Unless it's a thoughtful gift or a party in their honor, nobody likes surprises. That's especially true when it comes to sudden, serious, or non-negotiable repairs to a condo building or HOA. A community must have enough money saved to deal with major projects as they arise, or risk major financial and structural troubles. But economic woes of residents such as unemployment or default, or living on tight fixed incomes, means more HOAs are finding it difficult to keep their reserves adequately funded.
Having a robust reserve fund is important for those reasons, as well as a newer one: under the new federal mortgage funding rules courtesy of Fannie Mae and Freddie Mac, an association must have at least 10 percent of its budgeted income in a capital reserve fund to be eligible for a loan—or for some prospective buyers to qualify for individual mortgages.
Mitch Frumkin, PE, RS, CGP, is founder and president of the North Brunswick, New Jersey-based engineering firm Kipcon, Inc. “A reserve fund can also be used as a planning tool,” he says. “If the roof has one year of life left, the manager might say, `I’m going to have to spend that money a year from now, so let’s start getting the specifications and go out to bid.” Frumkin chaired the Community Associations Institute’s (CAI’s) national task force to come up with national standards on reserve studies, and in 2003 he was involved in the rewriting of the American Institute of Certified Public Accountants’ chapter on “Future Major Repairs and Replacements” in its Common Interest Realty Associations Guide.
How should buildings calculate the appropriate amount for their reserve fund? Experts agree that the amount of funding is based on how much money the association projects it will need within a 30-year window, although some studies will cover 35 or even 40 years. They also say that updates of the study should be performed every three to five years or so.
How is the amount of money needed for a reserve fund calculated? We received several answers for this. For example, Leonard Barber, CPA, president of Executive Property Management in North Brunswick, New Jersey, says the variables include age, expected life span, current condition and replacement cost. Roads and roofs are often overlooked but should definitely be considered.