Does your condo association have an adequate reserve fund?
Upkeep and maintenance can be expensive. Make sure you’re ready with a reserve account analysis.
As a board member of a condo association, you have a responsibility to look after the best interests of your residents. You select a trustworthy landscaper, enforce community rules, and stay on top of maintenance requests.
But what happens when simple “maintenance” isn’t enough? Do you have enough money set aside for large-scale projects, renovations, and repairs?
Having a properly funded reserve account for your condo association is crucial. Let’s talk about what a reserve account is, how it’s funded, and how you can make sure that it has enough cash for your needs.
What Is a Reserve Account?
Under Florida law, all condominium associations must budget for a reserve account, which is money earmarked for maintenance on features of the property that are owned by the condo association.
Reserve accounts are typically not used for recurring costs (i.e. landscaping, insurance premiums, and taxes), but for larger-scale projects that might otherwise be difficult to fund. Setting aside money for some features—such as roofing, painting, and items costing more than $10,000—is mandatory, while other categories do not have to be funded in the reserve account.
A reserve account is required as soon as 51% of a condominium project is occupied by buyers and the builders transfer ownership to the condo association.
Because the individual condominium unit owners are not responsible for maintenance on certain building features, it is the responsibility of the condo association to hold an adequate amount in reserve. The reserve account must account for any item with a replacement cost of $10,000 or more.
Although homeowner’s associations may also budget for a reserve account, only condominium associations are required by law to do so. Further, there are also laws stating exactly how much money should be in a condo’s reserve fund…and it’s very difficult to calculate correctly.
How to Budget For A Reserve Fund
The funds in your reserve account will be an estimate, but that doesn’t mean they can be based on a “guess.”
Florida Statute 718.112 states that reserve accounts “must be computed using a formula based upon estimated remaining useful life and estimated replacement cost or deferred maintenance expense of each reserve item.”
This means that the association must accurately calculate a) when an item will need to be replaced, b) how much it will cost to replace it. Then, those funds must go into the reserve account over that length of time.
For example, if a condominium’s roof is expected to last roughly six more years and will cost roughly $200,000 to replace, you should be putting an extra $33,333 into your reserve account each year. The same goes for the other features of your condo that the association is responsible for: parking lot pavement, plumbing, exterior stucco, etc.
However, even once you have finalized the budget, your work is far from over. Your reserve account should be examined and updated at least once a year, as repair costs and the “useful life” of the items may change.
Is Your Condo Reserve Account Fully Funded?
Condominium associations typically account for their reserve fund in the budget, which is in turn funded through residents’ association fees. But because reserve accounts are only occasionally needed, they are often critically underfunded.
If a reserve account is underfunded (and timely maintenance is required), you only have a few options: deferred maintenance and Special Assessments.
You can use your reserve account to pay for “deferred maintenance,” which is maintenance performed with the aim of prolonging the life of an item. For example, rather than repaving the parking lot, you can just have the worst potholes patched up.
While deferred maintenance can be useful in some circumstances, it is not a true solution to the issues plaguing your condominium and may even decrease your property values.
Your other option is to share the cost among the unit owners as a Special Assessment. And while this may seem like an easy solution to you, your unit owners don’t see it that way.
It’s not uncommon for a building inspection to uncover millions of dollars worth of work that needs to be done on the property (especially if you live in Miami-Dade Count and have a 40-year re-certification coming up). With a Special Assessment, your unit owners must all share that burden…in addition to their existing mortgage payments.
Your residents are already paying mortgage payments and association fees every month. If the Special Assessment fee is large enough (or if their financial situation is dire enough), they might not be able to pay it at all. You can send out as many invoices as you like, but if your owners don’t have the funds, you won’t receive them.
This is a good reason why you should always get information from existing residents before purchasing a condo. Ask if they have been hit with any Special Assessments and, if so, how much they were asked to pay. Some owners may be forced to sell their units if they can’t come up with the money to pay the Assessment.
Put Your Mind at Ease With a Reserve Account Analysis
Properly budgeting your reserve account requires extensive knowledge of construction.
It takes a highly trained individual to accurately estimate both “remaining useful life” and replacement cost of a condo’s architectural features. They might identify features that you didn’t think to account for.
The people on your condo’s board are likely laypersons who are not comfortable with (or capable of) such exacting technical estimates. How can you make sure you have enough funds set aside?
This is where BIS comes in.
A reserve account analysis (also known as a “reserve study”) is a meticulous inspection of your condominium building(s), budget, and existing reserve funds to verify that you have enough set aside to properly maintain your residents’ homes and ensure that they have a safe, comfortable place to live.
With a reserve account analysis, you will have valuable, accurate information on the state of your condominium and your budget.
BIS will also calculate the cost for each unit’s Special Assessments (if necessary), so you don’t have to.
A properly managed reserve account means a well-maintained property, happy residents, and a board that breathes easier. And by stockpiling the necessary funds in your reserve account, you will not only have cash available when you need it, the association can benefit from the interest it will earn. Every little bit adds up!
Routine maintenance and repairs are a certainty. You should be equally certain that your reserve account is accurately and adequately funded.
With an inaccurate reserve account (or none at all), your residents are left with the short end of the stick when they are hit with Special Assessments that neither they nor you were planning for. But with a reserve account analysis, you can be assured that your community will be properly funded and properly maintained.
As a condo association, you have a “fiduciary duty” to your residents. This means that you have an obligation to look after their best financial interests. That includes having a properly funded reserve account.
But reserve accounts are only as reliable as the inspectors who perform them.
At BIS, our background in construction and engineering is unparalleled and we’ve been in business for more than 45 years. During that time, we’ve performed tens of thousands of inspections, including reserve studies. If you’re wondering how to thoroughly and accurately fund your reserve account, give us a call today.