Category Archives: Reserve Fund

No, the Condo Reserve Fund is not the Board’s Cookie Jar!

B.C. from outside of Connecticut writes:

Dear Mister Condo,

Is a Reserve Fund to be used for only the intent that describes the Reserve Fund or can the money be taken and used elsewhere for replacement of an item normally taken care of by maintenance. This item is an accessory item and has no bearing of the intention of the Reserve Fund. It is just that this particular fund has an excess in it therefore has become the resource for the project.

Mister Condo replies:

B.C., thank you for the question. By it’s nature a Reserve Fund should never have “an excess in it”. Reserve Funds are for wear and tear that is occurring on the common elements each and every day. There should always be money in the Fund as the wear and tear occurs daily and the common element replacement is a known future expense of the association. Having money in the Reserve Fund to pay for those expenses is critical and vital to the financial well-being of the association. However, it is tempting for Board members to “borrow” from the fund to pay for other items the association needs now. Such would seem to be the case for your association.

As you can imagine this is a really bad idea. For the most part there are no laws protecting the Reserve Fund. They are an asset of the association and, as such, under the Board’s control. While the Board has a duty to protect the association, which includes protecting the Reserve Fund, they also have to be practical when it comes to the association’s expenses. It is unfortunately quite common for Boards to tap into their Reserve Fund to pay for non-Reserve Fund items. It’s just too easy and too tempting to do so. If the Board has an immediate plan to return the money, there may be no harm and no foul. However, these good intentions are often overlooked when it comes to increasing common fees or asking for a Special Assessment to cover the money borrowed so it doest get replaced and the association’s once healthy and adequate Reserve Fund becomes underfunded, creating a swath of problems for future association members.

The best policy for the reserve Fund is one of custodial guardianship. The Reserve Fund should be used only for the items it was designed to protect and maintain. Any extemporaneous projects that arise should be paid for with other funds, i.e. special assessment or increased common fees. If your Board has no plan to return the money to the Reserve Fund, you would be wise to raise the issue at an upcoming meeting. If your Board members are not willing to perform their fiduciary duties of protecting the association’s assets, such as the Reserve Fund, it is time for some new Board members. All the best!

Condo Board Depletes Reserves Without Plan for Replacement

K.C. from Long Island, NY writes:

Dear Mister Condo,

I live in a 40-unit condo community in Suffolk County, Long Island that was built 8 years ago. The sponsor upon his departure left $25,000.00 in Reserves with the recommendation that we continue to increase our Reserves to $35,000. Our present Board recently depleted all Reserves for the rehabbing of the wood on 2 buildings. According to our By Laws, the Reserves are to be used for roofs, roads, curbs, bulkhead. Living in an area susceptible to storms, floods and hurricanes – this makes me extremely nervous. Is there a source I can go to for laws & information on HOA Reserves for NY condos?

Mister Condo replies:

K.C., you are right to be concerned about how the Board is using the Reserve Fund and any of the association’s resources. A substantial Reserve Fund, or lack thereof, is often the difference between success and failure in condominium communities like yours. Unfortunately, the state of New York has been largely silent on the issue, leaving unit owners such as you, to review the association’s governance documents to make a determination as to what, if any, provisions exist that require the association to conduct and maintain a proper Reserve Study and to then properly fund the Reserve Fund so that the unit owners are protected against future maintenance costs which will surely arrive. When the community is not prepared for those expenses, unit owners get his with Special Assessments and/or increased common fees to carry the debt created by an HOA loan used to fund the repairs. It is truly a “pay me now or pay me later” scenario for unit owners. My best advice is for you to review your governance documents and see what they say. Most allude to having a Reserve Fund but few have a required contribution. You may suggest the association adopt a Reserve Fund annual contribution either based on a Reserve Study or even 10% of revenues collected. This will require an increase to common fees but it will help the association survive in the years ahead. You might also suggest the association hire a Reserve Study specialist who can best advise the association of how to plan ahead and save now for tomorrow’s known expenses. It might be an additional expense to the association today but it will provide great peace of mind and fiscal stability to the association in the future. All the best!

Condo’s Underfunded Reserve Creates Many Problems

C.R. from outside of Connecticut writes:

Dear Mister Condo,

I live in a condo building with 58 units. There are zero adornments except for a very nice meeting room. We have two elevators which travel eleven floors up and down. I am currently serving on the board. Our Reserve fund is at 18K which in my eyes is very low. We will need a major elevator repair in a few years and increasing insurance as well as a rooftop service plan. We have decided to increase HOA dues 15% = $3000. more each month or 20% increase equaling an extra $4000. per month. We want to propose this to our residents and are working on a plan. Currently, there are a few things that need addressing (i.e. a new awning, a better gardener and washing the windows). We do not feel we can do these things with such a low Reserve. We have had many leak and flooding issues some handled by insurance some not. Can you offer any advice?

