Tag Archives: Financial

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!

Florida Rental Condo Sold with Previous Owner Keeping Future Rental Deposits

S.C. from Florida writes:

Dear Mister Condo,

We recently bought a condo in Florida. The previous owner has booked rentals through to next year. Is he entitled to keep those deposits even though he does not currently own the condo?

Mister Condo replies:

S.C., it depends on how you negotiated the sale and purchase of the condo. Are you physically living there or is it a rental property for you as well? Are the future leases in your possession or the previous owner? I can’t imagine any situation where an attorney handling this transaction would have let such a potential problem go unanswered during the closing process. If you handled this transaction without the advice of an attorney, you will very likely need one now as the folks expecting the rental property to be available for them will most certainly expect that their deposits will be used towards payment of their rent for the property. My advice is to review the purchase and sale agreement and see what it says about these previous deposits. If it looks unfavorable to you, you should get in touch with a qualified attorney who can best advise you what your next steps should be. Good luck!

Condo Roof Leak Creates Insurance Mess for Unit Owner

G.G. from outside of Connecticut writes:

Dear Mister Condo,

Our condo roof is over 20 years old (I believe 23 years). Was already patched once when we first started getting water two weeks ago. With more rain it has begun to leak into the ceiling and wall in our kitchen/dining area (shared with a neighbor who currently isn’t having any water issues). The ceiling drywall was so saturated it began pouring into our unit through the seams of the drywall. We tore out the drywall. Damage appears to be very extensive. Our association doesn’t want to file a claim with their insurance. They called roofers (for the second time) to come patch the flat roof over the area. We called contractors for water damage out for an estimate. Who is going to pay for all of the damage? As of now it looks as though the wall behind our cabinets is damaged, cabinets are wet, and the subroof is also saturated and water is still pouring in. Since this wasn’t caused by a storm or anything we did as the unit owner, does that make the building/association liable?

Mister Condo replies:

G.G., I am sorry for your troubles. Water intrusion is a nasty, messy situation that requires professional help to remedy. Typically, your insurance would pay for the damage done to the interior of your unit. In fact, your insurer may be the ones who go after the Board to help pay for the damage, especially if it was caused by negligence to maintain. The Board is not under any obligation to submit an insurance claim. However, that does not free them from the responsibility of repairing the roof (which they did) and the possible claim against them for the damage caused to your unit. My best advice to you is to work with your insurer to collect as much money as possible to cover your loss. You might also want to involve an attorney to see what other legal rights or claims you may have against the association. My guess is that this might take some time to remedy but you will get your damage repaired without too much more than your deductible as an out of pocket expense. Good luck!

Condo Money Dries Up, Irrigation Sprinklers Turned Off!

G.O. from outside of Connecticut writes:

Dear Mister Condo,

My condo association decided to turn off the sprinklers because they went over budget with other maintenance. Now I am losing valuable plants that I’ve put in over the years. Can they do this?

Mister Condo replies:

G.O., I am sorry that you are losing your plants and I am sorry that your condo association has decided to save money be turning off the sprinkler irrigation system. As the democratically elected leaders of the association, the Board often finds itself in a difficult position when it comes to managing the association’s finances, especially when those finances are tight. I am guessing that the underlying problem here is common fees that are too low. There really isn’t any other reason that a maintenance project should cause a deficit to something as basic as operating a sprinkler system. The short answer is that, yes, they can make the decision. As a unit owner, you can petition the Board to rescind that decision but there may simply be no money to operate the sprinkler. Ideally, you will encourage them to raise the common fees so there is enough money in the budget for the Board to fulfill all of its duties and provide all of the services unit owners expect. Good luck!

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!

Repair Costs to Condo Limited Common Elements

R.B. from outside of Connecticut writes:

Dear Mister Condo,

When an HOA is paying for repairs of limited common elements that vary by unit (eg decks) and it must be paid by special assessment, can this be imposed based on actual cost of work per unit or must it be equal in % to the common elements. In our case it’s set up as 1/12th – equal for all units even though we are smaller and have less decks.

