annually. The purpose of a reserve study is to forecast the estimated costs an HOA will encounter so they can sufficiently fund reserves without having to levy a special assessment.
Reserve studies also help HOAs predict when certain areas of the property will be due for repair or replacement based on things like the age and condition of the building. It then seeks to quantify the projected costs for the repair or replacement of such property.
Planning for Capital Improvements
In addition to planning for future maintenance needs, a reserve study can also help ensure that funding is available for capital improvements. Capital improvement projects are an important part of maintaining and improving the value of a condo association property. These projects can include major repairs, replacements, and upgrades such as roof replacements, window replacements, and landscaping renovations.
Despite the importance of capital improvement projects, funding for them can pose significant challenges for associations, especially if they do not have sufficient reserves or are faced with unexpected expenses. Condo associations typically fund capital improvements one of three ways: by tapping into reserves, levying a special assessment or applying for financing.
To learn more about budget requirements for Illinois Condo associations and what to consider when building out your reserves, get in touch with our team at First Community Management.