Reserve Fund: What is it and why is it important?
After the completion of a property and handover, the task of maintaining the building over its lifecycle begins. In order to do so, most Owners’ Associations set up two funds to help cover the expenses of the building, a general fund and a reserve fund. A general fund is used for on-going expenses relating to the upkeep and maintenance of the property, such as cleaning, security, landscaping etc. whereas a reserve fund is used for capital expenses such as replacements of major common area assets, e.g. Lifts, water pumps, air handling units, building facades, road works etc. Simply put, a reserve fund is a financial tool to help the Owners’ Association to estimate and provide for funding future major repairs and replacement of common area components over a long term.
How do you set up a reserve fund?
As per the Real Estate Regulatory Agency (RERA) guidelines and Law No. 27 of 2007 (Defined by Direction for Association Constitution), every jointly owned property needs to have a reserve fund set up to account for one off investments and unforeseen expenses. In addition, no reserve fund can be set up without a Reserve Fund Study first being conducted. A reserve fund study is conducted by an independent building surveying firm that accurately assesses the condition of a property and its assets. The study projects the costs of maintenance and/or replacement of any capital assets that might occur over the lifetime of the building. The reserve fund study also recommends what kind of funding levels that the property should aim to have in its account to ensure smooth operations.
What are the hallmarks of a good reserve fund?
The strategy behind the management of a reserve fund depends on the management style of each Owner’s Association but all good reserve funds should have the below points:
- No special levies: In the event of an unforeseen expense for the building that the reserve fund cannot cover, the Owner’s Association may enact a special levy from the residents in order to make up the difference. A well-managed reserve should have enough funds to cover any eventuality and as such, should have no, or a very low number of special levies on record.
- Good maintenance plan: Regular maintenance can help ease wear and tear on the property’s assets and prevent major issues before they happen. A good maintenance plan indicates that the Owners’ Association Management is proactive and seeks to minimize unnecessary expenses.
- Liquid: By its nature, a reserve fund should be liquid and easy to access. Though some Owner’s Associations use the money in investments to get some returns, in general, putting the money in a savings account generates enough additional funds to account for inflation.
- Accurate and up to date: Market situations change, as do the realities of property management. Generally speaking, a new Reserve Fund Study should be reviewed every three years maximum in order to update the projected expenses versus actual expenses and account for inflation. An out of date Reserve Fund plan runs the risk of coming up short in case of major expenses.
A well-managed reserve fund can ensure that major expenses are taken care of without having to place an undue burden on the owners and indeed, minimize the need for those major expenses in the first place. It will also enhance the value of a property over its lifetime and ensure its smooth operations.
Need to set up a reserve fund for your building? Or maybe you need to update the existing study to be in line with current market conditions? Land Sterling’s team of experienced and accredited surveyors is happy to assist you with conducting a reserve fund study and can help you set one up for your building. Send us an email at firstname.lastname@example.org or contact us on +971 43 808 707.