Mister Condo replies:

C.R., I feel your pain. When it comes to long-range planning and proper funding a Reserve Plan and a commitment to fund the suggested amounts of Reserves is a commitment taken on by the community (through the Board) are always the best solution to problems like yours. However, as many as 7 out of 10 associations decided to underfund or completely fail to fund their Reserve Fund, leaving them in the same precarious situation you now find yourself in. You have answered your question by suggesting that it is time to increase common fees and fund the Reserve. It may also be time to consider a community association loan to make the more urgent repairs. Neither of these options are going to be popular with the unit owners as both will cost them an increase to their monthly fees. Many Board members who wish to continue serving on the Board will be afraid of upsetting their constituents by suggesting an increase to the common fees but that is what needs to be done. How you handle it will determine your success. I suggest an open dialogue with all unit owners. Explain the problem and the proposed solution. It may be a bitter pill for them to swallow but it is the only way to keep their investment properly protected and financially secure. Good luck!

How Does the Condo Know How Much to Keep in Reserves?

B.B. from outside of Connecticut writes:

Dear Mister Condo,

What is a good process to determine the amount to be kept in reserves and set assessments?

Mister Condo replies:

B.B., there is only one tried and tested process to determine the amount to be kept in Reserves and set assessments and that is the implementation and adherence to a Reserve Study. There are many companies that specialize in this service but associations that wish to save money and have the confidence they can do it right can even do it themselves. The concept is simple. The minute the first common element is added to the association, it begins to age and decay. Some go quickly, some take decades, they will all need to be replaced and have a known useful life. The Reserve Study looks at the cost of the common elements and uses a formula to determine the likely cost at the age of replacement. Obviously, it cannot be an exact number but I think you will find these studies, when performed properly, are surprisingly accurate. Once the study is performed, a funding plan is put in place. As long as the funding plan is adhered to, there should always be enough money in the Reserve fund to handle these known upcoming expenses as they come do. Additionally, the association benefits from accruing interest on these funds which tend to help offset inflation. I wish you and your association the wisdom of Solomon in determining and adhering to your Reserve Study findings. Good luck!

No Formal Condo Association Leads to Informal Roof Problem

M.L. from outside of Connecticut writes:

Dear Mister Condo,

I own a condo in a converted 1860-era house. I have the first floor and upstairs neighbor has 2nd and 3rd. We don’t have a formal association. We just split shared expenses 60/40 (I’m 40). It has worked fine but now there is an issue. We desperately need a new roof. But they keep stalling and finally have come clean that they don’t have the money. What recourse do I have?

Mister Condo replies:

M.L., if you have a condo agreement as part of your purchase agreement, you have a formal association. You and your fellow owner just haven’t been following it, which is fairly common in your two-unit condo. You are about to learn first-hand what happens when one of the unit owners doesn’t have the money for the needed repair and it isn’t pretty. The short-term answer is that unless these folks agree to pony up the money for the new roof, you’re not going to get a new roof. The long-term solution is that you will likely need to sue in order to get them to pay. Since they aren’t likely to do that, they may need to look into other options like mortgaging (unlikely) or selling (ideal). This could take years and you still won’t have a new roof until a new buyer is found who is willing to not only buy their portion of the condo but also pony up 60% of the expense of a new roof. One other option you may have is for you to pay for the new roof and hit them up with a lien for their portion of the roof. You will need an attorney to draw up the papers, which will have to be in compliance with your condo’s governing documents as well. As you can see, this is a most unfortunate event for all involved. There is one other option I didn’t mention and that is for you to sell and make this someone else’s problem. I don’t know if that is an option for you but I wouldn’t hesitate for a minute to get out of this potential money pit if given the opportunity. All the best!

Condo Board Seeks Solution to No Money for the New Roof

P.B. from Hartford County writes:

Dear Mister Condo,

My Board wants to get a new roof. They set up a meeting for owners to vote on whether to take a 250K loan or not. At the meeting an attorney hired by the board to do the closing showed up and was practically running the meeting and trying to convince owners to give approval for the loan. I objected on the grounds that it was a conflict of interest to have the attorney there running the meeting since no vote was taken and not enough owners showed up for the meeting. Now the attorney instructed the board to go door to door to get proxies filled out. Is that ok?

