Category Archives: Reserve Fund

HOA Board Ain’t Fixin’ Nuttin!

R.M. from outside of Connecticut writes:

Dear Mister Condo,

4 months ago, I purchased a duplex which has 3 buildings and 6 owners. I had a hard time getting documents during the sale and did not understand the dynamics involved. The first email I got from the treasurer was on the day the fees were due. Our first meeting when I met the other owners was a nightmare. The president has been in position for 20 years and has Alzheimer’s so her daughter had appointed herself to the position. The treasurer was appointed by her, not vote, and the secretary had been behind 6 months in fees which they were trying to cover up. When I brought up concerns about the outside of our building, I was yelled at by the President’s son-in-law and told “we ain’t fixing nuttin, we got no money!” Then my neighbor brought up a repair not done properly and he stood up screaming and swearing at her and everyone started fighting. I asked for the bylaws and I was told by the president to find them myself. She doesn’t have them.

A few weeks ago, the fascia that needed repair was hanging off of my roof. I called the president and son in law started screaming and threatening me and said we have no money to fix it. I mentioned the Reserves that we should have had when I moved in, and both him and the treasurer admitted it was fudged to make the sale happen and accused my realtor of fraud. I had her call them and the next day the son-in-law apologized and paid out of pocket to have the fascia repaired.

They had previously called a special meeting to discuss the budget so I told them I did not want the son-in-law there as he has no business there; they agreed. The meeting started off ok until we brought up questions about missing payments from a couple of owners. We started getting bullied again. When the argument was brought up about the fascia I defended myself telling what the son-in-law said to me. He came running down the stairs screaming and swearing and threatening me again and threw me out of his mother-in-law’s house. I called the police.

I want to have the President, Treasurer, and Secretary removed by law for keeping false books, hostile environment, favoritism, harassment and negligence. If I have solid proof (which I do), will I be able to charge the association for the attorney since it’s in the best interest of the owners? It’s the board who caused all of these problems.

Mister Condo replies:

R.M., your tale of woe reads like a comedy of errors. I am glad you got your fascia replaced but the rest of this tale is a nightmare! This is a small homeowner’s association (6 units if I understood your opening statement). Small associations face the same challenges as larger associations but have far fewer resources to handle the issues. A functioning Board is a good start but there are legal remedies available to you. I want to ask you about your own purchase into this association. Did you use an attorney? Did the attorney review the governance documents? They can’t go missing as they are part of the closing process. Of course, if you somehow waived your right to these critical documents in an eagerness to make the purchase, you are experiencing a major case of “Buyer Beware!” It sounds to me like there is awful lot of impropriety going on here. You need to speak with an attorney, which I am not. I offer friendly advice; an attorney will offer you legal advice. You may end up suing the association, individual officers, anyone else associated with these misdeeds in an attempt to get the association back on sound footing. By the way, 6 owners don’t guarantee deep enough pockets to do that. In fact, you may be throwing good money after bad in an attempt to correct this problem. Your attorney can better advise you if you can include your own legal fees in any litigation but winning the litigation is just the beginning. You need to collect from these folks, who clearly don’t have the money from what you have told me. If it were me, I think I would try to sell and cut my losses. Otherwise, be ready to deal with an ongoing problem for months and even years to come. Keep the police on speed dial because these folks clearly have no idea what they are supposed to be doing and will likely continue doing what they have always done. Good luck!

Condo Vendors Work for the Board; Not the Unit Owners!

L.K. from New Haven County writes:

Dear Mister Condo,

A company was hired by the Board to do an assessment of the complex and provide a report to the board in order to get a loan. I called the person who did the report to ask some questions and he said he had been instructed not to answer questions from unit owners. All questions have to go to the Board first. No direct contact is allowed. Can the Board restrict unit owners from talking to a vendor hired by the Board and paid for by unit owners?

