A Reserve Fund for a Saudi Building: A Worked Contribution Example

How to turn a list of ageing building components into an annual contribution per owner, and what happens to the numbers if you do not.

A reserve fund converts future large costs into present small ones. The calculation is not complicated: list the major elements, estimate the remaining life and replacement cost of each, and divide. What makes it useful is doing it before anything fails rather than after. This example works through the arithmetic for an illustrative building and then shows what the same building faces with no reserve at all.

The situation

A thirty unit residential building, fifteen years old, has been running on a service charge that covers routine costs only. A new committee commissions an engineer to schedule the major elements and wants to know what a proper reserve contribution would be, and whether owners will accept it. All figures are illustrative.

Assumptions (illustrative)

• Thirty units of equal share, so each owner carries one thirtieth of any shared cost.
• Two lifts, assumed remaining life 7 years, assumed replacement cost SAR 420,000 in total.
• Roof waterproofing, assumed remaining life 5 years, assumed renewal cost SAR 300,000.
• Main air conditioning plant, assumed remaining life 10 years, assumed replacement cost SAR 650,000.
• Facade repairs and painting, assumed cycle of 8 years, assumed cost SAR 240,000.
• Existing reserve balance: SAR 0.

Step 1: Convert each element into an annual provision

Lifts: SAR 420,000 over 7 years is SAR 60,000 a year. Waterproofing: SAR 300,000 over 5 years is SAR 60,000. Plant: SAR 650,000 over 10 years is SAR 65,000. Facade: SAR 240,000 over 8 years is SAR 30,000.

Each large future cost becomes a manageable annual number. This is the entire mechanism of a reserve, and it works only if it starts before the remaining lives get short.

Step 2: Total the annual provision and divide by units

SAR 60,000 plus SAR 60,000 plus SAR 65,000 plus SAR 30,000 gives SAR 215,000 a year. Across thirty units that is SAR 7,167 per unit per year, or about SAR 597 per month.

The honest number for this building is roughly SAR 7,167 per unit annually on top of routine costs. Any charge materially below that is not cheaper, it is incomplete.

Step 3: Test whether the schedule is affordable as presented

The waterproofing needs SAR 300,000 within 5 years but the fund starts at zero, so by year 5 the fund will hold 5 times SAR 215,000, which is SAR 1,075,000, less whatever has already been spent. The waterproofing is covered.

Because the contributions are pooled rather than ring fenced per element, early items can be funded from the total. The schedule works as long as nothing is pulled forward.

Step 4: Check the worst sequencing case

If waterproofing is needed in year 3 rather than year 5, the fund will hold 3 times SAR 215,000, which is SAR 645,000. The SAR 300,000 is still covered, leaving SAR 345,000 before the lifts fall due in year 7.

Running the sequence rather than the total is what tells you whether the plan survives contact with reality. A plan that only works if nothing comes early is not a plan.

Step 5: Model the building with no reserve at all

With no fund, the waterproofing arrives as a demand of SAR 300,000 across thirty units, which is SAR 10,000 per owner in one payment. Two years later the lifts arrive as SAR 420,000, which is SAR 14,000 per owner.

The same money is paid either way. The difference is that SAR 597 a month is a budget item while SAR 10,000 in one demand is a crisis, and some owners will not pay it.

Step 6: Price the arrears effect of the no reserve route

If an assumed 20 per cent of owners cannot meet the SAR 10,000 demand, the building collects SAR 240,000 of the SAR 300,000 needed. The remaining SAR 60,000 falls on the paying owners, adding about SAR 2,500 each to a demand they have already met.

Lump sum demands generate arrears, and arrears are redistributed to the owners who pay. The reserve route is cheaper for a compliant owner even before considering the condition of the building.

What changes the answer

• If replacement costs were 20 per cent higher than assumed, the annual contribution rises to about SAR 8,600 per unit, which is roughly SAR 717 a month.
• If the building had forty units rather than thirty, the same SAR 215,000 falls to about SAR 5,375 per unit per year.
• If an existing reserve of SAR 400,000 were already held, the required annual contribution falls materially for the first several years.
• If the plant life were 5 years rather than 10, its annual provision doubles to SAR 130,000 and the total contribution rises by about 30 per cent.
• If arrears run at 30 per cent rather than 20 per cent on a lump sum demand, the burden on paying owners rises sharply and the building is likely to defer the work.

What the numbers tell you

• A reserve calculation is a list of elements, lives and costs, and any committee can build one with engineering input.
• Pooling contributions rather than ring fencing per element is what makes early items affordable.
• Run the sequence of demands, not just the annual total, to test whether the plan holds.
• The same money is paid with or without a reserve, but lump sum demands produce arrears and deferral.
• Arrears are not absorbed by the building; they are redistributed to the owners who do pay.

Limits of this example

Every figure above is an illustrative assumption used to show the method, not a quote, valuation or market rate. Costs, rates, fees and regulations change and must be confirmed with the relevant authority, lender or supplier before you commit.

Domira works on the ownership side of a Saudi property for owners based abroad: verifying title and boundaries, assessing the building, handling registration and handover, and managing the asset afterwards. For legal and tax questions, work with a licensed adviser; Domira will tell you plainly what the property itself supports.