For example Car Park and Driveways of a Jointly Owned Property may require painting every 5 years. Even though the paint is done after 5 years, it is gradually used during the 5 years, hence it is but logical to keep setting aside some money every year as the paint deteriorates over the 5 year period so at the end of 5th year the JOP has enough funds to commence the painting works.Reserve fund in the context of Jointly Owned Property is an amount of money set aside to pay for major expenses that are expected in the long run. One of the most significant reasons for maintaining a property reserve fund is because it spreads obvious expenses evenly over a given period. This enables one to plan and meet these obligations as they occur instead of pumping into them. In this sense, the reserve is not an extra expense, but an actual and necessary expense spread over multiple financial years.
If the management asks the Owners to pay for Painting Work in the 5th year it would put an unfair burden on the Owners at that time. May be someone just bought a unit only a few weeks ago. Since the Owners are benefiting from the useful life of the asset every year, Reserve funds fairly allocate the cost to owners spreading it over the expected useful life of that asset.
Buildings, just like most assets, are subject to maintenance costs. In case a building requires major repairs or replacements; an adequately maintained reserve fund will be a relief to the owner and those who live in it. Some of the repairs and maintenance costs include roof replacements, repainting, carpet, appliance replacements, elevator equipment, chillers, pumps, and so on.
For instance, it will be extremely expensive to foot a replacement bill of a chiller in a tower building with one installment. Instead, the management will set aside a portion of funds every year over the working life of that chiller so that it will be easy to replace it when it stops working. By contributing to a reserve fund, the owners, their tenants, and the community at large will benefit when the building is kept in good condition by this fund.
For owners of property who intend to sell their property, a good reserve fund greatly enhances the resale value of the property. In the international stage, most states require associations to disclose information on the amount of the reserve fund held to potential buyers. Locally, RERA (Real Estate Regulator Agency) also stipulates that management provide adequate reserve fund information on its financial statements.
Below are some frequently asked questions concerning reserve funds that will assist Owners’ Committee members to fulfill their responsibility of understanding the regulations and making decision in the best interest of all owners
1. Is it Mandatory to have a Reserve Fund for JOPs in Dubai?
Yes, clause 52, Part 8 of the Directions on Association Constitution issued by RERA stipulate that the Owners Association should form two funds – the general and the reserve, as soon as it is practically possible after its constitution.
2. What constitutes a Reserve Fund?
RERA lists sources of income that constitute the reserve fund as follows;
a. Part of the Service Charge levied on the owners specified as Reserve Fund Contribution
b. Penalties imposed on owners for failing to keep up with their contributions towards Reserve Funds.
c. Income from Shariaa (Islamic Law) compliant investments made from the reserve fund
d. Donations made to the reserve fund.
3. How much should be the contribution to the reserve fund?
As per regulations issued by RERA, the Manager should prepare and the board must approve a budget for each financial year, and present that budget to the Owners Committee. The budget for general fund must be for one year and minimum ten year for the reserve fund. The ten year budget should be based on a study forecasting major repairs and replacements. Accordingly the management forecasts JOP’s cash flows and raises reserve fund.
4. Where can the management invest reserve fund?
The management can invest reserve funds only in Shariaa (Islamic Law) compliant investment products.
5. Is it requirement to keep the reserve fund in a separate bank account?
No, there is no such requirement, the JOP can have all its funds in one bank account; however it is a good practice to keep the reserve fund in a separate bank account, preferably a savings account (Shariaa (Islamic Law) compliant) to earn a return and offset inflation to some extent.
6. Is it a must to show reserve fund as a separate item on the JOP’s statement of financial position (Balance Sheet)?
Yes, it is required by directions issued by RERA to account for and report the general and reserve funds separately.