R.A. from Fairfield County, Connecticut writes:
Dear Mister Condo,
I have been told that there is a CT State legal requirement for a Fairfield County PUD or Condo Association to provide a minimum contribution to the reserve of at least 10% of its operating budget. Is this true? If so, can you tell me where to find/cite this fact?
Mister Condo replies:
R.A., there is a long-held notion that 10% of the operating budget is an adequate amount for a condo, planned unit development (PUD), HOA or any community association to set aside each year for their Reserve Fund. It originates from a requirement of the FHA that in order to insure or fund mortgages within condominiums, the FHA had a requirement that 10% of the Operating Budget be set aside each year as a Reserve contribution. While that may satisfy the FHA requirement, it isn’t typically anywhere near enough to adequately fund an association’s Reserve Fund. Only a Reserve Study can provide that insight. It is typically closer to 25%, 30%, or more to adequately reserve for those common elements that are known to need replacement. In the case of a PUD, where the unit owners typically own their home and the land beneath it, there is typically no FHA requirement upon the association. The mortgage is for the individual unit and has little or nothing to do with the fact that the home is in a PUD. My advice to your association is to conduct a Reserve Study, either professionally or DIY if you are a small association. Look at the real requirement of funding your Reserve Fund and be sure to have a plan to do so. That may mean increasing common fees but that is a better plan than leaving it to chance or assuming that the 10% contribution will be enough when the time comes. All the best!
Reserve funding driven by data…having the money to pay for capital items when needed….what great concepts! Good overview, Mr. Condo – well done 🙂