Mister Condo replies:

P.B., not only is that OK, it may be the only way to get the necessary votes for the loan so the new roof can be purchased. HOA loans or Special Assessments are rarely needed by community associations that plan for the future and build a proper level of Reserves to handle something as common as a roof replacement. But, as is too often the case, the desire to keep common fees low wins the battle for fiscal responsibility. The end result is no money in the Reserves when needed. In this case, the Board has decided to seek out an HOA loan. The reason the attorney is needed is that it is very common that the association’s governing documents do not allow for the Board to take out a loan on behalf of the association. The proxy votes are the Board’s attempt to get the authority to negotiate the loan and obligate the association to the repayment of the loan, which is required from the bank before the loan is granted. As you can see, it often plays out as a comedy of errors before the final vote is taken and the money is loaned. The real question is how will you support the association moving forward? Will you be the one to suggest that common fees are raised 15%, 20%, 25% higher than they are right now? Will you be the one to insist that the association build a proper Reserve Fund and that Reserve Study be conducted so that a proper level of funding can be achieved? Without support for the unit owners, the Board’s hands are tied. If you need a new roof, the money will need to come from somewhere and that somewhere is the unit owners. Whether it comes in the form of a loan, a Special Assessment, an increase in common fees or a combination of any of the three, the unit owners will pay. Good luck!

Condo Board Closes Pools Versus Maintaining Them

T.K. from outside of Connecticut writes:

Dear Mister Condo,

We have 2 outdoor pools. For the past 2 years, 1 pool has been closed – no reason given. This year, none of the pools are opened. I was planning on attending the yearly board meeting that was to begin at 7 pm last evening. However, upon showing up for it we were told it wouldn’t be starting until 8 pm as they were “running late”. I have my own theory as to why they were delaying. What recourse do we have with regards to our pools not being opened and not being informed as to the situation? Our maintenance fees go up every single year without hesitation. Aren’t they liable to honor the dec’s & bylaws with regards to maintaining & operating the pools? So FED UP!

Mister Condo replies:

T.K., being fed up is a good start. Now, it is time to take action. I am sorry that you and your fellow unit owners are being denied full use of your amenities. Pools are a major amenity for many associations and you are correct that their care and maintenance is the responsibility of the Board. However, many associations fail to collect enough money in common fees to properly handle all of the fiscal responsibilities of the association. Even though as a unit owner, all you see is common fees that go up every year, that is no indication that enough money is being collected. Ultimately, associations need to have really good budgets and really good Reserve Studies adhered to in order to thrive. Would you be surprised if I told you that your common fees may need to rise 20 – 30% for that to happen? Would you support a Board that raised the common fees in order to meet the financial obligations of the association? The problem is that the Board is comprised of democratically elected unit owners who must run for election and reelection to serve their community. If they raise fees, they may not be returned to office as that is always an unpopular course of action. However, I can assure you, if the association ties their hands by not raising enough revenue to operate properly, you can expect your pools to remain closed. That is likely the tip of the iceberg. Are roofs being properly maintained? How about parking lots? How about walkways? Underfunded associations are easy to spot. The problems don’t all appear at once but they do surface. I would encourage you to have a candid conversation with your Board and fellow unit owners. If there is no money to make the repairs, you might want to be the one who suggest that common fees be raised. Without that extra capital to work with, I doubt much will change. Good luck!

Underfunded Condo Association Leaves Common Area Repair to New Owner

S.M. from outside of Connecticut writes:

Dear Mister Condo,

One year ago, an owner financed the sale of condo. Now the new owner says there is a serious drainage problem outside back sliding doors. He asked the HOA to fix the problem but there is no money available to do so. The HOA gave the new owner permission to do the job. Then the new owner got city inspectors involved who do concur that there is a major problem. Could the property potentially be condemned? New owner is telling us to either renegotiate our deal, thereby sharing cost of the job, or he will renege on the deal, putting all of the expense back on us. What can be done?

