J.D. from Fairfield County, Connecticut writes:
Dear Mister Condo,
We seldom have enough money left over for a reserve fund. We are approaching a large capital expenditure. Is it true the reserve fund can only be a certain % of a condos annual income? If so, how does one save for capital expenditures? We are less than 10 units in size. Owners do not want to raise common charges or fund a reserve fund. I am president. What should I do?
Mister Condo replies:
J.D., heavy is the head that wears the crown, my friend. As president of your small condominium association, it is your job to guide the Board to making prudent fiscal decisions for current and future residents of your condominium. However, you do need to respect their wishes with regards to how much they are willing and/or able to spend each month on common fees with regard to future repairs and reserve fund contributions. My advice is to encourage residents to being contributing to the reserve fund each and every year your budget is approved. There is no money “left over” for a reserve fund contribution. It is a line item in your budget each year and it gets funded just like the trash removal and lawn maintenance line items are paid. If you continue to rely on “left over” money to fund your reserve, you will be sadly disappointed year after year.
In the past, FHA has required that at least 10% of the annual budget be set aside for the reserve fund. FHA didn’t want to guarantee mortgages for condos like yours where special assessments were likely to cause defaults and foreclosures. That is one way to sell your current residents on the value of contributing to the reserve fund today. The investment they are protecting is their own. All the best!