Preserve… With Reserves
Why Adequate Reserve Funding Is Critical For COAs
By Will Anderson
If condominium owners were to view their reserve fund obligations as a regular payment toward the proportional share of the common elements that they use, the rationale for funding reserves is clearer.
As condominium owners, you probably realize that your condominium is full of equipment and other property with limited life spans. For instance, eventually your roof may need replacement, or your building may need to be repainted. How will the association pay for these infrequent, yet large expenses? They will be paid by each unit owner through large special assessments or in regular payment increments into a reserve fund.
When you purchased your condominium unit, you became part of a common interest development. Generally, you own everything in your unit, but you are also a shareholder in the rest of the building and facilities. As such, you are a member of the owners’ association, which is legally obligated to maintain and repair the buildings and grounds.
The main purpose for creating reserves is the distribution of these major expenses in order to avoid immense special assessments. Trying to get all of the owners to pay a large special assessment can be very difficult, especially in these economic times.
Whether it is a new roof, a new paint job, or a new pool, it should be seen as a matter of preserving the value of your condominium. Instead of thinking of it as contributing to a new roof, you should see it as a contribution to value. Another way of justifying the funding of reserves is to understand that major components of a condominium building are continually being consumed and deteriorated by present owners over time, and eventual replacement is a given. If condominium owners were to view their reserve fund obligations as a regular payment toward the proportional share of the common elements that they use, the rationale for funding reserves is clearer.
Unfair situations arise where adequate reserve budgets are not maintained. When one buys real estate, they assume the obligation for any existing expenses and future expenses that may come due. For example, it is not unusual for a new owner of an older condominium unit to be hit with a large special assessment for the replacement of a major asset, such as a pool or elevator, the benefit of which was never experienced by that person. If a long-term owner used those common elements for years and sold the unit just before the items needed replacement, haven’t they avoided their responsibility to help pay for the proportionate share of the facilities and equipment that they consumed over time?
The value of a carefully structured and managed condominium reserve should be obvious, but it should also serve to increase the marketability and monetary value of your investment. Conversely, the failure to adequately fund reserves—now more than ever—can make it much more difficult for a prospective purchaser to obtain a loan to buy a condominium unit. Lack of sufficient reserves can also indicate other problems such as poor maintenance of the condominium property.
A good way to calculate necessary reserves is to have an engineering firm conduct an examination of the condominium property and prepare a comprehensive report, including an estimate of the remaining life of buildings and equipment, as well as cost estimates for their replacement. A reserve study will determine the expected lives of your common facilities such as the HVAC system, roof, siding, light fixtures, etc. But don’t stop once you have received a reserve study. You can get more reliable cost estimates by putting these items out for bid and having local contractors or vendors give you precise costs for your geographic region.
I recommend that condominium associations undergo a reserve study every three years, if possible. If the funds aren’t readily available, the association should try to wait no longer than five years for such a study. In Florida, associations are required every five years to have an architect or engineer provide a reserve study, but it is possible for the association to waive this requirement by majority vote for a five-year time frame.
Alabama does not statutorily mandate that an association maintain a reserve fund, but it is the prudent thing to do. However, the Florida Condominium Act does require that an association’s budget shall include reserve accounts for capital expenditures and deferred maintenance that must, at a minimum, include roof replacement, building painting, pavement resurfacing, and provide for any other item which the deferred maintenance expense or replacement cost exceeds $10,000. Again, a majority of the voting interests in a Florida condominium can vote to waive or reduce the funding of reserves, but this should be carefully considered as it is not an ideal course of action.
Once funds are set aside for reserve purposes, they cannot be used by the association to fund general association operations or expenditures. The reserve funds, and interest accrued from them, can only be used for the specific purpose for which they were set aside. An association’s membership may vote to convert the additional funds in a reserve account for some other use, or it may vote to refund excess funds to the members.
In these lean economic times, it may be enticing to waive or reduce reserve funds, but if you choose to do so, you are only delaying the inevitable expenses that hurt much more when they come at once. Reserve funds are an important element of a community’s maintenance plan. And, as Benjamin Franklin said, “an ounce of prevention is worth a pound of cure.
Will Anderson is a member of the Baldwin County-based law firm of Daniell, Upton, Perry & Morris, P.C. The attorneys in this regional law firm practice in the fields of condominium, construction and insurance law in coastal Alabama, Florida and Mississippi. Contact the firm at P. O. Box 1800, Daphne, AL 36526; Phone: (251) 625-0046; Fax: (251) 625-0464; www.dupm.com.