S.M. from Fairfield County, Connecticut writes:
Dear Mister Condo,
Mister Condo replies:
S.M., Reserve Funds are determined individually by community associations and should be based on the aggregate value of the common elements, their respective life expectancies, and the best guess as to inflationary effects on the replacement of those common elements over their life span. With an answer like that you can see why it would be very difficult to have a law to determine the amount as it would vary by community.
It is quite common for associations to hire third-party specialists to review and enhance their Reserve Funds. These analysts specialize in community associations, building products, financial considerations, and budgeting. It is not uncommon for them to have some type of engineering background as well. They are in the best position to take an outside look at a community and determine what a healthy Reserve Fund would look like.
A simple example I can think of would be a 50-unit condominium with no amenities like a pool or tennis courts. 50 townhomes, a parking lot, a fence, and simple grounds make up the common elements. If you assume the association is responsible for the siding and the roofs you could simply take the value of the common elements and divide by a usable life span. To keep it simple, let’s say the common elements are worth 1 million dollars and have a lifespan of 20 years. That means each year $50,000 is being used in the form of depreciation. Divide that number by the number of units (50), and you get $1000 per year per unit needing to go to the Reserve Fund. Add 5% or so for inflation adjustment and you have $1050 divided by 12 months or $87.50 per unit per month in common fees devoted to finding the Reserve Fund. This is a very simple example and far more goes into a true Reserve Study and Reserve Fund recommendation but I hope this gives you a basic idea.
A complete list of vendors that provide Reserve Studies for condominiums can be found at http://www.caict.org/?page=Directory#reserve Kindly contact a Reserve Study professional for a more thorough answer and further advice. Good luck!