G.D. from Fairfield County writes:
Dear Mister Condo,
We have a Reserve account, which is more than 10% of our monthly income. It has been the association’s practice to use the Reserve instead of doing assessments. We now need to have a large project done and estimates are coming in for more then we have in the Reserve. Isn’t the Reserve account supposed to be used for large projects rather then for lots of small projects?
Mister Condo replies:
G.D., I am sorry that your association did not plan sufficiently to avoid a special assessment now that a major capital improvement project has come due at your association. How and when the association’s Reserve Fund is used is largely at the Board’s discretion. Projects, both large and small, can be paid for out of association Reserves. The “10% of our monthly income” is a telltale sign that your Board is following suggested guidelines set forth by the FHA, which requires that condominium associations allocate not less than 10% of their annual budget to be deposited in the Reserve Fund or the FHA will not approve any unit within the association for FHA-backed mortgage eligibility. While a 10% contribution to the Reserve Fund is better than no contribution to the Reserve Fund, your association is a strong example of why 10% is often nowhere near enough. FHA is not concerned with the true needs of your association’s Reserve Fund. They use the 10% number as a measurable guideline which indicates there is a minimal Reserve Fund for emergency use.
The proper method of calculating reasonable Reserve Fund contributions is to have a proper Reserve Study conducted where future replacement costs are fairly estimated. Once the true dollar figure is known, adjustments to the common fees can be made so that there is enough money available when capital improvement projects like yours become necessary. However, this will very likely mean a significant increase to common fees (imagine a 20% to 30% contribution to Reserves versus the current 10%). Unit owners may fight that type of increase, in which case, you will be left with the situation you currently face; the special assessment.
The bottom line is that Reserve Funds are only as good as the calculations used to derive their value. Blindly choosing a percentage value does not do the Reserve Fund justice although it will satisfy FHA requirements. I hope that explanation helps. All the best!