Mister Condo replies:

L.K., even though it might seem contrary to reason, the vendor was hired by the Board, not the unit owners. The vendor reports only to the Board. That doesn’t mean you don’t have a right to see the report once it becomes part of the association’s records but until then, the vendor, in this case it sounds like a Reserve Study expert, is correct not to interface with unit owners as it might color the report made to the Board. The Reserve Study specialist needs to be completely objective and present his or her findings directly to the Board. Your observation that unit owners have paid for this contractor is not technically correct. Yes, you and your fellow unit owners all pay your common fees but the governance of those funds is the exclusive purview of the Board. This is very similar to paying your taxes to the town or city in which you live. People that work for the town or city are not your employees, are they? No, the same is true for folks employed by the association. They work for the Board and are responsible only to the Board. I hope your Board makes good use of your new Reserve Study. Good luck!

Condo Owner Seeks Access to Reserve Study

G.H. from Fairfield County writes:

Dear Mister Condo,

Is the most recent Reserve Study that the BOD uses to determine owner’s monthly contribution to the HOA reserve fund one of the business documents that any owner has the right to review and/or have a copy of?

Mister Condo replies:

G.H., as a shareholder in the corporation, you have the right to review any and all official records of the association. The Reserve Study is prepared for the association at the Board’s request. Unlike Minutes of a meeting, it is not created by the association but, rather, for the Board to be used as a guide to make sure the proper level of Reserves is being collected to keep the association fiscally sound as the years go by and the common elements deteriorate. It can be argued that since it is a tool for the Board and not an actual record of the Board, it may not be freely available to association members. However, if you request a copy (at your expense), I would think most Boards would allow it. There may be a record inspection fee and there might also be a “per page” copy fee. Reserve studies can be lengthy so it could get a little pricy. Do you know what firm performed the study? You might be able to request an electronic copy of the document which would save you both time and money. If you are fully denied access to the document, you might want to speak with an attorney and see if there is any other way to compel the document from the association. I might also ask you why you need it. If you trust the sitting Board members to properly care for the association’s fiscal needs, the Reserve study is simply a tool to help them do so. Your annual budget, which you most certainly have a right to inspect, will show you what they are doing with that information. I would guess a healthy Reserve Fund contribution would be somewhere around 30% of common fees. If the Board is simply using a 10% number, then it is likely they are following FHA guidelines and not the Reserve Study. Kudos to you for paying attention. Most condo owners simply submit their common fees and hope for the best. Good luck!

Condo Reserve Study Reveals Major Shortage

B.P. from outside of Connecticut writes:

Dear Mister Condo,

Our new condo management company did a projection study. Unit owners received a letter stating that each unit will be assessed $50,000 payable over a 30-year period unless we vote to take over inside and outside of our units. Is this legal?

Mister Condo replies:

B.P., I’ve never heard of such a thing but that doesn’t make it illegal. The whole idea of a condominium association is that the association is responsible for all common elements, which includes the exterior of the buildings. Individual unit owners do not own the building exteriors so they are not directly responsible for the care and upkeep of them. I say “not directly” because unit owners do have to do two things to make sure their properties are well maintained. The first is to pay their common fees on time. Common fees are the lifeblood of the association and include a contribution to the Reserve Fund, which is where the money to maintain the common elements should eventually come from. Second, and equally important is that unit owners need to elect responsible folks to govern their association. The Board is directly responsible for overseeing the upkeep of the association. They typically do so by hiring outside contractors and management companies to implement this duty but they are the ones representing the association in all matters regarding maintenance and preservation of the association’s common elements. Your governance documents clearly spell out the duties of the association with regards to common elements. If I had to guess, I would say that the communication you received is not properly communicating the message of a Reserve Fund contribution. $50K contribution over 30 years is a little less than $140 per month. Without knowing the amount of assets your association needs to maintain, I would say that is not an unreasonable number for monthly Reserve Fund contributions. I would hope that your association is already collecting these Reserves as part of your monthly common fees. If not, this letter may have been meant to serve as a warning that there is going to be an increase to your common fees to cover the necessary Reserve Fund contribution needed to maintain the community. The “projection study” conducted by the management company may have actually been a “Reserve Study” and they are simply conveying the results of the study. Either way, your association needs to build a healthy Reserve Fund so future repairs can be afforded. Every single common element is aging as we speak. Money needs to be collected today for those replacement projects tomorrow. All the best!

