J.L. from New Haven County, Connecticut writes:
Dear Mister Condo,
Can you provide a clear definition of exactly what reserves may be spent on and how that differs from operating expenses? Seems our complex has deep reserves but not sure on how they can be spent.
Mister Condo replies:
J.L., congratulations on living in a condo that has “deep reserves”! I can’t begin to tell you how many other condo associations will be jealous when they read this!
Reserve Funds are created to replenish, restore, or replace major common elements. Everything from roofs to parking lots to swimming pools to tennis courts to roads and more. Operating expenses are the more common day to day costs incurred by the condo association. Typically, they include items like insurance, common utilities, landscaping and snow removal, management fees, legal fees, and other regularly recurring budget items.
There are times when condo associations are tempted to use their Reserve Funds to pay for items that are not clearly defined as operating expenses. While this can solve a short-term financial problem, say a particularly heavy snow season where plowing expenses exceeded the snow removal budget, it can create a bigger problem down the road, say not having enough money in the Reserve Fund to provide for replacing the outdated boiler system when it fails. The most successful communities I know have a well thought out Annual Budget that funds operating expenses with a little room for unforeseen expenses and properly funds a dedicated Reserve Fund, year after year so that the money is there when the community needs it the most.