C.I. from New Jersey writes:
Dear Mister Condo,
Is there a New Jersey State Law that determines what amount of money should be in a Reserve fund for a Townhouse community of 122 units.
Mister Condo replies:
C.I., thank you for writing. The subject of Reserve Funds is near and dear to my heart because I get so many questions from condo and HOA dwellers who deal with the first-hand consequences of underfunded Reserve Funds when major capital improvements are required in their associations. The Community Associations Institute (CAI) released a report in September of 2013 that took a look at the state of the industry with regards to state laws and Reserve Funds. You can find the full report here: http://www.caionline.org/govt/news/Political%20HeadsUp%20Public%20Document%20Library/Summary%20of%20State%20Reserve%20Fund%20Laws%20-%20Sept2013.pdf
Here are the highlights and what they had to say about New Jersey:
“Many states have enacted legislation dealing with community association reserve and operating funds to protect owners from fiscal problems and financial hardship. More states may enact similar legislation as community associations continue to gain popularity. The following is a summary of each state reserve fund law.
Reserve Studies are required in the following states: California, Delaware, Hawaii, Nevada, Oregon, Utah and Virginia. Washington statutorily encourages associations to have a reserve study performed every three years unless doing so would impose an unreasonable hardship.
Please remember that community associations are governed by state law, which can vary widely from state to state. This information is intended for general educational and informational purposes only; it may not reflect the most recent developments, and it may contain errors or omissions. The publisher does not warrant or guarantee that the information contained here complies with applicable law of any given state. It is not intended to be a substitute for advice from a lawyer, community manager, accountant, insurance agent, reserve professional, lender, or any other professional.
NEW JERSEY
The association may levy and collect assessments duly made by the association for a share of common expenses or otherwise, including any other moneys duly owed the association, upon proper notice to the appropriate unit owner, together with interest thereon, late fees and reasonable attorneys’ fees, if authorized by the master deed or bylaws. All funds collected by an association shall be maintained separately in the association’s name. For investment purposes only, reserve funds may be commingled with operating funds of the association. Commingled operating and reserve funds shall be accounted for separately, and a commingled account shall not, at any time, be less than the amount identified as reserve funds. Section 46:8B-15.
There is no statutory requirement to conduct a reserve study and no statutory requirement to fund reserves.”
I hope that helps. All the best!
New Jersey HOA Reserve Fund Law: http://t.co/4zawFVFmH2
My questions is concerning a maximum allowable condo reserve amount in NJ
Is there a limit as to how much money can be in a condo reserve fund in NJ? I was under the impression that it can’t exceed a certain amount .
M.W., I am not aware of any law that would limit the amount of Reserves a condo association can collect. A healthy Reserve Fund is great for the association. Sounds like you have a great one. All the best!
Does New Jersey impose any restrictions on where the excess funds can be invested until needed for future building repairs?
R.M., I am not aware of any restrictions imposed by the state. However, most associations have language in their governance documents that indicate a safe and secure investment vehicle be used. Commonly CDs are the choice of associations because they limit the risk to the association and the money is held safe and is available when needed. As opposed to a weekend junket in Atlantic City, which is most definitely not recommended as an investment vehicle for the association’s funds… 🙂 All the best!
Under NJ law, are reserve funds restricted to pay for replacement items listed in a reserve study or can reserve money be used to supplement the HOA’s operating budget?
M.P., the intent of the law as I understand it is that the association maintain and fund an adequate Reserve Fund. I am not an attorney nor do I offer any legal advice in this column. By definition, Reserve Fund items should appear in the community’s Reserve Study. Typically, these are common assets that will wear out over time such as driveways, sidewalk, roofs, etc.. Normal operating expenses do not qualify as Reserve Fund items. However, the Board is also responsible for the interpretation of the Reserve Study and the administration of the Reserve Fund. If you feel they have not followed the spirit of the law, you should point out the mistake and ask that they rectify their actions. If they refuse and you feel you are in the right, you may wish to speak to an attorney to seek what other actions are available to you and your fellow homeowners to make sure that your association is behaving within the law. Good luck!
Hi, Can an updated reserve study be paid for out of the reserve account or must it be operating? And is there really anything stated preventing us from paying for it out of the reserve?
