Q&A: Establishing Reserve Monies

Q I am the president of our condo association and I am in favor of creating reserve funding. Over the last 40 some years, our residents have voted down the establishment of a reserve. I would like to recommend to the owners a general pool of reserves. Question: Do I first hold a vote on if the owners want a reserve, or must I first conduct a study to establish an estimated cost?

—Reserves Proponent

A “First, by way of background,” says Charles A. Perkins, an attorney with Westford, Massachusetts-based law firm Perkins & Anctil, P.C., “it is imperative that condominium associations maintain a reserve account. General Law Chapter 183A, §10(i) requires that all condominiums shall be required to maintain an adequate replacement reserve fund collected as part of the common expenses. Note that this may be overridden by a vote of sixty-seven percent (67%) of the beneficial interest in the association at an annual meeting. However, Fannie Mae, Freddie Mac and FHA now require an annual operating budget to include a reserve fund of at least ten percent (10%) of the budget. If this is not funded, then the units will not be eligible for financing through any of the above entities.

“In order to set a true amount of what the reserve should be, it is prudent to obtain a reserve study from a qualified source. This type of study will give the board an idea of what the annual reserves should be based upon the status of the capital items at the association. However, based upon your question, be prepared for the worst case scenario. If you have not been funding your reserves for the last forty (40) years, there may be large amounts of makeup to the reserve account that will be due.

“When faced with that scenario, many associations will attempt to borrow money to have the capital items brought up to a new condition and thereafter move forward with a reserve based upon that number, all of which would be set in your reserve study.”

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Comments

  • Good Grief! For starters just budget the 10% and tell the folks that they are required to budget 10% or they'll never be able to sell their units and if they do not have a larger reserve account they will eventually also be seeing a whole lot of special assessments!!!