Condo Media - August 2009 - 22

LEGAL by Alan E. Lipkind, Esq. Replacement Reserve Funds Statutory and Mortgage Market Requirements ue to secondary mortgage market requirements, a reserve account that is improperly funded will likely preclude a unit owner from selling or refinancing. Accordingly, it is imperative that trustees, managers and unit owners are knowledgeable regarding statutory and secondary mortgage market requirements pertaining to reserve accounts. the managing agent [M.G.L. c. 183A, §10(g)]. The statute does not define what dollar amount constitutes an adequate fund. This is one reason that condominiums should consider obtaining a reserve study as a tool in determining what level of funding is adequate. lenders will not fund a loan secured by a unit in a condominium with an inadequate reserve account. An inadequate reserve account will likely lead to an inability to: sell a condominium unit to a buyer that needs mortgage financing, and refinance a mortgage secured by a condominium unit. Although the Massachusetts General Laws do not define what constitutes adequate reserve account funding, on November 15, 2007, Fannie Mae, which purchases mortgages issued by banks, and therefore sets the requirements of the secondary mortgage market, issued revised guidelines pertaining to mortgages secured by condominium units. Under the revised guidelines, lenders must review a condominium’s budget to be sure that it is adequate, and that it “… provides for the funding of replacement reserves for capital expenditures and deferred maintenance (at least 10 percent of the budget). …” In other words, for a condominium unit mortgage to be sold on the secondary mortgage market, the organization of unit owners must have an adequate reserve account, and have 10 percent of its budget going toward the replacement reserve fund. Because most condominium mortgage loans are resold on the secondary mortgage market, most lenders will investigate the budget of a condominium prior to making any loan to be secured by a unit in that condominium. The owner of a unit in a condominium that does not meet the requirements of the secondary mortgage market will have a difficult time selling or refinancing that unit. Such an owner will be D Importance of Reserves Even in normal economic times, the importance of an adequate reserve account is self-evident. Many building systems will not last forever. When a major system needs to be replaced — like an HVAC system, an elevator or a roof — seeking to pay the entire replacement cost through a special assessment or by taking a loan may be impossible at worst, or extremely painful for unit owners at best. The lack of an adequate reserve may lead to a need to pursue collection actions against owners that cannot pay a large special assessment. Keeping an adequate reserve account, and funding it regularly, eases the burden of a major replacement, and more accurately reflects true ownership costs. Although loans and special assessments may be available to fill any gaps between the reserve account and project costs, the payment of major expenses from a reserve account eliminates the need to impose large special assessments on unit owners who may not be able to pay them. Massachusetts Statutory Obligations Massachusetts General Laws c. 183A, §10 (i) requires all condominiums to “maintain an adequate replacement reserve fund, collected as part of the common expenses and deposited in an account or accounts separate and segregated from operating funds.” By definition, a replacement reserve fund “… shall be used to replace, restore or rebuild common areas and facilities” [M.G.L. c. 183A, §1]. In condominiums that appoint a manager who has responsibility for the collection of assessments, payment of common expenses, or the accounting or custody of common funds, the property manager must maintain a separate account for the replacement reserve and that account may not be commingled with the assets of the property manager or any other person or entity [M.G.L. c. 183A, §10(f)(2)]. Additionally, for professionally managed condominiums, all checks on the reserve account must be signed by one or more members of the governing board in addition to the managing agent, absent a written agreement to the contrary between the condominium trust and Secondary Mortgage Market Requirements In today’s world, adequately funding the reserve account is critical because in determining whether to grant loans secured by condominium units, most 22 CONDO MEDIA • AUGUST 2009

Condo Media - August 2009

Table of Contents for the Digital Edition of Condo Media - August 2009