What is 'Reserve Fund'
A reserve fund is a savings account or other highly liquid asset set aside by an individual or business for meeting the future costs of upkeep and any unexpected costs that may arise. If the fund is set up to meet the costs of scheduled upgrades, less-liquid assets may be used. For example, condominiums often set up reserve funds in which condo owners pay a set monthly amount to maintain the quality of the condominium.
BREAKING DOWN 'Reserve Fund'A reserve fund sets aside money for covering scheduled, routine and unscheduled expenses that would otherwise be drawn from the general fund. For example, a pension fund lets employees sign up and receive a payout during retirement. Working employees put money into the reserve fund to ensure money is available when they retire. The money is invested on behalf of members of the fund and paid out during retirement.
Goal of a Reserve Fund
Governments, financial institutions and private households may establish reserve funds. Although the fund size may vary, the typical goal is depositing funds on a regular basis so they accrue interest, and the fund increases in value. Expenses may be paid out of the reserve fund rather than general funds.
Because one does not know when expenses may arise, a reserve fund is typically kept in a highly liquid account. For example, a household may maintain a savings account for covering unexpected expenses.
Reserve Fund for a Condominium
A condominium typically establishes a reserve fund that owners pay dues into for covering maintenance, repairs and other expenses related to operating the building. For example, the board may use part of the reserve fund money for covering biannual insurance payments. Part of the fees pay for ongoing costs such as landscaping, whereas some fees cover one-time expenses such as painting exterior walls.
If a condominium incurs a large expense the reserve fund cannot cover, each unit owner pays an assessment for covering the cost. For example, when the parking garage needs repairs, unit owners may be asked for additional funds beyond their regular association dues.
The best way of avoiding a special assessment is making sure enough money is in the building’s reserve fund. The board of directors (BOD) should conduct a reserve study with experts coming in and looking at the property. The experts consider the age of the building, the state it is in, and the amenities it provides, as well as project maintenance costs that may be needed in the future. Because condominiums do not always fully fund their reserves, the final figure is only a recommendation.