G.B. from Minnesota writes:
Dear Mister Condo,
What is the requirement for a reserve fund maintained by a condo association? In Michigan the law reads “maintain a reserve fund, which the annual funding, at a minimum, shall be equal to 10% of the association’s current annual budget on a noncumulative basis.” How do you interpret this? Are we required to put in 10% of our budget every year, regardless of how much we accumulate in our reserve, or do we just need to maintain 10% of our annual budget in the reserve?
Mister Condo replies:
G.B., I am not an attorney nor am I an expert in Minnesota community association law so please accept my advice as friendly and not legal. For a legal opinion, I suggest you speak with one of the many fine community association attorneys from your state. My non-legal interpretation of your law is that each year a minimum of 10% of the funds collected need to be deposited in to the Reserve Fund, regardless of previous year’s contributions. This is in line with current federal regulations for associations seeking FHA funds to back mortgages within their associations. While each association is different, I do not know of any that could easily survive with only a 10% annual contribution to their reserve fund. Typically, a 25% to 30% contribution is more in line with what the association will require to maintain, protect, and enhance itself over the long haul. Of course, the only proper way to fund a reserve fund is with the aid of a reserve study which lists all of the association’s common elements, their likely usable life span and a best guess estimate as to how much it will cost to replace these items. Only then can an association know how it is doing with regard to proper reserve fund planning. Your state’s requirement is an admirable step in the right direction, in my opinion, but is likely in place so there is an easy to measure tool for examining the reserve fund. This is exactly what the FHA does and while it is better than not having any reserve fund contribution requirement, it does not fully address the needs of the association with regard to having an adequate reserve fund in place when it is needed. And when there is not enough money in the reserve fund when needed in Minnesota, I expect a mighty “Uff Da” from the unit owners! Good luck!