Condo Media - December 2017 - 20

Asked & Answered

Reserve Funding
The Fine Art of Predicting Future Costs

Q
A

CONDOMEDIA

Our board is debating reserves-specifically,
how much we should be contributing to that
account for our Massachusetts condominium
association. Some say the reserves are overfunded; others say the funding level is too low,
but no one seems to know exactly what the
funding level should be. Are there statutory
requirements we must meet or, if not, best
practices we should follow in this area?

The adage about not being too rich or too thin applies,
with reasonable limits, to condo reserve accounts as
well. While it is theoretically possible to have a larger
reserve than you need, most industry executives say
they have never encountered a community association where that was the case; under-reserving is by
far the more serious problem. There are no statutory
requirements your condominium association must
meet. The Massachusetts condominium law-one of
the few statutes to address the issue at all-simply says
reserves must be "adequate."
Secondary market requirements provide some guidance. The Federal Housing Administration requires
condominiums to contribute 10 percent of their annual
budget to reserves each year to be eligible for FHA certification-a prerequisite for obtaining a mortgage or refinancing one with a lender that sells loans to Fannie Mae
or Freddie Mac. If your association's operating budget
is $200,000-reflecting the common-area fees owners
pay-you should be contributing $20,000 a year to your
reserves. If you do, you will meet the FHA requirement,
but you won't necessarily be meeting your community's
reserve funding requirements, Kenneth Bloom, CPA, a
partner in Bloom Cohen Hayes LLC, cautions.
The FHA's 10 percent requirement "is an arbitrary
number, chosen by regulators who aren't involved in
managing condominium communities," Bloom says.
"There's nothing magical about it." That benchmark
may be counter-productive, he says, because it creates
a false sense of security in communities whose funding
needs may be much greater than the FHA guideline requires. The guide associations should use, he says, is the

community's reserve study, which estimates the useful
life of critical components (the roof, the HVAC system,
siding, elevators, etc.), projects the cost of replacing
them, and based on those projections, estimates how
much owners should contribute to reserves each year to
meet the association's capital repair, and replacement
needs. For reserve planning purposes, Bloom says,
"there is really no substitute" for the reserve study.
Critics will point out that the study's projections
aren't 100 percent accurate, and that's true, Bloom concedes. "When it's time to redo the asphalt, or replace the
roof, you almost always discover that it costs more than
the reserve study projected. It's an imperfect science,"
he adds. "No one can perfectly predict future costs.
There are too many variables."
But even if the reserve estimate turns out to be only
70 percent or less of what you need, Bloom notes, "that's
still going to give you a cushion," reducing the size of the
loan the association will need or the special assessment
the board will have to levy on owners to cover the costs.
"Over time, you're going to have to pay whatever it
costs to maintain the community," Bloom says. "You
can't control whether you're going to need a new roof;
you can only control how, or if, you plan for it."

Condo Media - December 2017

Table of Contents for the Digital Edition of Condo Media - December 2017