What is the Right Amount for Monthly Condo Reserve Fund Contributions?

J.C. from Middlesex County writes:

Dear Mister Condo,

I just took over as President of a 5-unit condo by default. We own a unit but do not live there. The units (townhouses) were built in 2004. There is no common area except a paved parking lot. The exterior is vinyl and roof is asphalt. One unit owner made the accusation that we are underfunded. To my knowledge no Reserve Study has been done. I am still getting a handle on the expenses, but they are minimal. Current fee is $130/unit/month. It appears we add about $2,000/year to the Reserve, although the Reserve balance is only about $10,000. I am in the process of separating the Reserves from the Operating account and allocating a set amount to the Reserves each month. So the real question is when figuring reserves, it is essentially only the roof, siding, and pavement. Siding is good for as much as 50 years, so there is a useful life of 30-40 years. The roof should have a useful life of 20 years left and the pavement is technically used up, but it is in good condition and I figure it is unlikely to ever repave the ENTIRE lot. We would most likely spot patch. Maybe we would sealcoat to extend the life? Am I missing something on the life span? I think if we increase by a moderate amount $20/unit/month we are in good shape. Essentially, with the exception of the pavement (again it is in great condition – we do not even put salt down – sand only). The major capital items are realistically 20+ years in the future.

Mister Condo replies:

J.C., congratulations on your forward thinking and your stewardship of the condominium’s future. 5-unit condos can be as challenging as 500-unit condos when it comes to something as important as collecting reserves and understanding why the money is needed now for items that won’t wear out for years to come. I would say that you have a pretty good handle on the process although I might question how you came up with your $20/unit/month conclusion. Let’s work with what you have told me and I’ll see if I can help you get a more accurate number.

If you can find out what the likely costs will be to replace the common elements over time, you can then make a reasonable estimation of what the monthly contribution to Reserves should be. For instance if you determine that your common elements cost $20,000 today and will likely cost $30,000 in 20 years when they may need replacing, you could take $1,500 per year as your Reserve contribution. Assuming that all 5 units contribute equally, that is $300 per year or $25 per month. However, I am guessing that your actual numbers are significantly higher. The increase of $20 per month that you are proposing may be enough but not enough information is provided for me to give you any truly useful advice. I am an advocate of adequately funding the Reserve and if your fellow unit owners are in agreement that a $20 per month increase is acceptable, I would start there. Before next year’s annual meeting comes up, do the exercise I mentioned above and come up with a real number. Don’t be surprised if it is 2 to 3 times what we’ve discussed here. The $150 per month common fees you will pay this next year may not be nearly enough to adequately fund your Reserve. That being said, keep at it until you get it right. Far better to pay for future repairs in the form of proper common fees today than to assess large dollar amounts in the future or risk having your investment fall into disrepair due to inadequate Reserves. All the best!