Condo Reserve Fund Mortgage Advice

T.C. from New Haven County writes:

Dear Mister Condo,

From the point of view of a financial institution funding mortgages to acquire individual condo-units, what, in your opinion, is a good level of reserves for a condominium complex in terms of multiple of monthly operating expenses? How about % of assessed value of complex?

Mister Condo replies:

T.C., I am neither a lender nor a Reserve Study specialist so I can only provide my opinion on this topic which is what you have asked for so I will oblige. My opinion is that there is not a “One Size Fits All” answer to your question. The proper level of Reserves for a condominium complex varies by association and has so many factors to take into consideration that I do not think it can be boiled down to a percentage of complex value or a relationship to monthly operating expenses. I think that is one of the reasons that the Fair Housing Administration (FHA) has struggled in providing proper guidelines in this area. The FHA insures or backs many of the lenders that provide mortgages on condominiums. They have requirements that include how many renters occupy units, how many units are in delinquency with regards to their common fee payments, and even a suggested 10% minimum contribution to the Reserve Fund from the monthly common fees. Even with all of those safeguards I think there is still great volatility in the market due to an ever changing job and real estate market and large swings in the actual value of individual units.

My instinct is that that each association requires a full listing of all of its common elements and that each of those elements needs to have an age and an assigned value for replacement. Further, to show that it is financially viable for future investment, I think there should be a plan in place to fund these known future capital expenses. An association with lots of common elements – pools, tennis courts, club house, etc. will carry a much higher burden than an association with nothing more than their buildings and parking lots to maintain. The only thing in common is that they both need to have a solid Reserve Strategy in place to make sure there will be enough money to replace the common elements when they need improvement. Otherwise, the association is planning to levy large special assessments or take loans when this money is needed. Both of those scenarios will stress the unit owners’ ability to pay their mortgages as well as their common fees. Failure to do both could lead to foreclosure of the unit owner and make for a bad investment which I have witnessed at many condominium associations.