Is Condo Reserve Fund Needed for Catastrophes?

N.M. from New Haven County writes:

Dear Mister Condo,

Our property manager says we need $50K – $60K in our Reserves just for catastrophes. Is he correct?

Mister Condo replies:

N.M., Reserves (more commonly referred to as the Reserve Fund) are not for catastrophes! In fact, by their very nature, catastrophes are rare and should be mitigated by insurance so as not to cause the association too much risk because of a lack of coverage for an unforeseen catastrophe. My guess is that your Property Manager is cautioning the association that not having adequate Reserves is a dangerous business practice in general and leaves the community quite vulnerable in many areas, most importantly in the ability to maintain the common elements of the association as they wear down. Many condominiums are in the 25- to 30-year age group and they need a lot of their original elements replaced. If you read my column regularly, you know how many associations just don’t have adequate funds saved when the time comes to make those major capital improvements. That leads to financial distress for the unit owners when they are hit with large special assessments or are asked to take on additional debt in the form of a loan to handle the repairs, which can cause common fees to jump significantly. Ask your Property Manager for clarification of the Reserve Fund needs of the community. If the Reserve Fund is low or empty, it is time to have the Board put a better plan in place. All the best!