D.J. from Fairfield County writes:
Dear Mister Condo,
I am a new owner in a 6-unit condo association. I am concerned about the lack of Reserve Fund here. I’ve been told that, when asked, the Board has not been able to agree upon setting up any kind of reserve fund for ongoing maintenance and capital repairs. We had a new roof put on this spring which seemed to go off without any major issues. But, it really opened my eyes into the potential predicaments we could find ourselves in if an expense were unexpected and/or if somebody was unable to pay.
Reasons I’ve heard for not doing so up to this point: we’ll have to pay taxes on it on any balances at the end of the year…what happens when somebody sells? I need to learn the in/outs of reserve funds so I can begin to debunk the myths and present the case for taking the time now to set up a reserve fund while we have no major planned expenses on the horizon. Can you point me in the right direction? Thanks.
Mister Condo replies:
D.J., you are wise to be concerned over your condo’s lack of an adequate reserve fund or plan for long-term expenses that are known. However, in such a small condo as yours, the residents either agree that there will be large out-of-pocket expenses or they begin setting up a proper Reserve Fund. Condo by-laws don’t always speak to the specifics of the Reserve Fund although they do dictate the percentage of unit ownership formula that determines who will pay what percentage for common fees and expenses. If it is a simple division of 100% divided by 6, each unit owner is on the hook for 1/6 of these future expenses. As long as you know there is no active contribution s being made to the Reserve Fund, I would strongly suggest you start saving your own money in an interest-bearing savings account for the sole purpose of paying for these future expenses. If the association decided to pursue a Reserve Fund, you’ll be ahead of the game and ready to start making your contributions out of this savings account.
As you know, major expenses are always getting closer. As soon as the first board is nailed in place, building maturation begins and the clock is running on replacement. Forward thinking condominium associations address this issue by creating and managing a Reserve Fund that can help pay for these expenses and build a solid financial institution for current and future owners. Associations without Reserve Funds could easily find themselves facing financial failure, especially if one or more unit owners can’t make the payments for the assessments as they come due. Smaller associations may also face an additional problem due to their size. Lenders are generally unable to loan money to associations under 25 units as the risk is not spread out enough. That leaves special assessments as the only method of raising capital when the monies are needed. Best wishes!