When buyers purchase a condominium unit and begin paying common element fees, they often have little understanding of how those fees are allocated. Many assume these fees primarily cover amenities, when in reality, they also support the condominium reserve fund—a critical resource for maintaining and repairing shared building components. While only a small percentage of owners serve on their condo board, those who do gain a much clearer view of how reserve funds are managed.
For those unfamiliar, monthly common element fees contribute to both day-to-day operations and the reserve fund, which is set aside for major repairs and replacements. The portion allocated to the reserve fund is determined by a mandatory reserve fund study, conducted at least once every three years.
Key Challenges in Reserve Fund Management
Condominium boards and owners face several common challenges when managing reserve funds. Below are some of the most pressing issues:
Differing Engineering Opinions on Future Expenditures
Reserve fund studies are typically conducted by engineering firms, whose expertise is relied upon to assess the condition of the building and estimate future repair and replacement costs. However, engineering firms do not always agree on these projections, sometimes leading to drastically different expenditure forecasts, with key reasons for these difference including:
Lifespan estimates – Some firms take a more conservative or aggressive approach when estimating how long building components will last.
Repair methods – Engineering firms may propose different repair or replacement methods, which can significantly alter cost projections.
Board influence – In some cases, boards push for modifications to major repair schedules to reduce short-term fee increases.
Inflation and interest rate assumptions – Different firms apply varying economic assumptions, affecting long-term cost estimates.
When condominiums change engineering firms for future studies, expenditure schedules and owner fees can shift dramatically. While obtaining a second opinion is often a prudent step, it can also introduce unexpected cost increases.
Human Biases That Lead to Underfunding
Condominium board members are elected volunteers, often balancing their board duties with personal commitments. Understandably, many prefer to avoid difficult conversations with owners—particularly discussions about fee increases.
Psychologically, people tend to weigh negative feedback more heavily than positive outcomes. This natural bias can lead boards to prioritize short-term financial comfort over long-term stability, inadvertently underfunding the reserve fund.
Since reserve fund management requires relatively few decisions, small biases in investment strategy can have significant long-term effects. Boards may default to overly conservative investments, choosing perceived safety over growth, even when a more balanced approach is warranted.
By incorporating data-driven software tools, boards can make more objective decisions about reserve fund strategies. This approach helps eliminate bias and ensures that key financial decisions are based on accurate data, not emotion.
Overly Optimistic Reserve Fund Estimates
Reserve fund studies provide long-term financial forecasts, estimating the fund’s balance over multiple years. However, due to certain fixed economic assumptions such as static interest and inflation rates, these studies often overestimate fund growth.
Fixed Rate Assumption
Most reserve fund studies assume that interest rates and inflation rates remain constant over the entire study period—both of which remain unchanged over decades. While boards may be allowed to suggest adjustments, predicting future interest or inflation rates with certainty is impossible.
A more accurate approach involves simulating multiple economic scenarios rather than relying on a single fixed-rate assumption. Advanced forecasting tools use historical data and financial modeling to create a range of probable outcomes, helping boards prepare for different possibilities.
Holding Back Cash
Reserve fund studies often assume that all available funds are continuously invested, generating returns. In reality, many property managers keep a portion of the reserve fund in cash to cover emergency expenses.
While maintaining liquidity is necessary, excessive cash holdings reduce investment income. Boards should assess:
How much cash is truly needed for short-term expenses
Whether funds could remain invested longer while maintaining accessibility
The impact of cash reserves on long-term investment growth
By carefully evaluating cash requirements, boards can strike a better balance between liquidity and return on investment.
Staying Proactive in Reserve Fund Management
While these challenges highlight some of the common pitfalls in reserve fund management, being proactive can help condominium boards navigate these issues more effectively. At Vertical City, we help boards make informed, data-driven financial decisions to secure their building’s long-term future. By staying aware of potential obstacles and leveraging the right tools, boards can optimize their reserve fund strategy and ensure financial stability for years to come.
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