This Week's Q & A

Q: I am a trustee in a small condominium with 47 units. We have no clubhouse, no tennis courts, no swimming pool or other expensive amenities to maintain. Our monthly fees are reasonable but more than adequate to cover regular maintenance and operating costs. We've never had a special appropriation –in fact, we don't usually spend all the money budgeted for annual operating expenses. My question—and the focus of an ongoing debate among the trustees: What constitutes an adequate reserve for an association such as ours? Some of us feel we should have a minimum of two month's of condo fees set aside, which would be about $10,000 — considerably less than the $24,000 we currently have available. Others say that's not nearly enough to ensure our ability to cover major capital expenditures that might be required in the future. My personal feeling is we should keep our reserves as low as possible and invest the "excess" productively (in landscaping or other improvements that will increase the value of our units). If we ever need additional funds, we can always do a special assessment. I think current owners will be better-served and prospective buyers more impressed by low monthly fees than by a huge reserve account. What's your advice?

A: I think the old adage about not being too rich or too thin applies, with reasonable limits, to condominium reserve accounts as well — you can't have too much money in them. It is possible to have a larger reserve than you need, but I don't think that's the case for your condo association or for 99 percent of the other condo associations operating today. It's under-reserving, not over-reserving, that is by far the more serious problem.

I should point out that condominium associations should actually have two reserve accounts:

	Contingency reserves, used for expenses that weren't anticipated in the annual budget — for example, pest extermination, increases in utility rates, higher than expected heating costs, or loss of income because of delinquencies in condominium fee payments — a major concern for many associations today; and
	Capital reserves — set aside to finance to finance the future repair and replacement of major condominium components when they break down or wear out, as they inevitably will, over time.

I'm assuming you're talking about these reserves for big ticket items (replacing the roof, repainting or residing the entire complex, replacing the roof, installing new central heating and cooling systems) requiring huge expenditures, any one of which could instantly wipe out the reserves you currently have in place, several times over.

If I were you, I'd be far less concerned about having too much in reserve than about what will happen if you don't have enough. It's true the association has the authority to levy a special assessment on unit owners if the reserves aren't adequate to cover an essential capital cost. But I suspect that the majority of your fellow-owners would not be nearly as sanguine about that prospect as you appear to be. If the elevator or the heating system goes, the bill could run into thousands of dollars for each unit owner — an expense that most would find difficult and many would find impossible to meet. You don't have to look very hard to find examples of condominiums that followed the "small is beautiful" reserve philosophy you are advocating and are paying for it, in spades, today. Certainly, prospective buyers will be concerned about the size of the monthly condominium fee, but savvy buyers will be equally concerned about the adequacy of your reserves. Most buyers want to be reasonably confident they aren't going to be facing a huge extra assessment two months or two years after they've moved in.

There really isn't a single formula that can be applied to all condominiums to determine what their capital reserve level should be. Industry experts recommend that you hire a structural engineer to undertake a reserve study, auditing the condominium and estimating the useful life and replacement costs of all of its major components. Once that inventory is complete, you will want to go item by item and set aside enough money each year to bring you to the desired total by the time the repair or replacement is necessary. For example, an association might have a total reserve account of $200,000, $50,000 of which is designated for the roof, $25,000 for painting, $12,000 for lighting, etc.

No one likes to save for a rainy day, but it's even less pleasant to live in a condominium in which the roofs leak. The dollars unit owners contribute to the reserve account today will add up to thousands of dollars they won't have to cough up in the future.

One final point: While condominium associations aren't likely to have too much set aside in a reserve account, they may have too much of their reserve money sitting in a single bank. Associations with reserves totaling more than $100,000 should establish accounts in several different institutions. You don't want to have more than $100,000 — the maximum amount covered by federal deposit insurance — on deposit at any one bank or savings institution.