M.D. from Hartford County, Connecticut writes:
Dear Mister Condo,
Our association is getting bids on a big project. There are not enough Reserves set aside for it. I had assumed the remainder needed could be an assessment or a loan. But in the past our association significantly dwindled reserves for a decorating project, paid 100% by using reserves earmarked for capital items. So here we are again, thinking that it is OK to use up reserves that have been listed for other items. Also, I notice there is no reserving at all for many things, one being roofs. The property manager said roofs would be paid for by a loan when they need replacement. Is there a law that says an association has to reserve for items like that and that an association is not supposed to use up reserves dedicated for other items to pay for something not adequately reserved for? I’d like to be able to say what the statute or law says (if there is any).
Mister Condo replies:
M.D., regardless of laws, your association is doing what many do. Very few condo associations fund their Reserve Funds properly. Many do not even conduct a Reserve Study or have a good handle on why they need a Reserve Fund or what it is for. Almost all governing documents mention saving money for future replacements. Most states, including Connecticut, require that these Reserve Funds be funded adequately but few states have any enforcement provisions for when they aren’t properly funded which is what leads to situations like yours. Reserve Funds are funded over decades so the current Board likely inherited the mess you find yourselves in today. The real question is how much financial stress can the condo association members endure? There are two problems here: funding the immediate needs and funding the Reserve Fund for future needs. Not only do you need a new roof today (paid by assessment or loan that will raise the common fees) but you also need to save for the roof next time it will be needed (another increase to the common fees to cover the cost of the new roof 20 years from now). It is difficult to find leaders willing to take on this type of challenge and it is also difficult to get elected or keep your post by raising common fees. It is a perfect storm for poor financial management. At the end of the day, there is only one place for the money to come from and that is the unit owners. I hope your community can see its way through this storm. All the best!
1 thought on “Condo’s Lack of Reserve Fund Creates Problems Today and Tomorrow!”
Reserve funds offset the “cost” of ongoing deterioration. It is a bill that needs to be paid. The roof will fail, asphalt will fail, etc. just as reliably as the power bill will arrive next month. If not paid, it doesn’t go away. It still needs to be paid.
Get a Reserve Study, and learn how much to set aside to provide for the needs of the association, on an ongoing basis!