How Much Should I Have in My Condo Reserve?
Posted by Scott Wolf
A typical question I am asked is “what is required to be in reserve for an condo association"? Well according to the law it would be what is “adequate”. No offense to the lawyers out there but that seems a bit vague. Rightfully so.
There is not way to come up with a one system fits all formula. My opinion would be the more money in reserve the better. Associations should budget each month to put money aside for the future replacement of common areas and facilities. How much is determined by the size of the property and the amount of common areas that will need attention down the road.
The best way to determine this is to have a reserve specialist or engineer provide you with a reserve study. This study will determine the expected lives of your common area facilities. The heating system, the roof, the siding, the chimney, light fixtures, interior painting, etc. It will then apply future costs to each element and determine what needs to be put aside each year to meet these goals.
For smaller associations this can be cost prohibitive. Trustees or condo board members could develop their own version of a reserve study by obtaining pricing on the larger common area elements and adding a lifespan to them. I have seen many Board designed plans that have been very complete and accurate.
If the condo association is professionally managed, your property manager could assist in developing this type of study with the condo association board. Be prepared to pay an additional fee to the management company for this type of work since it is outside the scope of most contracts.
Get to know who lives at the property. This is important on many levels and could come in handy to do a self designed reserve study or other types of projects. You may have an engineer, architect, contractor, lawyer, accountant or one of many other professions that do not have time to be a condo association board member but are very willing to be involved on a committee.
How much should you have in reserve? You have enough money in reserve if you can address a common area or facility issue without having to implement a special assessment. That would be my definition of adequate.
In my state of Massachusetts, a Condo Association Replacement Reserve Fund is a separate and segregated portion of the common funds or the organization of unit owners which shall be used to replace, restore, or rebuild common areas and facilities.
In Section 10 (i) it states that "All Condominiums shall be required to maintain an adequate replacement reserve fund....." Section 10 (m) it allows on an annual basis for sixty seven percent (67%) in beneficial interest or more, may modify this provision.
Scott D. Wolf, PCAM
President
Greater Boston Properties, Inc.
www.gbproperties.com