Mister Condo replies:

S.M., HOAs with insufficient funds often make bad decisions. In this case, a really bad decision is coming back to haunt the association. Exterior drainage problems are the problem of the association and should have been repaired by the association, not the unit owner. Further, the correct way to raise money for such a repair is to raise common fees, levy a special assessment, and build a Reserve Fund for future repairs and improvements. The phrase “no money available” indicates to me that there is also no Reserve Study in place and that the common fees have probably been way too low for way too long. The immediate problem facing the association is the possibility of a city inspector condemning the property. While that is an extreme measure, it is possible of the unit is in such disrepair as to cause the inspector to make such a call. Typically, even if a citation is given, the association has enough time to make the repair and avoid condemnation (unless human life is at stake, i.e. a collapsing roof or broken foundation). Assuming the repairs can be made by the association, get an estimate on the job, levy a special assessment or take an HOA loan (if eligible) and handle the repair. Then, sit down and take a good look at the budget for the association. Chances are common fees should be raised this year and for several years to come until the association gets back on sound financial footing. This may prove unpopular with unit owners but it is necessary for the association’s long-term fiscal health and to make sure the Board doesn’t need to make future bad decisions on needed repairs. All the best!

Condo Move In Fees Create Budget Excess!

J.G. from Illinois writes:

I’ve tried submitting this blog question online, but I keep getting an error message saying I didn’t enter the “recaptcha” correctly.  It’s just a check box, so I’m not sure what I’m doing wrong.  I hope you’ll consider this question for your blog. We’re trying to determine the proper treatment of fees collected that are outside the normal monthly assessments.  We have a move-in fee and occasionally collect late fees for monthly assessments.

Our condo rules state:

“There is a $500.00 fee for moving in that is non-refundable to cover cleaning and future rekeying of the building. ”

Our condo declaration states:

“…the Board shall supply to all unit owners an itemized accounting of the common expenses for the preceding year actually incurred and paid, together with a tabulation of the amounts collected pursuant to the budget or assessments, and showing the net excess or deficit of income over expenditures plus reserves.  Any amount accumulated in excess of the amount required for actual expenses and reserves shall be credited … to the next monthly installments due…”

The IL Condo Act gives the Board the right to determine how to distribute excess as long as it’s not prescribed in the condo documents.

We’re expecting an excess this year due to a large number of unit turnovers.   Are we obligated to credit this to the owners?  Or, can we move any excess to reserves since it wasn’t “collected pursuant to the budget” (i.e. not part of the budget that all owners paid assessments for)? Thanks for any advice, opinions, or references!

Mister Condo replies:

J.G., I am sorry if the “recaptcha” tripped you up and I am glad that you emailed me instead. The “recaptcha” is needed due to deter the large amount of attempted SPAM that used to flood the website. Thank you for your vigilance. I am neither and attorney nor an expert in Illinois condo law so please accept my advice as friendly and not legal. For a legal opinion, you should contact a local attorney who specializes in community association law. At face value, I would say that you should return any monies that were over-collected before simply depositing them to the Reserve Fund. This would be in keeping with the spirit and intention of the law which is to protect homeowners from paying more than needed or agreed to in their vote to approve the budget at the Annual Meeting. At the very least, I would offer the unit owners a vote on how to use those funds at next year’s Annual Meeting. Chances are, it isn’t such a large amount that you would get much pushback to moving the funds to the Reserve Fund where it can be used to protect all unit owners. I salute your thinking and commend you for increasing your Reserve Fund but my advice is to follow the spirit and intention of the law and even your own governing documents so that no init owner can cry foul and demand their money back. All the best!

Unhappy and Unsatisfied Condo Owner Moves Out

J.J. from outside of Connecticut writes:

Dear Mister Condo,

I been having a problem at my condo where I used to live. I left because they were always harassing me and my daughter. I’ve been towed because my car on my parking spot and the back tire was on line of the other parking spot. I have been trying to find out for 3 years where money is going because we have Reserves but we have no amenities but a pool.

Mister Condo replies:

J.J., I am sorry you have had such a trying experience living in a condo. Following parking rules can be challenging but managing the parking lot so all unit owners can enjoy the amenity is even more challenging. If you parked where you shouldn’t have you really can’t be too upset if your car got towed. How else could the association parking lot be available for all of the other unit owners who have also paid for unobstructed use of the parking lot? Understanding where your common fees go can be difficult to understand. Just because an association has a Reserve Fund (all should) doesn’t mean they don’t need your common fees for other budget items. All of the common amenities and services are paid for out of the common fees. Everything from the lights in the parking lot to the trash removal to the management of the association and so much more are paid out of your common fees. If you feel you were harassed in any way by your association, I would encourage you to speak to an attorney to see if what you experienced meets the requirements for harassment. Towing your car for parking improperly and insisting you pay your common fees certainly doesn’t qualify but I am guessing there is much more to the story than you have relayed to me here.  Good luck!