Category Archives: Reserve Fund

Paying the Price for Years of Low Condo Common Fees

A.C. from outside of Connecticut writes:

Dear Mister Condo,

I live in an 85-unit condo complex that was built in 1970. Many of our residents have lived here since the 80s. Unfortunately for us, the Reserve Study we reviewed before buying listed the HOA health as good and properly funded. The Reserve Study issued a month after our purchase brought to light a number of upcoming expenses to maintain the buildings due to age. What many of the new owners are discovering now is that for years the association kept unit dues very low and avoided large repairs until needing emergency repairs. Now they are increasing dues rapidly to help pay for aged repairs- such as replumbing of the buildings. Our dues have increased by over 50% in a few years. Dues increases and assessments are incurred based on % of ownership, but is there a legal option (perhaps through a change to by-laws) that would allow for a special assessment based on years of ownership to place some of the financial burden on those that enjoyed years of rock-bottom dues at the expense planning ahead?

Mister Condo replies:

A.C., I am sorry that you and your fellow units are left paying the bill for previous unit owners. The sweetness of low monthly fees is often replaced with the vial reality of special assessments and higher common fees for future owners. There is currently no laws that allow for associations to go back and recoup additional common fees or assessments from previous unit owners. All that you can do as an association is to buckle down, address the reality of the situation and base future common fees on a properly funded Reserve Fund for when these common elements will need replacing next time. Otherwise, you will very likely find the next generation of unit owners feeling the same way you do now when there is no money available to them to make the repairs and replacements for the common elements you are about to replace and use for decades ahead. It is a vicious cycle but, with planning and proper budgeting, it can be managed. Good luck!

Condo Unit Owner Seeks Legal Recourse for Poorly Maintained Roof

D.N. from outside of Connecticut writes:

Dear Mister Condo,

After living in my condo unit for many years, the roof recently came off during a rainstorm. The Association’s master policy is paying for the property damage which means they will put the home back to the state it was sold to me. However, do I have any legal recourse against the property management company and the board for not maintaining the roof in good order in addition to what the insurance will cover. The roof was originally scheduled for replacement in August. My roof came off in July. The state of the roof of my unit as well as the other roofs in the building unit I am in was in very poor shape. It appeared as though the roof should have been replaced or maintained quite some time ago. I was wondering if I had any recourse against either or both parties for not maintaining the property at the level it should. I have always paid my condo fee in full and feel I deserve to have my property maintained.

Mister Condo replies:

D.N., poorly maintained condos are almost always the result of “deferred maintenance”, the polite term for not collecting enough common fees to make adequate Reserve Fund contributions over the years. I am sorry that you had a such a direct impact from such a poorly maintained roof and I am glad that you have had the benefit of insurance to help you rebuild. As for your ability to seek additional damages against the association, I am doubtful. That isn’t to say you couldn’t try but the reality is no real crime was committed here. The Board is democratically elected by the unit owners like yourself and has likely changed over many times in the years of neglect involved. The Property Management company does the bidding of the Board so they are not at fault. Who exactly would you sue? The association paid to replace your roof after it failed so they fulfilled their obligation as well. I am not an attorney and offer no legal advice here. My friendly advice is to be happy that you have been made whole by insurance and that no one was injured by the failed roof. You might ask the Board what steps they are taking to start saving for the next roof now that the current one is new. My guess is your common fees need to increase 20% or more to properly reserve for future repairs. As you can imagine, that won’t be popular with unit owners who are unlikely to want to pay more today for tomorrow’s repairs. Yet, that is the right solution. Good luck!

Condo Owners Reluctant to Pay Proper Common Fees

K.I. from New Haven County writes:

Dear Mister Condo,

I serve as board president for a small association. The Treasurer and I are the only unit owners who have any interest in serving in more than name only. Despite our best efforts, we can only seem to get the unit reps together annually to discuss business. For the past few years he and I have been warning everyone that due to inflation, our expenses are surpassing our income. We have tried raising monthly dues, but according to our by-law, raising dues and levying of non-emergency assessments must be passed by majority, so we’ve been unsuccessful. Because of this, we have been unable to allocate funds to do upkeep. The unit that is the most vocal about status quo reported a water stain that will certainly lead to a leak. The treasurer and I would very much like to address this…but we don’t have the money because we’re being out-voted on raising dues and budgeting future assessments into them. Once there IS a leak we can say this is an emergency assessment and levy it, but the unit that reported it is threatening legal action against us for not maintaining the building unless we fix it post-haste. Because we are a small association, we have been unable to find a property manager that will take us on or that we can afford, so we don’t have access to a lawyer. We’ve called around, but have been unable to find a lawyer that will even see us for a consultation! Any advice?

Mister Condo replies:

K.I., I am sorry for your situation. Unfortunately, you are seeing the direct results of what happens when unit owners’ apathy reaches a dangerous level. There are some things you can do but you will likely get pushback from unit owners and even the uninterested Board Members. A lawsuit from an upset unit owner will get their attention despite your best efforts to avoid that scenario. The emergency repair will also cause the immediate problem to be fixed but will not solve the long-term issue of inadequate Reserve Funds and even general maintenance funds. The reality of the situation is that your common fees should probably be at least twice what they are right now but, as you know, unit owners will fight you tooth and nail if you raise the fees that much. Having money for a property manager and an attorney are all part of collecting adequate common fees. Until the fees are raised, the problems will persist. If it were me, I’d hit the road while the units still have some value. If you wish to stay and fight, you can cite governance and legal (Connecticut State Law) requirements to adequately collect Reserves as part of the monthly common fees. It will take years to correct but with diligence, I do believe you can turn the association around. The alternative is catastrophic financial failure, which will lead to the association going under and owner losing their homes. I hope it doesn’t come to that. Good luck!

Unusual Items Paid for by Condo’s Reserve Fund

E.I. from writes:

Dear Mister Condo,

Are Condominium Associations permitted to use Reserve Funds to purchase and install items within units such as intercoms or programmable thermostats. Are these items considered common or non-common items? Each unit receives their own separate electricity bill for which they are responsible for. Would this be different for the purchase of low-flow shower heads where the water bill is paid for by the association and thus receives the savings?

Mister Condo replies:

E.I., just about any common element owned by the Association is eligible for Reserve Fund funding. Each and every asset of the association comes with a cost and a repair or replacement estimate. If the intercoms, thermostats, and low-flow shower heads are owned by the association, then they are common elements (limited or otherwise) and can be included in the list of Reserve Fund items. However, if these items are not owned by the association then the association should not be paying for them, Reserve Fund or otherwise. The bottom line is who owns the asset. As long as it is the association, it is their responsibility. Putting money away today for tomorrow’s repairs and replacements is exactly what the Reserve Fund is for. All the best!

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!