Exterior Rot on Condo Leads to Interior Water Intrusion

R.S. from Missouri writes:

Dear Mister Condo,

I am a condo unit owner for 13 years. I recently experienced my third interior damage leak from rotted siding and decades old flashing. Would the HOA be responsible for the cost of these repairs? My monthly common includes maintenance of the exterior of the unit. Thank you!

Mister Condo replies:

R.S., I am sorry that you have had three different water intrusion events that have caused damage to your unit’s interior. I hope you have homeowner’s insurance to help you mitigate against the losses. It would appear that your condo isn’t being maintained as well as it might if you are experiencing rotted siding. Properly installed flashing may last decades but not if water is getting in behind the flashing. The Board of Directors is charged with maintaining, protecting, and even improving the common elements of the association as outlined in your condo documents. They are also responsible for putting in place a strong fiscal plan that includes building up association Reserves for the eventual replacement of common elements. Have they done that? Is there money in the Reserve Fund to pay for the needed repairs? If not, this problem is only going to get worse as further deferred repairs will lead to more decay and more water intrusion events as you have described. It may be time to have a heart to heart with the Board and fellow unit owners. It may be time for a community association loan to make these repairs and it is most certainly time to raise common fees so that a Reserve Fund can be built for future repairs. This may mean that common fees will rise significantly but if there is no Reserve Fund, they have been artificially low for too long. The HOA is responsible to repairs made to the exterior of the unit. You are responsible for repairs made to the interior, even if they are caused by neglectful maintenance by the association. That is why you have to have insurance for these losses. It’s time to get your condominium association back on track financially or these claims are going to become larger and much more frequent. Let’s hope it doesn’t come to that. Good luck!

Condo Reserve Fund and Operational Fund Should Not Be Same Account

E.B. from Litchfield County writes:

Dear Mister Condo,

Can you refer me to a good article I can share with the board relating to using Reserve Funds and Operational Funds? I have some board members thinking it is one big pot of money! I would like to show them an explanation.

Mister Condo replies:

Sure thing, E.B.! The difference between Reserve Funds and Operational Funds is significant and the two should never be mingled or thought of as one big pot of money! My friend, Jeff Hardy, Founder of TOPS Software, wrote an excellent article on the topic that you can find here: http://camblog.topssoft.com/back-to-basics-understanding-reserve-fund-accounting. I am not sure what type of training your Board has had but one of the first things Board members need to learn when they agree to serve is all of the fiscal fiduciary duties they have as Board Members. Funding and protecting the Reserve Fund is paramount to maintaining a fiscally healthy association. There is always great temptation to simply spend or borrow from this fund, but, as is almost always the case, the monies never get put back and the community becomes deficient when the next major capital improvement project comes due. That takes the community down the path to Special Assessments or loans to make the needed repairs, or worse, deferred maintenance (not making the repair at all). All of this is easily avoidable by a proper understanding and respect for the Reserve Fund. Good luck!

Late Fees on Condo Special Assessment

R.S. from outside of Connecticut writes:

Dear Mister Condo,

Can late fees be charged on special assessments if the condo documents allow late fees on assessments but do not specifically state late fees are allowed on “special assessments”? Are “special assessment” just assessments when it comes to late fees?

Mister Condo replies:

R.S., unless your documents specifically address the difference between Special Assessments and assessments (common fees), my advice would be to treat the two the same. That means that Special Assessments that are not paid in timely fashion would be subject to the same late fees that would apply when any assessment is due. There are exceptions, of course, and I have seen 30-day and longer “grace” periods offered by associations that are trying to alleviate the burden of “immediateness” to the unit owner struggling to pay the Special Assessment. However, at the end of the day, late is late, and the association needs as many collection tools at its disposal as possible. Late fees are the least of a delinquent unit owners’ problem as collection actions and expenses are likely to ensue. Of course, the best policy is for the association to adequately fund their Reserve Fund so that Special Assessments are the true exception and not the planned method of collecting funds as major capital improvements surface. Special Assessments put both the unit owner and the Association at risk. It is better to have regular common fees set at a high enough level that Special Assessments are rarely, if ever, needed. Good luck!

