Small Condo Reserve Fund Basics

S.B. from Chicago writes:

Dear Mister Condo,

I live in a Chicago 4-unit condo building (there are hundreds of these in Chicago). Our building is worth approximately $2 million, and was built in 2005. Total square feet is approximately 6000. We have no elevator. Insurance makes up almost half our annual spend. I am treasurer. Our reserves grew to about $30K two years ago, and have been depleted down to $20K in last 2 years (not via spending on capital projects…or very little on that). We are too small to pay for a reserve study, and I am fine with trying to do a makeshift one. I was hoping to get a “rule of thumb” for targeted levels for reserves (we have done a decent job of maintenance). I had read a couple years ago that a good minimum level would be $5,000, and of course as the building ages we would want to save more. We are now trending other direction. We are a simple property. Garage and driveway down (2 park inside, 2 outside). We do pay for snow removal on the driveway. We are all concrete construction (recently did some foundation crack repair). We have the roof resealed every 5 years. No elevator. Our principal issue has been leakage into the duplex down unit (our historical sump pump was not adequate). I know there is no “right” answer to this question, but if we had $1,000 I know everyone would say we were under-reserved. If we had $500,000 we would be too high. Where is the normal range? Thank you.

Mister Condo replies:

S.B., the correct answer to your question is there is no correct answer to your question. However, I have to agree with you that $1,000 is definitely too little! I can understand the association avoiding the expense of a professional Reserve Study but you can certainly “do it yourself”. Basically, you need to look at all of the elements owned by the association. You have already listed many – concrete foundation that needs crack maintenance, garages, driveways, roof, a sump pump, etc.. In theory you would list all of the association’s common elements, assign a useable life span to each element, and approximate its replacement cost adjusting for a guess at inflation. Once you have those numbers, you come up with how much depreciation is actually occurring each year. Let’s take your roof and assign it a $50,000 replacement value and a 20-year life. That means every year $2,500 needs to be set aside for the roof. After 20 years, you would have saved the $50,000 needed for the roof repair. If that were the case, the Reserve Fund would grow every year until that money were needed. The fund is dynamic meaning it changes every year. As one element comes up for replacement (the driveway, for instance), the fund will be drawn down. In a year when no items are replaced, the fund simply grows larger. The key is to never stop contributing or just relying on a gut feel that the association has saved enough money. Smaller associations like yours have very limited means of raising capital if the Reserve isn’t strong. A special assessment could be financially devastating to a unit owner who gets stuck for a common element replacement that should have been saved for by previous owners. I think you are on the right track, Mr. Treasurer. Complete your do it yourself Reserve Study and see how well you are doing. All the best!