How Much Should a Private Club Keep in Capital Reserves?

"How much should we have in reserves?" is one of the most common questions club boards ask, and one of the hardest to answer with a single number. The right level depends on the age and condition of the club's assets, the timing of major replacements, how the club funds capital, and how much risk the membership will accept.

This guide explains the measures clubs use, the main funding strategies and how to set the annual contribution. It builds on our guide to club reserve studies.

Key takeaways

• Keep operating reserves and capital reserves separate.
• Percent funded compares the reserve balance to the used-up share of replacement costs.
• Many boards target 60% to 70% funded or higher.
• Write the funding strategy into a reserve policy and update the model yearly.

Operating reserves vs. capital reserves

Clubs need two kinds of reserves, and mixing them causes problems.

• Operating reserve. Cash to cover seasonal swings and unexpected operating shortfalls. Many clubs target two to four months of operating expenses, more in highly seasonal markets. See seasonal cash flow for Florida hospitality.
• Capital reserve. Money set aside to replace existing assets as they wear out: roofs, HVAC, irrigation, kitchen equipment, carts, bunkers, pools. It is sized from a reserve study or capital asset inventory.

New projects that add amenities are usually funded separately through assessments, capital campaigns or debt. See club capital project financing.

Percent funded: the core measure

A reserve study estimates each component's remaining useful life and replacement cost. From that, it calculates a "fully funded balance": the portion of each component's replacement cost that has already been used up. Percent funded compares the actual reserve balance to that figure.

For example, if a $400,000 roof has a 20-year life and is 10 years old, half its life is used, so its fully funded balance is $200,000. Add up every component, compare to the reserve balance, and you have the club's percent funded.

Reserve professionals commonly describe funding levels in broad bands. Below roughly 30 percent, special assessments and deferred maintenance are likely. Between roughly 30 and 70 percent, the club has some cushion but limited flexibility. Above roughly 70 percent, the club can usually fund replacements on schedule without surprise assessments.

Funding strategies

• Full funding. Contribute enough to reach and keep 100 percent funded. Most conservative and most expensive in the short run.
• Threshold funding. Maintain a target percent funded, such as 60 or 70 percent, or a minimum cash balance.
• Baseline funding. Contribute just enough to keep the balance above zero over the study period. Lowest contribution, highest risk.
• Hybrid. Fund routine replacements from reserves and plan known large projects through capital dues, assessments or debt.

Whatever strategy the board chooses, write it into a reserve policy that states the target, the funding source and how withdrawals are approved.

Setting the annual contribution

1. Start from the reserve study's 30-year expenditure schedule.

2. Choose the funding strategy and target.

3. Model contributions with an inflation factor for costs and a conservative return on invested reserves. See club investment policy for reserves.

4. Test the plan year by year so the balance never drops below the minimum.

5. Decide the source: capital dues, a share of initiation fees, operating surplus transfers, or a combination.

6. Update the study every three to five years, and the model every year.

Explaining reserves to members

Members accept reserve contributions more readily when they can see the plan. Show the 10-year capital schedule, the percent funded today and the target, and what happens without the contribution: deferred projects or a future assessment. Our article on club dues increases vs. special assessments shows how to frame the trade-off with numbers, and why clubs with a reserve study still get special assessments covers the gaps to avoid.

Common questions

How much should a private club have in capital reserves?

It depends on the club's reserve study. Many clubs aim for a threshold such as 60 to 70 percent funded or higher, which usually allows replacements on schedule without special assessments.

What does percent funded mean for a club?

The ratio of the club's actual reserve balance to the fully funded balance, which is the portion of each component's replacement cost already used up based on age and expected life.

What is the difference between operating and capital reserves?

Operating reserves cover seasonal swings and unexpected shortfalls in operations. Capital reserves fund replacement of existing assets as they wear out.

How often should a club update its reserve study?

A full update every three to five years is common, with the funding model refreshed annually during budget season.