Condo Board Liability for Underfunding the Reserve Fund

G.H. from outside of Connecticut writes:

Dear Mister Condo,

What are the recommended best practices for boards to abide by when deciding whether, or not, to adjust annual Reserve Fund contributions to take inflation and interest on reserves into account? Is there any liability assumed by a Board if they do not take these two factors into account when finalizing the annual budget and establishing the HOA’s contribution to its’ reserve fund?

Mister Condo replies:

G.H., there are several states that have enacted legislation to force associations to use Reserve Studies and to adjust their common fee contributions to keep the Reserve Fund at adequate levels. A list of these states can be found at the CAI website at https://www.caionline.org/Advocacy/StateAdvocacy/PriorityIssues/ReserveStudy/Pages/default.aspx. So, if you live in California, Delaware, Hawaii, Nevada, Oregon, Utah, or Virginia, your association is required, by law, to have a Reserve Study in place. The page also lists Washington State as having a statute that “encourages”, not “requires” a Reserve Study to assist the Board in determining the appropriate level of common fees for an association. Even if you don’t live in state where it is mandated, Reserve Studies are vital tools for associations to know that they are following the Best Practices and sound business judgment in running their associations. I am not aware of any liability assumed by the Board for not taking inflation or interest into account when determining Reserve Fund contributions but a well thought out Reserve Study would certainly do so. In other words, if there were $100,000 needed to replace the common elements in 20 years and only $100,000 were budgeted to do so, factors like inflation and interest would likely make that number too low when the time came to actually make the expenditure to replace the common element. On the other hand, a well-funded Reserve Fund can actually offset some of the interest expense by being invested in a reasonably liquid asset, such as a CD. Hope that helps!

Required Condo Reserve Study in Ohio?

R.D. from Ohio writes:

Dear Mister Condo,

 

In Ohio, can a condo owner act as Associate Treasurer and must there be a Reserve Study of the Association Made?

 

Mister Condo replies:

R.D., I am not an attorney so I cannot speak to specific laws in your state. You can see a graph prepared by the Community Associations Institute (CAI) of what states require Reserve Studies by Statute here. Ohio isn’t listed as a state that does. Additionally, I am not aware of any law that requires Ohio condominiums to conduct Reserve Studies. That being said, many association have rules in their by-laws that require the association to perform routing and preventative maintenance as well as keep the common elements in good working order. A Reserve Study is the perfect tool to keep the association on track financially as the years go by, the elements wear down, and the Reserve Fund is used to replace those worn elements. As for the role of any unit owner to serve as Associate Treasurer or in any other capacity on your Board, you should refer to your governing documents. Typically, Board members are elected from unit owners within the community. I am assuming that the person in question is serving either as a Board Member or as an Appointee of the Board to function as Associate Treasurer. To be honest, I am not that familiar with the title Associate Treasurer. I am assuming that is someone who assists the Treasurer? Do they have the ability to write checks for the Association? If so, the person should be vetted the same way the Treasurer or anyone else is who access to the Association’s funds. Dual signatures, routine audits, etc. should all be part of the Best Practices followed by the association. Best Wishes!

Condo Operating Expense Versus Reserve Charge

J.N. from Fairfield County writes:

Dear Mister Condo,

When is an operating expense really a Reserve Charge?

Mister Condo replies:

J.N., typically speaking, operating expenses are those expenses which are incurred during the regular course of business during a calendar year for the association. There are exceptions, of course, as there are some expenses that recur at intervals outside of the calendar year that are still operational in nature. Reserve Charges, on the other hand, are quite specifically collected and deposited in the Reserve Fund. Additionally, many associations have specific Reserve Fund components, meaning funds are collected in Reserve for the roof or the parking lot or the buildings or the pool and tennis courts, and so on. These funds should not be mingled with Operating Funds, which further help to identify them as Reserve Charges. If your association is doing something else when collecting Reserve Charges (paying insurance bills or management fees, for instance) then they are not handling Reserve Charges correctly and could find their use of these funds questioned by a concerned unit owner like you. Hope that helps. Good luck!