A typical question I am asked is “what is required to be in a condo reserve"? Well according to the condo association law it would be what is “adequate”. No offense to the real estate 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 condo reserves the better. Condo Associations should budget each month to put money from condo fees aside for the future replacement of common areas and facilities. How much is determined by the size of the property and the amount of condo association common areas that will need attention down the road.
The best way to determine this is to have a reserve study specialist or engineer provide you with a reserve study. This reserve study will determine the expected lives of your HOA or condo association 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 you condo association.
For smaller condo associations this can be cost prohibitive. Trustees or condo boards could develop their own version of a condo reserve study by obtaining pricing on the larger association common area elements and adding a lifespan to them. I have seen many Condo Board designed plans that have been very complete and accurate.
If the condo association is professionally managed, your property manager could assist the condo board in developing this type of reserve study with the condo association board. Be prepared to pay an additional fee to the property management company for this type of work since it is outside the scope of most contracts.
Get to know who lives at in the condo association or HOA. This is important on many levels and could come in handy to do a self designed condo reserve study, HOA 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 condo management committee.
How much should you have in condo reserve? You have enough money in a condo reserve if you can address a condo association 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 condo reserve funds or the organization of condo 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.
If your condo association does not have enough in condo reserve for projects, consider an HOA Loan or Condo Association Loan.