S, that’s an interesting question. Technically, the cost of the Reserve Study isn’t a Reserve Study item because it isn’t an asset that will wear down over time as are other Reserve Study items. That being said, I don’t know of any outside entity that is watching to see how it is paid for. The important thing is that the association has and adheres to the Reserve Study. All the best!
I’m in NJ.
I’m told that total HOA operating funds should not exceed 3 months or 25% of HOA ‘s annual dues.
Our HOA has been carrying ~ 67% for more than 4 years.
I’ve been told that 15- 25% is more than adequate for an operating fund. Thoughts?
Questions:
Isn’t an excess that high against the IRS rules for non-profits?
Shouldn’t the excess be:
Moved to the reserve account
Returned to the owners
Allocated to reducing future HOA fees?
S., not sure where you heard that rule of thumb about Reserves but I am not familiar with it. Also, no two associations are the same. Each HOA has its own Reserve requirements based on amenities, common elements, and typical wear and tear for their geography. As far as IRS rules for non-profits, you should check with the association accountant. I am not an accountant nor do I offer CPA-level advice. I will say that I am impressed with the level of Reserves you are describing. It makes for a very strong community from a financial perspective with very little risk of special assessment or capital improvement projects being deferred due to lack of funds. All the best!
Thanks for the reply.. to be more specific the amount held in the operating fund is the question. The replacement account / fund is more than adequately funded based on a replacement reserve study.
My research has found that the opinion of auditing firms suggests a 15-25% operating fund cushion as being inline and that carrying an excess in this are has tax implications.
Certainly a healthy operating account balance is necessary to respond to unexpected expenses that might occur, funds in excess should be and can be deployed to benefit the owners and unless it can be justified. Running with a large operating cushion is unnecessary.
My end goal is to have the Association accept responsibility for maintenance and replacement of items that were incorrectly excluded as Association responsibility in the restrictive covenants and assigned as owner responsibilities. Long story.. but a sister community (Exactly the same units) made this change to correct the error by changing the restrictive covenants. Due to this error our communities appearance suffers from inconsistent maintenance by the owners. Maintenance of shared things like driveways and siding are not physically separated due to the way the building and driveways are constructed. By assigning the responsibility of this maintenance and replacement as owners unnecessarily complicates the management of the community. In the future the replacement of the siding and the driveways will become a burden to the owners and the association management. It also puts our units at a competitive disadvantage to our neighboring sister community as they have also included their decks which are considered owner responsibility in our community.
My goal is to change the covenants and jump start the funding for replacement and maintenance through the use of the excess in the operating funds.
Any suggestion as to how I can bring a vote of the owners if the board does not wish to address this situation? I’m currently doing my due diligence so that I can present this information formally to the owners to move this forward.
S., you are welcome. Sounds to me like you have a strongly worded set of governance documents. It also looks as though there is precedent with what you are referring to as a “sister” community. Your argument makes sense to me, but, let’s face it, my opinion carries no weight that you could take back to your Board as an indication they should change their governance documents. I would think that a discussion with the Board of your “sister” community would be a good place for your Board to start. Find out what they di and why and see of the same can be done at your community. The Board will undoubtedly need the advice of a community association attorney as changing covenants as you have described is no simple task and carries a myriad of legal challenges, including involvement of players outside the community. Folks like banks who hold mortgages will likely want a say in who does what as they granted portages based on the original documents. If you are adding burden to owners, the banks may object. My best advice, ask your Board to talk with the other Board. If there is an interest in modifying your documents after that discussion, engage an attorney. Finally, make sure that the outcome is swarth all of the expense and legal rigamorole that this will take. If it looks worth doing, it probably is. Good luck!
Hello, can condominium associations in NJ co-mingle Special Assessment funds with Reserve Funds? Our Association is using Reserve funds to pay for Special Assessment projects and writing “due to/from Reserve” on audit. This seems contrary to the special assessment clauses requiring a separate account for all special assessments. Thank you.
M., it is a bad practice but not a forbidden one. I wrote an article about it a while back if you care to take a look: https://askmistercondo.com/new-jersey-hoa-reserve-fund-law/.