Mister Condo replies:

R.B., without being able to review your governance documents, I really can’t offer you a specific answer here. Typically, common elements are handled by the association in accordance with how the governing documents dictate. If the item in question is not mentioned, in your case “decks”, then the repairs are handled the way all other repairs are handled, in common. If the documents call for the decks to be maintained by the unit owners, then it is their responsibility. Special Assessments have their own rules for how they are levied. Again, your documents specify the terms. Typically, an assessment is levied in proportion to the percentage of unit ownership formula but there are exceptions. My advice is for you to review your condo documents about common and limited common element repair and maintenance. I think you will find your answer there. All the best!

Seasonal Condo Landlord Faces Pushback from Year-Round Owners

S.M. from outside of Connecticut writes:

Dear Mister Condo,

I bought a condo as a vacation home in Maine. There are five units. As I live in Massachusetts, and still work full-time, I am only able to use it intermittently in the summer, and then I rent it out November – May. There is another owner that rents hers year-round, and a third that comes intermittently in the summer and closes it up for the winter. That leaves two other units that are owner-occupied year-round. One of them is proposing that the non year-round owners pay an extra percentage or dollar on the monthly condo fees “for months when owners are not here to cover all the management/maintenance issues that fall to those who live here full time”. Can they do this? I would agree that the year-round owners are the ones who have to call the repairman, or may sweep up between cleaning lady visits, or admit inspectors to our units if required, but should they/can they be compensated through additional fees?

Mister Condo replies:

S.M., unless your governing documents allow for such a fee (unlikely), then the only way to add one would be to modify the documents. Since three of the five unit owners would likely vote against such a rule, it is unlikely to pass. That being said, there may be some validity to what the other year-round unit owners are asking and since it is such a small community, you might want to find an agreeable solution to keep peace and harmony in the community. Personally, I would argue that the year-round unit owners are benefitting by being the ones making the calls to repairmen and keeping their homes in good working order. If they need additional “sweeping up” between cleaning lady visits, perhaps it is time to schedule more cleaning lady visits, an expense shared by ALL unit owners, even those not there year-round to benefit directly from the additional cleaning. Other than that, I think they should review the governance documents and realize that the real estate purchase they made entitles them to the common services as outlined. Anything above that is an unreasonable expectation on their part. Good luck!

New Pet Rules Discriminate Against Condo Dog Owners

L.B. from outside of Connecticut writes:

Dear Mister Condo,

If condo bylaws permit a pet (no restriction on size) does the condo board have the right to impose a surcharge to pet owners (specifically dog owners). Our board voted to charge $20.00 per month per dog & new owners a one-time charge of $200 plus the $20.00 per month. Do they have the right to impose such charges? What about cat owners? Should they be charged as well. These charges seem discriminatory.

Mister Condo replies:

L.B., as long as the Board passed these rules in accordance with association governance powers, they have committed no foul. However, it is important to note that these individuals were voted into service by homeowners like you. If you and enough of your fellow homeowners feel the rules are unfair, simple replace the Board members with like-minded representatives of the people. If you can’t muster enough support for that, I don’t see why the rules should change. The sitting Board likely had their reasons for imposing these rules and, as long as they were adopted and passed correctly, they are the rules of the association. All the best!

FHA Not Satisfied with Condo Reserve Fund

T.S. from outside of Connecticut writes:

Dear Mister Condo,

I am having trouble getting this Condo approved for mortgage financing. I was told that if the current budget does not have a line item for the Reserve Fund, that would make the HOA ineligible. Can you give an example of a budget that shows a Reserve Account? Why is a savings account on a balance sheet not sufficient? The HOA is saying this is the Reserve Account. Please help.

Mister Condo replies:

T.S., when reviewing the condo’s eligibility to qualify for mortgages that are backed by the FHA, the lenders look to see that there is a Reserve Fund and that the association is making at least the minimum amount of annual contribution (Currently 10% of the budget). Local mortgage lenders typically require this stipulation because they want their mortgages insured or underwritten by the FHA. Typically, condominiums maintain FHA approval status as it makes it easier for units to be bought and financed by owners seeking FHA-backed finance options. However, there is no legal requirement that forces the condominium to comply or even maintain FHA approval status, leaving mortgage seekers like you in the lurch. There are mortgage companies that specialize in dealing with FHA approvals and this association might be well served by working with one to achieve FHA approval, making it possible for mortgage seekers such as yourself with better access and option when it comes time to take a mortgage on one of the condo units within their association. It isn’t as simple as having the association claim an association-owned saving account is the Reserve Fund. Good luck!