By: Gary Porter


Virtually all Associations have a Replacement Funding Program. The methods of funding these programs, however, are diverse and varied. An Association may have a Level Funding Program, whereby amounts are added to Replacement Funds on an equal and pro-rata basis based on a straight line method of funding until such funds are needed for replacement of the common area components. An Association may rely to a certain extent on special assessments, or may have an ascending or descending Funding Program, perhaps coupled with a Special Assessment Program. Some Associations may even include borrowing against the common areas assets as an integral part of their funding program. However, the most common method of funding is the pro-rata level method of funding, generally component by component, adding to a sum total level funding program.

This article suggests that the Association can reduce over-all dues by committing to a revolving replacement fund, whereby funds are "borrowed" from one reserve category to pay for imminent costs in another category. This means that the Association will, at all times, maintain a lower cash balance then under a Level Funding Program. However, by careful planning, funds will be available for all required replacement costs at the time they are needed if the Association carefully plans for the timing of expenditures, and maintains an adequate floor of cash available to cover unanticipated emergencies.

Such a funding program allows an Association to utilize its idle cash reserves and restrict its capital needs and monthly assessments. In order for this method to be used successfully, the Association must generally prepare an extensive multi-year analysis of its' cash flow for the replacement funding program. The system should be closely monitored and adjusted as events indicate.